The downside of Chinese entrepreneurship is the vicious cycle of commoditization: its relentless focus on cost reduction heightens the price competition for products and services, which leads to more cost reductions. This has raised questions about the long-term viability of the low- cost strategy. Huawei and China’s other telecommunications equipment buyers may be thriving, but some companies in other industries, such as Changhong (a low-cost television-set maker) and most of the country’s various mobile handset manufacturers are all high-volume, low-margin producers. They either have found or could find themselves struggling as their industries embrace new technologies. The economic fallout from the global financial crisis and recession will also affect the future of China’s companies by weeding out weaker companies, particularly those that depend mainly on recession-hit export markets.
China’s stronger companies will most likely emerge leaner, with larger market shares and better positions on their industry value chains. Some will make overseas acquisitions that will enhance their technological assets, marketing reach, and managerial expertise. Among the world’s industries where a greater Chinese presence can be expected are automotive components, transport equipment, shipbuilding, mining, machinery, and components for computers and other IT products.
These companies will not stop figuring out ways of producing goods more cheaply; that cost pressure will continue. But they will also figure out ways of producing goods more effectively, applying and reapplying the lessons they have learned. Witness the success of Haier, which has figured out how to sell niche goods 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.
An increasing number of Chinese entrepreneurs recognize the importance of building their own brands and moving up their industry value chains. This phenomenon is most prevalent in hotly contested sectors where there is no or little government protection. In the apparel
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industry, for instance, Chinese brands such as Metersbonwe, Semir, and Bosideng are leaders. In the sporting goods sector, Li Ning, Dongx- iang, Anta, and 361 Degrees are major brands. In the automotive sector, many Chinese manufacturers have pursued their own brand strategies. One example is BYD. Another is the Shanghai Automotive Industry Corporation (SAIC), whose Roewe brand is targeted to the mid- to high-end sectors. Other automotive makers such as Chery, Geely, Great Wall, Changan, Dongfeng, and First Auto Works are all pursuing their own brand strategies.
The net effect will be the creation of a new Chinese business culture. This culture is very different from that of America, Europe, and Japan, or even of Hong Kong, Taiwan, and the overseas Chinese communities of southeast Asia. It is simultaneously developing in two directions: a “Westernized” direction, which is absorbing the management techniques of multinational companies, and a more “Chinese” direction, which draws on the characteristics of the local environments. China’s new business culture features these core traits:
1. Bursts of entrepreneurship when opportunities present themselves. The Chinese business culture is highly risk-tolerant. Having risen so far so fast, often making decisions when there is little information to gauge the likely success of a venture, and consequently finding their hunches were accurate, many companies are happy to continue operating in such a rough-and- ready manner.
2. An emphasis on speed. Planning and evaluation have their roles, but they are subordinate to the need for fast decisions and immediate action. This culture doesn’t let practices get bogged down in bureaucracy.
3. A preference for imitation and experimentation over innovation, with an emphasis on cycles of imitation, adaptation, and testing, which iterated repeatedly can move a company a long way from its original business model. Ultimately, this approach can gener-
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ate a significant number of breakthrough products and business models.
4. A “good enough will do for now” attitude. This culture embodies the premise that products and processes can always be improved in the next cycle of change, and again, in the one after that.
5. Acceptance of “the Confucius inside.” This is a culture of obedience within an accepted hierarchy in which top-down directives predominate, corporate outlooks are shaped by a single leader, and there is little or no debate at team level.
6. A “why not me?” view of success. This culture believes that individuals can succeed as entrepreneurs if given the opportunity, and that they can be as good, if not better, than those from anywhere else in the world.
At least for the moment, this culture serves Chinese companies well. And in part, it has worked because of the country’s unprecedented economic growth; the Chinese have their own version of the saying “A rising tide lifts all boats.” By moving rapidly, testing and experimenting, endlessly looking for new entrepreneurial opportunities, and producing goods that were just good enough to meet customers’ needs and expectations, companies found they could thrive. Product quality was often poor, and most businesses lacked the time, knowledge, or resources to excel. Nevertheless, their “rough-and- tough” management style (known in Chinese as cu fang xing guanli) met the requirements of China’s rapid market development and loose regulatory environment.
