The China Syndrome

Annie Wang was 9 when her parents vanished behind the Bamboo Curtain. It was the start of China’s “Cultural Revolution,” a terrible time for anyone in that country with money or status.

Communist Party Chairman Mao Tse-tung urged citizens to engage in “class struggle” and the overthrow of “capitalist roaders,” encouraging the political persecutions, betrayal, torture, murder, public humiliations and paranoia that followed in the late 1960s and early 1970s. Among the first victims was Wang’s father, the secretary of Beijing’s municipal government. Like many high-ranking politicians, he went to prison as Mao consolidated power. Wang’s mother, a doctor, was exiled to the vast Chinese countryside — a fate befalling many intellectuals. And so Wang lived alone through her pre-teen and teenage years, surviving on $10 per month from the government, not knowing if she would see her parents again.

Now the president of Asia Pacific operations for Oakdale gas detection equipment maker Industrial Scientific, Wang recalls attending school during the day and returning each night to a dark, empty house. Her “dream,” she said, was that “I’d see a light.”

Wang’s journey from the loneliness of Mao’s Cultural Revolution to a physics Ph.D. in the U.S. to her current role overseeing a Shanghai factory is one of many local links between what China was, what it is and what it someday could be — tangible evidence of Pittsburgh’s participation in the greatest economic transformation of our time, in the resurrection of a nation that lost tens of millions to famine, abuse, civil unrest and pathological political campaigns. Wang is living proof that doing business in the world’s most populous nation is no longer forbidden, nor is it a fad.It’s a critical component in a strategy of escalating profits, providing the lift local companies need as the U.S. economy slows and a weak dollar stokes demand for American exports.

Pittsburgh executives, such as H.J. Heinz’s Jack Heinz, PPG’s Vince Sarni and Westinghouse’s Robert Kirby, were among the first in the U.S. to recognize China’s shift in the late 1970s and realize they could benefit from it. Today local companies employ thousands in China, operate dozens of plants and collect hundreds of millions of dollars annually by selling all kinds of products and services.

“There isn’t a large Pittsburgh-based company that isn’t doing business in China,” said Roy Powell, a partner with the Pittsburgh office of Jones Day, which has law offices in Beijing, Shanghai and Hong Kong.

Pittsburgh is also making notable contributions to the improvement of Sino-American relations. H.J. Heinz Co. is providing American cuisine to a culture increasingly hungry for all things Western — feeding cereal to 5-8 million new babies annually; promoting frozen dumplings with help from a world table tennis champion; assisting tomato growers in a western province; and training Chinese chefs to make American food inside a government-run Olympic training center in Beijing.

West Mifflin’s Bombardier is providing a series of 33,000-pound rubber-wheeled railway cars which will ferry millions around Beijing during next summer’s 2008 Olympics. Westinghouse Electric Co. is preparing to build a series of billion-dollar nuclear power plants along China’s eastern seaboard. PPG provides paint for the proliferation of new buildings and cars (1,000 new vehicles a day enter the streets of Beijing). It’s also responsible for coating the pole in Tiananmen Square where Mao first raised the red flag and its five stars. PPG also painted more than 200,000 police vehicles, 20,000 buses, and produced coatings for new airports in Beijing and Shanghai, the iconic Oriental Pearl Tower and the 88-story Jinmao Building, both looming high above Shanghai’s Huangpu River.

“China and the U.S. are the two biggest economic powers of this century,” said William Poirier, a Westinghouse Electric vice president in Beijing. “It will be important to find ways to cooperate that are mutually beneficial, to understand each other. We are very different, and it takes time to understand those differences and work through them for mutual benefits.”

Assisting with that divide in a different way is Carnegie Mellon University, a key exporter of brainpower to China and an institution revered in a nation where education and engineering are paramount (legendary Chinese bridge builder Mao Yisheng received his Ph.D. from CMU in 1919, the first person ever to earn a doctorate from the school). Several other CMU grads are mini-celebrities in China, running marquee operations for such firms as Microsoft and Google. And the Chinese government wants CMU to build a satellite campus and train the next generation of Chinese leaders.

