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


China’s Five Surprises

This represents the acceleration of a 30-year trend. Today’s economic success in China owes a great deal to its diaspora — to the Chinese who live abroad. Even when the economy looked permanently stalled, overseas Chinese sent money home. They were also realists; they saw China as a source of cheap labor, and of relatives, however distant, whom they could trust to handle logistics and money. As opportunities expanded in China, these expatriates began to return in person. Entrepreneurs from Hong Kong, Taiwan, and Macau opened factories back home; students who had won positions in American or European firms returned to China to start their own companies, bringing with them technological and management knowledge, as well as Rolodexes full of contacts — including contacts with one another. In one study of immigrant professionals in Silicon Valley, AnnaLee Saxenian, dean of the School of Information Management and Systems at the University of California, Berkeley, found that 73 percent of Chinese immigrant professionals said they would consider establishing businesses back in their homeland — and a large number had already done so.

Edward Tian is a notable example of the influential role that some globally experienced Chinese executives play, even in government- supported enterprises. After earning a Ph.D. in ecology at Texas Tech University, Mr. Tian started a high-tech venture in Texas. The Chinese national government then recruited him to be the CEO of China Netcom, originally a small startup telecommunications firm based in Beijing. In 2002, China Netcom merged with a major part of the incumbent China Telecom, the then-state-owned primary national telephone utility, to form a new, giant-scale China Netcom, with Mr. Tian as the president. Another example is Fu Chengyu, the president of China National Offshore Oil Corporation (CNOOC), who led that company’s 2005 bid to acquire Unocal. Mr. Fu holds a master’s degree in petroleum engineering from the University of Southern California. Early in his career at CNOOC, he led the joint management committee, which oversaw joint ventures between CNOOC and global leaders such as BP (then BP Amoco) and Shell.

For its part, the Chinese government realizes that, to turn startups or state-owned enterprises into world beaters, it needs to build strong management capabilities. Executives of state-owned enterprises regularly attend management and leadership training sessions, held either in China or at top academic institutions overseas. They are thus exposed to cutting-edge Western management philosophy and techniques. Meanwhile, the government’s “go out” policy encourages corporate executives to acquire foreign assets — not to exploit, but to learn from. The oil industry, in particular, will continue to be on a global watch for companies that will help China build up its strategic reserves in management as well as in oil. China, in short, is no longer an isolated place, and its bridge to the outside world is this growing cadre of people who are comfortable in both places.

Out from Guanxi
China’s business environment is far more diverse than it seems at first glance. Japanese, Korean, European, Australian, and American multinationals compete against overseas Chinese and local Chinese state-owned and privately owned players. The mix of strategies and tactics has created the world’s biggest management laboratory.

However, the most successful participants are not always the Chinese. There are two types of Chinese industries. Wherever the government has a policy of restricted commercial ownership — in industries such as energy, telecommunications, financial services, and banking — the ethnic Chinese still have a home field advantage. For example, although there is a timeline for relaxing restrictions on it, foreign ownership of telecommunications companies is still limited.

In the second category of industries, including consumer products, personal computers, handsets, and pharmaceuticals, there is a much more level playing field. These industries are open to competition from companies all over the world, including Western multinationals, Asian multinationals, overseas Chinese, and local Chinese enterprises. They compete on products, brands, sales and distribution channels, and services, and they often need to bring their best capabilities to China to win. In these open industries, the winners are sometimes the foreign multinationals and sometimes locals. The key to success is effective management and corporate governance practices that can succeed in the marketplace rather than through government favoritism.

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