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November 2001 was a turning point for the People’s Republic of China. Early that month, Motorola Inc., the biggest foreign investor in the country, upped its stake. At a highly publicized meeting in Beijing, the board of directors of the Schaumburg, Ill.-based company announced their new “10-10-10 policy.” The telecom giant’s goal is to invest $10 billion in the country, to buy $10 billion in goods and services there, and to generate $10 billion in annual sales from China — all by 2006. “It’s an exciting time to be part of a rapidly changing industry like telecommunications, especially in our role of helping China build its infrastructure,” says Wayne Sennett, general manager of the Motorola Computer Group. It was a bold move. The industry leader is grappling with a global telecom slump so severe that the company may post an annual operating loss for 2001 — its first in about 45 years. But for Motorola and other multinational businesses, China is a worthy bet. Why the wager? Part of the answer comes from another November meeting. In Doha, Qatar, the 142 members of the World Trade Organization voted to let China into their ranks. The PRC spent 15 years trying to learn the secret handshake, and the price of WTO entry is steep: eliminating caps on foreign ownership of companies, lowering tariffs and publicizing its laws. China also agreed to submit its trade disagreements to the organization’s dispute arm, which should free U.S. lawyers from the creaky Chinese court system and biased local mediators. The financial benefits of China’s new open-door policy are expected to be enormous. According to The World Bank, $56 billion a year will be pumped into the economies of China and its major trading partners. Half of that should go to China; the rest, split among such countries as United States, Japan and South Korea. A range of industries hope to profit in the China rush. Imports to the country, especially cars and consumer goods, should jump. Foreign telecommunications, insurance, banking and securities companies are expected to prosper from setting up businesses there, says David Liu, a senior associate in the Shanghai office of Sidley Austin Brown & Wood. The Chinese will get a stake in these companies, too. In late 2001 the PRC announced that it would allow some foreign companies to sell shares to domestic investors. Bloomberg News counts American International Group, Unilever, Koninkligke (“Royal”) Philips Electronics N.V. and Bank of East Asia among the businesses that plan to sell stock. EXPECT DELAYS When will this journey down the silk road start? Many multinationals already have a presence in China, but for them and others, there may be a few pit stops along the way. In the midst of a global recession, many businesses are coping with declining earnings, lowered stock prices and diminished cash flows. For some companies that means quietly scaling back or delaying plans to expand in China. Although Mitchell Dudek, a partner in the Shanghai office of Cleveland-based Jones, Day, Reavis & Pogue, won’t name names, he reports that he and his colleagues have “seen a slowdown of some [Chinese] deals we thought would be done by now that require investment from the U.S.” But this is just the short-term picture. Long-term, many U.S. executives say that the biggest risk lies in ignoring China, the world’s seventh-largest economy. Such corporate luminaries as AIG CEO and chairman Maurice Greenberg and Jack Welch, General Electric Company’s famous former chief, have long been among the Asian country’s biggest boosters. Of course, AIG has every reason to love China. The insurance company was founded in Shanghai in 1919. Although it left during the country’s civil strife in the 1940s, AIG returned in 1992 after more than a decade of lobbying by Greenberg. The fruits of his labor: For years now AIG has been the only foreign insurer allowed to own 100 percent of the eight businesses it operates there (this arrangement is currently being challenged by the European Union in the WTO). AIG wouldn’t say how much money it makes in China, although industry experts say that any profits there are probably minimal. GE was also an early champion of China & Co. “If you want to be a world leader in your industry, you must be a leader in China,” Welch has said. The Fairfield, Conn.