China todayChina todayThis presentation summarizes This presentation summarizes

development process of Chinese economydevelopment process of Chinese economy

A M ChoudhariA M Choudhari

COO, L&T (China)COO, L&T (China)

"I hear and I forget. "I hear and I forget. I see and I remember. I see and I remember. I do and I understand." I do and I understand." Chinese proverb Chinese proverb

I summarize China’s fast development model as SSFC I summarize China’s fast development model as SSFC : Scale, Speed, Focus approach and low Cost: Scale, Speed, Focus approach and low Cost

Scale: China has created huge capacities and thus is quickly Scale: China has created huge capacities and thus is quickly able to cater to ever increasing demand from the entire able to cater to ever increasing demand from the entire world.world.

Speed: Is seen every where, in decision making as well as Speed: Is seen every where, in decision making as well as implementation. In just about a decade, it has 40000 Kms of implementation. In just about a decade, it has 40000 Kms of express ways, fast trains running at 350 Km/Hour, over 150 express ways, fast trains running at 350 Km/Hour, over 150 airports, huge network of over bridges/cable bridges almost airports, huge network of over bridges/cable bridges almost of same quality as any developed nation, 780 GW of power of same quality as any developed nation, 780 GW of power generation capacity, the list is un ending.generation capacity, the list is un ending.

No religion, cast system helps in staying progress No religion, cast system helps in staying progress focused.focused.

Single political party helps in quick decision making Single political party helps in quick decision making and political accountability in expediting decisions.and political accountability in expediting decisions.

Think tank of experts at the top and executors at Think tank of experts at the top and executors at lower level. Execution is precise and without lower level. Execution is precise and without questioning the decisions.questioning the decisions.

Do or die attitude, be it winning highest Olympic gold Do or die attitude, be it winning highest Olympic gold medals or attracting FDI or constructing an over medals or attracting FDI or constructing an over bridge in a record time.bridge in a record time.

Single child policy since 1976, has helped in Single child policy since 1976, has helped in improving per capita income, literacy and health.improving per capita income, literacy and health.

Export house to the entire world. China has amassed Export house to the entire world. China has amassed foreign exchange reserves to a whopping 3 trillion foreign exchange reserves to a whopping 3 trillion USD. 700 billion USD loan given to the US is giving USD. 700 billion USD loan given to the US is giving China political leverage. China political leverage.

Lately China has changed the focus to attract only Lately China has changed the focus to attract only technology driven FDI and R&D centers.technology driven FDI and R&D centers.

Business environmentBusiness environmentin Chinain China

PoliticalPoliticalSocialSocialEconomicEconomicTechnicalTechnicalBusinessBusiness

Political Political

CCP – single major partyCCP – single major party Economy opening in 1978 Economy opening in 1978 Deng Xiaoping said “we do not mind Deng Xiaoping said “we do not mind

whether it is white cat or black cat whether it is white cat or black cat provided it catches mice”provided it catches mice”

High political accountabilityHigh political accountability Anti corruption driveAnti corruption drive Quality driveQuality drive Quick decisions fast implementationQuick decisions fast implementation Olympics, Expo successOlympics, Expo success

Political Political MediaMedia

State ownedState owned Delicate issues controlled by GovernmentDelicate issues controlled by Government

Dalai lamaDalai lama US forcing China for Yuan appreciationUS forcing China for Yuan appreciation

Image improvement stories are also presented wellImage improvement stories are also presented well OlympicsOlympics Handling of 2008 earthquakeHandling of 2008 earthquake

Govt. – trying to tame and control internetGovt. – trying to tame and control internet Google exited China marketGoogle exited China market Netizens circumvent the controlNetizens circumvent the control

High corruption but not zero sum gameHigh corruption but not zero sum game HoukuHouku

Government control to reduce inflow in to big cities.Government control to reduce inflow in to big cities.

