At the height of 'China fever' in the 1990s, Malaysian newspapers were filled with reports about billions of ringgit being invested in the giant economy. The truth, however, was not so rosy.

Former Malaysia-China Chamber of Commerce president Ngan Ching Wen has this story to tell.

In 1993, then prime minister Dr Mahathir Mohamad visited China with 200 government officials and industry representatives. One memorandum of understanding after another was signed at the hotel where the delegation stayed, as the prime minister and a Chinese governor looked on.

When the delegation checked out, many of these important documents were found in the hotel rooms. Thinking that they were left there by mistake, the manager informed the Malaysian embassy - it turned out that the industry representatives had no intention to invest in China at all.

"The fever of investing in China peaked in the 1990s, accompanied by frequent news reports - for example, about certain companies building a bridge over the Yangzi River or a casino in Yunnan Province," he said.

"As I read these stories, I said to myself, 'This can't be true'. The companies just wanted to build their image and reputation by publicly claiming that they were investing several million, or billion, ringgit in China. I would guess that less than 10 percent of the memoranda were put into effect."

But what about those who really did invest in China?

Deputy president Tan Yew Sing said: "Failures outnumbered successes. Before 1990, there was only bilateral trade, which went on quite well. From 1990, with increasing convenience in travel, there were more investments in China.

"Many Malaysians chose to invest in their hometowns in China... the so-called 'ties of affection'. But this caused them to be less stringent (in their ventures, which then failed). What a beautiful misunderstanding."

Decisions regretted

Ngan's own experience in China over the past 15 years has taught him several lessons about avoiding failure - of these, the most useful is that there must be sufficient preparation.

"Investors from Europe and America experience a lower rate of failure because they would have consulted the local firms before doing business in China.

"Chinese Malaysian investors took it for granted that they were familiar with China and then applied the Malaysian operating mode without making the necessary adjustments. I had the same experience. I shouldn't have considered I am always right."

In 1993, Ngan set up three factories to manufacture stick-on notepads in Shen Yang and Chang Chun in northern China and in Shanghai.

"I did carry out some research and surveys, but problems arose one after another. First tax issues, then technical problems and finally, competition," he recalled.

He was told that corporate tax in China was 33 percent which he felt to be manageable, since Malaysia imposed 30 percent at the time.

"It was not until tax-payment time that we realised we also had to pay the state income tax of about 20 percent. We were shocked because there is no such tax in Malaysia."

Problems came up with the manufacturing process, resulting in "the product being useless when sold".

This was traced to the fact that the process worked best in a tropical or semi-tropical climate. Shen Yang and Chang Chun have a temperate climate, with -10 degree centigrade winters.

"The chemist had done the tests in a room where the radiator was on," said Ngan wryly.

Without any other option, both factories were closed. The one in Shanghai ran quite well for the first few years, but was eventually sold when local competition grew.

"The Chinese who are so brilliant" was keeping quite a number of Malaysian investors away, said Ngan.

He then invested in real estate in Cheng Du and Gui Yang, in the expectation that there would not be so many problems, but even this experience left him with regrets.

"I finally realised that the state governments in China had far more power than those in Malaysia. For example, taxes can be far lower in areas with a stronger economy," he said.

"Government officers in certain inland areas think they have control of local issues, but officers in such cities as Shanghai regard themselves as public servants."

A Shanghai government officer, who refused to identify himself, admitted that China's legal system was imperfect, making it possible for some officers to take advantage of it.

Investment scale

Tan said another reason for failure lies in the small-scale nature of Malaysian investments and the absence of joint-venture efforts, such as those undertaken by investors from Singapore and Taiwan.

"What seems to be a large capital sum in Malaysia will seem small in China, while a small amount in Malaysia can't be seen at all in China," quipped Tan.

"Taiwanese investors gather all kinds of business, from upstream to downstream, when investing in China. Singaporeans follow their government's directives. Malaysians explore China without joint effort. This left many so helpless that they didn't even know where to seek assistance."

Ngan pointed out that there are basically two ways to invest in China - to set up a company with substantial capital or to run a small business as a single proprietor.

He has noticed, though, that not many can afford investments of RM10 million. Even if they could, few were willing to take the risk.

Strategies for success

No more than a half of the top 10 Malaysian billionaires have invested in China, including Kerry Properties Ltd, Rimbunan Hijau and the Lion Group.

Ninety percent of the Lion Group's investments have been profitable, primarily because of the CEO's individual efforts.

"The major reason for the failure of others was that the president hadn't sent people in charge to negotiate with partners and the local government. I always chose to go myself, making it possible to reach an agreement in no time," noted its chairperson and CEO William Cheng.

The conglomerate has invested US$800 million (RM2.92 bilion) in China's market to date. This was preceded by research and three visits from 1985, before the Lion Group's first Parkson department store was opened in 1992.

Initially, the Beijing Parkson did not do well, raising complaints from Wu Yi, the Chinese vice-minister of foreign economic relations and trade at the time.

"She said worriedly, 'It seems that you can't make it; ordinary citizens can't afford any single article, which costs at least 100 yuan (RM45)'," said Cheng.

Changes were made and products have continued to keep pace with customer demand, another strategy in the group's success, according to Ngan.

"Investors must meet three requirements: enough capital, a familiar business and expectations of China market," he explained.

"Ask yourself if you have any unique skills, techniques and management methods that can't be substituted, bearing in mind that science and technology in China are more advanced than in Malaysia."

Tan emphasised the importance of choosing reliable business partners and local managers, since many failures have involved cheating by associates in China.

"Make sure you manage your resources well and economically, and this will ensure half the success," he said.

China is at a stage of economic growth where opportunities abound, but investors need to keep their wits about them and not get caught up in 'beautiful misunderstandings'.