-based conglomerate has put $1.5 billion into its wholly owned and joint ventures in the People’s Republic since 1979. And that investment continues. In November the company announced a $60.4 million joint venture with local transportation company Beiya Industrial (Group) Co. Ltd. to create a huge goods distribution system, primarily through railways. There are fortunes to be made for those who create distribution systems in China, says Thomas Pugel, professor of economics and international business at the New York University Leonard N. Stern School of Business. “The country is not well connected from town to town and especially not from province to province,” he says. “Foreign firms will end up with a large advantage if they can find a way to develop more national distribution capabilities” — deals that the WTO agreement finally allows foreigners to do. The other burgeoning Chinese market is telecom. While the industry took a bruising in the U.S. and Europe this past year, many see China as the next great telecom frontier. Motorola, the world’s second-biggest manufacturer of mobile phones, has certainly noticed. Its 10-10-10 strategy is predicated on growth in the mobile phone market, and the projections look good. In the first half of 2001, the number of mobile phone users in China reached 120.6 million, making the country the largest mobile phone market in the world, according to a study by Jones Day’s Dudek. By 2005, he predicts, the number of users is expected to surpass 260 million. THE LONG MARCH For some industries, such as agriculture, the outlook for growth is just as strong, but revenues will take longer to appear. According to the WTO, in 2000 the U.S. imported $2.4 billion worth of agricultural products into China, with average tariffs of 31 percent. Tariffs are supposed to drop to 14 percent by the end of 2006, and agricultural imports are expected to jump up to $73 billion in the next 10 years, the U.S. Department of Agriculture says. “We know it is going to be a slow road,” says R.D. Folsom, a lobbyist with The Wexler Group, a Washington, D.C.-based government relations firm. Folsom, who counts the Hong Kong government among his clients, says agricultural companies will have to be patient. While the outlook for these markets is strong, there is one big catch. After decades of protectionism, will China really be able to change its ways? Some experts are skeptical. “A lot depends on the extent [to which] China plays by the rules or makes up special rules as [it goes] along,” says Lawrence White, of the Stern School of Business. “China doesn’t have a strong tradition regarding the rule of law; home protection is stronger than it is in the U.S. … [so] I’m a bit leery.” Other China-watchers say that the promised reforms will come; they may just take longer than many businesses expect. “The time frame for WTO reforms won’t be quick,” says Judith Lee of Gibson, Dunn & Crutcher in Washington, D.C. “It will depend on how forthright China is. Things won’t change there overnight.” DUKING IT OUT Patience may also be needed when it comes to trade disputes with China. If the country reneges on any of its trade commitments, companies now have the option of asking their countries’ trade representatives to bring the beef to the WTO’s Dispute Settlement Body. This process can be slow and complicated. Still, the WTO forum may be the best place to go. Waiting three years for a resolution “is a long time for a company that is in a dynamic industry,” Andrew Shoyer of D.C.’s Powell, Goldstein, Frazer & Murphy acknowledges. But he says that “it will be useful for these industries to take the long view,” go to the WTO and get the rules of the game clarified for the long haul. The WTO also may be preferable to the alternatives. Multinational businesses have always wanted to avoid the even slower Chinese courts, which are largely inexperienced in both commercial matters and arbitration. Many Western execs instead turned to the quasi-governmental China International Economic and Trade Arbitration Commission. Since its founding in 1993, CIETAC has mediated nearly 3,500 cases; it now claims to be the busiest arbitration body in the world. But CIETAC has grown less popular in the past few years, American lawyers say, because of complaints about arbitrators’ partiality and awards’ unenforceability. U.S. companies with years of experience in the People’s Republic have learned to handle problems the Chinese way — that is to say, through “guanxi,” or connections. Richard Brecher, director of international affairs for Motorola, says that his company always tries to resolve disputes by turning to local authorities with whom the company has built relationships. In only the most extreme cases does Motorola seek help from the U.S. government, he says. “You like to see pressure [from the U.S. government] but you don’t like to see anyone pull the trigger — ever,” says Brecher. “It puts commercial interests at risk.” Maybe now, though, U.S. companies will find it a little easier to avoid disputes. One of the greatest changes wrought by China’s WTO membership is that the PRC has promised to publish and make available all of its laws and regulations. At long last, U.S. lawyers will be able to know the rules by which the Chinese are playing. This comes as an enormous relief to many, including Kenneth Tung, in-house counsel for Rochester, N.Y.-based Eastman Kodak Company. “At the end of the day, it’s my job to advise the businessmen on the proper level of risk to take — and in China, it always takes some,” says Tung. But at least, with a transparent legal system, Tung and his colleagues will be better able to calculate just what that risk is. Related charts: Who Wants a Piece of China? U.S. and Indigenous Firms in China

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