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It's Getting Hotter In The East


For more than two decades, Western bosses chased the China dream. They professed to love the scorching Maotai served at those endless government banquets celebrating yet another costly and complex joint venture. Just as they began noticing rising profits from sales of cars or telecom gear, they'd get blindsided by sudden rule changes favoring local players, demands for new technology transfers, or cut-throat pricing from Chinese imitators unconcerned about profits. Some early entrants ended up writing off huge investments. But more often, CEOs groveled before their boards back home, begging for another $100 million to sink into a mainland venture that was always just about to turn the corner. This was China, after all. Everybody had to be in China, right?

Finally, the long march is reaping benefits. Of more than 450 U.S. companies surveyed by the American Chamber of Commerce, 68% today say they are profitable, and 70% say their China margins equal or exceed their global average. Such an answer would have been unthinkable just five years ago, before China entered the World Trade Organization and had to open its economy wider to foreign companies. The biggest beneficiaries are the pioneering multinationals -- such as Procter & Gamble (PG), Caterpillar (CAT), and United Technologies (BA) -- that arrived in the 1980s, then stuck it out in the worst of times. But now even small and medium-size U.S. companies are realizing they have to play their China hand or lose out altogether.

If a company stays the course, the results can be remarkable. China contributed 9% of Motorola Inc.'s $31.3 billion in sales last year, and thanks to smart products and marketing the Schaumberg (Ill.)-based company is battling with Nokia Corp. (NOK) for leadership in the world's biggest handset market. Low-cost exports from China, and the brainwork done at 16 labs, have also helped revive Motorola's fortunes. For many products, "China will become a larger market than the U.S.," says Motorola Asia Pacific Senior Vice-President Simon Leung. "And it helps our global operation from the perspective of costs, quality, and time to market."

The prospects of some companies, in fact, may be brighter in China than at home, where they have entrenched competition or are saddled with high-cost operations. "In China, nobody has home-court advantage," says Jonathan Woetzel, McKinsey & Co.'s Greater China director. "You can play a new game and get a new lease on life." While Hewlett-Packard Co. (HPQ)has been in crisis mode in the U.S., its China sales have risen 20% annually for four years. Booming China is one of the most important markets for slumping General Motors Corp. (GM)

And it is a godsend for financially troubled auto-parts giant Delphi Corp., (DPH) whose China sales have been growing 30% annually for 11 years and hit $637 million in 2004. Delphi has just opened a tech center on a still-muddy site in Shanghai's Pudong district where, by 2010, 1,500 engineers will design parts for the explosion of new models rolling off the assembly lines of customers like GM, Volkswagen, and Nissan. (NSANY) "China is our company's hope for a growth machine," says Delphi Asia President Choon T. Chon. As China liberalizes to meet World Trade Organization commitments, new opportunities are opening in fast-growing areas such as finance, retail, and tourism. It's also easier to make acquisitions. "The beauty of China today is that all options are open," says Stuart L. Levenick, group president of Caterpillar Inc., which has recently bought several Chinese construction machinery makers.

This isn't to say China has suddenly become an easy place to do business. Indeed, it remains one of the world's riskiest and most complex markets. Intellectual property is brazenly ripped off and contracts are violated with little recourse. Corruption is rampant. The baffling regulatory environment is a work in progress. Growing capacity gluts and fierce competition from Chinese companies -- some aided with cheap state loans -- still can keep prices and margins low. Then there is the sheer pace of change, making it necessary to constantly adapt to stay ahead.

LOCAL TALENT

Still, many multinationals that invested the time, effort, and resources have begun to learn the lessons needed. Among them, obviously, are that guanxi, or connections, and investing early do matter, as Motorola's experience has shown. Partly as a reward for staying the course after Tiananmen, Motorola was allowed to own 100% of its key operations, while its telecom rivals had to form ventures with state partners.

But succeeding in today's China is about a whole lot more than guanxi and getting your products past customs. The big winners are investors who have nurtured Chinese managerial talent and given them the reins to run vital operations. They localize manufacturing, parts sourcing, and R&D to the greatest extent possible to lower costs and leverage China's immense talent pool. The winners treat partners as equals when joint ventures are a plus, and part ways when they aren't. They also keep a grip over distribution and after-sales service networks to ensure customers are satisfied. And they invest heavily in training to integrate Chinese engineers and sales staff into their global organizations -- and keep them motivated so they won't jump ship. "Retention of skilled workers is on every company's mind now in China," says Dayton Ogden, chairman of recruitment firm Spencer Stuart Management consultants. "You have to make your company a place where people want to stay."

Success also requires an ever more sophisticated understanding of the Chinese market. China's emerging consumer class, for example, cannot be treated as an undifferentiated mass. Tastes vary by region, and many upwardly mobile professionals see cell phones with all the latest features as fashion statements. Others demand top performance at a low price. It's also a mistake to focus exclusively on rich cities like Guangzhou and Shanghai. "To continuously grow your business, you must go to level-two, -three, and -four cities," says Sun Cheng Yau, head of Greater China for HP. In smaller cities, some members of HP's growing network of 200 service reps even have to work out of their own homes.

Few companies pay better attention to all these details than P&G. It has invested more than $1 billion in China since 1988 in four factories and a Beijing R&D center. P&G sells 17 brands, from Head & Shoulders shampoo and Cover Girl makeup to Pringles potato chips and Pampers diapers. It leads each category in which it competes, except detergent. Even here, Tide is No. 2.

