Selling to China: Stories of Success, Failure, and Constant Change, edited by Ker Gibbs, former president of the American Chamber of Commerce in Shanghai during the U.S.-China trade war, is a sobering look at the realities of the intermeshed nature of the Chinese and American economies at a time of increasing political tension. Foreign companies are caught in the middle between compliance with U.S. laws and policies versus doing what is required for support and success in China and access to the world’s largest growth market. Opportunities still exist, but this is a dangerous and complicated time.
In an interview conducted on August 31, 2023, Ker Gibbs discusses the challenges and opportunities of doing business in China at a time of tension and distrust in the bilateral relationship.
Transcript
STEPHEN A. ORLINS: I’m Steve Orlins, president of the National Committee on U.S.-China Relations, and I’m thrilled today to be joined by my old friend Ker Gibbs. He has recently authored, or edited I should say, a book called Selling to China: Stories of Success, Failure, and Constant Change. If you don’t know Ker, you haven’t been dealing with China much in the last 20 years. He’s been there for 20 years in many different hats as a consultant, an investment banker, and investor, and probably as best known as president of the American Chamber of Commerce in Shanghai.
So, this is a—it’s a book which really is on the ground. All of the authors have worked in China. They’ve really—in addition to you and Ken Jarrett who write both a forward and then an epilogue—everybody there has spent enormous amounts of time. But the introduction talks—you talk about why you’ve written the book but give the listeners and the watchers a sense of why you edited this book.
KER GIBBS: Sure. Thanks Steve, and it’s great to be with you here to talk about the book, and kind of what’s going on in China. But the reason we wrote the book is, and this is a very important point, is we felt that the dialogue about China has just become so dominated by the national security issues and the territorial disputes.
And we really felt that the commercial discussion was getting lost, and we felt it was important to bring that back into the conversation so that people can be reminded of why this relationship with China is so important. And we’ve got to get these problems solved so that we can get it back on track. So that’s kind of the why part of why we wrote the book.
But what people will think, what readers would get out of this, is the book itself is—it’s not really a book about U.S.-China relations per se, although that’s obviously the backdrop for everything we write about. But what this book is, is really a window into the world of a large foreign business and how they operate in China, what issues we deal with, what struggles we face, and what successes and failures we’ve experienced over the years. So that’s in a nutshell what the book is about.
ORLINS: How did you choose each of the chapters? When I often talk about kind of big companies in China and, you know, everybody focuses on the problems—the IP theft. Few focus on the successes but I think about Starbucks, McDonald’s now owned by my former partners, KFC, Apple, Sheraton Hilton, those guys who’ve had really great successes. But you choose others. Why?
GIBBS: Well, I was really going for a cross-section, and I was going for diversity, so each chapter is representing a different industry. And I did not pick authors or industries that are particular successes or particular failures. You’re going to find both in this book. But I wanted—it is also a slice of China business. It’s very specific. It’s large foreign businesses.
So it is not about—there are lots of exciting stories about Chinese entrepreneurs and also stories about the state-owned enterprises and things like that. All of those things are part of the fabric of a business in China, but this is just the large foreign businesses so that’s how I chose the authors.
I was also going for diversity in the sense that I picked a few authors that are China-born and some authors that are not China-born. So this is a story about foreign business, but it’s not necessarily written by foreigners. Because as you know Steve, the process of localization has really taken place in many of our businesses. Really middle management all the way up to the top are now run by Chinese nationals. And what we find is that some of them actually deal with similar concepts in the book in slightly different ways. For example, every business book on China has to deal with 关系 (guanxi, relationships) and 面子 (mianzi, “face” as in “saving face”), you know, these kinds of things. But they’re dealt with in a slightly different way by the authors that are China-born versus some of the foreigners, so that’s basically how I selected the authors.
ORLINS: The book. It’s fair to say that the book is advocating continuing to invest in China, even though it points out some of the failures, the difficulties and stuff. Have people said that you’re too soft on China? Has that been a criticism?
GIBBS: Well, I think there’s always going to be people out there that kind of miss the nuance of our relationship with China and that in a sense, that really is what the book is about. It is trying to bring nuance into the conversation. There’s going to be people out there who just read the headlines and look at the national security issues, of which there are many, and serious issues. And they’re saying, why are we even there? You know, we should disconnect from China.
