The China Strategy draws on my experience from nearly two decades of working with business leaders in the country. I have worked with hundreds of global companies seeking to establish manufacturing or sourcing bases and penetrate the country’s markets, and an equal number of Chinese companies aspiring to develop their management capabilities and go overseas. Being born in Hong Kong, then educated in the United States, has put me in the fortunate position of being able to incorporate insights from both management cultures. As a child and young adult, I was always interested in Chinese and world history, and after working in China, I began to study Chinese business history going back several centuries, in an effort to learn about the country’s deeper commercial traditions and values. As a senior partner in Booz & Company and as the firm’s chairman for Greater China, I can confirm that the business models and approaches in this book are practical; they have been developed and tested in work with many foreign and domestic companies, and found to meet the specific demands of a wide range of sectors and industries.
This book provides a series of frameworks that businesses can use to succeed in China. While case studies are used to illustrate key points, it is important to grasp the overall themes. Extrapolating from a small number of points to draw conclusions is always rash. Unfortunately,
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that is what many do when it comes to dealing with China—hence the willingness of observers to declare China to be everything from on the brink of collapse to the next superpower. Worse still, when things do not turn out as predicted on the basis of a handful of data points, China is declared to be incomprehensible.
What is needed instead is a sufficiently holistic picture of China— the Chinese context—that can explain what is happening and identify the driving forces determining its future. This is particularly important for corporate leaders. They need to know which elements of the vast amount of information and data on Chinese markets, customers, and competitors are relevant to their industry and must be monitored, and which they can safely ignore. Given China’s size, knowledge will always be incomplete, meaning that executives must be aware of both what they know and what they do not know. In this way, when any major decision is taken, risk can be more accurately assessed.
My starting point for thinking about these issues was the early 1990s, shortly after I started practicing consulting in China. One of my first assignments was helping an American snack-food company that wanted to enter the Chinese market. Together, we looked at its competitors and their products. In addition to other international snack-food makers, there were Chinese, Taiwanese, Hong Kong, Singaporean, and Malaysian competitors. In short, although the market was nascent, there was already a phenomenal number of rivals to contend with. Clearly, China had already passed the stage where an outside company could easily enter, find a partner to help it get established, and expect a free run at the market.
It struck me that the Chinese government played a very small role in saying what companies could or could not do. There were no rules insisting that foreign companies had to have local partners, or restrictions on what could or could not be sold, as long as they complied with baisc practices for health and hygiene.
This was very different from what I had expected. During my years away, I had often heard that running any business in China was a
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THE COUNTRY THAT CANNOT BE IGNORED
nightmare. The key to any kind of progress was guanxi , the Chinese word for connections. Yet here was a totally contradictory example: what business people needed was a good product, strong marketing and brand strategies, the ability to distribute goods, and a sound understanding of local consumers; officials were nowhere in sight. True, success would require coping with ferocious competition, but the nature of the challenge was broadly similar to that which would face a snack-food company anywhere in the world.
Unfortunately, when I tried to have a telephone installed in my office, I found myself confronted with a very different China. Not only was the installation fee huge, but the whole process took six months. The service was awful and support was nonexistent. The main reason for this was that China’s only telecommunications operator then was not even a company, but an arm of what was at that time called the Ministry of Posts and Telecommunications. Immune from competition, unaccountable to consumers, and without the need to make profits, it could safely ignore the needs of businesspeople coming in from overseas (and Chinese businesspeople as well).
So there I was, struggling to reconcile these two very different impressions. On the one hand I saw a place with a very open, highly competitive consumer goods sector, where international companies had to bring their top people and best-in-class capabilities to succeed. And on the other hand I saw a totally closed, rigidly controlled telecommunications sector, with just one player, whose products and services were poor and expensive.
Later, as I was increasingly invited to conferences around the world to talk about China, I realized that it made no sense to talk about what was going on there as a series of isolated cases or examples. I had to put what was happening into a framework that could explain these apparent contradictions. My attention focused on two key trends: the government’s ongoing deregulation of sector after sector of the economy and the way in which multinational companies were beginning to move more elements of their value chains to China. From these I
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developed the conceptual frameworks —product market freedom and value-chain migration —that linked internal changes in China with the arrival of foreign multinationals from around the world.
The frameworks, and the four driving forces that underlie change in China, have helped me and many others grasp the overall context of this country and its implications for particular businesses. With an understanding of these dynamics, corporate leaders can position themselves not just to succeed in China, but to be part of the great renaissance now unfolding there—a renaissance that will change the world.
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CHAPTER 2