Remember the regulators
May 2nd, 2009 by Kent KedlAudio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.
China’s rapid development in the past 15 years can leave one feeling a bit dizzy. My first time in Shanghai in the late 80s – in town for an escape from the small central China city where I was living and teaching – was heady enough. There were only 10 taxis in the entire city and you had to get around on diesel fume-belching busses or by foot (and it was a battle between the aerobic benefits of walking and the heart-stopping inhalation of diesel exhaust). Now its tough to step in the street here and avoid getting hit by a cab (unless, of course, it is raining or you are late to a meeting or you have two heavy boxes you are trying to schlep to a client … and then there are NO taxis to be found in the entire city. Go figure).
So when China seems like its returning to the bad old days, it is a bit shocking, particularly when this return is signaled by increased regulation from the Party. There have been a series of steps over the past year that, in hindsight, are heading in a direction that could be of concern to everyone who does business in China, local and foreigner alike. Late last year we saw the government put extra restrictions on Carlyle, the financial investor, as they sought to buy out XCMG, one of China’s leading heavy equipment manufacturers. Carlyle eventually let the deal die because the limitations were so onerous. At the time, everyone clucked about “protectionist policies” but eventually chalked it up to China wanting to guard an industry that could figure into national defense (ala the U.S. blocking the Chinese oil giant CNOOC from investing in a U.S. offshore oil company a couple of years ago).
The next big restriction was for visas for foreign visitors wanting to enter China just before the Olympics last year. Thousands of businesses were impacted by this and many Olympic events were sparsely attended because people just could not get here. Again, apologists for China cited so-called “legitimate” reasons for this … in this case there were serious security concerns. The reality was that China was playing a game of CYA – “Cover Your Anterior-region” – and was willing to go overboard on restrictions in order to insure that nothing happened while the spotlight was shining so brightly on them. Sure, it bothered me too but I guess I understand erring on the side of caution – my own country’s Transportation Safety Administration recently busted my daughter on a routine check at an airport … she was relieved of a fingernail clipper, ostensibly because she might use it to hijack the airplane to Cuba (where she would need said clipper because you simply cannot buy them there). In the immortal words of Fleetwood Mac: “Oh well.”
But then this year, things have been getting even more tight, it seems. We started the silly season off with Coke being denied their acquisition of the large Chinese juice manufacturer, Huiyuan. The government was oddly silent on the specific reasons for the denial. There were some mumblings of avoiding “monopolistic” practices which, in a way, was legitimate as the merger would create a beverage company that would rule in two key categories: sodas and juices. But many legitimately pointed out that China’s industries are ripe for consolidation and that, following pretty much any other economy as its developed, there are, as time goes on, going to be fewer but larger players in the market. There is speculation – no none of it published, as far as I have seen – that the government is pushing Huiyuan to themselves become more acquisitive … to go out and start buying up smaller beverage companies to grow larger themselves, in effect creating a competitor to Coke. Typical of China, the old adage is flipped on its head: “if you can’t join them, beat them.”
Just this last week, two things have happened to make me even more concerned. The first was the release last Friday of the new Postal Law in China which everyone in the logistics and delivery sector has been anticipating like Christmas morning at the Bill and Melinda Gates household. However, much to the chagrin of foreign delivery companies like FedEx, UPS and DHL, the law bans foreign companies from participating in domestic express delivery, citing the original 1986 Postal Law that limits domestic delivery of regular mail to the government-owned China Post.
1986? In China in 1986 it took an entire day to mail a letter! We had to, literally, make our own envelopes, painstakingly cutting out a template from paper and then using paste thoughtfully provided by the post office to glue them together. Then you had to let them dry before stuffing them with your letter. You ended up with glue all over, trying to cram a sticky mess in a drop box with fingers webbed like Aquaman. And if you wanted to send a parcel in China, fuggitaboutit! You had to purchase white cloth and make your own bag in which to put your items. Seriously, I am not making this up. Around the post office were stores selling fabric, needles and thread and you had to form your own sweatshop on the steps outside the post office to assemble your package for mailing. I had flashbacks to 7th grade home-economics class, nearly failing for improper needle threading and insufficient stitch tightness. Who knew that I was actually learning life skills that would come in handy some day??
