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China's Gates Swing Open


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CHINA'S GATES SWING OPEN

No sooner did President Clinton announce renewal of China's most-favored-nation (MFN) trade status on May 26 than a team of five Chinese auto experts flew off to Detroit. Their mission: to review Chrysler Corp.'s plants before deciding whether to select Chrysler or Mercedes-Benz to build and run a $1.2 billion minivan plant in Guangdong province. The MFN news certainly didn't hurt Chrysler's chances. "We hope Chrysler will win the bidding," says a knowledgeable Guangdong business executive.

A breakthrough for Chrysler would be another sign of a new era in U.S.-China business relations. Clinton's decision to decouple China's trade status from its human rights record is likely to give U.S. companies a shot at becoming major players in key Chinese industries from aerospace to computers to telecommunications. And as American giants win deals that will help reshape the Chinese economy, hundreds of smaller companies will ride their coattails (table). As a result of the new economic entente, European and Japanese companies are likely to feel intensified competition from U.S. companies.

A boomlet of deals emerged even before Clinton's announcement, as it became apparent that the President would eliminate the biggest source of animosity between Washington and Beijing. Caterpillar Inc. recently unveiled a joint venture to build hydraulic excavators in China, where Caterpillar expects the market to be worth $2 billion by the year 2000. On May 26, reports surfaced that Boeing Co. would win a $5 billion order from Chinese airlines. A Boeing spokesman says discussions are under way.

Then, on June 1, Apple Computer Inc. announced plans to begin production of components in China, part of an effort to grab 20% of the Chinese PC market. Apple is trying to catch up with IBM, which last month signed a memorandum of understanding with China to design and install information-technology networks.

HIGH-TECH SURGE. U.S. officials insist the President's MFN decision was not driven by the prospect that China would cut sweet deals with Corporate America. And, indeed, some deals the Chinese have proffered could fall through now that MFN is in the bag. But with bilateral relations on a firmer footing, the Clintonites believe the Chinese will start paying much closer attention to U.S. companies. "Other things being equal, they might tip some business our way," says one senior Administration official. To help make sure they do, Commerce Secretary Ronald H. Brown will lead a delegation of American chief executives to China in August.

Critical as it is, the lifting of the MFN cloud isn't the only reason that China watchers expect a burst of commercial transactions over the next few years. The Clinton Administration has positioned the U.S. for an export surge by ending curbs on high-technology sales to China. As a result, U.S. capital-goods exports to China, now worth about $7 billion, are likely to increase by more than 100% within five years, says Nicholas R. Lardy, a China expert at the University of Washington.

Such predictions would have been moot had Clinton placed stiff sanctions on China. U.S. bidders on projects requiring Beijing's approval would then have been targets of retaliation. Decisions on some of those transactions had been on hold. Now, says Philip Carmichael, president of the American Chamber of Commerce in Beijing, "there will be an upward swing."

For the vast majority of U.S. companies, delinking MFN from human rights simply levels the playing field. AT&T is a prime example. In the next six years, China plans to spend $41.4 billion on telecommunications, and AT&T is competing fiercely with European and Japanese giants for several contracts worth $10 million to $100 million from individual provinces and local authorities. Since last year, AT&T has secured more than $500 million in contracts. Rivals, however, did not lose a chance to play the MFN card against AT&T. "By removing the uncertainty, it strengthens our position," says William J. Warwick, CEO of AT&T China.

Now, other foreign investors in China may also be encouraged to buy more American goods. Some Hong Kong property developers involved in major construction projects in China had been reluctant to buy products such as Caterpillar earthmovers for fear of Chinese retaliation if MFN were revoked. "There was a subtle resistance to having a long-term supplier relationship with the U.S. firms," says one U.S. official in Hong Kong. "That's going to disappear."

A surge in U.S. investment in China is also likely. Last year, U.S. companies signed investment contracts worth $6.8 billion, more than in the previous 13 years combined. But investment slowed as the MFN decision neared. U.S. corporations can now plunge ahead without worrying about a trade war. In late May, glass-fiber maker Owens-Corning Fiberglas Corp. announced plans to spend $150 million on 10 plants in China. On May 28, Kentucky Fried Chicken opened a fast-food restaurant in Shanghai, its 28th in China, and said it would pour $200 million into 200 outlets by 1998.

MIXED REVIEWS. Clinton's MFN decision is equally good news for dozens of small and midsize companies that ride the coattails of American multinationals. For example, Oak Tree Packaging Corp., a $42 million company in Montvale, N.J., plans three factories in China to make packaging for Nike shoes, Gillette razor blades, and Bristol-Myers Squibb aspirin. "The more that multinationals move in," says Robert J. Chandler, Oak Tree president and CEO, "the more need there will be for support functions that are not there now." Platinum Technology Inc., a $62 million Oak Brook (Ill.) software company, has now moved China to the top of its priority list. "With the prospect that more large U.S. companies will enter China, the market will open more rapidly for us," says Michael Cullinane, executive vice-president.

As relieved as U.S. executives are about Clinton's China-policy U-turn, the President's decision is playing to mixed reviews abroad. Asian governments, which take a dim view of linking human rights and trade, are pleased. But some European aircraft executives worry that a grateful China may reward Clinton by doling out orders to Boeing and McDonnell Douglas Corp. And given China's $23 billion trade surplus with the U.S., "we expect to see the American manufacturers apply pressure," says one European aircraft source. After years of battles over MFN, Americans may finally have the edge in the world's biggest market.Amy Borrus in Washington and Joyce Barnathan in Hong Kong, with Bruce Einhorn in New York and Stewart Toy in Paris


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