Sunday, February 17, 2008

Smart China Exit Strategy: Leave but Don’t Burn Your Bridges

China Law Blog (the “CLB”) has just come out with an excellent post regarding how investors should deal with the changing investment circumstances/environment in China. Most fittingly, CLB titled its post as “China Changes. Don't Over-React. Don't Under-React.

To substantiate its argument, CLB borrows some pearls of wisdom from the China Business Blog, which recently posits the following on how one should respond to changes occurring in China:

1) Don’t over-react
The recent changes in China are not a death knell for global business. What is happening here are just the normal growing pains of a developing economy showing signs of budding maturity and the problems that go along with it.

2) Don’t under-react
China IS going to be a growing consuming market and it WILL suck up a lot of raw material and energy resources. And this WILL have an impact on other nations and economies by making these resources more expensive. It is a reality. It is happening. Sitting and complaining about it is NOT going to help. What emergency plans do you have that address potential future scenarios involving a growing China?

3) Don’t over or under-react, but DO REACT
Many a fortune cookie tells us, in some form, that in the midst of great chaos one may find great opportunity. Well, now seems a time of – if not GREAT chaos – then of some modicum of chaos in global markets. So how can you react and take advantage of it?

4) Look at all of your options
The lesson here is that companies should certainly consider their growth possibilities in China. It is (and will remain for some time) the most compelling market in the world. However, companies should not look at China at the cost of ignoring other markets. If the changes in China are motivating companies to consider all of their options, then I think this is possibly a good thing and is healthier for everyone involved.

In pure simplicity and brevity, CLB translates the above into—“use your head” when dealing with a changing China.

CLB’s advice is most poignant and relevant in light of the way some Korean companies are handling recent changes in China. Reportedly, some Korean companies decided to withdraw from the China, thus causing a pretty noticeable exodus. Nothing wrong with leaving, but it is problematic when they leave illegally (Chinese only). Some “escaped” in the middle of the night, and apparently the problem is so severe that the Korean Foreign Ministry has stepped in to help the exiting companies leave legally.

True, the cost of doing business in China has risen due to a host of economic and legal factors. Inflation keeps rising; labor costs are getting higher accordingly; tax breaks are disappearing; land control is getting tighter; and then there is the “cursed” labor contract law. For some, a quick exit might be the right and appropriate reaction to the changing investing environment; for others, it might not. But, before jumping onto the exodus wagon, it is crucial to analyze the appropriate measures to take, with professional help if necessary. Examine the motives, methods, reasons, and options for exiting.

It is bad enough to leave China illegally, presumably for not settling accounts with supplies, employees, and not paying taxes. It is worse to find out afterwards that China is actually still the place to be, and that you have already burned your bridges in China.

To end, I quote CLB—“Use your head.”

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