HSM | Why Chinese are Workaholic?

By Edward Tse
January 2020

Gao Feng Advisory’s CEO Dr. Edward Tse’s article was published in his regular column on Brazil’s HSM Management Magazine in January 2020 issue. In this article, Dr. Tse discusses the “working hard” culture of the Chinese businesses.

English Version

After decades of tremendous growth, China is now an upper-middle-income nation, according to the World Bank. Its reputation as an innovative economy is increasing. Along with its economic growth, China’s productivity too has been growing well.

The growth of China’s productivity during the last few decades is mainly due to the opening-up and reform policy implemented from 1978 onwards, its labor intensive exports driven manufacturing and investment-led growth model underpinned this extraordinary progress. Yet some strains associated with that approach have become evident in the last one decade or so as these economic drivers seem to be running out of steam.

China stepped into the innovation wave after the wireless internet (together with smart phones) became prevalent. Chinese entrepreneurs have leveraged this technology to create a range of new business models and products that cater to the evolving consumer and business needs. In the race against time and in the midst of hyper-intensive competition, Chinese entrepreneurs have to be fast, agile and adaptive in order to remain ahead of others. They often don’t mind using the market as a test bed for experimentation as they fine-tune their business models along the way. Quick experimentation often becomes the core part of the very culture of Chinese companies. Speed, rhythm, intensity and multi-tasking have become parts of the DNA of many Chinese companies. On top of this, evolving government policies and regulations are often a source of uncertainty and they keep Chinese entrepreneurs persistently and highly alert and vigilant.

As a result, many Chinese businesses have formed a culture of “working hard.” This is the now widely known as “996” schedule – which means working from 9am to 9pm, six days a week. This has become common place among Chinese entrepreneurs, particularly among large internet-based businesses. The 996 schedule was initially applied in order to improve overall productivity of companies by increasing working hours.

Source: Baidu

However, the notion of “996” has become somewhat controversial. Alibaba’s founder Jack Ma is a vocal supporter of the gruelling working hours commonplace in China’s tech and internet industry. He once said at an internal meeting that this is, “a huge blessing that many companies and employees do not have the opportunity to have,” according to a transcript published on Alibaba’s official WeChat account. Richard Liu, CEO of JD.com, a leading e-commerce company, responded to the recent layoffs saying that JD.com would never force employees to work in a 995 or 996 schedule, but every staff of JD.com must “have a competitive spirit!”

Besides the 996 schedule, many Chinese companies, including both state-owned enterprises (SOEs) and privately-owned enterprises (POEs), are actively seeking multiple ways of improving productivity. More and more companies, especially SOEs and some internet companies, are beginning to provide free meals to their employees in order to reduce the amount of time spent on purchasing and eating meals. Moreover, employees’ dormitories and free buses are also being offered as perks to simplify the lives of employees and make sure they can get to work on time. In some companies, a military-style management has also been deployed to improve the efficiency and productivity of their staff’s work.

The “working hard” culture of the Chinese businesses probably won’t go away any time soon.

How Would China’s Businesses be Affected by the Coronavirus?

Source: Baidu

These days, the news is dominated by the impact of the Coronavirus and how China is coping with this latest shock. Consumer demand for goods and services is declining in China; sectors such as retail, travel and leisure are the most directly impacted as businesses have closed or are semi-closed throughout the country. The Coronavirus has challenged China, exposing some crucial gaps, but it will also potentially create new opportunities. Attention will be focused on improving China’s entire public agenda, not only one or two vertical areas.

In the aftermath of the crisis, one would expect China’s governance system to become more transparent and there will be more accountability. In order to ensure its public agenda is advanced properly, a lot more effort and resources will need to be put in by the central government as well as local governments at the provincial, city and township levels. State-owned enterprises (SOEs) and non-state-owned enterprises, including both Chinese privately-owned enterprises (POEs) and foreign companies, will be able to better leverage their respective strengths and capabilities. As a case in point, two new specialized hospitals were built in Wuhan – one in 10 days and one in 14 – through the combined efforts of SOEs, POEs and foreign companies. That was quite a feat.

Comprehensive data has always been collected throughout China and surveillance too, was prevalent, and yet China wasn’t able to fully track those who might have contracted the virus. In the aftermath, surveillance and monitoring will become even more important for ensuring their utility for the people.

China’s socioeconomic pattern is also changing as consumer behavior shifts and technology continues to develop. Consumption is shifting increasingly from offline to online. New commercial applications of technologies such as 5G, AI and IoT are also developing faster because of the epidemic. We will see innovative business models and changes in the ways that humans interact with each other and with machines in the future.

Source: Baidu

What trends could possibly drive future business opportunities in the aftermath of the Coronavirus?

1. A major nationwide effort would be made towards creation of a safer and more health-conscious living environment.

2. For public health: early detection, prevention, advanced treatment, and diagnostics would receive much more attention and a more comprehensive public health management system would evolve.

3. There would be more Public Private Partnerships (PPP). Collaboration between private and public sectors to create solutions addressing public agenda issues going forward.

4. The development of a more ubiquitous, connected and intelligent society will accelerate, leveraging new disruptive technologies such as IoT, AI, 5G and blockchain.

5. Big data will become even more prevalent with more data sharing across the board for more effective public agenda management.

6. A rise of new modes of interactions will be imminent. Although human-to-human touchpoints will still remain, other forms of interactions, such as human-to-machine and machine-to-machine will grow exponentially.

7. While entrepreneurship and innovation have already been rising in China over the last several decades, they would further accelerate going forward for addressing the pain points that were exposed during the Coronavirus crisis.

The virus has exposed China’s many problems and created challenges. In the short run, it has added more uncertainty to businesses operating in and with China from manufacturing, supply chain and consumer demand perspectives. In the medium to longer-run, we can expect a huge potential shift as China re-invents itself, making the improvement of its public agenda management a top priority. Collaborations across governments, SOEs, POEs and foreign companies to foster synergies, while at the same time, new consumer patterns and innovative use of technology and business models will come along.

Edward Tse: China’s Shift into Industrial Automation

Another new article authored by Gao Feng Advisory’s CEO Dr. Edward Tse was published, where he discussed china’s shift into industrial automation. Dr. Tse said robots will become a strategically important constituent in China’s labor force going forward.

China’s labor market is evolving from a mass of unskilled labor into one featuring an increasingly sophisticated labor force. Now, it is transforming as automation and the use of robotics in manufacturing or logistics sectors are rising fast.

Cheap labor has long been considered as one of the main factors propelling the country to the status of the word’s factory, which shifts global supply chains and attracts thousands of companies in other countries moving their plants to China. However, economic growth during the past 20 years has led to a rapid increase in wages. China’s average wage increased by 8.2 percent annually in the decade, much higher than the global growth rate, according to the International Labor Organization report. In the report, it also mentioned the average real wages of China has almost doubled between 2008 and 2017. That’s the result of an economy that’s been growing by high single digits to double digits annually for two decades.

In 2008, Beijing updated its Labor Contract Law to improve the labor contract system by defining labor right, reducing working hours and improving the welfare benefits and working environment. Labor conditions have largely been improved since that time. At the same time, there are an oversupply of educated workers and a shrinking low-cost labor force as more high school graduates go on to obtain university degrees. With increased labor union activities, better wages and higher levels of education improving the plight of workers, manufacturing becomes less profitable before the country can shift to less labor-intensive and more value-added industries.

“Made in China 2025”, a strategic plan of the People’s Republic of China issued by Premier Li Keqiang and his cabinet in May 2015, aims at rapidly moving from being a low-end manufacturer to becoming a high-end and high-tech producer of goods. Under the plan, the number of industrial robotics operating in China is targeted to expand tenfold to 1.8 million units by 2025. As part of its effort to upgrade its manufacturing sector, the Chinese government started a campaign in 2014 with the overall aim to gradually replace manual labor with robots, with the heavily industrialized provinces of Jiangsu, Zhejiang, and Guangdong among those introducing the new technology on a massive scale.

According to the World Robotics 2019 report released by International Federation of Robotics (IFR), China has been the world’s largest industrial robot market since 2013. The city government of Dongguan, in the heart of the Guangdong province that is known as China’s industrial and export hub, has allocated 385 million yuan (US$56.8 million) to boost automation in factories last year alone. Foxconn, the Taiwanese electronics giant which makes half of the world’s iPhones, plans to fully automate 30 per cent of its production by 2020. In the logistics sector, robotics is also changing the whole industry. Cainiao, one of China’s leading logistics players (~63% owned by Alibaba), has opened China’s largest and most efficient robot-operated warehouse in 2018, with the application of nearly 700 robots, including robotic arms and unmanned drones.

China began its economic ascent as the “world’s factory” over the past several decades by taking advantage of cheap labor. Now, a robot revolution is under way and robots will become a strategically important constituent in China’s labor force going forward.

 

Edward Tse: Are Chinese Workaholic?

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This is a new article authored by Gao Feng Advisory’s CEO Dr. Edward Tse, in which he discusses the culture of “working hard” —”996″ schedule of the Chinese businesses.

After decades of tremendous growth, China is now an upper-middle-income nation, according to the World Bank. Its reputation as an innovative economy is increasing. Along with its economic growth, China’s productivity too has been growing well.

The growth of China’s productivity during the last few decades is mainly due to the opening-up and reform policy implemented from 1978 onwards, its labor intensive exports driven manufacturing and investment-led growth model underpinned this extraordinary progress. Yet some strains associated with that approach have become evident in the last one decade or so as these economic drivers seem to be running out of steam.

China stepped into the innovation wave after the wireless internet (together with smart phones) became prevalent. Chinese entrepreneurs have leveraged this technology to create a range of new business models and products that cater to the evolving consumer and business needs. In the race against time and in the midst of hyper-intensive competition, Chinese entrepreneurs have to be fast, agile and adaptive in order to remain ahead of others. They often don’t mind using the market as a test bed for experimentation as they fine-tune their business models along the way. Quick experimentation often becomes the core part of the very culture of Chinese companies. Speed, rhythm, intensity and multi-tasking have become parts of the DNA of many Chinese companies. On top of this, evolving government policies and regulations are often a source of uncertainty and they keep Chinese entrepreneurs persistently and highly alert and vigilant.

As a result, many Chinese businesses have formed a culture of “working hard.” This is the now widely known as “996” schedule – which means working from 9am to 9pm, six days a week. This has become common place among Chinese entrepreneurs, particularly among large internet-based businesses. The 996 schedule was initially applied in order to improve overall productivity of companies by increasing working hours.

Source: Baidu

However, the notion of “996” has become somewhat controversial. Alibaba’s founder Jack Ma is a vocal supporter of the gruelling working hours commonplace in China’s tech and internet industry. He once said at an internal meeting that this is, “a huge blessing that many companies and employees do not have the opportunity to have,” according to a transcript published on Alibaba’s official WeChat account. Richard Liu, CEO of JD.com, a leading e-commerce company, responded to the recent layoffs saying that JD.com would never force employees to work in a 995 or 996 schedule, but every staff of JD.com must “have a competitive spirit!”

Besides the 996 schedule, many Chinese companies, including both state-owned enterprises (SOEs) and privately-owned enterprises (POEs), are actively seeking multiple ways of improving productivity. More and more companies, especially SOEs and some internet companies, are beginning to provide free meals to their employees in order to reduce the amount of time spent on purchasing and eating meals. Moreover, employees’ dormitories and free buses are also being offered as perks to simplify the lives of employees and make sure they can get to work on time. In some companies, a military-style management has also been deployed to improve the efficiency and productivity of their staff’s work.

The “working hard” culture of the Chinese businesses probably won’t go away any time soon.

 

【今日语录】12月10日

在高端咨询工作中,最过瘾的阶段是 problem definition。越复杂越不确定越好玩。因这个过程是要考功夫的,需要在貌似浑沌、无棱两可中找出套路来。咨询顾问开始时可能会不知所措、有所恐惧。但只要坚定的抓住重点,回归第一原则,有效利用适当分析框架来分析问题,仔细聆听客户和其他信息来源的输入,团队集体合作,众志成城,你会发觉在某一天某一时刻,你会茅塞顿开。你的 Eureka moment 便已到达!

SCMP | China and the US on Technology: Racing or Dancing?

Originally published in South China Morning Post with title, “Why the US Should Not Try to Thwart China’s Blockchain and Digital Currency Ambitions.” All rights reserved.

In the October 23 Congress hearing on Facebook’s digital currency Libra, Mark Zuckerberg, the founder and CEO of the social media giant, warned Washington that blocking Libra would give way to China’s growing technological supremacy, which would eventually jeopardise America’s democratic values.

Zuckerberg’s remarks, though somewhat apocalyptic, fit into the rhetorical framework of the battle for technological leadership between the world’s two largest economies, the United States and China. Identified by the Trump administration as a revisionist power and strategic threat, China has been at the forefront of tech-enabled innovations, such as digital currency, since 2014.

During a meeting last month, President Xi Jinping endorsed blockchain as the nation’s core technology. China’s plan to launch a sovereign digital currency is also triggering new appetites for start-ups, traders, investors and researchers.

As the underlying technology of digital currencies such as bitcoin and Libra, blockchain is a distributed, decentralised and public digital ledger system which allows information and data to be immutably stored and transparent to all. The technology promises unparalleled efficiency, security and transparency and carries profound implications in a variety of scenarios from finance to manufacturing and energy.

In the finance sector, for example, blockchain can help traditional banks reduce operation costs, allowing individuals to perform transactions in a secure environment. The technology is also set to be involved in the development of smart, digitally connected cities. Blockchain-enabled parking platforms, for instance, would provide real-time information on parking spaces for drivers to reserve spaces, thus reducing congestion and on-street parking.

Source: SCMP

In the private sectors, demand for blockchain solutions for supply chain and logistics is quickly expanding. In a traditional supply chain, payments can take up to days, and contractual agreements involve different layers of third-party costs; the increasing globalisation and complexity of trade makes it almost impossible to trace products back to the source, compromising supply-chain integrity.

According to PwC, 40 per cent of food companies find food fraud difficult to detect with current methods, and 39 per cent believe their products are easy to counterfeit. Blockchain could be the answer to such supply-chain frictions.

China’s three-layered development model has lent resilience to its development. The central government sets the overarching strategy of developing a technologically advanced, innovative society while thriving entrepreneurial, private-sector companies drive business innovations, with local governments in the middle as liaisons. Guangzhou’s Huangpu Development district authorities, for instance, recently published regulations on blockchain use to cater for a major increase in applications, while a blockchain platform was launched last year in Shenzhen to serve the Guangdong-Hong Kong-Macau Greater Bay Area.

Source: SCMP

The US, meanwhile, is unsettled by China’s rapid expansion into the frontier technologies. President Donald Trump is set to help the US solidify, or regain, its position as a global innovation hub, despite his complicated love-hate relationship with the tech industry. In February, Trump signed an executive order to maintain America’s leadership in artificial intelligence. Last month, the White House revived the President’s Council of Advisors on Science and Technology, a group of experts who work to inform public policy on science, technology, education and homeland security.

The private sector is an important source of innovation in the US, as epitomised by Google’s milestone achievement in quantum computing – a technology that will produce a strong symbiosis with artificial intelligence and cryptography.

The de facto punchline of Trump’s tech move, though, was to cut Chinese companies off America’s technology value chain, especially the core scientific know-how. Over the course of the year, Washington repeatedly put pressure on Chinese telecom equipment and smartphone maker Huawei and blacklisted it, citing the company’s alleged coziness with the Chinese government, while reining back China’s dominance in 5G technology. Another 28 Chinese companies were later added to the blacklist, including the supercomputer maker Sugon along with three of its microchip subsidiaries.

Given the intensity and speed at which the rivalry is escalating, Zuckerberg’s warning is not totally unjustified. If China’s digital currency is adopted in more countries, America’s oversight and regulation of the global financial system will become challenging. This gap will only increase as the two countries diverge further into separate trajectories of the technology.

Hostile competition is likely to result in a zero-sum game. Continued blacklisting will do more harm than good, wreaking havoc on jobs and disrupting the global technology supply chain. As China develops applications of blockchain system, it should adopt best practices and international benchmarks, and establish a clearer, full-bodied legislative framework.

Source: SCMP

Though differences exist, and will continue to exist, the world will benefit if the two leading economic powers can seek commonalities, rebuild trust, cooperate on technological initiatives, and establish global governance and a code of conduct on blockchain technology as well as its applications. After all, increasingly, the issues facing humanity transcend national borders and require big powers to work together.

On the business level, such collaborations are already happening. For instance, IBM, Walmart, Chinese retailer JD.com and Tsinghua University launched a project in December 2017 to develop food safety solutions using IBM’s blockchain platform. The project also involved major food suppliers such as Dole and Kroger, benefiting offline and online consumers across the globe.

On a global level, blockchain’s potential trade-related applications could transform various aspects of international trade, including finance, customs and certification processes, logistics, and intellectual property. But for the technology to empower global growth, countries would have to cooperate with one another.

SCMP | Foreign Businesses Need to Better Understand China

The NBA and Apple Cases Show Foreign Businesses Need to Better Understand China, and Its Boundaries

By Edward Tse
October 21, 2019

Original published by South China Morning Post titled The NBA and Apple Cases Show Foreign Businesses Need to Better Understand China, and Its Boundaries on October 21, 2019. All rights reserved.

Gao Feng Advisory’s CEO Dr. Edward Tse’s latest op-ed was published on SCMP. In this article, Dr. Tse pointed out all countries have their own “boundary of sensitivities”, and foreign companies doing business should be mindful of the host country’s boundary. This applies to the recent cases of the NBA and Apple in China and will also apply to Chinese companies as they expand overseas.

The months-long protests in Hong Kong have not only attracted international attention, but have also begun to involve major foreign powerhouses like the NBA and Apple. The fallout caused by Houston Rockets general manager Daryl Morey’s tweet led Tencent and China’s predominant broadcaster CCTV to suspend the airing of NBA games, and Chinese companies such as Ctrip.com (China’s major travel booking platform) to terminate NBA sponsorship.

Meanwhile, Apple’s approval of an app which allows users to track protest activities received an immense backlash from the Chinese government and consumers. Apple has since removed it and released a statement that the app “violate[d] our guidelines and local laws”.

Some critics were quick to jump to the conclusion that China is victimising foreign companies and preventing freedom of expression. However, as in every country, China has certain boundaries of sensitivity.

Issues such as racial discrimination are highly sensitive in the US. In 2014, Donald Sterling (the former LA Clippers owner) was fined US$2.5 million and banned from the NBA for life because of his racist remarks. The NBA reacted to the unacceptability of these comments in US society, even with freedom of expression considered.

It is common sense that companies doing business in a foreign country need to observe and understand the host country’s boundaries of sensitivity and understand what is, and is not, acceptable. Not doing so is generally the result of ignorance, incompetence, arrogance or a combination of these things.

In 2012, many pundits were quick to say that Japanese companies had no chance of succeeding in China during a period of anti-Japanese sentiment (regarding a territorial dispute over the Diaoyu/Senkaku Islands). During this time, some Toyota and Honda dealerships in China were burnt down and their sales in China plunged.

Today, Japanese carmakers are actually doing well. Japanese brands’ market share in China has steadily increased, and today is the second-largest in terms of foreign passenger car brands (measured by country where the companies’ headquarters are based).

I agree with the assertion in The Economist’s June 28, 2018 Schumpeter column that “[t]he sense of victimhood is over the top; American firms have done reasonably well in China”. The NBA has been very popular and was on the rise in China for over a decade before Morey’s tweet.

Were the Chinese people’s reactions appropriate? It depends on your point of view, of course. The negative impact for the NBA in China is likely to be temporary. After all, a company’s success is a function of its competitive advantages, especially its products and brand, so the NBA can recover.

Despite the recent controversy, passionate Chinese fans turned out for a preseason NBA basketball game between the Brooklyn Nets and Los Angeles Lakers at the Mercedes Benz Arena in Shanghai on October 10. Photo: AP

There are already signs of this, as Tencent lifted its temporary ban on live-streamed NBA games, and recently streamed two NBA games in China. Of course, the NBA and its stakeholders should continue to work on damage control.

Apple remains a strong brand in China, even while facing competition from local players like Huawei and others. The uproar regarding the Hong Kong app was simply China’s view on how a sensitive boundary had been crossed (by design or not, the app helped Hong Kong protesters organise around the city).

Apple’s response was swift and, from the Chinese perspective, appropriate. On its own, this episode will have a limited impact on Apple’s position in China.

These two episodes do not represent the institutional barriers causing difficulties for foreign companies in China. Beijing continues to open up its market, sector by sector, for foreign companies, especially since the US-China trade war started.

However, foreign companies’ success in China increasingly requires a recognition that the world is diverging into “two systems” – one led by the US; another by China. Multinationals are finding that they need to develop different strategies for each system. Striking a balance will be critical for global operations and success.

In the auto industry, for instance, global companies such as Toyota and BMW need to create strategies to meet the dynamics of these very different markets. Toyota has developed completely different and separate ecosystems, recognising the need to meet China’s unique communications, IT and software requirements.

This includes building different “mobility as a service”, technological (such as autonomous vehicle technology) and business model solutions. For example, Toyota partners with Monet (a mobility-as-a-service joint venture between Japanese carmakers and the tech investment firm Softbank) and Uber in Western markets, and with Guangzhou Automobile Group and Didi Chuxing in China.

Foreign companies in China need to step up their game if they want to capture the full potential it offers. Increasingly it’s not just about the China market but also the nation’s impact on the rest of the world, especially developing markets, which are increasingly evolving in a fashion similar to China.

They need to understand China much better. While this may sound like a broken record, significant gaps remain, partly due to the context of China, which continues to evolve and is in many aspects proceeding into unknown territory.

Foreign companies need to adjust their products, services and business models to the Chinese context. To this end, they should seek to better appreciate and incorporate China’s quickly developing innovations, and integrate them into the core of what they do in China.

At the same time, they need to be extremely perceptive of where China’s boundaries lie and respect them, while deploying measures to anticipate and manage risks.

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 of 《创业家精神》).You may visit Dr. Tse’s blog to explore more of his intellectual capital: www.edwardtseblog.com

SCMP | Under ‘One World, Two Systems’, Companies Must Evolve

Under ‘One World, Two Systems’, US Companies that Stay in China Must Evolve

By Edward Tse and Bill Russo
27 Sep, 2019

Original published by South China Morning Post titled Under ‘One World, Two Systems’, US Companies that Stay in China Must Evolve on September 27, 2019. All rights reserved.

More US companies are staying in China than are deciding to leave, despite Donald Trump’s trade war rhetoric. But there is an increasing need to devise different strategies, as China’s market conditions become more sophisticated and unique

In a recent business report by the American Chamber of Commerce in Shanghai, 77 per cent of the surveyed companies reported that their China operations are profitable. Around 60 per cent are optimistic about the five-year business outlook and nearly half are increasing investment in 2019.

The findings were consistent with those of another report, by the US-China Business Council in August, suggesting that 87 per cent of the US companies operating in China do not want to leave.

Both are slaps in the face for US President Donald Trump, who earlier called for American companies to leave China and to return to the US. Very few, if any, have followed.

In July, 100 academics and policy advisers around the US wrote an open letter to Trump, advising that Beijing is neither an economic nor national security threat that must be confronted in every sphere.

US animosity towards China will eventually damage its own reputation, as well as the economic interests of all nations. There can be no winner in a zero-sum game.

The above-mentioned survey results and reactions are consistent with our first-hand experience of consulting for the senior management of many US companies in China.

As Trump’s trade war drags on, while some foreign companies have chosen to leave China – usually those in labour- or cost-intensive sectors such as shoe and apparel manufacturing – most have chosen to stay, simply because of the size of the China market or the high degree of integration of their supply chain with Chinese suppliers and manufacturers, or both. Paradoxically, after Trump’s plea, US retailer Costco opened its first store in Shanghai.

Also, electric vehicle maker Tesla is set to start production by the end of this year in its wholly owned manufacturing plant in Shanghai.

Among those that have chosen to stay, there is an increasing need to devise different strategies for China and the US. As China’s operating environment evolves, its market conditions are becoming more sophisticated and unique. For example, in the tech sector, some aspects of the two countries are diverging and companies will need to consciously adapt.

Terry Gou, founder of Apple supplier Foxconn, expects a divide in 5G technology between China and the US, because of underlying differences in strategic positioning, development and market needs. As fifth-generation cellular networks and their commercial applications evolve, the divergence will only increase.

On a broader scale but in the same vein, the G2 – the US and China – will replace the G20 in a new leadership framework: “one world, two systems”.

China’s three-layered development model is the key to the country’s resilience. At the top, the central government sets the overarching strategy for developing a technologically advanced, innovative society. At the bottom, the thriving entrepreneurial, private-sector companies are driving China’s business innovations.

In the middle, local governments connect the central government and businesses by building infrastructure (not only the physical kind but also, increasingly, smart infrastructure) and by being a funding source and incubator for start-ups. The smart infrastructure, for instance, is empowering the automotive industry as vehicles become more intelligent, connected and ultimately autonomous.

An integrated smart city allows real-time governance of a city’s major functions. Local governments are raising the stakes: for example, Hangzhou is managing traffic congestion with the City Brain and Wuxi is establishing a pilot zone for autonomous driving.

Some companies are already aware of the importance of a strategy of “one world, two systems”. For example, Toyota has realised that striking a fine balance between China and the US will be critical for its global operations. Meanwhile, it faces the delicate task of creating a strategy for meeting the industry and technological specifications unique to China.

This trend began to emerge even before the trade war began. China is evolving into a leader of innovation with new disruptive technologies such as artificial intelligence, the internet of things and blockchain, and is moving ahead of the US to build the world’s biggest 5G networks.

Businesses – in particular, the entrepreneurs working in concert with governments, both local and central – will take China through new paths onto new platforms.

As a result, the industry structure, competitive conduct and financial performance for all sectors in China will evolve in their own ways. Companies, no matter whether headquartered inside or outside China, should adjust their strategies going forward.

US companies that choose to stay in China need to be much more sophisticated. Copying and pasting business models from the US to China won’t necessarily work any more. Local innovation will be critical and, in many cases, US companies will need to join with local companies and governments.

While differences exist, the world will benefit from cooperation between the world’s two largest economies. Both Andrew Ng, the former leader of the AI teams at Baidu and Google Brain, and Jack Ma, founder of Alibaba, have suggested there is plenty of room for technology partnerships between China and the US.

Huawei founder Ren Zhengfei has said the company is open to selling 5G technology to US companies to create competition and a more unified global technological environment. Companies so far only focus on beating their competition, and the idea of creating competition and sharing advantages would be a breakthrough, if implemented.

There is more room for the US and China to collaborate than fight in the face of global challenges, many of which will transcend national borders.

About the authors

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 of 《创业家精神》).

Bill Russo is Managing Director of Gao Feng Advisory Company, he is also Founder and CEO of Automobility Ltd.

【Quote of Today】September 26th

,

 

From fringe to core and from core to fringe. A simple but powerful concept that was built on the Multiple Jumping strategy framework. We introduced this concept in 2014. New innovative ideas often begin at the fringe of a company’s business. When it grows, it often would move into the core of the company and become the mainstream. In some cases, companies would reinvent its original core business to make it great again. At some other times, however, the importance of the original core will diminish and eventually become a fringe business. This can be an ongoing cycle that goes back and forth for many times. And therefore at heart it’s dynamic strategy with duality as its nature.

Nikkei Asian Review | Debunking Myths on Chinese SOEs

Edward Tse

Debunking Myths on Chinese SOEs

Original published by Nikkei Asian Review titled “Chinese SOEs are Focused on Business, Not Politics” on September 13, 2019. All rights reserved.

In the eyes of some politicians and media in the West, Chinese state-owned enterprises are little more than corporate vehicles for carrying out Beijing’s policy agenda. This perspective has led to calls to restrict SOEs’ investments and acquisition of other companies and technologies.

This is a shortsighted view. Although I am from Hong Kong, not mainland China, and am not a member of the Communist Party, I have served at different times as an independent board director at four Chinese SOEs since 2006: Shanghai Pharmaceuticals Holding, Baoshan Iron & Steel (Baosteel), the holding company of carmaker SAIC Motor, and currently, China Travel Service (Holdings) Hong Kong.

In inviting someone like me to join their board, these companies sought an external perspective to help ensure proper governance. At no point before or during any board meeting was I ever asked to vote a certain way. No one tried to interfere with my professional judgment on what would be good for the companies.

In all these years of board meetings, I cannot recall any discussion that centered on serving a certain political agenda. Rather, the discussions were inevitably about business. Just as with a large Western company, the talk was of revenue, profit, market share, cash flow and returns on investment and how to improve them.

Of course, government policy would at times be a matter for discussion. Beijing has for some years been pushing through a consolidation of the steel sector, for example, so that inevitably surfaced in deliberations when I was a director at Baosteel.

It is also important to note that Chinese SOEs are far from uniform in their governance or outlook. For companies involved in sectors that touch on national security, discussions about the government’s agenda would be much more natural than in consumer-focused sectors like travel and autos.

Other SOEs are tasked with providing public services, such as infrastructure, health care and education. Notably, their evaluation of projects is generally based more around addressing utility for the public than a simple internal rate of return.

In open sectors like retail, consumer goods or pharmaceuticals, however, Chinese SOEs have to survive in perhaps the world’s most intensely competitive market.

Many of these SOEs feel they are falling behind their private-sector peers in innovation and are under pressure to catch up or collaborate with them. They are particularly concerned with whether they can continue to effectively compete as China opens up more sectors to private-sector participation, especially by foreign companies.

Even in sectors like banking and insurance where SOEs traditionally held unshakable positions, they are no longer immune to competition from the private sector. Consider how Alibaba Group Holding affiliate Alipay and Tencent Holdings’ WeChat Pay now dominate online payments. With a focus on adapting technology, Ping An Insurance Group has overtaken state-owned peers like China Life Insurance to become the country’s largest insurer.

 

Chinese SOEs do enjoy some advantages because they are owned by the state, but this is most true in sectors involving national security or public infrastructure, like energy and telecommunications. In such cases, the SOEs’ ownership of key assets and their protected operating franchises are somewhat comparable to those of public monopolies like water companies or postal services in Western countries.

A number of them, such as telecommunications infrastructure company China Tower, also benefit from having other SOEs as their main clients.

Local governments in China also tend to favor purchasing from SOEs based in their region as a means of supporting them as significant area employers and taxpayers. This can come into play, for example, with orders for official vehicle fleets.

Further, state companies have long had a significant advantage in getting access to bank credit from the SOE-dominated banking system but this has been changing.

According to Moody’s Investors Service, SOEs accounted for 52.6% of outstanding bank corporate lending as of Dec. 31 even though they have been generating less than 40% of overall output.

But after President Xi Jinping declared private enterprise to be an essential part of China’s economic system late last year, the country’s financial regulators pledged to widen access to credit and financial support for the nonstate sector.

These changes are taking time to implement, but policy is headed in the right direction and technology is helping to take the place of ownership in assessments of the creditworthiness of individuals and small businesses.

Chinese SOEs also carry social burdens much more often than private companies. As an SOE, Baosteel had to invest considerable time and effort to address the labor and community impact when it shut down older factories in urban areas to move to cheaper locations.

Until now, China’s parallel structure of SOEs and privately owned companies has largely worked well. As a whole, this duality has been a source of resilience for China, not a drag.

Yet officials in Beijing have identified reform of state-owned enterprises as an imperative. Of late, this effort has focused on diversifying the shareholding of many SOEs. This has included the introduction of private capital in some cases.

To make mixed ownership reform a success will require the establishment of proper corporate governance structures and principles. The role of the state agency that oversees SOEs will have to shift over time from direct control to being one among a number of shareholders. These changes will help SOEs to be able to compete effectively in China’s fast-changing and increasingly innovation-driven environment.

About the author:Dr. Edward Tse
CEO of Gao Feng Advisory
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 of 《创业家精神》).

 

【Quote of Today】 September 17th

The Resilient Organization. This organization is flexible enough to adapt quickly to external market shifts, yet it remains steadfastly focused on and aligned with a coherent business strategy. This forward-looking organization anticipates changes routinely and addresses them proactively. It attracts motivated team players and offers them not only a stimulating work environment, but also the resources and authority necessary to solve tough problems.

 

HSM | China’s Mega Platforms Organizations

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»).

 

【Quote of Today】 August 16th

Innovations and entrepreneurship have become core to China’s culture. Young people from all over are trying to become successful. Many will fail and they know but a small number will make it. A small % of a large number is a large number. And the ones who make it will become role models for others.

Inspiring Innovations through Curiosity in the China Context

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.

China Daily | Many Unicorns Don’t See Profits

China Daily Global

Updated: 2019-05-27

The Hurun Research Institute, which compiles lists of China’s wealthiest individuals, released the Hurun Greater China Unicorn Index 2019 Q1 along with the Hurun China Future Unicorns 2019 Q1 on May 7.

According to Rupert Hoogewerf, chairman and chief researcher of the Hurun Report, which is a research, media and investments business, the total number of unicorns-startup companies valued at $1 billion or more-in China has reached a record 202, possibly the highest across the globe.

These Chinese unicorns include Alibaba’s financial technology affiliate Ant Financial, which is valued at $150 billion, and ByteDance, an internet company behind machine learning-enabled content platforms like TikTok (also known as Douyin) and Toutiao.

Tech startups today have not been able to replicate the financial success of well-known tech giants such as Google, Facebook and Alibaba. For example, China overtook the United States in AI investment in 2017, but around 90 percent of the AI companies were unprofitable.

This phenomenon is not exclusive to China. Some of the biggest names around the world have yet to make money, such as the publicly listed electric car maker Tesla and music streaming company Spotify, which are losing billions. Ride-hailing platform Uber lost $1.8 billion last year, but still made its debut on the New York Stock Exchange this month.

 

Although there are many startups that are unprofitable, it is probably unfair to compare established tech companies with the internet unicorns of today. The nature of entrepreneurship implies that there will always be winners as well as losers, best illustrated recently by the dotcom crash.

So what is driving the rapid valuation growth of many internet startups that are still incurring huge financial losses? Favoring growth over profit, investors are embracing so-called “growth companies” like Amazon, the world’s third most valuable company despite pale profits. As capital is currently cheap, creating growth is more valuable than improving margins.

Why then, do some startups fail but some eventually succeed? First, many of those that failed were not able to address an essential need. The digital boom and fast money in the 2000s created plentiful space for first-generation technological companies, especially in sectors like e-commerce.

However, it is becoming harder for the current generation of tech companies to tap into that growth, since low-hanging fruit has already been taken.

As investors continue to search for the next Alibaba or Google and more unicorns appear, some might just need time to prove themselves, while others will simply be growing for the sake of growth without any prospects for profit.

HSM | China’s Age of Innovation and Game-Changers

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.

China Daily | Finding a Third Way Forward

By Edward Tse | China Daily Asia

Agile Chinese entrepreneurs are emerging as business thought leaders with their ‘multiple jumping’ expansion strategy

Ever since Deng Xiaoping hit the gas pedal on China’s economic reform when he made his famous Southern Tour to Shenzhen in 1992, companies in China — big and small — have been looking for ways to better manage, develop strategies and capture value.
For the first 30 years of the People’s Republic of China, the country was organized under a planned economy. There was no notion of companies, shareholder value, management or strategy. So when China’s economic reform started and when entrepreneurs first emerged, they by definition would not have had any formal education in modern management or prior experience in actually running a company.

