The landscape outside is smoggy with patches of barren trees and unadorned, concrete apartment buildings. I notice the odd urban layout consisting of large flat, undeveloped spaces abutting sections of tall skyscrapers and medium-sized offices and housing structures. We are on the high-speed train heading south from Beijing to Shanghai, leaving behind our guide, David, and the various others we interacted with during our short stay in Beijing.
The past meets the future in Beijing
After stepping off the airplane in Beijing, my first interaction was with a robot that scanned my fingerprints and passport photo page. The same thing happened in the U.S. when I returned from two years of living in the Dominican Republic. It made me think about the modern world we live in and what life will look like 10 or 20 years as more and more human jobs become replaced with automated and AI systems. China will be a leader in this area despite its brief history with the open market. Its industrialization occurred in the span of just 41 years and the country has already placed itself at the vanguard of technological innovation, with Chinese firms rivaling today’s giants like Google, Amazon and Facebook.
Our first outing was a clear departure from the modern world. We visited a section of the Great Wall. Around half our group chose to take a chairlift to the wall while others opted to hike up. Once there, we had about an hour and a half to explore a small section of the wall. This section has been restored so many of the stones are clearly new additions, but the basic structure is still as it was hundreds of years ago and I felt as though I visited something that closely replicates the original military innovation. It’s a humbling experience to stand on top of something that took so many humans and years to build. It seems to me that Imperial China was capable of building on a truly impressive scale. Modern China may not fall far behind in terms of achievement with its One Belt, One Road initiative and rapid industrialization in the 20th and 21st centuries.
Insights into the Chinese regulatory environment at DeHeng Law
On Monday we visited our first company. DeHeng Law Firm has clearly built its business on the past 40 years of China’s industrialization and, in particular, its relatively new legal system. The company is one of China’s leading law firms and has over 70,000 corporate clients. DeHeng’s Chief Operating Officer kindly gave us a tour of their office. Subsequently, a managing partner and practicing lawyer presented us with some interesting information regarding China’s business regulatory environment and DeHeng’s services. Our hosts focused the presentation towards foreign direct investment (i.e. international companies investing in China) and outward direct investment (i.e. Chinese companies investing abroad).
This was an interesting time to visit DeHeng, considering a law passed within the last two weeks that will open the investment market to foreign businesses. Previously it was a time-consuming and difficult process to start doing business in China as a foreign company, requiring approval by three government agencies: the National Development Reform Commission that supervises compliance with industry policies; the Ministry of Commerce that supervises compliance with broader commercial policies; and the State Administration of Foreign Exchange which handles the registration of a new enterprise. Beginning January 1, 2020, according to our hosts, foreign businesses will be able to invest in China without government approval, providing the assets aren’t on the “negative list.” The negative list includes certain industries that foreign companies cannot invest in or could possibly invest in under a joint venture with Chinese shareholders. This opens market access in important industries such as finance, transportation, and manufacturing.
Outward direct investment is subject to its own regulations, classified as encouraged, restricted, and prohibited investments. Encouraged industries include industries that align with the Chinese government’s strategic development goals such as high-tech industries and healthcare, restricted industries include entertainment and property for example, and the prohibited classification encompasses anything that would pose a national security risk, expose sensitive national infrastructures, or investments in countries with no diplomatic relations with China. The majority of DeHeng’s business is in providing advice related to the grey area surrounding restricted industries, as the encouraged and prohibited sectors are more straightforward.
Visiting the Foreign Commercial Service in the U.S. Embassy
Our next visit required American passports and security clearance: the Foreign Commercial Service in the U.S. Embassy. The FCS has two main missions in China. Its first is to assist small and medium-sized American businesses doing business in China. The second is facilitating Chinese private sector investment in the U.S. As a government agency, both missions are geared towards creating jobs in the United States. The China-U.S. trade relationship has the largest imbalance in the world ($539.5 billion to $120 billion in favor of Chinese exports to the U.S.). This isn’t necessarily a bad thing, but it’s a helpful piece of data in understanding our economic relationship with China. Our host provided us with some further details on this relationship.
