9) Strategy - China, 2004: a seven figure political blunder
Recycling plastic waste in China, which would be shipped from the U.S. and Germany, appeared to be an excellent business opportunity. Previously I had been an area manager for Olin Corp., a Fortune 500 chemical multinational. Therefore I had an appreciation for the possibilities of recycling plastics.
An ABC (American Born Chinese) from my days in San Francisco made contact with me in 2004 about the business. The concept was to collect plastic waste in the U.S. (initially California) and Europe (initially Germany) and ship it to China. Shipping costs would be low. An enormous number of containers leave China with products for the U.S. and China – many of them returning empty to China.
The plastic waste would be sorted and graded in China. It would then be sold to companies there, which manufactured goods from plastic. An additional interesting aspect was government subsidies, from the U.S., and even more so from the European Union (EU).
The business seemed to have major potential. Our group would have been in the position to offer an attractive solution for plastic waste disposal offshore (more interesting than local solutions, such as landfills). You could deal with our group, or with a completely different group in a different part of China, more expensive to reach, because our group had the access over Hong Kong. Or you could ship it to Vietnam -- where a similar operation had recently started. In other words, the huge market was served by a mere handful of competitors.
Given how much plastic waste needs disposing of from just one major city, a million Euro a month business appeared to be a legitimate starting goal, a million Euro a week business a legitimate medium to long term goal.
The Western group assumed the difficult part would be getting EU approval. A high level inspector flew out to China and was shown the preliminary site, purposely developed as a model. The EU was of course not going to award shipping subsidies for waste that would be processed by improperly protected (or under-aged) labor. The EU inspector arrived with satellite pictures of the site in operation, taken before his trip. These people were serious! However he was satisfied and promptly approved the model facility and the expansion plans.
The event that blew the business out of the water was completely overlooked by the Western contingent. The mainland Chinese were not able to deliver the licenses, not exclusive, not of any kind. First, another group with more leverage (better gratuities?) had made a more attractive offer. But this offer too, came to naught. Senior government officials, ones at the very top of the Communist party hierarchy, had become concerned about the potential magnitude of the business.
These politicians included some very bright individuals who had a long-term view of what was good for China, and what not. They were not going to allow any part of China to be turned into a giant garbage dump for the West. They had a valid point. The waste would have been separated into "premium" waste – for recycling. No problem there, but what about the waste for which there was no use?
China had plenty of its own plastic (not bio-degradable) waste. U.S. and European waste was not going to be allowed to be disposed of in China. So, two years later, the venture´s people went their separate ways.
At the end of the day, the downside was that I was short a few hundred dollars of unreimbursed expenses – and the opportunity cost of having declined other projects and teaching offers. The upside consisted of two fascinating trips to China. For the first time in my life, I was assigned a contingent of bodyguards to accompany me. Wonderful food, fascinating culture and tremendous business opportunities made for an overwhelming combination. Equally overwhelming can be the difficulties, as I indeed found out.
The ABC, an astute and cautious businessman with eight figure real estate developments in California, might have had one or two thousand dollars of unreimbursed expenses. The mainland Chinese partners had lost over $2 million.
The Chinese hands did not really know what the U.S. and European hands were doing – and assumed that all was well, correctly. For their part, the U.S. and European hands did not really know what the Chinese hands were doing – and assumed all was well. But it was not.
The lack of “full disclosure” was not due to ill will, lack of trust, or cultural clash. Rather the business was never fully integrated at the decision making (CEO, managing partner) level. Therefore necessary information surfaced too late, or did not surface at all. Political risk was never analyzed.
When a key business driver is the government, having back-up contacts and an alternative solution are imperative – easier said then done.
China offers tremendous opportunities. First, approach them with the right people in place, i.e. with Chinese decision makers as an integral part of the team or venture. Second, approach an opportunity with power, consistency, cultural empathy and above all patience. Do not think in terms of quarterly reports. Rather think in terms of quarter centuries. The Chinese (and Japanese) do – and it is the Chinese who have construction teams working 24/7 on infrastructure and city building. Powerful action now does not conflict with striving for long-term goals.
For some further comments on China, cf. China Event under my CV, International Supplement (JH) at “Who We Are.”