Talk presented to the Harvard Club of New York City by Russell S Johnson ('75 MBA '80): 8 March 2001

Introduction: Our talk tonight is on Sourcing in China and is presented by Russell Johnson. Russ is a 1975 graduate of the College and a 1980 graduate of the Business School. He has been trading with China for over 20 years. Russ's company manufactures food processing equipment in China, which is sold in the United States and Europe. His firm also assists US companies in setting up manufacturing partnerships in China for such diverse industries as wastewater treatment pumps, titanium heat exchangers and other alloy based manufacturing. I think you will find his experiences very informative. Russ.

Thank you Sumner.

One of my favorite books on China is one written by the historian Hugh Trevor-Roper about Sir Edmund Backhouse. Backhouse was a famous British Sinologist at the turn of the last century, who had unprecedented access to the court of the Qing Dynasty (The last dynasty in China). He was a confidant of the Empress Dowager, who was the power behind the throne during the last years of that dynasty.

Mr. Backhouse wrote two books documenting the behind-the-scenes machinations of the Qing Court, which became staples in historical textbooks covering this period in China's history. The only problem being that Mr. Backhouse was a bit mad and his books were sheer fiction, as were the diaries on which much of his books were allegedly based. These diaries, one of which purported to be that of the court's head eunuch, were later sold by Backhouse at a handsome profit.

So, if you hear or read of a Western passing himself off as an authority on China, take what he says with a grain of salt.

With that blanket disclaimer, let me tell you how I first became involved with China.

Upon graduating from Business School in 1980, I started a mail order company selling dairy equipment directly to dairy farmers in the US. --Talk about a breakdown in career counseling at the B School--. At the first trade show I attended I met an equipment broker from Louisiana representing some companies from China and I agreed to meet a delegation from China in Baton Rouge the following week.

The representatives of the various companies there to meet the Chinese were assembled in one large conference room. Ahead of me on the agenda was a company from Mexico looking to buy ferryboats from the China State Shipbuilding Corporation. The Mexican interpreter had a heavy accent. As did the Chinese interpreter. (Not surprising in 1980, since English, until a few years prior to this meeting, had been the language of the "Capitalist Running Dogs".) The broker from Louisiana was downright unintelligible.

Negotiations kept drifting off in unexpected directions. For example, an exchange on construction:

Mexican interpreter: "So, for the ship's hulls you use rivets?"

Chinese interpreter (after much puzzled discussion amongst his delegation): "Yes, rivers. The boats are used mainly on the Yangtze."

Louisiana Broker (confused): "You boys wanted ocean going vessels?"

After a few hours of observing this, I was a bit apprehensive, but managed to convey that I wanted prototypes made of some samples I had brought along. For the next four months I heard nothing and had pretty much written the whole project off when I received the following telex from the manager of the China State Shipbuilding Corporation (A versatile group: they built ferryboats and dairy equipment):

Dear Mr. Russell:

"I am missing you so very much. I think often of you and our lovely time together in Baton Rouge."

(I blushed slightly at this opening salutation.)

"We are wondering, where our US broker is? Can you help us find him?"

This was the fellow from Louisiana. The third largest company in China had lost its US broker. I looked for him, but he had folded up shop--never to be heard from again. The Chinese therefore requested that I come over to deal directly with them.

When I first visited Beijing in 1980, unbeknownst to me at the time, the trial of Madam Mao Tze Tung and the Gang of Four was taking place a mile from my hotel. This trial signaled the formal end of the Cultural Revolution and established Deng Xiao Ping as the unrivaled power in China. Trade with the West was just getting started.

Over the next 20 years, I found myself in a unique position to witness the greatest economic transformation in history. My knowledge of China is empirical. I am not a China scholar, but I have traveled there every 3 to 6 months for 20 years. I have not conducted much of my business in Beijing, Shanghai or Guangzhou (the economic centers of China), but rather in Jiujiang and Wuhan, industrial cities on the Yangtze River 450 miles inland.

Most of my business dealings have been at the factory level rather than with Government Agencies or Trading Companies. But I have had the good fortune to deal with some of the same people for 15 years and one person for the entire 20 years I have been going to China. These people have taught me what I know about the country. Working at the factory level away from the centers of commerce has given me a unique vantage point from which to observe China.

Arriving in Beijing for the first time, I was amazed to find the airport threadbare and dilapidated. (Today it is the most modern in the world.) Luggage was brought right into the waiting room on a wagon pulled by a tractor. All the luggage that is except for mine.