The rapid growth of China’s market and the emerging competition drove many of these entrepreneurs to look for ways to better plan and manage their businesses.
The first wave of management consulting firms and business schools came to China from the West in the early to mid-1990s, and brought along established knowledge, theories and frameworks. Chinese businesspeople were attracted to these new ideas as they searched for ways to help run their businesses better.

In the West, from the 1970s to 1980s, the notion of conglomerates was dominant. Companies like ITT and Tyco in the United States and Hanson Trust in the United Kingdom grew into large amalgamations of businesses, often across a range of unrelated sectors.

The notion was that “big is good”. After a while, the capital market decided that conglomerates were not such a good idea after all, because of the lack of synergies across the various businesses.

In 1990, Gary Hamel and CK Prahalad from the University of Michigan published an article called The Core Competence of the Corporation, focusing on this trend. They argued that well-performing companies compete based on their strengths, or what they called core competences or capabilities. This theory caught on quickly in the Western business community and became the governing thought for companies’ strategy formulations.

Today it is still the case. Using this theory, the capital market suggests that companies should focus on their areas of strength. And, by implication, companies should not expand arbitrarily beyond their areas of strength.

When management consulting firms and business school academics first came to China, they brought along these concepts and used them as guiding frameworks to advise Chinese clients. However, the Chinese executives, while intrigued, quickly came to the realization that something was missing.

While useful, these frameworks could not quite explain the overall context of doing business in China. The consultants and academics also quickly realized that business in China is somewhat different, although they could not explain exactly what the difference was.

In the meantime, the external operating environment was evolving fast, both in the world and particularly in China.

China’s fast economic growth, its gradual but consistent transition from planned economy toward market economy, the emergence of highly intensive competition in the open sectors, and the increasing prevalence of technology and the availability of angel investing and venture capital funds, all contributed to the emergence of waves of entrepreneurship and innovation in China that the country had not seen before.

In their search for growth strategies, these Chinese entrepreneurs were typically fast and agile. Some of them developed diversified conglomerates, and there were others that decided on a narrow focus, taking the core competence approach. The results have been mixed.

Interestingly, some of them, through trial and error, discovered a third way of strategy development. We call it “multiple jumping”.

When these entrepreneurs see new opportunities evolving, even if they do not have all the capabilities to fully operate the new business, they decide if they should jump over or not.

So far, some of the companies that have jumped have been successful in latching onto the new business sector. Often, they will repeat the process when newer opportunities turn up. When these companies jump, they try to fill their capability gaps either through their own efforts or by collaboration with other companies, or by using both approaches.

This multiple jumping approach to strategy is different from a conglomerate approach because, despite their involvement in multiple sectors, these companies generally keep their original heritage as their core.

On the other hand, multiple jumping clearly defies the core competence approach, because these companies are willing to enter new areas of business without having the expected core competences established.

So, this multiple jumping approach is another way to think about strategy beyond the conglomeration and core competence approaches. We call it The Third Way.

It provides another way for companies to decide how they should develop their business strategies in a fast-growing, discontinuous operating environment abounding with fertile opportunities.

A prime example of a company that has successfully adopted this approach is Alibaba, which has interests in industries including healthcare, the media and consumer finance as well as its core e-commerce business. Coincidentally, US companies such as Amazon and Google have also grown through this approach.

As China’s operating environment continues to rapidly evolve, innovation and entrepreneurship are thriving. Companies are looking for even more inspiration for growth. Many entrepreneurs continue to look at the West, especially at the US, for inspiration in technology, management and investment models. Some are also examining Chinese historical philosophies for guidance.

Today, in addition to a growing number of consulting firms, business schools and training companies in China, many corporations have also set up their own “universities” or “academies”. Business executives, successful or not, are eager to share their experiences in running businesses and some have turned into modern philosophers.

Conferences and seminars organized around themes of business, innovation and transformation take place regularly in different cities throughout China. Airport bookstores, where business traveler traffic is heavy, stock a proliferation of business books. Videos showing various “experts” talking about the secrets of successful business are now commonplace.

Social media, in particular, has become a popular medium for people to share their points of view — freely critiquing others’ successes and failures, with or without any real business experience of their own. Online celebrities emerge from the corners and some have captured many eyeballs with their opinions on business trends and remarks on individual businesspeople.

A fair number of Chinese entrepreneurs are still relying on brute force and guanxi (relationships) to run their businesses, but increasingly, some regard knowledge as the key source for building their companies’ sustainable competitive advantages. To this end, they actively search for new ways of building businesses.

On the surface, these attempts may seem unsystematic and perhaps some will prove futile. But some are creating new patterns that could become cutting-edge thinking, and they could form a new cornerstone for business thought leadership that will bring about future inspirations for the rest of the world.

Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. He is also the author of China’s Disruptors (2015).

 

SCMP | Common Goals : the US and China should Collaborate instead of Simply Focusing on Competition

Original published by South China Morning Post on May 6, 2019. All rights reserved

Embroiled in a trade war with China, the Trump administration, in February, signed an executive order aiming to spur the development of artificial intelligence, in response to the rising fear in academia and government that the US is losing the race for global AI leadership to China.

Such fears are not entirely unfounded. China has a well-funded commitment to the development of AI. The leadership in Beijing has outlined its ambitions in various development plans, including the initiative to build “advanced manufacturing”. According to Tsinghua University’s China AI development report, released last year, China has secured a leading position in the AI echelon in both technology development and market applications. China ranked first in the total number of AI research papers and AI-related patents, and second in terms of the size of its AI talent pool.

There are several key drivers of China’s progress. First, it enjoys a fundamental system advantage. In the past four decades since its “reform and opening up”, China has somewhat unconsciously evolved its own “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 nation clear targets to follow. At the grass-roots level, private-sector entrepreneurs have re-emerged and become a major force in driving economic growth.

In the spirit of driving the development of advanced manufacturing, provinces and cities across China have instituted preferential policies for AI start-ups. For example, Tianjin, a major port city in the northeast, launched a US$16 billion fund last year to bolster the local AI industry. Tech companies collaborate with local governments on AI initiatives such as smart city, health care and autonomous driving. Alibaba’s ET City Brain project uses AI to tackle traffic jams, reducing traffic delays by 15.3 per cent in parts of Hangzhou, the city in which Alibaba is headquartered.

Second, the massive size of the Chinese economy allows companies, especially AI companies, to rapidly scale up. China now boasts more than 800 million internet users, roughly 58 per cent of its total population and three times larger than the number in the US. According to the China Internet Network Information Centre, 98 per cent of them are mobile internet users. The large online population generates an abundance of data, on which algorithms can conduct large-scale research and experiments much faster and more intensely than is possible in the West.

For better or worse, Chinese are more relaxed about data privacy than Westerners, at least for now. What may be viewed as a violation of privacy by some could be advantageous for AI developers wanting to extract a large amount of data. This situation allows Chinese AI developers to achieve more accurate machine learning models in areas such as facial recognition, voice and gesture recognition, consumer behaviour analysis and robotics process automation.

Third, a “why not me” mindset drives Chinese entrepreneurs, who are eager to show that they too could succeed. Today, younger entrepreneurs view their successful predecessors as role models and want to replicate their success. China’s hypercompetitive environment harbours cutthroat commercial activities and transformative business models, allowing the fruits of AI to quickly spread across the economy.

China tops the list of the number of active AI companies and venture capital investment. Leading players, such as Baidu, Alibaba and Tencent, are investing heavily in AI technology. For example, in 2018, Tencent invested about US$120 million in Shenzhen-based humanoid robot designer UBTECH Robotics. Baidu not only poured US$1.5 billion into its Apollo Fund for autonomous driving, but has also developed a neural-network-based machine translation system that has at times achieved speech recognition accuracy higher than that of humans.

Rising start-ups, on the other hand, have created tremendous value. Among those is the previously mentioned UBTECH Robotics, the world’s highest-valued AI start-up at US$5 billion. ByteDance, the company behind AI-powered news and information content platform Toutiao and popular short video platform TikTok, has grown 230 per cent in revenue in the past two years.

While the Chinese tend to favour applications of existing technologies, the West focuses more on the science and infrastructure behind AI. Fundamental research is high-hanging fruit that would take much more time and risk to achieve results than commercial applications.

However, there are signs that this is also beginning to change. The Chinese government is planning support for AI education, research and development. One of the newer projects, the Next Generation Artificial Intelligence Development Plan, offers a forward-looking blueprint for basic theory and common key technologies. Another project on brain science and brain-inspired research is comparable to Europe’s Human Brain Project and the US’ BRAIN Initiative. Inevitably, some of these technological experiments will fail but others will make it. It is through experimentation that progress can be made.

Should we simply focus on the winner of the “race” between China and the US? “Race” implies a zero-sum game, as if the two countries must treat each other as “strategic competitors” and acknowledge a mutual threat. While there is competition, there is also plenty on which to collaborate. In today’s increasingly interconnected world, we need organisational means to address issues that transcend national borders, including those of AI development and governance.

Some level of collaboration in AI among American and Chinese researchers is already under way. For example, the Partnership on AI, an organisation founded by Amazon, Google, Facebook and others, announced last year that Baidu would join its network. The consortium of companies recognised the importance of global discussion around the future of AI and showed a desire to counter the arms-race narrative. There is a need for China and the US to focus more on similarities and common goals for the betterment of the entire world.

Picture Source | Google

Clariant | What Drives Business and Innovation in China?

What Drives Business and Innovation in China?

We are pleased to share with you an interview report on the topic of What Drives Business and Innovation in China?, which was published on Clariant Integrated Report 2018. It includes an interview with us that covers our perspectives on China’s innovations.
Q: Edward, what’s the biggest misconception Western companies have about China?
It’s the presumption that China’s development will follow the path of the West, and that they can simply copy and paste their strategy and business model to China. The typical Western stance is, ‘If this cookie-cutter approach results in success, that’s great and we know what we are doing! However, if it doesn’t, then the problem has got to be with China, and not our strategy’.
Q: What makes China so different?
It’s an ancient civilization going back 5 000 years, but its modern business development is exceptionally young. Only since the reforms and opening of the late 1970s has China started to reconnect with the rest of the world. That development is far from perfect, but it has lifted 700 million people out of poverty. The China that you’re seeing now comes from a rather unique background and makes for a very different context compared to that of the West.
Q: Is the role of the government as big as we think?
Going from a Soviet-style planned economy to a market economy takes time, and China is not entirely there yet. But today, relative to the state sector, China’s private sector is by far the bigger job creator and contributor to the country’s GDP. It’s also the primary source of business innovation. The reemergence of the Chinese entrepreneurial spirit is probably the most profound development in China’s recent history.
Q: It led you to write a book in 2015 about ‘China’s Disruptors’ What contributed to their success?
What certainly helped was the size and growth of the China market, which allowed for rapid scaling of their business models. The prevalence of digital technology, specifically the wireless internet through smart devices, was the critical enabler.
Q: What chapters would you like to add to this book today?
What’s special today is the fact that entrepreneurship is not just for the privileged. It has become the fabric of Chinese culture today. State-Owned Enterprises (SOEs) still play an important role, but many young people have realized that starting a business or working for a start-up rather than an SOE is a path for them to get where they want to be. If I were to write a new book about Chinese innovation today, it would be about the new era we’re entering with technologies like artificial intelligence, the internet of things, blockchain technology, and 5G. Those will have a profound impact on China’s innovation and business. The Chinese entrepreneurs will be at the forefront of that.
Q: Are Western executives in China less open to innovation?
Western executives are very keen – I would even say indoctrinated – to base their strategy on the doctrine of core competencies: ‘Focus on what you are good at and don’t divert your attention to anything else’.
Q: Why is that bad for innovation?
Because it limits what the company is willing to consider. Chinese entrepreneurs don’t necessarily have that ideological baggage. Many of them are happy to develop multiple business ecosystems even if they don’t have all the capabilities in place themselves. When they feel a new opportunity is worth pursuing, often they would rather jump before anybody else does and then fill the capability gaps along the way.
Q: Are the gold rush days over for Western companies in China?
China continues to evolve and to open up. China today is very different from China ten years ago, and it will again look very different ten years from now. There is major potential for more growth. But if you want to make the most out of that, you need to put China at the core of your global strategy and organization, which means making China a part of your corporate brain. Including the ability to evaluate opportunities and to design, innovate, and execute new ideas. It’s impossible for a corporate headquarter that is thousands of miles away to fully appreciate what’s going on on the ground in China.

SCMP | Levelling the Field

By Edward Tse

Levelling the Field: Foreign Firms will Need to Raise their Game in China with New Investment Law

Original published by South China Morning Post on March 23, 2019. All rights reserved.

China has just passed a new law that will replace existing regulations on wholly foreign-owned enterprises and on joint ventures involving overseas companies. In response to changing global realities and the need to further open up its economy, the new law includes many stipulations that aim to foster a level playing field for foreign and domestic enterprises.

Forced technology transfer, one of the main issues driving the US-China trade war, will now be banned. The law also emphasises intellectual property rights protection for foreign investors and encourages technological cooperation. Other incentives include establishing special economic zones with attractive tax and business regimes, allowing the transfer of profit and capital gains out of the country and shortening the list of prohibited investment projects. Moreover, China will encourage foreign investors to participate in the mixed-ownership reforms of state-owned enterprises.

These changes are certainly welcome news for foreign businesses and the circle of politicians and lobbyists in Washington, who have long complained about a lack of market access in China. For many foreign multinational corporations, China has become one of their largest markets, if not the largest, in the world. Even for those that are only considering first-time entry, such as cross-border payment or credit card businesses, their global business models wouldn’t be complete without a credible presence in China. However, though a favourable signal, these legal changes cannot guarantee foreign multinationals success. The market conditions in China have evolved quite significantly over the past decade.

A major shift in the past decade has been the emergence of Chinese companies as bona fide competitors to foreign multinationals. Whereas foreign multinationals still enjoy advantages in sectors such as luxury goods, premium-branded cars and patented pharmaceuticals, Chinese companies have become serious competitors in e-commerce, fintech, fast-moving consumer goods, appliances and logistics.

Source: SCMP

Some of these Chinese competitors are large state-owned enterprises, especially in sectors that require strong state roles, such as energy and telecommunications. However, the most formidable, and the majority, are private companies marked by their speed, agility and creativity, in sectors where the playing field is practically open and even.

This phenomenon is part of the rise of business innovations in China over the past decade, as a combined result of increasingly prevalent technologies, local and central government policies and grass-roots level entrepreneurship. Ridding itself of the “copycat” stigma, China has nurtured a new internet and tech sector – ranging from ride-hailing to e-commerce, robotics and artificial intelligence – that grew 20 per cent in 2018 to a total value of US$142 billion.

Two Chinese companies, Tencent and Alibaba [the owner of the Post], are now among the world’s top 10 most valuable companies. Unicorns – unlisted companies that are less than 10 years old and valued at or above US$1 billion – are thriving. Ant Financial, a Chinese fintech company and an affiliate of Alibaba, is now the world’s largest unicorn with a valuation of US$150 billion. ByteDance, owner of Toutiao, a popular newsfeed app, and Tik Tok, a popular short video app, is valued at US$78 billion, ahead of the US-headquartered ride-hailing app Uber.

Regrettably, foreign multinationals have largely been bystanders to innovation of Chinese origin. However, the rapid changes in China’s innovation context is forcing them to react.For example, in the automotive industry, transformative trends such as electrification, autonomous driving, connected and intelligent vehicles and “mobility as a service”, which combines multiple private and public transport options for users, are forcing even the leading global carmakers to adapt. Across sectors, foreign companies are eager to connect to digitally savvy Chinese consumers through means such as super-apps like WeChat and online payment systems like Alipay and WeChat Pay.

Belatedly, foreign multinationals have began to recognise the need to learn from China, to innovate in China for China and perhaps even for the world. This will not be easy, as foreign companies need to embrace China as a breeding ground for innovation and for new thought leadership in business strategy. To do this right, they have to put China at the core of their global strategy, instead of seeing it merely as a market, albeit an important one.

So far, most of the foreign multinationals’ localisation efforts have remained basic – hiring local managers and assigning them only roles involving execution, while strategic planning and decision-making take place outside China, either in global or regional headquarters. Not only is this process not fast enough, it also does not take into account sufficiently the changes in the overall China context that can have a disproportionately large impact on a company’s China, and even global, strategy. Foreign multinationals should add substance to their localisation plans by appointing local thought leaders to senior levels, with the appropriate decision-making power and resources.

Foreign multinationals have tended to try to run their business in China by themselves, perhaps with some joint ventures here and there. Going forward, that won’t be enough as the changes in China, especially in innovation, will require capabilities beyond those that foreign multinationals are aware of. They should adopt a more open-minded approach with the idea of business ecosystems in China, and form collaborative partnerships with local companies, including established companies, start-ups, academics and research institutions, to augment their capabilities on the ground.

Like every new measure that comes out of China, the new foreign investment law will not be immune from scepticism from outside. However, the new law signals a friendlier environment that enables foreign multinationals to capture greater value in one of the world’s most important and dynamic markets. In the meantime, they should remember that in this ever-changing, increasingly competitive landscape where innovation is critical, they need to step up their game in China to capture the potential that the market offers.

Quote of Today (March 31)

In every consultant, there are bits of being a problem solver, a reporter and a process manager. The way these attributes manifest depends on the person. Most consultants believe they are problem solvers. In reality, lots are more inclined towards the latter two attributes.

China and the Power of Tech-Enabled Philanthropy

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.

Quote of Today (March 28)

“Like himan, organizations are driven by their subconsciousness. ‘Business as usual’ is the norm. That’s why many co’s can’t cope with today’s fast-changing environment. The leader’s job is to raise the level of consciousness of the organization so it’s fully alert.”

Quote of Today (March 27)

“The basic requirement of a qualified consultant is to excel in three types of leadership: Thought Leadership, Client Leadership and Team Leadership. Deficiency in any one of these dimensions would make a consultant incomplete.”

Quote of Today (March 22)

Everything in the world is a duality (underpinned by a union or non-duality). Sun and Moon. Yin and Yang. Order and Chaos. Intellect and Creativity. Strategy and organizations all manifest in terms of duality. The best problem solvers are those who are aware of this and can consciously balance the forces within the duality in a dynamic manner.”

Quote of Today (March 21)

With major disruptions taking place on both the demand and supply side epitomized by technological changes, massive market scale and gradual retorms, China has become the world’s leading business laboratory. The country has transcended its identity as a market or a manufacturing and supply base, it has become a definitive source of cutting edge intellectual capital on strategy and business. The radiation of that source to rest of the world will impact how executives, investors, academics and professionals expand their thoughts on businesses.

Quote of Today (March 20)

Organizations are consisted of people. While most people are disillusioned by what their mind tell them, the same thing happen in organizations but with a much bigger scale. This is what we call “organizational subconsciousness.” Left to its own course, this could be dangerous and could lead an organization to deprivation. The job of a leader is to lead the organization to build and sustain its “organizational mindfulness.”

Quote of Today (March 15)

Quantum physics tells us that the world is not entirely physical nor entirely deterministic. Same applies to organisations. While there are physical and deterministic aspects to an organization, there are also non-physical and probabilistic aspects. Leaders must understand this in totality and incorporate this understanding in leading an organization forward.

Quote of Today (March 1)

Problem solving is both a leap and also iteratiions. It’s a leap because at all times, a consultant needs to have clear hypotheses of what the answers to the problem ought to be. However, the hypothesis by definition would evolve as the consultant gathers data and carries out analyses along the way. At any given point in time, the consultant needs to have a vision of what the end answer would be. Usually that vision is pretty blurred at the beginning but as data come in, it would become clearer. However, with more data, newer vision would emerge and that is often blurred. It will become clearer as more data come in. This cycle of iterations will go on for a number of times till an acceptable picture evolves. That picture may have some resemblance with the original hypotheses but often there are plenty of differences. Leaps and iterations are the intrinsics to first-principle problem solving.

SCMP | Fuelling Bright Ideas

 

By Edward Tse | SCMP

Edward Tse says the trade war is helping to accelerate the mainland’s reform and innovation

Original published by South China Morning Post on February 4, 2019. All rights reserved.

In trying to curb China’s supposedly unfair trade practices and substantially reduce its trade deficit with China, the United States is unintentionally helping to accelerate China’s reform and innovation.

Washington’s trade war has gained support from many in the Sinophobic circle of politicians, businesses and lobbyists, who have long complained about Beijing’s treatment of foreign businesses, especially those from the US, on issues such as intellectual property protection, forced technology transfer and market access.

However, while it is arguable that China’s market liberalisation could be faster, it is unfair to say Beijing has blocked most foreign companies. In the tech sector, pundits lament that Facebook and Twitter are blocked in China, but neglect to mention Apple, Amazon, Bing, LinkedIn, eBay and Airbnb are not.

While Chinese tech giant Huawei has met with the American and other governments’ roadblocks overseas, its American counterpart Cisco continues to do business in China. As The Economist’s Schumpeter column notes in the June 28 edition, the picture of American firms being victimised in China is exaggerated.

Since US President Donald Trump’ tariff war broke out, China has accelerated the opening of its market to foreign companies. Last April, Beijing set a timetable for phasing out foreign ownership limits in the automotive industry. It is also easing curbs on sectors such as banking, securities, insurance, agriculture and aircraft manufacturing. Recently, BT Group became the first non-Chinese telecom company in China to get a nationwide operating licence. S&P Global’s Beijing-based wholly-owned subsidiary was also given a green light to enter the Chinese bond rating market.

Source: Internet

Reform is also coming to the private economy. To boost the private sector, Chinese President Xi Jinping met entrepreneurs last November, and China Banking and Insurance Regulatory Commission chief Guo Shuqing followed up with a statement that no less than 50 per cent of new loans should go to private businesses.

At the same time, China is stepping up mixed ownership reform, that is, diversifying the ownership of parts of the state sector. According to the National Development and Reform Commission, 100 more state-owned enterprises will join the mixed-ownership reform programme. Along the way, many “zombie” enterprises will be eliminated.

To improve the protection of intellectual property right, China’s top court has started to rule on intellectual property cases since the beginning of this year; laws are also being drafted to ban forced technological transfer.

In Davos, Chinese Vice-President Wang Qishan stressed that China would continue to carry out structural reforms and adhere to multilateralism.

Last November, The New York Times wrote in a special report: “The Chinese economy has grown so fast for so long now that it is easy to forget how unlikely its metamorphosis into a global powerhouse was.” In fact, China owes the remarkable resilience of its economy to its own evolving development model of “three-layer duality”.

At the top, the central government sets goals and directions, giving the rest of the country clear targets to follow. At the grass-roots level, private entrepreneurs have re-emerged and become 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 competing but also collaborating within regional clusters. To this end, they work closely with entrepreneurs who bring innovative ideas to bear.

Undoubtedly, the current trade dispute has generated much uncertainty and volatility for China, as well as the rest of the world. It has exposed a fundamental mistrust of China in certain parts of the West, and given some Western businesses an opportunity to amplify their long-standing concerns about China, justifiable or not, through their respective chambers of commerce. This should have woken up the Chinese government to the fact that it needs to adjust its approach. This is why Beijing is reinforcing its commitment to globalisation and accelerating reform.

Source: Internet

The short-term issues brought on by the trade dispute would naturally unsettle some foreign multinational companies operating in China, but for many others, especially the larger ones, China has become so strategically important that they must figure out a way to overcome the challenges.

China’s innovation – the fast-evolving consumer demand patterns, rapidly developing government policies and regulations, increasingly prevalent tech-enabled business innovations, and the emergence of bona fide innovative and competitive local companies – has led many foreign multinationals to the realisation that what they have learned in the West won’t give them an advantage in the local market any more. Their success in China is no longer guaranteed if they rely only on what they already know. They will need to learn how to innovate in China, for China, and also in China for the world – and this won’t be easy for many.

China has reached a turning point. The age of single-minded pursuit of growth is over, and there will instead be a focus on refining the country’s economic structure, quality and sustainability. However, many in the West and even some within China are doubtful about whether Beijing will be able to make the necessary changes in a timely manner.

The challenge remains for the Chinese government to demonstrate its commitment and ability to fully implement the changes. Paradoxically, the pressure from outside, intended to thwart progress, is likely to push China into more reform and opening. Expect new waves of developments and new opportunities for companies from all over. The companies who can seize these opportunities will be among the true winners in the trade dispute.

Quote of Today (February 28)

For a long time, mainstream strategy thinking says a company should seek an advantaged position in their industry based on their core competences and that would be fine. End of story. Some people call this holy grail “Positioning.” But is it? Business is always dynamic. That a static positioning that can guarantee a long-term success doesn’t make much sense. This limitation is exemplified by the increasingly fast speed, high volatility and heightened uncertainty of the operating environment. And industry boundary is constantly being redefined. So today’s strategy must be dynamic in nature and should be based on a continuous balance between opportunities and capabilities; chaos and structure; self-built and collaborative partnerships. A corporate leader’s job is to ensure that the right balance can be made along the way with the right rhythm.

Quote of Today ( February 27)

As consultants conduct problem definition, they also need to go through the entire thought process to address the problem. Problem definition goes first but inevitably its process is somewhat iterative. Thought process development proceeds commensurate with the problem definition process. Without a complete and appropriate thought process up front, many consultants would waste their time along the way. Worst, ultimately they are not able to adequately resolve the client’s problem for the client.

Quote of Today ( February 26th)

Problem solving is done in two ways. The first is based on expertise or experience on addressing similar issues. The second is to resort to first principles, going back to ask the most fundamental questions regarding the problem on hand. In reality, actual problem solving includes a combination of both, but the balance may differ. Expertise or experienced based problem solving is typically more efficient but could become linear and in-imaginative. First principles problem solving is needed to address ambiguous and fluid issues but could take more time. A good problem solver can master both and knows under what conditions what ought to be the optimal balance between the two approaches ought to be. And, adjust along the way.

Quote of Today (February 25th)

Where there is “core”, there is also “fringe.” That’s one way of how duality manifests itself in companies. While for a long time – and still today – consulting firms and many academics advocate “focus” through “core competencies,” the rise of successful businesses like AWS have shown the power of “from fringe to core.” So while there is “core competence”, companies also need to understand the power of “fringe competence.” The two go hand in hand.

Inkstone News | China Enjoys Many Advantages in AI Development

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.

Quote of Today (February 14th)

The boundary of a company’s business is a function of opportunities versus the company’s capabilities. As such, it’s dynamic. Of course, one doesn’t change its business boundary every day; however, a mechanical “focus” approach that never adjusts one’s business boundary may also not be that appropriate. The job of the company leader is to know how to consciously evaluate the trade-offs between opportunities and one’s own capabilities and decide if one needs to “jump over” to grab the new opportunities or not. Capability gaps can be filled along the way through self built and/or collaborative partnerships through ecosystems.

Quote of Today ( February 11th)

Like individuals, every organization has a character. Or personality. More fundamentally, it’s about “Who are you?” Lots of companies put their “vision”, “mission” or “values” which are crafted in plagues in the most visible locations. But do people really believe in them and internalize them in their daily behavior? Often not. Many companies do not have a clear sense of who they really are. They let their subconsciousness lead their behavior and end up being disillusioned. And eventually lose their direction and are trapped.

Quote of Today ( January 29th)

All organizations consist of opposite forces. When there is black, there is also white. Same for yin and yang. And structure and chaos. But each of these forces won’t be able to manifest itself without the other. No one knows what black is without knowing what white is. And vice versa. Ultimately, what’s apparently opposite is actually one of the same. Or the Oneness. The job of the leader of any organization is to help the people to see through the illusion of the duality and get to the real core of the non-duality or the oneness. When an organization gets the notion of oneness, it’s consciousness will manifest and it will know what, how and how fast to navigate in the most natural way.

Quote of Today (January 23rd)

We often say we do “projects.”  More appropriately, however, we should say we undertake “engagements.”  Projects signify a transaction. Engagements stand for symbiotic relationship that goes on.  It stands for mutual commitment.  And the relationship extends beyond the contractual duration.

Quote of Today (January 18th)

Consulting should be non-hierarchical, collegial, meritocratic and team-based. Consulting is best conducted through conversations in which both consultants and clients engage in seeking truths. A good consultant is one who can lead the team and client in the discovery process from ambiguity to clarity, from unknown to known, from little logic to logical, and from little consensus to alignment. And ultimately enlightened client and team.

Quote of Today (January 17th)

Consulting is a marathon not a hundred meter dash. So consultants should pace themselves. Don’t kill yourself by keeping on dashing. Take time and relax. Sometimes get totally out of the rat race for a while. You will see your mind would work better that way. Also your health.

China Daily | Reform, Resilience, Progress and Innovation

By Edward Tse

January 2019

China has figured out its own development model without consciously knowing it

This article is published on the book The Sleeping Giant Awakes by China Watch Institute


The last 40 years of Reform and Opening-Up have brought incredible changes and progress to China, turning the image of the country upside down from a planned economy to one of the world’s most vibrant business landscapes.

While the central government didn’t attempt to change everything overnight—as the International Monetary Fund advised—it made continuous reform and opening the centerpiece of its governance.

With pragmatism and tangible results in mind, China has figured out its own development model without consciously knowing it. At the top, the central government’s guiding hand in Beijing sets goals and directions for the country, giving the rest of the country clear targets to follow. At the grass roots level, private sector entrepreneurs, who were given the opportunities to re-emerge, have become a major force in driving not only the growth of China but the upgrading of the global economy. In the middle, China’s local governments, in response to the central government’s direction and strategy, channel their resources and focus on areas of national and local priorities. The local governments often collaborate closely with entrepreneurs who bring innovative ideas to bear. As the local governments compete with each other, some of them also often collaborate in regional clusters.

This three-layer working paradigm, though not perfect, has indeed been proven to enable robust momentum driving progress forward and generate resilience for continued development. Between 1978 and 2016, China’s annual GDP growth averaged 9.7 percent, faster than the growth of any other country over the same time period and almost quadruple that of the US.

The symbiosis of state-owned enterprises (SOEs) and private-owned enterprises (POEs) in China’s dual economic structure is also a defining feature of the economy. On the one hand, SOEs take the initiative on nationwide mission-critical projects such as major infrastructure, utilities, natural resources, military and defense; while on the other hand, POEs are great at market-driven innovations, often enabled by technology, that address society’s pain points. While SOEs in many cases enjoy greater advantages in terms of policy privileges, resources and capital, and licensing rights, the private sector embodies more agile organizations, higher business innovative potential, as well as sensibility and responsiveness to market changes.

Though the dual economic structure encounters occasional glitches, the two sides complement each other well most of the time, often without knowing it, and use their respective strengths to generate synergy in society as a whole.

In the meantime, China has accelerated its pace of opening by liberalizing the market access of more key industry sectors. In June, Beijing unveiled a plan for easing foreign investment curbs on the banking, automotive, agricultural and heavy industrial sectors, which signals lower entry barriers and more opportunities for cross-border investors. China will also phase out ownership caps on businesses, including ship and aircraft manufacturing, power grids and some consumer goods sectors. Either in the context of the trade war or the critical juncture of industry restructuring, China has gathered more confidence in the resilience of its domestic businesses and is ready to embrace competition from worldwide, which, in turn, would further stimulate innovation and growth.

The de facto game changers of China, namely the entrepreneurs, have evolved in generations. At the end of the 1970s, the Chinese realized that not only was their economy underdeveloped but also the business mindset backward compared to developed nations. This dose of reality was a shock to those who had subscribed to the nation-state’s self-sufficient, long-standing utopian economy. This situation spurred a new sense of purpose among Chinese entrepreneurs—the desire to strive for success and show the world that they too could succeed. They thought to themselves, if Li Ka-shing and Bill Gates can become men of great wealth, why not me Although it’s been 40 years since the opening-up of China, this question of “Why not me” is still the key engine that drives the Chinese entrepreneurial spirit.

 

Source Google

At the same time, the size and fast-changing nature of China’s market allows companies to rapidly scale up. Leading Chinese companies are benefitting from high valuations that are based on favorable forward-looking expectations of China’s market potential. Over the past 20 years, plenty of capital needed to fund development and growth was made available through the public capital markets, either within or outside of China, as well as through plenty of venture capital, private equity and angel investors, fueled by the immense aspirations of the governments, entrepreneurs, and investors.

Nowadays, the new generation of entrepreneurs continues to inject vigor into the country. The Internet and technology sector—ranging from ride-hailing to e-commerce, robotics and artificial intelligence—grew twice as quickly as the overall gross domestic product in the past decade, according to Xinhua last year. Deloitte and China Venture, in a 2017 report, said that China accounts for more than a third of the total number of unicorns globally, and has become the world’s second largest birthplace of unicorns.

New dynamics are also emerging among entrepreneurs, who are getting younger and more geographically diverse. China Youth Daily reported in 2016 that the age of first-time young entrepreneurs in China averaged around 25; another study showed that although startups generally prefer top-tier cities, they are also reaching lower-tier cities such as Xi’an and Qingdao.

Women, in particular, are starting to rise to the entrepreneurial center stage. Last year, in the Forbes list of the world’s 56 selfmade women billionaires, there were 21 Chinese, accounting for 37.5 percent of the total. China’s femalemale ratio of an index measuring entrepreneurial activity is 0.87, above the global average of 0.7. The Total Early-stage Entrepreneurial Activity index, published by the Global Entrepreneurship Monitor, reflects the percentage of the 18-64 population who are either a nascent entrepreneur or an owner-manager of a new business.

Altogether, Chinese entrepreneurs dabble in various entrepreneurial pursuits while the Chinese society now accepts entrepreneurs who try and fail. Certainly, only a few would succeed, and much fewer would succeed at the first try, but failures are no longer stigmatized.

With President Xi Jinping’s declared goal of creating an innovation nation by 2030 and strategic goals like Made in China 2025, we expect more innovations from China. The country is now already the second-largest spender on research and development and accounts for 21 percent of the world’s total, according to the US National Science Foundation. From the grass-roots level, patents, trademarks and industrial design have soared in recent years. The World Intellectual Property Organization reported that China contributed to 98 percent of global growth in patent filings, more than the combined total of the US, Japan, South Korea and Europe.

The Fourth Industrial Revolution is imminent, and China is one of the leading nations. As new and emerging technologies like AI, IoT and Blockchain are here and 5G is just around the corner, the Chinese are fully embracing them to further enable innovation.

For example, to support higher levels of manufacturing productivity, China recognized the necessity of automated manufacturing, and added 87,000 industrial robots in 2016, slightly lower than Europe and the United States combined. Chinese growth in robotics is forecast to exceed 20 percent annually through 2020, according to the International Federation of Robotics.

The transition into this new era will have major implications for China and the rest of the world. For companies, new opportunities would at the same time mean greater risks and responsibilities. Today, many private companies are led by their owner-managers. Going forward, corporate survival hinges upon succession planning and transition. Having grown at a breathtaking pace in the last few years, large organizations, such as Didi, which was twice embroiled in safety scandals this year, need to have a clear value proposition and bear in mind their responsibilities—defined not merely as maximizing shareholder benefits but the intangible impact on the society at large. Both investors and management teams must understand and internalize the need for the company to demonstrate corporate leadership well beyond the narrowly-prescribed realm of financials, epitomize what a good corporate citizen really is and turn that into proper governance.

China will be at the front seat witnessing the turning point in the Fourth Industrial Revolution, perhaps ahead of most of, but not all other countries in the world. As the country continues to embrace multilateralism, naturally it will play an even larger and responsible role in future global governance. We expect China to step up further and take on global leadership, and even more and disruptive innovations to come from China’s businesses.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company. One of the pioneers 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»).

