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 / Spring 2010 / Issue 58(originally published by Booz & Company)


The China Challenge

In general, the 2008 global economic crisis enhanced the position of Chinese companies and their relationships with overseas enterprises, making them much stronger — and presenting a new sort of challenge to other global companies. The reasons for this robust recovery have to do with fundamentals. Besides fostering its emerging consumer base, China had rid itself of most of the structural rigidities inherited from socialism during the 2000s; its national productivity rose steadily through the decade. The government’s economic stimulus, which began to take effect early in 2009, was designed to reinforce these fundamentals and improve the prospects for Chinese businesses. The recession also forced the country’s overheated real estate and construction sectors to slow down, consolidate, and shed some of the extra capacity that had built up during the manic years of growth from the late 1990s to early 2008.

The next five to 10 years will see the emergence of a new generation of Chinese companies, bigger but leaner, better able to compete, and prepared to operate on a global basis. For example, over the next five years, while American automakers are focused on their problems at home, some of China’s car companies will expand overseas. Similarly, while American and European banks are sorting out the consequences of a financial morass of their own making, some of China’s leading financial institutions will have growth strategies built on international expansion. Not every Chinese company will thrive, but many are in strong positions to take advantage of the recession. For instance, they will exploit major declines in corporate valuations in Europe and North America to buy companies headquartered on those continents.

The new wave of Chinese entrepreneurship represents a change in business models — away from a dependence on rapid, low-cost production and copycat R&D, and toward effective long-term management — and it will take some time to develop. Chinese producers are still prone to the vicious circle of commoditization; its relentless focus on cost reduction heightens price competition, which leads to more cost reductions. And most Chinese companies are still relatively unskilled in the kinds of management methods and knowledge that a global company needs.

But the stronger companies in China are making themselves leaner, with larger market shares and better positions on their industry value chains. They will increasingly make overseas acquisitions that enhance their technological assets, marketing reach, and managerial expertise. These companies will continue to pursue ways of producing goods more cheaply; that cost pressure will remain. But they will also figure out ways of producing and marketing goods more effectively by applying and reapplying the lessons they have learned. Witness the success of Haier, which sells specialized appliances like wine-cooling refrigerators in developed markets, and Fuyao Glass, a maker of glass for the automotive industry, which has made itself a supplier to many China-based car producers.

Or consider the game-changing potential of the Chinese aircraft manufacturing sector. At first glance, this technologically complex, capital-intensive industry would seem like a big leap for a developing nation’s economy. But it is official government policy to develop large passenger aircraft and eventually compete with Boeing and Airbus. Given China’s record over the last couple of decades of establishing a presence in industries previously deemed too technologically advanced for developing countries, the aircraft initiative could well be successful. And it could happen within a few years — far less time than the two decades it took Airbus to launch its first commercial aircraft.

Chinese manufacturers are entering this market in the same way they develop their presence in every other industry. First they make components; then they sell them at low prices to claim market share; then they expand through acquisitions. This gives them access to further know-how and expertise, allowing them to move up the value chain and build out the range of components they produce, eventually getting to a point where they can make entire products. In 2007, Airbus sourced $60 million worth of components from China; by 2015, it expects that value to have risen to $400 million. In the city of Tianjin, the company’s A320 aircraft are being assembled; the first one was completed in June 2009. A separate runway has been built at the city’s airport specifically to handle test flights for the aircraft.

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  1. American Chamber of Commerce in Shanghai and Booz & Company, “China Manufacturing Competitiveness 2008–2009,” 2009: Research on the evolving capabilities and interests of manufacturers in China.
  2. Andrew Cainey, Suvojoy Sengupta, and Steven Veldhoen, “Capturing the Asian Opportunity,” s+b, Winter 2009: Why economic recovery in China, India, and elsewhere in the region could be the strongest source of sustained global growth for years to come.
  3. Patrick Chovanec, “The Nine Nations of China,” The Atlantic, November 2009: The further differentiation of China, its culture, and its prospects for development and change.
  4. Anil K. Gupta and Haiyan Wang, Getting China and India Right: Strategies for Leveraging the World’s Fastest-Growing Economies for Global Advantage (Jossey-Bass, 2009): How to go beyond simplistic, premium-based marketing in both global economies.
  5. Warren Liu, KFC in China: Secret Recipe for Success (Wiley, 2008): The in­side story of the success in China of KFC and its subsidiary Yum Brands.
  6. Sam Palmisano, “The Globally Integrated Enterprise,” Foreign Affairs, May/June 2006: The chairman and CEO of IBM explains how the corporation is evolving from “multinational” to “global” enterprise.
  7. Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): An overall, in-depth guide to the vision, versatility, and vigilance demonstrated by successful companies in China today.
  8. Edward Tse, “China’s Five Surprises,” s+b, Winter 2005: This article explained China’s entrepreneurial intensity, fearless experimentation, “brain gain,” transition away from patronage, and overseas ambition.
  9. Edward Tse, “Context and Complexity,” s+b, Autumn 2007: More examples of the flexible approach needed for China’s increasingly diverse market.
  10. Edward Tse, Kevin Ma, and Yu Huang, “Knockoffs Come of Age,” s+b, Autumn 2009: Illuminates how China’s shan zhai companies, once associated with pirated goods, have become competitive players, even in mature industries.
  11. For more thought leadership on this topic, see the s+b website at:
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