Li Ning is one of China’s most instantly recognizable faces. He shot to fame in 1984, winning six medals in gymnastics competitions at the Los Angeles Olympics, three of them gold. Since then, he has remained in the spotlight by becoming one of the country’s most successful businessmen as the owner of China’s largest sportswear company. The eponymous Li Ning brand has more than 7,550 retail outlets across the country and annual sales of more than $980 million.
The Li Ning Company Limited is still tiny compared with Nike and Adidas, whose global revenues in 2008 were $18.6 billion and $15.9 billion respectively. But Li Ning’s growth is faster; its global marketing, still in the beginning stages, includes sponsorships of major league basketball in the United States, Argentina, and Spain.1
Then the 2008 Olympics went to Beijing. Li Ning was chosen to light the torch at the opening ceremonies in Beijing’s Bird Nest stadium, in front of a television audience of more than a billion viewers. The moment must have been particularly difficult for Adidas, which had spent a quarter of a billion dollars on Olympic sponsorships and marketing during the run-up to the games. Suddenly, here was not just one of China’s most famous former Olympic gold medalists, but one of their leading business rivals—and a living symbol of the intent, ambition, and competitive spirit of Chinese enterprise. In a handful of seconds, he stole the show from his Western competitors.
China has hundreds of thousands of Li Nings: entrepreneurs who have driven one of the fastest sustained national economic growth rates of any country in world history. They may not all be as successful as Li. But after decades of being held back by their country’s adoption of socialism, they and the rest of the Chinese population are moving forward with the force of water gushing from a broken dam. The intensity of their aspirations, joined with the plans of the government and the presence of the country’s hundreds of millions of ordinary people, suggests that future developments in China will overshadow even the momentous changes of the recent past—and in a way that affects the strategy, and even the identity, of companies around the world.
Indications of China’s new identity are everywhere. They were evident in the enormous haul of gold medals that Chinese athletes won at the 2008 Olympics. They are also evident in the stunning modern architecture of Beijing, Shanghai, and other cities; the cornucopia of products that fills the shops and stores of China’s cities; in the country’s Internet and mobile-phone user bases, both the largest of any nation; and in the market capitalization of Industrial and Commercial Bank of China, the world’s most valuable bank. Perhaps the most significant indicator is the increasing presence of China’s investment and business presence in every other major region, from Africa to Europe to the Indian subcontinent to the Americas. This wave of energy and entrepreneurship is changing the world, but its impact has just begun to be felt, and it is still often misunderstood, both by foreigners and by China’s own people.
A large number of businesspeople have gained experience in China in the last decade. They believe they understand how to operate there, and they have built their business models on expectations of a relatively stable, coherent, expanding future for their Chinese operations.
But the intensity and scale of change in China means that all businesses, even those that are currently successful, will find themselves inadequately prepared for the turmoil and dynamism to come. And if they aren’t prepared for the new China emerging today, their companies are likely to falter. They will not just miss out on the opportunities in this economy; they will be pushed aside by rivals, old and new, that use China to transform their competitive position.
For in the world’s fastest-growing economy, the experience of the last ten years will not be the best guide to the next ten years. Business leaders around the world who want to be successful—not just in China, but anywhere—will need a new China strategy.
A new China strategy does not merely mean a set of plans for doing business in China. Most large companies are already selling to China’s markets and competing against Chinese companies. Many more, even relatively small enterprises, will join them. But a true China strategy is different. It is a one world strategy: a long-range developmental plan for doing business as a global enterprise in which China is a central and integrated component, in a world where China plays a very different role than it has in the past.
Corporate leaders who see China as a large but still-emerging market must come to see it as a diverse and immense group of global consumers. Those who see Chinese companies as partners in joint ventures must come to see those companies as active, highly capable global competitors. And those who see the Chinese government as simultaneously welcoming and opaque must come to see it as an active, increasingly open player on the global stage. In other words, they must see this country in the same way that the corporate leaders of the late nineteenth century saw the still-emerging United States of America.
Changing this paradigm, and seeing the Chinese market and government in this new light, will not be easy. It will feel unfamiliar and challenging for many companies, even those that have operated successfully in China over the past ten years. The Chinese themselves have only just started digesting the implications of the changes they are going through. Having experienced such rapid growth, they are now looking at its impact—managing the effect on its environment and figuring out what sort of companies should be fostered and which discouraged. They are also trying to ensure that the wealth being created benefits more than the coastal rim of the nation, that workers interests are protected, and that companies and industries can move up the value chain.