And you’re right, Steve. This is very much a pro-engagement book. It’s not necessarily a pro-China book, and it’s not necessarily saying that all is great in China. It’s not. It’s a very challenging environment over there, but we are saying that large American businesses are in China. We have successes, we have failures, but we’re there to stay. It’s still a very attractive—and in some industries—a must have market. And in some of the chapters, the authors go into some detail about why it is absolutely critical that American companies are in China and stay in China.
For example, in the automotive section—I don’t want to steal any of the thunder that Bill Russo has written about but the automotive in particular. Not just Tesla but all of the large American companies that are selling autos. I mean, China is the largest auto market in the world, and Bill Russo makes the argument that it probably always will be. And so we need to be there not just to make revenue and profit, but to experience the innovation that’s happening, especially as we see this shift from what we call ICE over to NEV, so the internal combustion engines over to new energy vehicles. So he makes a very compelling argument about that.
ORLINS: I think the automotive chapter—and all the chapters are great—that one is particularly great. What’s interesting—what I kind of wanted him to make a contrast to but he didn’t was to Japan. So, I walked the streets of Shanghai and I see GM and I see Fords, I see Chryslers, I see now Teslas—I didn’t years ago obviously. When you walk the streets of Tokyo, you don’t see that, and nobody bothers to point out that contrast.
GIBBS: It’s funny you should say that, Steve. Our good friend Bob Fleet who passed away a few years ago—we dedicated the book to him—one of the things he used to point out is exactly what you just said. He says it’s funny how GM, it’s always in the news talking about issues in China. And people like I just said, they talk about some of the problems that happened in China.
And he pointed out that, gee, it’s funny. You know, GM never complains about the market in Japan and it’s because they don’t sell any cars there and it’s just not an open market for American vehicles. And I agree with you. I mean walking around downtown Tokyo, you just look up and see what brands you see and you’re not going to really see the American brands there.
And you—as you said walk down Nanjing Road and in some of the shopping areas in China, you see foreign brands everywhere. And again, our good friend Bob Rubin used to make that point that China—yes, we do complain about market access. Yes, there are issues. The USTR (Office of the United States Trade Representative) is not wrong to be pushing for that. But it’s also true that China may actually be the best success story in Asia for American products.
ORLINS: Yeah. It’s such an interesting—it’s so understated when you’re in Washington and you point that out and people say, oh, well you’re a politician. Well no, we’re not. We’re just stating a fact. You know, I spent plenty of time in Tokyo, so I understand that. In chapter one, Don and Marie William write, “In recent years, while IPR (intellectual property rights) continues to be an issue, the bigger story is innovation and intellectual property creation.” Do you agree with that statement? Is IPR no longer—kind of fading away as an issue?
GIBBS: Yeah, you know what, Steve? The thing is, I think this is a very good example of how multiple things can be true at the same time. And it is true that in the early days after Deng Xiaoping moved China towards this reform and opening up and they set that goal to really catch up economically with the rest of the world, I’d be—yeah they were on a mission to catch up and really didn’t care much how they got there.
And you know, I would respectfully point out that that’s not that dissimilar with what the United States as a young country breaking free from Britain and Alexander Hamilton—He was famous for that. He said the same thing. We got to develop our new country and do it any way we can.
And American entrepreneurs in those days stole IP shamelessly from the textile mills in Britain and moved technology over to the new world. Now I don’t want to get into what about-ism and certainly not with a story that’s 300 years old, but the point here is that that was true towards then. But the market has really shifted, and I would say around 2015 is when the IP courts really developed.
And second—Don Williams makes this point in his chapter about how China has been developing its own IP, so it had more of an incentive to protect it—to set down the infrastructure and system to protect IP.
Now, that is not to say it’s not an issue and that theft doesn’t take place. It does, but it’s a very different situation today than it was before. And again, this is one of the reasons why we wrote the book, is we want people to have an updated and nuanced understanding of the current situation in China with respect to how our businesses are operating there.
