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					Palme r, Brian. The view from China. Nova Iorque: Fortune, vol.140, art. 9, pg.211; 8 de
novembro de 1999.



The view from China
Fortune; New York; Nov 8,    1999; Brian Palmer;


Abstract:
Dressed in a conservative Western business suit, China's President Jiang Zem in in late
September delivered a speech to executives at the Fortune Global Forum in Shanghai. Who
is the real Jiang Zem in - the one in Maoist dress reviewing PLA soldiers or the pragmatist
who came to Shanghai? That question and what it means for China, was the implicit
preoccupation of Fortune's 3-day conference, "China: The Next 50 Years." Foreign
strategists, economists, and bankers - and most of the Chinese officials present - agreed
that China has little choice but to continue economic reform.


[Headnote]
Big business confronts China's huge potential-and problems. By Brian Palmer



Dressed in a conservative Western business suit, China's President Jiang Zemin in late
September delivered a speech to executives at the FORTUNE Global Forum in Shanghai. Amid
blasts on Taiwan and human rights, he promised to "create a better environment for foreign
enterprises." Four days later, Jiang gave another speech. This time the setting was different (atop
Beijing's Tiananmen Gate), and the audience was different (the soldiers and masses assembled to
celebrate the 50th anniversary of the People's Republic). And so was Jiang: The visual
symbolism of China's President in a Mao suit was missed by no one.

So who is the real Jiang Zemin-the one in Maoist dress reviewing PLA soldiers or the pragmatist
who came to Shanghai? That question, and what it means for China, was the implicit
preoccupation of FORTUNE's three-day conference, "China: The Next 50 Years." It was
attended by roughly 300 foreign executives and more than 200 Chinese government officials,
managers, state bankers, and academics. These participants discussed a range of primarily
economic issues: state-owned enterprise and bank reform, e-commerce, legal issues, branding,
intellectual property, the environment, and nearly two dozen other topics.

General Electric CEO Jack Welch held forth to a packed auditorium on the secrets of
management, including the need to systematically weed out the poorest performers; Coke chief
Doug Ivester traded volleys in the cola wars with Pepsi's Roger Enrico; Henry Kissinger, Lee
Kuan Yew, and Robert Rubin shared their views of the world; Presidents Bill Clinton and
Jacques Chirac sent videotaped messages. Clinton spoke of China's great potential, and Chirac
invited the participants to Paris in June 2000 for FORTUNE's next Global Forum.

But beneath the glitz, the message was more subdued. Foreign strategists, economists, and
bankers-and most of the Chinese officials present-agreed that China has little choice but to
continue economic reform. "The inevitability is, China is condemned to grow," said Ken Courtis,
a Tokyo-based economist with Deutsche Bank. "You've got to create 18 to 20 million jobs a
year, or you have people in the street." Such growth, many agreed, requires liberalizing the
country's nascent capital markets; reorganizing the banking system so that credit can go to the
private entrepreneurs who are actually creating wealth and jobs; shutting down money-losing
state firms; boosting tax revenue; and speeding up legal reform. But all of these changes will
carry considerable short-term costs. "It's going to be very, very tough," said former U.S. Trade
Representative Carla Hills. "Yes, there will be investment and exports that generate economic
activity, but there will be bankruptcies. There will be failures."

Almost every topic addressed at the conference reflected two basic problems. First, that the next
round of reform will be much more difficult to implement: The easy things have already been
done. Now more people will have to pay a price. "You don't care that there will be ten million
jobs created [through reform]," Hills pointed out, "if yours is the job that has been lost." And
second, that the state's priorities conflict. How is it possible, for example, to have banking
reform, which everyone agrees is necessary, when the government continues to insist that state
enterprises should remain the "pillars" of the national economy?

[Photograph]
Caption: A Potemkin Pudong
Shanghai is proud of its Space Age television tower (left) in the city's Pudong district. But the area is
overbuilt, and rents have collapsed.



China cannot pretend that only Westerners were preoccupied with such issues. Singapore's
Senior Minister Lee Kuan Yew, in classic form, scolded China's mandarins: "China must
improve its legal and administrative system, with public servants separated from private business
to avoid conflicts of interest." Lee allowed that while it is difficult for the current leaders, many
of them Soviet trained, to change the way they think, the next generation will have to create a
more open system. "Behind the politesse, the Chinese have the same visceral urges just as you
have."

[Photograph]
Caption: Conference Stars
Top (from left): Dell of Dell Computer, Mockett of BT, Nasser of Ford, David Pottruck of Schwab. Left:
Liu of New Hope and Time Warner's Turner.