Social Social Pragmatic, result oriented societyPragmatic, result oriented society Many have English names in addition to ChineseMany have English names in addition to Chinese Priority to order over freedomPriority to order over freedom

Houses demolished over night for road wideningHouses demolished over night for road widening Standardization of roads, service stations, trees Standardization of roads, service stations, trees

Single child policy since 1976 has effected in low fertility Single child policy since 1976 has effected in low fertility rate rate

Mortality rate (death of children under 5 / 1000) has Mortality rate (death of children under 5 / 1000) has reduced to 21reduced to 21

Younger generation – atheist and do not follow any religionYounger generation – atheist and do not follow any religion Compulsory primary educationCompulsory primary education East China developedEast China developed Per capita income @ 2000 USD, skewed favorably towards Per capita income @ 2000 USD, skewed favorably towards

east Chinaeast China Rich are more rich but poor are also richerRich are more rich but poor are also richer

Economic development - 1Economic development - 1 Phenomenal development during last 30 yearsPhenomenal development during last 30 years

Now 3Now 3rdrd largest economy next only to the US and Japan. largest economy next only to the US and Japan. Surpassed Germany in 2009Surpassed Germany in 2009

GDP grew from 100 bil USD in 1978 to 4.3 trillion USD in GDP grew from 100 bil USD in 1978 to 4.3 trillion USD in 20092009

Red carpet for FDI (Foreign Direct Investment) created Red carpet for FDI (Foreign Direct Investment) created huge FDI growthhuge FDI growth

Trade surplus 2000 Billion USDTrade surplus 2000 Billion USD

Average 8% GDP growth during last 30 years ( double digit Average 8% GDP growth during last 30 years ( double digit during last 5 years)during last 5 years)

Economic development - 2Economic development - 2

By 2004, FDI was at 1097 USD over taking By 2004, FDI was at 1097 USD over taking the US for most popular destination for FDI the US for most popular destination for FDI earlierearlier

Per capita rose to 2013 USD in 2008Per capita rose to 2013 USD in 2008

Foreign funded companies were at 51000Foreign funded companies were at 51000

450 fortune 500 companies were in China450 fortune 500 companies were in China

Economic development - 3Economic development - 3

Focused infrastructure development Focused infrastructure development 40000 km of high ways40000 km of high ways 300 airports300 airports 680 GW installed capacity680 GW installed capacity 350 kmph train speed ( Wuhan to Gongzhou 1100 Km in 3 350 kmph train speed ( Wuhan to Gongzhou 1100 Km in 3

hours) hours) 23 nuclear plants under construction 23 nuclear plants under construction Tallest buildingTallest building Olympic stadiumsOlympic stadiums 36 Km long bridge36 Km long bridge

Now increasing focus on social infrastructure as wellNow increasing focus on social infrastructure as well 3 of the top 12 banks are from China3 of the top 12 banks are from China China has about 15% of the world coal reservesChina has about 15% of the world coal reserves

Some statisticsSome statistics% indicates world contribution% indicates world contribution

   USUS JapanJapan ChinaChina

Crude SteelCrude Steel 8%8% 9%9% 34%34%

RiceRice 0%0% 00 50%50%

WheatWheat 12%12% 1%1% 20%20%

machine tools2005machine tools2005 8%8% 40%40% 12%12%

4 wheelers 20064 wheelers 2006 20%20% 20%20% 10%10%

colour tv 2004colour tv 2004 15%15% 45%45% 40%40%

digital camera 2004digital camera 2004 0%0% 45%45% 45%45%

robots industrial 2005robots industrial 2005 15%15% 40%40% 3%3%

Ship building 2006Ship building 2006 1%1% 30%30% 24%24%

Mobile phones / 100 persons - Mobile phones / 100 persons - 20082008 76 76 75 75 22 22

PCs / 100 persons 2004PCs / 100 persons 2004 7474 5555 2626

Internet subscribers 2007 - 000Internet subscribers 2007 - 000 242,569 242,569 24,904 24,904 163 163

Technology developmentTechnology development Special benefits for import of technologySpecial benefits for import of technology

Encouraged statusEncouraged status Hi Tech statusHi Tech status

Dependence on imported technology continues. Number of Dependence on imported technology continues. Number of patents registered are quite low.patents registered are quite low.

