The Gap Year

by Robert Poole

One way to look at US business and China in 2010 to date might be to see it as a year of many gaps, or spaces where common or agreed interests don’t quite meet. Despite these differences, the underlying interest of both countries’ consumers in each other’s products remains strong, and even if parts of the business relationship are under challenge.

Where the gaps lie

The differences are numerous and occasionally lead to exaggerated media headlines and mutual pointing of fingers. Both governments recognize the vital need for cooperation, and yet

• Vows against protectionism have been belied by tariff and other actions in Washington and Beijing;
• Pledges on climate change have led to more promises and limited technical cooperation, without real progress on either side; and
• Industrial policy discussions have not markedly reduced worries and distrust of US and Chinese companies of each others’ markets, despite earnest efforts.

Economic and financial views

US and Chinese perceptions of what constitute suitable economic and financial policies have also diverged widely, with the battered Western model of lightly regulated market competition dimming considerably in most Chinese eyes against the relatively strong results of China’s own government-led economy. China’s economic and financial reforms have certainly slowed, and the debate over the best model for its modernization has fractured further.

Business policies: Encouraging Chinese growth or protectionism?

In business, gaps have grown more prominent, too. PRC officials have been surprised at world reaction to industrial policies aimed at their highest priorities: addressing domestic imbalances, maintaining employment, and transforming China’s economy by moving manufacturing up the value chain and spurring services growth. Steps to promote “indigenous innovation” have provoked legitimate international business fears that have reached the highest levels in foreign capitals. PRC officials have met foreign allegations of grand industrial conspiracy with defenses that seemed to range from “You just don’t understand us” to “Our model works better than yours, for us.”

Company views of China

In some instances, views of China between in-country executives and their counterparts at headquarters back home have widened. On a number of occasions, the US-China Business Council (USCBC) has been asked to gently disabuse visiting CEOs of the belief that 10 percent economic growth in China should enable the company’s China operations to grow revenues by multiples of that amount easily! But executives are right to appreciate the relatively good results that have come from China—most companies’ China operations outperformed other locations in 2009. Another bright point is retail spending, up 18.1 percent in the first quarter of 2010 over the same period of 2009, contributing to first-quarter growth of 11.9 percent.

Looking past the gaps

Several observations have stood out in the ups and downs of recent months. In stormy March, Amway Corp.’s President Doug DeVos wisely reminded a Beijing audience of Chinese and foreign officials and media that times of difficulty or strain in a relationship cause us to think more about the other side’s needs and can thus push us to find compromises and resolutions. Equally insightful was a PRC State Council official who told USCBC in April that China’s optimism about the long-term relationship with the United States is tempered by a realization that there will be “w-shaped” ups and downs along the way.

We all would probably do well to rein in our fears about the gaps—and our expectations about easy cooperation and profit. Instead, we should focus on the underlying commercial interests, always looking at the value proposition of good products and innovations for consumers, high quality in the services sector, and good employment practices and community citizenship.

My own optimism is grounded with the Chinese individual and corporate consumers who have demonstrated a growing desire and ability to afford worldclass products. It is tempered by a keen awareness of risk for US companies in China, including weak intellectual property rights protection, worrisome business policies, and larger issues regarding the sustainability of economic growth.

Seen from Beijing by someone with regular contact with US companies throughout China, 2010 is perhaps a year when gaps are more visible, but a year that may help us to focus on ways to reduce and resolve them.

[author] Robert Poole is vice president, China Operations, at the US-China Business Council in Beijing. [/author]