I i Ning is one of China’s most instantly recognizable faces. He shot -/to fame in 1984, winning six medals in gymnastics competitions at the Los Angeles Olympics, three of them gold. Since then, he has remained in the spotlight by becoming one of the country’s most successful businessmen as the owner of China’s largest sportswear company. The eponymous Li Ning brand has more than 7,550 retail outlets across the country and annual sales of more than $980 million.
The Li Ning Company Limited is still tiny compared with Nike and Adidas, whose global revenues in 2008 were $18.6 billion and $15.9 billion respectively. But Li Ning’s growth is faster; its global marketing, still in the beginning stages, includes sponsorships of major league basketball in the United States, Argentina, and Spain. 1
Then the 2008 Olympics went to Beijing. Li Ning was chosen to light the torch at the opening ceremonies in Beijing’s Bird Nest stadium, in front of a television audience of more than a billion viewers. The moment must have been particularly difficult for Adidas, which had spent a quarter of a billion dollars on Olympic sponsorships and marketing during the run-up to the games. Suddenly, here was not j ust one of China’s most famous former Olympic gold medalists, but one
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of their leading business rivals—and a living symbol of the intent, ambition, and competitive spirit of Chinese enterprise. In a handful of seconds, he stole the show from his Western competitors.
China has hundreds of thousands of Li Nings: entrepreneurs who have driven one of the fastest sustained national economic growth rates of any country in world history. They may not all be as successful as Li. But after decades of being held back by their country’s adoption of socialism, they and the rest of the Chinese population are moving forward with the force of water gushing from a broken dam. The intensity of their aspirations, joined with the plans of the government and the presence of the country’s hundreds of millions of ordinary people, suggests that future developments in China will overshadow even the momentous changes of the recent past—and in a way that affects the strategy, and even the identity, of companies around the world.
Indications of China’s new identity are everywhere. They were evident in the enormous haul of gold medals that Chinese athletes won at the 2008 Olympics. They are also evident in the stunning modern architecture of Beijing, Shanghai, and other cities; the cornucopia of products that fills the shops and stores of China’s cities; in the country’s Internet and mobile-phone user bases, both the largest of any nation; and in the market capitalization of Industrial and Commercial Bank of China, the world’s most valuable bank. Perhaps the most significant indicator is the increasing presence of China’s investment and business presence in every other major region, from Africa to Europe to the Indian subcontinent to the Americas. This wave of energy and entrepreneurship is changing the world, but its impact has just begun to be felt, and it is still often misunderstood, both by foreigners and by China’s own people.
A large number of businesspeople have gained experience in China in the last decade. They believe they understand how to operate there, and they have built their business models on expectations of a relatively stable, coherent, expanding future for their Chinese operations.
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But the intensity and scale of change in China means that all businesses, even those that are currently successful, will find themselves inadequately prepared for the turmoil and dynamism to come. And if they aren’t prepared for the new China emerging today, their companies are likely to falter. They will not just miss out on the opportunities in this economy; they will be pushed aside by rivals, old and new, that use China to transform their competitive position.
For in the world’s fastest-growing economy, the experience of the last ten years will not be the best guide to the next ten years. Business leaders around the world who want to be successful—not just in China, but anywhere—will need a new China strategy.
A new China strategy does not merely mean a set of plans for doing business in China. Most large companies are already selling to China’s markets and competing against Chinese companies. Many more, even relatively small enterprises, will join them. But a true China strategy is different. It is a one world strategy: a long-range developmental plan for doing business as a global enterprise in which China is a central and integrated component, in a world where China plays a very different role than it has in the past.
Corporate leaders who see China as a large but still-emerging market must come to see it as a diverse and immense group of global consumers. Those who see Chinese companies as partners in joint ventures must come to see those companies as active, highly capable global competitors. And those who see the Chinese government as simultaneously welcoming and opaque must come to see it as an active, increasingly open player on the global stage. In other words, they must see this country in the same way that the corporate leaders of the late nineteenth century saw the still-emerging United States of America.
Changing this paradigm, and seeing the Chinese market and government in this new light, will not be easy. It will feel unfamiliar and challenging for many companies, even those that have operated successfully in China over the past ten years. The Chinese themselves have only just started digesting the implications of the changes they are
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going through. Having experienced such rapid growth, they are now looking at its impact—managing the effect on its environment and figuring out what sort of companies should be fostered and which discouraged. They are also trying to ensure that the wealth being created benefits more than the coastal rim of the nation, that workers interests are protected, and that companies and industries can move up the value chain.
