作者：admin

Edward Tse

Gao Feng Advisory’s CEO Dr. Edward Tse’s article was published in his regular column on Brazil’s HSM Management Magazine. In this article, Dr. Tse wrote about China’s mega platforms companies. China’s innovations are not just about monetization. It’s an inspiration for new intellectual capital on how businesses generate their strategy and innovations. They enrich the world’s thought leadership.

English Version
China’s Mega Platforms Organizations

The most valuable Chinese companies today are typically “mega ecosystem” players which operate networks of businesses that can support each other and supplement each other’s capabilities. Internet giants, Alibaba and Tencent, arguably the most well-known companies in China, are now in the top ten of public companies by market capitalization.

The notion of a business ecosystem is not new. Apple, one the world’s most valuable companies, was a pioneer in this regard. Other leading U.S. tech companies such as Amazon and Alphabet are also ecosystem players. Chinese companies, however, have turned out to be even more adept at building such organizations.

Prime examples of mega ecosystems in China today include Alibaba, Tencent, and Xiaomi. Building out from their original core businesses, they have jumped into a string of new sectors.

Alibaba started as a small business-to-business online marketplace almost 20 years ago and jumped in with consumer-to-consumer site Taobao and later business-to-consumer site Tmall. To support these businesses, Alibaba started Alipay to support mobile online payments and then used it as a platform to offer wealth management services.

Today, Alibaba’s has also branched into areas including “automobility”, “big health”, media, “new retail”, location services, cloud services, and smart logistics.

Xiaomi, the youngest Fortune 500 company, is a leading ecosystem players with a range of businesses in hardware, internet services and new retail. By partnering up with a hundred more start-ups since 2013, Xiaomi has been able to add many more products onto its In-ternet of Things (IoT) platform, without having to produce them in-house. Today, Xiaomi offers more than 300 lifestyle products and are connecting more than 170 million devices (excluding mobile phones and laptops).

Xiaomi’s smartphone business is becoming a smaller part of its business, while internet services are growing. To this end, it has added to its portfolio apps ranging from online games, eBooks, live streaming, music and videos, internet finance, cloud services and automotive social platforms. This allows them to monetize on ser-vices after selling low-priced hardware, which could drive a large part of revenue going forward.

With such a large range of products in its portfolio, Xiaomi has made the jump into new retail that aims at seamlessly interconnecting its online and offline channel. Over the years, Xiaomi has built interac-tions and close relationships with its supporters, affectionately called the “Mi-fans.”

Xiaomi’s founder and leader, Lei Jun, has said that the next strate-gic move would be building a smartphone + AIoT (AI and IoT) in anticipation of 5G technology. With this strategy, it is likely that Xiaomi would extend its ecosystem, and increase in the variety of Xiaomi applications.

When Chinese companies sense a market opening, they would quickly make the jump to capture the opportunities and try to make up the gaps in capabilities through ecosystems of collaborative part-nerships. In contrast, most foreign corporations tend to focus on what they have been doing all along and avoid “diversification”. Foreign companies operating in China have now increasingly recog-nized this difference and are catching up by learning from Chinese companies and participating into their ecosystems.

About the Author
Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company, and a founding Governor of Hong Kong Institution for International Finance. One of the pioneers in China’s management consulting industry, he built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies, investors, start-ups, and public-sector organizations (both headquartered in and outside of China) on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas, as well as to the World Bank and the Asian Development Bank. He is the author of several hundred articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version «创业家精神»).

By Edward Tse

December 2018

This article is the introduction to the China highlights in the State of Curiosity Report 2018 published by Merck Group

Source: Google

The last 40 years of China’s reform and market liberalization have brought profound changes and tremendous progress to the country’s economy, especially to its business landscape. Along the way, China has evolved into its own development model without consciously planning for it – a “Three-layer Duality”. At the top, the central government sets the overall development priorities. At the grass-root level, the private sector entrepreneurs are now a major driving force in the Chinese economy. In the middle, various local governments, in response to the directions from the top, compete, and sometimes collaborate in regional clusters, often by teaming up with the entrepreneurs. With both a state sector and a private sector co-existing – in some cases competing and in others playing their own distinctive roles – this duality is a defining feature of the Chinese economy.

This three-layer working paradigm has stimulated the exponential rise of curiosity-driven business innovations, especially from the private sector. The rise in workplace innovation is reflected in Merck’s 2018 State of Curiosity survey, a multi-dimensional model that measured the importance of curiosity and innovation across several countries. China, above the US and Germany, found that innovation played a meaningful role in its workplace culture. With this value on innovation, the country has shed its copycat stigma and emerged as an epicenter of tech-enabled innovations. According to reports by Xinhua News Agency last year in 2017, the internet and technology sector – ranging from AI, big data, IoT, and robotics – grew twice as quickly as the overall gross domestic product over the past decade. Born with a different set of characteristics in each generation, Chinese entrepreneurs are thriving in what is now the world’s second-largest birthplace of unicorns (unlisted companies valued at or above US$ 1 billion that established within 10 years).

Source: Google

What has enabled China to move from copycat to curious innovator?

1. First and foremost, it is due to the “why not me?” mindset. Realizing the huge gap between China and the rest of the world, especially in the early days of the country’s reform and opening, Chinese entrepreneurs were compelled to show the world that they too could succeed.

2. As the economy transformed, China’s societal pain points that once were hidden became exposed. Coupled with the prevalence of technology, especially the commercial application of smart devices through the wireless internet, these new conditions provided the breeding ground for innovations.

3. While state-owned counterparts are typically slower in responding to these changes, private sector entrepreneurial companies rose to the challenge and took on the opportunities.

4. At the same time, China’s massive market allowed companies to rapidly scale up and its hyper-competition spurred companies to speed up their innovations to stay ahead in the game.

5. Finally, along the way, Chinese companies have benefited greatly from the vast capital pool and angel investors, and the investors, in turn, have benefited from exceptional returns on their investments in China.

Regardless of whether these investors came from abroad or home, Chinese entrepreneurial companies, especially tech companies, often pattern themselves after companies in the US Silicon Valley. Leaders of these organizations often work alongside the team, making it easy for them to capture market changes and make quick decisions. These leaders (usually founders and managers) are typically strong and visionary – a common trait of Chinese entrepreneurial organizations and culture. Structures of these organizations especially during their early phase tend to be flat thereby allowing efficient response to the ever-changing business environment.

While these companies have strong leaders at the top, they also have appreciable empowerment across the organization, which may sound like a paradox. However, institutional curiosity manifests itself often in a profound manner, particularly in tech companies during their entrepreneurial phases. A few key drivers are noted for these organizations in the form of Curiosity dimensions, as defined by Merck.

The first is the openness to people’s idea: The relatively open organization structure in Chinese tech companies enables more openness and better communications among team members.

The second is stress tolerance: There are more ambiguity and uncertainty in China’s rapid and disruptive evolution. Entrepreneurs must be willing to try and embrace pressure.

The third is joyous exploration: Growing income and better living conditions over the past decade have uplifted people’s expectation that the future will be better. They’re more willing to explore a life that’s better and more joyous.

Last but not least is deprivation sensitivity: Entrepreneurship makes people more sensitive to deprivation. If there is a gap, Chinese entrepreneurs are curious about it and more determined to close the gap.

With these highly adaptive characteristics, Chinese tech companies are embracing new and emerging technologies, and China as a whole is at the front seat witnessing the Fourth Industrial Revolution – the merging of physical, digital and biological means. With technologies such as AI, IoT and Blockchain are here and 5G coming just around the corner, the Chinese are significantly embracing them to enable the next generations of innovations.

Going forward, we expect more tech-enabled innovations driven by heightened organizational curiosity from China. Though it is a universal phenomenon that the bar for success remains high, given the scale of the China market, its fast growth, its increasing prevalence of various forms of technologies and the prowess of its “three-layer duality” paradigm, the “odds of making it” are expected to be on the Chinese side. China’s path towards an innovative economy will inevitably involve many ups and downs, perhaps at times becoming quite turbulent and wasting some resources. However, one should acknowledge China’s consistent drive toward better livelihood for its people and a “community of shared future” for the humankind. At the heart of it, the source of this inspiration is the intrinsic curiosity of its organizations.