As for multinational companies—or “foreign” companies, as the Chinese think of them—they still have a lot to learn about China itself. As the country matures and becomes more integrated with the outside world, more of its context becomes visible: its diverse markets and demographics, policies and regulations, cultures and tastes. Accessible as China has proved itself in the last two decades, it remains a country whose distinctive characteristics both create opportunities for businesses and constrain them.
Some companies appreciate this already. IBM’s quest to become a “globally integrated enterprise,” in large part through an expanded Chinese presence, is explored later in this book. But too many have yet to acquire the degree of sophistication necessary to appreciate both where potential may lie and the nature of the problems likely to be encountered in realizing it. On the plus side, most have abandoned the very worst simplicities, epitomized by the meaningless but often repeated phrase “a market of 1.3 billion.” Yet there remains a widespread tendency to underestimate both the complexity that exists already and the increasingly broad range of opportunities the country offers for companies seeking to enhance their global as well as their Chinese competitiveness.
Scale and Intensity
Very few leaders in the West were prepared for the speed of economic recovery in China in 2009. Even now, few are prepared for the way in which China (along with a few other Asian nations) will provide an engine for the global economy going forward. In the first nine months of 2009, automobile sales in China rose to 9.66 million units, up 34 percent from the year before—and at a time when worldwide vehicle sales were falling. In September 2009, net profits for the top five hundred companies reached $170.6 billion, exceeding for the first time the monthly net profits ($98.9 billion) reported by the top five hundred companies in the United States.2
To be sure, numbers like these result in part from the enormous investment made by the Chinese government in economic stimulus after the economic crisis began; but they also reflect the fundamental growth potential of the Chinese market, the resilience and energy of its entrepreneurs, and the determination and flexibility of its government. Most important, they demonstrate how rapidly the Chinese economy continues to evolve.
Every major dimension of China will be different during the next decade than it was through most of the 2000s. New leading companies will emerge; the appetites and tastes of consumers will shift; and China’s government will pursue priorities that are very different from the priorities of the reform program that Deng Xiaoping launched in 1978. Much of this change is still uncertain. Most specific predictions are unreliable, because the country is on a nonlinear trajectory that is generating enormous, discontinuous change.
But it is possible to define and track the two major forces—scale and intensity—that have given China its unique power and position today. No other country, not even India, has these two factors in such potent combination.
China’s scale, of course, stems from the size of its population: with 1.3 billion people, it is larger than any other country in the world. (India has 1.1 billion.) Although it is a highly diverse population, it is also remarkably coherent for its size. The Han people make up 92 percent of China’s population, and while they speak an enormous range of dialects and variations, they share a single written language and almost everyone can speak the official spoken language, Putonghua. Thus, anything that happens in China is magnified by its immense demographics, making the Chinese influential, even when they prefer to be obscure. This scale helps to explain why many international companies will continue to be active in China, no matter what else happens. Success in China, either for a local entrepreneur or a global multinational, is enough to transform a company’s performance worldwide. For international firms, a Chinese presence allows them to expand their reach to one-fifth of the world’s population. For domestic companies, it provides a base more than large enough to generate the scale needed for sustained success; for some, even an assault on overseas markets. Most companies will continue to be drawn to the Chinese economy, which grew at around 10 percent annually for three decades, and which may plausibly return to that rate as it continues to recover from the 2008 recession.
Within a few decades, China’s economy will replace the United States’ as the world’s largest. Exactly when this will happen depends on a range of variables, among them exchange rate fluctuations. But regardless of the exact date, one of the safer predictions for the first half of the twenty-first century is that China’s growth, supported by that of India and several other countries, will make Asia the source of more than half the world’s gross domestic product by around 2030— up from less than one-fifth in 1950, and one-quarter in 1973.3 This represents an overall shift in the center of the world’s economic gravity, the likes of which has not been seen since the industrial revolution powered the West’s rise to economic preeminence just over two centuries ago. Even a widespread return to trade protectionism would not derail this outcome.
