Essay, Research Paper: Chinese Economics

Economics

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The social values and history have shaped and formed the economical developments
and the current environment of business in the People's Republic of China. They
have determined the patterns for negotiation and the Chinese perceptions of
business, and their feelings towards westerners. The implicit and explicit rules
that the Chinese society has on the development of businesses, and the economy
in general, are very important issues for any person going into China to
understand and consider. In order to achieve a successful partnership between
Chinese and Western cultures it is essential to have a basic understanding of
history and cultural developments that have shaped the current environment of
business. The three pillars of China are economy, culture, and society. Economy
The Chinese economy has been formed as a result of centuries of history and
development, which reflect the philosophy of China and its current economical
position. China started as a mainly agricultural based society with the
subsistence group; the family. For more than 2000 years the Chinese economy
operated under a type of feudal system; land was concentrated in the hands of a
relatively small group of landowners whose income depended on rents from their
peasant tenants. Agricultural taxes levied by the imperial government and crop
yields subject to drought and floods kept agriculture relatively underdeveloped
and organized in small units with the use of primitive methods for basic
subsistence. The conclusion of the Opium War of 1840 formally initiated a period
of Western penetration of China from the coastal treaty ports. Railroads and
highways were constructed, and some industrial development began. Such activity
had little impact, however, on the overall Chinese economy. In effect, China was
carved up into a number of competing colonial spheres of influence. Japan, which
tried to attach China to its East Asia prosperity Sphere, was able to create
only isolated nodes of a modern economy. The Chinese Communist party emerged in
the 1920s in the midst of a mounting economic crisis caused by foreign
intervention and increased landlord influence in the countryside. For more than
two decades, it expanded its control over large rural areas by introducing an
agrarian program based on the control of rent and usury, and by giving power to
peasant associations. On October 1, 1949, the Communist party successfully
established a unified national government and economy on the mainland for the
first time since the end of the imperial period in 1912. From 1949 to 1952 the
emphasis was on halting inflation and ending food shortages and unemployment.
The new government initiated a land reform program that redistributed land to
300 million poor peasants into cooperative farms. In 1958 the rural people's
communes were established, and these dominated agriculture in China until the
early 1980s. The commune was based on the collective ownership of all land and
major tools by its members, who produced mainly to meet state planning targets
and who were rewarded according to the work they performed, although basic
necessities were guaranteed to all members. In the urban-industrial sector,
state ownership of property and of industrial and commercial enterprises was
gradually extended. Industry grew steadily from heavy investment under the first
five-year plan, and the state-owned sector achieved an overwhelming importance.
The second five-year plan was introduced in 1958, trying to get China ahead into
industrialization. This program was characterized by large investments in heavy
industry and the establishment of small-scale versions of such industries as
steel refining. The program, however, caused great disruptions in economic
management and in rational economic growth, and in 1960 the program had to be
abandoned. The Chinese economy then entered a period of readjustment, but by
1965 production in many fields again approached the level of the late 1950s. The
third five-year plan began in 1966, but both agricultural and industrial
production were severely curtailed by the effects of the Cultural Revolution; a
fourth five-year plan was introduced in 1971 as the economy began its recovery.