As for multinational companies—or “foreign” companies, as the Chinese think of them—they still have a lot to learn about China itself. As the country matures and becomes more integrated with the outside world, more of its context becomes visible: its diverse markets and demographics, policies and regulations, cultures and tastes. Accessible as China has proved itself in the last two decades, it remains a country whose distinctive characteristics both create opportunities for businesses and constrain them.
Some companies appreciate this already. IBM’s quest to become a “globally integrated enterprise,” in large part through an expanded Chinese presence, is explored later in this book. But too many have yet to acquire the degree of sophistication necessary to appreciate both where potential may lie and the nature of the problems likely to be encountered in realizing it. On the plus side, most have abandoned the very worst simplicities, epitomized by the meaningless but often repeated phrase “a market of 1.3 billion.” Yet there remains a widespread tendency to underestimate both the complexity that exists already and the increasingly broad range of opportunities the country offers for companies seeking to enhance their global as well as their Chinese competitiveness.
Very few leaders in the West were prepared for the speed of economic recovery in China in 2009. Even now, few are prepared for the way in
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THE COUNTRY THAT CANNOT BE IGNORED
which China (along with a few other Asian nations) will provide an engine for the global economy going forward. In the first nine months of 2009, automobile sales in China rose to 9.66 million units, up 34 percent from the year before—and at a time when worldwide vehicle sales were falling. In September 2009, net profits for the top five hundred companies reached $170.6 billion, exceeding for the first time the monthly net profits ($98.9 billion) reported by the top five hundred companies in the United States. 2
To be sure, numbers like these result in part from the enormous investment made by the Chinese government in economic stimulus after the economic crisis began; but they also reflect the fundamental growth potential of the Chinese market, the resilience and energy of its entrepreneurs, and the determination and flexibility of its government. Most important, they demonstrate how rapidly the Chinese economy continues to evolve.
Every major dimension of China will be different during the next decade than it was through most of the 2000s. New leading companies will emerge; the appetites and tastes of consumers will shift; and China’s government will pursue priorities that are very different from the priorities of the reform program that Deng Xiaoping launched in 1978. Much of this change is still uncertain. Most specific predictions are unreliable, because the country is on a nonlinear trajectory that is generating enormous, discontinuous change.
But it is possible to define and track the two major forces—scale and intensity—that have given China its unique power and position today. No other country, not even India, has these two factors in such potent combination.
China’s scale, of course, stems from the size of its population: with 1.3 billion people, it is larger than any other country in the world. (India has 1.1 billion.) Although it is a highly diverse population, it is also remarkably coherent for its size. The Han people make up 92 percent of China’s population, and while they speak an enormous range of dialects and variations, they share a single written language and almost
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everyone can speak the official spoken language, Putonghua. Thus, anything that happens in China is magnified by its immense demographics, making the Chinese influential, even when they prefer to be obscure. This scale helps to explain why many international companies will continue to be active in China, no matter what else happens. Success in China, either for a local entrepreneur or a global multinational, is enough to transform a company’s performance worldwide. For international firms, a Chinese presence allows them to expand their reach to one-fifth of the world’s population. For domestic companies, it provides a base more than large enough to generate the scale needed for sustained success; for some, even an assault on overseas markets. Most companies will continue to be drawn to the Chinese economy, which grew at around 10 percent annually for three decades, and which may plausibly return to that rate as it continues to recover from the 2008 recession.
Within a few decades, China’s economy will replace the United States’ as the world’s largest. Exactly when this will happen depends on a range of variables, among them exchange rate fluctuations. But regardless of the exact date, one of the safer predictions for the first half of the twenty-first century is that China’s growth, supported by that of India and several other countries, will make Asia the source of more than half the world’s gross domestic product by around 2030— up from less than one-fifth in 1950, and one-quarter in 1973. 3 This represents an overall shift in the center of the world’s economic gravity, the likes of which has not been seen since the industrial revolution powered the West’s rise to economic preeminence just over two centuries ago. Even a widespread return to trade protectionism would not derail this outcome.