From Mao to market

The changes taking place in China are as complex as they are remarkable. In the world’s largest authoritarian state, Mao remains a presence 31 years after his death. Thousands wait daily to see his body in Beijing’s Tiananmen Square, gaze at the solemn portrait of Mao hanging from the Gate of Heavenly Peace and honor his image on every denomination of the yuan (“the people’s currency”). But gone is Mao’s distrust of foreign investment, entrepreneurship, private property and the West. Mao’s “great disorder under heaven” has yielded to a free-wheeling marketocracy authored by Mao successor Deng Xiaoping, who opened China in the late 1970s, turbocharged economic reforms in the 1980s and 1990s with special business zones and famously proclaimed that “to get rich is glorious.”

This nation of 1.3 billion is now home to the globe’s fastest-growing economy, attracting $60 billion in foreign investment annually and growing at a clip of 11 percent a year (compared to less than 3 percent in the U.S., Europe and Japan). Many experts believe China will surpass the U.S. as the world’s largest economy in two or three decades. While 300 million still live inpoverty, surviving on less than $1 a day, China’s shift to “Socialism with Chinese characteristics” — as Deng called the blend of economic freedom and political authoritarianism — has lifted 300 million to 400 million people out of poverty in just three decades, more than any country at any time in history.

This shift is complicated by rampant pollution, human rights abuses, consumer product safety concerns, the potential for social unrest (protests are up 10-fold since 1993), the gap between rich and poor, copyright violations, American concerns about Chinese subsidies for exporting industries and a weak currency relative to the dollar that contributes to a widening trade deficit (the U.S. bought $288 billion in Chinese goods last year while China bought only $55 billion in U.S. goods).

U.S. Steel CEO John Surma is particularly concerned about government subsidies provided to Chinese steel makers — who account for 35 percent of the world’s output and can artificially lower their prices when selling in the U.S. At the same time, strong Chinese demand for steel helped resurrect metals prices stuck at 20-year lows earlier this decade, creating export business for Downtown-based U.S. Steel and Downtown-based specialty metals firm Allegheny Technologies, which now receives 4 percent of its sales from China. Even Surma acknowledged in 2004 that “China generally has been good for our industry.”

There are several reasons why China’s rise may be mutually beneficial not only for Pittsburgh-area consumers, but for local companies and the people who work for them. One is China’s investment of more than $1 trillion in the U.S. stock and bond markets, which keeps American interest rates low and the economy humming.

Another is the combination of China’s low labor costs (many Chinese factory workers make $1,000 a year) and a massive workforce, both of which allow Pittsburgh-area companies such as Findlay retailer Dick’s Sporting Goods or Upper Burrell portfolio maker Leed’s (two big local importers of Chinese products) to deliver products at a lower cost and in larger volumes while providing consumers with more choices.

Third is China’s voracious appetite for just about everything — it already buys more steel, coal, meat, grain, cement, aluminum and copper than the U.S. — as itbuilds hundreds of thousands of factories, highways, high-rise apartments and office buildings and as hundreds of millions join the ranks of the middle class and spend money as never before.

Not surprisingly, China is currently the hottest export market statewide, with Pennsylvania shipments up 40 percent each year since China entered the World Trade Organization in 2000 (total increase over that period is 358 percent). The top U.S. exports to China are computer and electronic products — no surprise given China’s proficiency in churning out iPods, iPhones, personal computers, mobile phones and video game consoles.

In Pittsburgh, though, the largest number of exports are from industrial producers — Latrobe tool maker Kennametal, the Moon electrical equipment unit of Eaton Corp., Allegheny Technologies and the Findlay-based U.S. headquarters of chemical company Lanxess AG, which spun out of German giant Bayer AG in 2004 (Bayer, which has a U.S. headquarters in Robinson, recently spent $1.8 billion on a Shanghai chemical plant expansion, its biggest investment ever outside Germany). Among local exporters in 2006, Lanxess had the highest amount, sending 8,108 tons of rubber valued at more than $55 million.

