Do You Know the Deputy Chief Engineer of Bengbu’s Economic and Industry Commission?

by Julie WaltonMost US companies that invest in China do so to serve the country’s diverse customers, rather than to manufacture and export back to the United States, the US-China Business Council’s (USCBC) 2010 membership survey results show (see US Companies Report Views of China’s Business Environment). The survey results also suggest that, from a business operating and profitability standpoint, these companies’ China operations are doing as well as or better than their global operations. US companies in China continue to play to their strengths in China: design, production, management, and delivery of quality goods and services.

Over the past year, however, I have seen one area in which US companies are not doing as well as they could be: communicating with local government officials. Though many US companies are better managed, provide higher wages, and offer safer working conditions than their Chinese counterparts, even US companies that have been in China a long time have yet to fully internalize the government’s substantial influence on daily operations, according to survey results.

To be sure, more companies have dedicated government affairs staff now than in the past. More companies are also taking steps to ensure that their voices are heard when the central government develops broad policies that will affect their sector. Given that industrial policy is a tool the central government uses to drive economic development, US companies should take these steps to make their voices heard.

But what happens when a foreign company leaves Beijing? What happens when a factory or office is located in, say, Bengbu, a small city in rural Anhui, one of China’s less-developed provinces? Two recent phenomena suggest that US companies have invested less effort in equipping their local staff to cultivate and maintain proper relationships with local officials than they have in building dedicated teams that can track and influence central government policy. The two phenomena—factory closures to meet energy-efficiency targets set in the 11th Five-Year Plan (FYP, 2006-10) and the development of the 12th FYP (2011-15)—highlight the connection between national policy and local implementation. They also reveal that US companies must know what is going on in their little corner of China before daily operations are interrupted.

Energy efficiency targets

According to targets established in China’s 11th FYP, energy consumption per unit of gross domestic product must be reduced by 20 percent from 2005 levels. At the end of 2009, central government officials began to signal through the press that the country would miss these targets. This was a clear warning that the government had identified a problem and would likely adopt administrative measures to address it. What those measures entailed became clear in July, when the central government announced that provinces would have to cut their energy consumption. As is common in China, provinces and municipalities were largely left to their own devices to determine how to implement the required energy cuts. As a result, local governments across China took myriad actions—shifting work days, assigning energy quotas, and shutting down factories.

US companies were caught off guard. By early August, phone calls and e-mails were rolling into USCBC’s Shanghai office from companies asking what was happening and what they could do about the local official standing on their factory floor telling them they had to reduce energy consumption by 20 percent immediately. What surprised me was that US companies were so unprepared, even after seven months of verbal warnings from the central government, and after many companies faced similar experiences in 2005 when factory and office shutdowns occurred nationwide because of coal shortages and high temperatures.

What would have helped US companies? Companies should have ensured that staff in their local facilities had developed and maintained appropriate relationships with relevant local government officials to understand the government’s thinking before disruptions reached crisis levels. In this situation, knowing how the local government was interpreting messages from Beijing, collecting and analyzing energy-usage data, developing methodologies to assign quotas, and targeting specific companies or industries would have afforded the companies extra time to prepare. More important, such knowledge may have enabled the companies to share ideas and best practices with local officials to reach energy-efficiency goals in a mutually beneficial manner, thus potentially minimizing disruption to work schedules and supply chains.

Local 12th FYPs

By overlooking the importance of government affairs, US companies may also be missing out on identifying and planning for future business opportunities or challenges under local FYPs. The central government drafts these massive economic and social guidance documents every five years, and it will release the 12th FYP next March. Each province and city will also develop its own 12th FYP. These plans will target all aspects of urban and rural planning, including priority sectors, investment incentives, social policy changes that may affect compensation and benefits packages, and, unsurprisingly, energy-efficiency goals. As local governments across China debate what to include in their 12th FYPs, some local governments will quietly seek industry input, predominantly from Chinese companies. US companies that have been in China for a while may have seen this process happen several times before, though they may not have participated in the past. Right now, US companies have a rare opportunity to know “the plan” for the next five years and may also be able to influence it. This privilege, however, is only given to companies that have deep connections to multiple local government entities.

At the end of the day, relationships with local government officials enable companies to respond to the challenges that arise in China’s ever-changing business environment. Local governments will play a decisive role in determining the ease with which companies can meet efficiency targets, protect intellectual property, pay taxes, or manage human resources. Chinese companies have an advantage because they inherently know the system and have personnel in place to interact with local officials. But Americans can, and must, learn how to do this too. So, encourage the plant and office managers to spend time with local officials and brainstorm solutions to company challenges. Train the finance and human resources professionals to ask the right questions and communicate information back to headquarters. When US companies start acting a little more like their Chinese competitors in recognizing the importance of maintaining professional, cooperative relationships with local officials, they will be adding another piece to the toolbelt of a successful company in China.

[author] Julie Walton ([email protected]) is the US-China Business Council’s chief representative in Shanghai. [/author]