ethics class, the bamboo network

THE BAMBOO NETWORK

How Expatriate Chinese Entrepreneurs are Creating a New

Economic Superpower in AsiaBy:

Murray WeidenbaumSamuel Hughes

INTRODUCTION:

• The Bamboo Network

– An informal network of overseas Chinese entrepreneurs, settled in Southeast Asia after the communist revolution in China

– According to the author, this Bamboo Network has been a central player in the regional development including Malaysia, Indonesia & Thailand, and a key factor in the transition of People’s Republic of China from a closed economy to an open marketplace as Greater China (Mainland, Hong Kong & Taiwan)

INTRODUCTION:• Three Stages of Progress

1. While fighting with prejudice and discrimination as refugees in host countries of Southeast Asia, these overseas Chinese worked hard to set up their own family businesses and developed much of the modern private business sector in Taiwan, Hong Kong, Singapore, Malaysia, Thailand, Indonesia, Philippines & Vietnam

INTRODUCTION:

• Three Stages of Progress

2. The Internationalization of the family business on a uniquely Chinese bases. Common background (language, culture, ethnicity & family ties) of these overseas Chinese created great opportunity of business and trade for them in the entire region

• Even though going cross-border, the control of the business was strictly kept within the family

INTRODUCTION:

• Three Stages of Progress

3.Taking part in the development of their homeland by massive making investments and sharing their successful capitalist experiences (entrepreneurship, risk taking capital investment and business management capability)

• They have been successful in making Mainland authorities believe that capitalism is not only western institution but can also be very well adjusted with the ancient Chinese trading traditions

INTRODUCTION:• The Nature and Power of The Bamboo Network

• Despite the political and geographical differences (especially in China, Taiwan, Hong Kong & Macao (in 1996)) in the region, all the members of overseas Chinese community are linked with their rich heritage and culture

• Thus making an economic power and a strong competitor of western businesses in the region

• With its tremendous success and financial wealth, this well structured but informal network of ethnic Chinese businesses is focusing on its homeland to develop and to make profits

TRUST AND NETWORKING

INTRODUCTION:

• The Bamboo Network, Western Investors & China

• Cultural differences, lifestyle and particular business practices (feng shui, Guanxi) create endless problems for Western businesses in China

• Whereas, Overseas Chinese investors have far greater understanding of the mainland China because they share same language and similar religious, cultural and historical backgrounds

• Greater China is the most exciting business opportunity in the global economy, and no other region contains such combination of physical, financial and human resources

INTRODUCTION:• China in History

• For most of recorded history, China has been more developed, prosperous, sophisticated, and civilized than the West

• Chinese have been innovators, they invented gunpowder, the magnetic compass, the clock, the wheelbarrow, moveable type, and nautical innovations such as the rear rudder

• Chinese were casting molten iron 17 centuries before Europeans discovered the process

• Only the Chinese civilization (out of ancient Egypt, Greece, and Rome) could remain intact even today and going to restore its historical greatness again

CONCLUDING REMARKS:• This book is a good insight into the Asian-Chinese

corporate system and provides valuable information about the world’s most rapidly growing exotic marketplace, China, and shows how a remarkable group of ethnic Chinese overseas families is playing its role in transforming Mainland China

• However, despite looking for the real structure and functioning of “The Bamboo Network”, it looks as the author tried to promote U.S. direct investment in Mainland China as “before we miss the boat”

• Therefore, there is less information about the real structure and functioning of “The Bamboo Network”

CONCLUDING REMARKS:

• Biasness of the author towards the Asian (Chinese) way of doing business is evident, as he tried to prove it ambiguous in comparison with western business practices

• West needs to understand the fundamental principals of Chinese society to be successful in China, despite criticizing, and should learn to “bend” like a bamboo, as “Bamboo bends; it doesn’t break”