China’s intensity—the ferocious entrepreneurial energy and productivity emerging in every part of this country—will have even greater impact than its scale. This intensity stems in part from the deep-seated desire of the Chinese people to regain their historical primacy, taking back what they see as China’s rightful place on the world
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stage. Even the vigor and entrepreneurial activity of India will not match that of China, at least for the next decade.
Beginning in the early 1800s, after the Qing dynasty had passed its peak, China experienced a period of technological and economic stagnation. Mao Zedong’s revolution, culminating in the Communist Party’s rise to power in 1949, ended a long period of civil war and foreign intervention, but the central planning that followed was an economic disaster, especially during the Cultural Revolution of 1966-1976. Although that period of extreme authoritarianism came to an end with Mao’s death in 1976 and the ascension to power of Deng Xiaoping two years later, it took two more decades to clear the ground and lay the foundations for China’s economic reemergence.
Only in 1992, when Deng Xiaoping made his now-famous “southern visit” to the city of Shenzhen, was the current wave of economic momentum unleashed. By then, the pressure of pent-up economic demand and ambition had been building for a long time. And it did not abate during the first few years of economic growth; it only became stronger. After growing up in a value system built on two ideas—“Life is good under communism” and the Confucian edict “Acceptable behavior is determined by the authority of the parent, boss, and leader”—Chinese businesspeople are now questioning the efficacy of those values.
Today, there is one question in the mind of every fledgling entrepreneur in the high-tech start-ups of Beijing’s Zhongguancun neighborhood, the private factories of Wenzhou on the Zhejiang coast south of Shanghai, the manufacturers of Dongguan just north of Hong Kong, and dozens of other Chinese business centers: “Why not me?” These young Chinese businesspeople see the rewards of success all around them. They are driven by materialistic desires, eager to catch up with the rest of the world, and almost giddy with a sense of multiplying opportunity. They have read Internet chronicles of the triumphs of Amazon, Google, and Facebook, and in navigating the economic crisis of 2008-2009, they have become well aware of their country’s economic
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strength. They see themselves as the creators of the world’s future In- tels, Apples, and Microsofts, and some of them undoubtedly will be.
Since the early 2000s, this intensity has produced the China that the world sees today. It is almost certain to continue and accelerate. Its force and volatility explains why China’s future is unpredictable, and why many foreign (non-Chinese) companies may experience a bumpier ride than they expect.
Another factor has tempered China’s growth and helped to ensure its viability in the long run. The nation’s economy has been thoroughly restructured during the past decades. China has achieved a level of flexibility and competitiveness far greater than it had in the mid-1990s.
The principal change in China’s restructuring has been the elimination of most of its centrally planned, state-controlled economy. State- owned enterprises (SOEs) remain, but these are stripped-down versions of the dinosaurs of a decade ago. The largest and most important of them—including China Mobile, the leading mobile-communications operator, and China Petroleum & Chemical Corporation, an oil and gas giant—are tightly managed and for the most part profitable. Outside of these companies, a Chinese economy has sprung up with a large and growing number of privately owned smaller companies, supplemented by a small but disproportionately influential group of foreign-invested businesses. In this economy, prices for most goods and services are set by the market. The labor force is flexible, increasingly well educated, and continually improving its skills.
The Chinese banking system has also been reorganized and, in the process, shed all but a tiny portion of its nonperforming loans. A decade ago, China’s financial infrastructure was a mess, with a technically insolvent banking sector weighed down with nonperforming loans to SOEs. By the second half of 2009, however, China had the world’s
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largest foreign currency reserves at just over $2 trillion. It was the world’s largest holder of U.S. Treasury bonds, valued at $801.5 billion in May 2009. 4 And as I noted earlier, the world’s largest bank (measured by market capitalization) was the Industrial and Commercial Bank of China. Similarly, China’s trading status has risen from negligible to that of a world leader: its imports and exports are the equivalent of about 60 percent of gross domestic product (GDP). 5 In the United States and Japan, they account for about 25 percent of GDP.
