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thepeel
Joined: 08 Aug 2004
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 Posted: Mon Feb 05, 2007 8:12 pm Post subject: How to lose your shirt in China |
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I think this article is interesting.. Especially, as so many of us will be able to relate to it with our experiences in Korea.
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How to lose your shirt in China
The economy beckons, but its business climate makes China a killing field for Canadian firms
ANDREA MANDEL CAMPBELL
Ragupathy Madiyalakan can't help chuckling as he recounts his company's disastrous foray into China. If he didn't laugh, he'd probably cry. His Edmonton-based Quest PharmaTech is teetering on the brink, and the newly named executive chairman frankly doesn't know if the small, publicly listed firm will survive the fallout from a seven-year odyssey plagued by bureaucratic dissembling, broken promises and corruption. "We are on the verge of collapse because of the failure we had in China," says Madiyalakan. "It's been a disaster from day one."
Quest has spent the past two years trying to extricate itself from the quagmire, even changing its name and dumping its former management. But it may not be enough. The pharmaceutical firm has lost millions, and its market capitalization, which once hovered in the $60-million to $70-million range, has been slashed to $2.9 million by furious investors. Like so many Canadian comrades-in-arms who wade into China only to be picked off like cannon fodder, Quest was felled by a fatal combination of wide-eyed na�vet� and a business environment that has made China into a killing field for Canadian firms.
Just about everybody's been burned in China, from General Motors to South Korea's LG Electronics, but market veterans say Canadians seem to have a particularly hard time grappling with the country's no-holds-barred, get-rich-quick mentality. The list of firms scorched by the ferociously competitive market is long -- from the Royal Bank of Canada and fruit manufacturer Sun-Rype Products, to a string of junior miners -- and might explain why, despite countless Team Canada trade missions, Canadian foreign direct investment into China is limping along at a paltry $1 billion to date, while the rest of the world has poured some US$356 billion into China since 2001.
Canadians aren't exactly seasoned global traders to begin with, preferring to do the bulk of their business with the U.S., if they leave Canada at all. Their cautious, trusting nature is in sharp contrast to Chinese culture, where the word for honest, loashi, is a derogatory term meaning to be gullible or to follow blindly. "You're better off going to Vegas for the weekend," says Jim Sherry, a former federal trade commissioner turned consultant. "You'll lose money just as fast and have more fun." The carnage is so predictable that government bureaucrats and business consultants openly wonder whether Canadian companies are cut out for China. As one trade commissioner, formerly based in China, admitted: "Every joint venture [between a Canadian and Chinese company] that I knew of, they all failed, all except one, and even that ended." Gervais Lavoie, a long-time China hand and a director for the Beijing chapter of the Canada China Business Council, tells Canadian companies flat out not to come. "I tell them China is going to eat you raw, because you are so green they won't have time to cook you," he says with a grin. "Canadians come to get screwed and the Chinese go, 'okay, we'll give you a run for your money.' "
Quest PharmaTech could have used Lavoie's advice, but at the time it seemed like a no-brainer. The company, then known as Altachem Pharma, had just gone public in 1999. It was quickly taken up by the idea of combining its technology with China's cheap labour to manufacture its pellet cores -- translucent glucose spheres used to make drug capsules -- which it could then sell into the massive and fast-growing market. Chinese government officials made it easy, luring the firm with tax breaks and a sprawling 40,000-sq.-foot facility, complete with landscaping and security guards, in one of Shanghai's spanking new industrial parks. But the company's ambitious plans soon began to unravel.
The joint venture was plagued by technological foul-ups almost from the start. Within a year, Altachem's government partners pulled out of the money-losing venture, leaving the Canadians on the hook for the factory's 50-year lease. They decided to go it alone, even though it took three months of paperwork just to transfer money to pay their Chinese workers, and they caught their Chinese general manager running a side business out of the Shanghai facility. They had to hire a Canadian supervisor to keep an eye on the operation, adding to the less quantifiable costs of pervasive bureaucratic corruption. "I don't want to get too much into it," says Madiyalakan darkly, "but the corruption is there."
