What's changed about investing in China since the investments you describe in your recent book, Mr China?
Clissold: If you look at the fuss over Harbin Brewery (involved in a bidding war between SAB Miller and Anheuser Bush), you feel 'same old, same old'. We also invested in three breweries near Beijing, called Five Star. We found it incredibly difficult to get operating synergies between breweries and eventually sold them to Qingdao Brewery at a loss.
I find it hard to believe things have changed a great deal at a basic level.
You give a fairly negative picture of Chinese business practices in your book.
Not really. I think it's more accurate to say that China is similar to the US in the late 19th Century. A very dynamic economy and some fairly rough business tactics. I'm confident Chinese companies will be the world's leading corporate raiders and entrepreneurs in a few years, and that will force them to develop into companies with better business practices.
What are the main reasons you failed in Chinathe first time around?
One of the points of the book is to illustrate some of the mistakes foreign investors can make in China. It's not really meant to be a scathing indictment of the Chinese or of their business culture. Investors need to come here with their eyes open. The title is obviously ironic.
Was your original plan flawed?
I got involved in China thanks to a US investment banker, known as 'Pat' in the book. Through his contacts on Wall Street, we managed to raise almost half a billion dollars. We saw some rough times and many projects had to be sold at a loss. A big part of the problem was the disconnect between the US iinvestors and the conditions on the ground. But the original expectation that there would be great deal of consolidation in, for example, the auto components business, is now coming about.
But you mention many incidents of contract violations and seemingly irrational behaviour.
Yes, business is done differently in China. That's a problem if you're not willing to learn and to adapt. At first, I was very inflexible, and I've learnt from that. Take contracts, for example. It's true Chinese firms often see a contract as something flexible, which can be renegotiated - like a snapshot of a certain set of circumstances. That's obviously different to the West, where a contract is sacred. It can't easily be changed. But the Chinese approach also has its advantages. It's better suited to a rapidly changing, dynamic environment. So when your partner comes to you and wants changes, you can take the opportunity to get your changes included also.
But I'd like to emphasise that the business in any country can be tough and difficult. Chinese companies are not unusual in wanting to maximise their profits.
You also describe economically irrational behaviour.
Actually, there's no such thing. It may seem irrational on the surface, but underneath there's usually a very good reason. For example, in one of our ventures, our manager was very bright and co-operative. But we found he never carried out any of his promises! In fact, we discovered his subordinates were closely connected with senior people in the local government and as a result, they could block many of the changes he wanted to make.
One interesting aspect is the weakness of the company as an entity separate to individuals. Especially in State Owned Enterprises, you get negotiations between individuals rather than between companies. That has many repercussions in terms of attitudes towards company assets.
You mention many problems with fraud. What are your views on the ethical dimension?
Yes, we were milked of many millions of dollars. But there are many serious moral dilemmas that business managers have to face in a relatively undeveloped country such as China that managers in developed countries never come across. This is partly due to the poor control environment in China; if you know that there's a good chance you'll get caught, the temptation is less difficult to deal with. I'm just glad I've never been in the same situation.
Your book must make many foreign investors extremely wary of setting up joint ventures.
Wholly-foreign owned enterprises are increasingly popular. But again, JVs didn't always fail because of failure on the Chinese side. Quite often, it was simply a misunderstanding of what the JV was meant to achieve. Take GE Lighting. GE wanted to create a brand, while the Chinese partner wanted a cash cow. Both are perfectly valid business objectives but they turned out to be incompatible.
In any case, it's increasingly not just the foreign party which wants to avoid JVs. With better access to financing, Chinese businesses don't want to set up JVs with foreigners, at least not solely for cash. They are more interested in the product development and advanced technology that foreigners can provide.
Which areas do consider attractive now?
I started off working with foreign equity, then in foreign debt, then with Chinese debt. The most difficult, but interesting, area is Chinese equity. There is an enormous amount of SOE restructuring going on for those brave enough.
What was your experience of debt collecting in China?
You need some finesse. I once managed to get back $12 million that had been lent by a foreign investor by getting a central government administrator to have a word with the governor of the province where the debtor was located. The governor understood that allowing the debtor to default made it appear as if he was not interested in the government's desire to make that area attractive for foreign investment. This was during the time of the 'Go West' policy to develop Sichuan and other Western provinces. It all turned out very sweetly - and there were no lawyers around!
