Dean Jablonsky, operations manager at medical device manufacturer Boston Scientific Corp., in Minneapolis, conducted an exhaustive study of business in China, and concluded, “Overall, the whole world is confused about
China. They don’t understand the political and social climate, so they fail because of that.”

Jablonsky talked to 12 different companies about their experiences and compiled the results. On the plus side of the
China ledger is economic growth. However, that growth does not come without problems.
China has nine of the 10 most polluted cities in the world. The default rate has the banking system teetering on the brink of disaster with its rate of loan defaults. China says the rate is 29 percent; the World Bank puts it at 45 percent. For comparison, the rate in the United States is 1.7 percent.

In addition, the transition from an agricultural to a manufacturing economy, along with the extremely fast growth of cities, is having a huge impact on the social fabric of the nation. One thing to watch is the financial disparity between rural peasants and urban technical people. Jablonsky calls it the largest mass migration in the world, as the country tries to create a middle class of 300 million people. It is also important to remember at all times that the country has a socialist, authoritarian government.

“China has such a huge impact on U.S. business because of its large and growing customer base. As China joined the World Trade Organization, it had to sell off its state-owned companies. Most of these became joint venture companies with U.S. or European companies. This means that to do business in China, you have to understand the social and political issues. And you have to figure out your business plan, what your strengths are, and what you want to do in China,” Jablonsky says. “For example, Logitech set up companies for manufacture and assembly, but kept design and distribution for itself. Advantages of U.S. companies are innovation, laws and licensing, and these companies need to remember that.”

Jablonsky notes that one major driver of growth in China is its development zones. “You must research and understand these zones if you’re going to go over to begin manufacturing,” he advises. While these zones have removed some barriers to open markets in China, while offering special tax incentives, each one is different, Jablonsky points out. “So you have to understand what business you’re in and then which zone is best for you.”

Another aspect of culture in China is the barter economy that has existed for more than 4,000 years. Now China is trying to become a contract society, much like the West. But if you are doing business there, you should always be aware of the differences in type of business understanding so as not to be caught unawares.

Jablonsky gleaned several takeaways from his research of the 12 companies. “Understand the culture before you enter the market,” he says. “And don’t be a cowboy. Understand your value proposition. Have a long-term strategy and expect to lose money for five to seven years. Expect to lose talent—and to pay more for talent. You also need to acknowledge that what works in the United States won’t work in China. For example, Wal-Mart is a big box store, but in China, they don’t drive cars. They also don’t have a lot of space to store stuff.”

Jablonsky notes that one company, Owens Corning, learned when it went to the Chinese market that the Chinese don’t use shingles; they use ceramic tile. Further, there has never been an energy conservation policy in China requiring insulating houses. So for Owens Corning to sell its products there would have required a huge culture shift.

“Companies setting up operations in China should expect their technology to be stolen within six months,” Jablonsky adds. “S.C. Johnson developed a new fragrance for the Chinese market. It was knocked off and launched by a Chinese company just before they launched.”

An additional lesson:  Remember that relationships are more important than contracts, Jablonsky says.

Communication counts

Mary Frances Cox, senior vice president, Operations, North American Divisions, for automation and electric products vendor Schneider Electric, in Palatine, Ill., knows both sides of the competitiveness discussion—both cutting costs by manufacturing in low-cost countries and making North American manufacturing plants cost-competitive.

“Moving or starting manufacturing overseas must be a business decision, not just a manufacturing one,” states Cox. “One thing to look at is the huge size and growth in ...