The loss of my luggage caused a dilemma for my hosts (and no small amount of consternation). Everyone in China at that time wore Mao uniforms. But, the Chinese would not hear of a western dressing in such an outfit. A trip to the Number 1 Department Store turned up one pair of Purple Wool Pants-3" too short and uncomfortably snug in the crotch, and an embroidered blue shirt. For the next 3 weeks, I alternated between this outfit and the clothes I had worn over on the plane. Today in Beijing I could be outfitted in Armani, Versace or Levis from any one of a number of stores.

After a side trip to Shanghai, a three-day boat trip up the Yangtze River brought me to Wuhan. (On this trip, I wondered if the ferryboat I was on was like the one the Mexicans had purchased or if inadvertently they had ordered a fleet of oil tankers.)

I hope to address two broad questions today: What is the future of China as a supplier? And, how does one find a reliable source or partner in China?

On the first question: China's future as a supplier. Can it continue to grow its exports as rapidly as it has in the past?

My answer is a qualified yes.

One of the major qualifiers to my answer is political stability. Chinese politics is not my area of expertise. However, I will touch on some of these issues at the end of my talk, time permitting.

From the point of view of industrial capability, more my specialty, I think China can continue to grow as an exporter for several reasons:

One is growing worldwide acceptance. When I first approached US companies to buy products from China in the early 1980s, the response was often skeptical, if not down right hostile. Now companies approach me. Offshore manufacturing is a competitive way of life. The ability to source internationally is critical to the survival of many industrial companies.

The question then becomes whether to buy from China or some other developing country. From that point of view China has some interesting advantages. Basically, from 1960 through 1980, China was on its own. The country had rejected (or been rejected by) the West. It was alienated from Taiwan, Japan, and most other countries in Asia. And, in the early 1960s, long standing suspicions of the Soviet Union boiled over causing a break there as well.

This isolation, coupled with an obsession to build its military, forced China to bootstrap itself industrially. Anything the country needed it built itself. When I first visited factories in China, the only machine tools I saw were those made domestically or some made in satellite countries of the Soviet Union, such as Yugoslavia or Hungary. Through a harsh regimen China dedicated the material, engineering talent and laborers to building an industrial infrastructure grounded in military equipment and heavy industry. This self-sufficiency came at an extremely high cost, but today gives China a strong industrial base from which to work.

If you compare China to other developing countries, which were primarily agrarian before starting to build a manufacturing base for exports, you can see the advantages that China has accrued: The primary one being its current engineering capability and the system for training future engineers.

Secondly, China has low labor costs. This may sound like an obvious one, but my interest in this has more to do with using labor cost advantages to enhance quality to gain a competitive advantage. Low labor costs actually allow a Chinese factory to provide better quality than in the West by attending to details which have been cut from western manufacturing to reduce expensive labor costs.

For example, in the dairy industry metal polishing is a very necessary requirement. The US has gone mostly to chemical electro-polishing or plating, which is adequate, but inferior to hand polishing. Chinese factories can provide a superior hand polish at a still reasonable cost.

Over time, many US companies have also substituted plastic components for stainless steel ones to reduce costs. I have found that my company can go back to making these parts from stainless steel due to the low labor costs afforded by Chinese manufacturers. It has given us a competitive advantage.

Thirdly, China is moving into more markets. In the early 80s, most of the goods purchased from China were low technology items such as toys and textiles. As Western companies discovered China's rudimentary industrial capabilities, purchases have moved into what I would call middle technology. This is the vast area of industrial products: motors, pumps, engines, fittings etc. covering an ever increasing number of industrial sectors: automotive, plumbing, construction, food processing, heavy equipment, etc.

It is the Mother Lode of economic goods. And China has just started to tap into it.

Fourthly, China will achieve productivity gains on two fronts:

1. Upgrading antiquated equipment and

2. Applying appropriate western technology to manufacturing.

One of the parts we have made in China consists of a straight stainless steel tube that has a crimp put in the bottom of it. A few years ago, on a visit to one of our factories, I observed a worker putting the crimp in these tubes. I was astonished to see the worker using a tire jack to accomplish this task. He put the tube on a shaft, pumped the jack handle until a pressure gauge reached a certain PSI. Then released a pressure valve and removed the tube.

Despite the fact that the worker had a right arm the size of Arnold Schwarzenegger, he could only crimp about one tube per minute. And the jack method of crimping presented several problems with quality control.

