Chalo China

According to Harpreet Singh Puri, head of Business Links, a consultancy that focuses on helping Indian corporations in the mainland, the Chinese business environment is a potential minefield. 8216;8216;Information is not freely available, international norms of business are not applicable, intellectual property rights are a headache to protect and the legal framework is patchy,8217;8217; he counts off.

Consider the experience of the Orissa-based Orind Refractories, in China8217;s Liaoning province since 1994. 8216;8216;When we first came here, we found the legal framework to be opaque,8217;8217; says group managing director R Mishra.

Since the structure of the ownership of land was unclear, Orind had to switch locations for operations four times. It was only after hiring a Hong Kong-based legal firm that Orind officials were able to take an informed decision.

Mind to Matter
GIVEN the unique nature of the mainland8217;s market, all those who8217;ve got their feet wet recommend that anyone planning to enter China do some thorough homework and identify the precise scope of operations.

The first question: Is China really the best choice? 8216;8216;If you think you should come here simply because other companies have offices here, it8217;d be totally wrong,8217;8217; says K Kannan, who heads the TVS Electronics office in Shanghai.

As Puri explains, for certain products and sectors 8216;8216;Dubai, Malaysia or even Brazil might be better choices. There is no unbreakable rule that says you have to be in China.8217;8217;

For an Indian IT company, says Prakash Menon, head of NIIT in China since 1998, there could be four main reasons to develop a China presence: servicing global clients in China; serving global clients who are not in China but want a certain product developed in China; targeting the regional market; and targeting the domestic market.

For manufacturers, there are other considerations. For instance, says A M Naik, chairman of Larsen 038; Toubro, 8216;8216;Do you want to sell to, source from or manufacture in China?8217;8217;

For those into manufacturing, a further issue to explore is whether to export the manufactured products or try and break into the Chinese domestic market.

While the potential size of the domestic market is exciting for most Indian entrepreneurs, it is precisely this market that has caused the most spectacular losses. Despite being around for more than 10 years, Orind still exports 98 per cent of its products: The nexus between domestic steel mills and their captive suppliers has so far proved impossible to break.

Local Culture
Pharmaceutical companies were amongst the first Indian corporations to enter China but, over the years, they too have found it tough going.

8216;8216;In addition to competition from major multinationals and domestic producers, Ranbaxy has struggled in China because of cost-containment measures, especially the regular mandatory price-cuts ordered by the Chinese authorities on major brands,8217;8217; says K Ramalingam, spokesperson for the pharma major, involved in a joint venture in Guangzhou province since 1993.

Even IT companies8212;the most sought-after Indian corporations in China8212;have not had an easy time. 8216;8216;The big orders go to American companies like IBM and HP or to domestic players the government wants to prop up,8217;8217; explains Menon.

Given the risks of investing in China, the consensus appears to be to start small, rather than stage an aggressive entry. L038;T, for example, has evolved a three-phase approach for China: Set up representative offices and look for opportunities to sell industrial machinery and medical equipment to the mainland; source raw materials and finished products from China8212;the phase that has just begun for the company8212;and three, establish a manufacturing facility.

8216;8216;The old models don8217;t work in China,8217;8217; says Menon of NIIT, which has set up 125 IT-training centres across the country. The first few years taught them that the best way forward was a franchising model that would allow them to piggyback on 8216;8216;the hardware capacity that universities, software parks and corporations around China had in plenty.8217;8217; Today, all except two of NIIT8217;s China centres are franchises.

NIIT also soon discerned the importance of product localisation. 8216;8216;Every bit of teaching material had to be translated, the examples changed to suit the local culture,8217;8217; Menon says, 8216;8216;plus, the whole operation had to be driven by the Chinese. We have only five Indians in the entire staff.8217;8217;

Learning on the job was part of the package. 8216;8216;We were trying to encourage employees to work beyond the 9-to-5 schedule. But special cheques on their birthdays and anniversaries had no effect. The moment the clock struck five, everyone was out of the office, which just does not work for an IT company. It8217;s only when a new policy made 50 per cent of the employees8217; salary dependent on performance that the situation improved.8217;8217;

Lesson: The emotional, touchy-feely stuff does not work here. Only money talks.

People Skills
HR challenges are common in China. Beyond the basic language problems, employers complain that the staff are not used to taking independent decisions. Says Kanan, 8216;8216;Even after training, the situation has not improved. I cannot find local staff who can take full responsibility for a project from beginning to end.8217;8217;

Puri recalls a client8217;s scepticism over an exclusivity clause in a contract he was negotiating for a JV, which required employees to work exclusively for the venture. 8216;8216;The foreign client asked me why it was necessary to emphasise the employee wouldn8217;t work for others,8217;8217; he smiles, 8216;8216;but when the local partner saw the clause, he claimed it violated the workers8217; human rights by not allowing them to work elsewhere if they could find the time!8217;8217;

While most challenges to doing business in China can be overcome eventually, it is not the right place to look to for short-term profits. Says Narayan Rao, regional head of Dr Reddy8217;s Laboratory in China, 8216;8216;It takes three-four years just to get a product registered here. Profits can only come over a period of time.8217;8217;

Moreover, Orind8217;s Mishra warns that today8217;s China is, in many ways, less attractive to foreign investors than it was 10 years ago. Input costs are increasing with both labour and power becoming more expensive and less abundant. 8216;8216;There are also growing logistical constraints, like lack of availability of wagons for transportation of coal.8217;8217;

However, according to Puri, it8217;s not all gloom for Indian companies. 8216;8216;Indians have certain advantages over Westerners in China. We don8217;t get a culture shock. We are used to the density of population, to the haggling and bargaining that is part of the negotiating process here and to the concept of government bureaucracy.8217;8217;

So, as India Inc finally attempts to engage China, the mainland presents a complex proposition with promises of great rewards8212;and also the potential for financial disaster. The difference between the two would appear to lie in careful planning, a willingness to adapt, commitment to the long term and as always, a lashing of luck.