月份：2014年9月

Ed Tse

A cover story earlier this year in The Economist featured the headline “China loses its allure”. The key point was that, although in the past 30 years a large number of multinational companies have gone to mainland China to invest, this gold rush is now over, even though opportunities remain.
The key reasons, it said, include the slowdown of China’s economy and continuously rising costs; the fact that, even today, many sectors are still not entirely open for foreign companies; the emergence of local competition that has created new competitive threats; and the fact that China’s diversity across regions requires different strategies and operating models.
But has China really lost its allure? The answer depends on the type of company and its development strategies. In fact, for some multinationals, China may even be providing more allure today.
As China has opened up, so the importance of foreign companies in the nation’s economy has increased. They have brought, among other things, capital, technology, management techniques, business models and ways to develop human resources.
After more than 20 years, the experience of multinationals in China is clearly divided. For quite a number, China has become their most important market in the world, or one of the most important. The most notable case is probably the Yum Group’s KFC; more than half their global revenue and profit now come from China. Other notable examples include General Motors, Volkswagen, BMW and Apple.
At the same time, many others have tried their hand in China and eventually decided to leave. Some better-known cases include Best Buy, Mattel, Media Markt and eBay. Foreign multinationals’ experience spans the entire spectrum. Why?
For many, a common mistake was to assume the China market was the same as their other markets in the rest of the world. They believed that since they have been successful elsewhere, it would be easy to do so in China as well. They tended to apply their global business model to China.
Paradoxically, the more successful a multinational is in the rest of the world, the more confidence it has in applying its usual business model to China. However, after their entry, many discovered that China’s market was often much more complicated than other markets. Their original business model only allowed these companies to penetrate a small part of China’s market; often only the top end of their customer base or product pyramid.
Even worse, some foreign business models didn’t actually work in China. A classic case was Home Depot from the US. Its business model relies on customers who enjoy DIY. However, there’s no such culture in China and so the business never really took off.
The root cause of many multinationals’ dismal performance is, I believe, their “arrogant” DNA. When they expanded their business internationally, many were quite successful. Their products, services, brands and business models often helped them capture advantageous positions. Over time, this led many to believe they had a high probability of success wherever they went.
China’s market, however, has given multinationals an important and costly lesson. Over the past 20 years or more, China’s economy has developed into a complicated, fast-changing and often ambiguous operating environment. There are several reasons for this, including: the transition from a planned to a market economy; a mixed economy that includes state-owned enterprises, private firms, foreign companies and “mixed-equity companies”; and, an isolated country increasingly integrating with the outside world.
In addition, China’s large land mass, its large population and major regional disparities mean it is hard for many multinationals to adjust. Some are now beginning to recognise that if they want to be successful in the Chinese market, they need to fundamentally adjust their attitude about China. They need to change from being arrogant to humble, and be willing to learn and accept China’s differences.
Only with such an attitude and mindset can multinationals develop a strategy that is more appropriate for China. Without such reflection and change, it will be hard for them to achieve sustainable success.
Has China lost its allure? Those multinationals that have come to China, tried and failed, probably feel that way. However, for those that have found the right direction, developed effective strategies and, importantly, the right attitude and mindset, China will continue to present a multitude of opportunities.
Its huge market, fast development, increasing deregulation, improving technology, innovation and intensive competition, will make China even more attractive, as well as making it the breeding ground for the next generation of enterprise leaders.
This article appeared in the South China Morning Post print edition as Multinational companies must lose their arrogance to succeed in China

 

Edward Tse
2014-09-24

Many people outside China still view the country in a very narrow sense, as a nation with a one-party authoritarian regime where the economy is dominated by large state-owned enterprises. Though it remains true that the country’s biggest companies – its major banks and insurers, oil and energy companies, telecom operators, airlines and leading steel, auto and construction firms – are all government-owned or controlled, the often-overlooked private sector is where China’s largest source of growth resides.

There are about 2.3 million state-owned companies in China today, a staggering-sounding number, but not when you compare this to the total number of businesses. In 2013, the country had more than 12 million private companies and more than 42 million proprietorships.

In 2000, total revenues earned by state-owned and non-state-owned industrial companies were roughly the same, at about 4 trillion yuan (HK$4.6 trillion then) each. By 2013, while total revenues at state-owned companies had risen just over sixfold, those in the non-state sector had risen by more than 18 times.

Increases in profits were even more impressive over the same period: up nearly seven times for state-owned companies, but up nearly 23 times for non-state ones. Like it or not, Chinese entrepreneurship is growing in leaps and bounds.