On a subsequent trip, I observed the same part being made using a hydraulic press with a pressure foot pedal and a retractable shaft. The worker now dropped the tube in place, hit the foot pedal and crimped the tube. The finished piece was ejected automatically. The worker could do 10 to 12 pieces a minute: A 1000% increase in productivity. The hydraulic press had been purchased used for $500.

Upgrading of antiquated equipment represents only the beginning of productivity gains that will transform China. The largest gains will come through the application of more current Western technology.

Take the lathe as an example. In the West over the last few decades, controlling a lathe moved from:

Manual controls with hand cranks to

Numerical controls using data processing tapes to

Fully computerized controls

This technological evolution in the West has produced steady productivity gains, but it has also come at great cost. The development of each new technology was slow and expensive: For example, the first computers were expensive and the software to make them work was costly and unwieldy. Not to mention the sunk costs of missteps in development that were discarded along the way.

Fast forward to today. Computers are inexpensive. Software to operate them in an industrial setting has been perfected to a large degree. And, the computer systems retrofit onto almost any machine and are extremely robust.

The cost of developing these improvements has been bore by the West. The fruits of the improvements are now available at a fraction of the original costs to China. In much the same way that China has jumped directly to wireless telecommunications, bypassing the more expensive hard-wired systems. China's factories can now inexpensively leap frog from manual controls (which still predominate in China) to computer controls: Garnering productivity gains in a few years that took the west decades to achieve.

China by expanding into new industrial markets, upgrading antiquated machine tools and implementing the latest in Western productivity technology should be internationally competitive for decades.

Of course, the aforementioned productivity gains are theoretical. Implementation will proceed unevenly and several factors, from political upheaval to the collapse of the State Owned sector of the economy to disparity of incomes to rising unemployment, could derail or retard the process.

So, finding the right partner and being creative enough to manage that relationship becomes all the more important to achieving success in China.

Which takes us back to Wuhan and my first contract with the China State Shipbuilding Corporation. Wuhan is the site of the October 9 uprising in 1911, which brought down the Qing dynasty: The last dynasty in China. The city played a prominent role in the communist revolution.

Starting in 1949 China moved most of its military factories to the interior of the country to protect them from invasion. Most tended to be clustered around the Yangtze. The China State Shipbuilding Corporation is premiere among these military entities on the interior.

The area was militaristic and strongly communist: My hosts quoted Mao or Deng Xiaoping when making toasts at the endless banquets held for our prosperous future. But, the people were also extremely capable technically and very earnest in their desire for our venture to succeed. And, I would add here, they were also wonderfully hospitable, had terrific senses of humor and were curious and open minded about America.

One very prominent positive that the United States had in their opinion is that it had fought with the Chinese during World War II. One of the books I had read for background before going to China was Barbara Tuchman's "Stillwell and the American Experience in China, 1911-1945", an account of the US experience in China prior to and during World War II from the perspective of US General Joseph Stillwell, who actually helped lead Chinese soldiers in battle. It was fascinating to discuss this issue from the Chinese perspective.

Lastly, though I could not have known it at the time of our first negotiations, I was to find this group in Wuhan to be men and women of integrity and honesty: This has been the foundation of our 21 years of cooperation.

We met to negotiate our first contract in a large, typical Chinese conference room with overstuffed armchairs spread across two walls. On one side were 12 employees of CSSC: Consisting of managers (one of whom was reputed to have participated in the LONG MARCH), foremen, engineers and the ubiquitous political officer to insure the proceedings complied with Party policy. Across from them sat a 27-year-old, five months out of Business School, in wool purple pants up to his calves and a newly minted, 20 year old translator (provided to me by CSSC) who was thoroughly intimidated by his superiors arrayed across from him.

The people from the China Ship Building Corporation had never negotiated a Western style contract before. I had never negotiated any kind of contract before.

We started by defining the operational procedures: Specifications, quality standards, prices, delivery times etc. It was a slow process: reminiscent of the old translator joke. I would say something. The translator would translate and the 12 employees would burst into furious debate. After 5 to 10 minutes the translator would turn back to me with a simple summation, something like: "They do not think that is a good idea."

The most difficult operational issue was delivery time. The factory had worked under successive 5-year plans since the 1950s. In fact, when I visited them in November the workers were idle at all the factories I visited because their quota for the year had already been met. The workers still came to the factory, but only for training and political education.

