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 / Winter 2005 / Issue 41(originally published by Booz & Company)


China’s Five Surprises

In the world’s fastest-growing economy, the last 10 years are not the best guide to the next 10 years.

Illustration by Lars Leetaru
“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function,” F. Scott Fitzgerald once wrote. He might as well have been describing the future of China. There are at least two prevailing views about this country’s emerging global identity. Believers assert that by 2030, if not sooner, China will be the world’s largest economy. It is already the fastest growing, averaging a 9 percent GDP increase annually over the past 20 years. Skeptics respond that its growth is bound to falter, soon, amid the environmental, social, and political problems brought on by rapid expansion.

These two perspectives are persuasive and compelling — but simplistic. Like Japan in the 1980s, China has become difficult for outsiders to see clearly in the 2000s. In part, that’s because China is not a static business environment. It is rapidly transforming from a planned economy to a market economy. Capable and competitive Chinese companies are emerging, the consumer marketplace is growing, sales and distribution channels are being developed, and the regulatory context is changing, all at accelerating rates. Thus, the lessons of the last 10 years will not necessarily be relevant for the next 10 years. As foreign companies attempt to do business in China, their success depends on their ability to get inside the minds of their Chinese competitors (or partners).

There are at least five “surprises” in China’s future: facets of life and global business, stemming from the cultural, economic, and political evolution of this unique country, that will turn out differently from the way most outsiders suspect. These surprises are:

  1. “Why not me?” The intensity of Chinese entrepreneurialism is propelling many companies, even now, beyond a role as producers of low-cost commodities.
  2. Fearless experimenters: China’s emphasis on rapid-fire research and development makes it a seedbed for original products and services in the future.
  3. China’s “brain gain”: The ability to attract and retain executives from around the world has provided a higher level of competence for China’s enterprises.
  4. Out from Guanxi: Outsiders still view China as a largely patronage-based economy, in which connections and ethnic background determine success, but increasingly (at least in some sectors), high-quality management and transparent governance structures count more.
  5. China’s overseas ambition: The country is taking on a role as a catalyst of sustained economic growth in the emerging markets of the developing world.

“Why Not Me?”
Many foreign investors base their business plans on the assumption that their Chinese counterparts are simply low-cost competitors. They will be surprised by the ability of some of these companies to compete on product and service differentiation as well.

The most critical factor for Chinese competitiveness is the historical source of the present-day Chinese mind-set. Beginning in the mid-1800s (the latter part of the Qing dynasty), there was a period of relative technological and economic stagnation in China, capped after 1949 by more than 40 years of economic standstill under Communism. 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 now, the momentum has grown so strong, it feels as if holes have been punched into a steam pipe that was building up pressure for a long time. After growing up on a steady diet of two ideas — “Life is good under Communism” and “Acceptable behavior is determined by the authority of the parent, boss, and leader as outlined by Confucius” — Chinese businesspeople are now calling into question the effectiveness of those values.

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