UNDERSTANDING THE BAMBOO NETWORK

•The overseas Chinese developed the bamboo network•Trust and Tradition•Informal array of complementary business relationship•To dominate and to propel the economies of Southeast Asia•The economic dominance is a source of great tension•The biggest business school for managers ever created in the world

THE RISE OF CHINESE BUSINESSES

• Characteristic of the typical overseas Chinese business is its international diversification

• An Informal and Flexible Structure• Overseas Chinese families and businesses in Hong

Kong, Thailand, Taiwan, Malaysia, and Indonesia-and even a certain number of Chinese living in Europe and the United States provided the investment capital to bring China forward


Charoen Pokphand Goup of Thailand Sophonpanich Family


Salim Group of Indonesia Kuok Group of Malaysia


Li Ka-shing Group of Hong Kong Ong Beng Seng of Singapore

BUSNESS AND CULTURE

• Overseas Chinese businesses are responsible for much of the mainland’s economic expansion

• The family is the basic unit of management. • Loyalty, flexibility, speedy decisions and low overhead. • Breeds a crucial business element: trust.

THE POWER OF FAMILY AND RELATIONSHIP

• To maintain strong kinship ties that promote repeated interaction among the same people

• Most overseas Chinese take a low profile in the commercial world and shy away from publicity

• Ethnic Chinese family firms rely on strict, centralized control and informal transactions to minimize company bureaucracy and paperwork

• The successful overseas Chinese business family operates through the network of enterprise rather than the unitary company.

• Overseas Chinese business leader utilize a management style that is more informal and intuitive than that practiced in a typical Western corporation

Creating Greater China

• Greater China – an aggregation of the people, government and economies of mainland China, Taiwan, Hong Kong & Macao

• Forecast this Asian economic dragon could catch up to the US by the year 2020 as world’s largest economic superpower.

Creating Greater China

• The strategic area contains substantial amounts of technology and manufacturing capability (Taiwan), outstanding entrepreneurial, marketing, and services acumen (Hong Kong), A fine communications network (Singapore), a tremendous pool of financial capital (all three) and very large endowment of land, resources and labor (main land China).

Hong Kong, Macau, Taiwan & China

• HK world eighth largest trading economy- small land with low population (just over 6 million people).

• HK was suffering from high cost because of intensive utilization of very limited space.


• Mainland China has a great supply of lower cost land and workers, but short of skills

• Investment by overseas Chinese enters the mainland via Hong Kong.

• China is like a factory and Hong Kong is the storefront.


• 1984 Joint Declaration between China, United Kingdom & Hong Kong protect the interest of HK.

• There are concerns prior to 1997, China maybe voiding the contracts.

• Portugal agreed to turn over control of Macao to China at the end of 1999.

• As in HK, many firms are diversifying their activities as hedge against governmental expropriation.


• Taiwan and PRC refuse to recognize or trade with each other and using HK as intermediate.

• In late 1987- Taiwan permitted its citizens to visit relatives on mainland

• By 1993, Taiwanese investors have been allowed to acquire mainland passports for travel in the province of Fujian. Taiwan-based Great China Airlines has gained landing rights in four Chinese airports.


• In early 1995, a major breakthrough in Taiwan-mainland financial relations- The New York branch of Bank of China and Bank of Taipei signed agreement allowing each bank take deposit and issue letters of credit and export/import guarantees on behalf of other. Previously it was conduct through foreign bank


• Its clear in earlier stage Bamboo Network has its limitations. However the Bamboo Network enterprises continue to make major investments in their ancestral homeland.

• Firstly the geographical proximity of oversea Chinese minimized the usual costs of foreign trade. Secondly the overseas Chinese provide a large pool of liquid funds.

• The gradual nature of China’s open door policy had help China economic reform dramatically.

The rise of China Economy

• Population’s size had attracted many firms to enter Chinese market.

• GDP growth higher than population growth. “It is big and it is growing very quickly”

• Exports rose from $24 Million in 1984 to $120 million in 1994 -17% over a decade.