As Lee's remarks implied, China's leadership is about to crash into the fundamental
contradictions of "socialism with Chinese characteristics." For China to become the economic
force it clearly wants to be, the government must loosen its grip on the economy. But a genuinely
free- market system could destroy the party's power base.

A number of Chinese academics spoke candidly about the country's economic difficulties, but
the managers of Chinese enterprises, state bankers, and government officials tended to be more
circumspect. In fact, the higher-ranking the participants, the more likely they were to quote the
party line. "China enjoys political and social stability," intoned Zeng Peiyan, head of the State
Development Planning Commission and considered one of official China's brighter stars.
"Taking Deng Xiaoping theory as the guiding principle, and with the firm leadership of the third-
generation collective leadership with Jiang Zemin at its core, our party and government are
completely able to regulate the macro-economy, to respond to various complicated situations,
and to handle various new problems timely and resolutely." Executives not put to sleep by this
stuff had to be alarmed by it.

Although sensitive issues like human rights and political reform weren't on the formal agenda,
they did come up in several of the sessions. The need for transparency and the rule of law, in
particular, was mentioned repeatedly. At the same time, many Western executives were
sympathetic to the constant refrain of their official hosts-that China is a big, complicated country
where change cannot happen in a day. "There are 1.3 billion people in China. The leadership's
first priority is to feed, clothe, and shelter that many people," said Maurice Greenberg, CEO of
the American International Group. "That's a full-time job. And to expect them to respond to our
priorities is a little naive."

Only a handful of executives acknowledged publicly the serious downsides to doing business
with China, even though an official survey found that only a third of foreign businesses are
making money there. But privately, corporate chiefs swapped tales of corruption, theft of
intellectual property, and arbitrary government actions. "See these?" one FORTUNE 500 CEO
asked during a meal as he swept crumbs from the table. "The government wants all of them."
There is a palpable fear that China has taken a great leap backward. The seeming eclipse of
reformist Premier Zhu Rongji, creeping deflation, and escalating MarxistLeninist rhetoric worry
executives. One tangible expression of these fears is the level of foreign investment, which is
running 20% below last year's record $45 billion.

On more specific issues, the Chinese and foreign participants were able to find a surprising
amount of common ground.

* On the Internet: Electronic commerce in China is a very small business indeed at the moment,
but computer executives are agape at what it could be. Purrs Michael Dell, CEO of Dell
Computers: "The Chinese market is so vast and growing so fast."

China has only about two million Internet users. Though that number is growing rapidly, with
average urban household incomes of around $1,000, computers just don't fit into most families'
budgets. Nicholas Negroponte of MIT's Media Lab suggested that computers would have to drop
below $100 for large numbers of Chinese to afford them. Dell does not offer a $100 PC, but it
can sell its computers relatively cheaply by peddling them directly to customers over the Internet
or over the phone. Although the company has been operating on the mainland for only a year, its
business is already profitable.

As the Chinese go online, companies will be able to serve them more efficiently, bypassing the
costly distribution systems of the West. That's the view of Ford CEO Jacques Nasser, who wants
to sell cars over the Internet in China. "There are 23,000 car dealers in the U.S.," Nasser noted,
"and China's market will someday be as big as the U.S. Will you need 23,000 dealers in China?
No." Nasser envisions a world in which customers can buy a car much the way they buy a Dell
computer, by selecting a model, color, and options online, then having it custom- made.

British Telecom CEO Alfred Mockett envisions a marriage of the Internet and the mobile phone.
China has 30 million mobile phone users now; it is not out of the question that it could have 600
million by 2020. Because the country has a limited fixed- line telecom infrastructure in place,
Mockett believes that "China is going to leapfrog ahead of the rest of the world." His guess:
Most of those cell phones will be able to download material from the Internet, and a third of all
business and consumer transactions will be conducted over wireless systems.

* On the media: China, our panelists agreed, represents a potential gold mine for the world's
media companies. The question is how to find the right seam. Time Warner Chairman and CEO
Gerald Levin believes in the need to provide more local movies, television, music, books, and
magazines. "When you go into a marketplace like China, you find the extraordinary talent of a
filmmaker or a musician. The job of a company like ours is to give them a platform for their
voice. That's an important public role. It's not about taking American culture and pushing it
around the world. It's really about trying to take the ethnic diversity we have in the world and
give it expression."

