SCMP | Positive Disruption

UPDATED : 2015-07-18
BY Edward Tse

Dr. Edward Tse believes the rise of Chinese entrepreneurship will remake the country and change the world.

Many people believe China’s economy is dominated by its state owned enterprises, which are typically large, supported by the government and enjoy preferential market access. Some call it “state capitalism”. While this perception is not entirely incorrect, it is being challenged by the rapidly developing private business sector.

Over the past two decades and more, entrepreneurship in China has grown at an exponential rate. As a result, it is bringing forth disruptive changes not only in China but increasingly on a global scale.

In 2000, total revenues earned by Chinese state-owned industrial companies and those in the non-state- owned sector were roughly the same, at about 4 trillion yuan (HK$5 trillion) each. By 2013, while total revenues at state-owned companies had risen just over six fold, revenues in the non-state sector had risen by more than 18 times. Profits in the same period showed an even more remarkable difference, with state-owned companies showing a seven fold increase but profits at non-state-owned ones increasing nearly 23 times.

China’s entrepreneurs will be the ones driving the nation forward in the coming decades. Moreover, the entrepreneurial spirit runs deeper than just in business. It manifests itself in the government, and in the desires of ordinary people, most of whom share the dream of seeing their country reclaim its place as one of the world’s great sources of scientific ideas and technological advances.

China has the potential to emerge as a key force indetermining the direction the world will take through the 21st century. The reason is the role its entrepreneurs have assumed in the nation’s development.Through this process, they will change the world – not because they set out to do so, but because they can’t avoid it.

Given the inter connectedness of our world and China’s enormous scale, they cannot realise their potential without changing China, and they cannot change China without changing the world. China’s entrepreneurship, shaped by the country’s history and culture, both in theshort and long term, will inevitably intermix with global entrepreneurship.

As this happens, China’s entrepreneurs will no longer be able to ignore the most pressing global problems, above all, climate change and the environmental stress generated as more people become wealthy and begin consuming more of everything. They will have to be involved in solving these problems. Because of this, thanks to its entrepreneurs, China will be a leading source of the thinking and practices needed to overcome the challenges facing the world in the coming decades.

The world is interdependent and, barring major disasters, will only become more so. The question, therefore, is how and on what terms should other countries engage with China, and vice versa. Given China’s rate of economic growth, and the fact it could overtake the US in the near future to become the world’s biggest economy, the initial reaction in much of the West is to see it as a threat.

Indeed, already, it is clear that it is difficult for many in America and Europe to view with equanimity a world in which a new power with its own agenda is emerging. The current world was shaped by ideas that came out of Europe and America in the 18th through to the 20th centuries. But, now, with the emergence of Asia and especially China as a new centre of global economic gravity, new thinking is needed.

With the West looking less confident about its position, and its leadership losing credibility in many parts of the world,there is an opportunity for revolutionary new approaches. Despite the fears about the rise of a powerful China, the rest of the world needs to consider howbest to react to this change. Othersneed to see China’s re-emergence from a broader perspective, rather thanjust an economic story. They need to see that China’s entrepreneurs are alsodriving a renaissance that will have a wide-ranging impact in a host of fields,much of which they, too, can benefit from.

A unique phenomenon is taking place in China today.While its political system is in herited from a top-down planned economy hierarchy, its leading entrepreneurial companies, especially in the internet industry, which are young and dynamic, borrow much of their mindset, cultureand structure from America’s Silicon Valley.

In fact, many are closer to Silicon Valley than Beijing. In these companies, China’s political and economic structure is mixed with Silicon Valley culture, each influencing the other.

Finally, I believe that as a consequence of theopening driven by China’s entrepreneurs, the push to invest in science,research and development, and the new freedoms that people are enjoying, China has embarked on a renaissance that could bring it back to its historic heights.

The jury is still out but it is moving in the right direction.

This time, China’s impact could extend much further– with the country playing a crucial role in shaping global well-being and even global governance.

Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy consulting firm with roots in China. He is the author of the book, China’s Disruptors. www.chinasdisruptors.com

Used title: “China will reclaim its place at the top of global order, thanks to its new breed of entrepreneurs” on South China Morning Post Website.