But it’s not all about exports. Companies that want to succeed in China know they need to plant their flag firmly inside the country. Kennametal, the world’s second-largest maker of metalworking parts such as blades and drills, recently opened a new $30 million, 200-person factory in Tianjin, a busy northeastern port city, where on a clear day the air is whitish with a tinge of yellow and a hot wind mixes with exhaust, dust and particulates. The new complex brings Kennametal’s total China investment to $65 million, total employees to more than 400 and total sales in China to $50 million, making it No. 2 or No. 3 in its market. Kennametalbegan doing business there in 1991, but only in the last few years has it been able to develop “real traction” due to its willingness to bring the “latest and greatest” technology and hire a Chinese management team that understands the local culture, said Kennametal chief executive officer Carlos Cardoso. “We are a little different than most companies. Most have gone there for cheap labor. We are going to be there to support and take advantage of the growth in that country.”

Another leg of its strategy is to build loyalty and teamwork. It asks all employees, many of them in their 20s, to plant a tree — an important symbol to the Chinese. Last spring, as a trade mission from Pittsburgh toured the Tianjin plant, young Chinese engineers stationed at various points explained with great pride and in the best English they could muster what their responsibilities were and how they were working to improve the plant.

Because of these changes, “our growth has been accelerating,” Cardoso said, to the tune of “30-plus percent.”

Like Kennametal, Eaton Corp.’s Moon-based electrical equipment business also experienced a late start in China, not looking for partners until 1996. Competitors Siemens, General Electric and ABB all “entered the market before Eaton did,” said Jim McGill, Eaton’s vice president of Asia Pacific. But its purchase of Westinghouse’s distribution and control business opened doors in a country where the Westinghouse name still has a strong following (Westinghouse helped the Chinese license electrical equipment technology, including circuit breakers, after World War II). “It really got a lot of people’s attention,” said McGill, who joined Eaton as part of the 1995 Westinghouse acquisition. The Chinese government also helped Eaton identify more than 700 companies needing a Western investor,and Eaton traveled the country to get a list of possible suppliers. Even with the partners, though, Eaton had little control over investments, technology, hiring and firing. “It was still a challenge to operate the business,” McGill said.

So Eaton, which employs 5,000 there, began looking to own its plants outright,and it now has five. Also, instead of exporting products from the U.S. to Asia, almost all equipment made in China now stays in that region. “We found that we really accelerated our growth after we started producing locally,” McGill said.

Another firm pumping up to serve the local Chinese market is aluminum maker Alcoa, which employs 2,700 workers across 18 different locations. Employment is up 324 percent in the last four years, and sales are up 159 percent, to $475 million. Its $795 million investment in the Chinese aluminum industry makes it the largest foreign investor in that business, and it predicts that in another decade, the money spent in China will make Alcoa one of the country’s top 10 foreign investors in any business.

The companies with larger stakes in China argue that an expansion there does not mean a loss of jobs back home. When Industrial Scientific entered China last decade, there were “tears” and “a lot of hand wringing” at the company’s Oakdale headquarters about the prospect of all production moving to China, said Kent McElhattan, Industrial Scientific’s chairman and CEO. Yes, workers at its Shanghai factory make $200 a month assembling hazardous gas detectors and use machinery that is 20 to 30 percent cheaper than it would be in the U.S. But savings realized in China boosted the operation back home, and local jobs are up 20 percent, to 239, while total sales as a company are now a robust $150 million.

“We didn’t go to China so we could lay people off in Pittsburgh,” McElhattan said.

If anything, “growing businesses in China creates demand for more and more jobs in Pittsburgh,” said Michael Zanic, administrative partner with Downtown law firm K&L Gates, which has offices in Beijing and Hong Kong. Chinese investments “are not taking jobs away from Pittsburgh.”

Sleeping dragon

China’s turn at the front of the world stage really isn’t new. Nor are the desires of foreigners to make money there. Italian explorer Marco Polo spent about 20 years in China in the late 13th century, and came away impressed by its trade possibilities. The amount of merchandise carried on one river, the Yangtze, “is so inconceivable,” he wrote, “that no one in the world who has not seen it with his own eyes could possibly credit it.” Italian adventurer Christopher Columbus also set out to find China and the “incalculable amount of trade” he expected in gold, silver, silk, spices, porcelain, precious stones and wine.