China’s intensity—the ferocious entrepreneurial energy and productivity emerging in every part of this country—will have even greater impact than its scale. This intensity stems in part from the deep-seated desire of the Chinese people to regain their historical primacy, taking back what they see as China’s rightful place on the world stage. Even the vigor and entrepreneurial activity of India will not match that of China, at least for the next decade.
Beginning in the early 1800s, after the Qing dynasty had passed its peak, China experienced a period of technological and economic stagnation. Mao Zedong’s revolution, culminating in the Communist Party’s rise to power in 1949, ended a long period of civil war and foreign intervention, but the central planning that followed was an economic disaster, especially during the Cultural Revolution of 1966–1976. Although that period of extreme authoritarianism came to an end with Mao’s death in 1976 and the ascension to power of Deng Xiaoping two years later, it took two more decades to clear the ground and lay the foundations for China’s economic reemergence.
Only in 1992, when Deng Xiaoping made his now-famous “southern visit” to the city of Shenzhen, was the current wave of economic momentum unleashed. By then, the pressure of pent-up economic demand and ambition had been building for a long time. And it did not abate during the first few years of economic growth; it only became stronger. After growing up in a value system built on two ideas—“Life is good under communism” and the Confucian edict “Acceptable behavior is determined by the authority of the parent, boss, and leader”—Chinese businesspeople are now questioning the efficacy of those values.
Today, there is one question in the mind of every fledgling entrepreneur in the high-tech start-ups of Beijing’s Zhongguancun neighborhood, the private factories of Wenzhou on the Zhejiang coast south of Shanghai, the manufacturers of Dongguan just north of Hong Kong, and dozens of other Chinese business centers: “Why not me?” These young Chinese businesspeople see the rewards of success all around them. They are driven by materialistic desires, eager to catch up with the rest of the world, and almost giddy with a sense of multiplying opportunity. They have read Internet chronicles of the triumphs of Amazon, Google, and Facebook, and in navigating the economic crisis of 2008–2009, they have become well aware of their country’s economic strength. They see themselves as the creators of the world’s future Intels, Apples, and Microsofts, and some of them undoubtedly will be.
Since the early 2000s, this intensity has produced the China that the world sees today. It is almost certain to continue and accelerate. Its force and volatility explains why China’s future is unpredictable, and why many foreign (non-Chinese) companies may experience a bumpier ride than they expect.
A Decade of Difference
Another factor has tempered China’s growth and helped to ensure its viability in the long run. The nation’s economy has been thoroughly restructured during the past decades. China has achieved a level of flexibility and competitiveness far greater than it had in the mid-1990s.
The principal change in China’s restructuring has been the elimination of most of its centrally planned, state-controlled economy. State-owned enterprises (SOEs) remain, but these are stripped-down versions of the dinosaurs of a decade ago. The largest and most important of them—including China Mobile, the leading mobile-communications operator, and China Petroleum & Chemical Corporation, an oil and gas giant—are tightly managed and for the most part profitable. Outside of these companies, a Chinese economy has sprung up with a large and growing number of privately owned smaller companies, supplemented by a small but disproportionately influential group of foreign-invested businesses. In this economy, prices for most goods and services are set by the market. The labor force is flexible, increasingly well educated, and continually improving its skills.
The Chinese banking system has also been reorganized and, in the process, shed all but a tiny portion of its nonperforming loans. A decade ago, China’s financial infrastructure was a mess, with a technically insolvent banking sector weighed down with nonperforming loans to SOEs. By the second half of 2009, however, China had the world’s largest foreign currency reserves at just over $2 trillion. It was the world’s largest holder of U.S. Treasury bonds, valued at $801.5 billion in May 2009.4 And as I noted earlier, the world’s largest bank (measured by market capitalization) was the Industrial and Commercial Bank of China. Similarly, China’s trading status has risen from negligible to that of a world leader: its imports and exports are the equivalent of about 60 percent of gross domestic product (GDP).5 In the United States and Japan, they account for about 25 percent of GDP.
The liberalization of China’s economy has involved an extraordinary expansion of infrastructure: airports, sea ports, power stations, mobile and fixed-line telecom networks, expressways, and railroad lines, almost all of which have been developed to world standards and beyond. Beijing’s new airport, built for the Olympics, has received widespread media attention, but it is just one of countless achievements over the past decade. Among them are the world’s highest-altitude railway, running 714 miles to the Tibetan capital, Lhasa, and built at a cost of $3.5 billion; the Yangshan deep-water port, constructed more than 18 miles offshore at a cost of $12.5 billion, which has made nearby Shanghai the world’s busiest cargo destination; and one of the world’s fastest railways, the maglev in Shanghai, with a top speed of almost 270 miles per hour.6 This is a part of China’s ambitious $300 billion cross-country high-speed railroad-building program.