《中国的商业颠覆者》:看阿里巴巴,小米,腾讯及其他公司如何改变着商业规则

Updated July 15 2015 丨 Policy Innovations
By Edward Tse
(Reprinted fromChina’s Disruptors: How Alibaba, Xiaomi, Tencent, and Other Companies Are Changing the Rules of Businessby Edward Tse with permission of Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright (c) Edward Tse, 2015.)

Since the early 1990s, China has consistently been the world’s fastest-growing economy. It has opened its economy and its population to the outside world with a speed and success that is unprecedented not just for China but for any country. In the process, China has also acquired a large number of critics, especially in the United States. These include politicians, among them members of the Obama administration and other key figures in both the Republican and Democratic parties; leading economists such as Nobel prize winner Paul Krugman and Peter Navarro of the University of California, Irvine; and analysts such as Gordon Chang, author of the 2001 book The Coming Collapse of China. These critics argue that China’s economic success is due, in good part, to unfair practices by the Chinese government: its mercantilist trade regime, its currency manipulation that keeps the value of the yuan artificially low, its high-pressure efforts to open external markets to its businesses, its subsidies for manufacturers, and its widespread pirating of foreign goods and technology. The main beneficiaries of these policies, they say, have been Chinese export manufacturers—those who produce inexpensive smartphones, computers, toys, clothes, and other consumer goods, sucking in jobs from the rest of the world and dumping their products into Europe and America to drive competitors out of business.

Another factor frequently cited by overseas critics is the prevalence and influence of state-owned enterprises in China. The country’s biggest companies—its banks and insurers, oil and energy companies, telecom operators and airlines, leading steel, auto, and construction firms—are all government-owned or government-controlled. The Chinese members of the Fortune Global 500, which ranks the world’s top companies by revenue, would seem to confirm this view. In mid-2014, some 92 companies on the list were Chinese, but just 10 of these were privately owned enterprises. Using money from China’s $4 trillion of foreign exchange reserves, many of these businesses have been investing heavily overseas—been “buying the world,” as various book titles and headlines have suggested. Since the early 2000s, Chinese state-owned firms, backed by state-owned banks, have been striking multibillion-dollar deals in Africa, South America, and other regions, gaining access to energy supplies, raw materials, and even land for farming. Wherever these companies have gone, Chinese construction firms, also state-owned, have accompanied them, building ports, roads, and other infrastructure both to make sure that goods can be shipped back to China and to support the development of their host nations. But this view of the Chinese economy as a mercantile juggernaut, driven by a single-minded government, does not tell the most dramatic part of the Chinese story, the part with the greatest potential impact on the rest of the world.

That is the emergence of a new group of entrepreneurial business leaders, all from the private sector, most of them operating with little direct government influence or support, and all of them transforming their industries. These entrepreneurial disruptors are among the most successful and powerful individuals in China today. Many are billionaires, and some are multibillionaires. They are the reason that (as of August 2014) China hosts the world’s second-largest concentration of billionaires after the United States—152 out of the total 1,645, according to Forbes magazine.

The rise of these disruptive entrepreneurs is all the more noteworthy because, at the time of Mao Zedong’s death in 1976, China had no private businesses. All of the country’s industry and agriculture was publicly owned, run either by the central government, by local governments, or through collectives. Today, thanks to the economic reforms of the last 35 years, the private sector accounts for at least three-quarters of China’s economic output.

The Chinese government, despite having long since abandoned central planning, continues to regard itself as playing a key role in managing the overall direction of the Chinese economy. China remains home to approximately 2.3 million state-owned companies. That number, however, is dwarfed by its other businesses. As early as 2004, China had about 3.3 million privately held companies—many owned by investors with shares traded on public exchanges—and 24 million proprietorships—individually or family-run operations. By 2013, the country had nearly 12 million private companies and more than 42 million proprietorships (see Figure 1). Moreover, the government is firmly committed to increasing these totals. In the first seven months of 2014, thanks to regulatory reforms abolishing registered capital requirements, 1.5 million new private companies were set up—double the number during the same period the year before.

The number of state-owned companies, meanwhile, has fallen by almost half since 2004. And though these companies are far more productive than they were a decade ago, their increase in output is a fraction of that of the private sector. In 2000, total revenues earned by state-owned and non-state-owned industrial companies were roughly the same, at about 4 trillion yuan each. By 2013, while total revenues at state-owned companies had risen just over sixfold, those in the non-state sector had risen more than 18 times (see Figure 2). Profits jumped even more over the same period, up nearly seven times for state-owned companies, but up nearly 23‑fold for non-state ones.