Dr. Edward Tse’s article was published in his regular column on Brazil’s HSM Management Magazine. In this article, Dr. Tse discussed how China’s system works to the favour of the country’s tech-enabled business innovations.

English Version

China’s Age of

Innovation and Game-Changers

Branded for decades as a “copycat nation”, China has now re-emerged as a global epicenter of business and technological innovations. The internet and tech sector – ranging from ride-hailing to e-commerce, robotics and artificial intelligence – grew 20 percent in 2018 to a total of 142 billion USD value. Two Chinese companies, Tencent and Alibaba are now among the top ten of the world’s most valuable companies. China has also become the second-largest birthplace of unicorns (unlisted companies valued at or above US$1 billion), and has filed the largest number of domestic AI-related patents, trumping Silicon Valley by as much as seven times, according to CB Insights.

Several drivers contribute to China’s rapid transformation. First, a “why not me” mindset drove the Chinese entrepreneurs who, realizing the huge gap between China and the rest of the world, in particular during the early years of China’s reform and opening, want to show that they too could succeed.

Second, as its economy transformed, China’s once-hidden societal pain points became exposed; coupled with the prevalence of technology (especially the wireless internet and smartphones), these pain points provided the breeding ground for innovations.

Third, while their state-owned counterparts are typically slower in adaptation, privately-owned entrepreneurial companies rose to the challenge and took on the opportunities. At the same time, China’s massive market allowed companies to rapidly scale up, and its hyper-competition spurred companies to continuously innovate.

Finally, Chinese companies have benefited greatly from the vast pools of venture capital and angel investors. Many of the investors, including both foreign and local, have also benefited from exceptional returns on their investments in China.

The innovative ecosystem arose from China’s unique “Three-layer Duality” development model. At the top, the central government’s guiding hand sets goals and directions for the country, giving the rest of the country clear targets to follow. At the grass-roots level, the private sector entrepreneurs have re-emerged since the end of China’s Cultural Revolution and is a major force in driving the growth of China’s economy. And, In the middle, China’s local governments channel their resources into national and local priorities, often collaborating closely with entrepreneurs who bring innovative ideas to bear. Local governments often compete with each other, but they also cooperate within regional clusters. Though the model occasionally suffers from glitches, in general, the coexistence of private and state-owned players provides tremendous resilience for the growth of both sectors.

China’s path towards an innovative economy will, however, not simply be a straight line; it will inevitably involve many ups and downs. The probability of successful innovations for anyone – either large corporate or startups – is low. Nonetheless, with the scale of the China market, its relatively fast rate of growth, the increasing prevalence of various forms of technologies such as artificial intelligence, Internet-of-Things, blockchain technology and 5G, as well as the prowess of its “three-layer duality” paradigm, one would expect that China could continue to drive innovations in significant ways.

By Edward Tse | February 2019

Dr. Edward Tse’s article on China’s philanthropy was published in the augural issue of Social Investor, commissioned by the Chandler Foundation.

From e-commerce platforms and Internet mobility service providers to AI and blockchain developers, Chinese technologies companies are transforming China’s economy and changing entire industries – including philanthropy.

China has a long tradition of giving, although it stagnated for roughly three decades when wealth was nationalized under the rule of Mao Zedong. Today, China is home to more billionaires – 819 in terms of US dollars – than anywhere else in the world, outnumbering the US and topping the Hurun Global Rich List 2018. And China’s super-rich are increasingly engaging in philanthropic causes.

According to Harvard University and UBS, between 2010 and 2016, donations from the top 100 philanthropists in mainland China more than tripled to US$ 4.6bn, and 46 of the wealthiest 200 Chinese billionaires now have charity foundations. Giving is much more common among ordinary citizens as well. It was reported that early in 2016, more than 20% of the total charity in China came from individual donors, a number that has grown steadily over the years.

Corruption and Transparency Woes Impede Progress

Despite those growing numbers, the philanthropic industry has been plagued by corruption and a lack of transparency. These are especially prevalent with non-profit organizations that claim to be government-supported.

In 2011, for example, a woman named Guo Meimei received a substantive amount of money from an official at the Red Cross Society of China, then flaunted her luxurious lifestyle on social media. In 2012, to cite just one other example, the China Charities Aid Foundation was accused of money laundering and embezzling.

For private philanthropists, a number of institutional and social barriers make it difficult for them to build, promote, and sustain charitable organizations. Policies mandating high expenditure rates and low administrative costs are two such barriers. Private foundations are required to spend a minimum of 8% of their previous year’s assets, making it almost impossible to grow an endowment. As a result, philanthropy remains a largely monopolized, state-run sector, and donations are largely limited to a few causes: education, poverty alleviation, and healthcare.

Technology – the Great Gamechanger

However, new technologies have helped bring innovative approaches to philanthropy and encouraged broader participation.

Tech giants, in particular, have already learned to take advantage of their branded merchandises to involve the general public in philanthropic activities. For example, in response to the 2008 Wenchuan earthquake in Sichuan, Tencent, the company behind China’s biggest social network as well as the largest gaming company in the world, established an online donation platform. More than half a million people contributed, raising a total of US$ 2.9m. Tencent added donation options to WeChat, the instant messaging and social media app with one billion monthly active users, and allowed users to give any amount with a swipe of a finger, making philanthropic engagement easier than ever.

New technologies have created more diversified ways of giving. The rising popularity of fitness apps in China has inspired tech companies to incentivize giving among the younger, more health-conscious, generation. Through the Xingshan (“doing good”) app developed by the Beijing-based company iMore, users record the number of steps they take each day, which is then “donated” to charities through corporate sponsors. By the end of 2015, users of Xingshan had walked a total of 2.8 million kilometres, raising more than US$ 4.6m for 52 different public welfare organizations and projects.

Facing the troubled reputations of charitable organizations, new types of charity platforms have stepped in to address both transparency and accountability issues. Real-time updates on donation collections, along with different verification systems, guarantee the funding reaches the right people at the right time. For example, JIAN Charity – launched by Alibaba’s Cainiao Logistics in 2016 – is an online donation platform where people can place orders and then track the real-time location of the items they donated.

When it comes to smaller donations – often a much more manual process – this kind of tracking can be challenging. By encoding the lifecycle of each donation on a blockchain, Ant Financial, a subsidiary of the tech giant Alibaba Group, addresses these transparency concerns and significantly reduces operating costs.

Embedded within a larger digital ecosystem like that of Alibaba’s, philanthropy has an even more magnified potential. On Taobao, an online shopping site, sellers can register for the “Treasures for Charity” program, allowing them to donate a portion of sales revenue to non-profit projects. Sellers not only draw more customers but this also boosts their conversion rate. Even though the per-deal donation can be as low as US$ 0.0058, the cumulative effect is significant: in 2017, 1.8 million participating sellers and 350 million buyers donated a total of 245m RMB (US$ 35.7m) to charity projects the world – owing to the enormous transaction volume and user base on the e-commerce platform.

A New Era for Philanthropy in China

China’s private wealth continues to expand, and philanthropy in the country is on an undeniably upward trajectory. New technologies are unlocking more inventive forms of giving, which become more synergized with companies’ mega business ecosystems. Public awareness about philanthropy is rising, while non-profit organizations are regaining their credibility and trustworthiness. I expect a brighter future.

By Edward Tse
31 December 2018

Gao Feng’s CEO Dr. Edward Tse believes China’s sheer market size and lesser concern for data privacy could prove advantageous – but the US still leads in terms of research and creativity. This is a summary of his speech at the Center for Strategic and International Studies, published with the center’s permission but without Dr. Tse’s prior review or approval.

In the last 40 years since the start of China’s economic reform and opening up, a lot has happened. The most profound development in China is the rise of the private sector.

Compared to the state sector, the private sector contributes much more to GDP and the creation of new jobs. But more importantly, the private sector has been embracing emerging technologies, in particular over the last decade.

Ironically, this decade is epitomized by American inventions. The iPhone and the wireless internet have fundamentally changed China, and that has created a large number of innovations along the way.