The concept of delivery within 60 days of the order was new to them. They kept insisting that such a plan would disrupt the worker's schedule. At the same time continually spouting the adage "The Customer is King." (One of several paradoxes that never seemed to faze them.)

We then moved on to the Legal aspects of the contract, i.e. What if something goes wrong? There were basically two methods for conflict resolution: "Friendly cooperation" or the International Court in The Hague. Since the cost of taking a case to The Hague would have been exorbitantly expensive, I soon discovered that "Resolving problems through friendly cooperation" was really about the only recourse available: More on that later.

After an unprecedented night session of negotiating, we finally reached agreement on a contract. As I stretched, exhilarated and exhausted, the interpreter came up to me: "Do you know how to type?" He asked. "Why yes" I replied without thinking. "Oh wonderful." He responded with relief. "No one here knows how to type. Would you be so kind as to type the contract?"

As I sat at midnight pounding out the English version of the contract on an ancient manual typewriter I could see my breath since the buildings were not heated in China and it was November in the Mountains. There was no white out, so if I made a mistake I Xed it out and we initialed the Xs the next morning.

Remarkably, we operated under that original contract for the next 18 years: Invoking it with pride whenever we added new products or negotiated a deal with a new factory or manager. And more amazingly, even though both sides knew that it was virtually unenforceable legally, the first thing we did in the event of a dispute was get out the contract and use it as the authoritative basis for resolving the disputed issue.

Bear in mind that most of my dealings have been directly with factories for relatively small contracts. A large US company dealing with a large state owned or private Chinese company may have a different view of contracts.

However, I would warn against having any great sense of security in a contract as a legal document. China has promulgated several laws aimed at codifying Western style trade practices, but the laws are new, subject to unexpected interpretation (often based on factors that you will know nothing about) and there is no body of case law to provide guidance as to precedent. Certainly you want to draw a good contract, just don't put too much faith in it legally.

In my experience, a contract in China is a template for operations spelling out the obligations for each side. As each obligation is fulfilled, trust is built between the parties. That trust becomes the most important element in dealing with the Chinese.

Which for illustration purposes brings us back to Wuhan: The concept of "friendly cooperation" was quickly put to the test. The first shipment of goods received from China had $10,000 worth of stainless steel fittings which were wrong.

A flurry of telexes ensued. First, I informed the factory of the problem. They replied that the raw materials I had supplied were wrong. In those early days China's SS did not meet international quality standards, so I provided the raw materials from Japan. Indeed, upon checking, it turned out that one of the raw materials I had supplied was wrong.

I asked them why they had made the finished goods, if they knew the raw material was not right. They replied that the workers had been scheduled. (What happened to "The Customer is King"?) And that, the Letter of Credit expired after a certain date and would not have been funded if they had delayed. So they had gone ahead and made the parts.

They were sorry for the mix up and would now repair the parts at their cost as called for in the contract. The incorrect raw material component was a tube that had a diameter that was too large. I asked them if they had any suggestions as to how to make the diameter of a tube smaller. They replied that this was impossible. They were sorry, but they would be unable fix it. And, by the way when did I want them to start work on the next batch of raw materials, which had just been delivered to their factory.

I decided it was time to fly over. Upon arrival, I demanded my money back. They informed me that the Letter of Credit had been paid directly to the central government, which held all monies. And, that the government had a policy of not making refunds. They apologized for this policy, but also told me that it would be very bad for them if I took this matter up with the government. Couldn't we work out something as "Lao Pong Yo" (Old Friends)? (This was my introduction to this term and one I would hear many times over the years-and only very occasionally from actual old friends.)

With the second batch of raw material sitting in their warehouse. (I had a pretty good idea as to what their policy would be on returning raw material.) And, a third batch of raw material ready to be shipped from Japan. (Prudence was not a virtue of my youth). I decided to renegotiate.

These negotiations were stage-managed to save face: A common practice in conflict situations. The real meetings took place in my hotel room at night with two members of the CSSC delegation. We decided exactly how the negotiations the next day would proceed.

When we met the next morning everything went smoothly. Without mentioning the factory's mistakes, we renegotiated the labor cost down-the ostensible reason being "a change in US market conditions", the real reason being to off set the money I lost from the parts which had been made wrong.

Next, I insisted that in the future I would pay them by wire transfer only after receiving the finished goods: No more Letters of Credit. This decision, they said, required the Regional manager's approval.