After eliminating the vestiges of the Cultural Revolution in 1976, China's
leaders decided to move at a faster pace on all economic fronts to make up for
the loss suffered in the preceding ten years. A fifth five-year program began in
1976 but was interrupted in 1978, when the Four-Modernization program was
launched. It included the modernization of agriculture, industry, national
defense, and science and technology. A ten-year plan for 1976-85 stressed
improvement in economic management and a larger role for private and
collectively owned (as opposed to state-owned) enterprises. This program was
superseded by a more modest ten-year plan for 1981-90, but efforts to attract
Western technology and investment continued, as did a program of incentives to
increase agricultural production. Policies introduced in October 1984 called for
further decentralization of economic planning and for increased reliance on
market forces to determine the prices of consumer goods. China has potential to
be the biggest market of the world with 1.3 billion people. Furthermore, it
posses billions of unexplored resources and the biggest and cheapest labor force
in Asia. The size and underdevelopment make it a potential monster that has
created interest in every investing and developing country in the world. The
Chinese economy is an increasing economic possibility for anyone. Culture &
Society Chinese culture and society can be divided into two major periods,
Imperial China and Communist China. The modern Chinese society can be defined as
a combination of centuries of values and communist propaganda achievements. The
imperial China had a strong class system where 90% of the people were poor and
possessed limited resources to develop culturally, socially and personally. This
situation led to the strength of the large family and the basis for the
distinctive collectivism of China. The well being of the family and the state
are the main goals for any action in society. If actions taken do not contribute
to the family or the society as a whole, then the actions will not be regarded
as proper. Eliminating almost any form of individualistic thinking. The Chinese
Family is the main economic unit of society. The development of the Chinese
economy is based on the family. The Chinese family is the economic unit in which
members produce and consume in common. Also, it is the religious unit
responsible for the performing of rites required for the well being of the
family. The social security of the Chinese family relies on the effective
performance and interaction between religion and family. These concepts strongly
clash with western individualism collection of wealth for personal gain. A clear
example of this is the overseas Chinese control family-run business empires that
already dominate much of Asia. They invest billions in China, helping their
ancestral homeland become the world's fastest-growing economy. Together, China
and its approximately 56 million offshore Chinese are the most important
commercial and political forces for China and reflect, again the family based
economic strategy that they follow. In addition to the traditional imperial
Chinese society, the Communist values shape and blend into modern Chinese
philosophy. One of the early acts of the Chinese Communist party after it gained
control in 1949 was to officially eliminate organized religion. Previously the
dominant religions in China had been Confucianism, Taoism, and Buddhism. Most
temples and schools of these four religions were converted to secular purposes.
Only with the constitution of 1978 was official support again given for the
allowance of formal religion in China. The constitution also stated that the
Chinese population had the right to hold religious beliefs. Moreover, China has
a long and rich cultural tradition in which education has played a major role.
Throughout the imperial period (221 BC-AD 1912), only the educated have held
positions of social and political leadership. In 124 BC the first university was
established for training prospective bureaucrats in Confucian learning and the
Chinese classics. Historically, however, few Chinese have been able to take the
time to learn the complex language and it's associated literature. It is
estimated that as late as 1949 only 20% of China's population was literate. To
the Chinese Communists, this illiteracy was a stumbling block for the promotion
of their political programs. Therefore, the Communists combined political
propaganda with educational development. Chinese education has been strongly
affected by the communism in China. Since education was for the rich and
privileged during imperial age of China. One of the most ambitious programs of
the Communist party has been the establishment of universal public education for
their large population. In the first two years of the new government (1949-51)
more than 60 million peasants enrolled in "winter schools," or
sessions, established to take advantage of the slack season for agricultural
workers. Mao declared that a dominant goal of education was to reduce the sense
of class distinction. This was to be accomplished by reducing the social gaps
between manual and mental labor, between the city and countryside residents and
between the worker in the factory and the peasant on the land. After long
periods of breaks and changes in policies colleges reopened in 1970-72.
Admission was granted to many candidates because of their political leanings,
party activities, and peer-group support. This method of selection ceased in
1977, as the Chinese launched their new campaign for the Four Modernizations.
The governments stated goals for rapid modernization in agriculture, industry,
defense, and science and technology required high levels of training. Such
educational programs by necessity had to be based on theoretical and formal
skills more than on political attitudes and the spirit of revolution. After the
revolution every thing changed in China. The stability of social values and
structure where the highest achievement for the Chinese philosophy. These values
where already deep in the Chinese culture; however, they were strengthened with
communism and used into the development of China. The Chinese society had become
a combination of strong family and moral values and a country thriving for
modernization and industrialization. This concept of stability as the highest
achievement obstructed the development of China in the past, and still creates
problems today. The sole concept of risks disturbs the grounds of Chinese
culture in contrast to western society where risk is the main drive for
development and investment. Business Development in China The radical change
from imperialism and strong class differences to the equality philosophy
implemented by Mao Tse Tung created the modern China. Its development from
feudalism to communism created a conservative China, with very few attempts to
move towards capitalism. It was through the imperial years that mercantilism and
trade took place, yet it never flourished, as the capitalistic model westerners
know, until China's re-opening to the western world in the 70's. China has
always had the elements for development. In fact, they could very well have had
an industrial revolution before England. China possessed many key elements that
transformed Europe into a modernized industrial economy (compass, printing,
gunpowder, etc). Nevertheless, there is much more to China than just industrial
and economical development. Thus, when considering developing a business in
China one should always consider the cultural factors that makes the Chinese
society so strong and differentiating it from western societies. The fact that
China wants to grow, does not mean that it will do it with the western models
and philosophy, rather it will be with models developed from their own culture.
