Getting China Right
Booz & Company’s Edward Tse believes that, despite the challenges in today’s headlines, companies should take a long-term view when shaping their China strategy.
The practice of doing business in China has come into question in the early months of 2010. The disputes between Google Inc. and the Chinese government have been one factor; others have included the continued concerns raised in the West about China’s currency policy, and in China about Western financial policies. Moreover, questions about intellectual property protection in China have not gone away. At the same time, the consumer markets within the country are more vibrant as its pace of growth increases, and Chinese businesses are becoming innovative, fierce competitors within their country, and increasingly in the world outside. There has never been a time when getting China right is more important — or more difficult.
In this interview, conducted in London in March, strategy+business raised these issues with Edward Tse, author of The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010). Tse also wrote “The China Challenge,” the cover story in s+b’s Spring 2010 issue. He is a senior partner with Booz & Company and the firm’s chairman for Greater China; he has been advising companies in China and about China for more than 20 years. Tse has written extensively, in our pages and elsewhere, about China’s role in global political and business affairs. Here, he looks more closely at the tensions that are raising concerns among some businesspeople, at the reasons most companies cannot afford to ignore China, and at the long-term trends that will likely supersede today’s headlines.
Note: This transcript contains some material not used in the video.
S+B: What do you say to business leaders who are wondering, “Do I really have prospects in China?”
TSE: I think leaders of global companies have to step back and try to understand what China means to their business. They also have to understand what China has been achieving over the last couple of decades, since it started its economic reforms. Ignoring China is not an option. But the only way a company can take advantage of its massive opportunities is by placing its China activities in a global context — as part of an integrated web of capabilities, including manufacturing, marketing and sales, innovation, new business model incubation, and talent development.
I would recommend that global executives not pay too much attention to the day-to-day news. Instead they should step back and take a longer view.
S+B: What does that mean? How long is the appropriate distance to look?
TSE: You could begin by looking back to the start of economic reform by Deng Xiaoping in the late 1970s. And, more precisely, to 1992, when Deng made his now famous visit to Shenzhen. It was called the “Southern visit” at the time, to one of the places where entrepreneurial China got its start. And it was basically to set the tone: “Look, we’ve got to continue to open up and integrate ourselves into the global economy.” Over the decades since, China has held true to that path — and it will continue to do so, at least for the next couple of decades.
It’s important to recognize that China is still undergoing tremendous changes. In the early 2000s, China was seen as principally a source of goods for export and a potential market for multinationals. Now we’re going to see a wave of Chinese-developed products, Chinese multinationals, and Chinese money entering the global economy.
For example, China has become an incubator for every kind of business — from tiny startups to giant multinationals, both foreign and homegrown. Local companies are building platforms with sufficient scale to take their business worldwide. International companies will go to China to integrate this vast market and sourcing hub with their global strategies and operations.
S+B: Do you see China’s population becoming a more sophisticated consumer market?
TSE: Yes. Historically, China has been a largely rural society. But the government has decided that China should urbanize itself to a large extent. We will see a fundamental change in the nature of Chinese consumers: in the number of people who can afford consumer products, and the way that they think about buying products and services. No longer are they just one large army of people with similar clothing styles. This provides major opportunities, still untapped, for global companies that are interested in the Chinese market.
It’s imperative that multinational corporations understand the potential and complexity of China’s markets — in particular the extraordinary growth trajectories of the country’s regional markets. Only then can they develop the distribution networks and understanding of consumer culture that they will need to target their efforts.
S+B: Some observers, such as Paul Krugman, argue that the Chinese government is actually mercantilist: It’s trying to move in directions that benefit its own economy at the expense of the rest of the world.
TSE: I do not see China as a threat to global companies. On some issues, Chinese officials may have a different point of view than their counterparts in other countries. I think that’s only natural. But over the long term, as I said, I expect there to be even more integration between China and the rest of the world, because China can become a stronger global power only by becoming ever more integrated into the global economy.
S+B: How are China’s government-sponsored business initiatives shaping the competitive landscape? For instance, should Boeing and Airbus feel threatened by Chinese competition?
TSE: Threatened is the wrong word — but certainly, just as in a host of other industries, China is building the capacity to have its own globally competitive aerospace industry. And I expect that the duopoly of the last two decades will become a three-way competition, and probably far quicker than most of us expect: say, in the 2020s.
S+B: What do you make of Google’s threat to pull out of China if the government doesn’t stop requiring that it censor the findings on the Chinese version of its website?
TSE: There are industries in China where foreign companies will find it hard to succeed against local businesses with local knowledge, particularly in politically sensitive areas, such as the media and the Internet. Yahoo and eBay both failed to find success in China. And Google has struggled to take market share from the country’s leading search site, Baidu. In my view, part of this story is that Google has decided to concentrate its efforts elsewhere.
S+B: Is China’s mix of top-down government involvement and bottom-up entrepreneurialism unique in history? Or have we seen it elsewhere?
TSE: I think it’s driven by China’s unique history. Before the Communists took over in 1949, the Chinese, frankly, had been fairly disorganized for many years.
At the same time, the Chinese have always been known as good entrepreneurs, and particularly good small-business people. This has been in the blood of the Chinese for who knows how long. In an article I wrote several years ago, called “China’s Five Surprises” [s+b, Winter 2005], I noted the “Why not me?” attitude. Meaning that, in all corners of China, there will be people asking, “If Li Ka-shing [the chairman of Cheung Kong Holdings] can be so wealthy, if Bill Gates or Warren Buffett can be so successful, why not me?” This cuts across China’s demographic profiles: from people in big cities to people in smaller cities or rural areas, from older to younger people. There is a huge dynamism among them.
S+B: How would you sum up the relationship between entrepreneurial China and official China, in a nutshell?
TSE: There are so many contradictory features. You’ve got entrepreneurial people at the grassroots level who are very independent-minded. They’re very quick on their feet. They’re prone to fearless experimentation: imitating other companies here and there, trying new ideas, and then, if they fail, rapidly adapting and moving on.
On the other side, the Chinese government has channeled its efforts deliberately: It has been building good infrastructure across China, enabling companies to do business in a very efficient and effective manner. The Chinese have put in place institutional money — for example, from sovereign wealth funds or pension funds — to channel into the investment community within and outside of China.
S+B: What will China look like in 20 years?
TSE: China will definitely continue to grow. It will increase not only its economic power, but also its geopolitical power in the world. It will be not only a large consumer market, but a strong breeding ground for innovations. Twenty years from now, for a lot of global companies, China will be at the center of their strategies.
I think large multinationals will increasingly have to face this issue. What does China — or, for that matter, China, India, and all so-called emerging markets — mean to them? These companies are coming to realize that they need to integrate more and more of their value chains into China and India. They need to be close to these markets, because of their size. They need the ability to understand the needs of their customers in emerging markets, and turn them into product and service offerings quickly, by having on-the-ground facilities for product development and R&D.
S+B: Which elements of China’s new business culture will be particularly challenging for more established enterprises?
TSE: China’s business culture is built around fast decision making in an environment that often seems opaque. Companies that need to collect a lot of data and analyze it before they can move will clearly be at a disadvantage. The challenge for most Western enterprises therefore is to figure out how their own strengths can be applied in a business environment that moves quickly and produces opportunities overnight, but that is also hard to predict.
- Art Kleiner is editor-in-chief of strategy+business and the author of The Age of Heretics (2nd ed., Jossey-Bass, 2008).