Little trouble in big China

Business | Sat 10 Sep | Author – Business & Finance
Liam Casey 2011

Despite cautionary tales about the many and varied bureaucratic and legal pitfalls of doing business in China, Liam Casey – whose company PCH has its main operating facilities there – says in his experience, they are unfounded. John Walsh reports.

Cork-born, Shenzhen-based entrepreneur Liam Casey is known as ‘Mr China’. The title was conferred on him by local and international media in view of the huge growth his company, PCH International, has seen over the past 15 years. Given the thousands of western business people seeking their fortunes in the fastest growing and second biggest economy in the world, that is no mean achievement.

When Casey made his first foray into China in 1996, it was hardly a well-trodden route. It was the year before the British government handed back Hong Kong. The country was insular and very under-developed. In the space of a decade and a half, most recovery scenarios are predicated on China becoming the engine of global growth in the future. Whether China is able or ready to play its role as an economic powerhouse is now a multi trillion dollar question. (see box)

Casey says it is hard to understand what is happening in the country. “I don’t think there is anybody in China who understands China. It is just so big and complex. There is a property market that is racing ahead. From an export point of view, it is still growing very fast, but domestic consumption is also growing very fast. As long as trade continues, you will have the resources to prop up the economy. The government is extremely focused and does not sit idly by when something needs to be done. The last time they initiated a stimulus package it was evident on the streets two weeks later. Confidence is more important than gold or currency and they do that very effectively.”

In a way PCH is a posterchild for the benefits of globalisation. It is headquartered in Cork; its main operating facilities are in Shenzhen and the bulk of its customer base is in Silicon Valley. The concept is to take advantage of China’s low-cost manufacturing base and abundance of skilled workers to take over the design, manufacturing and delivery of smartphones, e-readers and tablets for some of the worlds biggest bluechip companies.

It is a model that has served Casey well. He has 1,200 employees and 2010 revenues were $413mn, which was a massive jump on the $152.6mn revenues posted in 2009.

Obviously for a company of PCH’s profile, robust growth in a growing market, access to capital is a key issue. The global financial system has been in turmoil for the past three years. Many corporates complain that banks are not lending. Rumours circulated recently that PCH would go public on the Hong Kong stock exchange sometime later this year or in the first quarter of 2012.

Casey says all options are still being looked at. “We are looking at every opportunity for fundraising. We have looked at the possibility of an IPO [initial public offering]. We will consider it, but we will also consider using venture capital and different forms of debt financing. We are reviewing all options and I wouldn’t rule out any of them. But we recently closed a round of funding which is enough for us in the near term.”

PCH secured a total of US$30mn in a new round of venture capital funding in June. Two new investors included Northbrooks Investments – an indirect wholly-owned subsidiary of Singapore-based Temasek Holdings; J. Christopher Burch – a US-based venture capitalist and entrepreneur; and, existing investors Norwest Venture Partners.

Just as most of the 20th century belonged to the US, this century will belong to Asia and China in particular. Most corporates are shaping future growth plans around penetrating the Chinese market. But there are plenty of cautionary tales about the pitfalls of doing business in China. These range from wilfully obstructive bureaucracy to an arbitrary legal system. Casey says in his experience most of the concerns are unfounded.

“We have opened up almost 20 different entities in China and each facility needs a business licence. We have had no issue whatsoever. You go through a process and there are rules and procedures to follow. A few years back I would have gone into great detail when we were opening facilities. Today I delegate these responsibilities because it is so easy to do. China is very entrepreneurial, innovative and competitive. Bureaucracy does not survive in that sort of environment.”

There is also the issue of safeguarding intellectual property rights. Again there are concerns that Chinese authorities do not respect intellectual property rights.

“We have a lot of experience in defending intellectual property in China. The day you register your intellectual property filing, that is, the day you file it in the rest of the world, whether it is in the US or the EU, then that is the day you file it in China. If you register a product or invention under Chinese law, then you can defend it. If the Chinese don’t respect their own law then there definitely is a problem. But it is all about going through the right processes and channels. It is all about showing the respect they ask for. They will support you if you do that.”

Even though Casey spends a considerable chunk of his time travelling between his operations in China and his main customer base in this country, he still makes regular trips to Ireland. He is optimistic about this country’s future, although there have to be changes to the ways things are done in the future, he adds.

“We have got a fantastic highly skilled workforce, but we have to create opportunities for younger people. International travel and business is here to stay. Emigration today is very different to the past. We need to prepare people for emigration, but in a different way. We need to help people set up support structures to make Ireland a hub for international business. We are great negotiators and deal makers and with excellent communications skills. We should never have got caught up in selling houses and cars to each other. We are brilliant at services and we have to get back to that.”

