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"To Get Rich Is Glorious," Chinese Leader Deng Xiaoping Once Said. Western Businesses Are Hurrying to Join the Market Boom in China -- with Mixed Results.

RISING IN THE EAST
WRITTEN BY MARK COLLINS
In Kissimmee, Florida, a mile down the road from Walt Disney World, sits Splendid China. This 76-acre theme park features miniature replicas of great Chinese icons. For the oddly precise admission of $23.55, visitors can watch Chinese artisans at work. (A nearby shopping area provides ample opportunity to purchase these native crafts.) Patrons can also tour a scaled-down version of the Great Wall of China, first built more than two thousand years ago to keep out marauding hordes along China's northwestern border. There's also a mock-up of Beijing's Forbidden City, where centuries of imperial leaders, worshipped as gods, ruled the vast empire.

The $100-million theme park, built just three years ago, presents an unerringly accurate (if unintentional) portrayal of the real, post-Mao China. The real China, like Splendid China, only opened a few years ago. The real China, like the theme park, is a "free market" that takes every possible advantage of Western money, yet retains tight control over its new-found economy. It's a historical China, demonstrating not only its artifacts but its ancient skill at trading and mercantilism -- as well as its wariness of outside "help." And it's a model China, orchestrated to show its best side to curious Western eyes. Most of all, it's a "new" China that sees fit to navigate recent -- and enormous -- economic changes in its own way, on its own terms...much the same way that Chinese civilization has operated for the last 3,500 years.

WHETHER THE TOPIC IS Splendid China or the real thing, one fact remains clear: the economic face of the world's most populous country has changed forever, both literally and figuratively. "I looked out my hotel room in Shenzhen," says Wayne DiBartola (Engineering '55), recalling his 1994 visit to the boom town north of Hong Kong, "and I counted 50 construction cranes. Fifty! And that was just from one side of the hotel."

The statistics from this Asian giant -- ostensibly still a "communist" nation -- speak for themselves. China's economy is growing at an unheard-of average rate of nine percent per year, which means its domestic market can double every decade. Despite its meager per capita income, the country's 1.2 billion inhabitants make it the third largest economy in the world in terms of purchasing power, behind the United States and Japan. And China also boasts an $18.3 billion trade surplus with the United States, with a gross domestic product topping $1.2 trillion.

But China's "new capitalism" is better understood in person than on paper. "Beijing was amazing," recounts Peter Oresick (Education '77, Arts and Sciences '81), marketing director for the University of Pittsburgh Press. Oresick visited China last year as part of an international publishing conference -- another sign of China's changing times. "There were vendors everywhere in Beijing, mostly young entrepreneurs in their 20s selling everything from T-shirts to CDs to vegetables to Coca-Cola. Some were selling copies of Mao's Little Red Book. It seemed to be sort of a retro thing. Maybe they were just capitalizing on the Western idea that kitsch is marketable."

And Western businesses are riding in quickly to exploit this entrepreneurial spirit. Others are lured by the prospect of cheap labor. But the focus is no longer confined to tourists and exports. The influx of foreign capital has had a ripple effect. A new Chinese moneyed class is emerging, one that hungers for all the tools of the entrepreneur: cars, computers, fax machines, cellular phones. In 1992, Motorola started a small plant in the port city of Tianjin, hoping to build a good export base for its pagers. Instead, the pagers were quickly bought up by China's domestic market. "We no longer talk about the 'potential' Chinese market," Motorola executive Lai Chi-sun told Business Week. "That market has arrived."

"It's become common to see people with cellular phones, briefcases, and pagers," says John Tecklenburg (Law '72), senior international attorney at Alcoa and a regular visitor to China. "In fact, it's more and more common to see them driving -- there are many more cars in China than there were just ten years ago."

How could a country that was so closed just 20 years ago be so openly market-driven today? One key, say experts, has been the order of reform: economics before politics. "The Soviet Union's change to capitalism happened all at once, and the result was a total disaster," says DiBartola, a Pittsburgh-based engineer for E G & G Environmental who's done business in China and in Eastern Europe. "The Chinese have moved cautiously toward a free market with very controlled, very intelligent planning." Tecklenburg isn't convinced that the new Chinese reforms are "controlled," but he does see the contrast to Russia. "Nothing was liberalized in the Soviet Union, then everything was liberalized," he says. "As a consequence, there's no residual knowledge in Russia about how business works."