Today most of the fortune 500 companies have their Today most of the fortune 500 companies have their presence in Chinapresence in China

Many IPR issues were reported earlier, now there is Many IPR issues were reported earlier, now there is reduction due to stricter control by governmentreduction due to stricter control by government

Increasing mobile phone and internet usersIncreasing mobile phone and internet users Monopoly on the net Monopoly on the net

Baidu.comBaidu.com QQ.comQQ.com Alibaba.comAlibaba.com

Encouraging business Encouraging business environmentenvironment

Tough competition between SEZs ( Special Tough competition between SEZs ( Special Economic Zones)Economic Zones) Tax cuts ( Corporate tax, Income tax, VAT)Tax cuts ( Corporate tax, Income tax, VAT) Free housingFree housing Free office / factory space, reduced land costFree office / factory space, reduced land cost Low starting timeLow starting time Other concessionsOther concessions

FDI targets given to SEZs (government FDI targets given to SEZs (government accountability)accountability)

Red carpet for technology Red carpet for technology Impressive infrastructure in eastImpressive infrastructure in east International schoolsInternational schools

Employee scenarioEmployee scenario Survival in ChinaSurvival in China

At least little knowledge of spoken Chinese is a mustAt least little knowledge of spoken Chinese is a must Difficult for vegetariansDifficult for vegetarians Stay with family is preferredStay with family is preferred Long duration posting is a mustLong duration posting is a must

CorruptionCorruption Bureaus, auditors – Accept gifts, super market cards before spring Bureaus, auditors – Accept gifts, super market cards before spring

festivalfestival Employees - Need to control – they are on look out for opportunity to Employees - Need to control – they are on look out for opportunity to

earn while purchasing, striking a deal etc.earn while purchasing, striking a deal etc. For approving a good order, it is normal to expect dinner, gifts, For approving a good order, it is normal to expect dinner, gifts,

commission etc. Government is trying to control this by publishing commission etc. Government is trying to control this by publishing severe punishment cases. severe punishment cases.

Hotels – No tip is expectedHotels – No tip is expected

Business method: Guanxi ( Relation based)Business method: Guanxi ( Relation based) InformalInformal Dinner tableDinner table 80 / 20 rule ( 80% talk of weather, 20% business)80 / 20 rule ( 80% talk of weather, 20% business) Appreciate drinking, smokingAppreciate drinking, smoking

Working style Working style Less time wastersLess time wasters

Absence of Politics, Religion/cast issuesAbsence of Politics, Religion/cast issuesFocusedFocused

Single track mind Single track mind Culturally they do not think.. Like to follow Culturally they do not think.. Like to follow

instructionsinstructionsNot able to prioritizeNot able to prioritize

No follow up requiredNo follow up requiredGive difficult job but do not give Give difficult job but do not give

unrealistic targetsunrealistic targetsDirect and straight forwardDirect and straight forwardDo not understand double meaning Do not understand double meaning No secrecy with customers or suppliersNo secrecy with customers or suppliers

RequirementsRequirements Flexibility requiredFlexibility required

Constantly changing lawsConstantly changing laws VAT refundVAT refund Stricter transfer pricingStricter transfer pricing Labour policy ( Increasing labour cost)Labour policy ( Increasing labour cost)

UnionUnion Minimum social insuranceMinimum social insurance Minimum wagesMinimum wages LeaveLeave

Interest ratesInterest rates

Patience requiredPatience required Establishing business may take yearsEstablishing business may take years Brand buildingBrand building

Respect JV partnerRespect JV partner Treat them as equals even if you have a majority stakeTreat them as equals even if you have a majority stake Culturally in China all are equal, respect itCulturally in China all are equal, respect it Do not try to compare whose culture is better. leave it at thatDo not try to compare whose culture is better. leave it at that

Changing focusChanging focus

Government has now changed the Government has now changed the tracktrackFocus on technology. Focus on technology. Red carpet only to technology driven Red carpet only to technology driven

companies.companies.Tightened norms of Hi Tech statusTightened norms of Hi Tech statusUSA and Europe has cautious investment USA and Europe has cautious investment

approach nowapproach nowInvesting in developing and Investing in developing and

underdeveloped countriesunderdeveloped countriesEncourage foreign educated Chinese backEncourage foreign educated Chinese back