The liberalization of China’s economy has involved an extraordinary expansion of infrastructure: airports, sea ports, power stations, mobile and fixed-line telecom networks, expressways, and railroad lines, almost all of which have been developed to world standards and beyond. Beijing’s new airport, built for the Olympics, has received widespread media attention, but it is just one of countless achievements over the past decade. Among them are the world’s highest-altitude railway, running 714 miles to the Tibetan capital, Lhasa, and built at a cost of $3.5 billion; the Yangshan deep-water port, constructed more than 18 miles offshore at a cost of $12.5 billion, which has made nearby Shanghai the world’s busiest cargo destination; and one of the world’s fastest railways, the maglev in Shanghai, with a top speed of almost 270 miles per hour. 6 This is a part of China’s ambitious $300 billion cross-country high-speed railroad-building program.
China’s reform era has also produced a string of glittering twenty- first-century metropolises, each with a population in the millions. Shanghai is the most famous of these, with its magnificent skyline, ultrachic restaurants and nightlife, and a population of more than 14 million people. Surrounding it in the Yangtze River Delta are a host of other rapidly developing urban centers, including Suzhou, Hangzhou, Nanjing, Ningbo, and Wuxi, each with its own unique history. Together, they are home to burgeoning electronics, chemical, semiconductor, automotive, and software industries.
In the south, the Pearl River Delta in the Guangdong province produces about 30 percent of China’s total exports. Also in this province,
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on the border with Hong Kong, is Shenzhen, China’s biggest boom- town, with a population that has grown from less than 100,000 in 1979 to more than 10 million today. In the northeast is Dalian, which has long been favored by Japanese corporations. Tianjin, a port city just sixty-eight miles of expressway from Beijing and the leading industrial center in northern China, is home to Motorola’s multibillion-dollar mobile-phone operation and one of Toyota’s two principal China plants and is a focal area of development by the Chinese central government. A little farther down the coast lies Qingdao, famous for its beer, but also home to northern China’s busiest port. Like all the other cities of the Shandong peninsula, it is very popular with South Korean companies. Below Shanghai are the provinces of Zhejiang, the heartland of privately owned business in China and home to legions of the country’s entrepreneurs, and Fujian, opposite Taiwan, whose growth will inevitably surge now that there are direct transportation links between the island and China’s mainland.
Along the length of China’s 11,000 miles of coastline, the story is the same—cities with highly dynamic economies, home to the vast majority of China’s middle class, packed with goods to buy, and host to tens of thousands of new companies, most of them privately owned. Most of these cities have new airports; they are all linked to each other via expressways, and are governed by officials who are eager to attract as much new business as they can.
The driver of all this growth has been the interrelationship and interplay between China’s market liberalization and its positioning as a key part of the global value chain for an ever greater number of companies. Hence one core theme of this book: to flourish over the next decade and beyond, multinational companies must formulate strategies that can integrate the business implications of China’s market liberalization into their global value chains. And if they hope to succeed in this, they must understand not just the China of the past twenty years, but also the forces that will change this country as it moves forward.
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The scale and intensity of the Chinese economy was not diminished by the global economic crisis of 2008 to any long-lasting extent. At first, the manufacturing sector was hurt badly by the decline in demand for China’s exports, particularly from the developed world. And like the United States, China recovered in part through a massive government stimulus—almost $600 billion, announced in November 2008 and put into play rapidly. But unlike the United States, where the recession marked the end of an era of growth built on unsustainable practices (especially in the financial sector), the downturn caused only a temporary hiatus in China’s growth; annualized growth shrank to 2 percent in the winter but was heading back toward 8 percent by July. By October, the Chinese recovery was generally recognized as under way; overall GDP growth for the year was expected to be between 7 and 8 percent. 7
Moreover, the recession enhanced the position of Chinese companies and their relationships with overseas enterprises. By September, Wang Jiming, the vice president of the Chinese Enterprise Confederation (the preeminent Chinese association of business leaders), was able to say that Chinese companies were not as vulnerable to the crisis as their American counterparts. 8
The reason for this robustness had to do with fundamentals: China had rid itself of most of the structural rigidities inherited from socialism, its national productivity was rising, and its economy was beginning to develop its own consumer base.
The stimulus itself was deliberately designed to improve these fundamentals: as New Republic writer Zachary Karabell put it, “Within a few months, money was being put to work—primarily on infrastructure projects in the interior of the country, but also on . . . measures such as handing out pre-paid cards to encourage consumer spending . . . The central government also mandated ... a more open approach to lending . .. The stimulus accelerated the long-term goal of
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the Beijing government to focus more on internal demand and interior development and less on export-driven activity.” 9
In retrospect, the primary cause of slowing economic growth within China can in large part be attributed to the overheated nature of its own real estate and construction sectors. As property prices fell sharply through 2008, demand from the construction industry for steel, cement, and other industrial products dropped sharply, and the government responded with an investment-driven stimulus package. In effect, China slowed down to take a breath and shed some of the extra capacity that built up during a run of unprecedented growth stretching from the late 1990s to early 2008. The economic slowdown may have helped accelerate this process by stimulating a much-needed round of consolidation across many of the country’s industries.
