Post of the Day
January 19, 2000
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On doing business in China
I've scrolled through a bunch of posts on the Sohu deal, and the Nokia fab that will be built in China.
Every time some company sets up in China there is the automatic salivating over the 1.1 billion person market. India is the same. And this is correct, for even though these countries are impoverished, the 1oo million strong middle Class in China and the 250 million person middle class in India are both huge markets.
But at the same time as someone who has worked representing western companies in both countries, I'm in a position to give fair warning that access to these markets rarely works out very well for the foreign company. I know of only one situation in India, and none in China where the foreign company has made any money.
Instead, the governments of these countries are absolutely expert at seperating these corporations from their hard currency in exchange for access in the markets.
Both countries require a local partner that does not necessarily need to put up an equity position. In China, more often than not, the equity partner is a front organization for the military. In India, it's usually a crony to the politicians in charge at the time. In both situations, the processes are rife with corruption, and even the most well-intended, straight as an arrow companies find the need to make all sorts of facilitiation and licensing payments to get a for-profit business started.
Even companies that prove to make some money in the countries have grave difficulties repatriating their capital out of India or China due to either arcane or purposely obfuscatory banking regulations.
In the end, the entities that generally profit from ventures in China and India are the governments and the political leaders. Not Coke, not McDonalds, not GM, not Enron, not Sprint, Morgan Stanley, Suzuki or Toyota have gone into either country and had a revenue positive venture, and some of these companies have been operating in India and China for well over a decade.
The only American company that I know of that has generated positive revenues in India or China? Citibank.
The access to the markets is great, but we must be cognizant of the incredible barriers to profitability that exist in these countries. China's government is oh-so-aware that foreign companies are salivating at the thought of access to its population, and is more than willing to make them pay for the privilege.
I've done it in telecom, and believe me, the easiest thing that Nokia will ever do in China is sign the agreement. Not to say that our beloved management isn't destined to be the ones to sort out how to make money in China, but they are playing against the house, and the house, so far, has won much more than it has lost.
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