By this time I had learned something about their negotiating methods. I told the region manager that a Letter of Credit put too much pressure on the factory. The workers might make mistakes in the future. Even worse they might miss a deadline and the Letter of Credit would expire before they could get paid. So, in consideration of the factory, I was generously offering to pay them directly after the finished goods were delivered. As their "Lao pong yo" (two can play that game) I would bear all the fees connected with the wire transfers. Surprisingly, the Regional Manager agreed wholeheartedly.

From that point on we worked under a system of what I refer to as "mutual hostages". They had my raw material. I had their finished goods. If a problem developed, we each had roughly the equivalent $ value of goods at risk.

Once we worked through this first problem, we realized that we could rely on each other to be fair within the system that we were working. I came out whole through the reductions in future labor costs. They were grateful that I had not taken the matter up with the government. The lesson gleaned from this first snafu is that the Chinese will work with you practically within the context of the circumstances. But, you have to figure out what that context is. Be flexible. Take set backs as part of a continuum-You must be in it for the long haul.

One corollary I would mention here: Be aware that there is a difference between prototypes and parts made in a production run. Prototypes are made one at a time usually by highly skilled engineers. Productions runs involve setting up equipment and procedures to produce parts in volume. The two have very little in common.

Incidentally, during this renegotiation I learned another new phrase: "Meio wente", which means "No Problem". If you are ever in negotiations in China and you hear someone across the table say: "Meio Wente. Lao pong yo" (No problem. My Old Friend), you are probably in trouble.

How then do you find a partner in China? More and more Chinese companies are being listed on the web and attending trade shows, but how do you evaluate them.

I recently met a fellow who was being sent to China to start up Dun & Bradstreet over there. I can't imagine how he will obtain useful credit information on Chinese companies:

Most companies do not use Western Accounting practices.

Many Assets and Liabilities are off-balance sheet.

Triangular debt, where company A owes Company B owes Company C, which in turn owes Company A, is still a big problem.

State Owned Enterprises are heavily Dependant on erratic government lending.

Credit References from other companies, a Dun & Bradstreet staple, would probably come from a cousin or friend from University who worked at the company providing the reference.

It used to be that a large State Owned Enterprise with its inside connections to cut through red tape was the ticket to success, but the majority of these companies are now floundering and the government has started to restrict lending to these firms leaving many of them virtually bankrupt.

In fact, China has quickly gone through three stages, which can be roughly paraphrased as follows:

In late 70s: "It is not illegal to own a private company."

In the early 80s: "To make money is glorious. Let 1000 private enterprises flourish."

The situation now has become: Can the private sector grow fast enough to bail out the failing State Owned Enterprises. That is, can private companies absorb enough of the employees left without work by the idle factories of the public sector to avoid political unrest?

The real growth in China has come from private companies. From 1980-1995 China's total Gross Domestic Product grew by approximately 10% per year. (Parenthetically, these numbers are only rough estimates. --If George Bush thought Gore's math was fuzzy, China's methods for determining GDP would make his head explode.)

But, if these GDP numbers are in the ball park for the entire economy, consider the fact that the private sector during that time represented anywhere from 20% to 40% of that total economy and that the public sector had flat to declining GDP numbers during that same period and you get growth rates for the private sector of anywhere from 30% to 50% annually: Simply astounding numbers.

Therefore, the answer would seem to be to find one of the successful growing private companies to partner with. But, here again there are potential problems:

Private companies in China are virtually all start-ups: Few have been in business more that 10 years. Fast growing startups are the most difficult to manage-As the failure of any number of Internet startups recently has proven.

These private Chinese companies are also operating in the same turbulent environment that is causing the public sector so many problems.

Private companies' access to capital is greatly restricted.

And, there is a critical shortage of qualified business managers.

This very dilemma of choosing between a State Owned Enterprise versus a private company was revealed to me a couple of years ago on a visit to China with a client of mine.

He was thinking of investing in a private factory. The people from the private company and the people who worked for me had been feverishly working on a feasibility study, which they had not had time to fax to us before we left the US.

We arrived in Wuhan late at night after a 36-hour trip. A car from the private company met us. The investor (all 6'7" of him) was folded into the front passengers seat. As we cruised into the quiet, dimly lit city, my Chinese consultant, sitting next to me in the back seat, turned to me and sotto vosso informed me that his briefcase, which held the only copy of the feasibility study, had been stolen. The investor, who in addition to being tall had damn good hearing, shifted around in the front seat to face us with incredulity: "The feasibility study was stolen?! This is like the dog ate my homework." An expression which took considerable time to properly translate to the rather flustered consultant.