The Chinese entrepreneurs have thrived, in part, because they created companies able to change as China changed. Many of them first set up businesses when the economy was still dominated by the state, which set most prices and appointed most company leaders. They survived the Asian financial crisis of the late 1990s. They fought off competition from the flood of foreign companies that arrived after China entered the World Trade Organization in the 2000s. And they rode out the worldwide downturn that followed the global financial crisis during the late 2000s and early 2010s. Throughout all of this, China’s entrepreneurs created an economy largely outside the direct control of the government. They are answerable primarily to the customers who consume the products and services their companies offer. As with their counterparts around the world, they are typically energetic, imaginative, and often idiosyncratic. They are extraordinary individuals in their own right, especially when you consider that they have created successful businesses with little official backing within a traditionally risk-averse culture that reveres authority and conformity.

These entrepreneurs come in all forms imaginable. They are old and young; some with no formal education beyond high school, others with doctorates; some from China’s richest and largest cities, others from remote country towns. Most, of course, run small companies, but others lead industry giants that employ tens of thousands of people. Some are highly influential, with access to the highest ranks of government. Others suffer from sustained official prejudice that favors state-owned firms, a factor that can make matters of everyday business, such as securing a bank loan, a nightmare.

Many of today’s most successful Chinese entrepreneurs, most of them now in their 40s, 50s, and 60s, had no experience in business when they started their companies. They had to learn things as they went along through a continual process of trial and error. They were “crossing the river by feeling the stones,” as Deng Xiaoping, China’s paramount leader from 1978 to 1998, characterized his approach to economic reform.

Among those who started businesses in the period from the 1980s through the early 2000s, not one could have foreseen the China of 2014. Yet these are the people who have played the single biggest role in creating the wealth that exists in China today. Nicholas Lardy, a senior fellow at Washington, DC-based Peterson Institute for International Economics and one of the world’s leading academic experts on the Chinese economy, estimates that privately controlled companies now account for two-thirds of all urban employment—meaning that almost all of the growth in urban employment since 1978 can be attributed to the private sector.

Chinese entrepreneurs are sometimes compared to the Russian oligarchs of the early 2000s. But the oligarchs built their fortunes by taking advantage of the privatization of industry that followed the collapse of the Soviet Union, often using their connections and positions to amass huge holdings in resource companies. The Chinese entrepreneurs we’re looking at in this book, in contrast, have almost all developed their businesses from the ground up, in many instances starting from an apartment or a market stall, or raising a few thousand dollars from friends and relatives. They built their companies by meeting the needs of their customers, often in businesses that no one else saw as feasible.

These business leaders know that they are riding and contributing to a historic wave of economic activity. As creators of the fastest-growing enterprises in the fastest-growing economy in the world, they recognize that they have immense potential influence. Running companies that have grown even faster than the Chinese economy, they are establishing the rules that all companies in China will have to follow. Despite having had almost no formal business training, they are moving rapidly to compete with the same companies from whom they were drawing inspiration just a few years ago, both in China and internationally. In the process, they will rewrite the rules of global management.

 

China Daily | Nation No Longer a ‘Wasteland’ for Entrepreneurs

Updated: 2015-07-07
By EDWARDTSE/BILL RUSSO(China Daily)

China’s Xiaomi Redmi 2 smartphones are displayed to the media during their launch in Sao Paulo, Brazil, June 30, 2015.

Rising generation of business leaders creates value-added solutions

People unfamiliar with recent developments within China generally believe that the nation lacks innovation capabilities as well as the infrastructure to support entrepreneurship. The stereotypical view, often fueled by Western media, portrays China as an “innovation desert” full of copycat companies that make shanzhai (fake) products.

They describe a China that lacks innovativeness due to an inadequate system of intellectual property protection, a rote-learning educational system that stifles creativity and a business landscape dominated by State-owned enterprises.

This perception is based on China’s history, but it does not reflect current realities. Worse, it fails to recognize the emerging wave of innovation from China.

Understanding innovation in the context of contemporary China requires a broader definition of innovation, beyond the classic product or technology-centric view espoused by Western management theory. We suggest a broader interpretation of innovation that includes solutions that offer added value to customers or businesses, which may be manifested in a variety of forms, but are not limited to low-cost disruptions or technological breakthroughs.

To better understand this broader view of innovation, we should look deeper into examples coming from China.

