It's one of the ironies of the U.S. trade deficit with China that a sizable portion of the goods exported to America are made by Chinese workers for U.S. firms. Earlier this year, the state-run Xinhua news agency reported that of the 200 top exporting firms last year, 153 were “foreign funded firms” — up from 141 in 2008.
It's estimated that at least a third of those companies are U.S.-owned. For example, Shanghai alone has about 3,600 American expatriate business executives — although it was around 4,000 before the 2008 economic downturn. Chongqinq, China's largest city, with a population of 32 million, lists 41 foreign firms operating there, including Lear, Du Pont, Delphi Packard and Pepsi. General Motors, the largest auto maker in China, expects to sell 3 million vehicles in the Asian market by 2015 from its Chinese plants. In 2009, the 665,000 foreign firms in China accounted for 28 percent of the nation's industrial output, 56 percent of its exports and 45 million of its workers. In the first quarter of this year, foreign investment rose 12.1 percent, to $9.4 billion, according to Business Week.
Even so, Google's recent difficulties with hackers in China may be an indication that as the Chinese economy matures the investment climate may no longer be as welcoming as it once was. One American executive doing business in Beijing says industrial espionage is rife and that the Chinese are experts at copying products. A foreign firm has at most a two-year window to establish itself on the Chinese market before it is challenged by an emerging local competitor.
As Chinese industrial know-how grows, the opportunities for foreign investors continue to diminish, according to business executives in Shanghai and Beijing. Recently, the Chinese authorities issued a directive encouraging government agencies to buy Chinese goods.
In a country where the state is still a major customer, this is a disturbing measure. But investors remain attracted by China, argues writer Zachary Karabell, author of the 2009 book Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It. Says Karabell, “There's really nowhere else to go where you have 10 percent growth, 300–600 million emerging middle class Chinese who want to buy stuff and an environment where the rule of law is increasingly at least adequate in enforcement of contracts and getting your investments out of the country.”
Google quit China after its servers were hacked, adds Karabell, partly because it wasn't doing very well in the Chinese market, and because it could afford not to do business with China.
The continued uncertain global environment has focused the Chinese government's attention on generating a domestic consumer market, so far with mixed results. Parting older-generation Chinese with their money means reversing a culture of saving, but the younger generations are avid shoppers. In the modern high rise that houses the Standard Chartered Bank in Shanghai — one of the thousands that crowd the city's skyline — Stephen Green, head of research, says older Chinese stubbornly stick to the “rainy day” syndrome — but “anyone born after 1980 behaves like an American.”
In the past decade, for example, Starbucks has opened more than 350 coffee shops in China, where it is flourishing at the same time its U.S. business has been hammered by recession. Starbucks' success is puzzling because the Chinese really don't drink coffee; China produces about 30,000 tons of beans a year but exports most of it.
Chinese flock to the 350 Starbucks coffee shops in China, including this one in Shanghai, but customers come for tea, not coffee, and because Starbucks is considered cool. (AFP/Getty Images/Oliver Lang)
Caren Li, Starbucks' spokeswoman at the company's downtown Chinese headquarters in Shanghai, says Green Tea Frappuccino is a predictably steady seller, but “we're promoting a coffee culture, offering the Chinese more choices besides tea.” Even so, it's not really about coffee: The coffee houses with the round green logo have become trendy meeting venues (there's even one in Beijing's Forbidden City), the chic place to be seen.
In 2009, a former Starbucks executive in China, Eden Woon, launched Toys R Us in China (locally called Toy LiFung), and today the American retailer has 15 stores in the country. China may be the world's leading toy manufacturer, but its citizens buy mainly for very young children. “There's no toy culture in China because parents think toys distract children from their studies,” Woon says over breakfast in a bustling hotel restaurant offering acres of dishes ranging from American pancakes and waffles to wonton soup. So Woon launched a campaign in this nation of overachievers with the message: “Toys are an important part of growing up.”
Mary Kay Inc., the Texas-based home-sales cosmetics firm, began operating in China in 1995. Headquartered in Shanghai, it marshals about 200,000 independent beauty “consultants,” thanks to a skin-care line tailored to the local market, including a four-week “whitening cream” treatment that sells for the equivalent of $120.
— Roland Flamini