The bulk of U.S. exports to China are in aircraft and aircraft parts, soy beans, motor vehicles and microchips. Aside from this, the U.S. provides many high value-added services to China in areas like environmental consulting and IT services. As I considered this information, I couldn’t help but wonder what the economic role of the U.S. will be with China in the future. China has companies developing aircraft that will one day compete with Boeing and Airbus. It has plenty of its own IT companies that will probably meet or surpass the capabilities of any U.S.-based IT firm. The U.S. certainly won’t be price-competitive in the manufacturing sector (though perhaps competitive in advanced manufacturing), so I’m at a loss for where U.S. companies will compete with Chinese companies down the road. China has already gone through its extreme growth period and is now establishing diplomatic and infrastructure ties to solidify its new position as a global superpower. Only time will tell how the world order shifts to accommodate such a hefty new player at the table.
Bethel China satisfies a social need
Our last visit on Monday was to Bethel China, an NGO that teaches life skills to and houses visually impaired children on a varying, case-by-case basis. It seems to me that as China has essentially fast-forwarded its development to achieve in 40 years what took other industrialized nations many more than that, but some social services have yet to catch up. In the 1960s the U.S. reformed its mental healthcare system. I don’t think China has had a similar movement to improve social welfare yet, though I do believe that will happen. Bethel China addresses one key gap in the social infrastructure by teaching these children necessary life skills including how to eat properly, read braille, and use a cane to navigate the world. The work they do is truly heartening and I hope they can persevere through the difficulties of growing an NGO to expand the scope of their services.
DHgate — the modern Silk Road
Tuesday began with another tourist visit to Tiananmen Square and the Forbidden City and, in the afternoon, we toured and received a presentation at DHgate.com, an ecommerce company that provides a platform to sell Chinese goods wholesale to overseas retailers. Its name stems from the Chinese city of Dunhuang, which was a major stop on the ancient Silk Road. DHgate promotes entrepreneurship worldwide by putting on events that empower people to create businesses using its platform. Their goal is to create a modern Silk Road linking China to global merchants and, ultimately, consumers. Sarah Li, a Willamette MBA alumnus, graciously hosted us along with some of her peers.
PADI dives into China’s blue ocean market: the experience economy
This morning the President of PADI (Professional Association of Diving Instructors) China gave us a presentation in their office. At first it seemed strange to me that we would visit the offices of a SCUBA diving certification organization, but after more consideration I realized that PADI operates just like any other business, in pursuit of growth and profits. PADI's growth has been very fast in China since opening its office here. I lack the exact statistic, but I believe CAGR has averaged above 40% annually. This growth has been driven by a blue ocean market in which Chinese consumers are shifting greater spending towards experiences and out of consumer goods.
The most interesting part of PADI’s presentation was their marketing strategies to attract new customers. In a country where many people do not know how to swim and many more are afraid of swimming in the ocean, how do you sell the experience of breathing underwater using an unfamiliar device? For one, they have placed transparent, above-ground dive pools in high-traffic areas like department stores and music festivals. This gives people an opportunity to try breathing with a SCUBA device in a safe environment while also allowing for Instagrammable photos, giving the company on-the-ground publicity. They have also developed a new product catering to their largest Chinese market — resort divers. This allows people to take an abridged version of the SCUBA training class in China, then they can participate in dives while on resort vacations in Southeast Asian or other countries. It was interesting to see how PADI has adapted its marketing to Chinese customers.
Headed to Shanghai
We are now a short time away from arriving in Shanghai. We will have some interesting visits there with Bao Steel, Intel, OMD, and BD Diagnostics. Plus, we will get to see a very different type of modern Chinese city. Shanghai wasn't much of a city until the British colonized it around 150 years ago and it has retained some of that colonial heritage. That influence is most noticeable in the Bund district, which served as the financial and trade center for the former colony and displays some impressive European-style architecture.