Multinationals pour in money as the mythical market turns real
SHANGHAI Barely has a big international company spun its wheels as
fecklessly as General Motors did when it raced into China.
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Amid notions of fantastic riches - if just one in a hundred Chinese drove
Chevrolets! - GM's 1992 foray collapsed after the company made about 300
pickup trucks, traded insults with its Chinese partner and entered local
lore as another company mesmerized by China's mythical market.
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But GM has a different story to tell now. Its four production lines churn
out a subcompact family car, a leather-lined executive sedan and six other
models - 110,000 cars in 2002. Industry experts estimate that GM's profit
margins are at least twice as high on cars it makes in China as on similar
models made in the United States. It is the skeptics, GM executives now
say, who look like dupes.
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"We had our moments of agony," said Philip Murtaugh, the company's top
executive for China. "But I look back now and can say that China has been
the smoothest and most successful venture GM has undertaken in recent history."
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A year after China joined the World Trade Organization, and two decades
after it began allowing foreign companies to invest locally, China is no
longer the impenetrable enigma and inevitable money pit it had long seemed
to be.
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Plenty of foreign investors still lose money. But they are increasingly
outnumbered by multinationals making profit that - if not quite justifying
the exaggeration of the 1990s - at least makes China an indispensable part
of their global operations.
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Just as remarkable is the way they are making money. Foreign companies have
long taken advantage of China's low-cost skilled labor to make goods for
export. China is the leading exporter in the developing world, with
foreign-financed companies accounting for about half, or $275 billion, of
its total exports last year.
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But many multinationals have shifted their sights to the domestic market,
which has become more lucrative and more openly competitive than many
imagined even a few years ago. China's economy, defying a global slowdown,
has been growing at 7 percent to 8 percent a year. While most Chinese
cannot afford even low-end foreign-made goods, per capita income in eastern
China has reached $1,200 a year, creating a lower-middle-income market of
470 million people.
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Companies invested record amounts in China last year - an estimated $55
billion - primarily because they now aim to tap Chinese consumers as well
as its workers.
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Already, the Chinese buy more cell phones than anyone else. They buy more
film than the Japanese. They buy as many vehicles as the Germans. Foreign
companies dominate sales in those categories and have a hefty presence in
scores of others, such as DVD players, heavy equipment, shampoo, software -
and hamburgers.
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Foreign companies operating in China are not required under local
accounting rules to provide financial information about their operations,
and most decline to provide details for what they say are competitive
reasons. Still, growing numbers of multinationals boast that their China
business now helps their bottom line.
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For companies such as Siemens of Germany and Motorola of the United States,
China has become the most important market for mobile phone handsets and
equipment, accounting for billions of dollars in annual revenue and
outsized profit, their executives in China say.
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Toshiba, the Japanese electronics and industrial equipment giant, once used
China as an export base. It now sells two-thirds of what it makes in its 34
China-based operations to the Chinese. Local sales reached $2 billion in
2001, the company said.
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McDonald's and Kentucky Fried Chicken have 700 Chinese restaurants between
them and open scores more each year. Eastman Kodak controls an estimated 63
percent of the domestic market for rolled film, prompting some grumbling in
the Chinese news media that it has become a near monopoly. Even Starbucks
has found plenty of urban tea drinkers ready to spend $2.50 for a coffee.
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A few companies have turned to their China operations to support parent
companies that have hit hard times. The fallen telecom titans Lucent
Technologies and Nortel Networks have suffered enormous losses globally but
continue to benefit from big China contracts.
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Siemens' profit on its nearly $4 billion in China sales "help make up for
losses we've suffered in other parts of the world," said Peter Borger,
chairman of its China holding company.
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AES, a power company based in Arlington, Virginia, once settled for
low-single-digit returns from the seven Chinese power plants in which it
invested. But while AES struggles to pay off debt and restructure
operations at home, returns from China have improved substantially.
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"China is now the best-performing business in the whole corporation and one
of the top cash generators," said Bill Ruccius, president of AES Orient. "I
go home these days with a much nicer story to tell."
