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


China’s Five Surprises

One question is in the mind of every fledgling entrepreneur in the high-tech startups of Beijing’s Zhongguancun neighborhood, the fabrication hubs of Wenzhou, the industrial region of Dalian, and dozens of other Chinese business centers: “Why not me?” Success is all around them. The recent Nasdaq IPO of Baidu, a Chinese search engine company led by young entrepreneurs, generated front-page acclaim in the Chinese press. Young Chinese businesspeople 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 Yahoo, Silicon Graphics, and Google. They see themselves as the creators of the world’s future Intels, Apples, and Microsofts, and some of them probably will be.

Because they are in such a hurry to make a place for themselves, and because it is still early in the life cycle of their ambition, Chinese entrepreneurs tend to give the impression that they don’t care much about quality. However, that is not universally true. Many of them recognize the trade-offs among cost, quality, and time that exist for any startup, and they have explicitly chosen designs and processes that sacrifice quality for the sake of speed and cost savings.

But this doesn’t mean that China will always be a nation of commodity enterprises; indeed, many Chinese businesspeople know the price of a Motorola phone in Chicago or a pair of Nike sneakers in Manhattan. They ask themselves, “If I can make these things, why can’t I sell them for higher prices?” Some of them are already laying the groundwork for the evolution of their industries from low-cost producers of shoes, handsets, and components to branded enterprises.

Within China, some industries are already developing a maturity that their Western counterparts took decades to reach. In automobiles, for example, full-service retailers have emerged (formerly, they were state-owned enterprises or joint ventures between the government and foreign manufacturers like Volkswagen). Chinese vehicle manufacturers are establishing global vehicle brands, such as First Auto Works, the world’s foremost producers of midsized heavy-duty trucks. The Wanxiang Group (a privately held manufacturer of auto parts from Hangzhou) is acquiring ownership stakes in American, European, and Japanese companies to build a global supply chain and develop a global brand. Chinese component suppliers are consolidating; some are establishing themselves globally. Most significantly, according to a Booz Allen Hamilton analysis of cost figures, price competition in China (along with price competition from India) has put enough pressure on margins that vehicle manufacturers will probably need to reduce costs by 8 percent per year within the country to stay profitable, even as annual sales volumes increase by 10 percent or more per year. Similar consolidation is taking place in appliances, electronics, and textiles. These are the hallmarks of a maturing set of enterprises.

And many Chinese business leaders are eager for that maturation. Yes, they want to get rich quickly, but they don’t want an anarchic, free-for-all atmosphere; they want sustained, stable growth. Of course, they won’t reach full stability very soon; too many entrepreneurs are trying too many new things. But the best Chinese companies will develop sophisticated supply chains, brands, research labs, and financial infrastructure more quickly than most observers suspect. Even if only a small percentage of the mass of Chinese entrepreneurs cross this threshold, it will have a striking impact on the global business community.

Fearless Experimenters
Not every Chinese company is good at technological innovation. But those that are can take advantage of several factors unique to China right now. Chinese universities are churning out engineers. Between 1996 and 2001, the country practically doubled the number of engineering and science Ph.D.s it graduated. Many of these individuals are willing to start their careers at relatively low wages, conscious that their fortunes could rise dramatically in the future if they hitch their wagon to the right entrepreneurial star. The anarchic “hungry spirit” of Chinese culture currently provides a supportive intellectual climate for invention, not constrained by the conventional wisdom of existing technological or market paradigms. And the needs of Chinese consumers are often latent and quickly evolving, which makes them open to purchasing the experimental and low-cost products that local innovators produce.

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