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Nikkei Asian Review | Recognizing the growth in China’s auto market

EDWARD TSE and BILL RUSSO
November 28, 2018 14:46 JST

Expanding mobility and digital services are offsetting the decline in vehicle sales

China is set to record its first annual decline in car sales in decades — at least, if the downward trend of the last four months continues. Sales in the world’s biggest car market fell 11.7% in October.

The gathering gloom about Chinese car sales, especially among foreign manufacturers, misses a fundamental point, however: growth in automotive services in the country is offsetting the decline in vehicle sales. We estimate that overall Chinese “automobility” revenues will rise this year to $590 billion, up $10 billion from last year. This figure is on track to top $1 trillion by 2025.

Chinese demand for mobility products and services has continued to rise as a growing population of urban residents earns higher wages and engages in economic activities requiring that they move around. An expanding range of options faces them: A city dweller can own or lease a car for her personal use, pay per use for a car to drive or ride in, or use public transportation. Demand for the purchase of new vehicles is also increasingly tempered by the growing availability of good-quality used cars.

The presence of commercially aggressive digital players like Baidu, Alibaba Group Holding and Tencent Holdings, together with their associated convenient mobile payment services, is helping to create a new competitive landscape in China.

Didi Chuxing, the country’s largest mobility services platform, handles some 30 million trips a day for over 550 million registered users. Bolstered by the huge popularity of short-distance ride hailing in China, Didi has become one of the world’s most valuable technology startups, with a valuation of more than $50 billion.

The new game of providing mobility services for people and goods represents an “automobility” business model based on the utility that vehicles can deliver, rather than on the sale to car owners.

The old model depended in part on the underutilization of vehicles sold to individuals and companies. Utility under the new model can be measured by kilometers traveled and the consumption of services linked to the connectivity features of new vehicles.

Shared-use vehicles, including those deployed for ride hailing, public transportation and carpooling, represented about 7% of China’s total passenger vehicle fleet last year. We forecast that their share will rise above 30% by 2025 as further service innovations emerge.

This means Chinese sales of new vehicles will continue to be under pressure. The automobility business model will increasingly commercialize connected, electric and autonomous vehicles through the economics of digital ecosystems. Companies such as Alibaba, Tencent, Baidu, Alphabet, Microsoft and Apple are viewing mobility-related services as a means of expanding their platforms.

Source: Baidu

How should foreign carmakers best capture the emerging opportunities in China and mitigate risks against the background of falling restrictions on their investment in local vehicle production and declining vehicle sales?

First, given the sheer size and speed of change of the Chinese market, the country needs to be placed at the core of carmakers’ global automobility strategies and not simply treated as a fringe market. This requires building an empowered corporate organization in China, developing market-specific capabilities while also leveraging the company’s global capabilities.

Traditional carmakers have generally been slow to embrace mobility services. They lack the digital DNA necessary for monetizing relationships with users of smart mobility services. Innovation linked to the digital economy and deepening relationships with end users will be key to survival in the increasingly technology-enabled new game in China.

Third, building a smart vehicle will not be enough. Emerging players, from Baidu and Alibaba to startup automakers like NIO, Byton and Weltmeister, are all focused on winning in the new game.

These companies aim to achieve intimacy with end users through digital platforms and monetize customer value through both mobility services and offerings for digitally connected lifestyles. NIO, for example, expects services to provide a bigger share of its revenue in the future than vehicle sales. It will be offering car battery-swapping services as well as creating a network of NIO Houses that will act as lifestyle hubs for users to connect, relax and play while getting vehicle support.

Traditional carmakers need to figure out a way to engage in this new model. Moving into software or services and becoming part of the digital ecosystem will be necessary, but will likely be difficult for companies who have long focused on the branded relationship with vehicle owners.

Lastly, companies need to create bespoke innovations in China for Chinese customers. The country’s vast market presents challenges and opportunities that are relatively new to foreign companies and they must adopt new ways to innovate to remain relevant.

The challenge already extends beyond China’s borders. Didi, for example, has recently expanded into Australia and Mexico. It has also invested in peers around the world including Grab, Lyft, Ola, 99, Taxify and Careem, creating an informal network that covers 80% of the world’s population.

Carmakers should pivot to where growth is heading. The traditional sources of competitive advantage for carmakers no longer guarantee success. Instead, they must build a new set of capabilities derived from digital ecosystems and mobility services partnerships.

For those who get it, the reward will be significant and will impact their global business. Those who do not will be marginalized and eliminated. Such is the nature of the new game in the world’s largest, most disruptive and most innovative market.

Edward Tse is chief executive of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China. Bill Russo is the firm’s managing director and former Chrysler vice president for Northeast Asia.

SCMP | The Game Changer

By Edward Tse

Edward Tse says multinational companies are realising that they cannot ignore Chinese innovation and must embrace China-specific strategies

Original published by South China Morning Post on November 19, 2018. All rights reserved.

Chinese President Xi Jinping met a group of entrepreneurs on November 1 and underscored the government’s support for the private sector. Soon after, Guo Shuqing, chairman of the China Banking Regulatory Commission, pledged that at least 50 per cent of new corporate loans by China’s banks would be provided to the private sector.

These moves reaffirmed Xi’s earlier position that both the state-owned and private sector are critical to China. In fact, a “three-layered duality” working model has emerged and is providing resilience for China’s economic development. At the top, the central government sets the overall development priorities. At the grass-roots level, private-sector entrepreneurs have become a major driving force behind the economy. Sandwiched in the middle, local governments, in response to the central government’s direction and strategy, collaborate and compete in regional clusters, often by teaming up with entrepreneurs.

Source: Internet

Another major initiative by Xi was highlighted in his speech at the opening ceremony of the China International Import Expo in Shanghai, on November 5. He emphasised China’s commitment to opening up and reform, inviting more foreign participation in the country’s growing market. He further endorsed multilateralism on global trade and finance, forging a win-win platform so countries can together create greater prosperity for the world.

Over its 40 years of reform, China has been gradually opening up, sector by sector, to non-state and in particular, foreign companies. Many sectors are already open to foreign participation, including consumer goods, retail, automotive parts and appliances.

Beijing recently set a timeline to phase out the ownership cap on the automotive industry. It has also committed to liberalisation in other sectors such as financial services, agriculture, aircraft and ship manufacturing. Clearly, liberalisation of market access will be carried out against a set of constraints defined by the Chinese government. Key industries touching on “national security” – military, defence, mission-critical public utility, data and cybersecurity – will continue to be subject to investment restrictions.

All these moves carry profound meaning, especially in the context of the US-China trade war. Reuters reported in October that, as the cost of production rises, a large percentage of US companies are planning to shift supply chains out of China. However, among this growing list, only 1 per cent said they had any plans to establish manufacturing bases in North America.

[Xi has] emphasised Beijing’s commitment to opening up and reform

For many foreign multinational corporations, including American companies, the China market has become so important that an exit is almost not an option. Take the auto market as an example. Though China recorded the sharpest sales decline in car sales in September since 2011, the country remains the world’s largest market. For most major international carmakers, it is a must-win market. China is also of strategic importance to the likes of Apple, Starbucks, Nike, Adidas, L’Oreal, Johnson & Johnson, and many other global companies.

Source: Internet

While US politicians and lobbyists are pressuring China for “reciprocity” – that is, more market access – they and many foreign companies have missed China’s waves of business innovation, probably the country’s most important development in the past decade. This innovation, often led by Chinese entrepreneurs, is creating new paradigms across the board. Terminologies such as “automobility”, “new retail”, “OMO” (online merged with offline), “smart homes” and “big health” signify how industries are being reshaped.

For example, the auto industry is quickly evolving into an “automobility” industry, driven by three major forces – electrification, autonomous driving and “mobility-as-a-service”. The latter enables people to completely plan trips using digital platforms that integrate booking, planning and ticketing across public and private services. This new paradigm involves both hardware and on-demand personal mobility services, such as ride-hailing services, in contrast to the old one of people owning traditional internal combustion non-digitally-connected cars. Though car sales in China are under pressure, the automobility market size is forecast to expand from around US$30 billion in 2017 to over US$210 billion by 2025.

Global carmakers have found that, to participate in this new paradigm, they need to build competitive advantages specific to China and embrace innovations in China for China.

Thus paradoxically, as the auto market opens up – and therefore “reciprocity” is in theory achieved – foreign carmakers are not shedding local partners to form wholly owned operations. Instead, new forms of partnerships among foreign, local, state-owned and privately-owned companies are being formed.

Source: SCMP

In September, Ford and Zotye Automobile, a Zhejiang-based privately owned enterprise, formed a joint venture to focus on providing customised smart electric vehicles to fleet operators and drivers in China’s ride-hailing industry. In October, Daimler and Geely, another Zhejiang-headquartered private enterprise, announced they would set up a joint venture to offer premium ride-hailing services.

Investments by foreign multinationals in China are not shrinking but expanding. In recognition of the strategic importance of the China market, for instance, Ford has just announced an elevation of its China operations to a separate business unit led by a newly recruited CEO, who is a Chinese national, reporting directly to the company’s global headquarters.

Innovation, not reciprocity, is the real game changer. In the past, foreign multinational companies have either dismissed or ignored Chinese innovations due to a combination of a lack of awareness and disbelief. Today, most have come to realise the power of the innovations by the Chinese players, as well as the growing importance of China’s market despite the trade war with the US.

As new technologies such as artificial intelligence, the internet-of-things, 5G and blockchain emerge, old knowledge from the past and from the West will no longer be enough. Global CEOs need to develop a “new game” strategy to win, or just to survive, under a drastically different set of conditions. Those who get it will be able to reap major benefits and build a strong position not only in China but for the world. Those who don’t will be marginalised over time.

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.

 

China Daily | China’s Burst of Tech-enabled Innovation

By Edward Tse | China Daily Africa | Updated: 2017-12-08

AI, internet of things to change the way companies acquire, connect, communicate, interact and service customers

The fourth World Internet Conference, which just concluded in Wuzhen, Zhejiang province, attracted a large number of senior participants – ranging from government officials and multinationals to leading tech companies and academics – under the theme of “Developing Digital Economy for Openness and Shared Benefits – Building a Community of Common Future in Cyberspace”.

Top foreign tech company executives, including Apple CEO Tim Cook and Google CEO Sundar Pichai, along with the leaders of China’s internet giants – Jack Ma (Alibaba), Pony Ma (Tencent) and Robin Li (Baidu) – attended the conference.

For a long time, China has been viewed as a nation reliant on low manufacturing costs and products and services copied from the West. Very few people believed that China had the ability for innovation. However, its development has proved otherwise.

Since the beginning of this decade, innovation and entrepreneurship have become key drivers for China’s economic development. An increasing number of young Chinese entrepreneurs and their fearless experimentations in new technologies have emerged. And, to the surprise of many, some Chinese entrepreneurial companies, notably Tencent and Alibaba, are now in the league of the world’s most valuable companies.

So what drives innovation and entrepreneurship in China? I think it is the following seven key factors:

Why not me? The question of “why not me?” is a key engine that drives the Chinese entrepreneurial spirit. Young Chinese entrepreneurs, post-’80s and post-’90s, believe that if Jack Ma and Pony Ma can become men with great wealth, why not me? They are inspired by these legendary success stories, spawning a desire to strive for their own success. Armed with a fearless attitude toward failure, they are often very agile and responsive to market shifts.

Market opportunities provided by the State-dominated economy: State-owned enterprises have important roles to play in the Chinese economy, but they are usually big and slow to react in a fast-changing market that is marked by intense competition. This created immense opportunities for innovative private companies able to take advantage of this market gap.

Transformative and intense competition: It has taken several decades for China to gradually transform from a planned economy to a market economy, and will likely take another couple of decades more, if ever, for a complete transition. A number of sectors opened up during the transformation, attracting numerous players and igniting intense competition. Against this background, innovation is the best way for companies to enhance their competitiveness and to stay ahead of competition.

Chinese society’s pain points: During the transformation process, Chinese society’s pain points, which had been hidden from sight before, became readily visible. Entrepreneurs considered these pain points as golden opportunities for innovation. Many innovations came about for the sake of solving societal ills or easing the pressure created by societal pain points.

Prevalence of technology, especially wireless internet: Technology is definitely a major enabler for innovation. Smart devices debuted a decade ago and are now becoming a core part of Chinese’ consumers daily connected lifestyle. Wireless Internet, 5G network and artificial intelligence all provide tremendous disruption opportunities for innovators and entrepreneurs.

The massive scale of the Chinese market: The size and fast-changing nature of China’s market allow companies to rapidly scale up. At the same time, there is plenty of room for innovators and entrepreneurs to learn via trial and error. Leading Chinese companies are also benefiting from high valuations that are based on favorable forward-looking expectations of China’s market potential. This gives them the needed capital ammunition to support their growth.

Capital resources: The availability of venture capital and angel funds, both overseas and local, is another key driver of innovations in China. Chinese companies have greatly benefited from the vast sums of capital provided by both foreign and homegrown investors over time.

In a congratulatory letter to the this year’s conference, President Xi Jinping said deep integration is needed between new technologies, such as the internet, AI, big data and the real economy, in a bid to fuel growth of the digital economy and sharing economy in China.

Using AI as an example, China’s unique capacity among nations to combine strong top-down government directive (both at central and local government levels) with vibrant grassroots-level innovation and an entrepreneurial ecosystem bodes well for success in its AI development. China has positioned AI as a national strategic priority, aiming to gain first-mover advantage in the revolutionary AI technology to leapfrog foreign peers and to become a world leader in science and technology development. The State Council, China’s Cabinet, released a “New Generation AI Development Plan”, which declared the goal for China to become a global leading AI innovation hub with an industrial scale of over 1 trillion yuan ($151 billion; 127.7 billion euros; £112.6 billion) by 2030.

Not only is the central government very supportive of AI innovation; local governments in China are also devoting resources and investing heavily into AI technology innovation in a bid to gain regional competitive advantage. For example, Guizhou, one of poorest provinces in China, positions itself, with support from the central government, as China’s “Big Data Hub” and has attracted major companies, such as Apple, Alibaba, Tencent and Qualcomm, to set up new data centers. Guizhou was able to achieve 10.5 percent growth in GDP, which was the second-highest in China.

Local governments also have a “coopetition” mindset, willing to collaborate with cities in a cluster and region and grow together. For example, cities within the Guangdong-Hong Kong-Macao Greater Bay Area, such as Dongguan, Guangzhou and Shenzhen, have all been competing with each other for a long time, but they will also collaborate to incorporate AI into their development plans and leverage it as a key economic growth engine for the Greater Bay Area cluster.

The government’s favorable policies have further promoted innovations across a wide range of tech players. Leading internet giants such as Baidu, Alibaba and Tencent, rising startups like Face++ (cognitive services), iCarbonX (healthcare), Mobvoi (natural language processing) and SenseTime (computer vision), as well as unicorns like Didi Chuxing and Xiaomi, are either already adopting AI technology in their operations or investing in it.

Another key technology area in this year’s conference was the internet of things, a network connecting physical devices, such as vehicles and home appliances, and data. This technology can help to digitize a user’s offline activities, connect the isolated information and data together and generate insights from the big data.

Looking ahead, new technologies such as AI and IoT will fundamentally change the way companies acquire, connect, communicate, interact and service their customers. In the future, industry boundaries will become blurred, and the new technologies can help companies to build customer-centric organizations with ubiquity, segment of one, connectivity and interactivity. Tencent CEO Pony Ma gave a speech in which he said that, in the past, wireless internet solved the pain points of individual users, while in the future, internet companies with new technologies will enable different industries and solve their pain points.

There will be many challenges waiting for China along the way to reach its goal of taking a global leading position on AI or IoT. However, like anything related to technological innovation these days, it would be imprudent to rule China out.

The author is founder and CEO of Gao Feng Advisory, a global strategy and management consulting company with roots in China. He is also author of China’s Disruptors.

 

China Daily | China’s Three-Layered Duality Continues to Evolve

By Edward Tse | China Daily Africa | Updated: 2018-10-12

Working paradigm of nation’s economy has enabled robust momentum in driving progress and generating significant resilience

On Sept 27, during a visit to Liaoyang in Northeast China’s Liaoning province, President Xi Jinping stressed that China’s State-owned enterprises should continue to grow and develop. He added that the principle of having the Communist Party of China guiding the SOEs must be consistently followed.

On another occasion on the same trip, Xi stressed that, since the start of market reform and liberalization, the CPC Central Committee has always been supportive and protective of privately owned enterprises. China’s basic economic system must unwaveringly consolidate and develop the public sector, and unwaveringly encourage, support, guide and protect the development of the nonpublic sector, he said.

Are these stances regarding SOEs and privately owned enterprises contradictory to each other? How should we interpret the dual support by Xi for both types of enterprises?

The past 40 years of reform and liberalization have brought incredible changes and progress to China, turning the image of the country upside down, from a planned economy to one of the world’s most dynamic business landscapes.

Along the way, China has evolved its own development path, without consciously knowing it. 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 grassroots level, private-sector entrepreneurs have re-emerged and become a major force in driving not only the growth of China but also of the global economy. In the middle, China’s local governments, in response to the central government’s direction and strategy, channel their resources and focus on areas of national and local priorities. The local governments often collaborate closely with entrepreneurs who bring innovative ideas to bear. Local governments compete with each other as well as cooperate to form regional clusters. A good example is the Greater Bay Area, which consists of nine cities in Guangdong province, including Shenzhen and Guangzhou, as well as the special administrative regions of Hong Kong and Macao.

This three-layer working paradigm, while evolving, has enabled robust momentum in driving progress forward and generating significant resilience. Between 1978 and 2016, China’s annual GDP growth averaged 9.7 percent, faster than the growth of any other country over the same period and almost quadrupling that of the United States.

The symbiosis of SOEs and privately owned enterprises, in China’s dual economy structure, is a defining feature. SOEs take initiatives on the country’s mission-critical projects such as major infrastructure, utilities, natural resources, military and defense. Within a decade, for example, China was able to build the world’s most extensive high-speed railway network from virtually nothing, thanks to its SOEs – a feat that would probably not have been possible if left to the private sector. On the other hand, privately owned enterprises are great at market-driven innovations, often enabled by technology that addresses society’s pain points. While SOEs in many cases enjoy greater advantages in terms of policy privileges, resources and capital, and licensing rights, privately owned enterprises embody more speedy organizations, higher business innovation potential and more sensibility and adaptability to market changes.

Though the dual economic structure encounters occasional glitches with inherent conflicts at times – on many occasions, pundits asserted “guo jin min tui”, meaning “the state advances while the private sector retreats”, while other pundits asserted the opposite – the two sides of the economy for the most part complement each other, often without knowing it, as each takes on its respective role.

China’s entrepreneurs have evolved in generations. In the late 1970s, at the end of the “cultural revolution” (1966-76), the underdevelopment of the Chinese economy spurred a new sense of purpose among China’s newly emerged entrepreneurs – the desire to strive for success and to show the world that they, too, could succeed. Even today, this notion of “Why not me?” is still the key motivator that drives the Chinese entrepreneurial spirit.

Source: Internet

Today, younger generations of entrepreneurs continue to inject vigor into the country, and they are also more geographically diverse. China Youth Daily reported in 2016 that the age of first-time young entrepreneurs in China averaged around 25; another study found that although startups generally prefer top-tier cities, they are also reaching lower-tier cities such as Xi’an and Qingdao.

An earlier article in South China Morning Post said that the scale and influence of China’s private economy can be recapitulated by “56789” – contributing 50 percent of tax revenue, 60 percent of gross domestic product, 70 percent of industrial upgrades and innovation, 80 percent of total employment and 90 percent of the total number of enterprises.

With President Xi’s declared goal of creating an innovation nation by 2030, we will expect more innovations to come from China. The country is now already the second-largest spender on research and development and accounts for 21 percent of the world’s total, according to the US National Science Foundation. The World Intellectual Property Organization reported that China contributed to 98 percent of global growth in patent filings, more than the combined total of the US, Japan, South Korea and Europe.

The Chinese are fully embracing new and emerging technologies like artificial intelligence, the internet of things, blockchain and 5G to further enable innovations. The three-layers paradigm continues to manifest itself. Governments at central and local levels alike, as well as the private sector, are investing significantly in revolutionary fields. These technological breakthroughs will enable a higher level of automation, connectivity and intelligence, and will enable more game-changing business models.

Source: Internet

Recent research from Tsinghua University found that two-thirds of global investment in AI is going to China, enabling a 67 percent growth in the industry in just the past year. A report by ABI Research says that Chinese AI startups have already overtaken their US counterparts by raising nearly $5 billion (4.3 billion euros; £3.8 billion) in venture capital funding in 2017. In November, Shanghai announced a new plan outlining a road map toward becoming a major national AI hub.

Around 450 blockchain technology companies have been registered in China, according to the Ministry of Industry and Information Technology. The regulatory attitude toward blockchain has turned from skepticism to acceptance and now to support. Throughout this year, the Chinese government has funded multibillion-dollar initiatives to develop blockchain-based networks, with Hangzhou’s city government investing a total of $1.6 billion in the Global Blockchain Innovation Fund in April.

China will be in the front seat witnessing the turning point to the Fourth Industrial Revolution, characterized by cutting-edge technologies that are blurring the lines between the physical, digital and biological spheres, perhaps ahead of most of, but not all, other countries in the world. As the country continues to embrace multilateralism, naturally it will play an even larger and more responsible role in future global governance.

We expect China to step up further and take on more global leadership in an increasingly turbulent and uncertain world, and even more and disruptive innovations to come from China’s businesses through a unique, three-part duality construct.

The author is founder and CEO of Gao Feng Advisory Co, a global strategy and management consultancy with roots in China, and author of China’s Disruptors. The views do not necessarily reflect those of China Daily.

 

SCMP | Powering Ahead

By Edward Tse

Original published by South China Morning Post on October 8, 2018. All rights reserved.

The topic of the Fourth Industrial Revolution topped the agenda last month at the World Economic Forum “Summer Davos”, where over 2,000 top-level representatives from politics, business, social sectors and the arts gathered in the Chinese municipality of Tianjin.

China has been one of the leading countries in this imminent revolution, characterised by cutting-edge new technologies that are “blurring the queues between the physical, digital and biological spheres”, according to forum chairman Klaus Schwab. The Made in China 2025 initiative, for example, has set China’s vision to take on global leadership in advanced manufacturing and hi-tech industries.

China has rid itself of its “copycat” stigma and has emerged as a global innovation hub in business. In 2017, the internet and technology sector–ranging from ride-hailing to e-commerce, robotics and artificial intelligence–grew at 18 per cent, substantially outpacing the overall economy, which grew 6.9 per cent, according to Xinhua.

In a recent op-ed in The New York Times, journalist Thomas Friedman quoted internet and technology analyst Mary Seeker as saying, “Five years ago, China had only two of the world’s largest publicly traded tech companies, while the US had none. Today, China has nine of the top 20 and the US has 11. Twenty years ago, China had none.”

In a recent Forbes op-ed, financial writer John Mauldin pointed out that China is building the world’s largest innovation economy and that its Greater Bay Area, which comprises Hong Kong, Macau and nine cities in Guangdong, is like “Silicon Valley on steroids” due to its size, policy support and innovation competitiveness.

The Chinese are fully embracing new and emerging technologies like artificial intelligence, the internet of things and blockchain, as well as 5G, to further enable innovations. Governments at both central and local levels, as well as the private sector, are investing significantly in revolutionary fields. These technology breakthroughs will enable a higher level of automation, connectivity and intelligence, as well as more game-changing business models.

For example, in a drive for automated manufacturing, in 2016, China added a total of 87,000 industrial robots, just slightly shy of Europe and the United States combined, according to the International Federation of Robotics. Schwab characterises China’s initiative in advanced manufacturing as “a supply-side miracle, with long-term gains in efficiency and productivity”.

Two-thirds of the world’s investments in AI have been going into China and have enabled a 67 per cent growth in the industry just in the past year, according to recent research from Tsinghua University.

A report by ABI Research says that Chinese AI start-ups overtook their US counterparts by raising nearly US$5 billion in venture capital funding in 2017. The Chinese companies also filed the largest number of domestic AI-related patents, trumping Silicon Valley by as much as seven times, according to data from CB Insights. Last November, Shanghai Municipality announced a new plan outlining a road map towards becoming a major, national AI hub.

In China, new value chains for the use of blockchain in different industry sectors have emerged. Around 450 blockchain technology companies have been registered in China, according to the Ministry of Industry and Information Technology. The regulatory attitude has turned from scepticism to acceptance and now encouragement.

This year, the Chinese government has funded multibillion-dollar initiatives to develop blockchain-based networks, with Hangzhou city government investing a total of US$1.6 billion in the Global Blockchain Innovation Fund this April.

In the automotive sector, innovations in new energy vehicles are gaining speed, in addition to autonomous driving and “mobility as a service”, which aims to reshape how city-dwellers get around. Traditional carmakers, both foreign and local, are trying to reposition themselves as future new-energy vehicle makers, while competing or collaborating with dozens of new, non-state-owned players, such as Nio, which was recently listed on the New York Stock Exchange.

Source: SCMP

China will be in the front seat, witnessing the turning point into the Fourth Industrial Revolution, perhaps ahead of most, but not all, other countries. Innovation has become and will continue to be a global, prevailing theme, and a country’s future well-being hinges on its willingness and ability to embrace this trend.

Many foreign companies and their lobbyists have complained for a long time about the lack of market access in China and have demanded “reciprocity”. While they remain fixated on such issues, they have largely ignored the major shift in China’s innovations in the meantime, and have become bystanders.

The US-China trade war notwithstanding, China will emerge as a larger and more capable innovative economy. China’s pathways will inevitably involve many ups and downs, some experiments may not work out as planned and some resources will be wasted.

The lack of core technologies such as cutting-edge microchips have exposed China’s weakness but this has also given the Chinese the impetus to catch up. Many start-ups will fail, but a small percentage will make it. It would be foolhardily for anyone to discount China’s will and ability to achieve its goals.

Innovations will certainly create social challenges such as job dislocations, educationre – configurations and increased wealth disparity but they will also bring about advances to humanity and create major opportunities for companies and individuals who can anticipate the opportunities and figure out ways to capture them. Those who can’t, or won’t, run the risk of being marginalised or worse. It’s time to ask yourself: which side of history would you rather be on?

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).

Nikkei Asian Review | Newer Startups will Address Safety Worries if Didi Doesn’t

By Edward Tse and Bill Russo
September 18, 2018 16:21 JST

After passenger deaths, Chinese ride service has to show it is not ‘evil’

Didi Chuxing Technology, China’s dominant ride-hailing service, pledged this month to invest 140 million yuan ($20.39 million) to improve safety and customer service.

In May, Didi had also vowed to put through a range of safety enhancements. Those promises followed the rape and killing of a flight attendant in the central city of Zhengzhou, allegedly by the driver she had been matched with by Didi’s Hitch carpooling service.

Yet the company did not move quickly on those safety measures. On Aug. 24, a 16-year-old Hitch user was also allegedly raped and killed by her driver in the northeastern port city of Yantai.

The two deaths have sparked a crisis for Didi and exposed underlying issues with China’s new breed of fast-growing, entrepreneurial companies. Despite suspending Hitch and dismissing two senior executives, the ride service faces a public furor and boycott calls on social media. This could cloud its hopes to hold an initial public stock offering by the end of the year.

Until now, Didi’s primary focus has been on growth. By 2016, it had achieved a market share of more than 95% after merging with Tencent Holdings-backed Kuaidi Dache and taking over the China operations of Uber Technologies.

Didi’s consequent near-monopoly produced higher prices and gave it little incentive to keep up its previous pace of innovation. In a survey last year by web portal Sina, 82% of respondents said that hailing a ride had become more difficult over the previous year and 87% said it was costlier than ever before.

Didi nevertheless continued to grow. Recently, it expanded into Australia and Latin America. Besides Tencent and early backer Alibaba Group Holding, Didi has picked up investments along the way from Apple, Singapore state investment fund Temasek and Japan’s SoftBank Group , with the ride-services group’s valuation last year reaching $56 billion.

With the focus on growth, top Didi executives may have missed red flags they should have seen.

The value proposition of Hitch was problematic from inception. The company’s marketing campaigns implied Hitch could be used to find a romantic partner. A platform function enabled drivers to label passengers to one another using sexually suggestive terms, unbeknownst to the customers.

Didi’s current crisis has opened up the opportunity for competitors who can promise safer, more secure ride services. In general, Didi’s customers have been willing to pay a bit of a premium to upgrade from public transportation to the personal space of a private car service. Many of these users are likely to be willing to pay a little more for additional peace of mind.

Source: Google

The mobility service landscape in China is poised to evolve in a more sophisticated manner and open up further for new entrants. In a market of nearly 800 million urban residents, the vast majority of whom do not own a motor vehicle, demand for such services has grown exponentially and they have become an indispensable tool.

Traditional Chinese carmakers, whose main focus has been on manufacturing and product engineering capabilities, have started to realize that digital ecosystem players have significant competitive advantage in the mobility services. Consequently, they are becoming more experimental to retain relevancy.

Caocao Zhuanche, one of the services that has been growing in Didi’s shadow, was launched by Chinese automaker Zhejiang Geely Holding Group in 2015 as the country’s first all-electric vehicle ride hailing company.

Valued earlier this year at $1.6 billion, Caocao now operates in 17 cities and fills roughly 150,000 orders a day. As of January, it ranked seventh among Chinese ride services in market share, according to figures from data company Jiguang. Caocao’s primary vehicles are Geely-made EVs.

A distinguishing feature of Caocao is the service’s training certification system. All drivers go through a standardized course, adapted from one used in London for nearly a century.

In a parallel initiative, Geely’s new premium Lynk & Co. automotive brand offers personalized car-sharing services to a younger target market. Through experiments like Lynk & Co. and Caocao, Geely is blurring the line between manufacturer and service provider and transforming into an “automobility solutions” provider.

Shouqi Group, a long-standing state-owned car rental and limousine company in Beijing, has expanded into app-based services as well. Its iZuche.com platform focuses on providing fleets of high-end vehicles for major business meetings and events. The company also operates ride-hailing platform Shouqi Yueche, and electric-vehicle time-sharing platform GoFun Chuxing.

Shouqi’s ride service platform has won financial backing from internet company Baidu as well as an arm of EV maker Nio. Traditional carmaker Chery Automobile meanwhile has acquired 10% of GoFun to build up its mobility service capabilities. Chery has also launched its own taxi hailing service, called Veni.

Source: Google

As with Caocao, Shouqi has realized the need to provide more safety assurance for passengers. GoFun, for example, is rolling out an artificial intelligence-driven system for real-time monitoring of rides.

Other traditional carmakers are collaborating to find ways to survive the changing market climate and strengthen their competitiveness in the nascent automobility sector. In July, carmakers Dongfeng Motor Group, FAW Group and Chang’an Automobile launched T3 Mobile Travel Services as a new ride-sharing platform, indicating they will seek other partners to push into driverless cars.

Though the business models of some of these new challengers may catch on if they can correctly anticipate how consumer mobility needs will evolve, Didi still retains an advantage based on its 450 million registered users.

With the exposure its corporate culture of accepting outsized risks, it is time for investors and managers to think critically about Didi’s business model going forward, just as those in Uber have been forced to do. Like Uber, Didi’s investors include a number of venture capital funds whose purpose is to quickly generate high financial returns. The incredible speed of money has distorted the priorities of Didi’s management.

Didi’s latest safety plan appears meaningful, however. A new system in trial makes audio recordings of each ride to provide a record in case of harassment allegations or disputes. An enhanced app feature connects riders immediately to police. The company has also enhanced its driver training and critical response programs.

It remains to be seen how much difference these measures will make. The real problem lies in the corporate culture and social responsibility of Didi. Didi has to demonstrate corporate leadership well beyond the narrowly defined realm of financials.

In a recent letter to Didi staff, Chief Executive Cheng Wei said, “Didi is not an evil company and we don’t put profit ahead of everything.” Let’s see if the company lives up to that.

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

Foreign Companies Should Take Advantage of China’s Innovations

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

 

How Huawei Found Global Success with Secondary-market Customers

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.

SCMP | Younger, Better Educated and Not Afraid to Fail

By Edward Tse and Josie Tai

Original published by South China Morning Post on August 22, 2018. All rights reserved.

Female entrepreneurship is on the rise in China. In the 2017 Forbes list of the world’s 56 self-made women billionaires, there were 21 Chinese entrepreneurs, accounting for 37.5 per cent of the total.

In 2017, China’s female/male ratio of an index measuring entrepreneurial activity is 0.87, above the global average of 0.7. The Total Early-stage Entrepreneurial Activity index, published by the Global Entrepreneurship Monitor, reflects the percentage of the 18-64 population who are either a nascent entrepreneur or an owner-manager of a new business.

In fact, female entrepreneurship is not new in China. Among the older generations, women who succeeded include Yang Mianmian, Haier’s co-founder and former president who helped turn the company into one of the leading white-goods makers in the world; Sun Yafang, who was chairwoman of Huawei, the world’s leading telecommunications equipment maker, from 1999 to 2018; and Dong Mingzhu, the former chairwoman of Gree Group, the world’s largest household air conditioner maker. Younger women have also made their mark, such as Lucy Peng Lei, a co-founder of the e-commerce giant Alibaba (owner of the South China Morning Post).

Before 1950, women entrepreneurs were almost unheard of in China. The strict gender roles in Chinese culture mean aspiring businesswomen face many challenges.

Source: SCMP

Why, then, are more Chinese women becoming entrepreneurs, and succeeding? Of course, both the women’s liberation movement in the West and communist China’s promotion of gender equality, especially workplace equality, have had some influence.

A closer look reveals some interesting dynamics. First, China’s women entrepreneurs are young. According to a 2017 report by the Chinese online platform 36Kr and start-up incubator GirlUp, women entrepreneurs in China today tend to concentrate in the 21-30 age group. In the national female workforce, those in the 36-45 age group predominate.

Studies in the past found that successful businesswomen cut their teeth in state-owned enterprises, where they honed their business acumen, improved their managerial skills, and saved up the capital needed to start a business. Today, more are starting from scratch, and starting earlier in their lives.

Failure is no longer stigmatised; in 36Kr’s sample, many women were second- or even third-time entrepreneurs.

Source: SCMP

Second, technology has empowered Chinese women more than ever. Several years ago, traditional sectors such as real estate and logistics were the fastest path to wealth for women. Now, new technologies are helping to unleash the internet-based economy – ranging from e-commerce and ride-hailing services to AI and robotics – that is transforming businesses. The digital economy accounted for about 32 per cent of China’s total gross domestic product in 2017, according to the China Internet Plus Index Report released by Tencent earlier this year.

Women, in particular, perceive the non-traditional industries to have lower entry barriers and a more gender-neutral environment. 36Kr found that 36 per cent of Chinese women entrepreneurs surveyed worked in the digital economy, of which around 64 per cent were in the BAT (Baidu, Alibaba, Tencent) ecosystem.

Tech entrepreneur Gong Haiyan is one of them. She grew up in a poor farming family in Hunan province but made it to university. While in graduate school in Shanghai, Gong paid 500 yuan (US$73) to register with a dating site to find a lifetime partner. But she discovered that the company used stolen profiles. That motivated her to start her own dating service. Like Facebook, Gong’s website, Jiayuan.com, was set up from her college dorm. Today, 15 years later, the site has nearly 190 million registered users across China.

Source: SCMP

Another example is Diane Wang Shutong, who once held senior management positions at Microsoft and Cisco, founded DHgate.com and grew the company into a leading business-to-business cross-border e-commerce platform.

