When “Engagement” Backfired: The Story Behind Pro-Communist Private Enterprise

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Min Ye’s  The Belt Road and Beyond: State-Mobilized Globalization in China 1998–2018 is an interesting, if dense, examination of Chinese development politics. I dislike the jargon Ye has invented to convey her ideas, but am delighted with the evidence she marshals in support of her arguments. Ye wants to focus our understanding of the Belt and Road away from the Central Committee and towards the organizations that actually go about implementing it: SOEs, private businesses, and municipal/provincial governments.

In especially interesting section Ye goes about classifying different attitudes private enterprise might take towards the Communist Party and its national campaigns. Under the category “Loyalty Capital” we learn about the firms Safety Electric and Rejuvenation After Quake:

A research trip to the company [Safety Electric] in 2014 revealed a corporate headquarters showcasing its loyalty to the ruling party. Red posters of party doctrines and photos of political leaders could be seen everywhere. Furthermore, the company has a CCP Party Committee that regularly organizes study sessions for employees on party doctrines and new government policies. On one occasion, the company organized group dating and group weddings for their employees, reminiscent of a common practice in the socialist past. In the meantime, the company was both dismissive and distrustful of global ideas and practices. Managers deemed that “Western learning” was incompatible with the Chinese business environment.

Communist loyalty was also clear in another company I researched in 2015. Rejuvenation after Quake was an earthquake detection device maker in Sichuan whose founder had studied in the United States and returned with proprietary technology and initial venture capital. However, turning technology into marketable devices required considerable and continuous financial injection. Those typically came from state banks. The company’s orders were also filled with government procurement. Treated as an exemplary case [dianxing] for returnees with advanced technology who found successful business in western China, the company was meticulous in demonstrating its loyalty to the Communist regime and Communist values generally. In the company’s meeting room, two conspicuous flags – the national flag and the PLA army flag – adorned the massive conference table. On the walls were red posters with famous quotes from Communist leaders, including Chairman Mao and President Xi, as well as enlarged photos of government officials who visited the company. [1]

Ye makes clear that these two firms are not representative of most private enterprise in China. However, they also are not outliers, but two examples of a fairly common type (in Ye’s typology, “loyalty capital”). Ye has a theory for why certain firms embrace this sort of signaling. The cause of Simple Electric’s loyalty ethic become apparent when one considers its history:

Safety Electric’s globalization started in the early 1990s. In the beginning, the company relied on Wenzhou’s immigrant networks abroad and exported products in such countries as Italy, Spain, and Brazil, where Wenzhou business associations were most vibrant [the firm’s headquarters is in Wenzhou]. Nonetheless, the company’s main growth and expansion occurred in China. By the mid-1990s, several of the company’s electrical devices had captured the lion’s shares of domestic markets. As China opened the sector and domestic markets to foreign goods and manufacturers, SE emerged as a competitor to incoming global players. Competition and rivalry developed rapidly.

In 1994, French manufacturer Schneider Electric emerged as a player on the scene. It began by proposing a joint venture (JV) deal with Safety Electric but asked for 80 percent equity in the JV, a proposal that SE quickly rejected. This provoked Schneider to lodge an intellectual property (IP) lawsuit against Safety Electric. The case would drag on for years, and in 1998, Schneider proposed another joint venture in which equity shares would be distributed at 51 versus 49 percent in slight favor of the French maker. This was an offer that was again rejected by SE. This resulted in three more IP lawsuits by Schneider. Animosity between the French and Chinese rivals became intense.

 After China joined the WTO in 2001, Safety Electric increased exports to international markets, particularly in Italy, Germany, and France, where Schneider products were traditionally dominant. As SE’s exports grew, Schneider proposed the third joint venture with equity shares 50–50. By this time, however, SE had deemed Schneider as its chief rival and again rejected the proposal. Relations hardened further; Schneider lodged multiple lawsuits against key SE products in different European countries. SE found itself embroiled in costly legal battles, with its products banned from the European market. Inside China, Schneider also launched extensive legal wars against SE. From 1994 to 2007, Schneider lodged a total of 24 lawsuits against the Chinese company. 