China’s reform era has also produced a string of glittering twentyfirst-century metropolises, each with a population in the millions. Shanghai is the most famous of these, with its magnificent skyline, ultrachic restaurants and nightlife, and a population of more than 14 million people. Surrounding it in the Yangtze River Delta are a host of other rapidly developing urban centers, including Suzhou, Hangzhou, Nanjing, Ningbo, and Wuxi, each with its own unique history. Together, they are home to burgeoning electronics, chemical, semiconductor, automotive, and software industries.
In the south, the Pearl River Delta in the Guangdong province produces about 30 percent of China’s total exports. Also in this province, on the border with Hong Kong, is Shenzhen, China’s biggest boomtown, with a population that has grown from less than 100,000 in 1979 to more than 10 million today. In the northeast is Dalian, which has long been favored by Japanese corporations. Tianjin, a port city just sixty-eight miles of expressway from Beijing and the leading industrial center in northern China, is home to Motorola’s multibillion-dollar mobile-phone operation and one of Toyota’s two principal China plants and is a focal area of development by the Chinese central government. A little farther down the coast lies Qingdao, famous for its beer, but also home to northern China’s busiest port. Like all the other cities of the Shandong peninsula, it is very popular with South Korean companies. Below Shanghai are the provinces of Zhejiang, the heartland of privately owned business in China and home to legions of the country’s entrepreneurs, and Fujian, opposite Taiwan, whose growth will inevitably surge now that there are direct transportation links between the island and China’s mainland.
Along the length of China’s 11,000 miles of coastline, the story is the same—cities with highly dynamic economies, home to the vast majority of China’s middle class, packed with goods to buy, and host to tens of thousands of new companies, most of them privately owned. Most of these cities have new airports; they are all linked to each other via expressways, and are governed by officials who are eager to attract as much new business as they can.
The driver of all this growth has been the interrelationship and interplay between China’s market liberalization and its positioning as a key part of the global value chain for an ever greater number of companies. Hence one core theme of this book: to flourish over the next decade and beyond, multinational companies must formulate strategies that can integrate the business implications of China’s market liberalization into their global value chains. And if they hope to succeed in this, they must understand not just the China of the past twenty years, but also the forces that will change this country as it moves forward.
A Very New and Old Nation
The scale and intensity of the Chinese economy was not diminished by the global economic crisis of 2008 to any long-lasting extent. At first, the manufacturing sector was hurt badly by the decline in demand for China’s exports, particularly from the developed world. And like the United States, China recovered in part through a massive government stimulus—almost $600 billion, announced in November 2008 and put into play rapidly. But unlike the United States, where the recession marked the end of an era of growth built on unsustainable practices (especially in the financial sector), the downturn caused only a temporary hiatus in China’s growth; annualized growth shrank to 2 percent in the winter but was heading back toward 8 percent by July. By October, the Chinese recovery was generally recognized as under way; overall GDP growth for the year was expected to be between 7 and 8 percent.7
Moreover, the recession enhanced the position of Chinese companies and their relationships with overseas enterprises. By September, Wang Jiming, the vice president of the Chinese Enterprise Confederation (the preeminent Chinese association of business leaders), was able to say that Chinese companies were not as vulnerable to the crisis as their American counterparts.8
The reason for this robustness had to do with fundamentals: China had rid itself of most of the structural rigidities inherited from socialism, its national productivity was rising, and its economy was beginning to develop its own consumer base.
The stimulus itself was deliberately designed to improve these fundamentals: as New Republic writer Zachary Karabell put it, “Within a few months, money was being put to work—primarily on infrastructure projects in the interior of the country, but also on . . . measures such as handing out pre-paid cards to encourage consumer spending . . . The central government also mandated . . . a more open approach to lending . . . The stimulus accelerated the long-term goal of the Beijing government to focus more on internal demand and interior development and less on export-driven activity.”9
In retrospect, the primary cause of slowing economic growth within China can in large part be attributed to the overheated nature of its own real estate and construction sectors. As property prices fell sharply through 2008, demand from the construction industry for steel, cement, and other industrial products dropped sharply, and the government responded with an investment-driven stimulus package. In effect, China slowed down to take a breath and shed some of the extra capacity that built up during a run of unprecedented growth stretching from the late 1990s to early 2008. The economic slowdown may have helped accelerate this process by stimulating a much-needed round of consolidation across many of the country’s industries.
