One Billion Customers (James McGregor) 0 comments

With the rise of China there are countless new books appearing regularly on doing business in this new emerging giant economy. Recently I have been reading much on this topic and I shall introduce a few interesting books covering it. This book is one of them.

The book was actually highly recommended to me by a friend who promised that it would not be dull reading. And so I picked it up and indeed it proved hard to put down.

First, a word about the author James McGregor. The credentials of the author often determine the credibility of the book, and this guy is no slouch on the topic of China. He was a former Wall Street Journal China bureau chief post-Tiananmen massacre, chief of the Dow Jones' China business operation during the 1990s, and a former chairman of the American Chamber of Commerce in China. He now serves as a China business advisor and investor. When you get Henry Kissinger praising the book at the back cover, you know instantly that this is not another run-of-the-mill book on China.

The book is actually a collection of tales of various Western companies' past experiences in doing business in China. Each chapter can be read separately, and that is why it is so enjoyable reading (it helps that the author is a former journalist). The tales span a wide variety of industries: from Morgan Stanley's partially successful efforts to start an investment bank in China through a joint venture, to Dow Jones and Reuters' regulatory tussle with the state-owned People's Daily in the financial data services market, Rupert Murdoch's transition from villian to mentor of the media industry in the eyes of the Chinese propaganda ministry, the emergence of the Personal Handyphone mobile telecommuncations system in China against all odds, and the problems faced by the high-technology industries of satellite/aerospace arising from export restrictions triggered by government-to-government tensions, which have crippled US competitiveness vis-a-vis European competitors in this area. Each of the above tales form one chapter in the book.

A common thread running through the book is the dominating role played by the Chinese government and state bureaucracy in Chinese business. Anecdotal as well as statistical evidence suggests the importance of the state is decreasing in recent years (by design), given the emphasis given on selling stakes of SOEs (state-owned enterprises) through IPOs as well as the growing importance of private enterprise verses state-owned enterprises. However, James McGregor's tales show clearly how influential the Chinese government were in the 2-3 decades following the economic liberalisation initiated by Deng Xiaoping (in the late 1970s). Although McGregor did not say it, it was clear that rule by law, not rule of law, was the buzzword as China groped around in the initial stages to integrate the essence of market economics and liberalisation with their socialist roots. Given that all assets were owned by the state, the opening up involved relinquishing/transferring state control, issuing licences, setting standards and regulations, defining the boundaries --- all requiring local discretionary exercising of bureaucratic judgment and interpretation that gave great power to local and state governments. This of course led to economic rent-seeking behaviour by the local entrepreneurs and corruption on the end of the bureaucrats. But more importantly, the power of the bureaucrats and the state meant it was important to understand their priorities: to strengthen their economy and bring progress. Foreigners who did not understand the corridors of power in China often ended up on the losing end, while those who understood to emphasise on adding value to the overall strategic government aim (while not making their hosts look bad) did well.

To a certain extent, the author's strong links with the Chinese government and the various big businesses make me wonder if his hands were tied in presenting a more cynical view. At the same time, many of the tales, with their details and intricacies, suggest that he might have interviewed many of the protagonists who might have embellished their versions of events to present themselves in the best possible light. But nonetheless, the industry backgrounding provided by the author at the start of each chapter provide some of the most insightful commentaries on China I've read, while the stories themselves are great reading.

One chapter to read in particular is a tale of corruption extending up to the highest echelons of the Chinese government that enabled a Chinese entrepreneur to make a fortune off his connections ("Eating the Emperor's Grain"). It fully reveals the system of patron-client relationships that existed between corrupt politicians and compliant Chinese businessmen that characterised the gold-rush attitudes infecting all classes of Chinese (lawmakers/enforcers included) accompanying the economic liberalisation of China. This, alone, is a risk that should be factored into the valuations of China stocks, mitigating the enormous potential of the Chinese economy.