Good Company

Good Company
Good Company

Sunday, March 26, 2006

The Chinese way

Interesting piece on doing business with China -set in the offshore oil context- here:
Currently offshore China is mostly in shallow waters in an area encompassing approximately 1.3 million sq km, including Bohai Bay, East China Sea, and South China Sea. National oil company Cnooc dominates and accelerates China’s offshore E&P activities. Sixteen projects are expected to come onstream during 2006-2007. During the period 2006-2010, China plans to invest $15 billion and double its 2003 offshore production by 2010, particularly in Bohai Bay and the South China Sea.

Exploration offshore China remains hot, due to a number of factors, including China’s energy hunger, security, challenges in finding oil overseas, and high oil price. Considering their ambition to become major international players, the government’s strategic and financial support, and their lack of expertise in deepwater projects, Cnooc and its subsidiaries such as China Oilfield Service Ltd. (COSL) eagerly require foreign involvement. Other Chinese nationals such as CNPC and Sinopec won approval for offshore explorations once monopolized by Cnooc until 2004, and these areas will also need foreign cooperation.

Current offshore oilfields developed by Cnooc are at water depths to 500 ft. Future oilfield developments are going deeper, and thus create opportunities for foreign companies. More opportunities await foreign E&P service companies in particular. However, there are a number of factors that any foreign company should understand to succeed in the offshore China marketplace.

• Labor cost and access to the right resources.

• Cultural conflicts. For instance, the Chinese are reluctant to sign a contract before trust is built, while westerners are willing to sign a binding contract up-front. Those subtle cultural issues could be significant in making deals.

• China operations. To accurately predict the market demand and build solid relationships with the Chinese requires getting closer to decision-makers and understanding both Chinese customers and management. In the opaque and inconsistent Chinese market, foreign companies are concerned with such issues as corruption and intellectual property rights, but China is moving toward a better, open market. Government interference is becoming less of a factor.

Despite shared Chinese heritage, there are tremendous differences between mainland China and the rest of the greater China region, which often lead to limited access to Chinese resources, miscommunication, and ineffective operations. About 10 years ago, foreign companies understandably needed Singapore or Taiwan as springboards to run China operations. This practice has changed. A good example: a major foreign company’s processing division has China-based offices and won not only large projects in China, but also Chinese refinery projects in the Middle East. The same company’s offshore division, using its Singapore office for China business, has not yet had a chance to bid.

Chinese companies once admired Southeast Asian countries for their ties to foreign companies, technologies, and products. As China is now more open to western countries, Chinese companies would rather deal with companies with a presence in China or directly with foreign headquarters than through Asian intermediaries, who often cause missed opportunities, miscommunication, and operational inefficiency.

In fact, China now has resources and capabilities to effectively deal with foreign companies. For instance, one Chinese oil company has over 5,000 western-educated and trained employees. In addition, foreign companies may fare better by using their native Chinese employees, who understand western business, have connections to China, and are business savvy.

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