Business Perspectives

Surprises lurk when doing business in China

If General Motors’ experience is any guide, Cessna Aircraft can be wildly successful in China. But the Wichita company will likely need to persevere through some nasty “only-in-China” surprises along the way.

Today, GM is the leader among foreign brands in China, selling 2.6 million vehicles in 2011. GM’s road to success, however, has never been straight or easy. There were many reversals, upsets and shocks to the system before Buicks and Chevys finally caught on with Chinese consumers.

But that’s getting ahead of the story. Let’s begin by looking at what drew both Cessna and GM to China to start with.

First, Cessna finds China’s potential for business jets irresistible, just as GM was captivated by the potential car demand. When GM started production there in 1998, the Chinese bought just 600,000 cars a year. Today, annual sales have rocketed to 13 million.

The outlook for jets is equally uber-optimistic. Chinese skies are expected to make room for some 2,500 private jets by 2020, up from just 170 today. That’s an explosion of growth that Cessna is right to pursue.

Second, Chinese regulators strongly encourage foreign companies to manufacture inside China in partnership with Chinese firms. To secure greater market access, Cessna plans to form joint ventures with AVIC, a powerful state enterprise, just as GM partnered with the mighty Shanghai Auto Industry Corp.

Chinese joint-venture relationships are notoriously mercurial. Because Chinese state enterprises are under tight government control, GM and Cessna’s Chinese partners play the role of both “the house” (shaper of the rules) and “the player” (competitor for sales and profits).

What this means is that China offers the most attractive business jet market in the world for the next 10 years. At the same time, China presents a quixotic and risky business environment.

Cessna President and CEO Scott Ernest told journalists in March: “Having a local partner in (China) gives you incredible market access.”

This is absolutely true. But in China, nothing comes free of charge. In exchange for market access, Cessna will occasionally find itself vulnerable to the whims of its partners.

Here is just one example of what can happen: GM competed with other foreign companies in the 1990s for the right to invest in a nationally approved joint venture. When GM beat out other contenders (including Ford) and invested in the $1.8 billion joint venture, everyone understood that GM and its partner Shanghai Auto would enjoy a monopoly in the large-car segment of the market.

Well, almost everyone. Nine months later, GM discovered that Shanghai Auto had covert plans to develop a new sedan with Volkswagen that would be in direct competition with the Buicks to be built by GM. That about-face by Shanghai Auto was a real shock to GM executives. Cessna should not rule out the possibility of similar developments in its own partnership.

Then there are the dangers that surface outside of the joint venture. There is a saying among veterans in China that R&D stands for “Receive and Duplicate.” Copying products in China seems almost as commonplace as jaywalking in America.

GM was stunned to discover in 2003 that a Chinese car company was producing a sedan that was identical from the tires up to a model that GM was poised to launch. This was a first – a copy of a car appearing on Chinese streets even before GM had launched the original!

Engineering blueprints for the car had somehow migrated to a Chinese competitor months earlier. GM sued three times in court, but to no avail.

No foreign company with a strong brand name – Nike, Louis Vuitton, Ping, Toyota, Mercedes, Rolex and Apple among them – has escaped copying in China. Given the high-tech nature of jets, Cessna should enjoy some protection from “reverse engineering.” But it would be a mistake to underestimate China’s determination to purloin know-how and brand name from a successful company such as Cessna.

GM persevered through head-turning dramas and has managed to build a strong and highly profitable business in China. Cessna has good reason to be optimistic about China, too, given the zealous demand of Chinese consumers for luxury offerings.

But the company should be ever vigilant to the risks lurking just around the corner. As Americans working in the People’s Republic like to say about the Chinese business arena: “It ain’t Kansas.”