Third, improvements in education attainment have also encouraged more women to strike out on their own. More Chinese are attending university overseas, and many return home to start a business. About 60 per cent of China’s women entrepreneurs were educated abroad; among them, 51 per cent attended college in the US. Having been exposed to a relatively egalitarian culture, they are bolder in seizing opportunities.

While many women entrepreneurs in the past were driven by the “poverty push” to start a business, after being laid off in the restructuring of state-owned enterprises in the 1990s, today’s cohort seem to be more motivated by the “opportunity pull”. The Global Entrepreneurship Monitor has found that today’s women entrepreneurs were more opportunity-driven compared to their predecessors, even their male counterparts.

In other words, instead of seeing entrepreneurship as a last resort, these women chose to start a business because of the perceived opportunities, “pulled” by their personal ambitions and goals of success.

They face several obstacles unique to them, of course, not least gender discrimination. For example, women start-up founders are often underestimated and thus overlooked for financing opportunities, and women businesswomen, like women in other professions, are expected to commit to family and child-rearing responsibilities.

Helping and fostering the next generation of female entrepreneurs will need support from everyone – men and women, government and non-government – to create a level playing field, a safe, sustainable business environment, and a fundamental change in the traditional perception of gender roles.

Edward Tse is founder & CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. Josie Tai is a research analyst at the firm.

 

SCMP | How We Can Help Next Generation of Entrepreneurs

By Edward Tse

Original published by South China Morning Post on July 19, 2018. All rights reserved.

The Yabuli Youth Forum took place in Hong Kong last month. More than 200 people attended the offshoot of the idea-exchanging platform, the China Entrepreneurs Forum.

Government and business leaders from Hong Kong, the mainland and Macau – including former Hong Kong chief executive Leung Chun-ying, former chairman of the China Banking Regulatory Commission Liu Mingkang and Vincent Lo Hong-shui of Hong Kong Trade Development Council – spoke of deepening cross-border collaboration to foster innovation for growth. Other speakers included young entrepreneurs from different backgrounds and industries.

Almost as one, the speakers highlighted the strategic importance of talent in developing the Greater Bay Area. In particular, Albert Chuang, president of the Y. Elites Association of Hong Kong, suggested that Hong Kong youths should look beyond the city, to the Greater Bay Area and even the rest of mainland China, where changes are taking place at an unprecedented rate.

Indeed, though the 1970s and 1980s witnessed Hong Kong’s rapid growth, with a booming service sector and light industries, this former land of opportunity is now struggling with slower economic growth, especially when compared with the mainland. Skyrocketing property prices, a narrowing industry structure and, most critically, the lack of upward social mobility, make young people increasingly disillusioned about the future.

Source: Internet

Some politicians attribute Hong Kong’s problems to the “one country, two systems” model. However, this misses many of Hong Kong’s own pitfalls. First, people have become too Hong-Kong-centric and unwilling to better understand the outside world. There is, in general, a lack of outward-looking perspectives and foresight.

Second, although some high-end sectors, such as financial services, still offer attractive jobs, Hong Kong’s economic structure lacks diversity and remains disconnected from the new economy.

Vital industries, such as real estate, communications, transport and even food, are monopolised by cartels and oligopolies and thrive on cronyism, virtually immune from the digital transformations that are redefining businesses elsewhere in the world. As a result, the city’s talent pool is insufficient to meet the needs of the future economy.

Meanwhile, the Chinese mainland has emerged as a global innovation hub. In the prospering internet and technology sector, ranging from ride-hailing to e-commerce,robotics and artificial intelligence, entrepreneurs are getting younger and more geographically diverse.

China Youth Daily reported in 2016 that the average age of first-time entrepreneurs was below 25; another study showed that although start-ups generally prefer top-tier cities, they are also reaching inland, towards lower-tier cities such as Xian, Xiamen and Qingdao.

Source: South China Morning Post

With these dynamics on the mainland, Hong Kong’s youth needs to better understand the opportunities and take advantage of them. Such opportunities and innovation can occur purely through osmosis – that is, interaction, particularly among people and a sharing of ideas.

To encourage such osmosis, governments from both sides should seek to minimise the physical limitations on the movement of people and goods, and most importantly, ideas, which is also one of the main objectives under the Greater Bay Area scheme. The scheme promises a combined economic output of some US$1.4 trillion and, if done right, the unique complementary capabilities of Bay Area cities would generate huge synergy and create a bigger pie for all.

Second, officials should organise more multilateral interactions like the Yabuli Youth Forum and work together to pool resources, training and space to help young people start businesses with lower opportunity costs.

Third, role models are key to stimulating entrepreneurial activities in Hong Kong. The city needs more entrepreneurial examples – like GoGoVan, the on-demand logistics service and Hong Kong’s first US$1 billion start-up, and SenseTime, the world’s highest-valued AI start-up – to inspire others to turn ideas into action.

Young people are the future. To help Hong Kong benefit from the growth of China and make the Greater Bay Area plan work, it is critical that we focus efforts and resources on talent development and create “osmosis” to nurture the next generation of entrepreneurs.

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).

 

GF Viewpoint | Seeking Commonalities while Maintaining Differences

By Edward Tse and Josie Tai
July 16th, 2018

On July 6th, President Trump’s tariff on $34bn of Chinese imports, ranging from water boilers and lathes to industrial robots and electric vehicles, marked the escalation of the tit-for-tat trade war with Beijing. In retaliation, Beijing immediately raised tariffs on a list of US goods that include soybeans, seafood, and crude oil.

Some analysts point to the falling trade imbalance and weakening Chinese currency, as evidence that the US has the more to gain and can weather through the short-term negative consequences of a trade war. Nevertheless, the real issue of a full-fledged trade war is not about who will gain, but that who will lose, and the answer is everyone. A brief overview of the economic history and a basic understanding of economic theories suggest that any such conflict would result in the worst disruption to the global economy. Linda Yueh, American-British economist and Adjunct Professor of Economics at London Business School, warned that trade barriers would not only damage both countries but would also disrupt global supply chains, raising prices for consumers worldwide.

Source: internet

In an ever more interconnected world, the two countries are deeply straddled in a globally intertwined supply chain, and to look at the trade relationship as merely bilateral is a gross oversimplification of its nature. Intel, for instance, carries out the most capital-intensive and technologically demanding part of its semiconductor manufacturing in the US, Ireland, and Israel;the resulting wafers are shipped to China for final testing. Even though China takes a relatively low-value step in the process, given that a number of chips from Intel or the like flow back to the US, the new tariffs will backlash against domestic companies and consumers.

In addition, American companies with operations in China are likely to find themselves in the firing line. 80 percent of products made in China by US companies were sold in the Chinese market; these companies include McDonald’s, which only owns 20 percent of its China business since the majority of its business is held by China’s state-owned conglomerate CITIC, and General Motors, which sells more vehicles in China than in any other market through joint ventures with state-owned automakers SAIC Motor and FAW Group.

Wei Zhen, head of China research at global index provider MSCI, wrote that “5.1 percent of the revenues of companies in the MSCI USA Index come from China and may be at risk as a result of a trade war. In comparison, only 2.8 percent of the revenues of the companies in the MSCI China Index come from the U.S.”

In fact, the US was actually the leading advocate of globalization that began decades ago, and in the process, it encouraged more divisions of labor across different countries according to their respective comparative advantages. The supply chain has developed through years around locations of manufacturing: while some of the most important technologies like micro-chips are largely retained in the US, China is evolving from a primitive-level world factory to a manufacturing powerhouse, and India is also picking up on software development. As a result, more and more companies are moving their operations in China to achieve maximum economies of scale.

Source: internet

After decades of the globalization experiment, however, the US is turning around the table. It is redefining the rules and beginning to set up barriers against other countries like China, in a bid to curb China’s “unfair trade practices” and “substantially reduce trade deficits”. Even though protectionism can be somewhat beneficial on the local level, based on operations research, any attempt to optimize based on local conditions without understanding the big picture will not likely produce a globally optimal, sustainable solution – and trade protection will eventually take its toll on US businesses themselves.

Avoiding a global economic disaster requires cool-headed discussions and an appreciation of commonalities from both sides. The US and China have more shared goals and responsibilities than trade disputes: building a permanent peace mechanism on the Korean peninsula, resolving terrorist threats and the refugee crisis, maintaining global economic stability and creating an international environmental regime. RAND Corporation, a US think tank, recommended in a recent report that the US should establish a comprehensive strategy and leave open the potential for cooperation to manage emerging rivalry with China.

Source: internet

The two countries also share many commonalities on the business level. Although often questioned by the West, China follows its own development model where the central government sets trajectories at the top, the grassroots entrepreneurs thrive and drive growth at the bottom, and local governments compete and collaborate in the middle. The private sector has been opening up, now supporting more than 60% of China’s GDP growth and 80% of jobs, according to statistics published by Xinhua last year.

Chinese entrepreneurs look to the West for inspiration, not only modeling their organization design on Silicon Valley but also pouring billions into US startups. Tencent Holdings, for example, holds significant stakes in high-growth American companies such as Snapchat and Tesla, becoming the second-largest foreign investor in the US tech industry. The rhetoric portraying Chinese VC investors as players of a technology transfer scheme skews the nature of and disregards the tremendous tangible benefits from these investments.

US companies can also benefit from participating in China’s thriving innovations. China’s entrepreneurs are highly driven to grab new opportunities through “multiple jumping”: they may focus on their existing core competencies at first, but when new opportunities come up, they will try to catch these new opportunities even if they don’t have all the capabilities needed to run the new business. They would collaborate with partners, and thereby building ecosystems and crossing business boundaries. For example, Meituan-Dianping, the popular food delivery app with 400 million active users in China, entered mobility service by leveraging its huge consumer database. Thus, there are still many potential benefits that American firms can capture by exploring new business models in light of the myriad of Chinese innovations.

Admittedly, a full-blown trade war is already taking shape, and it would put economic growth in both countries at risk and wreak havoc on the global supply chain. However, it is not too late for the US and China to prevent further deterioration of trade relationships. Both countries should rethink about the collateral damage of ill-conceived trade actions, establish mutually beneficial agendas and replace polarizing rhetoric with rational economic arguments.

About the Authors
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»).

Josie Tai is a Research Analyst at Gao Feng Advisory Company. Josie is a Yale undergraduate majoring in economics and psychology, with interests in Chinese consumer behaviors, the tech industry and US-China trade relations. Her previous experience was in legal consulting, journalism and startup, and she was also trained in empirical data analysis, industry research as well as accounting and valuation.

Bernice So, Research Analyst, also contributed to this article.

 

How Corporate Innovations Work in China?

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.

Nikkei Asian Review | Time for International Carmakers to Change Partners in China?

May 11, 2018 16:35 JST
Bill Russo and Edward Tse

International automakers have earned hefty profits from China’s emergence over the past two and half decades as the world’s largest car market, yet have felt unsatisfied because of a regulatory requirement to share these earnings with a local partner.

The announcement last month that the rules requiring foreign carmakers to operate in 50/50 joint ventures with local automakers will be rescinded after years of lobbying might suggest that foreign companies will soon be able to boost profits by raising their ownership in their local operations to 100%. (Their share of profits was usually already more than half when trademark licensing and other fees were included.)

Yet the road ahead is not nearly so clear and straight. A crop of private Chinese automakers operating on their own are leading a surge that has seen local brands’ share of the domestic market start to approach 50%. Meanwhile, China’s powerful internet companies are focusing on mobility services as a critical growth driver for their digital ecosystems, putting themselves at the forefront of the industry’s impending technology shifts in what will be the biggest market for such offerings.

The outlook however need not be gloomy for foreign carmakers. They should seize Beijing’s market opening as a turning point to rethink their China strategy. This can be a chance to form new partnerships to build innovative vehicles in China for sale around the world, taking advantage of emerging suppliers who can produce component technologies at scale.

Mercedes-Benz showed off several new luxury models for the first time at the Auto China 2018 show in Beijing in April. © Reuters

The 50/50 joint venture rule dates back to 1994. At that time, Chinese auto manufacturing was dominated by state-owned enterprises which lacked the technical and financial means to develop their business further independently. The government hoped local carmakers would learn from experienced foreign partners and eventually emerge as successful global automakers in their own right.

This has not worked out quite as expected. While Sino-foreign automotive joint ventures have supported the development of networks of suppliers capable of high-quality production, no global car brands have emerged from China as a result of the 50/50 policy and foreign brands have dominated local passenger vehicle sales.

Nonetheless, on April 17, the National Development and Reform Commission announced that foreign ownership limits on ventures producing special-purpose vehicles and new energy vehicles will be eliminated by the end of this year. The foreign ownership cap is to be abandoned for commercial vehicles in 2020 and for conventional passenger vehicles in 2022. Foreign automakers will also no longer be limited to having only two Chinese joint ventures.

While the regulatory requirement for joint ventures will be scrapped, JVs are unlikely to disappear. Some, and perhaps most, existing joint ventures will probably remain as the foreign carmakers could find it difficult to reach agreement with their partners on restructuring ownership.

With the policy relaxation starting with new energy vehicles, wholly owned foreign carmaking ventures are likely to appear first in this area. U.S. electric car producer Tesla has expressed keenness to take this path.

Yet even with new ventures, foreign carmakers would be well advised to consider the merits of taking on Chinese partners, if not necessarily the same ones.

The leading domestic carmakers today are privately owned companies which have largely grown without the benefit of foreign joint-venture partners, such as Zhejiang Geely Holding Group, Great Wall Motor and BYD. The capabilities of local players are rapidly improving and Chinese brands now hold a 44% market share in the country. They are the pacesetters in the fastest-growing market segments — sport-utility vehicles and electric vehicles.

However, the real disruption of China’s car market is not coming from its traditional manufacturers. The prevalence of the mobile internet has made it possible for individuals to achieve personal mobility without vehicle ownership. Competing in the new business model requires more than the engineering of cars themselves, but also access to a digital ecosystem of mobility services. This new service-centric business model fundamentally transforms the car into a transportation and digital services platform and alters the economics for commercializing connected, electric and autonomous vehicle innovations.

Baidu, like rival Chinese internet companies, is investing in self-driving technologies, seeing the vehicles as a platform to offer a range of lifestyle services. © Reuters

Chinese mobility startups are quickly emerging and expanding, backed by deep-pocketed internet services companies including Tencent Holdings, Alibaba Group Holdings, and Baidu. All three companies are working on self-driving technologies. Both Tencent and Alibaba are also major shareholders of ride-share leader Didi Chuxing. Tencent has also invested in new electric carmaker Nio while Alibaba has invested in rival Xpeng Motors.

The internet companies are seeking to transform automotive hardware into an intelligent platform for a wide variety of online and offline lifestyle services. It is likely that the future mobility revolution will be largely led by Chinese digital companies and their ecosystem partners, especially in areas such as ride hailing and car sharing. Foreign automakers can gain an edge by seeking allies among these Chinese companies rather than taking advantage of their new freedom to operate independently.

Indeed, new forms of Sino-foreign collaboration are likely to surface as companies recognize the need for joint ventures that bring together complementary capabilities. At the same time, the removal of the compulsory joint venture structure will likely eliminate the last inhibitor that has discouraged foreign carmakers from making more use of China as an export platform.

The rapid evolution of China’s automobility industry now requires every participant, Chinese or foreign, to bring relevant capabilities to the world’s largest mobility marketplace. In this emerging arena, all players will have to apply a collaborative innovation model that matches local needs with global capabilities.

Beijing’s decision to scrap its automotive foreign ownership limits is a recognition that China’s industry has become a pacesetter for commercializing new mobility technology thanks to its advanced digital economy. The new policy will alter the industry’s competitive dynamics and accelerate commercialization of new mobility innovations at scale. It is up to foreign carmakers to find their own forward.

Bill Russo is managing director of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China, and a former Chrysler vice president for Northeast Asia. Edward Tse is Gao Feng’s chief executive.

 

SCMP | Mindset for Success

By Edward Tse | SCMP
April 20th, 2018

Edward Tse says while foreign companies clamour for China to speed up its market reforms, they need to rethink their strategies to survive in an increasingly competitive business environment

At this year’s Boao Forum, President Xi Jinping reiterated China’s commitment to further open the country’s market to foreign companies and improve intellectual property rights protection, an issue that has long been a concern for foreign companies operating in China.

A couple of weeks before Xi’s speech, at a press conference at the end of China’s Two Sessions, Premier Li Keqiang said China would not force foreign companies to transfer their proprietary technology to China.

Source: Google

While some say the plans lack detail, the leadership’s commitment to opening up China further for foreign business shouldn’t be underestimated.

So, what are the implications for foreign multinational corporations? Is there anything CEOs should do differently?

For a long time, some Western politicians, business executives, lobbyists and the media have held the view that foreign companies can’t grasp all the opportunities in China because of a lack of market access, unfair competition and poor intellectual property rights protection.

While such criticism is not unfounded, it is not the whole truth. Since its reform and opening up some 40 years ago, China has been gradually opening different sectors to foreign participation. Today, while some sectors, such as commercial banking and insurance, remain relatively closed, many others are entirely open, such as consumer products, appliances, retail and automotive parts.

Though there is a 50-50 joint venture requirement for automotive manufacturing, China’s automotive market as a whole is very open in terms of products and markets. And, Beijing has just announced it will scrap the foreign ownership restrictions in the automotive manufacturing sector over five years. In the tech sector, pundits have correctly pointed out that Facebook and Twitter are blocked in China, but they forget to mention that LinkedIn, eBay, Airbnb and Amazon e-commerce are not.

Source: Google

A remarkable development in China in recent decades has been the rapid rise of entrepreneurship. Today, China’s economy is best described as a duality (state and non-state). Business innovation, often enabled by technology, is thriving, driven largely by entrepreneurial companies, such as Alibaba and Tencent, which are now some of the world’s largest by market capitalisation. Droves of young people are being entrepreneurial, aspiring to be the next Jack Ma or Pony Ma. An increasing number of fast-growing, sizeable innovative companies are emerging that have built large ecosystems of collaborative partnerships.

China has found its own development path, the “China development model”. At the top, the central government actively plans the direction of the country. At the grass-roots level, entrepreneurship is thriving, driving economic growth. In the middle, local governments compete and sometimes collaborate in clusters of cities within regions. This model has become a major source of resilience for China’s growth.

Given this evolution, corporate decision-makers need an informed and sophisticated view of the country to devise an effective China strategy.

First, their strategy requires a thorough understanding of the China context, which is evolving in a peculiar and multidimensional manner. While China’s reform has been largely gradual, changes can at times be abrupt and rapid. Too often, foreign companies enter China with a market strategy at the business-unit level, using a linear, incremental approach. By focusing on the micro conditions, they often miss the big picture.

Second, China should be at the core of any global strategy. The speed of development, uniqueness, complexity and strategic importance of China requires foreign multinationals to fully embrace China as an integral part of their strategy and organisation, not just one of many markets.

Third, companies should participate in China’s thriving innovations, rather than being bystanders due to a lack of awareness or unwillingness to take risks. Companies could consider engaging in businesses that may not be their traditional core but could provide opportunities for growth, and also form ecosystems with Chinese companies.

I am not advocating diversifying aimlessly. However, I have seen numerous cases when CEOs missed opportunities in China because they either didn’t know about them or felt they needed to focus on their “core competencies”. As a result, they also missed out on the chance to learn from Chinese consumers and the best Chinese companies.

For example, by investing in Autohome, a leading Chinese online automotive advertising platform, Telstra, an Australian telecom and media company, whose core business in China is restricted by foreign participation rules, made a profit of around US$2.5 billion in less than 10 years.

Source: Baidu

Fourth, foreign multinationals should train their China managers to be thought leaders and place them at senior levels. Too often, they treat their managers in China merely as operational people. Strategy and major decisions come from the global or regional headquarters, making it difficult for businesses to come up with an effective strategy for China.

Finally, foreign companies need to shorten their decision-making process and become more agile and flexible. After all, China is evolving fast and competition is intense. Chinese companies are known for bring fast, nimble and innovative. Foreign multinationals should become “more Chinese than the Chinese”.

The rise of China and the simultaneous development of technology are changing the country – and the rest of the world – fast. China is on the verge of a sustained, generational rise that will generate even more opportunities, and challenges, for global businesses. Foreign companies need to figure out how to deal with this.

Clamouring for equal and full market access is not entirely fruitless but that is not where the real game is being played. China will reward those who are innovative and discover new ways of creating value. This requires foreign multinationals to approach China with a different mindset.

China will continue to open up and embrace the rest of the world, perhaps not all in one go, but its direction is clear. CEOs and boards should ask themselves: “How can we capture the potential that China offers us?”

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).

 

China’s HNA, Shedding Debt Overseas

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.

 

A Gap in Expectations

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).

 

China Daily | ODI Outlook Promising Overall for 2018

By Edward Tse | China Daily Europe | Updated: 2018-03-09

Despite roadblocks ahead, there will be more opportunities for startups involving Chinese and outbound entrepreneurs

After the peak in 2016, China’s outbound direct investment in 2017 slowed significantly and recorded its first annual drop since 2006. According to the Ministry of Commerce, China’s total outbound direct investment in nonfinancial sectors declined by 29.4 percent year-on-year to $120 billion (97.5 billion euros; £87 billion) in 2017. However, if we take the last five years’ data (from 2012) and take out the 2016 data, the cumulative annual growth rate is actually around 10 percent.

2016 was probably an aberration, as there was a rush by a number of Chinese companies to invest feverishly overseas, causing concern for the Chinese government about the abnormal outflow of capital from China.

Since late 2016, the Chinese government has exercised more stringent controls on capital outflow, and it appears that undisciplined overseas investment is now largely under control.

So what do we expect to see in terms of China’s outbound investments in 2018, in particular as it relates to its two important trading partners and investment destinations: North America and Europe?

Two recent failed deals involving Chinese companies investing in the United States made headlines. US telecom company AT&T walked away from a deal with Huawei, a Chinese telecom equipment and smart device maker, under pressure from the US Congress.

Source: Baidu.com

The US government also rejected the intended acquisition of MoneyGram, a US money transfer company, by Ant Financial, an affiliate of Chinese internet giant Alibaba. Media have reported that on Capitol Hill, there is a prevailing wind of “trust deficit” regarding the US-China relationship on trade and investment.

Similarly, China’s investments in Europe have encountered obstacles from the European Union. Last year, the German government adopted stricter regulations on non-EU countries’ investment in German companies, especially in such crucial areas as energy, infrastructure and high-tech. Also, a few months ago, the European Union launched a probe into China’s high-speed train project from Belgrade to Budapest, alleging that Chinese companies won public contracts without open bidding.

Deals triggering “national security” concerns from the US and EU governments’ standpoint will always raise red flags, and with regard to Chinese companies’ investment, the theory goes like this: The Chinese government is behind everything that Chinese businesses are doing, and State-owned enterprises, because of their government ownership, act on behalf of the Chinese government. By implication, they have motives that are not trustworthy. In addition, the Chinese government employs strong industrial policies that create an unlevel playing field for companies and countries, according to the theory.

I can’t say these arguments are completely fiction. However, this is certainly not the complete picture.

While the State sector is certainly prevalent in China, the non-State sector is actually becoming more important and powerful in its own right. By 2016, approximately 56 percent of China’s total outbound investment in nonfinancial sectors was made by non-State owned companies, compared with only 19 percent a decade ago. Additionally, according to Chinese government statistics, the non-State industrial sector’s revenue in 2016 was close to four times that of the State sector. About the same ratio also applies to total profit.

Source: Baidu.com

Based on 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. By definition, these new economy companies are mostly, if not entirely, private-sector companies. Entrepreneurship and business innovation are thriving in China, and they come mostly from the private sector.

The Chinese government has applied tighter supervision on Chinese companies’ outbound investment to prevent irrational investments, such as in the areas of real estate, hotels and entertainment.

However, the government continues to encourage Chinese companies to “go abroad”, as long as the reason is considered legitimate. One area in which the Chinese government is particularly supportive of Chinese companies’ participation is the Belt and Road Initiative. Although nonfinancial sector outbound investment slumped by 29 percent in 2017, investment in Belt and Road countries increased by 3.5 percent year-on-year to $14.3 billion, accounting for 12 percent of total outbound investment.

To many Chinese companies, the US and Europe are attractive (and in some cases necessary) markets, and the conditions for manufacturing are becoming more favorable. China’s direct investment in North America has grown at a cumulative annual growth rate of 25.8 percent over the past five years.

For example, Triangle, China’s third-largest tire manufacturer, is going to invest in a $580 million plant in North Carolina this year. Keer Group, a Chinese textile producer, plans to invest $218 million over the next five years to expand the capacity of its facility in South Carolina. Additionally, it has been reported that China’s investment in Germany reached a peak in 2017.

Source: Baidu.com

Recently, Huawei confirmed its long-term commitment in the United Kingdom with a 3 billion euro ($3.7 billion; £2.7 billion) investment. Also, China launched a 3 billion yuan investment fund, backed by State-owned asset manager Shanghai International Group, during British Prime Minister Theresa May’s recent visit to Shanghai. The fund will invest in European manufacturing companies in the medical, chemical and environmental protection sectors, helping Chinese companies to upgrade their manufacturing capabilities.

As China’s innovation and entrepreneurship continue to thrive, there will certainly be more opportunities for startups involving both Chinese and outbound entrepreneurs (especially in the US), as well as for venture capitalists. Technology, especially AI, will increasingly be embraced for enabling innovations by entrepreneurs.

In the past five years, China’s outbound direct investment has grown rapidly in technological industries such as information communication, software and information service (with a cumulative annual growth rate of 53.9 percent). Both the US and China are now leading the world in the development and application of AI, and this trend will likely continue to accelerate.

The interactions between China and the US at the startup and investors’ levels are actually taking place intensively, as there is so much to share and many opportunities to jointly pursue. Much of this has already manifested in cross-border investments between the two countries.

However, roadblocks exist in cross-border trade and investments. The US government has introduced policies to restrict China’s investment in some areas of high-tech, especially when it is viewed as potentially infringing on US national security. It was reported that three key European countries – Germany, France and Italy – have drafted a legal initiative for more rigor in investigating and restricting investments from China.

It would be naive to expect plain sailing for the China-US and China-Europe trade and investment relationship this year. However, I don’t believe all will be bad, either. There will be areas of tension and differences in points of view and policies, but there will also be areas of collaboration and alignment.

“Coopetition” is perhaps the best way to describe the nature of China’s relationship with the US and Europe going forward. After all, it won’t be – and shouldn’t be – a zerosum game, especially not in today’s world of increasing connectivity.

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

 

Europe’s World | Don’t Belittle China’s Innovation Potential

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.

 

China Daily | R&D Driving China’s Innovation Speed

By Edward Tse | China Daily Africa | Updated: 2018-02-16

The central government’s blessing of entrepreneurship has created a vibrant environment that began at the grassroots

At the beginning of China’s opening-up and reform 40 years ago, the country’s reform architect, Deng Xiaoping, put forward that “science and technology are the primary productive forces”. At the 19th National Congress of the Communist Party of China in October, General Secretary Xi Jinping proclaimed that “innovation is the primary force driving development”.

Behind both of these statements is the philosophy that research and development as well as innovation results in generating key capabilities for the country. R&D investment is generally viewed across the world as the backbone of a globally competitive and innovation-driven economy.

Late last year, the European Commission released “The 2017 EU Industrial R&D Investment Scoreboard”, which covered 2,500 companies from 43 countries that invested the largest amount in research and development last year. These companies recorded a total investment of 741.6 billion euros ($909 billion; £657 billion) in R&D, a 5.8 percent year-on-year increase.

Among the companies covered in the Scoreboard report are 376 Chinese enterprises. Their R&D investment grew by 18.8 percent year-onyear in 2016, compared with a 7.2 percent increase by 822 US companies and a 7 percent increase by 567 European Union companies.

While most of the top companies in the report are from the West, Huawei, a China-based telecom equipment and smart device manufacturer, leapfrogged to sixth place, registering 10.4 billion euros in R&D investment. Huawei’s ranking advanced by more than 200 places between 2004 and 2016. Chinese internet giants Alibaba and Tencent also entered the top 100 on the list.

Source: Baidu.com

Chinese companies are also well known for tech innovation in such areas as drones, electric vehicles, autonomous driving and artificial intelligence. DJI, a Shenzhen-based company, has a global market share of around 70 percent in consumer drones. NIO, a Chinese electric vehicle startup, developed the fastest electric sports car, the EP9, within 18 months and broke the world lap record at the Nurburgring Nordschleife track in Germany. In terms of AI, a Chinese company, Face++, developed advanced facial recognition technology that is widely used in the financial technology, smart retail and many other industries. This technology, now used in more than 200 countries, processes over 30 million requests each day. SenseTime, a Chinese AI company founded in 2014, focuses on innovative computer vision and deep learning technology. In July last year, the company successfully raised the largest single-round investment in AI globally, at $410 million.

For a long time, China was viewed as a nation that relied on low manufacturing costs for exports. And Chinese companies were labeled “copycats” by the West. Very few people believed that China had the ability to innovate. However, the country’s development over the past decade has proved otherwise.

Source: Baidu.com

In fact, innovation is thriving in China. MIT’s Technology Review included nine Chinese companies such as iFlytek, Tencent, Face++ and DJI in its 2017 list of the Top 50 Smartest Companies. So what caused China’s innovation and the entrepreneurship that goes with it to take off? I think it’s because of the following reasons:

1. “Why not me?”: At the end of the 1970s, during the onset of China’s era of reform and opening-up, the Chinese discovered that not only was their economy backward and undeveloped compared with the economies of the developed nations, but the gap between the Chinese economy and those economies was vast. Against this background, Chinese entrepreneurs were spurred by a new sense of purpose and the desire to strive for success and show the world that they, too, could succeed. Although it’s been 40 years since China’s opening-up began, this question of “why not me?” is still the key driver behind the Chinese entrepreneurial spirit.

2. Market opportunity provided by the State economy: For a very long time, China’s economy was dominated by State-owned enterprises. In a market defined by fast changes, intense competition and the need for innovation, SOEs are usually slow to react. Many innovative companies have taken advantage of this market gap and have benefited with extraordinary growth.

3. Transformative and intense competition: China’s process of shifting from a planned economy to a market economy is gradual and will take time. In this process, a wide range of sectors have opened up and, coupled with the allure of the massive China market, we see players from all over the world igniting intense competition. This state of hyper competition forces companies to innovate in order to stay ahead.

4. Chinese society’s pain points: In the process of transformation, pain points that had previously been hidden are now in plain sight, and they provide entrepreneurs with opportunities for innovation.

5. The rise of technology: With the wireless internet, smart devices and social media becoming a core part of the everyday life of Chinese consumers, tremendous disruption opportunities are provided for innovators and entrepreneurs alike.

6. The massive scale of the Chinese market: The size and fast-changing nature of China’s market allows companies to rapidly scale up. At the same time, it provides a platform for innovators and entrepreneurs to learn via trial and error. Leading Chinese companies are also benefiting from high valuations that provide them with the needed capital ammunition to support their growth.

7. Capital resources: Over the past 20 years of China’s development, many venture capital companies and angel investors have benefited from exceptional returns on their investments in China. Regardless of whether these investors came from abroad or were homegrown, Chinese companies have benefited greatly from the vast sums of capital these investors have provided over time.

Against this backdrop, China’s development model plays a crucial role. From the top, China’s central government actively directs the country’s economic development with great results. In this context, the central government has positioned innovation and entrepreneurship as a key national initiative, and with this blessing, a vibrant innovation and entrepreneurial environment began at the grassroots level. In addition, various local governments across China are both competing and collaborating with each other, providing additional impetus for innovation.

The author is founder and CEO of Gao Feng Advisory, a global strategy and management consulting company with roots in China. He is also author of China’s Disruptors.

 

Nikkei Asian Review | The Extraordinary Power of China’s Corporate ‘Mega Ecosystems’

By Edward Tse| February 9, 2018

Companies like Didi and Meituan are increasingly coming into competition

Some observers have criticized China’s market economy for lacking the “creative destruction” that is said to give Western capitalism its lasting vitality.

Such doubts are misplaced as the new year is likely to underscore. In recent weeks, Didi Chuxing, the country’s predominant ride services app, has moved to add bike-sharing options to its platform and has acquired Bluegogo, a bike operator that had run into difficulties. The move clearly positions Didi, already one of the world’s most valuable startups, to take on current bike-sharing leader Mobike. Meanwhile, Meituan-Dianping, which is best known for its food delivery service and has more than 250 million users, has moved to offer car-hailing services in competition with Didi.

The fight is on. Didi Senior Vice President Chen Ting has already said Meituan’s move will touch off the “war of the century.” In the background is the increasing overlap between the business networks of China’s two most valuable listed companies, Tencent Holdings and Alibaba Group Holding. After a series of mergers, both have ended up as key shareholders of Didi. Tencent also backs Meituan and Mobike while Alibaba is a major investor in Ofo, which is Mobike’s top rival as well as a partner of Didi’s.

Not long ago, many argued that state-owned enterprises were becoming increasingly dominant in China’s economy at the expense of the private sector. These observers highlighted government protections enjoyed by state companies and noted their privileged access to resources and market niches.

In reality, the fastest-growing companies in China over the last few decades have predominantly, if not entirely, been entrepreneurial companies from the private sector. According to a study by the Institute of Population and Labor Economics at the Chinese Academy of Social Sciences, new economy sectors, ranging from e-commerce to car-hailing services, expanded twice as quickly as China’s overall GDP over the 10 years to 2016. These new economy companies are nearly always private sector companies.

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. A milestone was crossed last year when Alibaba and Tencent, the mega ecosystem leaders, surpassed Facebook in market capitalization.

The growth of entrepreneurial Chinese companies has been amazing. According to tech-sector funding research company CB Insights, the number of unlisted Chinese companies valued at $1 billion or more — the so-called “unicorns” — has risen to 59. The U.S., with nearly twice as many unicorns, is the only country where CB Insights counts more.

The Chinese though are closing the gap fast. Five years ago, CB counted only three Chinese unicorns, less than a quarter as many as it tallied then in the U.S. Those in China now valued at $30 billion or more include Didi, Meituan, Ant Financial Services Group and smartphone maker Xiaomi.

The notion of a business ecosystem is not new. Apple, the world’s most valuable company, was a pioneer in this regard when it launched the iPhone back in 2007 and made the App Store its platform for distributing apps. Other leading U.S. tech companies such as Amazon.com and Alphabet are also ecosystem players. Chinese companies, however, have turned out to be even more adept at building such organizations.

Alibaba, Tencent and Xiaomi are prime examples of mega ecosystems. Building out from their original core businesses, they have jumped into a string of new sectors as market opportunities have popped up amid economic reform and technological developments have enabled them to disrupt existing means of doing business.

Alibaba started as a small business-to-business online marketplace almost 20 years ago. Around 2003, when online shopping was emerging, Alibaba jumped in with consumer-to-consumer site Taobao and later business-to-consumer site Tmall. Next Alibaba started Alipay to support mobile online payments and then later used its platform to offer wealth management services, including the Yu’e Bao money market fund, which subsequently became the backbone of its network’s internet finance business.

Today, Alibaba’s internet finance interests are grouped under Ant Financial, which includes businesses such as electronic payment processing, banking, social credit scoring and financial cloud services. (Alibaba said on Feb. 1 that it will resume its direct shareholding in Ant, exercising rights to take a one-third stake.) Alibaba has also branched into areas including big data, smart logistics, media, auto-mobility and cloud storage. Each sector has its own system which together form Alibaba’s mega ecosystem. Though its development took a somewhat different course, Tencent has built a mega ecosystem too.