China has the world’s largest internet economy. There are more than 800 million active internet users and Chinese consumers do everything online: shopping, ordering food and so on.

Artificial intelligence is another emerging technology. For Chinese people, technology has served us well in the past decade, so why not embrace it?

Vast amounts of data are being generated every moment. Whenever we are on WeChat, we tell the app what we are doing.

Whenever we buy anything on Alibaba or JD.com, we tell Alibaba and JD.com what we are doing. It’s the same thing here in America with Facebook and Twitter. The difference is the scale.

Source: Internet

Artificial intelligence is really about a lot of iterations. The larger the amount of data you have, the greater the opportunities for machine learning and fine-tuning the pattern recognition. Therefore, better results are yielded for commercialization.

Rightly or wrongly, China has gotten itself into a situation where data privacy protection is perhaps not as stringently applied, compared to many of the Western economies.

China fundamentally has a system advantage. It’s not only about the scale of the market, but also the state and the Communist Party.

When someone decides something, they will push it all the way down to the whole country and everybody has to obey.

But that’s not the only thing that happens in China. There is a large number of entrepreneurs, who are coming up with all sorts of innovations.

Chinese companies are investing significantly in new technology. But they’re nothing compared to the Googles, the Amazons and the Microsofts of the world.

The gap is still very significant. Americans are way ahead in terms of creativity and original research. The Chinese certainly would like to close the gap, but only time will tell if they could succeed.

I think China is likely to be a leader in AI, perhaps the leader in commercial applications. But it won’t be the leader in original ideas.

Edward Tse is founder & CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is also author of China’s Disruptors.

By Edward Tse and Bill Russo
17 Sep, 2018

Despite the simmering trade tensions, China announced on April 17th to scrap a two-decades-old limit on foreign ownership of automotive ventures by 2022. While unsettling some state-owned car manufacturers who worry about emerging competition, the plan unveils tremendous opportunities for foreign corporate investors to fully leverage the advantage of China’s market size and growth. Earlier in April, the country had also lifted ownership cap on banking and financial sectors.

President Xi Jinping described the measures as part of a “new phase of opening up” which has its roots back in the 1970s. For a long time, foreign multinational corporations (MNCs) complain about a lack of market access in China and ask for reciprocity. They argue that China’s regulatory and industrial policies confer unfair advantages on Chinese companies, represent forced technology transfer and penalize foreign companies. In reality, China has been liberalizing its sectors for non-state Chinese companies and foreign companies gradually over the past decades. Many previously closed sectors were opened, either entirely or partially. Though not every sector is now open, the trend and direction are pretty clear.

Is the golden era for MNCs in China over? Pundits take examples of companies such as Best Buy, Home Depot and PepsiCo, which have had to make “strategic retreat” from China’s market. PepsiCo, for instance, sold its bottling business in China in 2011 to the Taiwanese company Tingyi Holding, which has a broad distribution network across China.

Source: Internet

The answer lies in how foreign MNCs approach the China market. They tend to copy-and-paste their strategy approach that has worked, perhaps for decades, in their home markets, assuming that it must also work elsewhere in the world. However, coming out from a planned economy at the end of the 1970s, China is a highly complicated and fast-evolving environment. This market context makes the “cookie-cutter business model transfer” approach not always appropriate.

However, China’s environment is not entirely without patterns. Through years, China has found its own development model: at the top, the central government plans the direction of the country. At the grass-roots level, entrepreneurship is thriving and driving economic growth often through innovations. In the middle, local governments compete and sometimes collaborate in clusters of cities within regions. This three-layered model, though not perfect, has indeed enabled China’s tremendous economic growth for the past four decades and offered major resilience for continued growth.

China’s innovations, in particular, are picking up with unforeseen speed and intensity. With “Made in China 2025” outlining China’s roadmap to becoming the world’s leader in high-tech, China is now already the second-largest spender on research and development and accounts for 21% of the world’s total, according to the US National Science Foundation. From the grass-roots level, patents, trademarks and industrial design soared in recent years. World Intellectual Property Organization reported that China contributed to 98% of global growth in patent filings, more than the combined total of US, Japan, Korea and Europe.

While China’s innovation is taking place with speed and intensity, MNCs have largely been a bystander. For long, China was known as a “copycat nation” and admittedly, for a long time, copycatting was blatant. However, innovations, largely business model innovations driven by China’s entrepreneurs have emerged with unprecedented speed, ever since technologies such as the wireless Internet became prevalent in China. Most MNCs were not even aware of this phenomenon because they didn’t believe the Chinese could be that innovative, and they did not really mix themselves into the Chinese business ecosystems.

Source: Internet

This lack of awareness is a key reason why MNCs have not captured the full potential that China offers. The “core competency” mindset from western corporate management drives foreign CEOs to not take risks and cling to what they are (supposedly) good at, often missing out on new opportunities to learn from Chinese consumers and companies. On the other hand, China’s leading entrepreneurial companies are good at identifying emerging market opportunities and are often willing to “jump over” to capture the new opportunities, even if they don’t have all the required capabilities to compete in the new conditions. They would often make up the capability gap through a combination of self-building and leveraging partnerships in the ecosystem.

Another reason why MNCs didn’t “get it” is that they see China as one of the many markets in the world, albeit often a very important market, but few put China at the core of their global development strategy. As much, they position their managers in China merely as operational or administrative people. Without an in-depth understanding of the China context, decision-makers from faraway global headquarters often find it difficult to stay informed of China’s innovations and to take full advantage of them. Or worse, they think they know and make decisions on that basis while in actuality they don’t (or at least not enough).

Lessons can be learned from multinational drug companies that are already bleeding talent to China startups. Zhi Hong, an 11-year veteran of GlaxoSmithKline, who led the company’s infectious diseases business, launched Brii Biosciences which raised $260 million from investors including Sequoia Capital. Dr. Xiaobin Wu, former China manager of Pfizer, left for a local cancer drug developer, BeiGene, where he sees opportunities for indigenous innovations for patients in China.

First, their strategy requires a thorough understanding of the China context which is evolving in a peculiar and multidimensional manner. Instead of using a linear, incremental approach at micro business levels, which is common at MNCs, they should focus on, or at least start with, the big picture and capture changes that can be abrupt and rapid.

Second, because these changes can be abrupt and rapid, MNCs should shorten their decision-making process, thus becoming more sensitive to innovations happening at the grass-roots level. Compared with the complex layers of management at MNCs, the dynamics at China’s new start-ups are very nimble and the decision-making is very fast. MNCs should therefore draw inspiration and create more agile organizations.

Third, the speed of development, uniqueness, complexity and strategic importance of China require foreign MNCs to fully embrace China as the core of their global strategy and organization, not just as one of many markets. Foreign multinationals should also train their China managers to be thought leaders and place them at senior levels as well as empower them with appropriate decision rights and resources.

There are cases of MNCs capturing significant value from China’s innovations. Earlier examples include Telstra, an Australian telecommunication and media company. Though its core business in China is restricted by foreign participation rules, it turned to invest in China’s online automotive advertising platform Autohome and made a handsome profit. Insiders estimated Telstra profited well over US$ one billion in well less than 10 years. Lately, Coca-Cola China ventured into the yogurt business with an investment in Beijing Lepur to tap the growing demand for health products and consumption trade-up. Lepur, a premium yogurt startup, is one of China’s fastest-growing brands.

Source: Internet

The golden era for foreign MNCs in China is not over. But to capture the rightful potential that China offers to them, foreign companies have to step up their game through more innovations, as well as better disruptive strategies supported by the right organizations and driven by the right leadership under a new and empowered global governance. Participating in China’s innovations in a full-fledged manner gives foreign companies a much better chance to succeed.

A major potential is emerging in Sino-foreign collaborative innovations (“co-innovation”). While China needs access to breakthrough technologies from global innovation hubs such as North America, Europe and Israel, top global technology firms also need a market that allows innovations to scale up. One of the most progressive markets with a vibrant digital economy, China is an ideal place to deploy and scale up new technologies.

To catch up with the new rules of games, foreign MNCs must accelerate by joining or even creating their own innovations ecosystems. Thriving or failing in China depends on whether they can strategically anticipate and capture the opportunities and handle the challenges. After all, it goes back to companies’ own mindset and awareness.