• The rapid growth has hosted problem such rising inflation, corruption and the demand for political liberalization to accompany the economic reform.

• Lack of control the flow of money and credit into the market.

Western Investment in China

Challenges & Difficulties

Language Barrier

Cultural Barrier

Weak Property Rights & Vague Contract Law

Lack of Protection of Intellectual Property Rights

Formal Restrictions

Legal Uncertainty

Corruption/

Confusion

The challenges and obstacles face by Western businesses

The Bamboo Network, on the other hand, has the advantages doing business in China because they “speak the language” and also because of GUANXI

Experience of U.S. Businesses, Good and Bad

Examine the unique problems that confront American firms in China, also some favorable experiences and the lesson to be learntInitial Pitfall; Honeywell Inc., 1984~

Catering to the Chinese Market

Successful Ventures

AT&T, quo qing (unique Chinese characteristic)

Western cultures and ideas should be adopted only if they fit guo qing – Deng Xiaoping

General Electric, Baskin- Robbins, Citicorp, Beijing Jeep Corp (Chrysler), Hasbro Inc., Minneapolis-based H.B Fuller Company, Philip Morris’s Maxwell House, Procter &Gamble (Rejoice), McDonald, 7-Eleven, Coca-Cola

Adapting their products to the Chinese market (adapting to guo qing)Rely on Chinese partner for cultural expertise and guanxi

The special case of High Technology;

Because Chinese companies (both on the mainland and offshore) focus on low technology investment and service sector, US firms have the opportunity to increase their market share for advanced technology projects; Boeing Company, Airbus, McDonnell-Douglas

Issue: Will the Chinese expel the foreign companies after they learned to utilize advanced Western technology???

Size of China Market($) Annual Growth(%)Avionics equipment 375 30 Computers 1,300 20 Aircraft 3,000 15Mining equipment 1,800 10 Agricultural Chemical 7,350 10 Oil field machinery 5,000 10 Electric power system 11,000 7 Industrial Chemical 12,000 6 Telecommunications 1,800 5 Agricultural machinery 6,000 5

10 major market in the PRC that are receptive to import from the U.S.


Organizing to Do Business in China

Joint Ventures

U.S investors > contribute technology, equipment and industrial property rights,

Chinese partner > contributes land, factory building, raw material, currency to buy domestic cost and the intangible ability to deal with national, provincial and local authorities

WFOE (Wholly Foreign-Owned Enterprises)

Discouraged by Chinese govt. > do not enjoy privilege given to joint ventures companies

The choice for US firms which are concerned about technology transfer and business control, e.g: Motorola

Umbrella Enterprises

China-based subsidiaries which integrate a whole range of operations- manufacturing, investments, etc

But they may neither import finished product nor sell them in China, e.g: DuPont, IBM


Special Problem for Americans

Opportunities for American Business

Bribery

Which is illegal under ‘U.S. Foreign Corrupt Practices Act’ –perpetrator subject to fine up to $100,000, plus 5 years jail,

penalty for a company can be as much as $ 2 million.

American companies gripe about how the act prevents them from being competitive from other nation which can be more relaxed about such ethical matters.

Dealing with market access/ Covering intellectual property rights

1992, U.S. – China Memoranda of Understanding

-eliminate import barriers by 1997

-publish laws & regulations governing international trade

-provide stronger protection for patents, copyrights, trademarks and trade secrets

Despite the difficulties arise, American companies continue to enter and increase their investment in China, WHY??

Axiom of business finance, “ High Risk High Returns”

As the Chinese may say, “Yin Yang of Challenge Opportunities”


Joining East & West

A Look to The Future

Conclusion, drawing the lesson

Strong domestic position does not automatically ensure success in the Chinese market

Foreign firms that hope to carve out market niche must bring something special to the bargaining table.

