The current wave of China-related business books are primarily written with one of three goals: to explain China’s emergence and its potential impact on the world economy; to show businesspeople how to enter China's economy and sell to its millions of consumers; or to provide guidance to business leaders on how to compete with their emerging Chinese rivals. In other words, they all tell part of the story—but they leave business leaders with an incomplete perspective.
In this book I will try to provide a holistic view of the Chinese business environment, looking at consumers, competitive enterprises, the government, integration with the rest of the world, and the ways these elements interact. I have also laid out a framework that puts together the different, often apparently contradictory, trajectories of China’s future. This framework, which will be explicated in chapter 2, shows how change is taking place in a nonlinear fashion: some factors, such as Chinese entrepreneurship, are expanding exponentially, while others, such as the value of China’s labor arbitrage, may be reaching a plateau.
To make sense of China’s next decade, it is critical to grasp that there is no single driver of the nation’s future. Instead, four very different drivers are pushing the country forward at once, all powerful, and all interacting with each other in unanticipated ways.
The first driver is an aspect of the country’s economy and culture that I call Open China. The emerging potential of China’s consumer markets is well known to outside producers, many of which, like General Motors, have already come to depend on these markets for their profitability. Unlike other leading economies in Asia, including Japan and South Korea, China began opening its markets to foreign companies at the very start of its economic reforms and it has opened them wider ever since.
At the same time, the Chinese people have rapidly advanced as consumers; the wealth created by China’s growth has created a substantial
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middle class. Putting a precise number on the size of this segment of the population remains tricky, but however large it is, China’s current middle class is a mere fraction of what it will become as hundreds of millions more people join its ranks over the next decade. After this honeymoon phase, the Chinese mass market will morph into a vast, highly differentiated and sophisticated, multitiered consumer economy capable of driving growth for Chinese and foreign companies alike. This growth trajectory represents a powerful short-term opportunity for major non-Chinese companies (for example, in helping to develop the country’s retail sector) and a daunting long-term challenge in terms of maintaining market share.
This growth has also created an immense cultural transition from a largely rural country to a nation of cities. In the 1990s many companies had their hopes for China dashed because they were trying to sell urban-oriented products into a market where three-quarters of the people still lived in the countryside. Now around half live in urban areas. By 2020, this share will rise to 60 percent. This shift to an urbanized population means that China’s markets, fundamentally different from ten years ago, will be transformed once again in the next decade. Urbanites need, and buy, fundamentally different types of products and services.
The second driver is Competitive China. Hundreds of thousands of new Chinese companies have made this country the world’s most competitive business environment. Indeed, China is now the world’s largest and fastest-growing source of entrepreneurial start-ups. It is also an incubator for large businesses, both foreign and home grown. Nearly 300,000 foreign-invested businesses have been established in China, vying to tap into the country’s manufacturing base and reach its consumer and business markets.
And China is also becoming an innovation center for foreigners. The best of the world’s companies have come here to transform themselves, gaining experience and capabilities in China that can be applied to their businesses worldwide. Meanwhile, many of China’s leading
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entrepreneurs, like Li Ning, see themselves as natural global competitors. Companies such as the computer maker Lenovo, the white-goods firm Haier, and telecom equipment manufacturers Huawei and the Zhong Xing Telecommunication Equipment Company (ZTE) are building platforms of sufficient scale to take their businesses worldwide. They will be joined, in turn, by hundreds and then thousands more.
During the past fifteen years, global companies went to China pri- marliy to sell or manufacture goods. Over the next decade, international corporate leaders will go to China to integrate this vast market and sourcing hub with their global strategies and operations. Accomplishing this will require enormous leadership skills, within China and outside the country, especially at headquarters level.
Chinese producers will face unprecedented challenges of their own, including the challenge of sustainability. Since 1978, China’s economic growth has been phenomenal, but also extremely inefficient. Driven by huge amounts of investment and fed by China’s huge reservoir of rural labor, the focus has been on volume. But the related waste has been enormous, the environment has suffered, and consumer demand has been a secondary consideration. China’s emphasis will switch toward creating a more efficient economy, as well as a more productive and competitive one. There will be a greater emphasis on demand as the main driver of growth versus investment, and on reducing the resources consumed per unit of output and the environmental impact, while raising technological and managerial standards.