About the authors
Dr. Edward Tse
Founder and CEO, Gao Feng Advisory Company
Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company. A pioneer in China’s management consulting industry, Dr. Tse built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies – both headquartered in and outside of China – on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas. He is the author of over 200 articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version «创业家精神»).
Email: edward.tse@gaofengadv.com

Bill Russo
Managing Director and the Automotive Practice leader
Gao Feng Advisory Company
Bill Russo is Managing Director and the Automotive Practice leader at Gao Feng Advisory Company based in Shanghai. With 15 years as an Automotive executive, including over 14 years of experience in China and Asia, Mr. Russo has worked with numerous multi-national and local Chinese firms in the formulation and implementation of their global market and product strategies. He was previously Vice President of Chrysler North East Asia, where he managed the business operations for the Greater China and South Korea markets. Prior to this, Mr. Russo was Head of Product & Business Strategy for Chrysler. He also has nearly 12 years of experience in the electronics and IT industry, having worked at IBM Corporation as a manufacturing and systems engineer, and formerly served as Vice President of Corporate Development at Harman International.
Email: bill.russo@gaofengadv.com

The following is an edited excerpt from China’s Disruptors: How Alibaba, Xiaomi, Tencent, and Other Companies are Changing the Rules of Business by Edward Tse. The excerpt was provided by Portfolio Publishing.

In a quarter of a century Huawei has made itself the world’s biggest manufacturer of telecom-network equipment, rivaled only by Sweden’s Ericsson.

Huawei’s founder, Ren Zhengfei, was born in 1944 in southwest China’s Guizhou province, one of the country’s poorest regions. Ren attended university, studying engineering, and then joined the People’s Liberation Army to work on military-related technologies.

He left the army in the early 1980s as part of a round of military downsizing, moving to Shenzhen to start his own business. After a few false starts, he used 21,000 yuan of his own savings (then worth about $5,600) to set up Huawei in 1987. Initially, Huawei’s main source of revenue came from selling office telecom equipment imported from Hong Kong.

By 1990, it had acquired enough resources to open its first research laboratory. Two years later, the company launched its first digital switch, the core piece of equipment at the heart of any telecom network, which directs signals to and from callers. China at that time had just embarked on a massive telecom rollout; within less than 10 years, the country went from having no private telephones to acquiring first a nationwide fixed-line network and then multiple mobile ones.

The big winners for most of this period were the international equipment makers – Siemens, Alcatel, Nokia, Motorola, Ericsson, and Nortel – all of whom found ready customers in the provincial arms of the country’s big telecom services providers: China Telecom, China Mobile, and China Unicom.

These companies’ best Chinese customers were in the richer provinces and cities of the east coast, from Guangdong in the south to Beijing and Tianjin in the north, where buyers preferred to get their hands on the more advanced equipment offered by the international vendors.

But a government rule saying that all provinces had to buy equipment from at least two suppliers opened the door for Huawei to become the second provider in poorer, inland regions. Orders were small at first, which allowed Huawei’s engineers to gain experience at both installing equipment and seeing how what they made measured up against the systems from the international suppliers.

Driven by Ren’s insistence that Huawei continually upgrade its products’ quality through research and development, and supported by a government eager to see indigenous equipment makers displace foreign companies, the company’s footprint grew. The performance of its switches still lagged that of its competitors, but cheaper prices compensated for the gap. Able to undercut foreign companies on price and out-compete Chinese state-owned companies on quality, Ren began to find buyers in richer coastal provinces.

In 1997, Huawei stretched across the border immediately to Shenzhen’s south to secure its first international deal, a contract with Hong Kong operator Hutchison Telecom. Within eight years, as it extended sales first across Asia, then Africa and Latin America, and finally into Europe, Huawei’s overseas revenues were greater than its domestic ones. To ensure it secured deals, Ren insisted that his sales staff always submit bids below those of competitors – typically, by 5 to 15 percent, according to a report by Wharton Business School.

From the start, there was also another side to Huawei’s business: regardless of a customer’s size, the company would always be willing to come in and look for ways of improving the operations of its clients. During the golden era of telecom growth through the 1990s until the dotcom collapse, this approach was very different from that of the big international vendors, whose main focus was developing cutting-edge technology which they could then sell to fast-growing telecom operators.

Their preference was for selling entire systems to big companies, and they had little interest in selling to smaller businesses, especially those in poorer markets.

Huawei, in contrast, was happy to work with such customers, focusing on their often prosaic needs. It developed smaller, more power-efficient mobile base stations that allowed operators to reduce their electricity and rental bills. The company honed its ability to integrate its equipment with existing systems.

And, perhaps most important, it rapidly expanded the number of its R&D staff, hiring thousands of computer programmers and software-engineering graduates fresh from university, and putting them to work figuring out ways in which operators could run their networks more efficiently.

Today, Huawei is China’s biggest private exporter, with two-thirds of its $39 billion in revenues coming from overseas. It sells to markets in almost every part of the world, with the glaring exception of the United States, where its sales have been restricted to a handful of small mobile operators, largely due to national security concerns in Washington. Unsubstantiated allegations that the company is an agent of the Chinese government, however, serve as a smoke screen to hide Huawei’s significance.

It has shown how innovation, instead of calling for a string of groundbreaking products, can also be about finding ways of supplying and supporting an appropriate version of a product to secondary-market players. Serving customers in China’s lower-tier regions and other less-developed countries, then working with smaller players in developed markets, allowed Huawei to gain footholds and experience without having to go head-to-head with the big European and American equipment makers.

Instead, accompanied by a constant push to narrow the technological gap on its rivals, it could focus on growth through stealth by eroding their market share in areas they usually regarded as of secondary importance. As it grew in scale, Huawei’s consistently cheaper prices also had the effect of commoditizing the telecom-equipment sector, in the process reducing its competitors’ profits.

While its rivals could still win contracts where technological prowess mattered, less frequently could they win them where operators simply wanted their networks extended or upgraded in a routine manner. Along the way, Huawei has gradually transformed the world’s telecom-equipment market into something resembling China, where what counted was being able to offer constant incremental improvements in technology, features tailored to meet the precise needs of cost-conscious operators with no extra frills, and always at a price a little better than anyone else’s. Year by year, other companies merged or exited the industry, as Huawei relentlessly forced margins downward.

By 2012, it had established itself as the world’s biggest network-infrastructure vendor, with Ericsson its only remaining serious rival, and second only to Cisco in the router and switching market.

On March 15th, 2018, Gao Feng Advisory Company’s CEO Edward Tse was invited by Asia Society Switzerland to discuss China’s innovations in business. We would like to express our gratitude to Mr. Ernst Bärtschi, chairman of the Board of Directors of Conzzeta AG, for initializing the concept of this event and for orchestrating its organization. We would also like to thank the event’s host, Ms. Eunice Zehnder-Lai, member of the Board of Directors, Asia Society Switzerland, for leading the conversation.

Ms. Eunice Zehnder-Lai (EZL): Thank you, Mr. Bärtschi. Innovation is a very timely topic for all of us. Technology seems to be influencing all parts of our lives. China, as a topic, is also very relevant. Having said that, innovation in China may not come as the most intuitive topic. To many, the image of China is that of a socialist, planned economy and as a copycat nation. Not long ago, a lot of people were afraid of forming joint ventures with China, that they will steal your intellectual property, that they’re very good at making imitation and fake products, selling them at a fraction of the price and ruining your market. Suddenly, China has become a global leader in innovation. They’re one of the leaders in cashless payments, in drones, in many areas of e-commerce, and in facial recognition. How did that happen so quickly? If you count the number of unicorns in China, it is catching up with the US very quickly. If we look into history, at the end of the Cultural Revolution in the 1970s, Deng Xiaoping took over and inherited a big mess. His job was to turn the country around and he made certain decisions that really set the backdrop for this mass entrepreneurialism and grassroots innovation. Could you give us a little bit of color on the backdrop?

Edward Tse (ET): First of all, thank you. Thanks to Asia Society Switzerland for the invitation and to Mr. Bärtschi for your arrangement which is really wonderful, and Eunice for your being our host this afternoon.

