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Thursday, July 22, 2010

Immelt's China meltdown


Special to The Japan Times

HONG KONG — General Electric Co. Chairman and CEO Jeffrey Immelt has certainly stirred up a hornet's nest in China with his words of wisdom about doing business there. In the most publicized supposedly private speech of the year, Immelt grumbled that it was getting very difficult for big companies to do business in China and that his own company was considering other countries to invest in.

He complained that China was increasingly hostile toward foreign multinationals and showing growing protectionist tendencies.

"I really worry about China," Immelt told a dinner audience in Rome. "I am not sure that in the end they want any of us to win, or any of us to be successful."

It's hard to know whether to laugh or cry. After all, founded by Thomas Edison, GE is ranked as the second biggest company in the world according to Forbes, with 304,000 employees worldwide, and is the only one of the 12 original Dow Jones industrial companies still on the index. GE does $5.3 billion in business a year in China, which is a mere 3.4 percent of its global revenues.

Immelt also claimed that GE was so peeved about China that it was looking at increasing its relations with other resource-rich countries in the Middle East, Africa, Latin America and Indonesia that "don't want to be colonized by the Chinese." This is a piece of prize chutzpah considering how U.S. and other multinationals exercised quasi-colonial sway in China and in vast other swaths of the world in the not-so-distant past.

GE claims that the remarks were private, taken out of context and were part of a long speech that contained a lot of praise of China. But Immelt has been chewing over the problems of China for some time. In a June speech at the Shanghai Expo, he lamented that "the hardest thing to do in China is to get a win-win relationship."

In Shanghai, he was scratching his head rather than displaying anger as in Rome: "Every time I'm here, I'm humbled by how fast China moves, how much it's grown . . . and whenever I leave here I just have a headache because I'm confused. I don't know exactly what to do. It's like riding a wild horse or something like that."

His stumbling conclusion was that GE is trying to deepen its roots in China — "such an important part of the world" — rather than withdraw: "You have to be ready every time you come here to change and adjust and learn and keep going forward in a bold way. I am always impressed with how well the government moves, how strong the actions are."

He talked of joint ventures with Chinese state-owned groups such as the 50-50 avionics deal GE struck with China Aviation Industry Corp. One aim is to create a "new global franchise" in which GE would take "China Inc. to places where it could not go before and take GE to places it couldn't go before." In reverse innovation deals, GE could take Chinese low-cost, high-quality business models and introduce them to the West, such as high-speed rail that China is pioneering.

Is Immelt so naive as to believe that China actually should support foreign businesses in their forays into China more than foreign businesses should be expected to support the political agenda of the Chinese government? In business, you have something to sell at a good quality and reasonable price that the other guys wants to buy, so you do a deal; mutual political or warm fuzzy feelings have nothing to do with it.

Immelt's remarks, however, echo what other big business leaders are increasingly saying about the problems they face in China. Yves Smith of Naked Capitalism poured scorn on Immelt's views as "American corporate arrogance writ large," adding that "China is out for China, period, and that is a stance that the U.S. would be well advised to emulate, rather than being brainwashed (or bribed) into thinking that the interests of a large multinational are aligned with national goals."

Smith accepts that China is a cruel place to do business: "I may sound like a complete Luddite, but I have long questioned the wisdom of foreign firms locating factories in China and exposing themselves to the risk of piracy, counterfeiting and other forms of technology transfer. This is an authoritarian country where organs are harvested from prisoners."

Indeed, a Japan Times columnist has written that China exports convicts to work on its projects in developing countries.

What has undoubtedly changed is that China no longer needs foreign capital, but needs advanced foreign technology.

Ian Bremmer, president of the political risk consulting company Eurasia Group, warns that China follows a model of state capitalism, which behooves foreign companies doing business with China to rethink their assumptions about competition. The principal feature of state capitalism is that the state is the main actor and arbiter that drives investment and sets the rules.

Bremmer warns in an interview with McKinsey Quarterly that foreign companies need to look closely at the ever-changing rules. Among the questions is: "What is it that you offer that is indispensable" not only today but also tomorrow so that the state cannot rip it off or decide that "there are local, state-owned or state-connected companies that will take you out? . . . Western multinational CEOs have not yet gotten this joke."

He contends that censorship, though a problem, was not the reason for Google's difficulties in China. "Google's not doing well in China because Baidu was supported by the Chinese government to be the premier search engine for China."

China is not going to go away or crack anytime soon. The question for foreign businesses is whether enthusiastic but critical engagement is the more profitable way forward.

Kevin Rafferty is editor in chief of PlainWords Media, a consortium of journalists dedicated to the politico-economics of developing countries.


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