A couple days later we visited a State Owned Enterprise, which made a component needed by the private factory to make complete assemblies. After a pleasant, but evasive conversation we were finally informed that no components had been made for the last 90 days, due to the fact that the government had cut lending to this enterprise, which left them unable to pay the workers. As a result the workers had refused to work. "Who could blame them?" Asked the manager, who informed us that he also had not been paid and was not being paid to have this very meeting.

The investor did not invest: Mentioning something about having a better risk profile investing in derivatives for energy futures.

The private factory ultimately did get funding and is now operating successfully. But, the story does point up the pit-falls inherent in either a private or state owned enterprise.

I would liken choosing a partner in China today to the process a Venture Capitalist goes through in choosing a deal.

First, get to know the management and their track record.

Second, verify the technical capability of the firm.

When you do choose a partner, just choose one. Don't try to diversify your risk by getting three or four partners: The complexity level just gets too high. Follow Mark Twain's advice: "Put all your eggs in one basket, then get a gun and watch that basket."

Absolutely get an outside, independent overseer, accountable to you, to look after your interests on a regular basis.

If possible, get regular audits of the company by an outside accounting firm.

Finally, demand QUALITY and ON TIME DELIVERY right from the start. If a factory does not adhere to these two requirements, look elsewhere. It will not improve.

The potential of China is huge and has just begun to manifest itself. But, it is a rapidly shifting environment, with high risk. Those who chose correctly will make a lot of money. Those who chose incorrectly could lose their embroidered shirt.

In closing, let me quickly bring you up to date with the Wuhan factory with which I made my first contract. I think it illustrates much of what is happening in China today.

As I mentioned earlier, the engineers there had been hand picked by the government for work in a military factory. They were the best in their classes at their Universities. They were patriotic. Over the years, many of them voiced to me their pride in having built their country's military. They did not mind the sacrifices of moving from their homes and even living apart from their families.

They, unlike many other Chinese I have talked to, did not begrudge the huge amounts of money entrepreneurs were making in the private sector. They felt that they had helped their country in a serious time of need and that the security the country now enjoyed was gratifying to them. And, it had been prestigious for them to have built missile guidance systems and other advanced weaponry, and then later to have been chosen as one of the first factories to manufacture goods for the West.

But, military spending was eventually cut back and several of their Western customers departed for private companies, so they were asked to make motors for washing machines for the domestic market. Now, making missile guidance systems is one thing, but to make washing machine motors for the "glory of the country" stretches the motivations of prestige and patriotism pretty thin. They have had little success competing in this market.

I think their experience teaches us is that it takes a capitalist to make the mundane products in life. The only real motivation for making a good washing machine motor is money.

Thank you. Are there any questions?

OK. The question is "Why have I stayed in the interior while Shanghai and other places have been expanding so fast. Why not have my goods built there?"

For the products I deal with, that is industrial goods, I think the interior is still the best place for manufacturing. Military production is still a priority and therefore the personnel and equipment are first rate and because the area is a bit remote from the hyperactive coast, the labor rates are still reasonable. No I am quite happy to take my chances with the interior-eventually I think it will take over the bulk of manufacturing in China, just as the Midwest of Chicago, Detroit and Pittsburgh did in the United States during its early industrial age.

Yes. "What about China as a market?"

I know less about this, but I'll give you my opinion for what it is worth. As a consumer market, I think people are going away from that early concept of "If I can sell one of some item to all 1.2 billion people in China, I'll be rich."

One needs to segment the market, just as you would in a western market. Urban areas such as Shanghai and Guangzhou possess a large population with disposable income--which is what you are looking for in a consumer market. One could look at these urban areas in aggregate as being the market size of say S Korea, which is smaller that the 1.2 billion people scenario, but still represents a good market to pursue and more importantly one that has fantastic growth potential.

China as an industrial market, I have a little more experience with. One of the things I run into quite frequently (and more so every day) is Chinese manufacturers who need some critical component from the US or Europe to make a higher-level product. By getting the unique component from the US, the Chinese company can build around this component to make a product with a much higher value added and therefore profit. So from that point of view there is an excellent market for western technology in China.

The one drawback I have run into however is that with all the publicity about China and Intellectual Property Rights, western companies are reluctant to provide sensitive equipment to China for fear of having it duplicated without compensation. I think these issues are and will be worked out and that the flow of goods from the west to China will increase over time, but not as fast as goods from China to the West.