I’m very privileged and I hope I can share with you some of my views and experiences. Having worked in China for over 25 years by now at some of the top and biggest consulting firms, first with the Boston Consulting Group, and later with Booz Allen Hamilton (later known as Booz & Company), I was fortunate to have helped a large number of companies, foreign and Chinese – including SOEs and private sector companies — over the years to help them develop their business and strategies.

Developing the right kind of strategy for China needs consideration of the China context. Without that consideration, the strategy would mostly fail. You cannot just copy and paste the strategy approaches that you take in Europe or in America or wherever and expect that to work in China. Sometimes it works but most often, it doesn’t because the context is very different.

Eunice, your question is very good. Many people are surprised by the speed and intensity of the changes in China. However, all of these happened for a reason.

The biggest near-term game-changer in Chinese history is the Cultural Revolution which left the Chinese disillusioned. When that was over, Deng Xiaoping returned to power. He decided to be pragmatic and tried something different: allowing entrepreneurship to come back to China.

Back at that time, the Chinese people were clueless about business because they had no exposure to the notion of business under a planned economy. However, we Chinese were innately very entrepreneurial in history. For centuries, the Chinese were trading with the Europeans, Indians and Arabs over the Silk Road. And we traded with our neighbors. It was just totally and artificially stopped by that aberration in the first 30 years of the PRC. However, after Deng lifted the ceiling, entrepreneurship started growing fast.

EZL: When we think about Chinese companies’ entrepreneurship, there are three companies that always come to mind: the “BAT” – Baidu, Alibaba and Tencent. And every time we see them, they seem to be going into a new business. And they seem to be growing horizontally in their ecosystems. Whereas in the West, the managers are taught to focus, to find out what your strengths are and what your core competency is. Do not deviate from what you’re good at, because the market will penalize you for it. It doesn’t seem to be the same in China. Why is that?

ET: You’re right. It is about management science. When I first joined consulting 30 years ago, I was in the US and was taught there were only two ways to think about business strategy. One is to form conglomerates, meaning collections of different kinds of businesses but on a random basis. The other way is to focus based on a company’s core competencies, i.e., what you are good at.

In fact, since around the 80’s, conglomeration was not considered as a good thing by the western capital market. The notion of “focusing on what you are good at” as an outgrowth of the “core competence” concept became the mainstream strategy thinking in the West till even now.

The rise of China and the prevalence of technology, in particular the creation of smart devices, have provided the context for the rapid emergence of companies like BAT. The Chinese really embrace the Internet, particularly wireless internet and its associated features like social media.

In China, while there are some companies that are conglomerates and there are some that are core competence focused, the fastest-growing companies grow by “multiple-jumping”: jump when they see new opportunities, even though they may not have all the capabilities needed to operate in the new opportunities space. They will make up for the capability gaps along the way either by themselves or through collaborations with other companies, or both. These companies may focus on their existing core competencies at first, but when they see the opportunities showing up in what we call the S-curve manner, they will try to catch these new opportunities even if they don’t have all the capabilities needed to run the new business. Managers in Western multinational companies don’t necessarily see these new upcoming opportunities in China. Even if their local managers tell them there are opportunities, most of them will revert back to a core competence focus, thinking, “if I try to stretch, I will be accused of being not focused.”

On the opposite, the Chinese entrepreneurs are highly driven to grab these new opportunities. If they lack the capabilities to do so, they would collaborate with partners thereby building ecosystems. Companies like BAT have developed into not just one but multiple ecosystems, turning into mega ecosystems. Today Alibaba and Tencent are already in the world’s top five by market capitalization.

By the way, leading U.S. tech companies like Google and Amazon have also grown through “multiple jumping”.

EZL: In all these mobility companies, they don’t really see themselves as transportation companies. They see themselves as data gatherers. The value is really in the data they have from having twenty million rides a day.

ET: That’s exactly right. The Chinese entrepreneurs have discovered this without knowing it actually. With the command of large user databases, they feel they can crisscross over industry boundaries. They can go into industries that they were not in before. So they can do multiple jumping.

Meituan-Dianping, the popular food delivery app, has 400 million active users in China and offers fast and convenient service. With that database, they look at mobility services as a good business to enter into. The leading mobility services company in China is a company called Didi Chuxing. Didi competed with Uber for a while until Uber pulled out from China. Didi didn’t look at the auto OEMs as competitors because they lived in different spaces – mobility solution and car manufacturing respectively. But this is not the case with Meituan-Dianping, who as a food delivery provider, has a large active user database. When Meituan announced that they would go into mobility service solutions, Didi was concerned that real competition and a real war would start. This is how competition is being defined in China’s digital space.

EZL: What other advantages do the Chinese have if you look at the very successful companies in China that are truly innovative? Do you see a common thread that goes through all of them? What are the typical characteristics of these companies compared to what you see in the West?

ET: It all started with the mindset and the leadership. In the West, companies tend to focus based on their core competencies. That is the response to a general slowdown of the economy in the 80’s and the early 90’s after the “go go years” of the conglomerates in the previous decades. So the academics and the consulting firms came up with a theory to try to explain that, which became the mainstream thinking in the West and it still is nowadays.

The Chinese came from a very different context. In the 80’s, coming out of the Cultural Revolution, they were experimenting with businesses, but had little clue because the notion of “business” didn’t even exist in China’s planned economy. Thereafter China has grown in a very different era and much faster. When opportunities came with the prevalence of technology, Chinese entrepreneurs began to develop a new and different mindset. This mindset is epitomized by the willingness to take risks and to capture new opportunities before the opportunities fully manifest themselves. Technology is a key enabler for developing new business models and new capabilities. Examples of this include not only BAT but also many others such as Ping An, Xiaomi, Geely, etc. Ping An, for example, has evolved from an insurance company into a major horizontal ecosystem. Peter Ma, its chairman, is now trying to benchmark the company against Google and Amazon.

EZL: What insight and learning would you have for our audience here? Not everybody here is involved in business in China. And even if they’re in business in China, it’s not a hundred percent in China. One could say, “Okay, all these great things are happening in China. How is it going to affect me?” How should we think about the threats and challenges of these new business models in China to the West? That’s number one. Number two are these context questions that you said about why these entrepreneurs are so successful in China, having a fast-growing market, having government support, having a lot of data, having hungry people because of their pain points that we don’t have in Switzerland. It’s a good life here and there is little competition. So what can we learn from innovation in general that is transferable to Europe?

ET: Of course, to what extent China affects you depends on your individual conditions. Some of you may be doing business with China and so China has a lot of implications for you. Some are not doing anything with China but are looking. Some may have nothing to do with China. But the Chinese may knock on your door anytime and you should be prepared for it.

China is on the verge of a new generational rise that will last for some prolonged period. Entrepreneurship and innovation are an important underpinning for that. Entrepreneurship cuts across many parts of China, and young people are going after their own dreams and pursuits. They aspire to be the next Mark Zuckerberg or Bill Gates or Jack Ma. Though only a very small percentage will succeed, a small percentage of a big number is still a big number.

Some of these young people realize that if they can be successful in China, they have a good chance of being successful in other parts of the world. I cannot predict exactly who they may be, but I know the mentality: the first step is to become number one in China; the second step is to go out to the world. The world is becoming more and more connected through technology, and globalization will prevail more than isolation.

EZL: Thank you very much.

About the host and guest

Ms. Eunice Zehnder-Lai is CEO of IPM (Institut für Persönlichkeitsorientiertes Management). Previously, she was in the financial services industry for 20 years with LGT Capital Partners, Goldman Sachs and Merrill Lynch in New York, London, Hong Kong and Switzerland. She also worked for Procter & Gamble in marketing and brand management as well as for Booz & Co. in strategy consulting. Eunice is also a member of the Board of Directors of DKSH (since March 2018), Geberit Group (since 2017) and Asia Society Switzerland (since 2016). She holds a Masters of Business Administration from Harvard Business School and a Bachelor of Arts degree from Harvard University.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company. A pioneer in China’s management consulting industry, Dr. Tse built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies – both headquartered in and outside of China – on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas. He is the author of over 200 articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version «创业家精神»).