The rise in Chinese entrepreneurship can be seen as four distinct waves. The first one came in the 1980s soon after Deng Xiaoping started economic reform in 1978 and included companies like Huawei and Legend (the precursor to Lenovo).

The second wave was in 1992, after Deng went on his now legendary “southern tour”. This wave lifted the companies established in the first wave and also served as a launch pad for many others. A number of former government officials decided to xia hai (jump into the sea) to become businessmen, forming the so-called “Gang of ’92”.

By the mid- to late 1990s, a third wave of entrepreneurs had established themselves and these included the now notable internet companies – Baidu, Alibaba and Tencent, collectively known as “BAT”.

The fourth wave started in the late 2000s, fronted by those born in the 1980s and after. Many of these latest start-ups are internet-related, building e-commerce businesses. These young people who grew up in the post-reform era try to copy the successes not just of American internet companies such as Google and Facebook, but also of BAT, China’s home-grown giants. This wave came in a much larger number than its predecessors and many of them aspire to be the next Jack Ma Yun, of Alibaba fame, or Pony Ma Huateng, who founded Tencent.

One remarkable thing about the entrepreneurs of the first two waves of China’s economic reforms is how their companies were able to adapt to the changes during this period. They set up businesses when the economy was still dominated by the state. They survived the Asian financial crisis of the late 1990s. They fought off competition from the flood of foreign companies that arrived after China joined the World Trade Organisation. And they rode the worldwide downturn that followed the global financial crisis.

Chinese entrepreneurs do not all fit in a cookie-cutter mould. They are of different ages and educational backgrounds, come from a wide spread of hometowns, and have varying degrees of government influence. Most have run small companies, but some come from management backgrounds in giant companies.

Yet they all share this trait: they are willing to take chances and not at all afraid of failure. Almost all have an extraordinary openness to ideas; they seek inspiration from around the world and are willing to use resources from outside China, especially human talent with the right kind of expertise.

At the heart of China’s entrepreneurial spirit lie three core elements: pride, relating to a desire to once again see China rise and be counted among the forefront of nations; ambition, a belief that aspirations can be achieved; and China’s Confucian tradition, shaping aspirations both for and beyond business. The pursuit of the “Chinese Dream” often comes up when these entrepreneurs speak about their motivations.

I believe that today’s China, both in terms of scale and complexity, is a forerunner of how the world’s business environment will evolve. Just see how technology, especially the internet, is breaking down barriers between industries and fostering more cross-sector competition. To survive, businesses must seek new sources of advantage – even if that means moving beyond their traditional area of expertise.

The internet is not unique to China, but its impact on the country, because of the nascent nature of its economy, is greater and more pronounced than in developed economies. Retailing, for example, is being turned on its head as e-commerce allows shoppers in even China’s remotest regions to gain access to goods, long before bricks-and-mortar stores can be built. The country’s e-commerce giants are moving into finance by offering money-market products that offer higher interest rates than banks can.

Other companies are also stretching themselves. Computer giant Lenovo and telecom equipment maker Huawei are both striving to become international players in the smartphone market, for example.

The complexity and speed of change in China puts a premium on improvisation and innovation. To be successful, entrepreneurs need to seize the advantages of China’s scale and dynamism to make their companies fast-growing, powerful and flexible, ever ready to reinvent themselves continuously and repeatedly.

One Chinese entrepreneur has recently been receiving worldwide attention: Jack Ma of Alibaba, which is about to be listed on the New York Stock Exchange. According to Bloomberg, Ma is China’s wealthiest person, with a net worth of US$21.9 billion. The second and third on the wealth list are Tencent’s Pony Ma and Baidu’s Robin Li Yanhong. These three men built up their businesses from scratch some 15 years ago to become the leading internet companies in China. As far as most people know, they are not princelings, nor do they have any special government privileges; they came from fairly humble backgrounds.

China has embarked on a transformation, one that will bring both tremendous opportunities and challenges. Amid all this, it will be China’s entrepreneurs who play the key role in (re)forming the economy necessary to create a dynamic society whose citizens and government contribute to shaping a new China.

