Opportunities for Alliances

Western companies, in particular, have found that forming alliances with local entities is one way to cut through the complexities, especially since much of the complexities are due to bureaucracy. One thing the local entity must know is the bureaucracy that's relevant to their business. If they don't, you have the wrong partner. (Whatever we may think about Washington, they are novices compared to the Chinese who invented bureaucracy.) As one example, China Hewlett-Packard has been a successful joint venture since 1985. Even 3M which in 1984 had one of the first wholly owned foreign ventures in China decided that less equity was more market share and took in a local partner about ten years later.

This is a good time for the western company to find and pick a local partner in China. One of the consequences of the transformation to a market economy is that the State is removing the safety net from the state owned enterprises. The enterprises now have to justify their existence based on laws of economics--that means they have to make money. This is a revolutionary concept that most Chinese were quick to grasp. They are now eager to make deals.

It is not just the western technology, know-how, management practice, capital and access to international market that appeal to the Chinese enterprises. Those are nice, but in addition, any enterprise with 25% or more foreign ownership can shuck off the heavy social burden imposed by the State (such as onerous pension obligations, free health care and heavily subsidized housing) and reorganize into leaner and meaner companies. A new company can replace the iron rice bowl with incentives based on merit and the threat of dismissal for the slackers. (This is the real revolution that western media rarely talked about.)

The dilemma of western company going to China will not be not finding potential local partners. Just the opposite, the company will be challenged to find the winner among a haystack of propositions and alternatives.