Learning to Play the Game

by Chris Mayer

I’m planning a trip to China in November. China’s emergence as an economic force is changing the patterns of world finance and trade in numerous ways — particularly the consumption of numerous commodities and basic materials, which I wrote about in the April issue. The development of the Chinese economy looks to be one of the biggest financial stories of the decade, perhaps of the century.

I don’t expect a 10-day trip will make me an expert on China, but I expect the experience will give me added perspective on what’s going on there. I plan to spend some time in Beijing and Shanghai, two key cities.

So I’ve been spending some time trying to learn as much about China as I can. I’ve been clipping interesting news pieces on China, and I’ve ordered a few books as well. In writing about China from an investment perspective, I would like emphasize the experiences of people who have actually worked and lived there, people who have tried to make a go of it in China — as opposed to relying on professors and media-types writing about China from afar.

As John Pomfret, The Washington Post’s Beijing bureau chief from 1998-2003, recently noted, “Writing about China is never easy. The country is so vast and full of contradictions that almost anything said about it at any given time is true.” He also warns of “fresh-off-the-boat enthusiasts amazed at the spanking new skyline in Shanghai or Beijing.” I want to try to avoid that, to avoid the cliche of China. You’ve surely seen such pieces, where the thrust of the argument is something along the lines of, “If everyone in China only bought one extra pair of shoes, there would be billions of shoes sold.” Just insert your favorite consumer good, and you can write stuff like that all day long.

I also want to avoid the temptation to write about the rise of China as some sort of overt threat to the United States and as a sign of American decadence and depravity. As Pomfret observes, “Too often, when these people write about China, they are actually using its successes as a way to mourn perceived problems back home. America is becoming complacent, uneducated, slow and bureaucratic, they say. Look at China; it’s got all the answers. It’s the future. But is it?”

A proper balance of skepticism and enthusiasm is what I will try to bring to the table. Like everyone else, I’m amazed at the numbers I see in China. Here are just a few from the dust jacket of a book called China, Inc., which I’m reading now:

* China has more speakers of English as a second language than America has native English speakers

* China has 320 million people under the age of 14, more than the entire population of the United States

* Three hundred million rural Chinese will move to the cities in the next 15 years; China must build urban infrastructure equivalent to Houston’s every month in order to absorb them

* China’s sex industry alone needs 1 billion condoms a year.

(Sorry, I had to throw this last one in there.)

Staggering numbers… and there are many more. But there are also challenges for Westerners trying to make some money in the deal.

I’ve recently finished a book called Mr. China by Tim Clissold. It’s basically the story of how Clissold co-founded a private equity firm to invest in China. For a time, his firm, which had $400 million to invest, was the largest private equity investor in China.

Clissold has a strong fascination with China. He learned to speak Mandarin, and he’s spent more than 17 years working in China. Currently, he lives in Beijing. This is the kind of on-the-ground perspective that I would like to emphasize in my own explorations of the Chinese story.

What I take away from Clissold’s book is that making money in China is not going to be easy. Clissold writes about his firm’s frustrations with Chinese bureaucracy, especially the heavy hand from Beijing — which seems to permeate an awful lot of decisions (even down to approving the firing of plant managers) — and his struggles with Chinese workers and managers.

Many of these latter struggles result from widely differing cultural experiences and backgrounds. Much of China’s industry is still nationalized, or has been recently privatized, and exhibits characteristics you would expect to find in such circumstances — gross inefficiencies, overstaffing, awful working conditions and horrifying pollution.

Making changes and improvements, implementing administrative procedures — things that Westerners take for granted as part of their jobs, were much more difficult to achieve in China. In the book, Chinese managers ask for major capital expenditures without any formal analysis or presentation to management. Chinese workers and managers also had a way of shading their figures and not telling the whole truth to their superiors. Rank insubordination, which would be grounds for instant dismissal in Western companies, is tolerated and common in China. Even simple matters, such as collecting bills in a timely fashion, become a whole different game in China’s complex society.

As Clissold notes, there are plenty of rules seldom enforced. “Appearances mattered more than substance, rules were there to be distorted and success came through outfoxing an opponent.” He calls it a kind of “institutionalized confusion.”

There are also plenty of oddities. Clissold writes about the army expanding into commercial activities, like owning hotels and manufacturing medicine. The police in Guangzhou apparently ran a chain of cake shops on the side. “Officials routinely manipulated badly written rules,” Clissold writes, and he recounts his travails with “fake letters of credit, judges who did not understand a case but passed judgment anyway, officials from an anti-corruption bureau who asked for cars and bags of money.”

Clissold quickly learned that if you play by the rules, you are finished. You had to find “a Chinese solution to a Chinese problem.” You had to learn to play the game. Clissold eventually did, and his firm, set up in the 1990s, was the only one to survive. The business landscape was littered with failed joint ventures, and billions of dollars invested languished in dysfunctional companies. One of Clissold’s partners referred to China as “the Vietnam War of American business.”

Even though his firm survived, it could hardly be said to have prospered. As he writes, “according to Wall Street’s equations, the whole endeavor failed miserably.” It cost investors a lot of money, though it seems things had turned around by the end of the book (which covers the period 1995-2002).

Clissold’s is a cautionary tale that ends on a hopeful note. It is well to keep in mind that making money in China is not going to be easy and that transformation into an economic power is not preordained. Jim Rogers calls China “pure potential,” and he is as big a bull on China as there is. He also acknowledges the road to prosperity will be rocky. The metaphor of 19th-century America is sometimes used in describing China, and there are some similarities. But we can’t forget that the two come from vastly differing political traditions. Surely, there was plenty of rule-bending and corruption in 19th-century America, but no entrepreneur had to deal with anything resembling the mammoth government bureaucracy that emanates from Beijing.

I haven’t even gotten to other areas of concern: the growing disparity between coastal China and the interior (which some say threatens China’s existence as a unified state), the widespread banking problems, a dysfunctional stock market and more.

There is opportunity, as well, which I’ll get to. But I’ve written enough on this topic for the moment. There is more to come in future missives, to be sure.

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