ORLINS: Yeah, Jean Liu and—this jumped out at me, right? There’s an established process for the passage of new laws. In fact, this process can be long and democratic, and what I’m talking about here is consulting with affected industries and China does have a decent policy on that. But if it’s a political issue, if it touches on any political issue, isn’t that not true? And there isn’t consultation—one thinks most immediately of laws relating to Hong Kong. There wasn’t real consultation.
GIBBS: Again, multiple things being true at the same time and she’s right. One—it’s a very important chapter that everybody who reads the book really should maybe start with that one. It’s this relationship with the government and how that government works. Let’s face it, China is a very different political and economic system and always will be.
So you’re right, and you use the D-word there, Democratic, and a lot of people will have a reaction to that and say, “No, China is not democratic.” In respect to passing of certain laws, they actually do, and they do go into the business community—foreign business community and actively solicit input from the community.
This is a big part of what the American Chamber of Commerce does, is we consolidate that input from actual business practitioners. And now do they listen? Not always, and it depends. But there’s a couple of things—you gave one example in the case of Hong Kong, but there’s other cases where the personal income tax treatment of foreigners that they had made a decision some five or six years ago to make a big change in how foreigners are taxed in China.
The foreign community over there went ballistic and has been actively engaged with the government there to try and get them to change or delay that they have. So it does work. But you’re right, in certain contexts it works. You’re also right. Transparency is an issue and transparency, consistency, trying to interpret the regulations. And again, yet that’s one of the things that Jean Liu is explaining in her chapter about that. That foreign business really need to understand that.
And this is one of the issues that’s been raised in the last few days as Secretary of Commerce [Gina] Raimondo has been over there in China talking to the foreign business community. And this is one of the issues that’s been raised is general transparency and specifically around China’s data protection law. And foreign companies are having a real struggle understanding it, making sure that they are in compliance with it, and in some cases they’re going to have to adjust business practices to accommodate it.
ORLINS: Since you mentioned Secretary Raimondo’s visit, do you think the working groups that she’s setting up with the Chinese is going to help at least establish some understanding of the new rules both for U.S. businesses in China and for Chinese businesses in the U.S.?
GIBBS: Too early to say what the results of that are going to be, but very positive move that the two governments at least can agree on something and that there’s a positive dialog and a process being put in place. And more importantly, I think that the visits from both Treasury Secretary [Janet] Yellen and Secretary Commerce Raimondo have managed to kind of stop the slide of downward movement in the relationship.
And so we’re definitely hopeful that this can lead to just more constructive engagement at the government level.
ORLINS: Qin, of course, was the experience of the wiping out of the private tutoring industry. Qin, I think, was part of that industry and that was not consultative. It happened overnight, and suddenly, you know, 90% of the market value of those companies was wiped out.
GIBBS: This is something that concerns all of us, not just the foreign companies, but the domestic—and in fact, I think the domestic companies probably more than the foreign ones. And you’re right, it happened suddenly, and this is something that’s concerning again to both communities is that the suddenness and lack of transparency and where is this all headed? Because it’s not just the education sector that experienced that sudden shift, but then it was also in the technology sector when they decided to kind of rein in the tech sector. That happened very suddenly.
Now, you know, from the bankers like yourself and myself, we’ve kind of been expecting some kind of movement in the tech sector for quite a long time because the tech sector has actually been given quite a lot of leeway. And I’m talking going back 15 years or more in terms of capital raising and the latitude that the tech— which I think the Chinese government should be given credit for. For staying out of the way as long as they have to let that tech sector develop, which it has.
But the sudden action to rein it in shocked people, and now we’re seeing something possibly similar in health care. It’s hard to say whether that’s purely an anti-corruption move or whether it’s to get more control of health care. Hard to say so, but those are some of the things that concern all of us, and again to foreign companies and domestic companies alike.
ORLINS: Yeah, I mean it raises the question, how much of the problem is based upon being a foreign business and how much is the problem is based upon being a private business whether foreign or not?
GIBBS: Exactly. And a lot of these so-called foreign businesses actually operate very much like local businesses. But then at some point, you still run into regulation and then, as you brought up earlier, the interpretation of those regulations and how does it affect me. And I think this is one of the points that we bring up in the book is that very often the signs are there. You just have to know how to read them, and again, China is a very different place. And again, this is one of the reasons why we wrote the book. We just want practitioners to get the benefit of those lessons. We’ve been over there for quite a long time and learned a few things so it can be—
ORLINS: Very different from what it was before.