About Asia Society Switzerland

Asia Society Switzerland is an independent Swiss foundation, which is a member of the global Asia Society family. Founded in 1956 in New York, Asia Society has developed into a thought leader on Asian issues, and a vibrant community of decision makers around the world.

As the first Center in Europe, Asia Society Switzerland – founded in 2016 – provides a unique opportunity to become part of this global community, and to contribute to a meaningful dialogue that could shape our future. Asia Society Switzerland is committed to exploring Asia’s role in a multilateral world and to advancing the dialogue and strengthening partnerships among individuals and institutions in Switzerland and Asia.

About Gao Feng

Gao Feng Advisory Company (www.gaofengadv.com) is a pre-eminent strategy and management consulting firm with roots in China coupled with global vision, capabilities, and a broad resources network. We help our clients address and solve their toughest business and management issues — issues that arise in the current fast-changing, complicated and ambiguous operating environment. We commit to putting our clients’ interest first and foremost. We are objective and we view our client engagements as long-term relationships rather than one-off projects. We not only help our clients “formulate” the solutions but also assist in implementation, often hand-in-hand. We believe in teaming and working together to add value and contribute to problem solving for our clients, from the most junior to the most senior.

Our senior team is made up of seasoned consultants previously at leading management consulting firms and/or ex-top executives at large corporations. We believe this combination of management theory and operational experience would deliver the most benefit to our clients.

Our name Gao Feng is taken from the Song Dynasty Chinese proverb Gao Feng Liang Jie. Gao Feng denotes noble character while Liang Jie refers to a sharp sense of integrity. We believe that this principle lies at the core of management consulting – a truly trustworthy partner who will help clients tackle their toughest issues.

Reporting By Matthew Miller; Editing by Philip McClellan
CHANNEL NEWSASIA | March 16, 2018

China’s HNA, Shedding Debt Overseas, Is Still Hainan’s Hometown Champion

Hundreds of workers pour concrete as tower cranes swing overhead at the building site where a giant skyscraper is set to soar above the palm-fringed streets of this tropical Chinese city.

HAIKOU, China: Hundreds of workers pour concrete as tower cranes swing overhead at the building site where a giant skyscraper is set to soar above the palm-fringed streets of this tropical Chinese city.

The building is the first of two towers that will serve as the gateway to a 200-hectare new central business district in downtown Haikou, capital of the island-province of Hainan in southern China.

The project is being constructed by HNA Group , the widely scrutinized and highly leveraged aviation-to-financial services conglomerate that got its start in Hainan 25 years ago as a regional airline with just two aircraft.

But HNA is now looking to shed at least some of its sprawling interests in the huge 100 billion yuan (US$15.84 billion) business district, as it has done with many of the interests the company has amassed in a US$50 billion global spending spree.

HNA is currently in talks with potential “strategic partners” for parts of the development, which a range of investors also have stakes in, according to sources familiar with the situation, even as it prepares to re-organize its operations and shrink its workforce.

The search for investors in HNA’s hometown underlines the difficulties the company is facing as it struggles under the weight of the debt it racked up during its rapid expansion.
HNA told major bank creditors in January that it faced a potential cash shortfall of at least 15 billion yuan in the first quarter.

In the last two months, HNA has sold more than US$6 billion in prime real estate in Australia, New York and Hong Kong, while selling shares in Deutsche Bank , Park Hotels & Resorts , and Hilton Grand Vacations Inc .

On Monday, HNA Infrastructure Investment Group , one of the key developers of the Haikou business district, said it would sell a Hainan-based property company and logistics unit to Sunac China , a real estate developer, for 1.9 billion yuan.

When asked for comment on the stake sales, the company said in a statement that “HNA is always looking for trusted partners”.

The master plan for the Haikou business district includes 23 office buildings, residential compounds, and a massive luxury shopping mall. The first of the Haikou Twin Towers, 94-floors high, is scheduled to open in 2020, and will include a St. Regis Hotel.

Anchored in the center of the district is the Hainan provincial government, with HNA’s headquarters, a Buddha-shaped tower, sitting just down the road.

A COMPANY ISLAND

Hainan is in many ways an HNA company island. HNA Group operates 92 enterprises across the province, employing 30,000 workers, with total assets of nearly US$50 billion. It is Hainan’s biggest money maker, with total revenues outstripping the combined sales of the province’s next nine largest companies combined.

HNA is also critical to local government efforts to establish Hainan as a regional and global tourist destination.

The group operates the island’s three commercial airports and its flagship Hainan Airlines operates 17 international and regional routes from the province and transports about 45 percent of all visitors arriving by air here.

The company is currently investing 15.3 billion yuan for a second runway and terminal for Haikou’s international airport, part of an expansion to accommodate 35 million visits by 2025.

The branded tailfin of Hainan Airlines, which travels to 110 cities worldwide, has elevated the province’s name around the world, said Edward Tse, chief executive of Gao Feng Advisory Company, who previously advised Chinese companies at Booz & Company and Boston Consulting Group.

“HNA is a business card for Hainan province,” Tse said.

Hainan’s governor, Shen Xiaoming, who visited HNA’s Haikou headquarters in November just as the severity of the company’s financial struggles emerged, underscored the importance of the group to the province’s development.

“HNA took root in Hainan, understands Hainan, implemented a new development concept in Hainan, and built a modern economic system in Hainan,” Shen said. “If HNA is good, then Hainan is good; when Hainan is good, then HNA is better.”

GOVERNMENT CLEAN-UP

HNA and other non-state conglomerates in China have meanwhile been under intensifying pressure from Beijing to clean up operations and deleverage their businesses.

In recent weeks, Chinese regulators have taken control of Anbang Insurance Group. The government is also investigating the chairman of CEFC, which has agreed to take a US$10 billion stake in the Russian oil major Rosneft.

HNA executives have recently elevated their patriotic rhetoric and have tethered company goals closely to those of Beijing.

HNA Capital, for instance, announced on Feb 27 that it was helping to raise 20 billion yuan to help fund projects along China’s new Silk Road trade initiative.

HNA’s cause is the “cause of the party, the cause of the people and the cause of all mankind”, Chen Feng told HNA’s Communist Party members on Feb 7, according to a company report.

HNA’s co-chairman, Wang Jian, voiced a darker message, telling employees that the company’s difficulties were the result of a “major conspiracy” against the party and President Xi Jinping by foreign and domestic “reactionary forces”, according to an internally-distributed email.

China’s leading industrial conglomerates and technology companies all have Communist Party committees, and such rhetoric is not unusual now, said Tse of Gao Feng Advisory Company.

By Edward Tse
March 29, 2018

A Gap in Expectations – Why People Didn’t Understand China’s Innovation

Many people are now talking about China’s innovation like they have just discovered a New Continent. Some say China is now going “from imitation to innovation” while others even say, “It’s time to copy China.” This is unthinkable just several years ago.

Recently, I went back to my book China’s Disruptors, which came out in 2015, to recall what people said about China’s innovation at that time. The following is a relevant excerpt. In addition to the people quoted in the excerpt, I remember around that timeframe, Carly Fiorina, ex Hewlett-Packard CEO, was quoted saying, “…but what (the Chinese) can’t do is innovation, they are not terribly imaginative, they are not entrepreneurial…”

The following is the excerpt from my book.

Outsiders who get information about China from the Western media tend to view it as an innovation desert: a country of copycat firms, weak or nonexistent intellectual-property rights, and an education system based on rote learning.

Addressing a group of air force cadets in May 2014, U.S. vice president Joe Biden declared, “I challenge you, name me one innovative project, one innovative change, one innovative product that has come out of China.” Two months earlier, Harvard Business Review published an article with the headline “Why China Can’t Innovate.” The piece, written by business-school professors Regina M. Abrami, William C. Kirby, and F. Warren McFarlan, boldly declared: “Today, … many believe that the West is home to creative business thinkers and innovators, and that China is largely a land of rule-bound rote learners – a place where R&D is diligently pursued but breakthroughs are rare.”

The authors agreed with this outlook and dismissed the kind of advances seen at companies such as Alibaba and Baidu as “second-generation” innovation – adaptations of existing technologies for the Chinese market, and the kind of routine work companies around the world do day in and day out once someone else has done the blue-sky thinking.