The next five to ten years will see the emergence of a new generation of Chinese companies, bigger but leaner, better able to compete, and prepared to operate on a global basis. Over the next five years, while American automakers are still fixing their problems at home, some of China’s car companies will expand overseas. Similarly, while American and European banks are sorting out the consequences of a financial morass of their own making, some of China’s leading financial institutions will plan growth strategies built on international expansion. And while American and European telecommunications equipment makers are downsizing and restructuring, their Chinese competitors will be claiming a larger share of international markets.
Of course, not every Chinese company will thrive, but many are in strong positions to take advantage of the recession. For instance, they will exploit major declines in corporate valuations in Europe and North America to buy companies headquartered on those continents. Outbound investment by Chinese companies has been rising rapidly— from around $5 billion in 2004 to $27 billion in 2007, then almost doubling to $52 billion in 2008.10
It is easy to overstate the extent to which the Chinese people feel they are sharing a national mission, especially in the aftermath of an economic crisis. But it is no exaggeration to say that for the majority of Chinese, national identity is an important factor in determining their actions and in their acquiescence to their country’s political system. After falling steadily and further behind the West during the nineteenth and twentieth centuries and having endured so much internecine conflict, the country is rediscovering a sense of national pride. The Chinese reaction to the Olympics and the importance attached to hosting the games makes this very clear.
The Chinese also display a striking amount of openness in their current national character: manifest, for example, in their willingness to embrace new ideas and technologies. This is easier to understand when you consider that since the early twentieth century, the Chinese people have weathered relentless upheaval. As recently as the mid1990s, the closure of tens of thousands of state-owned enterprises led to the layoffs of tens of millions of workers. The growth of China’s export manufacturing sector led to the migration of more than a hundred million country dwellers from the poor central and inland regions to the coastal manufacturing centers. The Chinese learned that they could take this change in stride and life would improve.
As a consequence, the closed attitude of the isolated Celestial Empire that the West confronted two centuries ago is evolving into a national mindset that wants to mix with the outside world, and expects that outsiders will recognize their achievements. That’s why hosting the Olympics was so symbolically important.
There is a historical precedent for this evolving worldview. It was prominent in China during the Tang Dynasty, which spanned nearly three hundred years from the seventh to tenth centuries. That, too, was a time of great commerce and cosmopolitan openness. It was the golden era of the Silk Road, China’s link to central Asia, the Middle East, and Europe. Maritime trade flourished, with Chinese ships sailing as far as the Persian Gulf, Red Sea, and Africa. Trade with Japan and Korea was extensive, and Arab and Persian merchants established outposts in China, especially in Guangzhou. Thousands of foreigners lived in the country, and its capital, Chang’an (now Xi’an), was the world’s largest city. There was a vibrant mix of religious and philosophical ideas; Buddhism flourished alongside Taoism and Confucianism. Culture flourished, too; this was the period of China’s greatest poets. There was also an explosion of technology and innovation, with woodblock printing contributing to the advancement of medicine, geography, cartography, mechanics, horology, and engineering.
The current era is also one of openness to new ideas. China’s economic reforms since 1990 have been launched with a strong focus on technological innovation. One of the core goals has been the acquisition of technology and expertise, and the results can be seen in everything from China’s space and nuclear power programs to its telecommunications and computing prowess. This effort also laid the foundations for a whole series of “pillar” industries (as the most fundamental business-enabling sectors are called in China), including automobiles, telecommunications equipment, electronics, semiconductors, nuclear power, aerospace, and specialty chemicals. And the government continues to emphasize the need to gain the skills and know-how that will be required to prosper as the global economy becomes more and more knowledge based.
In the process of transforming its economy, China is also transforming the characteristics of its national leadership, in business and government. Few observers have recognized the way in which a leadership once characterized as old, conservative, and inward looking has advanced. For example, some of the most leading-edge communication, transportation, and energy technologies have been brought into play with a boldness that beggars belief.