For centuries, China was home to the world’s most advanced civilization, inventor of paper, the magnetic compass, gunpowder and the “escapement,” a key component of clockwork. It had no equal in technological and cultural sophistication, literacy and per capita income; it was a cosmopolitan place that traded around the world while Europe lingered in the Dark Ages. The Golden Tang period (618-907) was the height, with more than two dozen cities holding populations of over half a million.

But a slow decline began when more conservative elements gained control and closed the country to outsiders in succeeding centuries.In 1793, for example, the Chinese emperor Qian Long dismissed a 700-person British trade delegation by saying that China had not “the slightest need for your country’s manufacturers.” After China denied trade concessions to the Portuguese, the Dutch, the Russians and Great Britain, the “Opium Wars” in 1842 and 1858 forced open 15 ports for Western entrepreneurs (Britain also seized Hong Kong, which it would not relinquish until 1997), and trade picked up in the late 1800s and early 1900s, with another influx of foreigners and modernity. The moneymaking ended once the Communists took power, but even before that, in good times, doing business was always a challenge, full of the “golden illusion” of sales to match the large population, wrote American advertising executive Carl Crow in his 1937 book400 Million Customers. “No matter what you may be selling, your business in China should be enormous,” he wrote, “if the Chinese who should buy your goods would only do so.”

Opportunities, challenges

When Heinz sought permission in the early 1980s to build a southern Chinese baby food factory with a partner in Hong Kong, Heinz salesman Roy King urged his bosses back in Pittsburgh to “take a long-term view. We need to put our roots down now,” he said in 1984, when few American businesses were there. “In 20, 30 years’ time, we’ll be glad we did.”Jack Heinz, in one of his last acts as chairman before his death the following year, cut the ribbon on a new southern Chinese factory in 1986. Heinz today is the No. 1 seller of baby food in China, earning $150 million a year from its operations there.

It may be a cliché, but it’s true: Succeeding in China takes lots of time, patience and a willingness to deal with the unpredictable. Westinghouse, for example, first put down roots in the 1920s, training Chinese engineers as a way of building goodwill. It was also one of the first American firms to re-enter the country following President Nixon’s historic visit with Mao in 1972. Its history began to pay dividends in 2003, when Westinghouse Chief Executive Officer Steve Tritch traveled to Beijing and met with senior government officials who had expressed an interest in Westinghouse’s new nuclear plant design, the AP1000.The four plants Westinghouse will build are viewed as precursors to dozens more China may order in the next 15 years as it works to reduce its dependence on coal — a cheap but dirty fuel aggravating China’s pollution.

Even after the Chinese accepted the Westinghouse design, negotiations lasted another seven months. As Poirier said, “The Chinese are the most skilled negotiators I have come across. They did their homework. They have excellent English skills.” As the talks ended, the contract took a surprise turn, with two plants in the south taken away and replaced by two more in the east. Westinghouse still does not know why the change was made — typical of the cloudiness that characterizes business dealings with the Chinese.

“Many things are opaque,” Poirier said, “and it is not easy to get a final definitive answer.” But the historic deal is still “an extraordinary story of persistence by many people over many, many years to reach this point.”

Medrad senior vice president John Tedeschi also knows what it means to be patient in China. His first visit was in 1983, the year he started with Medrad at age 25. People still wore Mao-style suits, and bikes dominated the Shanghai and Beijing roads. “There were millions of bicycles, just millions of them.” The only shopping allowed was inside so-called “friendship” stores that accepted the “funny money” distributed to foreigners. “It was fun, it was tough and it certainly wasn’t luxury,” he said.