Chinese companies seem more inclined than their Western counterparts to migrate across sector boundaries and create larger ecosystems. This is perhaps because new market opportunities have been popping up more frequently in China and its consumers have embraced smartphone apps more closely. When they sense an opening, Chinese companies can quickly form ecosystems of collaborative partnerships.

In contrast, most foreign multinational corporations tend to focus on what they have been doing all along and avoid jumping across sector boundaries. This is a result of the “core competence” doctrine that has governed corporate strategy thinking in the West for about 30 years. Whle Chinese companies are more inclined to expand “horizontally” into new sectors, Western companies tend to grow “vertically” to areas upstream or downstream from their original focus.

Besides Alibaba and Tencent, companies like Ping An Insurance Group, Baidu and JD.com are building out mega ecosystems with incredible speed and intensity. Even some traditional manufacturers are moving in this direction. Zhejiang Geely Holding Group has gone from producing entry-level cars to selling premium models with the help of foreign acquisitions and has been the first Chinese carmaker to move into on-demand mobility services. It has also been experimenting with connected intelligent vehicles, shared ownership programs and flying cars, together assembling a sprawling transportation services ecosystem.

Clearly access to abundant user data is key for these kinds of companies. Even bike-sharing services like Mobike and Ofo claim that they are data-centric companies, signaling that they will also build out their ecosystems with consumer lifestyle at the core.
New technologies such as the internet of things and 5G mobile networks will enable companies to crisscross sectors faster and more capably. The operations of China’s mega ecosystems will overlap increasingly with each other, driving even more intense competition.

Perhaps more collaborations in some cases or even the merging of mega-ecosystems will take place. The “coopetition” that results would be even more dynamic. The already powerful mega ecosystem players could then get even more powerful. This will be exciting to watch.

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China, and the author of “China’s Disruptors.”

 

SCMP | Open For Business

By Edward Tse | February 7th, 2018

China-US trade and investment is thriving inpockets on the ground, despite the policy frictions

Edward Tse says while concerns about unfair Chinese trade practices and Chinese companies’ ties with the government are not totally unfounded, they ignore the real and growing business collaboration as the private sector takes the lead

Two recent failed deals involving Chinese companies seeking to invest in the US have made headlines. US telecoms company AT&T walked away from a deal with Huawei, a Chinese telecom equipment and smart device maker, under pressure from US Congress. The US government also rejected the intended acquisition of MoneyGram, a US money transfer company, by Ant Financial, an affiliate of China’s internet giant, Alibaba.

It was reported that both deals triggered US “national security” concerns. The media are now saying that, on Capitol Hill, there is a prevailing wind of “trust deficit” in US-China relations on trade and investments.

There seems to be two parts to this story. The first concerns Chinese companies investing in the US. The theory goes like this. The Chinese government is behind everything that Chinese businesses are doing and state-owned enterprises, because of their government ownership, will act on behalf of the Chinese government’s interests. By implication, their motives are not trustworthy. In addition, the Chinese government employs strong industrial policies that create an unfair playing field for companies and countries.

The second part of the story is about the perception of how US companies are treated in China. The key thesis here is that the Chinese market is closed to US (and for that matter all foreign) companies. The Chinese government favours local enterprises, especially state-owned companies, and so US companies cannot be successful in China. Many US politicians and lobbyists are asking for “reciprocity”.

There are some elements of truth in both of these arguments. However, they do not present the complete picture.

While the state sector is certainly prevalent in China, the non-state sector is actually becoming more powerful in its own right. According to Chinese government statistics, the non-state industrial sector’s revenue in 2016 was close to four times that of the state sector. About the same ratio also applies to the total profit.

Source: Baidu.com

Based on a study by the Institute of Population and Labour Economics at the Chinese Academy of Social Sciences, China’s “new economy” – internet-based businesses including e-commerce and car-hailing services – grew twice as quickly as China’s overall gross domestic product in the 10 years to 2016. By definition, these new-economy companies are mostly, if not entirely, private-sector companies. Entrepreneurship and business innovation are thriving in China and they come mostly from the private sector.

US President Donald Trump has called for the “re-shoring” of manufacturing to the US. Ironically, some Chinese companies were among the first to respond to the call.

Companies such as Fuyao Glass, Foxconn and Great Wall Motors – all non-state owned – announced plans to invest in the US. (Foxconn is, of course a Taiwanese company but its operations are mainly on the Chinese mainland). And Jack Ma, Alibaba’s chairman, pledged to create “one million jobs” in the US. Alibaba is the owner of the South China Morning Post.

Since its economic reform that started some four decades ago, China has gradually opened its sectors to foreign participation. Today, while there are still some that are closed or largely closed to foreign companies, a much larger number are open to competition, for example in consumer products and retail.

For US companies such as Nike, Starbucks, Apple, Ford and General Motors, China is one of their largest markets, if not the largest, in the world. And, China’s importance to these companies continues to rise. The “golden era” of foreign companies, at least for these successful ones in China, is certainly not over.

Many pundits have suggested that China’s “Great Firewall” has blocked all US tech companies from doing business in China. The likes of Facebook and Twitter are indeed blocked in China, and others like Google chose to withdraw as a stand against China’s censorship requirements. (It’s worth noting, however, that Google recently announced the establishment of a major artificial intelligence centre in Beijing.) However, there are many other tech companies that are not blocked. LinkedIn, Airbnb and Amazon’s e-commerce are all operating in China. Uber and eBay were allowed but they decided to divest largely due to extremely strong local competition (from the non-state sector).

Source: Baidu.com

At the 19th national congress of China’s Communist Party last October, President Xi Jinping made the pledge that China will continue to open up its economy to foreign companies. In November, the government announced plans to ease limits on foreign ownership in a range of financial services. Further liberalisation is expected over time.

Similar to how US companies are investing in China to try to capture the Chinese market, more Chinese companies are also investing in the US. Triangle, the third-largest Chinese tyre manufacturer, is investing in a US$580 million plant in North Carolina. To many Chinese companies, the US is an attractive market and the conditions for manufacturing are becoming more favourable.

As Chinese innovation and entrepreneurship continue to thrive, there will certainly be more opportunities for start-ups involving both Chinese and US entrepreneurs, and venture capitalists. Technology, especially AI, will increasingly be embraced for innovation.

Both the US and China are now leading the world in the development and application of AI, and this trend is likely to continue to accelerate. The interactions between China and the US at the start-up and investors’ levels are actually taking place intensively as there is so much to share and many opportunities to jointly pursue. Much of this is reflected in cross-border investment.

It would be naive to expect smooth sailing for the US-China trade and investment relationship this year. However, I don’t believe all will be bad, either. There will be areas of tension and differences in points of view and policies, but there will also be areas of collaboration and alignment.

“Coopetition” is perhaps the best word to describe the nature of this relationship. It won’t be a zero-sum game, especially not in today’s world of increasing connectivity.

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

 

SCMP | What’s in Store for China & US in 2018

By Edward Tse
January 11th, 2018

China is perennially a top of mind issue in American politics. Former President Barack Obama’s “Asia pivot” strategy had China as its centerpiece. President Donald Trump’s election campaign also centered around China, but in a very different light. He reasoned a key reason why America “wasn’t great again” was because of China’s increasing competitiveness which manifests itself mostly in its trade surplus against the US. As he vowed to make “America great again”, he sees China as a “strategic competitor” to the US.

In 2017, China made huge strides in stepping up its leadership position in global politics as the US, under President Trump, receded. At the World Economic Forum at Davos, Switzerland in January, Chinese President Xi Jinping underscored the criticality of globalization against the backdrop of Trump’s US-centric rhetoric. While the US withdrew from the Trans-Pacific Partnership, China stepped up its “Belt and Road” initiative with the formation of the Asian Infrastructure Investment Bank (AIIB) whose member countries now number 84 (as of Jan. 2018). While China (together with the European Union) pledges its commitment to reduce global carbon emissions according to the Paris agreement, the US decided to walk away.

As Trump called for “re-shoring” of manufacturing to the US, paradoxically some Chinese companies were amongst the first to respond to the call. Companies, such as Fuyao Glass, Foxconn, and Great Wall, announced major plans of investing in manufacturing in the US. (Foxconn is of course a Taiwanese company but its operations are overwhelmingly in Chinese Mainland). And, Jack Ma, chairman of China’s leading Internet company Alibaba, announced it will create “one million jobs” in the US.

So what will happen to the US – China relationship in 2018?

It seems likely the “co-opetition” nature of the relationship between the largest and second largest economies in the world will continue.

Donald Trump’s “America First policy”, or at least its rhetoric, would most likely continue and to that end, China will likely continue to be a target of a “strategic competitor” to the US. In global geopolitics, China will likely continue to step up its position as a global leader as China continues to seek its “Renaissance” while the US would continue to fortify its “Me First” position.

In business, as China’s economy continues to grow at around six to seven percent, China will continue to present numerous opportunities for US companies (and those from other countries). At China’s 19th Party National Congress back in October 2017, Xi Jinping made the pledge that China would continue to open its economy to foreign companies. Sure enough in November, the Chinese government announced plans to ease limits on foreign ownership in a range of financial services sectors. We expect the further opening for foreign participation in China’s growing economy will take place in 2018, allowing more degrees of freedom for US companies operating in China.

As China’s middle-class will continue to grow in size and the level of its purchasing power heighten, Chinese consumers will become even more important customers for US products and services both domestically and outside of China. For US companies, such as Apple, Starbucks, Nike, General Motors, Ford and Honeywell, China has become one of their largest, if not the largest, markets in the world. And, China’s importance to these companies will inevitably continue to increase. While competition is super intensive and technology is driving major, discontinuous change in the China market, more US companies will realize the incredible upside potential of the China market and will seek ways to capture its rightful potential. Even Google, who decided to withdraw from the China market several years ago, have recently announced the establishment of a major Artificial Intelligence (AI) Center in Beijing.

China has also become the world’s largest country of outbound travelers. In 2017, the number of Chinese outbound tourists is estimated at around 130 million. Chinese consumers will likely become even more globally active in 2018. The US will continue to be one of the most favored destinations for the Chinese. The Chinese consumers tend to spend a lot as they travel and that would bode well for the US travel and tourism industry.

In 2018, more Chinese companies are expected to invest in the US and to exploit the potential of the US market. For instance, in December 2017, reports claim that Huawei, China’s leading telecom equipment and smartphone maker, would partner with AT&T to sell its Mate 10 smartphones in the US. If true, this would be a breakthrough development, as for a long time, Huawei was not able to penetrate into the US market. Triangle, the third-largest Chinese tire manufacturer, is going to invest into a $580 million plant in North Carolina in 2018. Keer Group, a textile producer in China, plans to invest $218 million over next five years to expand the capacity of its facility in South Carolina. To many Chinese companies, the US is an attractive (and in some cases necessary) market and the conditions for manufacturing are becoming more favorable.

As China’s innovation and entrepreneurship continue to thrive, there will certainly be more opportunities for start-ups of both Chinese and US entrepreneurs, as well as for venture capitalists. Technology, especially AI will increasingly be embraced for enabling innovations by entrepreneurs. Both the US and China are now leading the world in the development and application of AI, and this trend will likely continue to accelerate. The interactions between China and the US at the start-up and investors’ levels are actually taking place intensively as there is so much to share and many opportunities to jointly pursue. Much of this has already manifested in cross-border investments between the two sides. We expect this would happen even more in 2018.

Inevitably, the US government will continue to send rhetoric on trade friction between the US and China, and will announce more policies to address the trade imbalance. Additionally, the US government will likely continue to view China as a strategic competitor, and national security will continue to be a key consideration by both governments when it comes to investments by organizations from the other side. However, common interest would prevail both at the government level and at the business level. In 2018, we expect the US- China relationship would continue to move along. There will be areas of tension and difference in points of view and policies, but there will also be areas of collaboration and alignment. Co-opetition is perhaps the best word to describe the nature of US – China relationship in 2018. After all, it won’t be – and shouldn’t be – a zero-sum game especially not in today’s world of increasing connectivity.

Original published by South China Morning Post on January 11th, 2018. All rights reserved.

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

 

SCMP | How China is Leading the ‘New Retail’ Revolution

By Edward Tse and Jackie Wang

Edward Tse and Jackie Wang say market moves by Chinese firms like Alibaba, Tencent and JD.com show how key players are experimenting with various forms of tech-driven ‘new retail’ in the O2O world, making the industry more dynamic than ever

While the past two years may have been brutal for brick-and-mortar stores worldwide, China’s online and offline retailers have witnessed a “new retail” revolution, driving an increasingly stronger national consumption.

Since China launched economic reforms in 1978, the country’s retail industry has undergone multiple stages of development.

With foreign retailers flooding in after China joined the World Trade Organisation in 2001, the scene was diversified. Offline retail started to be challenged by Taobao, Alibaba’s online shopping platform, which was founded in 2003 and grew -exponentially in the following decade. The transaction amount for Alibaba’s “Singles’ Day” 24-hour online sales each November 11 has grown from 50 million yuan (HK$59 million) in 2009 to 168 billion yuan this year (Alibaba owns the South China Morning Post).

With e-commerce booming, businesses have been adopting an “online to offline” (O2O) model, using online channels to attract offline traffic. In the past few years, this phenomenon has evolved into the notion of “new retail”.

New retail represents a trend of online merging seamlessly with offline, resulting from the prevalence of digital technology, like mobile payment, wireless internet, sensors and artificial intelligence (AI).

In this model, online is no longer just a sales channel, but provides ubiquitous touchpoints to interact with consumers and their social groups. By contrast, offline retailers are trying hard to keep consumers in their brick-and-mortar stores for longer, offering better customer experiences by leveraging digital technologies.

From sales and marketing to -logistics and inventory management, the new retail revolution is transforming the industry. For example, Amazon Go, the pioneer in new retail in the US, tracks purchasing behaviour with sensors placed on supermarket shelves. After consumers choose their products, they can just walk out of the store, with the amount payable automatically deducted from their mobile payment account.

Some aspects of the retail operation are also becoming less human-led. In China, logistics firm Cainiao is incorporating hi-tech-enabled hardware and software to improve efficiency. In its logistics park, -Cainiao deploys drones to monitor the security of the venue. Within the warehouse, several robots called “Geek+” work with staff to sort packages. It also uses computer vision to identify, monitor and -arrange different orders.

Improved logistics efficiency is contributing to the consumer experience as well. Consumers will not only receive their packages faster, but also with fewer errors and get fresher goods.

Whereas in America, Amazon is at the forefront of the new retail revolution, China’s speed and intensity have gone into orbit. Players big and small are experimenting with various forms of new retail, making the industry more dynamic than ever.

Driven by the huge market -opportunities and abundant venture capital, start-ups in China are actively participating in this revolution. For example, Xingbianli, a convenience store and vending machine start-up, offers many popular Korean and Japanese products that could mostly only be bought via daigou (individuals who shop overseas and resell to Chinese consumers). More importantly, it is testing the area of unmanned retail.

Products have their own bar code, which can be scanned by consumers when they choose their shopping and then check out on the Xingbianli app. There is also a mini-library and a -café within the convenience store, aimed at making consumers linger.

Traditional local retailers are also incubating their own new retail formats, such as Super Species, a subsidiary of China’s largest supermarket chain, Yonghui Superstores.

Super Species specialises in selling fresh produce, such as vegetables and seafood, and combines the traditional market with restaurants, -cafés, florists, and so on. It has also introduced a Yonghui Partnership Plan, allowing staff to present more innovative retail ideas and pilot them within the stores. Super Species itself is becoming an incubator for those innovative ideas, and new retail here is no longer just about changing the store format, but also the mindsets of all staff.

Tech giants like Alibaba, Tencent and JD.com are heavily investing and competing head to head in the offline battleground. Alibaba -invested US$2.9 billion in one of China’s largest supermarket chains, Sun Art Retail Group, in November. It aims to transform Sun Art’s offline business of over 400 -Auchan and RT-Mart branded -hypermarkets and provides technology to enhance customer data and inventory management.

In 2015, JD.com invested US$700 million in Yonghui Superstores. This month, Tencent, a close ally of JD.com, acquired a 5 per cent share in Super Species, and made capital injection for a 15 per cent stake in Yonghui Yunchuang Technology, Yonghui’s supply chain and logistics subsidiary.

To further compete with Alibaba online and enrich their own ecosystems, Tencent and JD.com are -investing in VIP.com, a Chinese e-commerce platform specialising in discounted products for women.

They will together own 12.5 per cent of VIP.com and, as they further monetise their traffic, the new retail battle with Alibaba will -get fiercer.

Foreign companies are also -actively piloting their new retail strategy in China. Earlier this month, the world’s largest Starbucks -Reserve Roastery opened in Shanghai, leveraging Alibaba’s technology to give consumers a more immersed Starbucks journey.

This is also the first mass offline application of augmented reality (AR) technology. Consumers can use the Taobao app to unlock the AR features in the store, such as learning about the details of the Starbucks coffee brewing process.

Technologies are enabling these companies to create new business approaches, while intense competition is driving all players to -become better. They can’t afford to slow down. China’s scale also allows companies to use the market as a business laboratory and to experiment with business models.

Through fast launch and adaptation, players can fine-tune their business model at a rapid pace.

Beyond retail, the future consumption landscape will be much more complicated and sophisticated. Digital technologies, especially AI, 5G network and the internet of things, are already blurring the boundaries of industries.

Eventually, retail will be merely one layer of the consumer lifestyle, albeit a high-frequency one. The internet of things will create a new ecosystem that is ubiquitous and interconnected. Also, 5G network development will facilitate this process in the near future and bring about disruption in the retail world.

Assisted by machine learning and big data, consumers will -increasingly be viewed as a “segment of one” and receive more personalised solutions, not just in -retail, but in every facet of their life.

To that end, China will be at the global forefront of innovation and experimentation.

Edward Tse is founder & CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. Jackie Wang is a senior consultant of the firm

This article appeared in the South China Morning Post print edition as: The future of retail

 

Ten Predictions on Business and Strategy in China for 2018

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.

 

China Daily | E-mobility Alters Auto Industry Dynamics

By Edward Tse and Bill Russo | China Daily Europe | Updated: 2017-12-15

Competing no longer just about physical hardware, but also the capability to build a digital ecosystem relationship with consumers

The electric vehicle market is growing rapidly in China and is now outpacing its Western counterparts. Already the largest auto market in the world, China is now also the largest electric vehicle market. It is also the largest car market for many global automakers, including Volkswagen, BMW, General Motors and Mercedes-Benz. As a result, it is becoming essential for these companies to follow China’s mandate to electrify transportation.

China’s EV policy is largely an outgrowth of the nation’s desire to secure the energy resources needed to power China’s economic development, along with a desire to level the competitive playing field with global automakers who have long dominated the auto industry with the intellectual property related to conventional fossil-fuel-based propulsion technologies. China’s electrification plans are designed to build a globally competitive domestic set of capabilities that help establish China as the leading supplier of the raw materials and products needed to repower transportation.

Electrification will also permit China to alter its energy mix and expand its use of renewable energy sources. In addition, electrification provides China with an opportunity to establish leadership in segments where foreign companies do not have a deeply rooted technological advantage. China has selected new energy vehicles, which include battery electric vehicles and plug-in hybrid electric vehicles, for its electrification push, since they offer Chinese companies a chance to leverage China’s favorable EV policies and large market scale to secure a place of strength as these enterprises strive to become global electric carmakers.

For these reasons, the Chinese government is using a variety of incentives to promote and support development of the EV industry. These include purchase subsidies as well as tax and license plate exemptions. In September, China announced its intention to ban the sale of fossil-fuel-powered vehicles, and regulators are working on an implementation timetable. There is also a strong correlation between license plate restrictions and EV penetration for cities that have implemented such measures. By simply making it easier and cheaper to get a license plate, China has significantly expanded the electric car population in these cities. A carbon trading program will be phased in starting in 2019, and this will push automakers to add more EVs to their product mix in order to avoid a tax penalty.

Source: Baidu.com

Facing these dynamic changes, local and foreign original equipment makers are accelerating their investments in EV product development. Emerging disruptors (Nio, Byton), hardware innovators (Tesla, BYD) and traditional experimenters (VW, Ford) are now seeking a place in China’s EV competitive landscape. They are competing with, as well as collaborating with, each other, as the original competitive advantages of traditional carmakers can no longer guarantee success in the new “e-mobility” business model.

Competing in this new business model is no longer just about the engineering of physical hardware, but also includes the capability of building a digital ecosystem relationship with consumers, especially in a market like China where companies like Baidu, Alibaba and Tencent are actively investing in future mobility technologies around connected, electric and autonomous cars.

NIO, a Chinese EV startup backed by Tencent, has raised more than $1 billion (849 million euros; £746 million) and will release its first mass-production EV, the ES8, early next year. Tesla, a global pioneer in the electrification of transportation, is planning to build a wholly owned factory in Shanghai’s Pilot Free Trade Zone. Tencent, which now owns 5 percent of Tesla, is also investing in NIO and Byton in the race to dominate the future of mobility.

Tencent is a co-founder (with Alibaba) of Didi Chuxing, China’s top mobility service provider, and is also the lead investor in Mobike, a leading bike-sharing mobility platform. The internet companies believe that connected, electric and shared mobility is an integral part of Chinese consumers’ connected lifestyle. By leveraging its vast insight and big data relationship with its users, Tencent aims to provide more-tailored mobility solutions to the market. E-mobility is not just about the vehicle hardware, but also about the broader digital ecosystem relationship with the everyday users of the mobility services platform.

There is already a strong indication that the rise of connected, on-demand mobility is accelerating EV adoption in mobility services fleets. In a sustainable energy summit sponsored by the United Nations and the Global Energy Interconnection Development and Cooperation Organization, Didi CEO Cheng Wei said the future of transportation “is new energy vehicles, and ride sharing will be a key link in promoting new energy on the road.” He aims to have 1 million EVs on Didi’s platform by the end of the decade, which will account for around 20 percent of the total number of EVs in China by 2020. Didi has also partnered with NEVS, a Sino-Swedish venture that will manufacture electric vehicles in Tianjin for the ride-hailing giant.

Source: Baidu.com

EV technology developments are paving the way for large-scale electrification of transportation. Anticipating this, Chinese enterprises are deploying a massive number of charging facilities, with a government target of a 1:1 EV-to-EV charger ratio by 2020. Improvements in battery chemistry and other potential disruptive technologies like wireless charging are also anticipated, which will further accelerate the transition.

For more than 30 years, China’s auto policy has required foreign original equipment manufacturers to establish joint ventures with local partners in order to access the market. However, in the age of e-mobility, industry dynamics are being fundamentally altered. Increasingly, Chinese companies are creating product and digital service brands that shift the focus from the hardware to the ecosystem of services that are derived from the hardware. In this new digitally enabled business model, Chinese companies are no longer following, but rather leading, the auto mobility revolution.

Edward Tse is founder and CEO and Bill Russo is managing director of Gao Feng Advisory Company, a global strategy and management consulting company with roots in China.

 

Inside China’s quest to become the global leader in AI

By Edward Tse | The WorldPost
October 19, 2017

SHANGHAI — If all goes as planned, China hopes to be the world leader in artificial intelligence by 2030. If successful, Beijing’s “moonshot” initiative – recently unveiled by the government – has the potential to be a game-changer not just for Chinese society but for global geopolitics as well.

My bet is that China will indeed reach its goal over the next decade, in part because of how far it has already come. While so much of the world today lacks clear direction, China has an edge in its ability to combine strong, top-down government directive with vibrant grassroots-level innovation.

Beyond this, China has an abundance of data to train AI-learning algorithms because of its huge population of Internet users – more than 700 million. China’s thriving mobile Internet ecosystem also provides a test bed for AI researchers to collect and analyze valuable demographics and transactional and behavioral big data and to conduct large-scale experiments at a much higher level than foreign counterparts.

This combination places Beijing in a unique position to dominate AI in just over a decade. It would be imprudent to expect otherwise. To understand why, look no further than the country’s current technological advancements.

China is investing in AI at the local level
Today, a number of local governments in China are offering financial incentives to encourage AI-related innovations. With the government’s assistance, Guizhou, one of the poorest provinces in the country, has become known as China’s “big data hub.” Major Internet companies such as Apple, Alibaba, Tencent and Qualcomm have set up new big data centers in the province, in large part due to this initiative. And in 2016, government data reported a 10.5 percent growth in Guizhou’s gross domestic product, one of the highest GDP increases among China’s provinces and municipalities.

Another example is the municipality of Chongqing. It was one of the first municipalities in China to establish a bureau to support local AI development. In May, Chongqing partnered with Baidu, a local search engine, to foster AI and big data. Elsewhere in China, Xiong’an New Area, a newly established district near Beijing, and Guangdong-Hong Kong-Macau Greater Bay Area, a city cluster, have also incorporated AI in their development plans as a key economic growth engine.

Workers test the functions of a giant robot as they set up a robot exhibition in Hefei, Anhui province. Sept. 26, 2013. (Reuters/)

China is inspiring tech to prioritize AI
The Chinese government’s favorable policies have inspired innovations across a wide range of tech players in the country. Leading Internet giants such as Baidu, Alibaba and Tencent, rising start-ups like iCarbonX and SenseTime, as well as “unicorns” – companies that have reached $1 billion valuation – like Didi Chuxing and Xiaomi are either adopting AI technology already in their operations or investing in it.

Baidu, for example, has shifted its company strategy from “mobile-first” to “AI-first.” Some of its initiatives include DuerOS, a conversational AI system that can be integrated into smart devices such as speakers, televisions and refrigerators; Project Apollo, an open source platform for the research and development of autonomous vehicles; and Baidu Brain, an AI platform with 60 different AI-enabled services. Its rival Tencent has also established its own AI lab, which developed the software that famously defeated high-ranking Japanese “Go” player Ryo Ichiriki earlier this year.

Additionally, Chinese health care start-up iCarbonX is building a digital “ecosystem” using AI technology to collect users’ biological and psychological data, provide personalized health analysis and predict users’ health status. And SenseTime, a Chinese AI start-up founded in 2014, focuses on innovative computer vision and deep learning technology. In July, SenseTime claimed it had raised the largest single round investment in AI globally at $410 million.

Alpha1 Pro, a humanoid robot for entertainment and education, at the Canton Fair in Guangzhou, China. Oct. 16, 2017. (Venus Wu/Reuters)

Still, there are some significant gaps to close before China becomes the world leader in AI. According to a recent AI report from Tencent Research Institute, the number of AI companies in China lags behind those in the United States, especially in the areas of core components and processes. China still falls short of the U.S. when it comes to new ideas and research related to AI but appears to have the upper hand in the application and implementation of these AI technologies.

Another potential challenge is geopolitics. According to an unreleased Pentagon report cited by Reuters, the U.S. government views Chinese investments in American AI start-ups as a potential threat to national security. As a result, the U.S. wants to scrutinize cross-border investment in sensitive AI technologies. On top of that, the Trump administration has proposed a 10 percent cut to the National Science Foundation’s spending on “intelligent systems.” This could present potential opportunity for China, through strong government support and financial incentives, to attract U.S. talent to set up AI labs and conduct pilots in China.

China has some work to do before it successfully harnesses the potential of AI. But it has the resources and talent to reach its goal – and now it has the political will to make it a national priority. That combination will be hard to beat.

This was produced by The WorldPost, a partnership of the Berggruen Institute and The Washington Post.

Edward Tse is the founding chief executive of the consulting firm Gao Feng Advisory Company. He has worked with the World Bank, the Asian Development Bank and the Chinese government on state-owned enterprise reform.

 

From “Teaching” to “Learning”

By Dr. Edward Tse

A few weeks ago, I had a meeting with the APAC head of a major Fortune 500 company at his office in Shanghai. It was the first time we met and the meeting was very enjoyable. He told me that he had arrived in China around six months ago and was sent from headquarters to run their Asia business with a particular focus on China.

He said he thought he would come to China to “teach.” While he knew China was a fast-growing country economically (and that things in general were changing fast), he believed that China was still somewhat “backwards” in terms of corporate management know-how and lacked innovation. In fact, many people still perceive China as a “nation of copycats”.

Since landing in China, he confirmed the pace and intensity of change in China, of course. That was easy. However, he was struck by the speed and magnitude of innovations taking place in China. He cited the dock-less bike sharing phenomenon, where literally over night the streets of Shanghai became overrun with thousands of bikes. Critically, this turned out to be a product/service that people really embraced rapidly. The way that Chinese innovations are taking place, he concluded, is often quite different from what he knew back in the United States.

He concluded his story by saying, “I thought I would come to China to teach, but instead I found out that I am here to learn. Or, at least to both teach and learn.”

This kind of reflections is becoming more and more prevalent among expat executives in foreign multinational companies (MNCs) in China. In the older days, i.e., a couple of decades ago, the “I come to teach” mindset was very common. Sure enough, back then China was at the early stage of its economic and political reform and opening-up. It was still at the initial stage of its transition from a planned economy to a so-called market economy. State-owned enterprises (SOEs) were dominant and privately-owned enterprises (POEs) were only at their infancy.

Corporate management practices in the modern definition were just being picked up by the Chinese. Copycats (“Shanzhai companies”) were all over. MNC executives who came to China during this time appropriately felt the knowledge and experiential advantage. For those who were compelled, they felt they could teach the Chinese.

As China grew, things evolved rather quickly. While SOEs continued to dominate some sectors, POEs were growing much faster, especially in sectors that were not as regulated. With the increasing prevalence of technology, driven by wireless internet, the leading POEs turned out to be not only entrepreneurial but also very innovative. They identified market opportunities and swiftly created new business models, often enabled by technology, to address major market pain points. Some of them have grown extremely fast creating what we call “exponential organizations” and in the process their executives also picked up a great deal of knowledge and experience on how to better manage businesses.

Source: Baidu.com

Today, innovation and entrepreneurship continue to pick up steam in China. Entrepreneurs are getting younger. Many of them are “post-80s” and “post-90s”. They can be found not only in major hubs like Beijing, Hangzhou and Shenzhen, but also in many lower-tier cities. They are dabbling in all sorts of start-ups across many industry sectors. Even more established companies have found they needed to change and to re-invent themselves in order to capture the new opportunities or at least not be marginalized. Many Chinese business executives are looking for inspirations from the cutting-edge development in technology, strategy, business models, organizations, and processes. More of them have concluded that while they were trying to learn from (“benchmark”) the western best practices in business and management a decade or two ago, they are now less able to identify appropriate western benchmarks for their growth going forward. Many of them need to figure out their own ways.

Across many sectors, Chinese companies are becoming strong competitors to western MNCs in China. They are not only fast, agile and adaptable (“they do everything”), but also increasingly sophisticated and innovative. At least the leading ones are. Most people by now know the likes of Alibaba, Tencent and Baidu, as well as Didi and DJI, but there are lesser known entrepreneurial companies such as Liby (household cleaning products), Jovo (Chinese alcoholic beverages), Three Squirrels (nuts and snacks), Lepur (yogurt) and Hema (grocery retail) that are disrupting their respective verticals including the major foreign incumbents. Examples of such are numerous and the number is increasing every day.

Source: Baidu.com

While there are still plenty of copycat companies around, the front end of the curve is driven more and more by innovative companies. They generate new ways of doing businesses and the leaders of these businesses also tend to be good students. To this end, MNCs found that their original superior positions are no longer guaranteed. They must adapt their strategy, organization and business models to China (and increasingly transfer their learnings from China to the rest of the world). There is no doubt that in some areas MNC expat executives still have things to teach the locals. And many of the locals are still open to learn. However, the reverse is also becoming true. MNC expat executives are quickly finding that they can learn a great deal from the local businesses. “The Chinese Way” is no longer a universally negative notion but increasingly being appreciated as ingenious and value-adding.

The transition from “I come to teach” to “I come to both teach and learn” took place over a relatively short period of time. The role of China in global business has evolved significantly during this period and one would expect more to come, perhaps with even higher speed and stronger intensity.

 

China Daily | Tapping Growing Potential of AI Industry

By Edward Tse/Jackie Tang | China Daily | Updated: 2017-10-17

The global artificial intelligence market has experienced explosive growth in recent years, and this game-changing technology is now considered the “next big thing” after the mobile internet.

AI has a long development history but recent breakthroughs have led to a new inflection point. Advances in deep learning neural network algorithms, alongside improved computer processing power, and the abundance of big data that serves as valuable training data are all contributing to the rise of the AI industry.

China’s AI industry has been growing in an exponential manner. According to Tencent Research Institute, the number of AI companies has increased more than tenfold over the past 10 years, from 57 AI companies in 2007 to 592 by June 2017. Remarkably, the number of newly established AI startups in 2015 was equivalent to the total number of AI start-ups from 1999 to 2012. In terms of fundraising, according to The Economist, Chinese AI companies received $2.6 billion investment from 2012 to 2016 while US peers received $17.9 billion over the same period. However, China has been catching up quickly in recent years.

The Chinese government has positioned AI as a national strategic priority. China, earlier seen as a technology development laggard, aims to become a world leader in AI to drive its economic transformations with it. In the most recent government policy document outlining the New Generation AI Development Plan, the State Council, the country’s Cabinet, has declared an ambitious goal of becoming a world leader in AI innovation with a market size of over 1 trillion yuan ($151.86 billion) by 2030. Policies such as Made in China 2025, the Three-year Guidance for Internet Plus AI plan, and the New Generation AI Development Plan are all top-down initiatives aiming to take the nation’s AI technology forward. Furthermore, local provincial and city governments are also offering preferential policies and generous financial incentives to AI start-ups. For example, the city of Tianjin recently set up a 30 billion yuan fund to support the local AI industry.

Data is the key to unlocking the potential of AI development. With 751 million internet users and 724 million smartphone users, Chinese are embracing a 24/7 connected lifestyle and adopting all kinds of new digital products and services. Their ubiquitous connectivity has led to tremendous amount of data that can be further monetized. And with the massive amount of training data sets as input, the AI algorithms are continuously self-tuning and improving. Companies are now able to leverage AI-enabled tools to develop a more comprehensive and dynamic understanding of their customers and competitors.

This vibrant innovation and entrepreneurial ecosystem has also fueled China’s AI development. Chinese AI-based patent applications grew 186 percent between 2010 and 2014, a huge increase from the previous five-year period. Also, in the past two years, all the top-performing teams in the ImageNet Large Scale Visual Recognition Challenge, an influential AI computer vision contest, were Chinese, while half the teams were Chinese-based. Meanwhile, Internet giants such as Baidu, Alibaba and Tencent, along with rising startups like Mobvoi, iCarbonX, Megvii and SenseTime, and unicorns like Didi Chuxing and Xiaomi are all investing in or experimenting with AI technology.

Source: Baidu.com

Baidu is one of the major leaders in AI development in China. It established the Institute of Deep Learning in 2013 and the Silicon Valley AI Lab in 2014. In 2017, Baidu announced a shift in its strategy from mobile-first to AI-first, and recruited Qi Lu, a former executive vice president at Microsoft, as its new COO. In particular, it has launched an open-source platform for autonomous driving solutions, namely Project Apollo, to transform the global research and development landscape of self-driving vehicles.

Yet, China’s AI industry still faces major challenges. First, China’s academia is not doing much in fundamental scientific research, especially in the areas of advanced computer algorithms and computing infrastructure. So far, the majority of groundbreaking research is still being done in the West. Second, AI startups are good at launching new products and features to satisfy unmet market demand. However they primarily rely on business model innovation rather than technology innovation. Third, governments and venture capitalists tend to provide more incentives to commercial applications of technology over fundamental technology research, which takes more time and involves more risks.

