Tuesday, December 19, 2006 - The Progress & Freedom Foundation Blog

The Panda Century

Can U.S. companies do business in China?

It's a question that will have to be answered with time, but today offered two signs of difficulty in the near-term. The big news would have to be eBay reportedly abandoning its own auction site in China, instead stepping aside to be a minority partner with a Chinese company, Tom Online. This contradicts CEO Meg Whitman's commitment to the Chinese market just two months ago. We were also reminded today of the high rate of piracy in China, but we also had good news as a Chinese court ruled in favor of five U.S. movie studios against a Chinese DVD store.

China often gives us mixed messages. It has home-grown companies looking to compete, but the question always remains as to what extent the government is putting its thumb on that scale. It has a general disdain for the IP of outsiders, but in needing to protect its own growing IP base finds itself needing to put teeth in its IP laws.

There are signs of competition in the Chinese market. Google and the Chinese search engine Baidu have been dueling it out for the growing tens of millions of Chinese online (still a fraction of the overall population) and now reportedly are separately looking at launching video services. Google was not kicked out of the market by Baidu, but it did agree to permit some censoring of search engine results, which caused no small amount of controversy in the U.S. Meanwhile, wireless hardware manufacturers and carriers have lusted after all of those Chinese consumers, but have wrestled with governmental desire to control the standards process.

Companies naturally focus on growth, and international expansion can be a great way to get fast results in that area. Fast results are good for quarterly earnings reports, which is good for your perception on Wall Street, which is good for your stock and good for your ability to borrow at good terms. China is the largest market by population and is one of the largest markets by economic growth rate. If you're a technology company, and understand that technology is not geography-dependent, you're naturally going to want to operate in China. You just have to keep in mind that you may not be on a level playing field.

There are certainly worse markets to be in. Say you're a Dutch oil company and are working an oil field in, oh, Russia. Say a "private" company in Russia cozy with the president and a recipient of oil properties taken from the president's political enemies says it would like to be a financial partner. If you want to stay in Russia, odds are you work out a deal. Of course, Kissinger used to say that the Chinese are just as dangerous as the Russians, they've just had more centuries of experience with which to disguise it.

If I sound like an untrusting cold warrior, it's probably because I am. But anyone who sits out the China market will in a few years have to keep warm with his smug moral superiority, because his competitors will have buried his business.

posted by Patrick Ross @ 2:46 PM | Trade