Also, "the economy inherited by Russia was much different than that of China," says Pitt economics professor Thomas Rawski. "The market forces in China were never truly suppressed."

So, with the mouthwatering opportunities -- the cheap labor, the growing market, the construction boom, and many eager partners -- Western businesses should be fighting to board the Orient Express to Shanghai, right?

Not so fast.

"THERE REALLY ISN'T one China," says Dennis Unkovic (Law '73), a partner at the Pittsburgh law firm of Meyer, Unkovic & Scott and a specialist in international trade. "It's one country with several regions. You can't treat them all the same any more than you could treat the United States the same." (By example, Unkovic recounts a German client who came to Pittsburgh in search of American partners. "This meeting will have to be over by 10:30," the client told Unkovic, "because I have a meeting in Chicago at 1 o'clock." "I'm not sure we can get you to the airport in time," Unkovic said. "Airport?" the client replied, surprised. "But I'm driving.")

Indeed, in a country as breathtaking in population, land mass, and history as China, a novice can be lulled into dangerous assumptions about uniformity among the Chinese. It's really a hodgepodge of differing interests, bound together by a shared bureaucracy, geography, and heritage, but -- business-wise, at least -- not much else. China's poor, rural interior populace, for instance, has little to do with the boom along the Pacific Rim -- except for supplying a steady stream of transient workers searching for jobs.

One of the biggest problems for Western companies is distribution, says Unkovic. Where one builds a plant is crucial in a country of 3.7 million square miles (the US is 3.6 million square miles.) "I remember one client I had, a firm that sold replacement machine parts," he recalls. "Shanghai looked promising, so I asked a local sales representative what kind of service coverage they could offer. They'd only sell within 100 miles of the city, which isn't much help. Then again," Unkovic adds, smiling, "that one area may include hundreds of millions of people."

Instead, Western companies have to investigate the local makeup: What kind of shipping is available? What kind of local talent is needed? What facilities are offered? And who will use the final product?

If these sound like first-year business school questions, you're right. Take the case of Alcoa, manufacturers of (among other things) plastic caps for soft-drink bottles. Despite the lower per-unit cost of manufacturing, it doesn't make any sense for Alcoa to ship boxes of little plastic caps all over the world from their plant in China, says John Tecklenburg. "It's all meant for the local Pacific market." But, Tecklenburg warns, any export arrangements must be worked out in advance with local officials. The specifics are built directly into the contract, and each contract is different. "Exports are often a contentious issue," he says.

In fact, the entire issue of contracts is contentious, say Westerners. "I have negotiated all over the world, maybe 45 countries," says Unkovic, "and the Chinese are the best negotiators by far. Deals with the Chinese are among the most difficult to do. The Chinese simply love to negotiate. They like everything about it." ("Well, yes and no," says DiBartola. "They may love to negotiate, but it's always toward some predetermined end. They know what they're doing every step of the way.")

Also, Westerners aren't prepared for the intricate personal relationships with their Chinese counterparts, says Mame Bradley, (Arts and Sciences '69, Education '73) head of the Pittsburgh chapter of the World Trade Center, a global trade organization that encourages international commerce. "It's like peeling layers of an onion," she says. "It begins with the highest degree of formality, then reveals more and more layers until a sense of friendship develops that governs the relationship."

This negotiating-while-making-friends process can be arduous: Get ready to spend a week or more in China with local government officials and joint partners -- and that's just in the bidding process, not the final negotiations.

Wait a minute. Government officials involved in negotiations? What happened to the new free-market economy?

The popular notion of the "emerging" capitalist China, experts say, is a myth. While it's true that rapid market reforms have forever changed the undergirdings of Mao Zedong's 1949 communist revolution, China's economy is still of the authoritarian, government-led variety. Rawski estimates that 90 percent of industrial production takes place in factories that are responsible to local or national governments. "These businesses are no more 'private' than the Port Authority Transit is here in Pittsburgh," he says.

"The idea that 'market forces' now totally run the country -- that's a facade," says Wayne DiBartola. "The government is in complete control of how the economy expands." In fact, the runaway growth has been slowed recently, largely due to the economic brakes applied in Beijing.

