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BUSINESS & TECH

Doing Business in China: Beijing’s Goal to Create Bull’s-Eyes Often Produces Moving Targets

By Doug Young

Announcement of a new electric-car joint venture between Ford and an obscure Chinese automaker got me thinking about China’s obsession with targets, and how that affects people doing business in certain areas. Targets are a fundamental tool for any business, and the concept of key performance indicators, or KPI, is a standard part of the management lexicon in the West.

But China often seems to take the concept to an extreme. Some might argue target-setting is a major factor behind the country’s phenomenal growth that has taken China from backwater status to the world’s second-largest economy in just three decades. But such target-setting just as often creates headaches for businesses, especially when numbers change with little or no warning. What’s more, such number-setting is almost an invitation to cook the books when people can’t meet their targets.

I’ve heard different theories about the origins of China’s target obsession, including a cultural preference for quantifying everything. My personal favorite is that the practice is a legacy of China’s recent past as a socialist economy where everything was planned.

Back in those days, people were told how much to produce based on central government targets, and the only thing that mattered was meeting those goals. Quality or logistical issues, such as how to get your products to market, were things for others to worry about. Obviously I’m simplifying just a little, but it’s probably still fair to say that meeting your state-set targets was the most important thing in the minds of managers from that era.

The Ford story that got me driving down target lane is a great example of just how problematic this kind of goal-setting can be for running an efficient business. This particular case saw Ford announce a joint venture with an obscure company called Zotye, which just happens to be one of China’s top five electric-car makers.

The news probably left most Westerners scratching their heads, trying to figure out why a company like Ford, which has its own electric-car program, would want to team with such an unknown Chinese brand. Industry insiders knew the move was completely driven by a new Chinese program requiring all carmakers to log about 8% of their sales as new-energy vehicles starting next year, which would have been impossible without the help of such a well-connected local partner. Sources told Caixin this week the program would be pushed back a year to start in 2019 after carmakers complained, though there was no official verification of that decision.

Ford’s announcement followed a similar joint venture by Volkswagen, and Daimler was also working on its own plan. No one can say if the big foreign automakers or their domestic rivals will be able to meet the aggressive state-set targets. But if history is any indicator, there will probably be some monkey business behind the scenes to meet those goals.

Inflated data

Such monkey business made headlines earlier this year, when northeastern China’s Liaoning province made the stunning admission that it had inflated its economic growth by about 20% from 2011 to 2014 to meet its targets. Not long after, wireless carrier China Unicom also disclosed similar inflation at its Shaanxi subsidiary over a five-year period, again in its quest to post phantom stellar growth.

Playing with government-set targets may come as an unfamiliar game to foreigners doing business here, and many will probably never have to deal with such issues as the country slowly weans itself from the practice. One of the biggest places where clashes are still likely to occur is in economic growth, which is a sacred cow above all others.

Much of a place’s economic activity comes from local employers, who may come under pressure to juggle their accounts to show the strongest figures possible for local officials calculating gross domestic product. One source who has headed several major multinationals’ China operations described disagreements with local officials in at least one instance, with the officials double-counting his output to help them meet their own economic targets.

At first he tried to argue that his company’s contribution was being overstated, but in the end the officials explained how they reached their conclusions, and that was the end of the discussion. One major difference lay in their decision to count internal company transactions as economic activity, even though Western methods wouldn’t allow such practices. At the end of the day, he said, he and most others at the companies where he worked simply ignored the big state-set targets and went about their own business.

Such aggressive targets can occasionally prove beneficial in some industries, according to another source in the solar power sector, which has been given huge goals by Beijing for new installation. But he also acknowledged that such target-setting can cause headaches when, for example, the government makes major changes due to flaws with its original plans.

Such fickleness has been on display in his sector lately, following a huge build-up of solar farms in remote areas of interior China, many of which are going underutilized or completely unused due to poor planning. Construction of those farms helped China to meet its targets, even though a big chunk of the new capacity was ultimately useless.

That led the government to set new targets that emphasized smaller, rooftop power systems that are easily connected to local grids and are the specialty of my contact, thus providing a boom for his business. But such rapid pendulum swings can hardly be reassuring for anyone trying to do longer-term planning, which underscores the irony that fickle central planners remain one of the bigger risks for people trying to plan their own future in one of these industries subject to state-set targets.

This column updates an earlier version of the story to add that sources told Caixin this week a quota program to encourage new-energy car sales may be delayed a year due to complaints from carmakers.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com.

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