Great Leap Forward: The changes China needs to make before becoming what it can be – could take a generation

Most major western economies are teetering close to a double-dip recession. Since 2008, the US and European economies have been hit by the hardest downturn since the great Depression in the 1930s. What saved the global economy from slipping into a synchronised and potentially devastating downturn is the resilience of emerging markets. China is the powerbroker among this bloc of economies.

Benjamin Charlton, an analyst with the global advisory firm Oxford Analytica, says it is important to understand how the Chinese government sees its role in the global scheme of things.

“China’s leaders have no particular wish for their country to be counted on as the world’s ‘engine of growth’. They have enough trouble holding their own country together without worrying about the rest of the world too, and don’t want the G20 breathing down their necks whenever they debate economic policy . . . what keeps them engaged with the outside world is their hunger for foreign technology and natural resources, and their fear that export markets may collapse or be cut off.

“But China has the world’s largest population, unified by a single market, a common language and a relatively stable political system. This makes it the world’s largest potential market and pool of innovation. In the long run China will almost certainly resume its historic role as the world’s ‘engine of growth’, the only question is how long this will take.
In view of the double-digit growth rates it has seen over the past decade, there are inevitably fears that it is overheating. There are three particular areas of concern: the housing market; the banking sector; and a rebalancing of the economy away from exports towards domestic consumption.  In view of the size and complexity of the economy, opinion is divided on whether there is a bubble forming in the Chinese economy or whether this time it really is different.

“China is not a bubble, though there are some cities which do have bubble real estate markets. Urbanisation is only about 50% so there are plenty of more people to get into the cities. And with this comes easy growth like Japan in the 1970s, not Japan in the 1980s,” says Stephen Green, an economist with Standard Chartered in Hong Kong.

Charlton says that it is quite possible that Chinese banks have accumulated very large stocks of bad loans, though the data are so murky, it’s hard to be sure. “But China’s banks are implicitly guaranteed by the state. The state has bailed them out before and will do so again if it needs to – without the sort of ideological compunctions seen in the West, because the Communist party never truly trusted the market anyway. Any scruples about moral hazard are insignificant next to the imminent threat of social turmoil.

“So the question about whether China’s banks are solvent really hinges on whether the Chinese state is solvent, and that’s even trickier to judge. Even assuming the banks and their local government borrowers are sound, the state’s implicit liabilities are potentially immense. They include the costs of supporting one of the world’s fastest-ageing societies.

“At the same time, Beijing’s tax base is limited for political reasons: it relies mainly on business taxes – VAT and corporation tax – ostensibly because these are easier to collect, but also because on some level, Beijing realizes that taxing individuals draws attention to the costs the government imposes on them, and makes them more aware that they have a stake in it. This could prompt ‘citizens’ to start thinking like ‘taxpayers’ and making awkward demands like wanting explanations of what happened to their money and some say in how it’s used – in other words, a greater say in government than is possible under the current one-party system can accommodate.”

Possibly the biggest challenge of all the country faces in the longer term is rebalancing the economy. As it stands, there is a huge reliance on export-led growth. There are policies in place to stoke domestic demand in an effort to boost domestic consumption and rebalance the economy. For this to happen there has to be an appreciation of the currency and the introduction of social protection policies that underpin western democracies.

Beijing needs the political will to tackle vested interests and this won’t be easy, says Charlton. “Beijing is constrained by its one-party system, which, far from letting the central government do as it pleases, actually requires the party to carry out something resembling a perpetual election campaign to ‘sell itself’ and sustain its mandate.

“Beijing likes to portray its political system as decisive and quick to act compared to lumbering liberal democracies, but this is only true in certain spheres. On flagship projects, Beijing can apply concentrated pressure and push them through even if they are controversial.  Some rebalancing policies, such as Renminbi (Chinese currency) appreciation, are susceptible to this approach.

“But diffuse, grassroots social programmes – of the sort that will be needed to disincentivise saving and put a larger share of the national wealth into the hands of consumers – are much more difficult because local-level implementation is harder to monitor and enforce. Spaceships, Olympic stadiums and – dare I say it – bullet trains, are easy compared with getting thousands of local authorities to implement effective social policies. From overseas, Beijing looks authoritarian but in fact it faces a constant struggle against the disobedient local authorities on which it depends to implement most of its policies.  Local governments are experts at finding loopholes and dragging their feet the moment Beijing’s back is turned, and Beijing’s attention cannot be everywhere at once.

“Even if rebalancing policies can be pushed through, the degree to which they will change behaviour can’t easily be predicted. Saving and consumption habits have a cultural as well as rational component and Chinese will not automatically become spendthrifts simply because they now have pensions and health insurance. Substantial change could take a generation.