And it is transforming its global presence as well. During the Tang Dynasty and for centuries thereafter, China saw itself as at the heart of the world. Then it was isolated. Now China sees itself as interconnected with the rest of the world. Any business with aspirations to global competitiveness must adopt a mindset that matches that of the Chinese in terms of openness and willingness to embrace the unfamiliar.
The Four Drivers of China’s Economy
The current wave of China-related business books are primarily written with one of three goals: to explain China’s emergence and its potential impact on the world economy; to show businesspeople how to enter China’s economy and sell to its millions of consumers; or to provide guidance to business leaders on how to compete with their emerging Chinese rivals. In other words, they all tell part of the story—but they leave business leaders with an incomplete perspective.
In this book I will try to provide a holistic view of the Chinese business environment, looking at consumers, competitive enterprises, the government, integration with the rest of the world, and the ways these elements interact. I have also laid out a framework that puts together the different, often apparently contradictory, trajectories of China’s future. This framework, which will be explicated in chapter 2, shows how change is taking place in a nonlinear fashion: some factors, such as Chinese entrepreneurship, are expanding exponentially, while others, such as the value of China’s labor arbitrage, may be reaching a plateau.
To make sense of China’s next decade, it is critical to grasp that there is no single driver of the nation’s future. Instead, four very different drivers are pushing the country forward at once, all powerful, and all interacting with each other in unanticipated ways.
The first driver is an aspect of the country’s economy and culture that I call Open China. The emerging potential of China’s consumer markets is well known to outside producers, many of which, like General Motors, have already come to depend on these markets for their profitability. Unlike other leading economies in Asia, including Japan and South Korea, China began opening its markets to foreign companies at the very start of its economic reforms and it has opened them wider ever since.
At the same time, the Chinese people have rapidly advanced as consumers; the wealth created by China’s growth has created a substantial middle class. Putting a precise number on the size of this segment of the population remains tricky, but however large it is, China’s current middle class is a mere fraction of what it will become as hundreds of millions more people join its ranks over the next decade. After this honeymoon phase, the Chinese mass market will morph into a vast, highly differentiated and sophisticated, multitiered consumer economy capable of driving growth for Chinese and foreign companies alike. This growth trajectory represents a powerful short-term opportunity for major non-Chinese companies (for example, in helping to develop the country’s retail sector) and a daunting long-term challenge in terms of maintaining market share.
This growth has also created an immense cultural transition from a largely rural country to a nation of cities. In the 1990s many companies had their hopes for China dashed because they were trying to sell urban-oriented products into a market where three-quarters of the people still lived in the countryside. Now around half live in urban areas. By 2020, this share will rise to 60 percent. This shift to an urbanized population means that China’s markets, fundamentally different from ten years ago, will be transformed once again in the next decade. Urbanites need, and buy, fundamentally different types of products and services.
The second driver is Competitive China. Hundreds of thousands of new Chinese companies have made this country the world’s most competitive business environment. Indeed, China is now the world’s largest and fastest-growing source of entrepreneurial start-ups. It is also an incubator for large businesses, both foreign and home grown. Nearly 300,000 foreign-invested businesses have been established in China, vying to tap into the country’s manufacturing base and reach its consumer and business markets.
And China is also becoming an innovation center for foreigners. The best of the world’s companies have come here to transform themselves, gaining experience and capabilities in China that can be applied to their businesses worldwide. Meanwhile, many of China’s leading entrepreneurs, like Li Ning, see themselves as natural global competitors. Companies such as the computer maker Lenovo, the white-goods firm Haier, and telecom equipment manufacturers Huawei and the Zhong Xing Telecommunication Equipment Company (ZTE) are building platforms of sufficient scale to take their businesses worldwide. They will be joined, in turn, by hundreds and then thousands more.
During the past fifteen years, global companies went to China primarliy to sell or manufacture goods. Over the next decade, international corporate leaders will go to China to integrate this vast market and sourcing hub with their global strategies and operations. Accomplishing this will require enormous leadership skills, within China and outside the country, especially at headquarters level.
Chinese producers will face unprecedented challenges of their own, including the challenge of sustainability. Since 1978, China’s economic growth has been phenomenal, but also extremely inefficient. Driven by huge amounts of investment and fed by China’s huge reservoir of rural labor, the focus has been on volume. But the related waste has been enormous, the environment has suffered, and consumer demand has been a secondary consideration. China’s emphasis will switch toward creating a more efficient economy, as well as a more productive and competitive one. There will be a greater emphasis on demand as the main driver of growth versus investment, and on reducing the resources consumed per unit of output and the environmental impact, while raising technological and managerial standards.