Three layers of innovation

In our view, there are three essential layers of innovation: people, organization and market.

At the core are people. Large corporations often find it difficult to maintain the same level of creativity and freedom, both of which are conducive to the innovation process, as exists within startups. In China, a growing culture of mass entrepreneurship and relevant favorable policies are emerging. As a result, we are witnessing rapid growth in startups, which serve as the breeding ground for creative entrepreneurial minds.

Inspired by successful examples of private entrepreneurs, a “why-not-me” mentality motivates aspiring young entrepreneurs to create solutions that deliver value. This new breed of young entrepreneurs are adept at identifying new and creative ways to add value to consumers’ lives within a volatile and sometimes sub-optimal environment.

Among the entrepreneurs who were born in the 1980s and 90s, there is a strong sense of entrepreneurial zeal and optimism ignited by recent successful examples of Alibaba Group Holding Ltd’s Jack Ma, Xiaomi Inc’s Lei Jun, Tencent Holdings Ltd’s Pony Ma and many others.

There are other factors in play that are creating a more favorable environment for innovation. These include China’s grassroots’ openness to the world, experienced returnee entrepreneurs with expertise and access to a global pool of resources gained from their experience abroad, and simply China’s scale that allows good business ideas to scale up rapidly.

China’s large population base also helps increase the probability of success from “trial and error” experimentation with new solutions. Many grassroots entrepreneurs are able to spot market imperfections and leverage that contextual understanding to create relevant solutions.

Lei Jun is a case in point. Xiaomi’s approach to innovation relies on a deep understanding of customer needs and continual feedback to tailor products for specific usage requirements.

Second, organization. Organizations typically resist change when they become successful. As markets mature, market leaders often lose their competitive edge as they fail to anticipate change, typical across numerous global industries.

As we know, China’s market changes fast. Many Chinese companies are very young and have a higher risk appetite for opportunities and radical innovations. A well-known case is how Haier Electronics Group Co Ltd achieved significant growth when it introduced a washing machine capable of cleaning not only clothes but also potatoes.

This demonstrates Haier’s awareness of indigenous demand from China’s lower-tier cities and the company’s customer-centric management philosophy.

Entrepreneurial Chinese organizations can be described as hungry, agile and nimble. They continually push for growth because there is no legacy of success to protect. This innovative character results in higher levels of patent activity and investment into research and development.

Third and last is the market. Critics often point to the flaws in China’s lack of market-centricity when expressing concerns about the future. These criticisms often dwell on the dominance of SOEs in certain sectors, a lack of transparency, the abundance of government incentives pushing for technological change without oversight mechanisms and the heavy presence of government investment to drive the economy.

SOEs will continue to play a major role in China, but private companies have emerged across multiple sectors (including foreign entities in China) and will become the dominant forces of innovation and economic expansion. In open sectors, competition has become intense as foreign corporations, SOEs and local private companies vie for a piece of the pie. Deregulation has been a major driver for China’s growth over the past couple of decades and that will remain the case.

Over the past couple of decades, China’s market has experienced unprecedented economic expansion, aided largely by government policies that provided top-down support at national and provincial levels. Tangible benefits include science and R&D parks as well as industry clusters throughout China. The supporting foundation for continued growth and innovation is also falling into place, including fast consumer adoption of the Internet, creation of startup incubators, and increased sources of funding for new businesses from venture capital, private equity and angel investment.

Innovation breeding ground

China is a complex, diverse and dynamic market, characterized by intense competition. Chinese companies are emerging with unique capabilities to win the bases of competition through lower cost, better quality and faster execution.

Innovative Chinese companies such as Baidu Inc, Alibaba, Tencent, Xiaomi, Haier and others have demonstrated unique capabilities and an innovation mindset well-suited to China’s unique context. Such businesses have proven capable of building cross-industry ecosystems for collaborative innovation and a willingness to “boundary jump” across traditional industry lines. These ecosystems exhibit “biodiversity”, which makes the entire value chain more robust and sustainable; of course, up to certain limits.

The China context can be described as a highly complex, diverse, dynamic and discontinuous environment accentuated by time-space compression. Within this breeding ground, innovative Chinese companies are leveraging this market context to deliver exponential growth.

Edward Tse is founder and chief executive officer and Bill Russo is managing director of Gao Feng Advisory Co, a global strategy and management consulting firm based in China.