2006 China Business Conditions State of Affairs

China will soon have the world’s second largest economy. Amazingly, China was not even among the top fifteen countries in economic ranking a quarter century ago. China has increased its relative ranking in total economic output faster than any other significant-sized country in the entire history of the modern world. For new investment, business people want to enter a fast growth market niche with reasonable predictability and stability. China has had both of these for most of the last quarter century.

A brief summary comparison of “Kingdom Businesses” in China versus other major unevangelized areas of the world (Africa, Central Asia, SE Asia, etc.) results in a startling factit appears that China has well over fifty percent (by total profits) of all Kingdom Businesses in the unevangelized world. Sadly, the vast majority of “known” Kingdom Businesses in other least reached areas of the world have failed to make a sustaining profit (using commonly accepted accounting practices) during the past twenty-five years. Additionally, these non-China areas have had precious few “significant-sized Kingdom Business model winners” which have been able to attract seven-figure (US$), market-based financing (debt and equity) on a continuing basis; instead China continues in first place for Kingdom-Business based capital investment.

The conclusion is that the past twenty-five years have been, overall, increasingly “good” years for Kingdom Businesses to be started and/or grown in China. However, while the future is quite bright, it will also become more competitive.

Comparisons between the Past and Now

THEN: This author worked in his first factory in China in 1983. Our business was then a “typical” central-government funded large (i.e. several hundred million dollar) project involving 5,000 workers in a state-owned enterprise where fees for a successful technology/license transfer were the basis of successnot profit at the actual China operation. I had no ability to directly hire or fire employees. Our manufacturing process required a dust and temperature controlled environment to do friction welding for manufacturing extreme-environment oilfield equipment parts. When workers were discovered using company equipment to “roast” a pig in this clean welding environment, we were unable to effect the changes we wantedimmediately fire the workers and put in new safeguards to make sure it never happened again.

NOW: A large, Kingdom Business (KB) recently decided, from an economic basis only, that their two wholly foreign-owned enterprises (WFOEs) should be consolidated into one. They successfully, within a nine month time period, laid off over 400 employees in one location and hired over 300 employees in the new location. Without this ability to rationalize production, this KB would probably have had to close down in a few years.

THEN: The first five manufacturing businesses in the early 1990s that this author invested equity in were all joint-ventures with Chinese partners where we, as the “foreign party” were the minority partner. We made some profit in four of these; however, in all five we were not very successful in keeping Kingdom-minded management in the business. We have now exited from all of these (our average length of ownership was eight years).

NOW: Since 1997, only one of our equity investments (approximately ten) has been a joint-venture (JV) with a Chinese partner. [Note: this JV was not a classic “greenfield” manufacturing start-up (where we would probably only do a wholly-foreign owned enterprise if at all possible). Instead, it was an acquisition where the Chinese partner’s investment was the purchase price of the newly-created JV.] Conclusion: China has tremendously liberalized (both in regulation and in practice) the ability of the non-national business/entrepreneur to own his/her own operation in China. Given the values that KBs try to instill in their operations, KBs should normally not have a local, non-KB partner if that partner wants to play an active on-site role in the business.

THEN: When I worked in the 1986 -’89 time frame with General Electric (GE) in China, we only had our Beijing and Shanghai offices with a new equity investment based in Beijing in late 1989. We did some aircraft engine sourcing in Xian and other places, but outside of short-term sales and technical support business in “remote” areas, GE’s several hundred million dollars per year business in China did not have any non-nationals long-term in second-, third- and fourth-tier cities in China. The Great Commission reality of China is that historically over thirty of the top fifty least-reached cities in the world were in China. With a few notable exceptions, KBs were not significantly “incarnationalizing” themselves any place outside of the big threeBeijing, Shanghai and Guangzhou.

NOW: If an entrepreneurially-competent team is committed to start a “world-class” business in one of the 170+ cities in China with over one million in population, they now should be able to create, network, analyze, final select and implement a successful business plan. With the cost of shipping and telecommunications continuing their general tread of decreasing over the past twenty-five years (on both a nominal as well as inflation-adjusted basis) while the quality and quantity of these continues to increase, a team with the “right stuff” has a reasonably good chance of finding its competitive advantage and “staying alive” with the business.

THEN: In January of 1981, this author attended the winter semester at Harvard Law School’s “China Law” class. We had less than 100 pages of Chinese laws to read; the class focused on Joint-Venture Contracts and other types of actual, individual business contracts.

NOW: China has entered the World Trade Organization as a full member. Contrary to the popular perception in the West which belittles China’s patent and copyright protection, China’s intellectual property rights (IPR) laws are basically up to the level of “international best practice.” Although the effective enforcement of IPR needs improvement, the legal and administrative IPR protection exists. Books in China with Christian-based values can be legally published and distributed.

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Dwight Nordstrom

Dwight Nordstrom, B.A., M.B.A. is chairman of Pacific Resources International (PRI), a privately-held USA Holding Company for manufacturing investments in China, and a twenty year China BAM veteran.View Full Bio