In response, Safety Electric stepped up investment in indigenous research and development and aggressively filed IP licenses in China. By 2005, SE’s IPR licenses in China had surpassed those of Schneider; it also strived to participate in attaining global standards and filed hundreds of licenses abroad. In 2006, in retaliation, Safety Electric even filed an IP lawsuit in a Wenzhou court against Schneider’s subsidiary in Tianjin, China. The first ruling was in favor of Safety Electric, a ruling that Schneider appealed to a higher court. This court then mediated a deal between Schneider and Safety Electric in 2009, with Schneider agreeing to pay a RMB ¥160 million (roughly $30 million) indemnity to the Chinese company. Following the agreement, the Chinese and French makers reached a peace accord worldwide, agreeing not to file lawsuits against each other as a business tactic.

However, the damage was already done. To senior managers at the Chinese firm, Schneider – a global giant – had ruthlessly used its hegemonic status to choke SE’s business in China and abroad. Inside China, the legal battles with the French company earned SE empathy and support in the media and with government agencies, who one way or another stood with the Chinese firm against the foreign rival. In retrospect, Safety Electric, due to its founder’s lack of global business experience, might have made missteps in its competition with Schneider. Nonetheless, the decades-old rivalry arguably contributed to deep nationalism and distrust of Western capital in SE’s corporate culture.

The rivalry also tragically contributed to an ill-prepared alliance with America’s General Electric (GE). In this case, eager to save its domestic market and expand into new foreign markets, SE was unusually flexible in its negotiations with GE. The American company, on the other hand, was a latecomer to China and faced hurdles from earlier European and Japanese entrants. Anxious to compete with other global players – Schneider being one – GE was attracted to Safety Electric’s extensive sales networks throughout China. In 2005, the Safety Electric–General Electric joint venture was established. The Chinese maker accepted an equity distribution in favor of GE (51% vs. 49%), giving the American partner controlling shares in the JV. It is worth noting that just a year earlier, the Chinese maker had rejected an equal-partner venture with Schneider. However, marriage based on convenience does not tend to last. In the ensuing GE–SE venture, distrust and false expectations were pervasive. After three years’ heavy losses on both sides, the two companies agreed to dissolve the venture.

The GE–SE venture demonstrates the inherent difficulties in alliances between global MNCs and indigenous capital in emerging markets. During the process of negotiation, the Chinese firm was under considerable pressure to make concessions. GE represented a global giant with a long corporate history; SE was born to a low-tech rural enterprise not long ago in southern China. Not only did SE compromise its initial insistence on majority shares in the new venture, it also give up its ability to intervene in the design, manufacture, and marketing of jointly branded products. Furthermore, the jointly branded product line was a direct offspring of an already failed GE line in China. Without any input from SE’s indigenous expertise, the product was doomed to another round of failure. The problem also lay in the fact that SE’s sales representatives were neither invited nor incentivized to participate in the JV negotiation and operation. The sales therefore continued to prioritize marketing for SE products to the jointly branded line Neither did they provide timely feedback on sales to GE management. entities who did not take direct orders from SE’s management. Being excluded from the GE–SE venture, they merely took in supplies of jointly branded products without actively promoting their sales. After the joint venture was dissolved, SE was left with considerable unsold inventories and incurred huge losses in order to absorb these inventories.

Safety Electric’s negative experiences with both Schneider and GE reinforced the company’s nativist approach to globalization. The company leadership was convinced that successful globalization had to follow its own way and ensure autonomy from external influence. In recent decades, in order to upgrade technology, SE invested heavily in R&D based in Shanghai and Hangzhou. In order to expand international sales and name recognition, SE invited foreign ambassadors and consuls in Beijing and Shanghai to tour SE’s facilities and corporate headquarters. Since 2005, it has also held a biannual international marketing forum where the company invites major foreign sales representatives to exchange information and networks. In 2009, some 190 sales representatives from sixty countries attended the SE International Marketing Forum. Since 2013, SE’s founder has accompanied President Xi and Premier Li’s overseas trips.

 Over the past decade, SE achieved more success in overseas markets by partnering with Chinese SOEs. Previously, SE’s foreign sales had been mostly carried out by supplying local partners in foreign markets. This practice saw foreign sellers capturing the main profit margins. Beginning in 2006, SE joined forces with Chinese companies in machinery imports and exports, international engineering contractors, and energy companies. Jointly, they participated in bids for energy and infrastructure contracts in international markets. In 2006, SE outbid established foreign rivals – including Schneider and Swedish-Swiss maker ABB – to supply €60 million worth of equipment to Italy’s national electricity company. SE also won energy contracts in Saudi Arabia, Cuba, Kenya, and Greece. In short, Chinese state-led investment and infrastructure projects in less-developed regions offered opportunities for SE’s expansion of its global footprint.