This is the point that can be attributed to cause most of the problems between
Chinese and Western cultures, and the point to be accepted in order to be
successful in developing a successful business relationship in China.
Negotiating in China can be very frustrating. Differences in decision making
styles and negotiating tactics cause misunderstanding and tension. Chinese
culture is based on the importance of rituals and ceremonies and so is Chinese
business. Business meetings are as important as the dealings during receptions.
To exemplify the process of dealing with China in order to develop a productive
relationship we will use the case of Kentucky Fried Chicken in China. This case
includes the different problems and strategies used in the negotiation and
development of business in China, specifically in setting up a foreign joint
venture. However, the problems that arise and the current working environment of
the Chinese economy cannot be understood without first understanding the history
and the cultural revolutions that have shaped it. This brief outline of the
history of China leads insight into some of the problems and the resolutions
that a manager for KFC experienced during his venture with the Chinese. KFC in
China In 1986, Tony Wang was Vice President of the Southeast Asia division of
KFC. He had an opportunity of bringing the world's largest chicken restaurant
company into the world's largest populated country. Wang was an experienced
entrepreneur and had been working for KFC for seven years. No other fast food
companies were currently operating in the People's Republic, so Wang did not
have anything to go by and had nothing to help him evaluate the attractiveness
of the Chinese market. The main downsides of operating in China were huge
demands on managerial resources and the low prospects of significant hard
currency repatriation. The first decision that Wang was faced with was where to
open the location of the first KFC. Obviously there were differences from city
to city but a reliable way to evaluate these differences did not exist. Wang was
interested in the enormous potential of the Chinese market, but he knew that
many other companies had failed in similar ventures. Ta-Tung, (Tony) Wang was
born in the Sichuan province in the People's Republic of China in 1944. He moved
to Taiwan when he was young and graduated from the Chong-Yuan University with a
degree in engineering. He later moved to the United States, and in 1973
completed a masters degree in management science from the Steven's Institute of
Technology in New Jearsey. He then attended New York University where, in 1975,
he received his post-master's certificate in international business management.
Wang joined KFC in 1975 at the headquarters in Louisville. Wang was convinced of
the large potential for American-style fast food in China. He attended a lecture
by the mayor of Tianjin (the third largest city in China), who spoke of the many
opportunities for investment in his city. Wang was asked by the mayor to sit on
a council to advise on improving the fast food industry in Tianjin. KFC was
currently owned by R.J. Reynolds, who was very interested in getting into the
Chinese market to sell their cigarettes. American smokes were in high demand in
China. Wang had the support of top management. He spoke perfect Mandarin and
English and was as comfortable working in New York as he was Beijing. He also
had experience negotiating with the Chinese. As Tony Wang investigated more and
more into the necessary requirements his concerns began to grow. He knew that
Chinese workers would have problems working under the KFC guidelines, and
time-consuming, expensive training programs would be a necessary requirement. As
well large capital outlays would be needed to find and negotiate a partnership,
to sign a lease and gain operating permits. Wang began to thoroughly research
the Chinese market. The first item that he began to look at was location. The
reason that this was so important was because the location would have dramatic
impact on the profitability, future expansion to the rest of China, and the
managerial resources commitments. Four cities were selected as potential
locations for the first store: Tianjin, Shanghai, Guangzhou, and Beijing.
Tianjin - One of the major advantages of Tianjin was the established contacts
that Wang had there. As well, it was only one of three municipal governments in
China that were not controlled by the Central Government in Beijing. The major
problem with Tianjin was it lacked a convenient supply of grain-fed chickens.
Local chickens were fed using fish meal fed chickens. This presented a problem
given that the Chinese place great emphasis on freshness and taste. Tianjin also
was not a very popular tourist location. Wang expected most profits to be in
Renminbi, but some foreign currency would be needed for profit repatriation and
purchasing needed supplies, which could only be purchased outside of China.
Shanghai - Shanghai has over 11 million people, and is regarded as China's most
prosperous business centre. Shanghai is home to a large variety of Western
hotels, business facilities and tourists, however it also is not a very popular
tourist spot, because of the pollution and loud noise. The investment could not
be justified if it did not supply an adequate amount of foreign currency.