Dr Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is author of The China Strategy

This article appeared in the South China Morning Post print edition as The Chinese wave

 

Ed Tse 高风咨询GaoFengAdvisory 2014-09-23

US Vice-President Joe Biden blasted China recently in a speech about foreign policy, arguing that the country hasn’t produced anything innovative. “China – and it’s true – is graduating six to eight times as many scientists and engineers as we have. But I challenge you, name me one innovative project, one innovative change, one innovative product that has come out of China,” he said.
In the same vein, in an article in Harvard Business Review, US academics Regina Abrami, William Kirby and Warren McFarlan sought to explain “Why China can’t innovate”.
Biden and the academics are wrong.
Does China breed innovation? Most who get their information from the Western media wouldn’t think so, as China is often associated with copies, lack of freedom of speech, poor intellectual property rights protection, rote-learning education and an overbearing state sector. Outsiders tend to think China lacks the fundamentals for successful innovation. But this view is both simplistic and superficial.
Lack of intellectual property rights protection is a real issue, but it hasn’t stopped innovation taking place. Over the past decade, there have been many examples of innovation in both product technology and business models.
As for the dominance of the state economy, even that sector can innovate. Large-scale examples include China’s space programme, its expanding high-speed rail network, the world’s highest-elevation railway (to Tibet), and the world’s fastest supercomputer. Like complex world-changing innovations anywhere, they would not have happened without intensive government participation, and it will take years to see their full impact.
However, most of China’s upcoming innovation will not come from the state. It will come from the companies and individuals who compete in China’s increasingly open economy. China is undergoing a measured but definite process of deregulation, sector by sector. The government reaffirmed this trajectory at its third plenum when it was emphasised that market forces will play a “decisive role” in economic development and non-state capital will gain access to more sectors.
The size of China’s market and the potential for profit mean that when the government opens up a sector, it becomes an arena for some of the world’s most intense competition. This forces companies to create the best products, services and business models.
There’s also a strong “why not me?” mentality among Chinese entrepreneurs. They see themselves as innovators, and when an opportunity opens, they go for it. Most may fail, but with such a huge population, even a small percentage of successes will encourage many others to try their luck. In short, waves of new entrepreneurs in China will be pushing for greater experimentation and more innovation.
Xiaomi, one of China’s leading smartphone players, is an excellent example of an innovative company in a highly competitive industry. Xiaomi’s leader, Lei Jun, understood the power of the internet and built his company’s business model by “listening to customers” through social media – the concept known as crowdsourcing. The strategy is working so well that Xiaomi’s revenues grew from zero in 2010 to US$5 billion last year, with the company now reportedly valued at over US$10 billion.
The late Steve Jobs didn’t believe in focus groups; Lei takes the opposite approach, and is convinced customers will be the best ones to tell him how his products should be designed and how its service model should be developed.
At a more basic level of innovation, Haier, a leading Chinese white goods manufacturer, quickly gained market awareness and share by introducing a washer capable not only of cleaning clothes but also potatoes, among many other products. This sprang from a customer complaint and is an example of Haier’s “customer centric” management philosophy.
Some say Chinese companies can’t develop technology. However, in seven years, Shenzhen-based DJI Innovations, started by young entrepreneur Frank Wang Tao, now supplies more than 50 per cent of global demand for unmanned aerial vehicles for the commercial and industrial sectors, and continues to expand.
Not every Chinese company will be like Haier or DJI, but the market is changing so rapidly that there are major incentives for Chinese companies – along with foreign ones and joint ventures – to be agile and innovative.
To successfully breed innovation, a country must be tolerant of mistakes and failures. These failures will include short-lived innovations, but they are part of a process necessary to sustain a culture of innovation. Tencent’s QQ, for example, was a precursor to WeChat, a fast-growing Twitter/WhatsApp type of platform. Although only three years old, WeChat already has over 600 million registered subscribers and over 350 million active users. It introduced voice capability before WhatsApp, along with a more recent payment capability that is undercutting China’s dominant incumbent, Alipay of Alibaba.
Telecoms operators see WeChat and Sina’s Weibo as competitors because they eat into their own text messaging businesses, and the prevalence of the internet, in particular wireless internet, is fast cutting out traditional distribution methods. Only a few years ago, Gome and Suning were the dominant retailers through their “bricks and mortar” stores. Today, Suning is having to quickly transform itself into an “O2O” (online to offline) retailer.
All of this should be seen from a historical perspective. China’s market economy is still developing, and it’s now been slightly over two decades since Deng Xiaoping’s now famous southern tour in 1992. This fundamental transformation from a fully planned economy is still just a small blip in China’s long history.
As China’s economic transformation continues, more and more monopolies will be broken down. Much of this will be driven by the government but some will be driven by the market. State-owned enterprises will remain important, but non-state companies have, for the first time, been put on an equal footing.
Experimental free trade zones like that of Shanghai will eventually be established in more cities, and efforts made to create economic conditions conductive to innovation.
Entrepreneurship is vibrant and omnipresent in China. This spirit and the intensive competition drive innovation, at an unprecedented speed and intensity. An arrogant view that China can’t innovate is not only shortsighted but also untrue.
Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is also the author of The China Strategy.
This article appeared in the South China Morning Post print edition as Bright lights