Currently, SE’s globalization strategy seeks to maintain core autonomy and technology. It is reluctant to make investment in overseas manufacturing; instead, it has acquired research teams in advanced countries, such as in the United States and Europe, to guide the company’s R&D and high-end manufacturing facilities in China. Thus far, according to senior managers, this practice is now paying off. The company has set up overseas branches in five continents and plans to grow its international sales to represent one-third of total sales by 2020. In this planned global expansion, SE differs from Precious Steel and Health Shoes [two other firms discussed in the chapter] in that it does not deem Western business consulting as useful because, as the managers explained, the corporate culture and business environment are so different between China and the West. Instead, the company concludes, quoting a senior manager in Shanghai, “Going global must be done; and going global has to work with the government.”

SE’s globalization experience is not unique. When China opened itself up to foreign capital in the 1990s, Chinese firms were thrown into intense competition with global players from both within and without. Many rural firms lacked basic technology and expertise and were ill prepared for the turbulence of competition. Their subsequent dealings with foreign competitors were often flawed. Negative experiences served to enhance nationalist tendencies at these companies; instead of converging with global practices, companies intensified their dependence on the Chinese state. Thus, instead of becoming a liberalizing force in political democratization in China, loyal private capital has become both the preserver and enhancer of the Communist autocracy. [2]

Ye’s account is based off of interviews with Safety Electric’s former managers; it is possible that had she interviewed their counterparts at Schneider Electric or GE instead, she would have heard a very different story. However, who stole IP from whom is not especially relevant to my take-away here. The liberal world’s strategy of “engagement” with China, especially as this strategy was understood in the ’90s and early aughts, was predicated on the notion that personal ties and shared experiences between Chinese and outsiders would naturally lead to positive interaction. The more engaged we were, the more mutual understanding would grow. Soon each group would perceive the other more positively than before. In hindsight, all of that seems incredible naive.  

The source of the naivete is clear enough. It is easy for cosmopolitans like myself to plant themselves on the other side of the Pacific and have a grand time. Early connections with an opening China were sustained on the back of just those sorts of cosmopolitans: diplomats, journalists, exchange students, and adventurers would head to China from the West, and graduate students, the majority of whom were liberal in their sentiments, came to the West from China. But the sort of easy friendships cosmopolitan Chinese formed with cosmopolitans Westerners were poor guideposts for what would happen when more ‘normal’ people from inside and outside of China’s borders were mixed together. You see this pattern often: when mass Chinese tourists arrive at a new locale, on American university campuses, during military-to-military exchanges, and even on online video games.[3] Mutual understanding has often not bred  warmness, but contempt.

I do not blame either side for this. Genuine multiculturalism is hard.  Creating positive interactions when you take people from widely different cultural backgrounds and force them all together is really hard. It can be done, but it is hard. This is true even with the most open and cosmopolitan members of a given population. It is much more true for the broader (and more nationalistic) masses. We pretend that hard things are easy and automatic. Now we reap the consequences of that error.

[1] Min Ye, The Belt Road and Beyond: State-Mobilized Globalization in China 1998–2018 (Cambridge: Cambridge University Press, 2020), 188.

[2] ibid, 188-189.

[3] Reports on tensions between Chinese tourists and their hosts are legion, see for some representative examples Gavin Hynes, “Have the Chinese Replaced Americans As the Worst Tourists in the World?” Vice (29 March 2013) and Karla Kripps, “Chinese tourism: The good, the bad and the backlash,” CNN (15 June 2017). For Chinese students in the 2010s, Eric Fish has many pieces. His most recent is “How a Strained U.S.-China Relationship is Playing Out in US Universities,” South China Morning Post (4 July 2020). . See also Brook Larmer, “Alienation 101,” 1843 (27 February 2017). On military exchanges, see T. Greer, “Did Mil-Mil Exchanges Do More Harm than Good?,” Scholar’s Stage (4 December 2017); on video games, Aaron Witze Wilson, “Taiwan No 1 Becomes a Sign of National Pride for Taiwanese Gamers,” New Bloom Magazine (11 December 2015).