* On the environment: Just glance out the windows of the new convention center where the
conference was held for a glimpse of one of China's biggest problems: pollution. On any given
day, the Shanghai skyline is draped with a heavy layer of smog, much of it from burning coal.
China depends on coal for 75% of its energy and uses it for everything from power generation to
home cooking. Of the world's ten most polluted cities, nine are in China.

[Photograph]
Caption: Wiring China
Nicholas Negroponte of the MIT Media Lab believes that if the Chinese are to enter the Internet age,
they will need simple and cheap computers.



How can China meet its growing need for energy without further degrading its air and water?
Goran Lindahl, CEO of ABB, the giant Swiss engineering company that is the major supplier for
the controversial Three Gorges hydro dam project, said, "Every country needs a balanced
portfolio of energy that includes clean coal, natural gas, nuclear, hydro, and wind power." Ken
Lay, CEO of Enron, the Houston-based energy company, argued that the country should invest
in natural gas, which burns much more cleanly than coal. "China has far more natural gas than is
apparent," said Lay, " because they simply haven't been seeking it out." Converting to gas won't
be so easy. It might be expensive, for one thing, and shutting down China's coal industry would
cost jobs.

China's energy system is grossly inefficient, and that's where Michael Bonsignore, CEO of
Honeywell, the Minneapolis maker of industrial controls, sees opportunity. "Right now, if a
Chinese apartment is too hot, people just open the window," Bonsignore noted. "Something as
simple as a home thermostat could conserve tremendous amounts of energy."

Liang Congjie, founder of Friends of Nature, China's first independent environmental
organization, put a planetary spin on the discussion. What will happen, he asks, if China's living
standards improve to the level of the rich world? Shanghai is a city of 15 million but has only
18,000 private cars; someday most families will be able to afford one of their own. The
implications for traffic and air quality are dire. Liang's immodest proposal: "We need to change
our way of life-not just the Chinese but everyone else in the world."

* On entrepreneurship: Liu Yonghao of the New Hope Group, a Chinese conglomerate; Ted
Turner, the founder of CNN and vice chairman of Time Warner; and Jerry Yang, the Taiwan-
born American who is one of the minds behind Yahoo, have had very different life experiences.
But they see the world very much the same way. All love the craft of business; all have had
irritating problems with government; all are constantly on the watch for innovation. "The easiest
way to make a fortune quickly," said Turner as Liu and Yang nodded emphatically, "is to do
something no one has ever done before."

The three also bemoaned the difficulty of getting capital at crucial moments. "If I'd had a little
money early on, there's no telling where I'd be today," said Turner to an audience notably short
of sympathy for his plight. Liu's story was more dramatic. When China began to allow private
commerce in the early 1980s, the Sichuan native was then working as a teacher for all of 38 yuan
a month (less than $5 at today's exchange rates). He sold everything he owned, including his
watch and bicycle, to raise $150 to buy a chicken incubator. His company went through terrible
times. Unable to get a bank loan to expand, he and his brothers facetiously considered running
away to remote Xinjiang province or throwing themselves into the Yangtze. But they were able
to finance growth through personal loans and profits. New Hope is now one of China's largest
private food processors; it also has interests in real estate. Jerry Yang conceded that when it
comes to capital, he cannot match Liu's story because "money fo und us." Eventually, that is.
Like Turner and Liu, he says, "I wish we had raised more money earlier... Knowing what I know
now, we could have hit that fastforward button."

Can China as a whole hit fast-forward? Without further reform the country will stagnate, and the
Communist Party needs economic growth in order to retain popular support. But giving up
control does not come naturally to China's leadership. The signs of this tension are already
apparent. The Chinese manager of a state enterprise grumbled at having to get government
permission whenever his firm wants to introduce a new product. Grafting a marketoriented
system onto a one-party state is tricky. A real banking system, for example, would direct credit
to where it could get returns, not to where it was politically expedient.

China clearly wants to stay in the driver's seat. Before the conference, Shanghai police rounded
up migrants under a form of arbitrary detention called "custody and repatriation" to get them out
of sight. And the sale of Time magazine (owned by Time Warner, FORTUNE's parent) was
suspended the week of the conference, presumably because it contained articles by Chinese
dissidents and the Dalai Lama. But beyond the obvious improvement in material wealth, the big
difference between China today and the sealed economy that Deng Xiaoping cracked open in
1979 is that absolute control is no longer possible. The migrants will be back. And bootleg
copies of Time-with the offending articles intact-were on sale at the convention center's gift
counter.

[Photograph]
Caption: Green China?
A FORTUNE panel discusses the need for clean energy. From left: Bonsignore of Honeywell, Lay of
Enron, and Liang of Friends of Nature.




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