When it became apparent the venture would never be profitable, Altachem decided to expand into another line of business, only to be blocked by new environmental laws. Cash-strapped, it had no alternative except to sell the facility. But when it came time to find a buyer, the company discovered it didn't have actual title to the land. While Altachem's original partners, a ward within the city of Shanghai, had a contractual obligation to hand over the deed, the move was blocked by higher-ups who claimed it was outside the ward's jurisdiction. Caught between competing factions within the Shanghai government, the company had no choice but to return the property to the city for a paltry $145,000, a fraction of the $2.2 million it paid for the plant. To get the money out of China, it needed 14 approvals from six different government agencies.
And that's not even the whole story. Altachem embarked on a second venture after a Chinese middleman, living in the U.S., convinced the company he could find a Chinese distributor for another of its technologies. The go-between was paid a hefty sum to hook them up with a Chinese cashmere manufacturer that was looking to get into the drug business. The Edmonton firm invested US$3 million to develop a high quality bacterial disinfectant, but after just six months, the impatient Chinese partner walked out of the deal. "They didn't understand biotechnology, they didn't realize it takes time," says Madiyalakan. Unable to find anyone to market or distribute the product, which is more expensive than the cut-rate Chinese market would pay, Altachem shut down the venture in 2005.
All told, Madiyalakan estimates the company lost $6 million, including $3 million in operating expenses and $1 million in foreign exchange and withholding taxes just to move its own money out of the country. "Maybe big companies can do alright in China," he declares, "but it's not a place for small companies."
In the past three decades, China has undergone a dramatic transformation as its creaking Communist economy embraces capitalism. The Middle Kingdom, many agree, has made great strides to embrace Western-style accounting practices and bulk up its judicial system. With the country's accession to the World Trade Organization in 2001, and much of its business elite Western-educated, "it is possible to do good business and with high ethical standards," says Howard Balloch, Canada's former ambassador to China and president of Beijing-based investment boutique, the Balloch Group.
Yet for many foreigners, the changes are only skin deep. While the country may have donned the exterior trappings of the West, a survival ethos prevails where the ends justify the means, and "lying and cheating are fine as long as you don't get caught," says Sam Goodman, a Canadian living in Beijing. "If I had to define China now, it's appearance over substance. Things appear different but the substance isn't there. Anyone who says the people have changed -- that's bullshit. This is still the wild, wild West."
Goodman speaks from experience. The Toronto-born former tree planter and wrestler came to Beijing in the mid '90s to study Mandarin. Learning the language wasn't a problem, but he quickly hit the proverbial Great Wall of China when it came to eating rice and noodles every day. Figuring the only way he could get Western food was if he made it himself, Goodman decided to open a restaurant. He knew it wouldn't be easy, but he relished the challenge. Goodman decided to call his new venture "Beijing Sammies: Where East Eats West." He had no idea just how true that tag line would turn out to be.
A friend had warned Goodman that his Chinese partner in the deli would screw him over within eight months. It only took four. At 4:30 one morning, he awoke to find the partner -- the cousin of a friend -- had taken the business licence and changed the locks. The partner was supposed to handle all the Chinese government red tape while Goodman managed the business. Instead, "he decided to deal with things by getting rid of me," says Goodman, who, together with friends, broke into the caf� and took everything that wasn't nailed down. The partner relented and a newly independent Goodman reopened for business 10 days later.
But that was just the beginning of his troubles. First, the landlord's go-between took off with his six-month rent deposit. Then, after paying a second time and renovating the place, he was belatedly informed that the street was slated for demolition. He got $28 in compensation. Still, Sammies' sandwiches, salads and fruit smoothies were an instant hit, and in 1999, two years after launching the business, Goodman opened a central kitchen, delivering food throughout downtown Beijing. To finance the $350,000 expansion, Goodman took on a Chinese investor. "That was my second mistake," he says.