Goverment officials aren't the only shrewd negotiators; private Chinese citizens are also experienced traders. Such mercantilism is part of Chinese heritage, says Dennis Unkovic. "The Chinese were into trading back when Europeans were still sitting around chewing on bark." It was the Chinese who have most influenced the frenzied trading regions in Malaysia, Thailand, and Singapore. Even 40 years of communist rule failed to squelch the Chinese urge toward trading. "Under Mao," says Rawski, "a field worker in a rural collective might earn 85 Chinese cents a day. Materials for building a house might cost as much as 1,500 yuan. No one can accumulate that kind of money from their collective payments. So they engaged in businesses such as raising piglets or collecting pig food from wooded areas to obtain money that they needed to finance house building, to finance marriages, to finance funerals. There was an explosion of business activity after 1979. The reason is that these entrepreneurial tendencies were suddenly allowed much greater scope for operation."

This singular mix between government oversight and private entrepreneurship leads to some economic schizophrenia. For instance, Peter Oresick notes, there's been an explosion in Chinese academic publishing since 1979. More than 100 university presses operate throughout the country -- about the same number that operate here. But cutbacks in state subsidies have forced many university presses to beef up their marketing skills. The problem, Oresick discovered, wasn't publicity or advertising, but distribution. China's book distribution system is still run through a state agency called Xin Hua -- "sort of like a governmental Sears catalog," he says. Xin Hua controls the book pipeline to their catalog and their stores. (Independent bookstores, Oresick notes, are slowly emerging, but are still rare.) Because Xin Hua places the major orders for books, publishers won't print until they know how many books Xin Hua is going to buy. And the books are priced as if they're still subsidized, with little increase in price despite 30 percent inflation since 1990.

This continued state involvement in an emerging free-market system is unique to China -- but can be troublesome to outsiders. For instance, Western companies bidding in China must be prepared to bid against other foreign competitors -- who may, in fact, be sitting in the next room. Unlike the blind bidding custom of Western capitalism, Chinese negotiators (including government representatives) will tell you outright who has the lowest bid and ask competing companies to match it. "You spend all of your time preparing your specs and your presentation, and you've come all this way -- it's pretty tempting to negotiate away your final price," says DiBartola. "But there comes a point where you have to say, 'I'm sorry. I'm no longer interested in this project.' You pack up and walk away. Sometimes they call you back to the table; other times, you just keep walking."

Cynics see this process as a way for the Chinese to secure as many detailed bid proposals as possible, then "steal" the plans and technical information for themselves. But DiBartola disagrees. "They want to be assured that you're a professional, every step of the way," he says. "You have to prove, over and over again, that you're fully capable of fulfilling the project."

THE IDEA OF "STEALING" trade secrets -- of pirating in general -- has dominated the trade dialogue with China in recent years. It's a complicated problem that includes both patently unfair business practices and far more subtle cultural differences. At issue, for both sides, are two forces -- money and principle. It's a dangerous combination: The fight over intellectual property led to threats of US sanctions against China earlier this year, the biggest rift between the two countries since the Tiananmen Square massacre.

The United States "was doing all the heavy lifting" in terms of trade threats, says economics professor Rawski. "In public, the United States is virtually alone in pressuring the Chinese to adopt more open policies." As a result of this ongoing tug- of-war between China and the United States, China has at times restricted the operations of US businesses in China, giving an advantage, at least temporarily, to other foreign companies there. But the threats seemed to work, Rawski notes. "China was surprised by the talk of sanctions," he says. "It was as if China thought itself too important in world trade, and thought the United States would be isolated. It didn't quite happen like that."

Although not always responsive to world opinion, China is very much aware of outsiders' views. "They are astute observers, experienced in diplomacy," says Montgomery Broaded, coordinator of Pitt's Chinese Studies program. "Yes, it's true the nationalistic pressures are strong and can be used by the government when it serves their interest. Of course," Broaded adds, "Americans are no strangers to politicians using nationalistic appeals."

The difficulty in dealing with China these days, Rawski notes, is compounded by the failing health of Deng Xiaoping. (The Chinese leader jokes about "going to meet Marx.") For instance, complicating the recent copyright dispute with the United States was the fact that the factories producing pirated music are connected to powerful people. "Whoever signs the papers ordering the factories to close presumably loses the support of these powerful people," Rawski says, at a time when everyone is jockeying for position in the political arena.

"There's no doubt about pervasive pirating by people who just want to make a buck," says Oresick. "But Chinese culture values the exact reproduction of esteemed icons. It's not seen as theft, but flattery. So copyright infringement just doesn't get as much enforcement because it's not a priority."