2 types of companies who have succeeded:

Hi-Tech Technology Firms

Low- Tech but marketing intensive company that has worldwide brand association

1 thing these 2 have in common:

An ethnic Chinese joint-venture partner! , Connection to the Bamboo Network

Heineken CP Group, Wal-Mart Ek Chor Distribution, CP KFC, CP NYNEX, PEC PepsiCo, PEC 7-Eleven, Li Ka-Shing P&G, Lockheed, Motorola, MTV

Introduction to the next slides

The Future

Growing military power

• Gulf war have open the eye of People Liberation Army (PLA) that they have weaknesses in so many military area especially in advance technological weapons.

• Historically, Chinese military has been landlocked relying upon vast numbers of infantry and low tech artillery, not been able to develop a modern navy, little air defense, its radar have limited range and its submarines are noisy and fitted with unreliable torpedoes.

• Now they have all the newly advance weapons and it is believed that it possess roughly 400 nuclear warheads.

The politics of trade

• Beijing- Washington relations have stumbled through of high profile incidents.- Beijing seeks definite assurance that the US will not recognize Taiwan and will remain committed to economic trade by maintaining China’s most-favored–nation status. Unfortunately US policy has not sent clear signals.- US was suspicious that China will sell they weapon to Pakistan and Arab countries and as a result they threatening China with economic punishment.

• In a broader context, both China and United States have great deal to gain from developing a closer relationship.

Environmental problem• Economic progress can mean ecological degradation• Erecting thousands of factories in Guangdong and Fujian discharge

substantial amount of surface, air and water pollution. • Economist has identified three distinct link between economic

growth and environmental quality.1. Expended economic quality acquire more natural resources and generate more pollutions.2. Nations with weak environmental laws may specialize in type of manufacturing that have particularly the environmental effects. The firm will have lower manufacturing cost.3. Richer nations can afford can afford newer, cleaner and more efficient technologies.

• By 2025, China will become world’s biggest generator of carbon dioxide

Three possible future scenario

Scenario #1; Successful transition to a market economy

• The best future for China and for those foreigner who invest in it.• As economic reform move inland, the role of the bamboo network in China

economic development diminishes.• Stock and bond offerings become more commonplace as the government

continues to lift restriction on stock exchange and stock market.• Greater wealth and prosperity leads to political reform; tentative steps

towards democracy. • Key ingredients of modern economy emerge: a body of commercial law,

secure property rights, reliable accounting systems, a viable insurance industry, a competence jurisdiction, tariff are reduced and quotas are phased out.

• Hong Kong loses some of its privileged position and shifted economic center to Guangzhou, Shanghai and Beijing.

• Japan Korea and China become a “Chopstick Union”. A free trade zone of three region’s largest economy.

• With China 8% growth economy consistence a year, it will surpass Japan in 2005 (3.8% per year) and US in 2019 (2.6% per year)

Scenario #2; Reversion to communism

• Wide spread crime, ethnic violence and ultra nationalization. (as happened to Russia drastic reform)

• China Communist Party (CCP) connection enable firm to received preferential treatment from government.

• Continuing economic progress threatens to reduce the traditional power base of the CCP. Since Deng’s death, the power struggle the hard-line coalition and economic reformers.

• Expansion of the Special Economic Zones ceases and many privileges of the existing zones are gradually withdrawn.

• Scares many foreign investors, they will moving their investments elsewhere.

• Force the government to severely restrict outflows of money, materials and people.

• The country plunged into deep recession.

Scenario #3; Growing instability leading to fragmentation

• Political instability tearing the China apart.• It will divide into two distinct region; The outer empire

(Tibet, Mongolia, Xinjiang, and North eastern Manchuria) and the inner Empire (China Southern, Eastern Coastline and primarily populated by Han Chinese)

• Rebellious in Tibet creates sparks in other region.• Guangdong (Cantonese dialect) and Fujian (Fukienese

Dialect) provinces separatists recent to share their wealth with Beijing and other poorer province lead to separation of coastal province.

• Dissolution of China into region states, possibly bound together in Commonwealth of China.

ethics class, the bamboo network

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