The partner kept demanding to be made majority shareholder, but never seemed to cough up any money. It was a "miserable" experience, admits Goodman, but not a unique one. "Every single joint venture I've heard of has been screwed over. Every single one," he says. "They do it because they can, there's no legal recourse, because you're in their sandbox. They don't value what you bring to the table. It's just a completely different way of doing business," Goodman concludes, adding, "The Chinese are the most pragmatic people I've ever met. Don't get me wrong -- there are good and bad people everywhere -- but doing business, oh my goodness, I wouldn't have a full Chinese partner ever again."
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That is just a sample of it. It is quite long.
http://www.macleans.ca/topstories/business/article.jsp?content=20070129_140010_140010# |
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Thunndarr
Joined: 30 Sep 2003
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| Posted: Mon Feb 05, 2007 8:41 pm Post subject: |
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| "If I had to define China now, it's appearance over substance. Things appear different but the substance isn't there. Anyone who says the people have changed -- that's *beep*. This is still the wild, wild West." |
Gee, what country does this remind me of? |
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wannago
Joined: 16 Apr 2004
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| Posted: Mon Feb 05, 2007 9:42 pm Post subject: |
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| Thunndarr wrote: |
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| "If I had to define China now, it's appearance over substance. Things appear different but the substance isn't there. Anyone who says the people have changed -- that's *beep*. This is still the wild, wild West." |
Gee, what country does this remind me of? |
Thailand? The UK? France? Canada? |
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Adventurer
Joined: 28 Jan 2006
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| Posted: Tue Feb 06, 2007 3:28 am Post subject: |
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How about investing in Eastern Europe, Turkey, and Kazakhstan.
They seem like better places to put your coin and more familiar to Canadians except for Kazakhstan. I heard Vietnam is getting better, but I don't know how attractive their investment climate is at the moment. |
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Troll_Bait
Joined: 04 Jan 2006
Location: [T]eaching experience doesn't matter much. -Lee Young-chan (pictured)
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| Posted: Tue Feb 06, 2007 5:10 pm Post subject: |
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| Adventurer wrote: |
How about investing in Eastern Europe, Turkey, and Kazakhstan.
They seem like better places to put your coin and more familiar to Canadians except for Kazakhstan. I heard Vietnam is getting better, but I don't know how attractive their investment climate is at the moment. |
But Kazakhstan very niiiiiiice!
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thepeel
Joined: 08 Aug 2004
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| Posted: Tue Feb 06, 2007 7:25 pm Post subject: |
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| Adventurer wrote: |
How about investing in Eastern Europe, Turkey, and Kazakhstan.
They seem like better places to put your coin and more familiar to Canadians except for Kazakhstan. I heard Vietnam is getting better, but I don't know how attractive their investment climate is at the moment. |
Eastern Europe is a hotspot, and will increasingly be so. Turkey has probelms with IP protection and a very corrupt regulatory system.
Look to China to have a banking/financial crises in the next year. The Chinese banking system is likely the most corrupt, and defrauded institution in the history of the world (no exaggeration). China loses about the equivalent of a Singapore in banking fraud every year (about 70-92billion, depending on who you talk to) and recovers only 0.002% of all stolen funds. (this is why Vancouver, with very little real productive abilities, has a perpetual housing boom...)
Vietnam is getting hordes of attention as of late. They were recently admitted to the WTO and are actively perusing FDI. They also have Faaarrr fewer problems than do the Chinese. As I understand it, Vietnam is the choice destination for firms looking to invest in Asia.
http://www.washingtonpost.com/wp-dyn/content/article/2005/06/05/AR2005060500958.html
http://china.seekingalpha.com/article/25956 |
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Trumpcard
Joined: 24 Feb 2006
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| Posted: Thu Feb 08, 2007 5:26 am Post subject: |
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| Don't rule out Cambodia - Vietnam is booming but Cambodia is only now waking up. ANZ Bank has a presence there... |
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