Medrad began selling its medical devices inside China in 1981, with help from a Hong Kong distributor. “We got lucky,” Tedeschi admits. “We didn’t really know [the partner] that well.” Over the next decade, it claimed more than 50 percent of a small niche market of injector systems, a critical accessory needed for X-ray images. In 1992 it found another distributor that agreed to sell Medrad products exclusively throughout China, and Medrad agreed to the arrangement because it knew the person in charge. At the time, Medrad was a $17 million company, with 150 people and not much of an international division. Because of its expansion in China and other foreign markets, Medrad now receives 36 percent of its $478 million in revenue internationally, and the total workforce is now 1,700, with 1,200 working in the Pittsburgh area.

Not that China has been stress-free for Medrad. A 2002 deal to have disposable syringes made in China hasn’t worked as planned. Medrad spent 18 months working with its local partner to assist in the building and design of a 100,000-square-foot facility, training local Chinese employees and explaining quality standards expected by Medrad. It would be the first time Medrad syringes were made overseas. But the Chinese denied Medrad permission to sell its China-made syringe products due to regulatory issues. As a result, Medrad shifted to producing connecting tubes. “We couldn’t sell what we wanted to sell,” Tedeschi said.

The unpredictability of China is also the biggest challenge for Calgon Carbon’s Jim Fishburne. “Almost everything I am doing is a moving target,” said Fishburne, who oversees the Asian operations which include producing activated carbon used to purify air and water.“In China, it’s liable to be one thing on Monday and a different thing on Friday.”

The looseness of contract law and intellectual property protection in China are still major concerns for any company there, said Powell, the partner with Jones Day, which has eight lawyers in Shanghai, 12 in Beijing and 53 in Hong Kong. Jones Day has helped steel, manufacturing, mining, energy, food, retail and engineering companies crack the market, and a cautionary story it tells clients is the building of a Chinese power plant in the late 1990s. The western company invited to build the plant with a Chinese partner provided the technology, and as it found out, “the Chinese are extremely good learners,” Powell said. “By the time the power plant was finished, the Chinese were building their own competing plant not far away.It is not unusual at all for you to enter the country and learn people around you are in competition with you almost immediately, using the very things you brought with you.”

PPG learned that lesson, too. It built two Chinese glass plants with a partner in the 1980s and early 1990s only to learn that it would not be allowed to sell the glass within the country. It eventually sold the plants and took a $102 million charge.PPG focused its business elsewhere and now employs 2,900 people in China. It plans to more than double its Tianjin plant.

The judicial system in China is another gray area for Pittsburgh-area companies. After Industrial Scientific signed its first joint venture, the local Chinese-born manager ran away with $281,000, the company said. No one in China will prosecute, said Wang, president of Asian operations, and nothing can be done about that. The manager responsible for the theft “is not a criminal,” she said. “He is protected by contemporaries.” Zanic, of K&L Gates, advises companies to “make sure you control the bank account and you have access to it. You can’t rely on the judicial system. That is what many of the companies that went over there didn’t understand — the different way you need to do business in China. It is not the same.”

Kirkpatrick & Lockhart has an application pending to open an office in Shanghai. It did not have a presence in the country until its merger earlier this year with Preston Gates & Ellis, which had offices in Taiwan, Beijing and Hong Kong. It’s glad it waited. “One of the things you had in China was a rush of many law firms to get there right away,” Zanic said. “The supply and demand impact pricing,” and “many law firms lost a tremendous amount of money. They didn’t investigate, plan, think through and get the right people. Don’t go in if you are not there for the long haul.”

New beginning

Left alone as a child, Wang now has a husband and two children. Her mother is 82 and lives in Beijing. Her father, after his imprisonment, became Communist Party Secretary of Beijing University, the school that produced many of the students who participated in the 1989 pro-democracy demonstrations inside Tiananmen Square. Wang was in her father’s office that spring when a concerned central party official called about the growing discontent.

“I quickly got out,” she said.

After government tanks killed thousands in 1989, Wang decided not to return the following year for her father’s funeral. Back home now, she notices some of her older friends still have “mental problems” from abuse suffered under Mao’s reign. Wang was young enough to emerge from the Cultural Revolution just as the universities opened and opportunities emerged. She attributes her success to the fact that she stayed in school when her parents disappeared, studied physics in the U.S. and landed the job with Industrial Scientific.

“I was so lucky.”

Now she is a participant in the rise of a new China.