The third driving force is Official China: the shifting direction and role of the government and Communist Party. The government has managed the liberalization of many parts of the economy, but it has maintained control over its strategic direction by retaining ownership of a core group of state-owned enterprises in the finance, communications, energy, resources, and media sectors. Contrary to the hopes of many foreign investors, Official China has no intention of letting go of these industries, and it will maintain tight control over those parts of the economy that it wishes to manage. As it faces the challenges of internal complexity and external engagement, it will remain nondem ocratic while evolving toward a market-driven form of rule that, arguably, has never been seen on the world stage before.
One certainty is that economic liberalization will continue. There is a deep commitment within the government to continuing down the path China has followed for nearly thirty years. Part of the reason is that economic growth is a key foundation of legitimacy for China’s government, and a major guarantor of political and social stability. Further, there is a deep belief that economic liberalization will raise China’s position in the world, not just economically but also in terms of global leadership, reputation, and respect.
Many Chinese officials have internalized this aspiration. They have taken on responsibilities beyond their job descriptions, acting as the guiding hand in the creation of China as a world-leading country. Their interests extend beyond self-enrichment to the creation of national wealth and pride. This has been the motive behind building up the infrastructure necessary to economic development. It also means a long-term commitment to ensuring incremental economic development, as well as a willingness to experiment and collaborate across government agencies and with the private sector.
Evidence of this approach can be seen in the commitment to developing and running the large number of special economic zones that dot the country, especially along the coast. It is also visible in official attempts to prevent the emergence of an oligarchical tycoon class—such as that which dominated Russia in recent years—with a power base of its own independent from the Communist Party.
And it can be seen in the government’s new level of external engagement. Starting in the 1950s, Mao cut China off from most of the world. Deng, when he launched China’s economic reforms in the early 1990s, deliberately downplayed foreign relations, stressing that it was more important to focus on internal challenges. But the export-driven nature of China’s growth means it must have trade relations with almost every country. The need for resources to fuel China’s growth means that Chinese companies must source energy and raw materials from wherever they can find them. The Chinese government, like its citizens, has no choice but to reach out to the rest of the world.
And the world has no choice but to reach back. The fourth driving force is the One World in which China, like all other countries, is interdependent as never before. Globally connected power, communications, and transportation links now exist almost everywhere in China. The artifacts of the twenty-first-century global economy—KFC and McDonald’s restaurants, Nokia phones and iPods, England’s Premier League and MTV—are appearing in even the most remote Chinese cities. Although trade disputes, terrorism, and political tensions continue, the global geopolitical community will not go back to Cold War– era rivalries, or to the fragmented nationalism that preceded them. The nature of “one world” and the open, entrepreneurial business culture in China will reinforce each other in unexpected ways. No major player on the world stage can ignore China, and any company active in China will find itself increasingly interdependent with business in other parts of the world.
Of course, global integration remains far from complete. Any serious understanding of the current global economy must recognize the differences between China and the rest of the world, and limits of globalization in general. As Pankaj Ghemawat points out in Redefining Global Strategy,11 most business activities remain country based, even when they can be conducted across borders. In China, given its size, this holds even more so: regions and provinces retain their distinct identities, with their own cuisines, customs, dialects, and sometimes languages. To use an extreme example, Hong Kong, despite more than a century and a half as an English colony, never ceased being Cantonese.
Together, the four drivers of change in China—Open China, Competitive China, Official China, and One World—will transform the way in which businesses operate everywhere. Managing supply chains, for example, will no longer mean simply seeking low-cost production in China, but tapping the country’s engineering and scientific capabilities for leading-edge research and development. Goods that are conceived, designed, and developed in China will be marketed to the rest of the world. Chinese companies, meanwhile, will increasingly go abroad to find new sources of technology and business skills, particularly for innovation, brand building, and access to international finance.
Developing Your Own Strategy
When you put all these pieces together, you see a complex business environment, unavoidable yet daunting—but also accessible for those who are prepared with flexible, observant, and engaged business strategies. China defies easy answers, but you can build the judgment and mindset needed to operate there, and by doing so, you can equip yourself better for business in the world at large.