Separate rules for FIE Separate rules for FIE

5 day week against 6 day for Chinese companies 5 day week against 6 day for Chinese companies 43% social security. Many Chinese companies pay 43% social security. Many Chinese companies pay

less.less. Extra payment for over time work: Many Chinese Extra payment for over time work: Many Chinese

companies do not pay extra for over time.companies do not pay extra for over time. Lower efficiencies than Local companiesLower efficiencies than Local companies Try to give as much responsibility as possible in the Try to give as much responsibility as possible in the

initial stage itself. Later it becomes difficult.initial stage itself. Later it becomes difficult. Consider 13th month salary is right not incentiveConsider 13th month salary is right not incentive Employees and bureaus demand that the working Employees and bureaus demand that the working

should be strictly as per rules, increasing the cost of should be strictly as per rules, increasing the cost of operationsoperations

Networking with other FIEs help a lotNetworking with other FIEs help a lot

Key to success in ChinaKey to success in China Get closer to peopleGet closer to people

No intermediate social organizations in ChinaNo intermediate social organizations in China Only family acquaintancesOnly family acquaintances Individual reports directly to stateIndividual reports directly to state Expect paternalistic treatment from companyExpect paternalistic treatment from company

MedicalMedical SchoolingSchooling HousingHousing

Get closer to marketGet closer to market Willing to pay higher price for European / American products but Willing to pay higher price for European / American products but

the gap is fast reducingthe gap is fast reducing Guanxi will help on long termGuanxi will help on long term Factor in high cost for entertainmentFactor in high cost for entertainment

Integrate Chinese culture and western technologyIntegrate Chinese culture and western technology Get right Chinese peopleGet right Chinese people

Some microsSome micros Cost advantageCost advantage

Only for global quantityOnly for global quantity Low labour , overheads and tooling costLow labour , overheads and tooling cost Low cycle timeLow cycle time

Order tool and components both from same supplierOrder tool and components both from same supplier

Factor in part of tooling cost in first few component lotsFactor in part of tooling cost in first few component lots

Tool suppliers want advance payment, BG is not acceptedTool suppliers want advance payment, BG is not accepted

There will be quality reduction from 1There will be quality reduction from 1stst lot and subsequent lot and subsequent lotslots

Have every lot approved before dispatchHave every lot approved before dispatch

Chinese products have “Just Good” quality. Most of the Chinese products have “Just Good” quality. Most of the products will last much lesser than similar ones produced in products will last much lesser than similar ones produced in developed countries.developed countries.

Cross cultural competence Cross cultural competence

Do not change management too Do not change management too oftenoftenIt takes time to settle down in China and It takes time to settle down in China and

get a hang of the cultureget a hang of the cultureContinued focus is needed on Continued focus is needed on

investing in the "soft side“investing in the "soft side“PeoplePeopleSystemsSystemsTrainingTraining

Chinese EtiquetteChinese Etiquette

Enter dining room as per rankEnter dining room as per rank Have sip of green tea when offeredHave sip of green tea when offered Take the seat when offeredTake the seat when offered More the dishes, more is the honour More the dishes, more is the honour

bestowed on gustsbestowed on gusts Praise the foodPraise the food Avoid Taiwan, Dalai Lama, border disputeAvoid Taiwan, Dalai Lama, border dispute Avoid business discussion initiallyAvoid business discussion initially 80% weather, 20% business discussion80% weather, 20% business discussion Toast is “Gumbai”Toast is “Gumbai”

Chinese EtiquetteChinese Etiquette

When asked a favour Chinese will say no When asked a favour Chinese will say no indirectlyindirectly It is difficultIt is difficult It is inconvenientIt is inconvenient

Avoid Loss of faceAvoid Loss of face Do not say ‘you are wrong’ directly Do not say ‘you are wrong’ directly Insulting in front of othersInsulting in front of others Treating officer as junior in front of juniorsTreating officer as junior in front of juniors

Get a third party friend to introduce you to Get a third party friend to introduce you to develop relationshipdevelop relationship

Present business card with both hands and read it Present business card with both hands and read it when receivedwhen received

Confucianism in ChinaConfucianism in China

Confucianism is not religion but more of Confucianism is not religion but more of code of conductcode of conduct

Chinese follow itChinese follow it Respect to seniors and parentsRespect to seniors and parents Duty to familyDuty to family Loyalty to friendsLoyalty to friends HumanityHumanity CourtesyCourtesy SinceritySincerity

Grown children duty to support their Grown children duty to support their parents in old ageparents in old age

Fastest growing large economyFastest growing large economyChallenging marketChallenging marketHuge business potentialHuge business potential

All the best !All the best !