But this won’t be sufficient to succeed in the future. It will eventually prove unsuitable for the global competitive landscape—and even for the Chinese business environment as it changes. Some Chinese business leaders are aware of this. They know that their companies can’t continue along the same development path that has served them to date: markets are larger but far more open; consumers are wealthier but presented with an ever greater choice of goods and brands; and
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investment in infrastructure means that increasing numbers of competitors can reach into their markets.
Accordingly, these leaders recognize the need to improve their management capabilities and corporate governance, often radically rather than incrementally. Some are responding with redoubled efforts to produce whatever they make even more cheaply—by adding scale, by looking for ways to reduce costs still further, by searching for new markets both overseas and at home. Others are asking themselves whether a reliance on low costs alone is still viable, and if so, for how long. They want to do things differently, but wonder whether they can find the resources to develop the innovation skills needed to move up the value chain or find other ways to develop new, sustainable competitive advantages. Increasingly, they understand the importance of greater precision in management: specifically, the use of analysis and data to support decision making.
A case in point is Hengan, a very successful consumer company headquartered in Jinjiang in the southern part of Fujian Province. Established in 1985 and listed in Hong Kong in 1998, Hengan has become China’s number-one player in the high-end tissue paper market and the number-two player in the sanitary napkin market. It is ahead of other multinational competitors such as APP, Kimberly-Clark, and Unicharm. Having a stated ambition of becoming an Rmb 10 billion ($1.5 billion) company in revenues, Hengan had already achieved Rmb 7 billion in 2008. By that time, its CEO, Xu Lianjie, had already led his company through two strategic transformations.
The first took place in 2001. While the company’s senior management team was still basking in the glory of Hengan’s Hong Kong listing and enjoying 10 percent annual growth, Xu became worried about the mismatch between his company’s growing scale and the structure of its management system. Over the next eighteen months, he restructured most of Hengan’s operating processes using total-cycle time techniques, which few, if any, other Chinese enterprises had adopted at that time. The outcome was a set of significant benefits in working practices that
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ENTREPRENEURIAL CHINA
saw revenue growth jump from around 10 percent annually to 37 percent between 2003 and 2008, while profit growth averaged 36 percent.
In 2008, when most Hengan staff were once again anticipating another prosperous year, Xu turned his attention to strategic planning and supply-chain management. To maintain the company’s growth rate he initiated a “second transformation,” working with external consultants to develop new management systems for strategy and operations. Still in progress, this program includes a focus on installing systematic methods for identifying new growth opportunities.
As this story suggests, the leaders of China’s most energetic companies, both state owned and private, are driven by lofty ambitions. They don’t just want their companies to survive, or even just to grow and be profitable—they want them to achieve world-class status—and in the shortest possible time. They have seen this happen with companies such as Huawei, Haier, and to some extent, Lenovo, and many of them want to do the same. They may not fully understand all of the details and ramifications of what it means to be “world class,” and what might be required to attain such status, but they will embrace any feasible change that will help them reach it.
A growing number of Chinese business leaders and entrepreneurs, like Xu Lianjie, recognize the shortcomings of their current business strategies and are all too aware that their current core competencies cannot help them sustain growth in the long run. They are more than willing to apply international best practices, even if that means having to change their own established ways of doing things. They are eager to learn about all the latest business and technology trends. Management books are enormously popular in China, usually displayed prominently in bookstores. Translations of Jack Welch’s autobiography, Jim Collins’s studies of successful companies, and other management classics are all long-standing bestsellers.
Chinese enterprise executives often talk about yuguojijiegui, adopting global business practices and establishing a stronger link to the outside world. At the same time, Chinese business leaders recognize that
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China is and will remain somewhat distinctive. They are cautious about transplanting Western practices wholesale to the Chinese enterprise environment without any revision or adaptation.
If the challenge for Chinese companies is to become more global while retaining the strengths they developed at home, for multinationals the challenge is to become more Chinese while drawing on the advantages of their worldwide operations. The multinationals that have performed best in China have embraced the same qualities that have led domestic companies to success: entrepreneurship, experimentation, ambition, openness to alliances, attention to emerging markets, and—above all—an ability to move fast when they spot opportunities.
Successful multinationals will be entrepreneurial in drawing on the resources China offers: moving more elements of their value chains into China; looking for further advantages in its manufacturing industries, and the supply-chain networks that support them; exploring the potential for partnerships and R&D; and, of course, penetrating new markets as they emerge and grow across the country. In short, the most profitable companies may be those that mix the practices of entrepreneurial China with those of the world’s best multinationals—a new China strategy.
CHAPTER 4