The success of China’s ambitious goal to become a world leader in AI by 2030 will hinge on the nation’s innovation capabilities and long-term strategic vision. Could China eventually achieve global leadership in AI? Like everything that is related to business and technology innovations these days, it would be imprudent to count China out.

Edward Tse is founder& CEO, Gao Feng Advisory Company, a global strategy and management consulting firm based in China and author of China’s Disruptors.
Jackie Tang is a consultant with the firm.

 

Nikkei Asian Review | A New Narrative of Chinese Corporate Growth

EDWARD TSE and ALAN CHAN
September 28, 2017 7:14 pm JST

Lower-profile entrepreneurs are achieving exponential growth after humble starts

A growing number of privately owned Chinese companies have been achieving exponential growth and successfully transforming their businesses. Many of them however remain relatively unknown in the West. Unlike famous Chinese internet companies like Alibaba Group Holding and Tencent Holdings and the latest crop of startups with skyrocketing valuations, these less prominent companies are comparatively down-to-earth and generally had humble beginnings but now boast solid business models.

SF Express, Oppo, Vivo and Midea Group are prime examples of this group. Each boasts a unique entrepreneurial story and has been relentlessly pursuing innovative strategies to create new markets and redefine the rules of the game for their sectors. Understanding these companies’ growth and origins can shed light on the complex, multi-dimensional and dynamic context of business in China.

SF Express, dubbed the “FedEx of China,” is a delivery-services company based in Shenzhen. At the age of seven, founder Wang Wei migrated from Shanghai to Hong Kong. After he graduated high school, he began working at a small print shop back across the border in Guangdong Province.

While sending print samples to clients in Hong Kong, he quickly noticed the growing demand for cross-border delivery. At the age of 22, he convinced his father to give him a 100,000 yuan ($15,000) loan and founded SF Express with just six employees and one delivery van.

Wang’s business has grown exponentially since its 1993 founding, riding the development of trade around the Shenzhen Special Economic Zone and other areas of the Pearl River Delta. During the Severe Acute Respiratory Syndrome outbreak in 2003, Wang seized the opportunity to buy five planes from cargo airline Yangtze River Express amid the slowdown in the aviation industry and then secured a license to run charter flights to keep deliveries flowing. The subsequent boom in e-commerce saw demand for timely package delivery services rise yet faster.

Today SF Express is a leading market player, with more than 13,000 service points, 400,000 employees, and a fleet of 15,000 motor vehicles and 36 cargo aircraft. Its revenue climbed 21% last year to 57 billion yuan, while net profit soared 112% to 4.18 billion yuan.

This year has been even more dynamic for SF Express. In February, it completed a backdoor listing on the Shenzhen Stock Exchange via an asset swap with defunct cable manufacturer Maanshan Dintai Rare Earth & New Materials and soon after could claim the highest market capitalization of any company on the tech-heavy exchange.

In May, SF Express announced a joint venture with global package delivery company UPS for services from China to the U.S. In June, SF Express completed its first commercial deliveries using drones after receiving a Chinese airspace license. Then on Aug. 22, it raised 8 billion yuan through a share placement to fund growth initiatives.

Smartphone disruptors
Leading smartphone brands Oppo and Vivo are both based in Guangdong and owned by the same parent company, BBK Electronics, a consumer electronics manufacturer founded in 1995 by entrepreneur Duan Yongping. Over the years, BBK Electronics has produced a wide range of products, from corded phones to household appliances and hand-held language learning devices.

Source: Baidu.com

Oppo was originally founded in 2004 by Duan and Tony Chen, who remains chief executive. Before entering the smartphone business in 2008, Oppo sold DVD and Blu-ray Disc players. Vivo was founded in 2009 by Duan and Shen Wei, who also still serves as chief executive. It entered the smartphone market in 2011 with handsets featuring slim design and high-quality sound.

Today both Oppo and Vivo target young professionals and students in secondary Chinese cities. Both brands feature high-end specifications with modern industrial designs that are comparable to Apple’s latest iPhone models. They are positioned with compelling selling points such as fast charging, large memory capacity and long battery life and boast various custom features for selfie and music enthusiasts.

Both brands rely heavily on traditional retail and distribution channels in secondary cities, leveraging the vast sales network of parent BBK Electronics. For example, Oppo has a presence in more than 200,000 retail outlets across China, with flagship stores in the biggest cities to showcase its models’ high-end image. It also gives attractive incentives to retail partners to push its brand.

In addition, they have invested heavily in traditional marketing, such as product placements, outdoor advertising, celebrity endorsements and television show sponsorships. Oppo is an official global partner for “America’s Next Top Model” and Vivo is an official sponsor of the 2018 and 2022 soccer World Cup tournaments. These marketing efforts are so successful that over half of consumers surveyed in secondary Chinese cities mistook the two brands for foreign companies.

In 2016, Oppo shipped 78.4 million smartphones, surpassing Huawei Technologies, Samsung Electronics and Apple to lead all brands in global totals. Vivo came in third, with 69.2 million smartphones shipped and a market share of 14.8%.

Smarter homes
Many industries in China are undergoing disruptive digital transformation, consumer appliances included.

Midea, founded in 1968 in Guangdong, has in recent years created an ecosystem of digital capabilities to capture new opportunities. Last year, Midea generated more than 10 billion yuan in sales on Tmall, Alibaba’s market-leading business-to-consumer online platform. This past January, Midea announced a strategic partnership with Tmall rival JD.com, aiming to deepen cooperation in the fields of intelligent home appliances, smart homes, channel expansion, personalized products and big data analytics, as well as a strategic partnership with Tencent’s QQ social network to collaborate on the internet of things, cloud technologies and smart home appliances.

Source: Baidu.com

Midea is also making big bets on industrial transformation. In 2016, it completed the 4.4 billion euro ($5.3 billion) acquisition of a 94.55% stake in Kuka, a leading German robotics manufacturer. It is aiming to leverage Kuka’s leading technological capabilities in automation, robotics and logistics solutions. This past February, Midea also acquired 50% of Servotronix, an Israeli automation solutions company, for $170 million.

Midea is now aggressively pushing forward a new “smart home + smart manufacturing” strategy, with the goal of becoming a “world leading technology group, focusing on consumer electronics, air conditioners, robotics and automation.” Midea has already invested 5 billion yuan in building smart factories with advanced automation and data exchange in a number of Chinese cities, utilizing a total of 1,500 robots. It ranked 175th on a European Commission list of the world’s top investors in research and development and was the only Chinese home appliance producer to make the list of 2,500 companies.

The growth mentality and entrepreneurial spirit of companies like Midea, SF Express and BBK should be an inspiration to both local and foreign business leaders. The visionary entrepreneurs who founded companies like these excel in speed, agility and adaptability and are grabbing new opportunities amid market discontinuities and spotting unaddressed needs. They are relentlessly identifying new strategic growth areas through fearless experimentation, jumping over capability gaps and charging across traditional industry boundaries, carving a path distinct from core competence-focused players and from diversified conglomerates such as Dalian Wanda Group.

China is no longer just a fringe or emerging market for multinational companies but increasingly at the core of their global strategies. The proliferation of technology enablers and intense competition will drive further development of business models and technological innovation. With China’s gradual transition from a planned economy to a market-based one, new opportunities will continue to emerge and be identified.

China is increasingly becoming a source of inspiration for new intellectual capital in strategy and management science. This unprecedented phenomenon, as shown by the growth stories of SF Express, Oppo, Vivo, Midea and many other similar organizations, will require the wider business community to look at organizations in new ways.

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting firm with roots in China.
Alan Chan is a senior consultant of the firm.

 

Innovation in China: An Interview with Edward Tse

About the Interviewee:
Dr. Edward Tse
Founder and CEO, Gao Feng Advisory Company

About the Interviewer:
Jim Euchner
Chief editor at Research-Technology Management, a US business journal

For more than two decades, Edward Tse has lived and consulted in China and observed the country’s dramatic transformation, one driven by a new entrepreneurialism and encouraged by the Chinese Communist government.

He has seen countless multinationals misread these changes, and a few grasp them. In this interview, he discusses the opening of the Chinese economy, the role of Chinese entrepreneurs in the resulting growth, and what multinational companies can do to succeed in the large, growing, and dynamic Chinese economy.

JIM EUCHNER [JE]: Your book, China’s Disruptors, makes a pretty compelling case that innovation is thriving in China. It’s a surprise to many who see China in the narrower role of a contract manufacturer or an imitator. What has happened in the last 8 or 10 years that has changed how China is innovating?

EDWARD TSE [ET]: One of the biggest impetuses was to open up the private sector in China. For a long time, the Chinese economy was dominated by state-owned enterprises [SOEs]. And while the SOEs have contributed in their own ways to the development of China, business innovation has come largely from the private sector. The private sector has been growing very, very rapidly, which the mainstream media in the West have not fully reported.

The entrepreneurs in China, by definition, are looking for ways to grow their businesses, and many of them are looking at innovation as the way to differentiate themselves from their competitors. And, of course, technology has become a very important enabler—in particular, the development of the Internet. The wireless Internet has been especially important over this period. It may surprise people that China is really a very significant Internet nation. The enabling factors of technology and thriving entrepreneurship in the world’s most populous country have driven the change. There are other factors, as well, but I think these two are probably the most significant ones driving innovation in such a fast and significant manner.

JE: Can you talk about the dance between the opening up of the economy and the official control of both the communications infrastructure and the state-owned enterprises? How does that dance work for the entrepreneurs?

ET: It is certainly true that China is still a very governmentcontrolled country; in many cases, there’s not a full degree of freedom in what people and companies can do. The interpretation of that in the West is that, therefore, it’s very difficult for the Chinese to be innovative. And also, perhaps, the Chinese are not very happy. This is only partially true. In reality, although the control of the government is very, very significant, the entrepreneurs are still able to grow in their own ways. It’s a very interesting case, because it’s becoming a duality in the development of the Chinese economy.

While the state-owned enterprises remain strong in some of the sectors, the private sector also has been thriving in its own ways at the same time, despite not having 100 percent economic liberation (so-called freedom). In a way, the Chinese government has been very, very supportive, in terms of working with the private entrepreneurs and in innovation and entrepreneurship. They have not in general tried to block the development of the private sector. The government, in fact, is encouraging almost everybody in China to be entrepreneurs and to be innovative. It has developed into a very interesting case; despite the imperfections in the society, it is thriving in its own way, which I think defies the assumptions that many in the West have made about the development of China.

JE: Yes, I think so. I had a chance on a trip to China to visit with some entrepreneurial firms, and I was surprised by their willingness to take risks and to invest in the development of new technologies and new processes. The management was nonbureaucratic; it was decisive. Did I just see a good example?

ET: No, what you said sounds right. Entrepreneurial thinking is an extremely widespread and fast-growing phenomenon in China. It is spreading across China, not only in one or two geographic areas; it’s not only in big cities like Shanghai or Beijing.

As you go around China, from the eastern seaboard, where it’s more developed, all the way to the inland area, down south to Guangdong, you see the same thing. Shenzhen is one of the world’s most innovative technology hubs. You see that all around China. People are willing to take risks.

I have found the entrepreneurs I have met in China to be quite bold, and they’re very thirsty for knowledge about technology. They’re very thirsty to understand what the latest technology is and how to apply it to business, whatever makes sense. It’s happening across age profiles. The entrepreneur in China is actually getting younger. We’ve got a lot of young people, who we call the post-80s and post-90s, who have become entrepreneurs. Many of them don’t want to work for big companies anymore; they want to be successful, and they have an urge. They see predecessors, people like Jack Ma from Alibaba and Pony Ma from Tencent. They aspire to become the next Jack Ma or the next Pony Ma.

It’s very encouraging. Of course, entrepreneurship is a low-probability game. Many of these entrepreneurs won’t be successful, certainly at their first attempts. But this has not deterred these young people from all over the country from trying to make it happen. China today actually is culturally accepting of people who fail. If they try and they fail, that’s okay. People can come back again. It’s a very different culture compared to the China of 20 or 25 years ago. Entirely different.

JE: In your book, you profile Alibaba and Tencent. Both had early failures, and yet they ultimately achieved—I hate to sound ethnocentric, but they achieved the great American dream. They achieved the same things we think of the most successful entrepreneurs in the West as having achieved.

ET: Exactly. It’s the pursuit of the same values or ideals, but it’s happening in a very different political and social context. It’s very interesting. I think that there have been assumptions made that for these sorts of inspirations, innovations, or breakthroughs to happen, you have to have a certain context, in politics and the organization of society.
But I think that the Chinese phenomenon is proving that perhaps there’s another way.

JE: It will be interesting to see. In your book, you talk about four things that are driving growth in China, with the acronym SOOT: Scale, Open, Official support, and Technology, especially the wireless Internet. Can you start by talking about the scale effect? There is a large, emerging middle class in China. Is its growth akin to what happened in the US after World War II, where a large number of people moved into the middle class, and there was a bootstrapping going on as the middle class created demand, which drove a growth in good jobs?

ET: In terms of actual scale, it’s bigger than even the US after the Second World War, since China is the world’s most populous country. So the scale is significant. But of course, before the opening up of China, up until the Cultural Revolution, China was closed and the Chinese people were poor. Although there were a billion people, they were not really consumers. But during the rapid economic rise of China over the last 25 years, a real middle class has been developing. And this middle class, depending on your definition and depending on whose analogies you believe, ranges anywhere from 200 million to 300 million or more people.That’s not a small number. And that number will only continue to grow.

Source: Baidu

At the same time, it’s not only the middle class consumers who are driving demand. We’re also seeing demand from the lower-tier consumers, as the rural areas in China are also undergoing major changes. Chinese entrepreneurs have benefited from the fact that the scale of the market for them is significant and, mentally and culturally, many of them are quite willing to take their business model innovations to the market, even though that business model may not be 100 percent perfect. They go to the market with a somewhat imperfect model, use the market to scale up the business and to experiment with the business model; they use the feedback from customers to learn and adapt and refine the business model. The scale of the China market is very, very important because it allows that scaling up in a very fast manner, which allows people to adapt and to improve.

JE: That makes sense. The scale and the pace are two different things. The pace of change is also staggering. How does that play into the entrepreneurial activity there?

ET: The pace is happening in two ways. One is on the demand side; the other is on the supply side. The demand side is driven by the rapid increase in income levels, so everything that’s related to consumers has been changing very rapidly; as income levels go up, people gravitate more to lifestyle needs rather than just the basic consumer needs. That doesn’t mean that the basic needs are not necessary; they’re still very necessary. But at the same time, the upper end of the needs pyramid is also developing very quickly, and it’s happening within a very compressed time frame and with a huge volume. That is what is driving the pace of change on the demand side.

On the other hand, the pace of change on the supply side is also very significant. The underlying driver for all of this is the gradual transition of China from a planned economy, something like the former Soviet Union, to a so-called market economy. Unlike the Soviet Union, which accepted the IMF recommendation when the Soviet Union collapsed and took on the shock therapy, where everything had to be privatized overnight, the Chinese moved more slowly. Deng Xiaoping actually said, “We actually don’t know how this will go, but let’s do an experimental and gradual process.” He called that process “crossing the river by feeling the stones.”

That process is still happening today. Obviously, it has its drawbacks, but at the same time, it also has a significant benefit. Every time there has been a sector that has opened up during this gradual transition, it has exposed additional imperfections in our economy. When entrepreneurs see the imperfections, and combine that with the new technologies, they see opportunities, as well. Once a sector is open, a lot of companies jump into the market and try to get a piece of the action because they see the opportunities.

From the supply side, we often see the world’s most intense competition happening in China. There are SOEs, who want to hang on to some of the market. There are the multinationals, perhaps, who want to get a piece of the action. But there are also some Chinese competitors that you don’t see in the US or in Europe. They are thriving here in China. The birth and the rise of local competitors are significant. Competition drives efficiency, and it drives innovation. With these forces at work, the pace of change is intense. It’s incredible.

But at the same time, competition also drives companies to improve. Some get it, but some don’t get it. Later on, they find out there’s an alternative way to do business that can overtake the incumbents. All of this is happening. The pace is significant because people need to survive and because people want to get ahead. We’re talking about different levels of intensity; China is more competitively intense than in many other parts of the world.

Source: Baidu

JE: As the economy opened, did it do so sector by sector? Did the government open up the entire economy, or did they choose what sectors to open first?

ET: This is a very important topic. The West, in particular the mainstream Western media, have not really clarified this point. So when they make comments on China business, they’re often comparing apples to oranges. The transition from a planned economy to a market economy has been a gradual process in China, starting about 30 years ago. And it’s still going on. In my view, it will continue to go on for decades, if not forever; 40 years ago, everything was 100 percent in the planned economy—it was closed, certainly for foreign investors. And everything was run by state enterprises.

With the economic reform that was started by Deng Xiaoping, the Chinese government has been taking industries one by one from being closed to being open. In this process, some sectors have become 100 percent open; this means that everybody, no matter whether an SOE or a private company, whether a Chinese private company or a Western multinational, can compete in that sector. There’s not much regulation. In fact, in some sectors, there’s almost no regulation except for the common rules and laws that apply, like antitrust. So, some of the sectors are already open, but other sectors are still very closed: they’re restricted to SOEs. Not even private Chinese companies can participate in these sectors, and certainly not the multinationals. We still have some of those sectors in China. Telecom operations is an example. American telecom carriers are not able to offer their services in China.

There are also sectors that are somewhere in between; they’re partially open. An example is the automotive sector. From the standpoint of manufacturing, a foreign OEM needs to have a 50/50 joint venture partner in China to manufacture vehicles. The industry dynamics are totally different between an open sector versus a closed sector, and also between an open sector and a semi-open sector. That process of gradual opening up is still happening. Once a closed sector opens up for nonstate companies’ participation, you often see a drastic change in the industry dynamics. Such changes incentivize a lot of companies to enter the market, including many entrepreneurs who want to get a piece of the action.

So the business climate in China varies a lot by industry sector, depending on the degree to which it is open and how long it has been open.

JE: That makes sense. In your book, you note that official support for entrepreneurial firms and for the environment in which they operate is very important. Can you talk about the nature of official support?

ET: One might hypothesize that because China is a Communist state, it would stifle entrepreneurship, certainly entrepreneurship at the grassroots level. That is the assumption that many people make. But that is wrong. That’s not what’s happening in China.

While the government in China is still very supportive of state-owned enterprises, and while it is trying to achieve a lot of things through the SOEs, at the same time the private sector is developing. When the government sees the fruits that the private sector is bearing, it is very, very supportive of allowing entrepreneurs to do what they’re doing.
The innovation that the entrepreneurs are doing, and the employment and the social impact that they’re creating, and the wealth that they’re creating in the process, are important to the Chinese government. So the Chinese government is not only supporting entrepreneurs but also now regards innovation and entrepreneurship as a key pillar to the future development of the Chinese economy.

JE: And what does that mean? In practice, what does the government do to encourage that pillar?

ET: In general, they are very supportive of entrepreneurs when they are experimenting with new ways of doing business or new business models. As a new business model or new innovation comes about, there may not be a full set of regulations or policies to govern the new concepts, right? The Chinese government is quite willing to work with the entrepreneurs to develop new regulations and policies that are sensible.

The government also encourages the local governments all across China to work with entrepreneurs and to invest in them. There has been a huge amount of venture capital money in different localities in China, and in many cases, the major investor was actually the local government. Local governments are starting up funds that will fund the experiments that the entrepreneurs are suggesting. That’s another way that the government is supporting entrepreneurship.

JE: How fickle is it? Could the government shift its view and affect the fortunes of these entrepreneurial firms? For example, there are an awful lot of very small factories in China; I visited a few of them. I don’t know whether it’s accurate, but I have heard that there’s a state desire that they consolidate and get to the scale that they can become more professionalized. That’s obviously going to have consequences for some of the entrepreneurs who started those businesses. How does that kind of desire on the part of the government work?

ET: In some cases, there may be government action to try to consolidate some subscale operations. And as you also know, in many sectors in China, there is a lot of capacity in production, and a lot of this capacity is not that productive. From the standpoint of the government, it’s critical that there’s a way to rationalize the capacity. In fact, we now call it supply-side economics in China. On the other hand, there are sectors that have been growing significantly without much overcapacity, and in many cases, these are driven largely, if not entirely, by the private sector; in these cases, the government is not blocking private businesses unless there is major risk of fraud. And these firms can grow to a scale that is extremely dominant.

Alibaba is one case of a very significant firm. Tencent or WeChat is another. We’re seeing this phenomenon over and over. The government is not blocking these private entities because they’ve become so significant and so big. In fact, the government is encouraging them to continue to develop innovation. So two things arehappening at once. There is overcapacity in some sectors, which causes the government to respond, but there is also continued encouragement of companies that are thriving and developing dominant positions in their spaces.

JE: That’s helpful. You just mentioned what you call the BAT, or Baidu, Alibaba, and Tencent—the three big, very successful, Internet-based companies. Can you say a little bit about them?

ET: BAT—Baidu, Alibaba, and Tencent—are the leading Internet tech companies in China. They’re all private, entrepreneurial firms; they’re not state-owned. They were formed at about the same time, towards the end of the 1990s; none of them is more than 20 years old. They’re all growing significantly. Alibaba had its IPO in the US two years ago, and it was the largest in US history. Tencent is listed on the Hong Kong Stock Exchange, and it’s now the most valuable company in all of Asia. These companies have become very dominant in China.

Source: Baidu

But their positions are somewhat different. Baidu started with the search engine business, kind of like Google, but now is very much shifting into artificial intelligence [AI], because they view AI as the future. Alibaba has built itself into a diverse business ecosystem, but the core is still in e-commerce, kind of like Amazon and eBay. It has launched various e-commerce marketplaces, including B2B (Alibaba.com), C2C (Taobao), and B2C (Tmall) models. They also have created businesses in cross-border e-commerce, mobile payment, Internet finance, smart logistics, cloud computing, and many others. Tencent started off mostly as a game company—video games and online gaming, and online games have become a significant business for them. But probably their most influential and most commonly adopted business is WeChat. It started off as an instant messaging platform, like WhatsApp, but now is basically a lifestyle and business application. People can do virtually anything on WeChat. And it’s a very, very sticky platform.

All of them are very significant in size and dominance, but each finds its own areas of focus. BAT is at the core of what a lot of people look at as the tech sector in China.

JE: Something that I had not fully appreciated is that there are, in a real sense, two Internets. There’s the Internet in China and the Internet in the rest of the world. Some people talk about the Great Firewall. How important is this firewall to the success of these companies? In some sense, they’re protected against competition from companies like Google because Google won’t comply with the politicalrequests or demands of the government. It’s a differently open Internet. Can you comment on that?

ET: That’s a very good question, and in fact, a question that’s probably on the minds of everyone I’ve talked to about this topic. In general, the assumption, at least from people from the West, is that because of the Great Firewall, people can’t be as innovative as they can in the West, because they don’t have access to all information. Further, they assume that people must not be happy, because they don’t have access to everything from the rest of the world. And the Great Firewall gives unfair advantages to Chinese tech companies at the expense of the West. These are the assumptions.

They are not entirely wrong, but they are certainly not entirely right, either. Some US companies were really blocked: I think Facebook was blocked; Twitter was blocked. Google was not blocked, but they chose not to comply with the requirements of the Chinese in terms of censorship, and so they withdrew.

There are also Western companies in this space that were not blocked at all. They were actually quite welcome to come to China to play. This includes eBay, which tried to enter China 15 years ago, and of course, Amazon, which has been in China since the early 2000s. But despite the prominence of Amazon and Jeff Bezos, and despite the fact that there is not much in the way—the kind of regulations and policies that would prohibit Amazon from operating in China—Amazon has not been able succeed in China in the e-commerce business as it has in the West. And eBay, as I mentioned, was beaten by Alibaba hands down in two years. Alibaba is not an SOE. It had no government support, but succeeded because of its capability and its competitiveness.

So, it’s a factual mistake to claim that all Western tech companies were blocked by China because of Chinese policies and regulations and the Great Firewall. That’s only partially correct. For those who have tried, many have not been able to capture the potential of the China market. Some of the reasons relate to the China context, but most of the issues are internally driven. They are limited by their ability to really understand China and to develop the right China strategy and the right China approach. This applies not only to the Western tech companies but in general to Western multinationals.

Source: Baidu

JE: I would like to segue to what works. What have multinational companies, not just tech companies, but tire companies, auto companies, appliance companies, done to succeed as they’ve moved from manufacturing in China to development in China and finally into innovation in China?

ET: If I had to pick one area where the multinationals have really failed, it is that they have tended to assume that whatever they do in the rest of the world, in particular in their home market whatever product, business model, go-tomarket model they use—would apply equally in China. That is an assumption that many multinational CEOs have made. In the back of their minds, they say, “Well, we’re a successful American company, or we’re a successful German company. We’ve been in business for 50 years, 100 years, 150 years. And we are a leader or the leader in our space in the world. I understand that China is large and growing, but I can just apply my way to China.”

And when they do market analysis, what they can forget or not fully appreciate is that the China market is developing in a faster and more competitive manner, and frankly, in a much more sophisticated manner, than their experience in the rest of the world has prepared them for. The size of China, the pace of China, the degree and intensity of competition in China, the quick development of technology in China, and the willingness to learn via trial and error all contribute to the complexity. Add to this the emergence of consumers who are, from an economic standpoint, middle class, but from a demand standpoint, probably among the most sophisticated and complicated in the world.

Instead of trying to cut and paste your business model or product from wherever it originated to China, start with a really deep understanding of what the China context is. Try to fundamentally understand what China was, is, and will be in the future. And from that, try to extrapolate to what business you should be in and how you can capture the right position in China and the full potential the China market offers to you.

I have worked with a large number of clients over the years. I think that the willingness of global CEOs to do that is actually very limited, including many of the global Fortune 500 CEOs. That is actually the fundamental issue with multinationals in China, rather than China is mysterious, China steals IP, and so on. That’s 20 percent of the issue; 80 percent is the companies themselves.

JE: Can you give an example of a company that’s done it well?

ET: There are some. The auto industry is doing in general pretty well. China is now the largest automotive market in the world. The German manufacturers and also General Motors and Ford, they’re doing very well in China. For those companies, the rapid rise of the auto market, the sheer size of the market, and the willingness of the Chinese consumer to adopt Western brands, really carries the automotive multinationals. And the market continues to grow at double-digit levels.

Source: Baidu

There are also companies that are in very intensively competitive consumer markets that are open; there’s not much regulation, and they’re really thriving. I’m talking about the sporting goods companies like Nike and Adidas. They’re really the stalwarts; they’re the leading companies. Starbucks is also doing well. Why would the Chinese like to drink coffee? Chinese people used to drink tea. Starbucks is doing extremely well in cultivating a new coffee culture in China. A latte in China is more expensive than a latte in America.

Honeywell is a prime example of an industrial company that has gotten it right in China. Honeywell is a multibusiness-unit industrial company with a variety of B2B divisions and a few B2C business units as well. China is now the second largest market in the world for Honeywell, after the US. It contributes the largest growth for Honeywell. They are a good example of a multinational that gets it in China.

JE: And that is because they really took the time to understand the dynamics of the Chinese market?

ET: That’s correct, yes.

JE: One more question, in the limited time we have. When I was in China, I spoke to people about the rich startup movement in China, the equivalent of what’s going on in Silicon Valley, or Austin, Texas, in the US, or Toronto in Canada, or London. I know Shanghai has a thriving startup market, with an active VC community. How is the startup movement in China similar to and how is it different from that in the West? If a company wants to work with startups in Shanghai or one of the other centers in China, how would it operate differently there than in Silicon Valley?

ET: In many ways, the basic tenets of entrepreneurship are not that different between Silicon Valley and the Chinese centers. People are willing to take risks. People see the pain points, and they want to turn the pain points into opportunities. People are enthusiastic about the opportunity and are willing to take risks to act on it. So the basic tenets are more or less the same.

The pace and intensity of entrepreneurship in China is unique, however. You often find, in a very short period of time, a lot of companies are trying to do the same thing or similar things: everyone sees the opportunity, and they jump into it. Very often, the market becomes quite crowded, overly crowded. And when it’s overly crowded, some of the companies will not be able to make it, as in any market. That process is happening at a pace and intensity that’s faster than in any other place in the world—perhaps even including Silicon Valley. And this is happening in a period of significant regulatory uncertainty.

So from a multinational standpoint, when you work with a startup in China, you have to take a somewhat different mindset. Of course, multinationals know that these experiments are a low-probability game, and you have to go into it with that kind of mindset. But in China, the risk and also the opportunities are amplified. They’re magnified even beyond what you see in Silicon Valley. And so, when you’re working with a startup, you have to have a mindset that recognizes the higher opportunity but also higher risk. And at the same time, you have to develop internal processes for managing these sorts of situations.

JE: Is IP a specific concern? I hear it mentioned often.

ET: IP concerns are, in my view, somewhat of an excuse for many multinational companies. You do have to be careful with IP, but at the same time, you cannot let that stifle your willingness to grasp opportunities in China. It’s a careful balance, and every company needs to treat it somewhat differently. But in general, a blanket statement that because of imperfect IP protection in China we shouldn’t be bringing our products or our technology or our innovation and experimentation to China is a flawed assumption.

Over the last 10, 15, or 20 years, entrepreneurship and innovation in China have been happening, led by Chinese entrepreneurs, under a very imperfect regulatory context. The lack of protection for IP, of course, applies equally to the Chinese companies, not only to the multinationals. Yet at the same time, a lot of companies are able to innovate and experiment and create new businesses. And many of them fail, but some of them are extremely successful. One needs to be careful about IP, but one needs to be careful, as well, not to use it as an excuse to not do innovation in China. If you don’t innovate in China, you’re missing a huge opportunity.

JE: If you were advising a CTO or a leader of innovation at a Western firm, what key advice would you give for succeeding in China?

ET: My advice applies equally to the CEO, the CTO, the CIO, or the Chief Innovation Officer: you need to really understand what’s going on in China and in the Chinese market. My advice is to throw away your Western lens for a little while and truly look at China without any constraints; try to understand both the threats—the risks of doing business, but also the competitive threats—and also the huge opportunity China offers. Once you have a full appreciation of the China potential, then devise your innovation strategy and your China R&D strategy. You need to have a lot of good, on the-ground competence in China to drive these things. The capabilities at headquarters are still critical, but headquarters needs to support, not control. You need to empower appropriately. You need to have a good balance between empowerment of the local team and support from the global function. You must build a strong team on the ground, a team that understands the market and really turns the demand side from the market into innovation ideas. This kind of innovation has to be done on the ground in China because of the need to stay close to the market, and also because the competitive environment requires speed and responsiveness.

JE: What’s the best way for leaders to get it? How much time should they spend on the ground in order to really understand China? What do you recommend to someone who says, “Okay, I get your message. I want to understand China. How do I do it?”

ET: The first hurdle is mindset. I’ve seen quite a number of leaders, presidents of business units and so on, who say, “I moved to China. I’m based in Shanghai now,” and they think that gives them the perspective. But from the outside, I can see that the way that he or she behaves is actually still very non-Chinese. I think that where you’re based physically is of secondary importance; the first level of importance is having a new mindset. You can do that from Munich, Germany, or from Cleveland, Ohio, or from Houston, Texas.

Once you have that mindset, and you’re willing to use an approach that is very locally adaptive, the key is to find the right team on the ground that you can work with and that you can appropriately empower. Then, keep a very close connection between the headquarters and the China unit. You should also have good advisors to help you, to remind you, to help you steer the way. That is the basic mechanism that I have seen work.

If you set it up right, it can be very powerful. That is what drove Honeywell to its success in China. It sounds very simple. But in my career, which includes over 25 years in China, it is interesting for me to observe how little multinationals have actually been able to create this mindset.

 

「南华早报」中国欲成为全球AI领导者,如何在2030年前击败谷歌

文 | 谢祖墀,王金千
编译 | 新智元
曾被视为技术落后的中国,如今将 AI 视为超越国际竞争对手的契机
在过去几年间,中国大力投入人工智能研究,旨在成为这一颠覆性技术领域的全球领导者。
《经济学人》数据显示,2012 到 2016 年期间,中国的 AI 企业获得的政府资助为26亿美元,美国企业则高达179亿美元,但情势迅速发生了转变。曾被视为技术落后的中国,如今将 AI 视为超越国际竞争对手的契机。
在全球 2015 年发表的顶尖 AI 学术论文中有超过40%包含有一名或多名中国作者。2010年到2014年减,中国的 AI 技术相关专利申请增长了 186%,相比较于前一个五年是一个极大的飞跃。与此同时,近两年 ImageNet Large Scale Visual Recognition Challenge 中成绩优异的团队均为中国团队,其中半数以上都植根于中国本土。
中国政府发布的推动中国人工智能企业于2030年前成为全球领导者的目标确定了基调。这一计划与中国政府最新的五年发展规划并驾齐驱,将科学技术发展确定为首要战略。
《中国制造2025》、《“互联网+”人工智能三年行动实施方案》及《新一代人工智能发展规划》等政策均致力于推动中国 AI 技术的发展。
中国多个省份及城市也纷纷出台优惠政策及丰厚的政府资助,扶植 AI 初创企业。以沈阳为例,该市投资人民币 200 亿元重点发展机器人技术开发项目。
这些优惠政策促进了小规模企业及大型互联网企业共同的技术创新。产业巨头如百度、阿里巴巴及腾讯,初创企业如旷视科技、碳云智能、出门问问及商汤科技,另有滴滴出行及小米等独角兽企业,均大力投入 AI 技术的研发。

例如,百度开发的应用神经网络的机器翻译系统,其语音识别准确率已超过人类,他们同时发布了自动驾驶解决方案的开源平台,命名为“阿波罗计划”,推动自动驾驶技术的研发。腾讯也建立了自己的 AI 实验室,汇集全球顶尖的 50 名科学家、研究人员及专家,提出“内容 AI,社交 AI 及游戏 AI”的目标。今年早些时候,腾讯开发的机器人“绝艺”击败了日本围棋高手 Ryo Ichiriki。
专注于计算机视觉技术的旷视科技在《麻省理工科技评论》评选的2017年50家“全球最聪明企业”中名列第11位,其面部识别产品 Face++已为全球一亿人刷了脸。科大讯飞的智能语音识别及自然语言处理技术为全球领先,这家市值已达到约120亿美元企业的语音识别技术甚至可分辨中文中的方言。
在学术领域的 AI 研究已经从少数顶尖中国高校拓展到全国。在活力充沛的学术环境下,中国研究人员可以同时汲取中文及英文的各类资源。大批的理工科专业毕业生投身 AI 产业。中国互联网及智能手机的用户基数向 AI 学习算法提供了巨大数量的有价值的训练数据。
相比较外国同侪而言,对于大量行为模式及日常数据的获取使得中国的 AI 研究者们能够以更高的速度及密度进行更大规模的学习和实验。
中国要成为全球AI领导者,政府、学界和产业界都需转变思维模式
中国完全有能力成为全球 AI 领导者。但要实现这一目标,政府、学术界及产业界均需要转变思维模式。

迄今为止,突破性的技术创新仍主要在西方国家中产生,科技及基础建设是推动AI 技术的关键。中国的学术界则多注重现有技术的全新应用,这也是中国政府一贯以来奖励实际研发成果做法导致的结果。AI 相关基础科学的研究耗时更长且并无保障。
中国的企业擅长迅速在市场上推出新产品和产品的新特性,因为长期以来他们对新商机的把握已得心应手。和学术界的状况类似,中国企业也停留在已有技术的应用阶段,而不是自主研发新技术。目前状况下,如推动了谷歌 AlphaGo 那种基础科学研究的激励并不存在。
如想成为全球 AI 领导者,中国必须实现基础性的转变。对于新技术而不是新应用应投入更多关注。所带来的挑战会在于,中国政府要重新考量政府资助、研究提案及研究计划所带来的影响的审议标准。
中国企业,在把握商机时一往无前,但仍缺乏微软及谷歌那样略带疯狂的创新理念。
此外也存在地缘政治方面的潜在风险,如果未来技术的互通受阻,中国迅速转型的速度也会被拖慢。

一份五角大楼的报告中称,中国企业在过去6年间向美国的 AI 初创企业投资达7亿美元,但美国国防部视之为针对美国国家安全的潜在威胁,并建议美国政府对此类投资予以禁止。
国外顶尖的研究者们也有可能因为担心自己的研究成果被“另作他用”而拒绝为中国企业工作。
为实现于2030年前成为全球 AI 领导者的目标,中国需要采取以下两个措施:第一,改革奖励机制,鼓励产业界及学术界研发新的AI 技术;第二,政府及产业界共同致力于将中国学术界发展成为全球 AI 研究领域的基石。
吴恩达曾将 AI 比喻为新电力,称其改变的不是一个领域,而是整个世界。
AI 可以,并且已经被应用于各个领域,为激活新的商业模式创造了前所未有的机会。AI 时代的资源也更加开放。企业原有的竞争力也许一夜之间就被跨领域的理念及技术融合所摧毁。
企业未来的优势在于掌握数据及具备预见性。
中国会成为全球AI领导者吗?这需要时间。但是正如在当今所有技术创新相关的领域一样,在 AI 领域无法忽视中国的力量。
注:本文图片均来自网络
关于作者:
谢祖墀博士 (Dr. Edward Tse) 是高风管理咨询公司(Gao Feng Advisory Company)的创始人兼首席执行官。中国管理咨询业的先行者。著有《China’s Disruptors》一书。

王金千(Jackie Wang)是高风咨询公司咨询顾问。

 

SCMP | Intelligent Future

By Edward Tse and Jackie Wang
UPDATED : Sunday, 27 August, 2017, 7:41pm

Edward Tse and Jackie Wang say China is more than capable of reaching its goal of global AI leadership, but it will require a change in mindset to carry out and support groundbreaking research, not just follow existing technology

In the past few years, China has dived head first into artificial intelligence (AI) research, with the goal of becoming the de facto world leader in this game-changing technology.