GIBBS: Very, very different from what it was before. But continuing to evolve on a daily basis, so you really have to keep track of it.
ORLINS: Yeah, you and I have lived through lots of pendulum swings. So, I can remember in the eighties when things would change, people would become depressed and say, we need to leave. And then the pendulum swings back and if you’d left, you would have lost your market share and not be able to succeed and in the nineties, the same thing happened.
My guess is we’re in another pendulum swing and it will swing back, and I think noise that the government—the Chinese government is making on foreign investment now is actually becoming more positive. Is that true? And you were just in China.
GIBBS: I was. I just came back two days ago. I spent most of the summer in Shanghai launching the book and talking to people about the current business environment, and I think you’re exactly right, Steve. We are in a pendulum. Although unlike a pendulum where you pretty much can see what the track is, this pendulum moves in odd direction, sometimes difficult.
But as far as exiting the market, you’re exactly right. It’s a hard market to go back into if you abandon your position, and so I don’t see many foreign companies at all abandoning the company, abandoning China as a market. I am seeing them restructure and, you know, it’s very fashionable to talk about de-risking these days, but there is a process by which some of the larger companies are kind of separating their China business from the rest of the world.
And this is concerning, and it is happening as a result of a lot of different factors. One of which is lessons that came out of COVID, and part of it also is the U.S. driven so-called decoupling measures and security measures. It’s also coming from the China side, and this is something that I’ve raised often with the Chinese government, is let’s not pretend that it’s only the U.S. driving decoupling.
China’s doing the same thing, and this data protection law is one example. The data protection law makes it very difficult for multinational companies to operate in the way that they’re accustomed to, meaning operating across borders where all of their operations touch multiple countries, and that’s an issue when it becomes illegal to move data outside of China. So that is going to be driving decoupling from a production point of view.
ORLINS: Yeah. Recently as this morning, I was on a Track II zoom with the Chinese and we were talking and they said, well, the technology decoupling has been driven by the United States. And I just went, “It neither is true historically nor is it true presently.” I said historically if we start in 2009, 2010, with Facebook and Google being effectively ejected from China, and then YouTube and Twitter, etc. And then with the data protection law today, the Chinese didn’t accept the argument interestingly.
GIBBS: You know, Steve, I’m glad you’re raising this in these Track II Dialogues that that you and the Committee are so involved in. I had the same reaction. I just read Ambassador Xie Feng wrote a very interesting article in The Washington Post and he made that point. He was saying, you know, the United States should or should not be separating. I can’t quite quote him verbatim, but I think you probably know the op-ed that I’m talking about. And, you know, I looked at it and again, respectfully, we’ve had a lot of very productive meetings with Ambassador Xie Feng, especially when he was coming up through the foreign ministry, have met him several times and we’ve raised that.
With respect, look who started it. What’s the great firewall? And now this data protection law if it’s not separating the economies? They’ve done a very effective job of completely isolating the digital economy in China. And the question now is, is that the model going forward that industry after industry is also going to be isolated like that, or are we going to find a way to get back together and enable the efficiencies that come with global companies, both from the United States and from China?
Today, there’s global companies coming out of China, and they want the same things we do, which is the efficiencies that come from running a multinational company, not a company that operates in multiple nations but operating across borders.
ORLINS: Yeah, absolutely. What I think people need to talk about is we can make the decision that we want to separate, but we need to understand the consequences of that. And precisely what you’ve said that the costs that that creates for any company is just enormous, and ultimately average American and Chinese paid the price for that.
The chapter on the automotive sector, again, addresses some of these issues. It’s great, but, you know, it’s a great chapter. How much—do we know? Have people calculated how much the tariffs and the dislocation in the supply chains in the automotive sector have increased prices for American autos? I was told its thousands of dollars.
GIBBS: Oh, undoubtedly. The American consumer is suffering the consequences, and I think Treasury Secretary Yellen has made this point repeatedly. And no, there’s no question that the American consumer has paid that price. But having said that, you know, business finds a way, business adjusts, and so life goes on.