Shanghai did, however, contain several feed mills and the largest poultry
supplier in China. Gangzhou - Gangzhou is located in Southeast China only a
short distance from Hong Kong, and is recognized for it preferential treatment
for foreign investment. It has greater autonomy in approving foreign investment
projects, reducing tax rates, and encouraging technological development. Many
tourists visit Gangzhou because of its close proximity to Hong Kong. As well any
operations could be managed directly from the existing Hong Kong operations. As
well, Wang did not anticipate difficulty finding a supplier for chicken. Beijing
- Beijing is the second largest city in China. It is the political and cultural
centre and has relatively high levels of affluence and the education of its
inhabitants. It is also the tourist centre of China, with many attractions
located in and around Beijing. A Beijing location would also give a higher
profile. This could be both good and bad. If they received approval from the
central government, they would be able to enter the rest of the Chinese market
without hassle. However, because of the higher profile, the government might
decide that they would not fit in to the Chinese landscape, which would prevent
them from ever succeeding. Outside of Beijing there were also numerous poultry
farms. Wang knew that the location was the most important detail, and would
decide whether KFC would succeed or not. There were currently no other
competitors in the Chinese market, so now was the time to strike to take
advantage of the situation. The risks were high, and Wang needed to weigh out
these risks to estimate whether the expenses would lead to for a huge gain or a
huge loss. In early February 1987, Wang decided to open operations in Beijing.
This was decided because of Beijing's high amount of tourists and its autonomous
municipal government. However, he was feeling more worried about the venture.
KFC signed a joint venture partnership. Wang's worries were stemming from the
difficulty he had been experiencing getting things done in a city governed by a
bureaucracy that seemed impossible to either understand or work with. He felt
that he would never be able to find a location in the city and government
approval was required on everything. Wang was also concerned whether Chinese
workers would be able to meet KFC's demands for cleanliness, quality and
service. The establishment of a joint venture was considered essential because
Wang described the chinese, "completely impossible for us to understand. In
fact, trying to do so is a complete waste of time." Trying to understand
investment regulations, winning approval for operating licenses, leases, and
employment contracts could certainly prevent them from proceeding. A local
partner was not required under Chinese law, however Wang felt it would be
beneficial in setting up operations and maintaining continued viability. Through
ties R.J. Reynolds had with the Ministry of Light, a partnership was formed
between KFC and the Beijing Corporation of Animal Production, a Beijing city
government-controlled producer of chickens. After careful inspection KFC found
that this would indeed work out, as Animal Production already produced three of
the approved breeds of chicken required for operations. Negotiations with the
poultry producer commenced with Mr. Jue Xia, a senior manager in the Beijing
corporation. Xia felt that it would not be able to meet KFC's large demand
because they did not have access to large enough reserves of grain. Xia was also
hesitant about KFC's quality standards. However, they thought that a partnership
with a Western firm would be beneficial for them as they would gain
international experience. Xia felt that Tony Wang was unlike most American
managers; he was a man he could deal with. The Beijing Corporation helped Wang
find a chicken supplier but they lacked close contact with the government
agencies that would be essential to setting up operations. So a third partner
was needed. Both partners agreed that the Beijing Tourist Bureau would be able
to meet their requirements. The Tourist Bureau was responsible for the
supervision of the construction and operation of all hotels and restaurants in
Beijing. They also had a lot of experience speeding up the construction of many
Western hotels, and had many times participated in a joint venture in these
operations. During these negotiations it happened that KFC was sold to Pepsico.
During this time KFC was the second largest fast food chain in the world. It was
initially thought that Animal Production had only come on board because of
pressure from the Ministry of Light Industry, who wanted to win points with
Reynolds, so the acquisition came at a bad time. As it turned out, however,
Pepsico's connections with the government in Beijing were even stronger then
Reynolds, so negotiations continued with a renewed interest. To convince the
partners to become part of the venture, Wang offered a guarantee of five percent
return on equity, much better than they could receive domestically. This sealed
the deal in winning over the partners. KFC retained 60% of ownership, The
Tourist Bureau received 27%, and Beijing Animal Production took 13%. This was
the actual breakdown of assets that each partner was contributing to the
arrangement. This deal was privately pre-approved as acceptable in negotiations
with the Foreign Economic Development and City Planning Commissions. The
approval of the partnership also required on the sharing of the corporation.
