Leaders of multinational companies may understand the need to do business in China, but few of them grasp the impact China will have on their operations in the rest of the world as China becomes integrated into the world economy. China is still typically viewed as a place “out there,” a stand-alone location isolated from other aspects of global business.
That will change. While it is impossible to forecast exactly what changes will occur, it is possible to discern some key trends that will affect the restructuring of global companies.
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One trend is the impact of innovation. As Chinese R&D becomes an ever richer source of new practices and knowledge, companies from around the world will draw upon the talent and innovations being realized in China. They will monitor the growing number of Chinese corporate research labs, particularly developments in their manufacturing and manufacturing-related skills.
The Chinese government’s funding of research in key technology areas such as aerospace and information technology will also be a factor. China has already received more than two hundred orders for a 70- to 110-seat regional aircraft, the ARJ-21, being developed by a subsidiary of the state-owned Aviation Industry Corporation of China (AVIC). And in September 2009, AVIC unveiled its C919 commercial aircraft: the single-aisle plane is scheduled to make its first flight in 2014, be in commercial use by 2016, and compete directly with planes under development by Boeing and Airbus. 8 Inevitably, some of those innovations will migrate into competitor’s designs.
Indeed, that migration is a perennial aspect of technological advance: it tends to break down borders. During the past twenty years, technological innovation has leaked from multinational companies to Chinese producers. Now, it is beginning to flow in the other direction. For example, Motorola, Alcatel-Lucent, Intel, and other leading IT and telecommunications equipment companies all have research and development operations in China, employing the same pool of technology graduates who constitute the core research staff at Huawei and other Chinese telecom equipment makers.
Another trend is the scale and speed of value-chain growth as it spreads from China to the rest of the world. The networks of manufacturers and suppliers within China have grown; they include not just Chinese companies, but companies from elsewhere operating in China and foreign companies funded by Chinese investment.
This expansion of value chains from China to the rest of the world will be further reinforced by the growth of China’s own markets. As more companies produce goods and services for the Chinese domestic
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ONE WORLD
market, they will integrate their China operations with their global value chains. This combination of a market and value chain in a single country is unique; mastery of both will give companies advantages that can be taken worldwide. No other country is like China in this combination, and nowhere has it ever before been necessary to be involved like this.
As this trend develops, competition among value chains rather than just among companies will become increasingly important. For a company such as Dell or Lenovo, at the “dragon head” of a value chain, overseeing the migration and management of their suppliers and key customers will become of even more importance than it is now. And companies within a value chain will have an even greater incentive to ensure they maintain their position and the overall success of the lead company and its brands.
These value chains will increasingly be multinational themselves, bringing together companies from China and other countries in unprecedented networks of businesses that cross national lines. Whether such an intermingling would lead to less national rivalry is hard to foresee, but it is hard to envisage this level of global integration existing without an impact on international relations. Politically, China and the United States may be rivals, but the relationship between the two (and between China and Europe) will be very different from the Cold War confrontation between the West and the Soviet Union. That was a zero-sum game—if one side won, the other lost—with no integration between the two sides. China’s relationship with the West and other countries will be very different because of their unprecedented integration in the global economy.
These two trends—the increase in R&D and the further development of global value chains—favor what might be called “one world companies”: international enterprises that can combine the best elements of international and Chinese operations in unified value chains, with each element—from research and development, through manufacturing and its attendant functions of sourcing and procurement, to
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distribution and marketing—in the most appropriate place for wherever they can find or create a market.
A growing number of these one world companies will be Chinese in origin. Moreover, China will play a disproportionate role in the development of one world companies, regardless of their country of origin. They will all have in common an ability to take advantage of the growth in scale of China’s markets, of its growing dominance of various parts of the value chain for many goods, of its pools of expertise and talent, and of its integration into global communications and transport networks.
Companies with one world status will take advantage of the strengths of each major region. The United States will remain a giant consumer market, the financial crisis notwithstanding, and the source of other functions such as R&D and management innovation. Europe will also be a powerful market, although it is less dynamic than America. Japanese manufacturers will be a formidable force for decades to come, but Japan’s preoccupations will be internal rather than international in the coming decades, as it tackles the issue of managing a graying population. India will be a significant market and source of business, particularly in software and services, but it will not come close to China as a market or production base for some years. It has yet to show a potential for evolving the sort of manufacturing sector that China developed in the 1980s and 1990s; this will make it less attractive to networks of suppliers. And it shows no sign of being able to match the kind of investment China has made in infrastructure that could lead to a comparable influx of investment.
China won’t be the best place for everything. Some industries will remain impossible to migrate to China. For example, as long as China maintains an unconvertible currency, global financial institutions cannot conduct full-scale cross-border business from China. Telecommunications services, closed in China to foreign participation, will have natural constraints around global development. Some industries, such as the motor vehicles industry, have to maintain production locations
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around the world; these will continue to be based around several key production nodes in the world’s largest markets. Comparative advantage will also be a factor: Chinese businesses will eschew enterprises that do not bring them sufficient returns. At the same time, many entire industries, like aircraft manufacturing, will establish a Chinese presence with dramatic speed and thus become global in a new way.