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 / Autumn 2007 / Issue 48(originally published by Booz & Company)


Context and Complexity

However, regulatory progress does not necessarily proceed in linear fashion. In 2006, after China National Offshore Oil Corporation (CNOOC) lost its bid for Unocal, some officials in China felt that Beijing had opened its markets too wide too quickly. The CNOOC case also taught the Chinese that “national security” could be used as a reason for refusing foreign investment, but the question was how to define that criterion in the context of business investment. In the aftermath of the CNOOC episode, there has been vigorous debate in China over whether Beijing should approve the attempt by the Carlyle Group, a U.S. buyout firm, to purchase an 85 percent stake in Xugong, China’s largest construction machinery manufacturer and distributor. In addition, the Na­tional Development and Reform Commission, China’s central policy-making body has specified, in the name of na­tional security, seven industries in which foreign companies cannot control majority shares: defense, power generation and distribution, oil and petrochemicals, telecommunications, coal, aviation, and shipping.

China’s regulators are balancing sometimes competing concerns; they want to continue the country’s growth, but within boundaries that will prevent the economy from overheating and collapsing. They want to help China integrate into the international community, but they recognize that nationalism is still a potent force. They will need to allow global competitors entry while ensuring that Chinese companies don’t lose their edge. Insight into how Beijing adjusts its rules to address these concerns will help executives weather the inevitable regulatory vicissitudes of China.

Outward-Facing Aspiration
Similarly, one must have a deep understanding of the aspirations of Chinese businesses. It’s no longer enough for Chinese business leaders to rule the domestic market. They want to be world class. The chairman of a regional Chinese airline recently told me that his goal is to bring his carrier to the high standards of Singapore Airlines. I’ve heard similar aspirations from the head of a large Chinese tele­communications operator and the leader of a major local airport. And the CEO of a Chinese beverage maker wants to turn his company into the next Coca-Cola. They know they’re not at that level yet, but they’re determined to get there.

That’s another dynamic element of China’s context: Chinese companies are learning to become even more competitive as they take on a rush of international competitors both at home and abroad and as they partner with multi­nationals. To join the top rank of international businesses, Chinese executives are very willing to learn international best practices, even if that means evolving beyond their own established ways of doing things. They are thirsty for new knowledge in business, management, and technology. In Chinese bookstores, man­agement books are easily the most popular category and occupy the most shelf space. Chinese translations of recent titles by such business celebrities as Jack Welch, Lou Gerstner, and Jim Collins are fixtures on the Chinese bestseller lists.

The nature of global integration is changing in ways that affect both Chinese companies and foreign companies operating in China. China has grown beyond its role as the world’s factory, and homegrown businesses have evolved beyond their role as a local toehold for global companies that need a Chinese partner just to crack the market. Increasingly, Chinese companies such as Huawei and Haier are now serving as product and process innovators both for the Chinese market and for international markets. And more foreign companies are integrating their Chinese manufacturing, sourcing, branding, marketing and sales, and distribution with their operations in the rest of the world; in the last five years, many of them have set up R&D centers in China that are an integral part of their global R&D system. At the same time, more Chinese companies are seeking expansion overseas.

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