The next five to ten 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. Over the next five years, while American automakers are still fixing 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 plan growth strategies built on international expansion. And while American and European telecommunications equipment makers are downsizing and restructuring, their Chinese competitors will be claiming a larger share of international markets.
Of course, 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. Outbound investment by Chinese companies has been rising rapidly— from around $5 billion in 2004 to $27 billion in 2007, then almost doubling to $52 billion in 2008. 10
It is easy to overstate the extent to which the Chinese people feel they are sharing a national mission, especially in the aftermath of an
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economic crisis. But it is no exaggeration to say that for the majority of Chinese, national identity is an important factor in determining their actions and in their acquiescence to their country’s political system. After falling steadily and further behind the West during the nineteenth and twentieth centuries and having endured so much internecine conflict, the country is rediscovering a sense of national pride. The Chinese reaction to the Olympics and the importance attached to hosting the games makes this very clear.
The Chinese also display a striking amount of openness in their current national character: manifest, for example, in their willingness to embrace new ideas and technologies. This is easier to understand when you consider that since the early twentieth century, the Chinese people have weathered relentless upheaval. As recently as the mid- 1990s, the closure of tens of thousands of state-owned enterprises led to the layoffs of tens of millions of workers. The growth of China’s export manufacturing sector led to the migration of more than a hundred million country dwellers from the poor central and inland regions to the coastal manufacturing centers. The Chinese learned that they could take this change in stride and life would improve.
As a consequence, the closed attitude of the isolated Celestial Empire that the West confronted two centuries ago is evolving into a national mindset that wants to mix with the outside world, and expects that outsiders will recognize their achievements. That’s why hosting the Olympics was so symbolically important.
There is a historical precedent for this evolving worldview. It was prominent in China during the Tang Dynasty, which spanned nearly three hundred years from the seventh to tenth centuries. That, too, was a time of great commerce and cosmopolitan openness. It was the golden era of the Silk Road, China’s link to central Asia, the Middle East, and Europe. Maritime trade flourished, with Chinese ships sailing as far as the Persian Gulf, Red Sea, and Africa. Trade with Japan and Korea was extensive, and Arab and Persian merchants established outposts in China, especially in Guangzhou. Thousands of foreigners lived
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in the country, and its capital, Chang’an (now Xi’an), was the world’s largest city. There was a vibrant mix of religious and philosophical ideas; Buddhism flourished alongside Taoism and Confucianism. Culture flourished, too; this was the period of China’s greatest poets. There was also an explosion of technology and innovation, with woodblock printing contributing to the advancement of medicine, geography, cartography, mechanics, horology, and engineering.
The current era is also one of openness to new ideas. China’s economic reforms since 1990 have been launched with a strong focus on technological innovation. One of the core goals has been the acquisition of technology and expertise, and the results can be seen in everything from China’s space and nuclear power programs to its telecommunications and computing prowess. This effort also laid the foundations for a whole series of “pillar” industries (as the most fundamental business-enabling sectors are called in China), including automobiles, telecommunications equipment, electronics, semiconductors, nuclear power, aerospace, and specialty chemicals. And the government continues to emphasize the need to gain the skills and know-how that will be required to prosper as the global economy becomes more and more knowledge based.
In the process of transforming its economy, China is also transforming the characteristics of its national leadership, in business and government. Few observers have recognized the way in which a leadership once characterized as old, conservative, and inward looking has advanced. For example, some of the most leading-edge communication, transportation, and energy technologies have been brought into play with a boldness that beggars belief.
And it is transforming its global presence as well. During the Tang Dynasty and for centuries thereafter, China saw itself as at the heart of the world. Then it was isolated. Now China sees itself as interconnected with the rest of the world. Any business with aspirations to global competitiveness must adopt a mindset that matches that of the Chinese in terms of openness and willingness to embrace the unfamiliar.
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