China's evolutionary road

Expert says foreign businesses must find innovative ways to survive in changing economic landscape

The growing competition for China's limited pool of highly skilled workers and the country's new stringent regulations are creating major obstacles for foreign companies in China, says Stuart Fuller, global managing partner at King & Wood Mallesons.

"You have to step back and look at the profound changes happening across China economically, in a government sense and in society," says Fuller, who added that many of the challenges facing foreign enterprises today were hard to imagine five years ago.

A report by the global law firm this month, called Doing Business in China, quotes a 2013 survey by the American Chamber of Commerce in China that says labor costs and a shortage of qualified employees continue to be the key challenges for foreign businesses.

That is a far cry from 2009, when the top concerns were more basic issues, such as having the know-how to obtain the right licenses and getting to know the domestic markets.

Fuller, who became global managing partner in 2012 as a result of the merger between the Chinese law firm King & Wood and the Australian law firm Mallesons, says foreign businesses need to find flexible and innovative ways to adapt to China's evolving markets.

The growing challenge of finding highly skilled workers in China is something that Fuller himself recognizes on a daily basis. This issue, he adds, is particularly important in the services sector.

The ideal employee in the service sector is not one who simply learns how to do business the Western way from their Western manager, but is able to lead a China market strategy using an understanding of the domestic market, Fuller says.

"Many Western companies went to China five years ago, trying to run their businesses with their own people, but now they're saying, 'You can't fly in expats to run the China operation when they don't understand how to do business there. It just won't work,'" he explains.

This changing attitude has created a demand for Chinese employees who have an understanding of both Western businesses and the Chinese market, perhaps through overseas work experience or studies. This group of people is also increasingly sought after by Chinese businesses as they look to expand abroad, he says.

But this rapid surge of demand far outweighs supply. China's talent pool is only just beginning to internationalize. It is important for foreign businesses to help cultivate young Chinese talent through secondment plans in which employees explore different career possibilities by temporarily changing roles within the same company. Fuller says King & Wood Mallesons often emphasizes this system at the firm.

Another factor in the battle for Chinese talent is the larger context of China's structural shift from a manufacturing-based economy to high-value added and consumption-driven growth.

Manufacturing, which was a key market opportunity for Western businesses in China five years ago, is no longer a unique selling point as the country's labor costs increase. Many manufacturers, Chinese and Western, are now shifting their production base to countries such as Vietnam and India, where costs are lower.

Instead, major opportunities for foreign companies in China now exist in consumption-based sectors, like financial services, education, healthcare and pensions, where regulations are gradually being loosened to allow for foreign entrants, Fuller says.

One example is the development of the Shanghai Free Trade Zone, a designated area used as a testing ground for China's financial services reform policies. Within the zone, foreign firms find looser regulations on larger capital accounts, fewer barriers to entry and greater interest rate liberalization.

These emerging opportunities mean that foreign businesses cannot simply train Chinese workers to make a product using global standards. Instead, they have to solicit the help of their Chinese employees to understand the consumer market, he says.

"In the Chinese market, the way customers buy products and the way clients expect things to be done are different. So your approach needs to be consistent but also flexible according to local market needs," Fuller says.

In recent weeks, a more controversial challenge has arisen: China's antitrust laws, which have been in place since 2008, and what some think is discrimination against foreign firms. Last month, the Chinese government charged Microsoft $140 million (110 million euros) in back taxes and interest. Qualcomm, the US semiconductor company, is currently under investigation by the National Development and Reform Commission and reportedly faces a fine of $1 billion.

Fuller says it is understandable for the Chinese government to enforce its antitrust laws because such laws are essential in protecting consumer rights and market efficiency.

He says these laws are likely being enforced today because regulators did not have the capacity or the knowledge to enforce them strictly a few years earlier when the market was less mature.

"The Chinese government is sending a strong signal that the way things were done in the past is no longer acceptable for China, and things are now done to a higher standard," Fuller says.

"The challenge in China is that it has had so much change in such a short space of time, including the freeing up of regulations and laws being enforced. The rate of change is significant and people need time to react to changes."

He says he is optimistic about the Chinese government's ability to reduce regulatory bureaucracy, citing the example of China's leaders' vow to streamline the nation's system of government approvals, specifically to reduce current government approval powers by one-third.

Fuller also says the new laws are needed to address new emerging challenges, citing the array of new laws in the global banking industry. China's enforcement of antitrust laws has therefore received far greater attention because of the "heightened visibility of what's happening in China".

"Everyone is watching China closely, whether it's the number one or number two sized economy in the world based on purchasing power parity, whether the HSBC Flash China Manufacturing Purchasing Managers' Index is up or down."

Fuller says he believes this high degree of attention to China is due to its amazing transformation over the past 30 years.

"My personal view is there are so many data points about China, if you read them in isolation it would be confusing," Fuller says.

He says it is impossible to find evidence to back up claims that Chinese regulators are willfully targeting foreign companies because there are no statistics available on how many Western companies are being investigated in comparison to Chinese ones.

The public impression, he says, "depends on what's reported outside of China. If there is an antitrust claim against a Western company and another one against a Chinese company, the Western company is likely to get greater press coverage".

cecily.liu@chinadaily.com.cn

(China Daily Africa Weekly 12/19/2014 page21)