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


China’s Five Surprises

Recognizing this, many Chinese companies deliberately use their acquisitions to gain management expertise and good governance structures from abroad. When Lenovo, China’s largest computer hardware maker, bought IBM’s $1.25 billion personal computer division, one goal was openly acknowledged: gaining IBM’s skills, structures, and experience with marketing, research, and probity. The new company has headquarters in New York, research centers under way in North Carolina and Beijing, and a former IBM executive, Steve Ward, as its CEO. Some state-owned enterprises are privatizing specifically for the sake of performance improvement. Private owners can bypass the costly shackles that keep enterprises from making money, which include guaranteed employment rules, guaranteed housing, and limited compensation for high-performing individuals. The new managers are also better equipped to make reforms in corporate governance, and to address some of the toughest issues that state-owned enterprises face: human capital, measurement and rewards, and social responsibility.

Together, government liberalization (in some industry sectors) and global integration have changed the rules of the game. Conventional wisdom makes much of the mystique of guanxi — a word that strictly translates as “connections,” but usually implies that success is based on relationships, favoritism, and patronage. But in the relatively unfettered sectors today, while knowing the nephew of a Communist Party leader can still open some doors, the trends are toward transparency and merit. What you know is already more important than who you know, and will be more so in the future.

China’s Overseas Ambition
The CNOOC bid for Unocal focused attention (and resentment) on China’s drive for American acquisitions. But the more significant trend is China’s increasing investment in other countries, particularly in the developing world: Asia, the Middle East, Latin America, and Africa.

Three obvious objectives underlie Chinese overseas investment: to secure the supply of resources such as oil and raw materials; to enter new markets (often by acquiring local brands and distribution networks); and to gain new skills and technological competence. But the country’s overseas investment initiatives also have a surprising impact: China plays a key role, deliberate or not, in accelerating the growth and industrialization of the developing world. This is happening not through grand, World Bank–style investments, but rather through private investments conducted with the same fast pace, experimentation, and pragmatism that have become so common within China. Some of this investment represents a “soft power” of the new China. But much of it is simply the natural consequence of unfettered entrepreneurialism. Instead of mercantile competition with Europe and America, Chinese capitalists are seeking a far bigger prize: Becoming the provider of choice for the newly comfortable people of Africa, Asia, and Latin America. Like Henry Ford with his $5-per-day wage, they are gambling that raising the living standard of people in the developing world will pay off enormously.

In Africa, for example, China’s economic, commercial, and political relationships with Zimbabwe, Angola, Sudan, South Africa, and Nigeria have grown rapidly in the last few years. The country now imports about a quarter of its oil from Sudan, Nigeria, and Angola. State-owned and privately owned Chinese enterprises have invested in a variety of African businesses in textiles, telecommunications, hotels and tourism, and construction and engineering.

Renaissance Nation
Of course, all five of these trends will be surprises only because they are often unseen. The forces creating them are so strong and irresistible that the outcomes are hardly in doubt. Still, they will probably be the undoing of many businesspeople from outside China who come expecting an isolated, inward-looking country.

The smartest business executives who come to China from different corners of the world have responded with their own willingness to embrace the same qualities that lead to success in China: intense entrepreneurialism, unfettered experimentation, rapid-fire ambition, openness to outside leadership and alliances, and attention to emerging markets. In this way, these outsiders have also helped to create the new Chinese business culture. In the end, rather than either dominance or weakness, China is facing something altogether different: its first chance of a real renaissance in more than 100 years.

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