China's Wild West

Dec. 21, 2004
The country's inland regions offer incentives, but westerners face a culture clash.

When the late Chinese leader Deng Xiaoping proclaimed to the country that "to get rich is glorious," people living along the country's coastal regions did not need to be told twice. They sprinted down the money-making road by whatever means available, making up for time lost during the political madness and economic miasma of the Cultural Revolution era. Within two decades of China's first opening up in 1978, cities along the eastern coastline, from Guangzhou to Shanghai to Dalian, have grown and prospered at an astonishing pace. In place of rice paddies and village shacks are modern factories producing CD players for Sony, cars for General Motors, and beer for Beck's. But while the east-coast and central areas have boomed, the less-accessible western regions of the vast country have remained moribund, caught in a socialist time warp of state-owned factories and outmoded management practices. Here the so-called Iron Rice Bowl system prevails, providing cradle-to-grave employment for workers, no matter how well they do their jobs. The disparity between the east and the west has become so glaring-with the underlying risk of the inequality fomenting civil unrest in the one-party state-that Chinese leaders have decided to act, embarking on a determined campaign to bring money, investment, and expertise to the nether regions of the country, whose borders touch those of Vietnam, Myanmar, Laos, Tibet, and Kazakhstan. The state has pledged a reported US$45 billion infrastructure program and grant package, with various tax breaks and incentives offered to foreign investors prepared to venture into largely untried and untested terrain. Chongqing, the transport hub of southwestern Sichuan province, with an estimated metropolitan population of 43 million, will have a new $2 billion railway line connecting it to the central city of Huaihua. Grand gestures and planned projects notwithstanding, the biggest single problem lies in the mind-set and skill level of the workforce. As a strategic military center, Chongqing has traditionally been wary of allowing outsiders to wander around at will, let alone foreign managers who want to dismantle the creakily inefficient state-owned enterprises. But when the central government speaks in a communist country, the provincial cadres prick up their ears, listen attentively, and act obediently. The decree from Beijng is that state factories nationwide that operate at a loss must shut down, radically improve efficiency, or find a foreign investor willing to take on a lumbering and archaic operation. In theory, foreigners can come into China independently, without an obligation to find a local partner, but few do, relying on their joint-venture Chinese contacts to oil the communist bureaucratic wheels and sort the workforce chaff from the wheat. It is a formula that has worked well for BP Amoco PLC in its far-western venture. The company's $200 million commodity chemical plant in Chongqing, built under budget and on time, managed to turn a $2 million profit during the first year of operation, no mean feat in the boondocks of China. "The raw materials-natural gas and methanol-are all here and having close-by petrochemical plants allowed integration opportunities," says general manager David Henley. "Having a good, strong, joint-venture partner helps; we don't have to advertise for 180 skilled workers or recruit people off the street. "We came here before there was the big push for development and found the rail system better than we thought: It runs for 1,500 km [930 miles] in either direction. The tax is competitive and we have investment-friendly local leadership who talk ourlanguage." Buoyed by the success, BP Amoco is planning to add a new plant and upgrade its existing facility at a total cost of $100 million. It stands to benefit from the planned government-initiated infrastructure projects, not to mention its standing with national leaders who look favorably on those who answer their call to invest in the west. The western regions "have the coal, gas, and minerals and are also rich in labor resources," says Carma Elliot, British consul general in Chongqing, which is located on the Yangtse River. "It has enough basic structure to attract people here even though it might not be a natural choice, and the government is giving it a big push with preferential policies. It might also get you Brownie points because you will be putting substance to what is a fairly hazy policy, but of course it has to make business sense. There are direct benefits, which is why manufacturing companies are interested." Even with government goodwill and financial sweeteners, joint-venture projects are fraught with potential difficulties and misunderstandings. When Mao-suit-wearing cadres meet M.B.A.-degree-wielding managers, something has to give; outsiders are told that they have to get used to the "Chinese way," which often in reality is the "socialist way," characterized by intransigence and xenophobia. Many companies, such as General Motors in Shanghai, were fortunate to be able to start from scratch, hiring only the brightest and the best for its $1.5 billion Buick plant workforce. Longer-standing investors, such as Cummins Engine Co. Inc. in Chongqing, became a joint-venture partner at an existing plant-with all its attendant, coffer-draining infrastructure including a company-funded hospital and school. Despite inevitable clashes between old-school Iron Rice Bowl systems and modern American management, Cummins turned a small profit last year of $500,000 on revenues of $50 million. Major road, rail, and bridge projects in the offing should ultimately help swell the 1,800-worker plant's order book. "It can be frustrating but it is also rewarding because you see the results," says general manager Peter Macinnis. "We have a lot of young, talented people who could do a lot, but we inherited the middle managers who are more resistant to change." The problem for Cummins and other joint ventures is the older-style managers and workers who are reluctant to give up their stress-free work habits. Cummins, which earlier implemented a technology-transfer agreement, put up half the $48 million investment in the diesel-engine plant, a deal that also came with a bloated workforce. Nonetheless, Macinnis, a China veteran who speaks Mandarin, has seen seismic changes during his 12 years in the country. After endless smoke-filled-room meetings with Communist Party leaders and stints in major cities, he is well placed to assess the likely changes in China. "In Chongqing they are working really hard to attract investment. The mayor is a terrific guy," he says. "He is making things happen, but it is a big job." A glance at a map of China gives little indication of the geographical and cultural disparities in the country. The much-touted figure of 1.3 billion potential consumers is misleading: Only 300 million of those, mostly living in the eastern cities, have any real spending power. Official figures show that almost all those classified as living below the poverty line are located in the western regions. And some of those regions are poorer than others. Residents of the northwest provinces of Gansu, Qinghai, and Xinjiang live in rugged and infertile terrain with little hope of improving their lot. Investors are understandably dissuaded from areas such as these with their unskilled workers and poor transportation links. Although China does have a comprehensive state railway system, it has no interlocking national road grid; the highways and freeways are located mostly in and around the affluent eastern-city regions. Some inland cities are beginning to make their mark, however. Xian, best known for its terra-cotta warriors, is also an industrial center and was chosen by Rolls-Royce PLC for its joint-venture factory, XR Aero Components, which turns out parts for gas-turbine engines. "Clearly aero engine parts are very specialized, and Xian is the center of China's aviation industry," says Bill Woon, the company's area manager. "What the foreign manufacturers bring are management systems and quality systems. We can find very good people and train them. The younger generation is very adaptable. "Before the opening up China was a planned economy, and [manufacturers] didn't have to take market factors into account," Woon continues. "Now, though, they are making parts that are going into our engines and meeting our quality and program requirements. The big problem with joint ventures is always different agendas." And therein lies the rub for manufacturers contemplating a pioneering trip into China's Wild West. The journey may be a rough one; partnering two sets of participants with diametrically opposed attitudes and upbringing is never easy. The outsiders come armed with money, expertise, and ambition; the traditional Communist Party members are equipped with permits, prime land, a cheap labor pool, and an economic grounding based on the teachings of Karl Marx. But whatever the means, all ultimately agree that to get rich is, as Deng said, glorious.

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