Source: Google

This is bizarre. How can the authors of that article and many other similar pieces miss the impact that companies in a wide range of industries are creating in China, reworking daily life by inventing and applying new ideas in a variety of fields? Consider Haier in white goods. Huawei in telecommunications. Xiaomi in mobile phones. Alibaba in e-commerce and finance. Tencent in messaging and gaming. These are just a few examples; there are many more. Yet they are often overlooked. Why?

Rather than simply a snapshot of today, or even a view from the past, China’s development is inevitable, discontinuity is a way of life and often multi–dimensional. As such, linear and single-dimensional viewpoints will often miss the point.

The simplest explanation is a gap in expectations. Chinese companies have yet to produce basic technological research in power systems or chemicals, for example, or a product or service that has had the same impact on Western markets as the iPhone or Facebook, or a praised and adopted business process such as Japan’s “just-in-time” production system. But simply translating this into “China isn’t innovative” is short-sighted, simply focusing on what has not happened in China and not seeing what is actually taking place.

Source: Google

Since my book was published, China has taken huge strides in both innovation and entrepreneurship. Today, many people have come to recognize that China can be innovative, especially in tech-enabled innovations. However, as the above excerpt of my book indicates, this certainly wasn’t the case just a few years ago. It is always important for people to study China not from a long distance but be on the ground – all the time and across many dimensions. It is also important for people to adopt a prospective point of view on the likely changes in China instead of just taking a snapshot of today or constantly looking back at the past.

Edward Tse is founder & CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. A pioneer in China’s management consulting profession, he led the Greater China operations for two major international management consulting firms for 20 years and is widely known as China’s leading global business strategist. He is author of The China Strategy (2010) and China’s Disruptors (2015).

By Edward Tse | 24 Feb 2014

Four years ago, Dr. Edward Tse wrote an article, Don’t Belittle China’s Innovation Potential, which was published on Europe’s World. The date of the publication was February 24th, 2014.

Is China a breeding ground for innovation? Most people wouldn’t say so, as China is so often associated with copycats, restricted freedom of speech, poor protection of intellectual property rights (IPR), rote-learning education and an overbearing state sector. For some or all of these reasons, outsiders tend to see China as lacking the fundamentals for successful innovation.

But this view is simplistic and superficial. Let’s look at two of these so-called reasons in more detail. Lack of IPR protection is a real issue, but it hasn’t stopped innovation from taking place. Over the past decade, there have been many examples of innovation originating from China, both product and technology innovations as well as business model innovations. One can argue that change is still at a snail’s pace, but China’s IPR protection is improving and in recent years there have been cases where foreign companies successfully sued Chinese companies for IPR infringements.

The dominance of the state economy is another often-cited reason inhibiting innovation in China. Yet even the state sector can create innovations. 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. The list goes on and is lengthening. These were all developed under the auspices of the state sector. Regardless of what many people say about the Chinese copying or even stealing technology from others, for projects as complex as these, real innovations clearly do exist, and the dominance of the state economy was able to provide ample funding for these advances.

“Despite the state sector’s role so far, most of China’s innovation will not be coming from there. It will come from the companies or even individuals who compete in China’s increasingly open economy”

China’s market economy is still developing, and is now slightly over two decades old. This fundamental transformation away from the fully planned economy so deeply ingrained during the Chinese People’s Republic’s first 30 years is still just a small blip in China’s long history, and nothing that we have seen during the last 20 years is by any means perfect. But the forces shaping the future change need to be fully understood, and the direction and speed of their change recognised and appreciated.

Despite the state sector’s role so far, most of China’s innovation will not be coming from there. It will come from the companies or even individuals who compete in China’s increasingly open economy. And that includes both Chinese and foreign private companies as well as state companies. And as more mixed equity enterprises are formed in response to the needs of a competitive market, the lines separating these different kinds of companies will become more blurred than ever. China is undergoing a measured but definite process of deregulation, sector by sector. Not all sectors of the economy will ever be fully deregulated, but the trend is clear.

The size of China’s market and the potential for profits 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 be innovative and to create the best products, services and business models to achieve success. There’s also a strong “why not me?” mentality among Chinese entrepreneurs, so when an opportunity arises they tend to give it a try. Some – maybe even most – may fail, but with a population of 1.4bn, even a small percentage of successes is noteworthy and these are going to 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 “crowd-sourcing”. Its strategy is working so well that Xiaomi’s revenues grew from zero in 2010 to $5bn in 2013, with the company now reportedly valued at $10bn. The late Steve Jobs at Xiaomi’s U.S. counterpart, Apple, didn’t believe in focus groups because he felt he knew best, but Lei Jun takes the opposite approach, and is convinced that customers will be the best ones to tell him how his products should be designed and how its service model developed. With millions of fans, Lei Jun claims his business model is not to make money from the hardware, but from services.

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. This sprang from a customer claim and is an example of Haier’s “customer centric” management philosophy. Not every Chinese company will be like this, but the market is changing so rapidly that there are major incentives for Chinese companies to be agile, nimble and innovative.

“There’s also a strong “why not me?” mentality among Chinese entrepreneurs, so when an opportunity arises they tend to give it a try”

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 the process and in fact often further examples of how innovation will be sustained in China. Tencent’s QQ, for example, was a precursor to WeChat, a fast-growing Twitter/WhatsApp type of platform very popular not only in China but internationally too. Although only two years old, WeChat already has over 600m registered subscribers and over 270m active users and the numbers are growing fast. It introduced voice capability before WhatsApp, along with a more recent payment capability that is undercutting China’s dominant incumbent, Alipay of Alibaba.

Telecom 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 Sunning were the dominant retailers through their “bricks-and-mortar” retail stores and today, Sunning is having to quickly transform itself into an “O2O” (Offline to Online) retailer. The same goes for companies like Haier, while many retailers, especially state-owned ones, are looking at how they must revamp their business strategies to remain competitive.

As China’s economic transformation continues, more and more monopolies will be broken down. It’s unlikely that China will become completely deregulated in the near future, but it’s heading in the right direction, and the new government re-affirmed this trajectory at its recent Third Plenum when it was emphasised that market forces will play a “decisive role” in China’s economic development and non-state capital will gain access to more sectors. State-owned enterprises (SOEs) are set to remain important, but non-state companies were for the first time put on an equal footing with the SOEs. Experimental free trade zones like that of Shanghai are to be established in more cities across China, and an effort will be made to create economic conditions that are conductive to innovation by entrepreneurial companies, both foreign and state-owned.

China’s unique qualities are its complexity and size. Even a small percentage of successes can be significant in the context of global commerce. Europe and the rest of the world will need to keep a close eye on China’s innovations because as well as threats they will bring with them opportunities.

By Edward Tse | January 12th, 2018

It has become a tradition for people to come up with predictions around the new years and here’s my list for 2018. This is my first endeavor and given my professional focus, my predictions will center on strategy and businesses with focus on China and China’s increasingly involved role in the world.

No predictions of this sort will be totally MECE (mutually exclusive and collectively exhaustive), including mine. I will attempt to go through my thoughts from the top of my mind. My predictions for 2018 will be as follows.

1. China’s GDP growth for 2018 will be around 6.5 percent

I don’t really have a crystal ball and as you know, this sort of predictions is anyone’s guess. Nonetheless, my work through different parts of China has allowed me to talk to businesses and people from all over, As always, there is both optimism and pessimism. Overall, I sensed more optimism than pessimism and I felt that a somewhat positive momentum is being built. Like always, there will be areas in which China will struggle, for example, sectors with chronic overcapacity and structurally low performing SOEs in parts of China. There are also doubts on the prospects of China’s property sector in 2018 and China’s debt level remains high, causing concerns about its financial risks; however, there will be areas in which China will continue to do well. According to a study by the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences, China’s new economy – Internet-based businesses ranging from e-commerce to car-hailing services – grew twice as quickly as China’s overall GDP in the past 10 years to 2016. The contribution from the new economy to the overall GDP growth will continue in 2018, along with an increase in consumption and investment as well as trade, all serving to continue to prop up the GDP growth. In summary, barring major Black Swan events, I expect China’s GDP growth would hover around 6.5 percent plus and minus some, consistent with what the Chinese government and institutions such as the World Bank and IMF predicted. The perennial prediction of the “coming collapse of China” will unlikely to happen (again).