Anyway, I digress … This new and unimproved interpretation of the Postal Law is going to be a serious setback to the entire postal system in China. Plainly speaking, the foreign delivery companies have, for the most part, cracked the code in express delivery in their home markets. Pretty much anywhere in Europe or North America, if I want something delivered by 10 a.m. tomorrow morning, its going to get there. I might have to take out a second mortgage on my house to do it, but dang-it, its going to get done! Now, I don’t for a minute think that any express delivery company would be able to quickly transplant their system in China … China is too big and too complex to do that simply. But the China postal system could certainly use some external influence and best practices … mailing a letter by regular post is a hit-or-miss thing these days. The Chinese authorities cited security reasons for keeping the foreigners out … I guess news of the express-delivered anthrax a couple of years ago in the U.S. freaked some people out here. But seriously, can the Chinese postal system do any better?? I guess in one way they can – with such a dismal delivery rate for their mail the insidious package can’t do any damage if it never reaches the intended receiver. Let’s hear it for incompetence!
The last indicator that something’s up is the rumor – at this point unsubstantiated – that China is going to once again be very restrictive in issuing visas this summer and into the fall. This year marks two very important anniversaries in China: the 20 years this June since the Tiananmen Square movement and 60 years this October since the founding of the People’s Republic. Like with the Olympics last year, China wants to keep out anyone who might make a placard and march on the streets, shouting their support of any one of a number of banned issues. Hong Kong’s South China Morning Post published a story last Thursday saying that Beijing has said that all “F” business visas issued after April 15th will expire on September 15th. An F visa is for short-term stays of less than 6 months. The paper quoted several China visa agents who said that applications for F visas beyond September 15th would be put on hold until there were more clarifications from the government (who, like any government, avoids clarity like the plague). Again, there have been no confirmed announcements of this, just newspaper articles … so let’s not wig out until we have to.
But shy of wigging out, I think there is some indication for concern here. There is DEFINITELY a protectionist wind blowing in China and with it could come a storm that could hit us all. There are two sides of this coin here:
First, remember that Chinese regulations are often published but never – or are selectively – enforced (on a side note, the converse is also true … China has been known to enforce rules for which they do not allow the publishing of the official law … I have heard stories of people being prosecuted for breaking a law and were refused the request to actually read the law on the basis that the law was a state secret). What this means is that there are varying levels of sensitivity in China – if you are a big company and are doing big things in China, the light shines more brightly on you and you have to take more care to cover your bases. All the big Fortune 500 companies working in China spend squillions of dollars each year in lobbying efforts in Beijing and in the various localities in which they do business. This is just good business practice (hey, they even do it in Washington!).
But for many companies, they work hard at doing a series of smaller things in order to stay below that radar and to not attract attention. In any M&A deal we do in China, one of the biggest commercial due diligence questions to probe is how the regulating authorities will treat the new entity once it has foreign ownership. Chinese companies can get away with things that foreign companies cannot, simply because they are foreign companies (and, contrary to popular practice, having local staff often does not protect you … the spotlight is just brighter on you when you are a foreign company). So the lesson here is to explore all the possible regulatory implications of what you are doing in China … not just the laws on the books but to talk to all the authorities who touch your business to get their read on what might actually be enforced. Your business leaders here – your general managers and CEOs – should be spending a large amount of their time schmoozing with the authorities here. If they are not, you are exposed.
The second thing to remember is, simply, that China is different – it is a one-Party system and that Party is primarily concerned with maintaining their singular hold on power. On a global scale, it is not the riskiest place to do business – that honor is held with dictatorial grip by some southeast and African nations. But it is comparatively riskier than doing business in the West. Walk the streets of Shanghai and you can often forget that – the signs for Western products and services make it seem like New York with a really big Chinatown. But its not. China is different from other markets.
And, truthfully speaking, I often forget this. Therefore, I have made myself a May Day resolution (my New Years resolutions having drowned in the Ocean of Poor Self Discipline long ago) – I resolve to be more observant of some of the macro-regulatory moves here and to not be so flip and dismissive of them when they do happen. I firmly believe that China is moving towards more openness … my last quarter century hanging around here is proof of that. However, these changes progress at glacial speed with short-term freezes and retreats in the midst of forward movement. Whether what we have been seeing recently is such a momentary freeze or the tip of a larger iceberg remains to be seen.