The third driving force is Official China: the shifting direction and role of the government and Communist Party. The government has managed the liberalization of many parts of the economy, but it has maintained control over its strategic direction by retaining ownership of a core group of state-owned enterprises in the finance, communications, energy, resources, and media sectors. Contrary to the hopes of many foreign investors, Official China has no intention of letting go of these industries, and it will maintain tight control over those parts of the economy that it wishes to manage. As it faces the challenges of
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internal complexity and external engagement, it will remain nondem- ocratic while evolving toward a market-driven form of rule that, arguably, has never been seen on the world stage before.
One certainty is that economic liberalization will continue. There is a deep commitment within the government to continuing down the path China has followed for nearly thirty years. Part of the reason is that economic growth is a key foundation of legitimacy for China’s government, and a major guarantor of political and social stability. Further, there is a deep belief that economic liberalization will raise China’s position in the world, not just economically but also in terms of global leadership, reputation, and respect.
Many Chinese officials have internalized this aspiration. They have taken on responsibilities beyond their job descriptions, acting as the guiding hand in the creation of China as a world-leading country. Their interests extend beyond self-enrichment to the creation of national wealth and pride. This has been the motive behind building up the infrastructure necessary to economic development. It also means a longterm commitment to ensuring incremental economic development, as well as a willingness to experiment and collaborate across government agencies and with the private sector.
Evidence of this approach can be seen in the commitment to developing and running the large number of special economic zones that dot the country, especially along the coast. It is also visible in official attempts to prevent the emergence of an oligarchical tycoon class—such as that which dominated Russia in recent years—with a power base of its own independent from the Communist Party.
And it can be seen in the government’s new level of external engagement. Starting in the 1950s, Mao cut China off from most of the world. Deng, when he launched China’s economic reforms in the early 1990s, deliberately downplayed foreign relations, stressing that it was more important to focus on internal challenges. But the export-driven nature of China’s growth means it must have trade relations with almost every country. The need for resources to fuel China’s growth
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means that Chinese companies must source energy and raw materials from wherever they can find them. The Chinese government, like its citizens, has no choice but to reach out to the rest of the world.
And the world has no choice but to reach back. The fourth driving force is the One World in which China, like all other countries, is interdependent as never before. Globally connected power, communications, and transportation links now exist almost everywhere in China. The artifacts of the twenty-first-century global economy—KFC and McDonald’s restaurants, Nokia phones and iPods, England’s Premier League and MTV—are appearing in even the most remote Chinese cities. Although trade disputes, terrorism, and political tensions continue, the global geopolitical community will not go back to Cold War- era rivalries, or to the fragmented nationalism that preceded them. The nature of “one world” and the open, entrepreneurial business culture in China will reinforce each other in unexpected ways. No major player on the world stage can ignore China, and any company active in China will find itself increasingly interdependent with business in other parts of the world.
Of course, global integration remains far from complete. Any serious understanding of the current global economy must recognize the differences between China and the rest of the world, and limits of globalization in general. As Pankaj Ghemawat points out in Redefining Global Strategy, 11 most business activities remain country based, even when they can be conducted across borders. In China, given its size, this holds even more so: regions and provinces retain their distinct identities, with their own cuisines, customs, dialects, and sometimes languages. To use an extreme example, Hong Kong, despite more than a century and a half as an English colony, never ceased being Cantonese.
Together, the four drivers of change in China—Open China, Competitive China, Official China, and One World—will transform the way in which businesses operate everywhere. Managing supply chains, for example, will no longer mean simply seeking low-cost production in
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China, but tapping the country’s engineering and scientific capabilities for leading-edge research and development. Goods that are conceived, designed, and developed in China will be marketed to the rest of the world. Chinese companies, meanwhile, will increasingly go abroad to find new sources of technology and business skills, particularly for innovation, brand building, and access to international finance.