We did suffer in the throes of the trade war, and in some ways, it’s still going on. But hopefully we can find a way to get back together and resolve these differences.
ORLINS: Yeah. The argument that I often make is that the increase in costs that it is created—this is for Americans. In other words, the argument that you make to folks who say, “Well, the U.S. just doesn’t affect us. The Chinese pay these tariffs.” You know, retailers tell you that the average bill for an American family of four has gone up about 1,000 USD. So if you’re wealthy, it’s kind of whatever. You don’t notice the thousand dollars. If you’re lower income, you got to decide, do I buy the kids new shoes? Do I buy textbooks? Do I buy new shirts? What do I decide to buy that there’s a real consequence for the lower—a worse consequence for lower income Americans.
GIBBS: Absolutely right, Steve. And I was just in Nebraska a few months ago, and you’re right. It’s not just the low-end consumers who are, you know, people shopping in Wal-Mart and stores like that, but the farmers. They hate the tariffs. They’re just pointing to rows of corn and saying I’m not selling as much corn and it’s not the price that I want, and it’s because of the tariffs.
And it’s ironic, actually. You go to Nebraska, it’s deep red, obviously and they’re going to vote Republican. They love [former] President Trump. They hate the tariffs, and they kind of blame President Biden for not dropping the tariffs that President Trump actually put in place. It’s actually ironic, I think, in the next election cycle, it’s very likely that President Biden is going to be punished for the sins of Trump, and so, if that’s not irony.
ORLINS: He should have cut the tariffs though. I agree with the farmers. He should have cut the tariffs. So there’s a great chapter on sports marketing with a discussion of the NBA (National Basketball Association, North American professional basketball league). What are the lessons that we should take from both the NBA’s success in China, which has been enormous and the challenges that it’s faced?
GIBBS: It has been a great success in China, and it’s sad to see what happened there. I’m sure all your listeners are familiar with the story of the Daryl Morey tweet and the consequences of it, so we don’t need to go through all those details here. But you’re right. The NBA was a great brand and a great ambassador for the United States.
It’s, you know, the game of basketball, which the Chinese love, so it was really an unfortunate situation all around. I think we take a couple of different lessons. One is the larger geopolitical lesson, and that is that the reality is China is kind of unique in this way is that they’re so sensitive to this.
And geopolitics is going to enter into the business realm whether we like it or not. This is the way China is. They have these knee jerk reactions to these things. They’re very sensitive, and they react to these things. So companies that operate in that market are just going to have to understand that is a reality.
The other lesson I think, and Mark Fischer does a great job kind of explaining this, and going into how to resolve problems when they do arise. And this I think China it may not be unique in this respect is that when these things happen, you can’t really litigate everything in the media. Yes, you do need to make public statements, but you also need to have the face-to-face meetings quickly. And [NBA Commissioner] Adam Silver did that, but probably not as quickly as he could have. I mean I wasn’t that close to it myself. I was watching it in the media myself, but it probably could have been handled better. And the results, of course, you know, the NBA was kept out of China for almost two years, and so a lot of businesses lost a lot of revenues as a result.
ORLINS: But it’s now kind of resorted to the old model.
GIBBS: It’s back. It’s, you know, all is forgiven. Time heals all wounds, I suppose and off we go. But until the next time.
ORLINS: But it’s still a great brand. It’s still a great representative kind of American culture and sports. And my hope is we’ll see another [former NBA player] Yao Ming in the NBA. We’ll see another great Chinese player in the U.S. NBA.
GIBBS: I’m quite sure we will, and if not in the NBA, some other sport. And again, sports is the great equalizer or it should be. And it should be that thing that kind of brings everybody together, you know, the people-to-people level.
ORLINS: This has given the listener a flavor of what is in this book. Read it for an on-the-ground perspective. One which gives you sufficient nuance to kind of understand what’s going on in the commercial relationship between the United States and China. Ker, thank you for what you do. What you’ve done, what you do to promote U.S.-China commercial relations, your work at the American Chamber in Shanghai, and for editing this wonderful book. Thank you so much.
GIBBS: Thank you, Steve. It’s been great to be with you.