Also, add Rawski and Unkovic, there's a historical angle as well. During the 1950s, the early days of GATT -- the General Agreement on Tariffs and Trade -- so-called Third World countries operated under generous rules. Japan and Taiwan (then considered "developing" nations in the post-war world) were allowed to stretch trade rules. For instance, Taiwan was once infamous for pirating books. Recently, the United States decided that this history of "exceptionalism" was a mistake, one they wouldn't repeat -- and China is where they took a stand. "You could predict this copyright crisis coming," Rawski says. "China feels as if they're being singled out."

"The attitude by many outsiders is, 'We'll make sure that China respects our intellectual property laws,'" says Unkovic. "There's a real failure to recognize a completely, fundamentally different concept toward knowledge in China. It's simply not seen as a moral issue." Many Chinese leaders hold the same attitude toward the Tiananmen Square massacre, Unkovic says, as they do toward environmental questions, Tibetan independence, and toward the poverty that's still prevalent in the interior of China. So when the West reacts with moral outrage and threatens economic sanctions, the Chinese do not understand this new and sudden factor in trade negotiations. "Their feeling is, 'This is not your problem.' If that sounds cold or unfeeling -- and I'm not saying I agree with their attitude -- remember that China has often been invaded, often told what to do by outsiders, both culturally and morally."

To many Americans, the very name of Tiananmen Square conjures up many images: the hand-made papier-mch Statue of Liberty, the students standing defiantly in front of the oncoming tanks, the news reports of the bloody final confrontation between the demonstrators and the military. It's an image, Rawski says, that's due for a change.

"The general picture of human rights in China is one of substantial improvement," says Rawski, who was staying near Tiananmen Square in 1989 when the tanks rolled in. "Clearly human rights violations still exist, but things are much different than when I first visited China in 1975. It was completely totalitarian then. Everyone was very afraid. People were afraid to visit me at my hotel, even afraid of wearing the wrong clothes. On my first visit to a Chinese university, my hosts were afraid -- and I mean physically afraid-of someone in the room with us. And I did not know who it was.

"Chinese society is much more open now than it was then. Free speech is broader, but there are still danger zones," Rawski adds. "China today resembles Taiwan or Korea in the recent past in that there are dangerous subjects where there is no freedom of speech. People who venture into these danger zones risk arrest and maltreatment. But for the vast majority of Chinese who do not wish to confront the government, the range of freedom has expanded very greatly in the past two decades. There have been enormous improvements in freedom of speech, of religion, of travel, and also of economic freedom -- all in the last 10 or 15 years. This occurred so fast that in some cases Chinese people don't fully understand what has happened." Despite the advances, the human rights question continues to influence how some Westerners do business in China. At the publishing conference Oresick attended, one American participant decided to bow out as a form of protest. "It's something I wrestled with," he says now, "but I didn't think that boycotting a goodwill mission to discuss books was an effective weapon of protest. If anything, the spread of books and ideas in a society that had been closed for so long was something I wanted to encourage."

With all of the drawbacks to business in China -- the government involvement, the Byzantine negotiations, the free- for-all bidding process, the technological handicaps, the export quotas, the pirating issues, the lingering question of human rights -- why would Western companies want to get involved? "Because they need your business and because there's not much competition," Wayne DiBartola says simply. "It takes huge amounts of money and resources to withstand the negotiation process, and that scares a lot of companies, especially smaller firms, away. In the end, though, it'll come down to three or four companies who decided to stick with it."

IN FACT, DESPITE THE DIFFerences, doing business in China isn't much different than doing business anywhere: it takes research and common sense. "There are Western businesses that have a cavalier attitude toward international trade," says Mame Bradley. "They take no personal involvement in the negotiations, won't meet with their trading partners, and do little investigation of the folks they're dealing with. That's not a good way of doing business -- not in China, not anywhere."

"I know companies who want to move their operations to China just to take advantage of the cheap labor," says Dennis Unkovic. "They're certain that they'll double their productivity. You know which country is the most productive? The United States. It's always been the most productive. There are plenty of good reasons to invest in China, but you can't be short sighted, looking for easy profits."

So it's sort of like any money transaction, right? It's like figuring out how to spend your disposable income. Do you go on a trip to Disney World, or a tour of Splendid China? It's knowing more than just the price of admission, but the value of the attraction. It's a matter of studying the numbers, of reading the brochures, of consulting the experts who have been there...right?

"Experts?" says Dennis Unkovic, laughing. There are no experts about China. People who tell you they're experts are fooling themselves."


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