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The success of a growing number of companies cuts against the persistent
stereotype that China is a sinkhole for foreigners.
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Since the age of Marco Polo, Westerners have tried, and usually failed, to
create profitable businesses with the Middle Kingdom. Royal trade
delegations failed to pry open the markets in the 1700s. British textiles
makers never succeeded in lengthening Chinese shirttails by a foot, as the
most exuberant among them imagined doing in the 19th century.
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When China opened its doors to Western investment in the 1980s, almost all
of the pioneers struck out. AT&T, Chrysler, McDonnell Douglas, Goldman
Sachs and Occidental Petroleum were among the global brand names that
invested heavily, hoping to reap a bonanza. By the mid-1990s, every one of
them had scaled back amid losses, inconsistent government policy and
brighter opportunities elsewhere.
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Though Procter Gamble and a handful of other early investors began making
sizable sales and profits in the mid-1990s, they were regarded as
aberrations. Sooner or later, the prevailing wisdom had it, Chinese
consumers would reject foreign-made products. The communist government, it
was thought, was happy to use foreign businesses to strengthen its domestic
market and glean their technology, but would ultimately make it impossible
for them to collect steady profits at the expense of domestic rivals.
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"Like adventurers in the quest for some fabled relic, investors press
unendingly forward - if only on the basis that the legend may one day prove
real," Joe Studwell, a leading commentator on the Chinese business world,
wrote in his book "The China Dream," published last year. "The China
investment proposition came down - as it always had - to hopes for the future."
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The auto industry, for example, has proved ripe. Though the government once
tightly controlled nearly all aspects of production, investment and sales,
it has relaxed its grip in recent years.
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A more genial regulatory environment has paid off for GM. After its initial
frustration, the company agreed to open a modern factory with a Shanghai
partner in 1997. Critics derided GM for agreeing to invest $1.5 billion in
China after flopping miserably. Many also argued that its decision to make
a high-end Buick sedan geared to Chinese executives looked risky.
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The Buick sold briskly, however. Late last month, the company unveiled a
remodeled Buick tailored to the local market. It has a bright chrome grill
and a plush interior, with DVD players on the back of the front seats for
people who ride in the rear. GM has had little trouble adding models,
including several aimed at Chinese families. The company had hoped to sell
100,000 vehicles annually after five years of operation, but it reached
that annual target in November, a year and a month ahead of schedule.
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Like GM, many other multinationals stumbled before finding their footing.
Microsoft found trouble almost as soon as it began marketing its Windows
software in 1995. It peddled a version of the program translated into
Mandarin by Taiwanese employees, who embedded some standard Taiwanese
anti-communist phraseology in the Chinese-language entry system, alarming
mainland users.
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Beijing has also encouraged local companies to adopt the Linux operating
system, the free rival to Windows, because of domestic fears that the
American government could use the secret Windows software code to gather
information surreptitiously, a suspicion Microsoft called unfounded.
Moreover, some 90 percent of Chinese computers run illegally copied
versions of Microsoft's software.
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Yet Microsoft has begun to turn things around. Late last year, it persuaded
nearly all the major Chinese computer makers to pre-install - and prepay
Microsoft - for the latest operating system, Windows XP. The Chinese news
media have reported that the payment is nearly $80 a computer, not much
less than what American computer makers pay.
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"China is really improving the environment across the board for software
makers," said Tom Robinson, one of Microsoft's Asia executives. He said the
company's revenue in China is growing at a 40 percent rate, but he declined
to provide numbers.
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In the hypercompetitive market for consumer electronics, where nearly all
the major international brand names have battled local companies, no one
makes a consistent profit, industry analysts say. One exception in 2001 was
Toshiba's joint venture in the northeastern city of Dalian, where it makes
high-end projection TVs for wealthy Chinese.
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"Of the 70 companies making color television in China, just one, ours, made
a profit in 2001," said Nobumasa Hirata, the chief executive of Toshiba
China, citing Chinese government statistics. "That shows that it is
difficult, but that it can be done."