With one-half coming from KFC and the other half split between the other two
partners. The deal also stated that the chairman would be appointed by Animal
Production and the vice-chairman would be appointed by the Tourist Bureau. This
concerned Wang because of loss of control over operations. Wang countered by
establishing the new store as a franchisee, with the franchiser being KFC's head
office in Singapore. This would require 3% royalty payments to be paid to the
head office, and require the store to purchase its seasoning mixes from the head
office, both using hard currency. Wang also appointed a day-to-day general
manager in Beijing, who would be appointed by KFC and have control over
operations. Although it seemed like all major challenges were over, they
weren't. The approval of the partnership did not give any operating authority
for KFC in the city. They needed a "Licence to Execute a Business
Activity." Approval of this required the signatures of the District
government, the Commerce Department, the Taxation Department, the Health
Department, and the Food Supply and Logistics Department. None of these agencies
had any coordination, so approval from each separately was required and this
could take months or years. Tony Wang stated: " We are pioneers in China,
but so are the Chinese. However, whether they want to learn or not is another
story. Many Westerners make the same big mistake in China: they assume that they
can just pay to have the required work done or at least expedited. This just
doesn't work in China. The Chinese are not motivated by a desire to do things
right simply for the sake of doing things right. They don't want your help in
speeding up the process. They just want to avoid problems. And unless we can
convince them otherwise, we are their biggest problem." A license was
necessary before a lease could be signed, but Wang was worried that a desirable
location might not be found. All buildings and possible space in Beijing is
occupied. As well, Chinese regulations stated that new tenants would have to
guarantee the employment of any workers left jobless when a new tenant took
over. This worried Wang because he would be stuck with a number of unskilled
Chinese that he would have to employ. Wang wanted the first store that was to be
opened to be big and flashy because it would determine the future success of KFC
in China. This was strategically a good idea but it ran counter to the culture
in China where there was a history of hostility towards Western culture. In
February 1987, a license was issued by the city, allowing KFC to operate in
Beijing. The Tourist Bureau played an integral role in speeding up the
application. Under the license KFC was given a tax remission for two years;
profits in three years, four and five would be taxed at 16.5%, with profits
thereafter taxed at 33% Wang now had to select a site to open the first
location. But no matter where a location was chosen KFC would still require a
building permit, as well as hookups for electricity, water, gas, and heating
before the store could open. Wang discovered that many of these services were
difficult to obtain, and it was not uncommon for applications to not be
processed for months. Another concern was the company's need to secure import
licenses needed to bring equipment into the country: pressure frying machines,
cash registers, blending and cutting equipment for the kitchen. Each item
required a separate permit that could take months to attain. During all these
negotiations Tony Wang realized that no one had thought to test market the area.
It was known that the Chinese liked chicken. From KFC's success in Hong Kong, it
was assumed that it would be accepted, but no one had had time to find out for
sure and they were forced to cross their fingers. Another problem was finding a
reliable supplier of quality potatoes. If they were unable to do this they would
have to use mashed potatoes, and Wang did not know how the Chinese would receive
this. The largest concern facing Tony Wang was whether or not the Chinese
employees could meet the quality, service, and cleanliness requirements. The
Chinese employees would have little appreciation for KFC's international
standards of cleanliness or product quality. Most domestic organisations lacked
any incentive programs, work was seen as something to be avoided, and service
was a foreign term. The KFC organization would not allow the store to open if
these levels were not met. The ironic part was that Chinese consumers would
accept less then what was required. This would create conflict with the
partners. Tony Wang also wondered what KFC would do with the soft currency that
the venture would generate, and wondered whether or not there would even be any
profits. Wang was faced with three options: 1. Pull out - cut the company losses
and avoid negative publicity if the venture failed. This would allow for further
research and KFC could try to re-enter in a few years when there was more
complete information. 2. Go ahead slowly - taking more time evaluating the
situation to make sure the partnerships were secure and the market would accept
KFC, however this would invite competitor response. 3. Go ahead full - the
market had high potential for success for KFC, and, with 1.1 billion people,
large potential for profits. Wang decided to go full ahead. The location was
finally found. The central government approved the lease because Wang sold them
on the idea that the restaurant would represent a symbol and statement of the
People's Republic open policy with the West. The lease was finally approved in
April of 1987, however they did not have the building permit, which would allow
them to make necessary renovations. They also required hookups for gas, water
and heating. Applications were continually lost or just went unanswered. When
KFC announced that it would be hiring it was flooded with applications.
Management decided to treat all applicants equally. Referrals would not be
accepted. This was a unique move in China where family contacts are usually used
to land highly sought after jobs. This move created conflict with the partners.

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