According to The Economist, from 2012 to 2016, Chinese AI companies received US$2.6 billion in funding while US peers received US$17.9 billion, but this is quickly changing. China, earlier seen as a technology development laggard, is now grasping AI as an opportunity to leapfrog foreign peers.

Over 40 per cent of the top AI-related academic papers published worldwide in 2015 had at least one or more Chinese researchers. Chinese AI-based patent applications grew 186 per cent between 2010 and 2014, a huge increase from the previous five-year period. Also, in the past two years, all the top-performing teams in the ImageNet Large Scale Visual Recognition Challenge, an influential AI computer vision contest, were Chinese, while half the teams were Chinese-based.

Source: Baidu

Beijing’s declared goal for Chinese companies to become global leaders in AI technology by 2030 sets the stage. This goes hand in hand with China’s latest five-year plan, which defines science and technology research as a strategic priority.

Policies such as “Made in China 2025”, the “three-year guidance for internet plus AI plan”, and the “new generation AI development plan” all aim to take the nation’s AI technology forward.

Various Chinese provinces and cities are also offering preferential policies and generous financial ¬incentives to AI start-ups. For example, the city of Shenyang has set up an investment fund of 20 billion yuan (HK$23.4 billion), focusing on robotics development.

These favourable policies have inspired innovations from both smaller firms and internet giants in China. Leading players such as Baidu, Alibaba and Tencent, rising start-ups like Megvii, iCarbonX, Mobvoi and SenseTime, and unicorns like Didi Chuxing and Xiaomi are all investing in or experimenting with AI technology.

Baidu, for example, has developed a cutting-edge neural-network-based machine translation system that has achieved a speech recognition accuracy higher than that of humans. It has also launched an open-source platform for autonomous driving solutions, namely Project Apollo, to speed up the ¬development of self-driving vehicles. Rival giant Tencent has also established its own AI lab, gathering 50 world-class scientists, researchers and experts to focus on “content AI, social AI and game AI”.

Its “FineArt” AI software defeated the high-ranked Japanese Go player Ryo Ichiriki earlier this year.

China’s tech titans discuss the future of AI
Ranked 11th in the MIT Technology Review’s list of the 50 smartest companies in 2017, Chinese start-up Megvii specialises in computer vision technology. Its facial recognition product, Face++, has recognised and distinguished over 100 million faces so far. iFlytek, a global leader in intelligent speech and natural language processing, has reached a market cap of around US$12 billion, and its speech recognition technology is able to differentiate between Chinese dialects.

Source: Baidu

AI research in academia has spread from being a focus at a few elite universities to those across China. Chinese academics have built a robust research community, which allows them to tap AI resources in both Chinese and English. Large numbers of Chinese science and engineering graduates are now flocking to the industry. With its large population of internet and smartphone users, China has an abundance of data, providing valuable training datasets to be fed into AI learning algorithms.

Access to large datasets of the behaviour patterns and daily lives of Chinese citizens allows AI researchers to conduct mass-scale studies and experiments, at a much higher speed and intensity than their foreign counterparts.

Artificial intelligence powers China’s tech future
China is more than capable of becoming a leader in AI. But doing so would require a change in mindset of the key stakeholders – the government, academia and business.
As of now, groundbreaking – research is still mostly being done in the West, where the focus is on the science and infrastructure behind AI technology. Chinese academics, on the other hand, tend to research new applications of pre-existing technology. This is mainly the result of the Chinese government’s ¬rewards for tangible results from research; researching the basic ¬science behind AI takes much more time and is far riskier.

Chinese companies are very good at launching new products and features quickly to the market, as they are well-versed in tapping newly identified opportunities. In the same vein as academia, Chinese companies primarily rely on new applications of pre-existing technologies rather than creating new ones. As things stand, there is little incentive for basic science research that powered AI breakthroughs like Google’s Alpha Go.

China needs a fundamental change to truly become a leader in AI. There needs to be a greater ¬emphasis on developing the ¬science behind the technology rather than emphasising new applications. This could be challenging, as the government would need to rethink the way it evaluates grants and research proposals, and the ¬defining metrics for evaluating the impact of ¬research projects.

Chinese firms, adventurous when it comes to identifying and “jumping” into new opportunities, are still underdeveloped in the “moon shot” mindset of Western firms like Microsoft or Google.

Google co-founder Sergey Brin on taking moon shots
There is also a risk due to geopolitical issues, where access to foreign technology and know-how could be cut off in the future, hampering China’s capability for a speedy transformation.

Source: Baidu

According to a Pentagon report, even though Chinese have invested over US$700 million in American AI start-ups in the past six years, the US Department of Defence views this as a potential threat to national security and wants Washington to ban such investment.

Leading foreign researchers could refuse to work with Chinese companies and academics if they believe their research will be used for “authoritarian” purposes.

To achieve the goal of becoming a global AI leader by 2030, China will need to take at least two essential steps. First, it should redraft its ¬incentives policies to motivate local companies and academics to conduct research on new AI technologies. Second, both the Chinese government and the business community should continue to nurture domestic academia to make it a cornerstone of the global AI ¬research community.

Andrew Ng, a leading American AI researcher, once said that AI would become the “new electricity” – transforming not just one industry, but all of them.

AI can be and, in fact, is already being utilised across different sectors, creating unparalleled opportunities to “activate new businesses”. Resources in the AI era are becoming more open. The competitive advantage of companies can be disrupted overnight by cross-pollination of knowledge and ideas across different sectors.

The edge for companies in the future will increasingly be data, and the ability to gain foresight, not only hindsight, from this new “mine”.

Will China be able to take global leadership in AI? Even if it can do so, it may take some time. However, like anything related to technological innovation these days, it would be imprudent to rule China out.

Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China, and author of China’s Disruptors.
Jackie Wang is a senior consultant of the firm.

 

China Daily | Capturing China’s Middle Class Potential

By Edward Tse | China Daily Europe | Updated: 2017-08-04

Success will depend on how much and how fast companies can adapt to new realities presented by this rapidly emerging sector

The emergence of China’s middle class is one of the greatest economic stories of the 21st century and a game changer for the global markets. This phenomenon has been written about by a wide range of sources, from investment banks such as Goldman Sachs to academic think tanks like the Center for Strategic and International Studies.

In a recent article titled “How well-off is China’s middle class?”, CSIS notes that in 2002, China’s middle class was only 4 percent of its population, and by 2012 that number had climbed to 31 percent – encompassing more than 420 million people – and is expected to reach 550 million by 2022.

The enormous purchasing power of this bloc is already creating new records on various fronts: auto purchases (last year, 23.9 million cars were sold in China, compared with 17.5 million in the United States); global travel (Chinese spent over $250 billion – 213 billion euros; £191 billion – abroad); and online purchases (650 million orders totaling 17.8 billion were shipped on Alibaba’s 2016 Singles’ Day).

China’s middle class is not only growing in purchasing power, but also enhancing its purchasing mindset. They are “trading up” for lifestyle products and services, becoming increasingly sophisticated and aspiration-driven. Purchase decisions are no longer made based on brand or social status only, but also the associated lifestyle values and the desire to express individualistic pursuits and dreams.

The emergence of China’s growing middle class is not just a China story, but increasingly a global one, and this has major implications for foreign multinational companies and Chinese companies alike.

With the increasing number of Chinese outbound tourists, multinational companies have realized that their “China strategy” is no longer solely about winning over the middle class’s wallets in China, but also about capturing the overseas spending of Chinese consumers abroad. Whether it’s offering Chinese digital payment solutions like Alipay or WeChat Pay in a Parisian boutique, or directly selling products from their global product portfolio through cross-border e-commerce, companies are facing massive shifts in the new consumer landscape.

source: Baidu

As consumption power grows in China, attempts by foreign and domestic companies to tap into the middle class’s demands seem to be mixed. Players that once believed themselves to be unassailable titans in their respective markets often find their positions increasingly tenuous. They are unable to fully acknowledge the new dynamics and strategic implications of the middle class and the overarching China context.

Many multinational companies tend to copy and paste their global strategy to China, believing models that worked in other markets can translate equally well to the China market. Companies that were successful in winning previous generations of Chinese consumers often fail to understand the differences between the older consumer generations and the new middle class, as well as the underlying drivers of demand.

China’s middle class is not only growing in purchasing power but also enhancing its purchasing midset

This lack of an understanding of the China context and an awareness of the need to adapt locally puts these companies at serious risk. On the other hand, companies such as Nike and Starbucks have found great success in China because they are able to tailor their products and their brand communications in a way that reverberates with China’s middle class. Starbucks’ brand in China has come to represent the sophistication and worldliness that China’s middle class craves, while Nike has become a symbol of China’s middle class’s desire for health and well-being. These companies are not merely selling products, but selling aspirational values and dreams.

China’s middle class is dynamic and rapidly evolving. Several drivers of middle class behavior stand out: technology, communication and geographic diversity.

Technology has become highly prevalent in China, from mobile internet to artificial intelligence. Chinese consumers are more digitally connected than any other country today, not just in information gathering but also in transactions, entertainment and communications. These elements will not only continue to shape new demand patterns, they will also enable new capabilities for suppliers to offer more personalized products and service offerings that address the demands of the Chinese middle class.

Increased communication is taking place with the benefits of the proliferation of smartphones and mobile internet. Consumers are now forming online communities and sharing information to different degrees of separation. The emergence of new social platforms has created new forms of online key opinion leaders and online celebrities, who have become new brand advocates and customer contact points between brands and consumers. Social media have become a ubiquitous mechanism for interactive and open communications with consumers.

The new generation of Chinese middle class consumers is becoming more geographically diverse. In the past, wealth and consumption were virtually limited to first-tier cities such as Beijing, Shanghai and Shenzhen, and some second-tier cities located mainly on China’s east coast. The current middle class can be found increasingly throughout China, from the traditional centers of wealth on the east coast to the lower-tier cities of China’s interior, even extending to the rural areas experiencing pseudo-gentrification due to the Chinese government’s New Rural movement.

Business-to-consumer companies that want to be successful in China need to go back to the fundamentals of their strategy and examine three key elements for connecting with the new Chinese consumers in the digital age: “Segment of One”, communities and interactivity.

source: Baidu

With technology enablers, instead of segmenting product-markets using a finite number of segments, companies can increasingly identify consumers on an individual basishence “Segment of One” – and build connectivity with the middle class consumers on an individual level.

On the other hand, China’s middle class consumers are also gravitating toward communities, often through virtual means, where they are able to express their own aspirational goals and lifestyles with other individuals that share the same desires. Jiang Xiao Bai, a young local brand of baijiu (traditional Chinese white spirit) was able to successfully win over Chinese millennials by building a community around the lifestyle that Jiang Xiao Bai depicts, which speaks directly to the dreams, desires and hopes of China’s millennials.

Online word-of-mouth has become a critical element of the Chinese middle class’s purchasing journey as they look to others’ assessments to supplement their own decisions. In addition, the new Chinese consumers are also asking for two-way communications with the companies. They want their views and input to be heard and to be taken into account by the companies so the companies can adjust their product or service offerings on a frequent and consistent basis.

From smartphones to international hospitality, the swiftly evolving Chinese middle class will bring major opportunities for domestic and foreign companies alike. The scale, speed and intensity of this phenomenon are overwhelming. However, the demand patterns of these consumers are evolving rapidly and their behavior will require companies to undertake a drastically different approach from past efforts.

To what extent companies can capture the rightful potential of China’s middle class is a function of how much and how fast companies are able to adapt to the new realities. Surely, some of them will succeed, but many of them won’t.

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

 

Why Foreign Companies’ M&As in China Have A Mixed Record?

By Edward Tse

China with its massive population and growing purchasing power has become a critical market for many foreign multinational corporations (MNCs). Over the years, different growth models have been adopted. Some have chosen to build their China presence organically while others have formed joint ventures with Chinese companies, or a hybrid approach. Some other MNCs decided to acquire local companies to accelerate their growth in China. Most of these acquisitions were with local privately-owned enterprises (POEs) because of simpler ownership structure compared to state-owned enterprises (SOEs).

Unfortunately, many of these acquisitions resulted in foreign MNCs and local companies getting a nasty shock. MNCs’ record of acquisitions of local companies is at best mixed, and in many cases, complete failure. Management of these MNCs have a go-to list of excuses for why these M&A deals failed (of course after the fact), with the target of the blame always being their acquired local companies. Often they claim these local companies are dishonest, cooking their books to make them look more profitable than they actually are, or that the eagerness to expand into the China market led to shoddy due diligence work that would have discovered these issues beforehand. Of course, in a number of cases this indeed was the truth and some of the falsifications were serious. However, these reasons do not fully explain all the cases that didn’t work out. (By the way, not all of the “local companies” accused of these improper behaviors were “Chinese”. Some of these companies were actually started and owned by foreign entrepreneurs. However, in the remainder of this article, let’s just call these companies “local Chinese companies” for sake of simplicity.)

Source: Baidu

In taking on acquisitions as a growth strategy for China, foreign MNCs normally assume integration of the local companies’ operations into the MNCs’ own operations to be an imperative. In fact, these MNCs’ management believe that integration is the best way for them to “add value” to the local operations because of their more superior management know-how and that synergies can be created via better economies of scope and scale – indeed a very common practice for MNCs in their M&As in many parts of the world. So why not doing the same in China? In order to ensure a smooth transition, the MNCs would typically offer financial incentives to senior managers of the local companies – often the founder himself or herself – to stay, at least for a certain period of time, until “integration is complete.”

From the local Chinese entrepreneurs’ standpoint, many of these acquisitions also didn’t realize their original expectations, but for different reasons. They were led to believe that under the wing of the MNCs who claim to be far more sophisticated and professional than the local enterprises, their own companies would have a better chance to continue to sustain, their brand would continue to grow, and that their companies would become a “long-lasting company”, or ji ye chang qing in Chinese. As the “integration” proceeds, many of these entrepreneurs begin to discover problems, the most common and biggest one being that foreign companies don’t really understand how to operate in China (lao wai bu liao jie) and how the original senior management are either forced out or leave of their volition after seeing that they are no longer welcomed or no longer “belong” there.

Like every situation in life, there are pearls of truth found in different perspectives of the same story. Both sides have their valid arguments, but the one-sided views often miss the overall picture. Based on what I saw through my consulting work in China, I would however suggest that the biggest contributor of these issues is the differences in behavioral approaches and norms between the parties involved. I believe there are four key reasons: 1. mismatch of expectations, 2. holistic philosophy vs. bits and pieces philosophy, 3. differences in rhythm and speed, and 4. decision making systems. (See Exhibit 1)
Exhibit 1:

MNCs vs. Local Chinese Companies

Mismatch of Expectations (top line vs. bottom line)
Foreign MNCs typically care for both top and bottom line growth. This is business 101. Most of these companies have been in operations for decades, if not for over a century. It’s only natural that they look for both top line and bottom line performance. In fact, that’s why many of them chose to enter the China market in the first place. After all, China is a high-growth market compared to more mature markets. The fact that many of the foreign companies, especially the larger ones, are publicly-listed makes the case of profitable growth even more compelling because the management of these companies need to be responsible to the capital markets. This can be very different for Chinese companies, at least for some of them, especially when China’s economy was growing at high speeds and opportunities seemed to have presented themselves left and right. For many Chinese entrepreneurs, their first priority was to grow, or to “land grab”; so top line growth was often more important than bottom line growth. Of course, this strategy wouldn’t work forever. But for a certain period of time, it was the go-to strategy for many Chinese entrepreneurs. Clearly, this divergence in points of view often led to difference in strategy, level, pace of investment, and if not properly handled, mistrust. Of course, the laws of gravity also apply in China. And companies, regardless of their ownership, need to be profitable. However, for some of the companies during certain periods of time, their priorities could be different.

Holistic Philosophy vs. Bits and Pieces Philosophy
Many foreign MNCs have built excellence by function across geographies over long periods of time. These global functional capabilities became the backbone of these companies’ well-being. And, they naturally desire to apply these capabilities across all geographies in the world. China wouldn’t be an exception. To this end, many MNC executives become specialists in their own right. They are very good at what they specialize in, but as a result, they are often less aware of areas beyond (or the “broader context”) and the often need for making necessary trade-offs. On the other hand, given that the Chinese owner/CEO often builds their company in a rather short period of time in an environment that is often ambiguous, imperfect and fast-changing, and filled with a large range of stakeholders, they frequently need to make tradeoffs across many dimensions and their solutions are commonly an optimization of numerous factors facing various constraints. So, when someone with a single-dimensional view looking for consistent, global standards and someone who has always been juggling different considerations across multiple dimensions in an evolving, imperfect environment have to work together, they would inevitably run into conflicts. These conflicts, if not properly managed, could lead to frustrations and mis-trust.

In their eagerness to “help”, many MNCs would assign some of their own people to fill in key management positions to “assist” the Chinese entrepreneurs. These people would typically be Mandarin speakers, either ethnic Chinese or non-Chinese who’ve been in China for some time. The MNCs often assume that “since these people were trained in my system and they know China, they must be able to help.” Unfortunately, that turned out to be not always the case. From the Chinese entrepreneurs’ standpoint, these people while technically sound, often lack the ability to see beyond their narrow specialty and to understand broader implications of a holistic perspective of the business. So, these attempts often ended up with mixed records at best.

Differences in Rhythm and Speed
Compared to foreign MNCs, Chinese POEs typically are far speedier, more agile and more adaptive. Foreign MNCs are much more focused on checks and balances, and deliberations which makes them slower. Many Chinese POEs are quite willing to quickly build a good enough product or business model, throw that into the market, and let the market tell them what they need to improve and adapt. This is of course risky, and unacceptable, if the product hinges on quality, safety and security. However, in cases of new business models, the willingness of the market to accept imperfect business models can actually be pretty high, especially in the first trials. But consumers do appreciate companies whose business models or products cater to their needs and utilize fast feedback cycles to improve their offerings to the consumers’ taste. In these situations, Chinese POEs tend to have an upper hand over more established foreign MNCs. So when these two different speeds and rhythms come in contact with each other, incompatibility naturally occurs.

Decision Making Process
Many Chinese POEs came into existence in less than couple of decades and many of them were able to achieve lots of growth piggybacking off China’s fast pace of economic growth. Many are still run by the owner who typically grew the company from nothing to its current size. These organizations are typically concentrated to the one person or a small group of senior executives with the founder/owner still calling the shots. In this structure, the organization is very top down and often hierarchical. While there are people who by title are leading various functions such as marketing, logistics, sales, or R&D, more often than not, they are merely carrying out orders from the most senior person(s). In a way, the founder/chairman/CEO in reality is the synthesizer of information and the decision-maker for all decisions affecting the company, no matter how large or small. Decisions often come from the top of the pyramid with the rest of the management simply there to execute. On the other hand, foreign MNCs, especially large ones, are organized with clearly defined roles and responsibilities throughout the chain of command. In a local POE, a senior VP of Marketing’s role is likely to execute the vision and strategy developed by the most senior person in the company. In an MNC, an individual with the same title will be actually responsible for the marketing strategy.

Source: Baidu

So, what should foreign companies do as they consider M&As in China? Clearly, one needs to do the basic homework well. Rigorous due diligence is a must. But for all those cases where the conducted due diligence did not identify the problems that were later discovered, that by itself is its own problem. For sure, these companies would have hired management consulting firms or auditing companies (and I am sure these are world-renowned brands) to do the due diligence and yet they couldn’t uncover some of the most basic yet critical problems. The reason behind this issue is that it really requires someone who understands the nitty gritty of businesses in China to do a proper and thorough job. This sort of capabilities is still rare in the professional firms in China especially those who are not headquartered in China.

Foreign MNCs shouldn’t assume that “integration” is the only way to capture the value of their acquisitions in China. At least, not “integration as fast as possible.” While in some cases integration may make sense, in many other cases, it may not. It depends on the contextual factors I mentioned above and the severity of the gaps in behavior and perspectives between the two sides. Due diligence should not only cover the “data” per se but also the culture, behavior and beliefs. This won’t be easy especially for many foreign MNCs. They tend to assign their M&A team from global HQ to carry out these tasks. While these people are usually technically sound and experienced with many deals under their belt, they often lack the experience and sensitivity needed to understand the softer, often unspoken, elements especially in a culture and context that are very different and can be overwhelming. Almost certainly, they don’t fully understand nor appreciate the China context. Over-eagerness in creating value often backfires as well as simple notions such as shared services, while a proven approach for realizing value in M&A deals in many parts of the world, may or may not achieve the same level of impact in China due to China’s complicity and diversity in labor rates, local regulations and requirements, as well as availability of competent human capital in key functions.

Fundamentally, MNCs need to fully evaluate the tradeoff between immediate integration or keeping companies separated or a gradual migration from separation to integration, and the speed and intensity associated with the process. Immediate and full-scale integration, which is often MNCs’ incoming assumption, may or may not actually yield the best result. Sometimes overzealous attempts at integration could result in loss opportunities for the MNCs to learn from the Chinese companies on how better to run businesses in China. For example, some Chinese companies are good at keeping their costs at manageable levels, while foreign MNCs tend to somewhat “gold-plate” things. For some local companies, their relationship with their distributors is often more win-win and intimate, while their foreign MNC counterparts can be more transactional.

Making the decision on integration or not correctly, and the manner of how, requires senior executives who can see the forest beyond the trees within the China context and increasingly, the role of China in the rest of the world, as well as being able to align the China realities with the expectation of the global headquarter. This capability does not always exist in MNCs but when it does, it’s a rare asset to have and to cherish.

About the authors
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

China Daily | Are We Ready for the New Revolution?

By Edward Tse | China Daily Europe | 2017-06-30

Technological advances are about to bring massive changes that some nations will cope with better than others

A while ago, a host of voices – including some leading management consulting firms – predicted a significant paradigm shift in manufacturing. They claimed that manufacturers, fed up with rising labor costs in China, would pack their bags and move back to America.

This “reshoring” movement, they said, would cripple China’s competitiveness in manufacturing. In a small way, these people were correct. Labor-intensive, low value-added manufacturing such as garment and toy manufacturing did indeed move out of China to developing nations such as Vietnam, Cambodia and Bangladesh. However, China was able to retain the type of industry the United States hungers for – high value-added manufacturing. The massive “reshoring” wave never materialized, or at least it hasn’t yet.

Whereas the original predictions were based on the rudimentary argument that focused on labor costs, it ignored the much more important, bigger picture. High value-added manufacturing is rooted in China because of an intricate ecosystem that includes industrial clusters, infrastructure and logistics. This ecosystem has fed the world’s increasing appetite for more “connected” and sophisticated devices, which not only favors technologically involved manufacturing staying in China, but also promises its growth.

According to market research company IBIS World, for the five years up to 2016, manufacturing of smartphones in China grew on an annual basis of 40.6 percent and was valued at $126 billion (110 billion euros; £97 billion) in 2016. Tesla, the world’s leader in electric vehicles, is planning to open a plant in China. These are just a few examples of a broader trend of China becoming an epicenter for technologically sophisticated projects.

To understand this manufacturing macro trend, we must examine it within the context of China. There are two forces concurrently at work. From the top down, the Chinese government is driving national policies such as Made in China 2025 with the goal of cementing the country’s position as the global hub of technologically sophisticated, high value-added manufacturing. From the bottom up, China’s thriving innovation and entrepreneurship are major engines fueling exponential growth for the country. China’s entrepreneurs are rapidly adopting more state of-the-art technology, from industrial robotics to 3-D printing, in a drive to be better than others in manufacturing. Even though not all of these entrepreneurs will be successful, some will and, given China’s sheer scale, a small percentage of a very large number is still a large number.

source: Baidu
This dual drive sets the foundation for China’s probable up-and-coming leadership position in the Fourth Industrial Revolution. China is already the world’s leading market for robotics. Local manufacturers are investing heavily in automation technologies, and China’s shift toward a consumption-based economy has sparked a massive shift toward smart and adaptive logistics systems and supply chains. Furthermore, China has become a global center in the development of artificial intelligence, big data and other next-generation technologies.

However, the disruption that will be created by the Fourth Industrial Revolution, while bringing opportunities, will also bring about major challenges. The factory of the Fourth Industrial Revolution will likely be nearly or completely automated. Countries where a sophisticated manufacturing sector now employs large numbers of the working class could find themselves with social issues such as widening gaps in income and standard of living between a small creative, educated class that benefits from these innovations and the population now made redundant by the technology.

Innovations will also create new job opportunities, in the way online marketplaces like China’s Taobao have created new opportunities for a large number of small to medium-sized enterprises across the country. The big question is always whether the jobs created are sufficient to offset the loss of those in other areas. Resolving this and other potential issues resulting from the Fourth Industrial Revolution will require governments to take innovative approaches to the welfare of their citizens.

source: Baidu
The Fourth Industrial Revolution offers both fantastic opportunities and serious quandaries. It has the potential to take global commerce to new heights, but will also put a magnifying glass on the structural weaknesses of 20th century nations in a 21st century world. Is the world ready for the Fourth Industrial Revolution? While change can be feared or abhorred, it is nonetheless unstoppable. We witnessed the era of globalization throwing the final punch at America’s hollowed-out manufacturing sector, yet we also saw Germany’s manufacturing sector maintain its position as a global powerhouse. The Fourth Industrial Revolution will create anew set of winners and losers. Some current job categories will disappear and new ones will appear as the pattern of demand shifts. New industries and sectors will arise with these pattern shifts, creating new opportunities and new livelihoods. For China, the Fourth Industrial Revolution is anew chapter of opportunities and challenges.
Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co, a global strategy and management consulting firm with roots in China. He is also the author of China’s Disruptors.

 

SCMP | Eyes on the Future

29 June, 2017
By Edward Tse

Edward Tse says though Hong Kong did not adapt well to the global rise of China and the game-changing tech revolution, there are now opportunities for it catch up – through the Greater Bay Area development and the belt and road plan

The 20th anniversary of Hong Kong’s return to Chinese rule is almost upon us and now is the time to reflect on our lessons learned and examine what the future may hold.

At the core of the handover is the “one country, two systems” principle. People who support this idea say it is a masterful invention by Deng Xiaoping ( 邓小平 ) and an ingenious way to resolve Hong Kong’s handover issues.

I believe China had no other choice. As a British colony, Hong Kong’s political and social systems mimicked those of Britain. Suddenly stripping away the social and political institutions Hong Kong people grew up with and forcing them to assimilate into a very different mainland system would have created major chaos. In trying to find a fair solution to the integration process, Deng took the risks and proceeded with “crossing the river by feeling the stones”.

The ambiguity surrounding the “one country, two systems” concept has resulted in different interpretations, leading to major disagreements among the different stakeholders – and not just in politics. These disagreements have become the root cause of the stale mate on various issues that have plagued Hong Kong society.

Hong Kong grew rapidly in the 1970s and 1980s because it was the only window into a closed-off China for the rest of the world. Hongkongers’ entrepreneurial spirit propelled the territory forward in a big way. And, when China began to open up, Hongkongers were the first batch investing in the mainland.

However, since that time, Hongkongers have not changed their operating paradigm much. Hong Kong’s investment in mainland China was mostly geared towards processing materials and re-export. While that worked in the early days, it became unsustainable as China’s labour costs rose. Much of the capital investments Hong Kong entrepreneurs made in China were marginalised and some companies were forced to shut down. Others have tried to build brands in China; while some did a fairly good job, many just didn’t have a clue about what it takes to be competitive in the mainland market.

How Hong Kong’s Basic Law can serve the interests of all China
Since the handover, Hong Kong people have become more inward-looking, with many focusing on the past and present. There is, in general, a lack of outward-looking perspectives and foresight.

As Hong Kong struggled in a state of entropy, two transformational global forces gained momentum: China emerged as a major economic and geopolitical power, and technology became ubiquitous. These forces are fundamentally changing the world, especially in Asia, and they are creating major wealth for those that are able to tap into them. Unfortunately, Hong Kong’s role in either of these two forces has not been commensurate with its potential.

In the first dotcom era, Hong Kong actually had a chance. It was then the Asian hub for the new dotcoms, venture capital and angel capital. Mainland China was not as open yet and the likes of Chinadotcom and PCCW were enjoying the nectar of success.

After the dotcom bubble burst, however, the Hong Kong dotcom community vanished virtually overnight and, for the next decade and more, no one rekindled the spirit of innovation and entrepreneurship, especially in the tech sector.

When will Hong Kong’s next Octopus moment occur?
Meanwhile, mainland entrepreneurs ploughed on. They fanned the flames of innovation and entrepreneurship that spread throughout the country, feeding and growing the venture and angel capital industry that was necessary to fuel innovation.

Today, the Chinese mainland has emerged as a global centre for innovation and entrepreneurship leveraging on the ubiquity of technology, such as wireless internet and the internet of things. China now has the world’s second-largest number of unicorns (start-up companies with a valuation of over US$1 billion), after the United States, and the number is growing fast.

Be afraid: China is on the path to global technology dominance
Hong Kong has been left in the dust. Hong Kong’s gross domestic product represented some 18 percent of China’s GDP at the time of the handover; today, it is about 3 per cent. The divergence between the paths taken is startlingly clear.

Another huge problem in Hong Kong is the lack of upward mobility of its young people. Some people attribute this to “one country, two systems” – incorrectly in my mind – believing that the cause is too much intervention from the mainland government. The pro-democracy camp asserts that if Hong Kong had universal suffrage, life in the city would be much better, including for its youth. Hong Kong’s attention has turned inward and it is myopic.

So what can we expect for the future? Better yet, what can we do to create a better future?

Hong Kong must become more outwardlooking. Not only should we let go of our myopic views on the past and immediate issues, but more importantly, we must look towards the future and anticipate the major trends and key drivers that will bring huge changes for the region and the rest of the world.

There is much that Hongkongers can do in this respect. The Greater Bay Area is probably the most important initiative. It will unite various cities in the Pearl River Delta, including Hong Kong and Macau, into a region with an economic output of approximately US$1.4 trillion. If done right, the unique capabilities of these cities – ranging from Shenzhen’s role as a global hub of innovation, Guangzhou’s role as a centre of cutting-edge high-value-added manufacturing, to Hong Kong’s role as a global centre of finance – would help power this new hub and create greater opportunities for people in the region, including Hongkongers. The spirit of “co-opetition”– cooperation amid competition – will guide the partnership.

The Belt and Road Initiative also holds huge promise for Hong Kong. China’s ambitious global trade and infrastructure project covering a large number of the world’s nations will provide Hong Kong with a chance to buttress its identity as a hub of commerce, trade, and logistics, while also creating opportunities for it to reinvent itself.

Hong Kong trade promoter to form consortiums with firms looking for ‘belt and road’ ride
Beijing will continue to view Hong Kong strategically, as part of its overall chessboard. It will see the city playing an important role in both the mainland’s domestic reform and the country’s pursuit of leadership in the evolving global order.

The value of Hong Kong to China goes beyond statistics
Hong Kong has another 30 years to go in the current framework of “one country, two systems”. We are now close to the midpoint. “One country, two systems” is the only framework that works for Hong Kong under unique historical and geopolitical circumstances. We cannot and should not throw it away. We should find ways to make it work even better.

To this end, we will need the leadership in both Hong Kong and on the mainland to direct matters in the right direction, with the right speed and intensity. Hong Kong people should also better understand the priorities and align themselves accordingly. Sometimes, taking a step back now actually means gaining a few steps forward later. Making progress in the midst of imperfections is often better than asking for precision, clarity and certainty in every step.

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

 

SCMP | Despite the Doubters, China Can Revive ‘Silk Road Spirit’

PUBLISHED : Tuesday, 23 May, 2017
By Edward Tse

Edward Tse says Beijing’s vision for its ambitious Belt and Road Initiative involves more than just building good infrastructure and, despite the doubters, China has the means and commitment to spur inclusive growth for all

With the rise of protectionism in the West, President Xi Jinping ( 习近平 ) has vowed his support for globalisation through China’s “Belt and Road Initiative”. The recently held forum in Beijing symbolised China’s ambitious claim to global leadership, and the belt and road – which Xi calls a “project of the century” – serves as a critical pillar of his diplomacy.

The belt and road is China’s game-changing strategy for the world, and it will fundamentally alter the dynamics of world trade and geopolitics. None of it will be easy, however.

Some nations remain sceptical about the practicality and coherence of the large number of belt and road projects, while a number of critics have labelled the initiative a form of neo-colonialism. Some countries even refused to endorse this grand plan due to concerns about China’s commitment to social and environmental sustainability and transparency.

The belt and road is China’s game-changing strategy for the world, and it will fundamentally alter the dynamics of world trade and geopolitics. None of it will be easy, however.

Some nations remain sceptical about the practicality and coherence of the large number of belt and road projects, while a number of critics have labelled the initiative a form of neo-colonialism. Some countries even refused to endorse this grand plan due to concerns about China’s commitment to social and environmental sustainability and transparency.

But what makes the belt and road potentially transformative is not merely the investment and technical infrastructure in the works, but, more importantly, the new values and philosophy that form the belt and road’s ideological framework. “The Silk Road spirit”, as Xi calls it, embodies the spirit of “peace and cooperation, openness and inclusiveness, mutual learning and mutual benefit”.

As one of the largest beneficiaries of globalisation in the past several decades, China is trying to leverage its understanding of the needs of developing nations to transform their economy and improve the well-being of their people. Xi seems to be trying to build the belt and road based on soft power rather than brute force. Clearly, this is very challenging and perhaps risky. Nonetheless, it provides a vision of a new global order.