Hundreds of P&G research managers live with Chinese families in cities and on farms to learn how they use everything from detergent to toothpaste. The insights have helped P&G adopt a multi-tier pricing system for some brands. The company sells cheaper, basic versions of Tide and Crest in small cities and villages, for example. In beauty care, it has created different versions of Olay moisturizing cream -- one for supermarkets and a pricier version with skin-whitening and anti-aging properties sold only in upscale department stores. "We have extended the brand to meet different needs," says Christopher Hassall, a P&G vice-president for Greater China. P&G is using the strategy for Olay and Crest in other developing nations and may try it in the U.S.

SITTING PRETTY

Smart marketing also is enabling some U.S. companies to succeed even in industries where Chinese manufacturers are ferociously competitive. Haworth Inc. is an example. At a time when hundreds of U.S. furniture makers are shutting down due to cheap Chinese imports, Holland (Mich.)-based Haworth is selling locally all the office furniture it can produce in its Shanghai factory -- even though Haworth products usually cost 30% to 50% more than models by local producers. One of its secrets: a team of Haworth designers and psychologists who, free of charge, develop an entire workplace "environment" for potential clients after interviewing executives and staff. That appeals to multinationals, and a growing number of Chinese companies, concerned about retaining and motivating talent. Haworth also welcomes passersby to try out its ergonomically designed furniture, and enjoy free cappuccino and wireless Internet connections, at its Shanghai Creativity Center in the trendy Xintiandi district. "You have to give people a chance to experience your product before they buy," says Haworth Asia Vice-President Frank F. Rexach. Since adopting the strategy three years ago, "business has started to explode," says Rexach. Each month, Haworth sells more than 100,000 chairs priced at up to $1,200 apiece and 75,000 workstations.

Carmakers also are learning to look beyond the wealthiest Chinese consumers. GM had enjoyed enormous success with its Buick Regal, which starts at $25,138, since production began in 1998 with partner Shanghai Automotive Industry Corp. Now, GM is trying to reach the gamut of consumers by expanding its line to include imported Cadillacs like the XLR, which retails for $158,000, locally made Chevrolet Spark sedans starting at $5,654, and even minivans. GM has launched three Chevrolet models in the past six months. And it built a network of 1,000 distributors. "One thing you learn in China is that you have to move fast," says GM China Group President Kevin E. Wale.

Such diversification is becoming essential to remain a serious player. As China emerges as the world's biggest market for everything from cars to digital TVs, it increasingly will influence global trends. Already, many cell phones sold in China have features not available in the U.S. At Motorola's labs in Shanghai, Chengdu, and Beijing, engineers are working on phones that surf the Web and double as MP3 players.

All the lessons from the corporate pioneers will come in handy to first-time investors. But they needn't follow the same trail. Changing rules mean new entrants can leap in with different strategies. Chicago-based IGA aims to do just that in the grocery business. The nonprofit alliance of grocers would seem to have little chance against retail giants such as Carrefour and Wal-Mart Stores Inc. (WMT), which have arrived in force. But IGA has signed up five Chinese retailers with a combined $1.6 billion in annual revenue. The group is trying to convince Beijing officials that it can help homegrown retailers compete with the giants by lowering costs via group buying. IGA also can help retailers export their own packaged foods, clothing, and even DVD players under its brand through its 4,500 worldwide affiliates. "We are giving local players the chance to make contact with the international market," says CEO Thomas S. Haggai.

As Beijing opens areas like tourism to outsiders, meanwhile, companies need more flexible business models. Parsippany (N.J.)-based Cendant Hotel Group Inc., which opened its first Ramada hotel in China in 1993, now is launching its Super 8 chain of motels, a sector Beijing is encouraging to offer more affordable rooms to tourists and business travelers and to create more jobs in services. Cendant has opened 10 motels this year, mainly in city centers, owned by Chinese franchisees. It wants around 60 within three years. "Overlay the personal income of China's growing middle class with a country with 21,000 miles of highway and big events coming up like the Beijing Olympics," says Cendant CEO Steven A. Rudnitsky, "and we are very bullish on business opportunities."

To many smaller U.S. companies, China still seems far too intimidating. But with hundreds of manufacturers succumbing each year to brutal mainland import competition, more are concluding they must take the China plunge. More than half of new American Chamber of Commerce members in China are managers from small and midsize companies. Chicago-based Phoenix Electric Manufacturing Co., a 100-employee, $20 million maker of electric motors for power tools, kitchen appliances, and other products, recently opened a second Chinese factory, in Suzhou. For Phoenix, the move was "a matter of survival because our customer base is moving here," says Chairman John S. Bank. It enabled Phoenix to keep its biggest clients, such as General Electric Co. (GE) and Emerson Electric Co. (EMR), which have shifted most of their consumer-electronics production to the area.

No doubt China will keep trying the patience and pocketbooks of U.S. companies. It will be many years before China develops the intellectual-property rights protection, transparent policymaking, and level playing field that will make it anywhere as predictable as the West or Japan. But one by one, most of the obstacles that for so long made China a money pit are diminishing. So, too, is the rationale for companies who thought they could be global players without getting into China.

By Dexter Roberts and Michael Arndt, with Pete Engardio in Beijing


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