2. China’s consumers will continue to trade up

The fact that the Chinese middle class is growing and that their ability to afford more products and services continues to increase shouldn’t be viewed as a prediction anymore. This will happen almost for sure, but it’s still an important trend that’s worth mentioning. Depending on whose estimates you believe, the number of China’s middle class is currently around two-and-a-half to three hundred millions. All estimates are pointing to an overall increase over time. And these consumers are trading up. Instead of basic products and services, Chinese consumers are increasingly looking for those who can cater for better lifestyle and health. They are also increasingly digitally savvy and globally mobile, and are becoming more individualistic in their needs and consumption behavior.

3. Innovation and entrepreneurship in China will continue to thrive

China has begun to shed off its image as a copycat nation as more and more companies, both large and small, are becoming innovators in their own right, mostly in tech-enabled business models. Entrepreneurship is spreading across China – not only in top-tiered cosmopolitan areas but also in lower-tiered cities and across a wide range of sectors. Additionally, the entrepreneurs are getting younger. Many of them are in their 30’s or even 20’s. The Chinese central government has embraced innovation and entrepreneurship as a core part of the national development strategy. In 2018, we would expect more to come.

Source: Google

4. Technology will play an even larger role in driving China’s innovations

The wireless Internet and the smartphone have played a major enabler role for helping to drive China’s rapid growth in innovations for the past decade. As Chinese entrepreneurs continue to search for the next rounds of innovations, technology will continue to play a major enabler’s role. The Chinese have embraced various forms of new technologies in artificial intelligence (AI), internet of things (IoT), augmented reality (AR) and virtual reality (VR), and are experimenting many different ways for innovations. Surely, many of these experiments would fail but some of them would succeed. Given the size of the Chinese market, the ability of scaling up gives experimenters opportunities to try, learn and adapt, allowing a natural selection of the right application of technology to businesses.

5. Continued hyper growth of the Chinese ecosystems organizations

In 2017, China made history as Alibaba and Tencent became two of the world’s largest market cap companies and their rankings continued to move up. These two companies are prime examples of “mega-ecosystems” as they have built out from their original core business to form various ecosystems that together form a mega ecosystem. They jump from sector to sector as they see new market opportunities pop up as China continues its reform and opening up, and as technologies become available as an enabler for disruptive means of doing business. Each mega ecosystem attempts to offer what the consumer needs for his or her “lifestyle needs”, so each of them could be a bona-fide exponential business. When put together, the mega ecosystem becomes “super exponential” in their growth. While leading US tech companies such as Amazon and Alphabet are also major ecosystems players and are very successful, the Chinese seem to be more inclined to migrate across sector boundaries and to create larger ecosystems. Companies like Geely, Didi Chuxing, Ping’an, Meituan are building out their respective ecosystems in incredible speed and intensity. Clearly, access to abundant users’ data is the core for this kind of companies. Even shared bikes start-ups like Mobike and ofo claim that they are data companies and not just shared bikes companies, meaning that they would also build out their ecosystems with consumer lifestyle at their core.

Source: Google

6. Mixed ownership reform of Chinese SOEs will finally happen

China’s SOE reform has been talked about for at least for the last couple of decades. In recent years, the notion of mixed ownership reform was mentioned many times as the solution to the structural issues of the Chinese SOEs. However, not much has taken place. In 2017, China Unicom’s mixed ownership reform was given the green light by the Chinese government. It looks like the Chinese government is ready to step on the gas pedal for this sort of reform in 2018. Not only SOEs at the central government level, but also many of those at local levels will be targets for reform. And, reform will likely be focused on enterprises in the “competitive sectors.” Let’s see how it would go but from what I saw and heard, it looks like things can get much more serious this time.

7. More opening up will be allowed for foreign companies’ ownership of their operations in China

Since its reform around three decades ago, China has been gradually opening up its industry sectors for foreign participation. Today, while some of the sectors remain pretty closed, some of them are entirely open. And, some are somewhere in between. I would expect the gradual opening process would continue but it is unlikely every sector would become entirely open overnight. In November 2017, the Chinese government announced the ease in foreign equity participation in a range of financial services sectors. While this move didn’t allow full foreign ownership in the relevant sectors, the increase in scope and scale was quite significant. I would expect more opening up in 2018.

8. Foreign companies’ performance in China will continue to be mixed

Some pundits have claimed that the golden era for (foreign-headquartered) MNCs in China is over. I don’t agree with that. China’s continued growth offers plenty of opportunities for foreign MNCs. It’s a matter of how the MNCs view the opportunities. However, the performance of these companies in China to-date has been mixed. Some came to China and were disappointed with the market. Some of them even decided to withdraw from the China market. Some other MNCs are engaged in sectors where there is significant and structural overcapacity. These companies tend to be in a wait-and-see mode. Yet, some others have found China to have become one of their most important and most profitable markets, or even the most important and most profitable. This overall pattern will probably continue in 2018 but the dynamics would evolve. For the companies who are in the third category, I predict most, if not all, of them would continue to invest in China, and for some, significantly. For some who have left or have de-emphasized the China market, they may return to and re-invest in China. For these companies, China is just too big and too important a market opportunity, as well as a pivot for these companies’ global strategy, to ignore. Competition in China’s open sectors will become even more intensive in 2018 driving foreign MNCs to become more competitive and more innovative in their own right.

9. Cross-border M&As will continue

While Chinese companies’ outbound investment in 2017 has dropped from its peak in 2016 due mostly from the Chinese government’s capital control measures, the 2017 investment level was modestly higher than that in 2015. Chinese companies’ interest in investing overseas has not fully cooled down as many of the Chinese companies are still seeking for ways to do these investments. From the Chinese government’s standpoint, the reason for investing overseas has to be legitimate. But as long as they are regarded as legitimate, it looks like the Chinese government would give the green light. Two recent cases in point were Geely’s US$ 3.3 Billion purchase of 8.2% of AB Volvo, the truck manufacturer, in December and the US$ 9 Billion deal completed by private oil company CEFC China Energy to take a 14% stake in Russia’s biggest crude producer, announced in September. I expect this trend will continue in 2018. Perhaps the total volume or value of the transactions wouldn’t shoot up in a major way, but I would expect a modest increase. Of course, cross-border Chinese investments are sometimes blocked by the host government due to “national security” reasons. I expect this would continue to be a challenge for the Chinese investors as they look to investing overseas.

Source: Google

10. The China development model continues to foster

For a couple of decades, the so-called “China Development Model” with which a top-down guiding hand by the central government and the bottom–up grass-roots entrepreneurship has worked remarkably well for China. This model has created several decades of high economic growth and has lifted several hundreds of millions of people out of poverty. While some pundits continue to argue against the legitimacy and sustainability of this approach, surveys have shown the Chinese people are largely supportive of the results that this model has generated. In addition to the top-down government guiding hand and the bottom-up entrepreneurship, the “China Model” also includes a middle piece which gives the entire model extra effectiveness and resilience. That is the intensive coopetition among various provincial and municipal governments. Over the years, local governments have tried to build their respective advantageous positions over others. To this end, various governments would choose certain sectors or technologies as focus of their developments. This competition has generated much progress across China and in some cases, much waste. While this kind of competition will continue in 2018, regional clusters of cities are also being formed such as the Greater Bay Area linking key parts of Guangdong Province with Hong Kong and Macau, the Greater Shanghai Area, the Greater Beijing Area (Jing-Jin-Ji) as well as the development of the Xiong’An New Area in Hebei Province. While cities within each cluster would cooperate with each other, competition is somewhat significant across the clusters. This coopetition will manifest itself more profoundly in 2018 providing an underpinning for further progress for China.

So, here they are – my predictions for strategy and businesses in China in 2018. As I said, these are not MECE. For example, I haven’t covered major topics such as Belt & Road, capital market, financial reform. property market, shared economy, etc. Nonetheless, hopefully these predictions offer some insights as you plan for your business in 2018.