Still a Great Wall

Gartner says companies should be aware of possible trade problems with China

Stamford, CT  September 24, 2001  A market with the almost unfathomable size and population of China would have even the most unwilling capitalist licking his chops at the sales potential contained in a population of 1.3 billion people. As a young cousin of mine said upon seeing the inside of a Toys 'R Us for the first time, I don't think I can stand it. But there's reason to be wary of becoming too Sino-centric in one's business efforts. While it appears that China will be approved for membership in the World Trade Organization this November, high-tech companies must be extremely cautious in making investments in the country, according to Gartner Inc.

According to a statement released by the analysis and consulting company, Gartner's research showed that that development of China's technology sector is inhibited by the lack of a safe harbor for investment by small to medium-sized foreign companies whose innovation drives the growth in the high-technology industries in developed countries.

"For these companies, despite the attractiveness of China's market and technically competent workforce, the maze of rules, regulations and corruption in China are too much of a hindrance," said French Caldwell, research director for Gartner. "Without significant political and economic liberalization, foreign technology investment in China will continue to be lethargic, the province of companies large enough to make long-term investments and shrewd enough to avoid the pitfalls of China's multi-layered bureaucracy."

The size China's population, as mentioned earlier, intrigues Western companies. In addition, the country's economy has grown, on average, 8 percent per year for almost a quarter of a century. This growth has created a huge demand for the products, services and knowledge that Western companies can supply, especially in the information technology (IT) industry.

"The Chinese government welcomes Western investment, but subordinates this to its strategy of building up Chinese companies to compete in a global market. The Communist Party, government ministries and the bureaucracy retain considerable control over the economy, with the result that making business decisions involves more than just economics," said Lane Leskela, research director for GartnerG2 Asia/Pacific in Hong Kong.

"China's poor infrastructure and lack of familiarity with Western business norms mean that Western companies that have already transformed themselves into e-business cannot simply transfer their practices into China," said Leskela. "China's leaders have a definite vision for the economy, and Western companies have to pay attention to the larger risks, such as geopolitical conflicts between China and the United States."

Gartner analysts said China's accession to the WTO comes at a time of internal political change. In 2002, new reform-minded leaders will take charge from their predecessors whose stability-obsessed political agenda was shaped by two traumatic events  Mao's cultural revolution of the mid-1960s and the 1989 massacre of students protesting for democracy in Tiananmen Square.

"The new leaders understand both the potential of economic liberalization and the current political limits on the economy. They inherit a country that through membership into the WTO will have all the incentive needed for economic liberalization but which still needs major political reform to become competitive in the global economy," Caldwell said. "For the new leadership, driving both economic and political liberalization in concert will be a fine balancing act."

Additional information is available in the Gartner research Spotlight titled "Key Issues for Enterprises Entering China's Market."