Companies will have to embrace complexity to achieve success in China. No simple marketing or production strategy will fit all of a company’s needs—the country and its dynamics are simply too varied. A strategy that works in the telecommunications sector in China will not necessarily work in computers; some alliances will be successful while others are not; a marketing strategy that works marvelously in one part of the country may fail miserably in another region. Despite all the business literature published on China, most authors and experts still treat this vast country in a facile way; they claim that one can “know” China after studying the business environment in a few major cities. That is like claiming to “know” the United States after working in New York, Washington, and Chicago.
Throughout the rest of this book, I will describe how to build the capabilities that business leaders need for developing an integrated China-global strategy. For example, you will learn how to tell which Chinese companies can provide the best alliances for particular purposes; what parts of the country to enter first; how to manage Chinese financing; and how to establish a trajectory for growth that benefits from the growth of the next wave of Chinese competitors. I will discuss flexible “footprints” for locating innovation, manufacturing, and services; the adaptation of brand names in China’s many markets; and the integration of back-office functions between China and the rest of the world. You will also learn how success in China can be applied globally, using the market knowledge, networks of low-cost suppliers, and scientific talent that can be found there as a platform for reaching a worldwide scale.
The structure of this book is intended to help you apply this aspiration to your own business and situation. The first half explores each of the four main drivers of change in China and how they fit together.
Chapter 2, “Open China,” explores the dynamics of the Chinese market—why it is expanding so rapidly and what this offers to companies, both Chinese and international. It briefly reviews the history of the last three decades to show just how important China’s openness has been in shaping the opportunities, then turns to look at how China’s markets will evolve over the next decade and beyond.
Chapter 3, “Entrepreneurial China,” examines the different types of companies operating in China, and the nature of the competitive threat they offer to each other. Two conceptual frameworks—a product market freedom matrix and a value-chain migration model—are introduced to explore the amount and nature of competition that companies are likely to face, and the kinds of functions they can expect to run in their China operations over the next several years.
Chapter 4, “Official China,” considers the role of the government and the Communist Party, the limits these two forces will put on China’s movement toward being a fully market-driven economy, and how their changing priorities will shape the business environment over the next decade.
Chapter 5, “One World,” pulls the threads of the previous three chapters together to show how the combination of China’s market liberalization and the integration of China into global value chains has laid the groundwork for integrated global strategies—the strategies that will propel the most successful companies of the next few decades.
The second half of this book then looks more closely at this type of strategy, how to craft it, and how to build the capabilities you need to implement it.
Chapter 6, “Vision,” describes the mindset—or strategic vision— that companies must develop to negotiate China’s business environment over the next decade. It explains why a China orientation is also a global mindset; that if a company does not try to shape its global strategy in the light of its China strategy, not only will it likely lose out in markets around the world, but it will also face the prospect of underperforming within China.
Chapter 7, “Versatility,” identifies the core capabilities companies must develop to realize their strategic vision. It highlights the need for flexibility, speed, and the ability to manage change, with a particular emphasis on the techniques used by China’s most successful domestic companies and how they have used their home market advantage to build the foundations for international expansion.
Chapter 8, “Vigilance,” discusses the type of leadership traits that corporate executives and managers will need to develop as they face the challenges of leading their businesses in China.
Chapter 9, “The Chinese Renaissance,” is a small epilogue suggesting that what we are seeing is more than just an economy reemerging. China’s revitalization could be as significant to the world as the great period in the early Tang Dynasty.
Throughout this book I recount the experiences of companies that have begun to develop their own versions of the China strategy. These include multinational companies such as Coca-Cola, IBM, KFC, Honeywell, and Nokia; and Chinese companies such as Huawei, ZTE, BYD, Haier, Li Ning, Dongxiang, Hengan, and Wanxiang. The companies that succeed the most will do so because they adopt a strategic mind-set: not strategies for China alone but global strategies with China at their core.
In this sense, China is the first country that has become truly analogous to the United States in geo-economic terms. Because of the scale of the American market, and because of the global reach and power of American corporations, every truly global company must compete, at least in some form, in the U.S. market. The same will hold true in China. If a company ignores China, it cedes this region to its competitors. If a company enters China strategically, it builds an increasingly necessary base from which it can establish its competitive prowess.