Historically, aid from traditional Western powers typically dangled economic development as bait to enforce Western political ideologies on the recipient nations. By contrast, the vision for the belt and road, according to the Chinese, is to form a “big family of harmonious coexistence” by turning the legends of the ancient Silk Road into a modern-day story of inclusive growth and global cooperation. This sounds a bit like a fairy tale, but the Chinese rationale is that the building of bridges and railroads in Central Asia and ports in Africa and South Asia will help these nations participate in the global economy to the best of their ability.

This is different than forcing any country to, in exchange for aid, conform to political behaviour desired by the donor country.

In addition to physical infrastructure, the belt and road also includes building “virtual Silk Roads” in the form of cross-border digital highways. China already leads the world in many ways in e-commerce and other forms of digital business innovations. This aspect of the initiative offers major potential to all involved.

The belt and road presents significant opportunities for companies with headquarters in China, and also those in the rest of the world. Yet, most companies outside China have not yet fully figured out how to get involved or maximise the full potential of the belt and road. This is understandable, given the initiative’s complexity and lack of adequate clarity.

At this stage, many people put the emphasis on the tangible belt and road elements, such as the size and scope of the infrastructure, the total monetary investment, the large number of nations involved, and declare that this is an unrealistic mission.

Many pundits claim that the sheer size and China’s inexperience in managing these types of projects will lead to their eventual failure. There are definitely many challenges ahead, but one would expect that China has been learning from past experiences – good and bad – and has now a better sense of how to best proceed.

While many Chinese state-owned enterprises will be the vanguard of the belt and road, the private sector will also play a major role. Compared to state-owned enterprises, China’s private companies are in general more agile, market-driven and entrepreneurial. The belt and road could provide the very best private companies a platform to evolve and grow to become global companies.

So, what can we expect from the initiative? Over the next decade, we will see a major step-up in global connectivity, and China’s geopolitical influence is likely to continue to grow. China will continue its migration from the fringes of the world stage to the centre.

If done right, the belt and road could provide the global economy with a necessary jolt for growth, lifting more people out of poverty and expanding the consumer class. Trade between European and Asian nations, for instance, could see an increase as belt and road infrastructure makes it possible for goods to be shipped more efficiently.

Given the initiative’s scale and complexity, one would expect some hiccups along the way, perhaps some pretty major ones. And, it is not a given that China can have all the tools and resources at hand to address every single issue correctly, at least not the first time. Preconditions such as the continuous well-being of China’s domestic economy are also necessary.

China will learn and adapt along the way, but the longer-term objectives and direction should be pretty clear. The belt and road won’t be easy and its impact won’t happen overnight, but it will be difficult to dismiss China’s wherewithal to make it a success.

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

 

Nikkei Asian Review | China’s Tech Companies Seek Profits in the Medical Industry

By Dr. Edward Tse and Jason Zhang
May 4, 2017

Aging societies are driving growth in innovation and new business models

China’s health care industry is infected. Not with some lingering malaise, but with a passion for high technology that promises a cure for the problems of a rapidly graying population.

The widespread application of advanced technology, such as artificial intelligence, big data and the internet of things (IoT), is transforming how the country views health care.

With the largest online population in the world, a vibrant startup and venture capital ecosystem, and growing demand for healthy lifestyles, China has seen explosive growth in both technology and innovative business models. The numerous problems with health care — lack of qualified doctors, disparity in distribution, and inefficient hospital operations, to name a few — are actually seen as sources of opportunity by a new generation of players.

But given the dynamism of China’s market and abundance of disruptive technology, incremental strategy is no longer sufficient for companies to succeed in this environment. Traditional competitors are being tested, and new types of players are constantly emerging.

The winners will be companies that develop game-changing strategies by challenging business-as-usual assumptions. These companies leverage technologies to develop radically new solutions that address major problems. In this way, they create paradigm shifts by exploring new markets and finding new ways to compete.

GAME CHANGERS

A number of Chinese startups have established themselves in the connected health arena, which fuses IoT technologies with the traditional health care sector. For example, WeDoctor, an online portal, focuses on hospital appointment services. Ali Health, a subsidiary of Alibaba Group Holding, is now a leading pharmaceutical e-commerce platform. And Chunyu Doctor provides a telemedicine platform for remote doctor consultation.

These companies have adopted an incremental strategy to alleviate problems in the health care industry.

The game-changers, however, are those like Shenzhen-based iCarbonX. The company has teamed up with seven other technology companies around the world to gather different types of health data; everything from metabolites and bacteria to sleep hours, fatigue and pain levels. It then uses AI to sift through the data. Based on the analysis, a digital avatar will tell the user what to eat, when to sleep and what activities they should be doing. Established in 2015, the company has raised $600 million in funding, as investors zero in on precision medicine, precision nutrition and other extended preventive measures.

Zhejiang POCTech Medical Corp. is also an interesting company to watch. It has developed a wearable device that enables continuous glucose monitoring. Using biosensors that gather information through 3,000 sensor data points updated every three minutes, the device allows doctors to diagnose and treat diabetes patients more accurately. China is the world’s largest market for diabetes-related medical products.

Source: Zhejiang POCTech Medical Corp. website

TAKING ON THE WORLD

After decades of its one-child policy, during which life expectancy rose and fertility rates fell, the country will soon find itself with more seniors than it can adequately care for. But China’s rapid embrace of a technological revolution in health care offers a rich breeding ground for a range of technology innovations that could have global significance.

Being aware of the many opportunities ahead, Chinese entrepreneurs will remain overwhelmingly positive. As Wang Jun, the founder and CEO of iCarbonX, said: “We represent a new model of an international Chinese organization. China has a legitimate shot to be a lead player on the international stage. Our technology can change the world.”

Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting firm, and the author of “China’s Disruptors.”
Jason Zhang is a Senior Associate of the firm.

 

China Daily | Pillars of Business Diplomacy

Monday, April 17, 2017
By Chen Yingqun in Beijing

Led by Jack Ma, elite entrepreneur club is building trust overseas to help Chinese firms extend global reach

Not only are they China’s most famous business leaders, they are also important envoys of public diplomacy eager to spread the word globally about the country and its thriving entrepreneurship.

Since 2011, the China Entrepreneur Club has made 12 overseas visits to countries including the United States, the United Kingdom, Germany and Italy. At each destination, members engage with the highest echelons of government and leading companies and entrepreneurs to discuss a wide range of issues.

During Canadian Prime Minister Justin Trudeau’s visit to China last August, his first public event was a meeting with the club. And in late 2015, French President Francois Hollande attended a breakfast meeting with them in Beijing during a state visit.

Zhao Qizheng, former minister of China’s State Council Information Office, has said he considers the club’s members “the business pillars of China’s public diplomacy”.

Established in 2006, the China Entrepreneur Club comprises 60 members made up of economists, scholars and founders of Chinese private companies. Their combined annual gross income is more than 3 trillion yuan (US$435 billion).

Jack Ma, founder of e-commerce giant Alibaba, succeeded Liu Chuanzhi, founder of the world’s largest PC maker Lenovo, to become the club’s chairman last May.

International visits are important annual events for Chinese companies on the lookout for overseas knowledge and opportunities, said Maggie Cheng, secretary-general of the club.

Last year, nonfinancial direct investment overseas by Chinese investors totaled US$170.1 billion, up 44.1 percent from the previous year, according to the Ministry of Commerce.

Cheng said the club works as a key platform to serve these entrepreneurs and to promote entrepreneurship in China. Its members all started their own businesses after the country’s reform and opening-up in the 1980s, and their companies rank in the top three in their specific industries.

A set of standards is in place for members joining the club: Their companies’ revenues must be worth tens or hundreds of billions of yuan; they must be leaders in their industries; and they must have a special approach to management, with involvement in corporate social responsibility programs, philanthropy and charity activities.

Even 10 years or so ago, when the engagement of Chinese companies around the world was relatively limited, many of those represented by the club had set out to test the waters overseas.

“We saw that in the process of globalization, Chinese companies were encountering very similar issues, such as complying with local regulations, market access and cultural integration,” Cheng said.

“We realized that the root of these problems was that there was this huge information gap between China and the world.”

Overcoming obstacles
Decades after China’s reform and opening-up, she added, the West recognizes China’s rapid economic growth but fails to understand the business dealings behind it all.

“So when it comes to entities in China collaborating with entities overseas, there are still many obstacles.”

The club’s international visits are a tool to communicate with the Western business world and to enhance understanding, Cheng said.

Ma Weihua, president of the China Entrepreneur Club and former head of China Merchants Bank, said he was highly impressed when he took part in the club’s visit to the UK in 2012.

During this trip, Chinese entrepreneurs and UK researchers and businesspeople at the Needham Research Institute in London discussed whether China’s institutional and economic systems were up to the challenge of promoting modern technological development.

“The British people raised many questions with us about China’s technological innovation, and we explained many things by drawing on personal experience,” Ma said.

The Chinese delegation gained a new perspective from the discussions, he said. “The way the idea sparks collided with one another was really impressive.”

Ma said that in visits arranged by the club, the Chinese businesspeople are always very astute when discussing issues such as visas and the business environment, and also with their explanations of how business in China operates.

When the club made its first visit to the US, many had no idea who these Chinese entrepreneurs were, let alone had much inclination to meet them.

“We really wanted to make an impact and bring about change, not just indulge in courtesy meetings. We wanted to broach important issues, and we needed to explain who we were, what the club was, what we were doing and why we were doing it.”

Cheng said that many businesspeople in the West were eager to learn more about Chinese business.

“The tales of Chinese entrepreneurs building their business empires from scratch are well-known in China, but few outside the country know these stories.”

She said a level of distrust was very likely when entrepreneurs were seeking potential overseas partners to work with.

“People might also have thought China was so far away and a little mysterious, and that one of the only things it could offer was low-end manufacturing. What we were able to do was set out the facts with these people face-to-face and sound out their views.”

The secret to success for businesspeople in China and elsewhere is identical, Cheng said.

“To be trusted you need to produce better products and offer better services, do well in competitive markets, respect competitors and customers, and take heed of the interests of all parties concerned.”

Ma, the club’s president, said that many businesspeople around the world are willing to participate in the club’s outreach activities, finding them invaluable.

“As individuals, most of us are unable to meet with that many people from the government and business worlds overseas, but as a group we can exercise influence,” he said.

“In these visits we can have candid discussions with people, some of whom may eventually become our business partners.”

Strong skill sets
Ma said all members of the club have strong entrepreneurial skills, can adapt to a changing business environment, have the desire to be innovative, are honest and trustworthy, have a sense of responsibility and are keen to repay society for their success.

Going global is a common challenge for Chinese entrepreneurs because the country’s economy is now so interconnected with the rest of the world, he said. Every company big or small, whether it makes products or provides services, needs global connections directly or indirectly.

“I’m very proud to be in a club in which I can learn so much by communicating with others,” Ma said. “When you are alone with no role model it is difficult to succeed. We are entrepreneurs, but we are also doing public diplomacy. I think Chinese
businesspeople could be good ambassadors to explain China to the world.”

The club also provides good opportunities for Chinese entrepreneurs to let the world know their ambitions, capabilities and the latest innovations they are working on.
Steve Tappin, CEO and founder of Xinfu, a consultancy that advises CEOs, said the China Entrepreneur Club plays a vital role as a bridge between China and the world.

The English businessman said that when he first met many of the top Chinese entrepreneurs, cultural and linguistic differences made it challenging to connect.
He recalled introducing Stephen Murphy, the former Virgin Group CEO, to Guo Guangchang, founder and chairman of Chinese conglomerate Fosun Group.

“It was not easy for them to deal with one another even though they were both outstanding businessmen.”

Nowadays it is very different, Tappin said.

“Guo has transformed himself by working hard on his English, his inner world via tai chi, and his understanding of global business dynamics. Western leaders need to make similar efforts to be successful in China.”

Cheng said that in the future, one key target for the club will be to consistently promote the globalization of Chinese entrepreneurs, “because we all believe that commercial competition cannot always be regional”.

“Strong companies need to face global competition,” she said.

The club is planning another event in the US later this year, she said.

Edward Tse, founder and CEO of Gao Feng Advisory Company, said that Western political and business circles are generally skeptical about dealings with China.

Moreover, many in the West think that China’s economy or companies are mainly State-owned and generally underestimate their value.

Tse said it would be of great benefit for more groups of Chinese entrepreneurs to communicate with influential businesspeople overseas. This would help both sides understand each other, he added.

“Entrepreneurs could represent China and explain its situation to the world. That would help change views about its companies and people, something that Chinese entrepreneurs need to keep doing.”

 

Caixin | Starbucks Sips Up to Beijing’s Elder Care Agenda

Apr 12, 2017 BUSINESS & TECH
By Yang Ge

(Beijing) – The elderly in China are getting a pick-me-up from the world’s biggest coffee chain, with the announcement that Starbucks will extend health insurance to parents of its employees for critical illness.

Analysts said the move should bring positive publicity to Starbucks Coffee Co., in a country where the elderly traditionally command a high degree of respect. The move also comes as Beijing and local officials plead with younger Chinese to take better care of their parents, many of whom survive on modest pensions and live in distant villages from the big cities where their children work.

Starbucks said its new program will provide insurance for up to 10,000 of its employees’ parents if they become critically ill.

It said the new coverage is designed to supplement China’s national health plan, and is an outgrowth of a broader program the company launched in 2010 to provide financial assistance to its workers. An analysis of data from that program showed that 70% of employees were concerned about the health of their parents as they aged.

China is in the midst of overhauling its health system to provide basic care to all of the nation’s more than 1.3 billion people. Many of those have fallen through the cracks in the country’s transformation from a planned economy, where health care was provided by state-run employers, to a market-based system where such coverage isn’t always guaranteed.

“The active participation by the private sector is critical to China’s efforts to further enhance the social security system to support our aging population,” said Jiang Chongguang, deputy secretary-general of the Insurance Society of China. “Starbucks has responded positively to the government’s call to elevate the commercial health insurance industry, our social security network and to promote a ‘healthy China.’”

Starbucks has been one of the stronger advocates of such corporate social responsibility (CSR) in China, alongside other big multinationals like The Coca-Cola Co. and Apple Inc., said Edward Tse a corporate strategist and CEO of Gao Feng Advisory Co. Programs like the latest one from Starbucks are particularly important in China, where big multinationals can sometimes get criticized for generating big sales in the country without giving back through investment and other social contributions.

“This is a great move by Starbucks in China as it sends a strong signal to its China employees that ‘We care,’” said Tse. “Taking care of the elderly is a core value of the Chinese culture. With the employer taking a proactive initiative to help, it sends the right goodwill message to its staff. This will bode well for Starbucks in China and sets a benchmark for other western companies operating in China.”

Tse added that Starbucks is probably also being motivated by recent calls by Beijing and local governments for young people to do more to support their parents, leading some observers to say that filial piety can’t be legislated.

A law passed in 2013 required children to pay frequent visits and ensure the spiritual and financial needs of parents older than 60. The law also allowed parents to sue their children if they are negligent, but did not specify penalties in cases of guilty children. In cases where parents sue, some judges have ordered children to make specified numbers of visits each month and provide support. But experts have pointed out the law and verdicts from ensuing lawsuits could be difficult to enforce.

Shanghai also made related headlines last year when it said children who violated the law could have their credit ratings reduced.

 

SCMP | How China’s ‘Copycat’ Tech Companies are Now the Ones to Beat

PUBLISHED : Thursday, 30 March, 2017
Edward Tse

Edward Tse and Marco Gervasi say the country, once derided as good only for producing fake products, is today producing leaders in innovation, becoming a model for others to follow

For a long time, Chinese companies have been known for copying market-proven products, brands and business models from the West and adapting them for the local market with only minor modifications. Such a phenomenon is known as shanzhai, a Chinese term thatwas originally used to describe a bandit stronghold outside government control. In today’s slang, it refers to businesses based on fake or pirated products.

Shanzhai has been prevalent in China in recent decades and this has earned China the reputation of being a“copycat nation”. Western media report that China’s preferential policies and regulations to restrict market access, such as the the “Great Firewall” in the internet industry, and the lack of intellectual property protection, give Chinese companies an unfair home advantage to create copies.

Yet, the by-product of such protectionism has been the development of a unique innovation ecosystem. The innovation brought about by China – an evolutionary approach on a mass scale –is different from that in the West, and it is influencing both emerging and developed economies.

While shanzhai is common across a range of products and services, it is particularly prevalent inthe internet sector. Chinese internet companies are often compared to theirWestern counterparts based on the similarity of their business models. For example, Baidu is known as the “Google of China”, Alibaba as the “eBay of China”, and Xiaomi as the “Apple of China”, just to name a few.

What is usually neglected in these comparisons is the underlying context in China that gave birth to these companies and how they have evolved. For example, though Alibaba adopted an eBay-like model in its early years, it has gone through so many changes that, today, its business model can best be described as a combination of the models of at least three internet titans – Google, eBay and Amazon. In fact, the success of many Chinese companies, across sectors, has depended on their ability to evolve and adapt foreign ideas for the mass market. This form of evolution, with continuous micro-innovations, is touching the lives of hundreds of millions.

Another example is Tencent ,which launched WeChat in 2011, a simple instant messenger mobile application that gradually evolved into a global “super app”, with one-stop hybrid features of Western models such as WhatsApp, Facebook,Instagram, Skype, Uber, Tinder and others. Today, WeChat has 846 million monthly active users worldwide.

Largely due to the success of WeChat, Tencent expanded into other innovative business models in social networking and mobile gaming. Tencent now leads in the world in terms of mobil eapp monetisation. The recent developments of Facebook Messenger, WhatsApp and Kik Messenger have shown a clear reference of WeChat’s strategy and functionalities.

The innovation brought about by China – an evolutionary approach on a mass scale – is different from that in the West

Besides Tencent, there are also a number of areas where Chinese companies are ahead of the rest of the world, such as in the emerging industries of internet finance, new social media,artificial intelligence, virtual reality, augmented reality and intelligent transport. Justin Kan, founder of Twitch.tv, a US-based video game broadcasting platform that has been acquired by Amazon, said: “Like everybody wants to know what is happening in Silicon Valley, I think we should also be aware of innovations coming from China. You will begin to see a lot of Chinese innovations diffusing into the US.”

For the first time, Western tech models are being challenged by those from China. And people are beginning to recognise this development. At a technology conference held last year in Beijing, Uber’s founder and CEO Travis Kalanick predicted that in“next five years, there will be more innovation, more invention, more entrepreneurship happening in China, happening in Beijing than in Silicon Valley”.

Last year, Baidu, Huawei,Tencent, Didi Chuxing and Alibaba (which also owns the South China Morning Post) were named the “50 Smartest Companies” by MIT’s Technology Review, alongside Tesla, Nvidia, SpaceX, Facebookand others. DJI and Ehang, two Chinese drone makers, have become the world’s leading innovators in unmanned aerial vehicles.

In the post-shanzhai era, China will see a proliferation of business models and innovations. Some companies in the rest of the world are beginning to “reference” Chinese companies, especially in the tech sector. We call this phenomenon “reverse shanzhai”.

Tokopedia, Indonesia’s No 1e-commerce platform, markets itself as the Taobao of Indonesia. “I really like how visionary Jack Ma is,” said William Tanuwijaya, Tokopedia’s co-founder, who adopted Alibaba’s business model after research.

A worker at Indian e-commerce company Snapdeal makes a call to acustomer before delivering a package in Ahmedabad, India, in 2015. Beforelaunching Snapdeal, Kunal Bahl and his partner Rohit Bansal visited China in2011 and noticed that the Indian market had more in common with the Chinesemarket than with the market in the US. Photo: Reuters

Snapdeal, dubbed the “Alibaba of India”, is a top e-commerce company in the country. Before launching their platform, Kunal Bahl and his partner Rohit Bansal visited China in 2011 and noticed that the Indian market had more in common with the Chinese market than with the market in the US. They realised Alibaba’s platform strategy would solve India’s biggest issue: aggregating India’s millions of small brands and sellers.

The same happened in Nigeria, where e-commerce website Konga.com was originally launched as a local Amazon at the beginning of 2014, only to morph a few months later into the “Alibaba of Africa”. And this trend is not limited to e-commerce. Indian entrepreneur VIjayShekar Sharma, an admirer of Jack Ma, modelled his company Paytm after Alibaba.The company, seen as the “Alipay of ­India”, has raised fresh funding from Ant Financial.

Stationless bike-sharing is the latest export of China-originated innovation. Mobike, the leading player, has gone from zero to 23 Chinese cities in 10 months, recording 200 million ridessince its launch in April 2016. It is now expanding into overseas markets.Others, such as oBike and LimeBike, have already been rolled out in Singapore and Silicon Valley respectively.

In some cases, Chinese companies enter new overseas markets by making strategic investments in foreign companies. For example, Alibaba invested in Singapore-based e-commerce leader Lazada to build an “Alibaba of Southeast Asia”. Didi Chuxing also invested in Grab, the leading ride-hailing platform in Southeast Asia.

Malaysia’s Prime Minister Najib Razak (third from left) and Alibaba Group founder and executive chairman Jack Ma (centre) in Kuala Lumpur this March, at the launch of the country’s digital free trade zone. Photo: AFP

Furthermore, Jack Ma has been appointed a key adviser to the Malaysian and Indonesian governments for theirdigital economy aspirations. This is a significant achievement as it provesthat China is becoming the benchmark, rather than the follower.

Yet, “reverse shanzhai” is not simply “copy and paste”. The recent struggles of the likes of Xiaomi and LeEco have shown that some Chinese companies still lack experience to sustain their business beyond borders. Often, one cannot simply transfer Chinese business models to another market without any adaptation. As Tokopedia’s Tanuwijaya putit: “Chinese e-commerce is a source of inspiration, but it is not a format that can be simply imposed on any market. You have to grow it from within.”

The trend of “reverse shanzhai”will be increasingly prevalent internationally, as China’s innovation and entrepreneurship continue to thrive.

The world should take notice.

Edward Tse is founder and CEO of Gao Feng Advisory Company and author of China’s Disruptors.

Marco Gervasi is executive director of Red Synergy Business Consulting and the author of East Commerce.

 

China Daily | New Year Will be Marked by Change

 

By Edward Tse | China Daily Europe | Updated: 2016-12-30

Uncertainty will dog 2017 but it will be offset by immense opportunity

It has been a monumental year for Chinese companies’ overseas investments. The companies, as a group have become the world’s largest source of foreign direct investment. According to Bloomberg, as of Dec 8. Chinese cross-border merger and acquisition activity for the year reached $237.7 billion (227.6 billion euros; 194 billion) – including $63.9 bilion and $83.4 billion on US and European acquisitions respectively – a year-on-year increase of 186 percent.

If the past quarter of 2016 is a sign of what is to come in 2017, then Chinese outbound investments will likely face a much more complicated environment, with the new year likely to be one of more geographically diversified M&A coupled with a decline of overall M&A volume, especially in the early part of the year.

In November 2016, the Chinese government made a decision to restrict capital outflows by increasing the scrutiny of Chinese outbound acquisitions over $10 billion and acquisitions of over $1 billion that are unrelated to the “core business” of the Chinese buyers. At the same time, the government also singled out investment in certain industries, such as foreign entertainment, hotels, real estate, film, and professional sports, where there will be increased scrutiny.

These additional capital controls didn’t just affect Chinese firms. Foreign companies were surprised to discover that the amount of cash needing approval by the State Administration of Foreign Exchange to be remitted abroad dropped from $50 million to $5 million and that the entire process will take more time than it did previously.

The results of the US presidential election and the rise of political populism in a series of other countries, including many in Europe, are casting major uncertainty on global politics. Both domestic and foreign pressures will force Chinese companies to become smarter and more knowledgeable when it comes to their global M&A goals and strategies.

How relations between the United States and China will evolve once Donald Trump becomes president remains highly uncertain and difficult to predict. There seems to be a prevailing political wind against further Chinese acquisitions of US companies, given the background of Trump’s major campaign controversies related to China throughout his presidential campaign.

It remains to be seen what awaits Chinese investors in the US in 2017, but a highly likely scenario is one in which it will be more difficult for Chinese acquisitions to get approval from the US government in sectors the government deems sensitive or potentially involved with national security. However, for the other sectors, one would be hard-pressed to imagine why and how the US government would not welcome Chinese investment.

A case in point is Fuyao Glass, which is investing $1 billion in the US, including a $500 million investment in Ohio to build the world’s largest automotive glass plant.

According to Cao Dewang, Fuyao’s chairman, the decision to invest in the US was based on analysis comparing the economics of producing glass in the US and in China. He concluded that it is in fact cheaper to produce in the US. By building a plant there, Fuyao’s investment would create between 2,500 to 3,000 local jobs. And job creation in the US, particularly in the blue-collar segment in the US rust belt, is a priority for the country.

Europe will probably continue in some form of economic stagnation in 2017. It may follow the US in policy-setting regarding Chinese businesses in some areas (China’s non-market-economy status, for example), but it may also decide to strike out on its own path in areas where it feels there would be tangible benefits to its member countries.
We expect Chinese companies to continue their interest in acquiring European companies – to gain access to necessary and more advanced technologies, for market access, or for bringing the acquired companies to the China market as part of business expansion.

The greatest risk for Chinese investors looking at European opportunities in 2017 will be an increase in local populism. European populism will be a wild card in 2017 that could cause Chinese companies seeking acquisition opportunities to be suddenly shut down by European leaders to satisfy their own citizens and fend off attacks from political rivals.
When Brexit becomes a reality in 2017, the United Kingdom will likely feel more vulnerable and possibly drive the UK government and its companies to cooperate more with their Chinese counterparts.

Already since the referendum, the pound sterling has depreciated quite a bit, from its high of 1:1.47 USD in May to 1:1.24 USD at its lowest to date in December, making the price of UK assets cheaper relative to the USD and RMB. This presents Chinese investors with opportunities to find good deals such as those found in British real estate investments.

As China looks at the world, there is clearly ample space beyond the US and Europe. In the past several years, China has stepped up its effort to play a more visible and influential role in international governance and geopolitics. The Belt and Road Initiative, though still nascent, is an ambitious and multinational program that could open up opportunities for Chinese and non-Chinese companies. Some of these initiatives can be huge and will take some time to materialize, if at all, but for the moment, good momentum is being generated.

We expect to see a higher degree of Chinese M&A activities in the countries along the Belt and Road. I recently visited Manila in the Philippines and met with a number of senior business executives. There was quite a high degree of interest from the Filipino business community regarding Chinese companies’ investment in their country.

This coincides with the renewed, improved diplomatic relationship between China and the Philippines – and, after all, the Philippines is also strategically located at the beginning of the Maritime Silk Road.

Of course, the Philippines is not the US or Europe. Nonetheless, it is an example of where Chinese investments are very much welcome.

We also expect more investment from Chinese companies along other parts of the land and maritime Silk Roads, and it will come not only from Chinese state-owned enterprises but also from private companies. Africa, in particular, could see a step-up in such activities, as many African countries need more and better infrastructure, and some of them are rich in resources that China desires. Strategically, China also sees Africa as an important ally.

Certainly, 2017 will bring uncertainties. In some cases, the Chinese companies’ overseas buying spree may be dampened, but in other cases it will probably happen with even more speed and intensity.

Economic nationalism will manifest in different ways across different countries. There will be a dampening of acquisitions in selected sectors, yet globalization and regional development will be intensifying in their own ways, and progress will continue.
Though a year of uncertainty, 2017 will also be a year of change – and for some, the uncertainty will be related to the immense opportunities.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co, a global strategy and management consulting firm with roots in China. He is also the author of China’s Disruptors (Portfolio, 2015).

SCMP | Oiling the wheels

UPDATED : Thursday, 05 January, 2017, 7:34pm

How Chinese Entrepreneurs Can Help Trump ‘Make America Great Again’

Dr. Edward Tse says Chinese investment and job creation are just what the US economy needs to sharpen its edge, not isolationism and trade wars

Donald Trump’s recent appointment of Peter Navarro to head his newly formed White House National Trade Council has sparked controversy.

Navarro is known for his hawkish views on China and many believe that, by appointing him, the US president-elect is signalling that he will play hardball with China on trade when he takes office.

Navarro has written a number of books and filmed a documentary in which he criticised China for unfair trade practices, especially with the US. He has called China “a cheat”, “brutal” and “amoral”.

Perhaps his most quoted book is Death by China (published in 2011), in which he accused China of purposely hollowing out America’s manufacturing sector, manipulating its currency to make exports cheaper, and creating an unequal playing field in which China can exploit US markets while ensuring American companies are squeezed out from the Chinese market.

‘Cheating, rapacious, venal, disease incubator’: here’s what Trump’s new trade tsar thinks of China

Trump has openly said that he read the book and found Navarro’s arguments to be clear. By implication, this would seem to be at least part of the reason why Navarro was picked for the job.

External views of China, as the country transforms, range from being very positive to very negative. However, most of these views, especially the negative ones, fail to take into account the full China context and its continued evolution.

A recent Wall Street Journal article calls Navarro’s arguments “hyperbolic and out-of-date ”.

China has evolved significantly since Deng Xiaoping (邓小平) pushed for greater economic opening up, during his landmark 1992 “southern visit”. During the 1990s and part of the 2000s, the country certainly benefited from cheap labour, with its limited worker protection and low overall environmental standards. However, China’s labour costs have been rising steadily due to more stringent regulatory standards and salary pressure, coupled with much higher benefits.

While China still has significant environmental problems, it is now a leading proponent of global cooperation against climate change and is investing billions of dollars to combat its own pollution issues.

Currency manipulation is another common mantra of Chinese alarmists. Currently, China is using its foreign currency reserves to stop the renminbi from getting weaker.

Even though some industry sectors are still closed or partially closed to foreign companies (and non-state Chinese companies), more sectors are increasingly being opened for companies, regardless of their origins. And, in these open sectors, competition is often extremely intensive, driving attempts at excellence.

While not every US company operating in China has done well, it would be inaccurate to say that US companies are in general unfairly treated in the country and squeezed out. Nike, Starbucks, General Motors, Ford, Honeywell and Apple are examples of how companies across different sectors are all doing very well in China.

Many economists of various political leanings have voiced support for free trade. In 2015, more than a dozen well-known, mainly conservative economists, including Alan Greenspan, Charles L. Schultze, Ben Bernanke, and Greg Mankiw wrote to the US Congress in support of various free trade deals, declaring free trade as being a fundamental good for the US economy. Paul Krugman, the Nobel-Prize-winning liberal economist, is an open proponent of free trade. Trade is not a zero-sum game.

Instead of launching a trade war, collaboration is the way to go. Fuyao Glass, a privately owned Chinese automotive glass company, recently announced it would invest US$1 billion in its US operations to open manufacturing plants in both Ohio and Michigan . These plants would create over 3,000 jobs for American workers.

Study: US-China investment ties are bigger and deeper than anyone thought

Fuyao chairman Cao Dewang said the economics of manufacturing in the US is now competitive relative to that in China, at least for his company. The US auto market is significant and having an established presence next to its customers is crucial for Fuyao. A report by US research company Rhodium Group, published in December and titled “Chinese Investment in the United States”, said Americans employed by Chinese firms have grown from less than 10,000 in 2009 to more than 100,000 today.

Rhodium also found that the majority of American firms acquired by Chinese companies have undergone expansion after the initial acquisition, and that Chinese companies’ investments are becoming capital-intensive production and research and development operations, that will bring in more jobs for American workers.

Fivefold surge in Americans on Chinese firms’ payrolls, US study shows

Earlier, Rhodium forecast that Chinese companies would invest between US$100 billion and US$200 billion, and create 200,000 to 400,000 jobs in the US by 2020.

Perhaps Trump will be concerned about investments by China (or other foreign countries) in sectors that the US government feels would endanger its national security interests. However, there is still lots of room for investments outside this area. The Fuyao investment is one such case. Manufacturing of other types of auto parts or supplies, construction machinery, building materials, consumer products and retail come to mind, too.

Chinese firms pour money into US R&D in drive for innovation

Attracting Chinese companies to invest in the US and build plants, especially in the Rust Belt, is probably the fastest way to create jobs where the US most urgently needs them.

Many of the Chinese companies with such plans or interests are not “leaving China”. Take Fuyao: China remains and will be its largest market, but investing overseas also makes sense, given the emerging international opportunities.

In addition to hard-core manufacturing, Chinese investors are also interested in the services, media and entertainment sectors , as well as internet-centric technology. Such investments would also create a substantial number of local jobs.

The competitiveness of a country is based on its relative, sustainable competitive advantages. And they are driven by innovation, openness and collaborative leverages. Given Trump’s stated desire to “make America great again”, he must focus on how to increase the competitive advantages of the US, and that will not come from isolationism and launching trade wars.

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

 

TECHINASIA | What happened to Xiaomi?

By Dr. Edward Tse
1:39 PM at Oct 25, 2016

Xiaomi, a Chinese electronics company founded in 2010, is often regarded as the Apple of China. It became the world’s most valuable “unicorn” in 2014, with a private valuation of more than US$46 billion.

Though it is best known for low-cost, value-for-money smartphones, Xiaomi is not merely a smartphone manufacturer. It has been aggressively building an ecosystem of smart connected devices, including: smart TVs, air purifiers, sports cameras, VR devices, drones, and even smart rice cookers.

Xiaomi became China’s largest smartphone brand in 2014. It attracted a lot of first-time, young, tech-savvy consumers due to its inexpensive pricing, highly customizable smartphone, and fan-based marketing. It rejected brick and mortar retail stores, traditional distribution channels, and conventional advertising.

Instead, Xiaomi utilized a unique and innovative way to engage its consumers with its “geeky” brand positioning. It leveraged online user communities, social media, flash sales, and online-to-offline (O2O) events which hyped consumer expectations.

The company ensured customer satisfaction by incorporating user feedback to make frequent software and features updates. As a result, Xiaomi created a sticky fan base, known as “Mi-fans.”

However, it didn’t take long before Xiaomi’s sales began to slow down. Its sales dropped by 5 percent in Q1 of 2016 and 38 percent in Q2 of the same year.

It also fell out of the global top 5 brands in terms of smartphone sales. So what exactly happened?

Reasons behind recent struggles
Xiaomi’s mission statement is to offer affordable smart devices so people can enjoy the benefits of technology and connectivity at a lower price.

However, Xiaomi’s core initial customers now have a desire for more premium products. Despite clear evidence that Chinese customers are willing to trade up, the company continues to focus on the budget end of the market.

Photo credit: Maurizio Pesce.

Xiaomi has also been focused on its young, tech-savvy consumers, marketing heavily through social media and online word-of-mouth. Consequently, its marketing efforts do not reach beyond its core fan base.

In addition, the majority of its customers are not devout Mi-fans. They buy its products based on their value without really embracing Xiaomi’s ecosystem. The company’s limited content has also failed to make return customers.

Chinese consumers have a broad range of brands to choose from and flock to whomever can offer them better value for money. Xiaomi has only had a few smartphone models on shelves for a very long time, which gives direct Chinese competitors like Oppo, Vivo, and Huawei room to steal the show.

To add to this, customers are increasingly frustrated by the company’s flash sales, hunger marketing tactics, and its inability to innovate independently. Its consistent mimicking of Apple’s image has become proof of its lack of innovation.

While Xiaomi has stuck to its non-traditional techniques, other Chinese competitors have leveraged traditional strategies to full effect. These competitors have offered better product features, stronger offline marketing, and a wider distribution channel. This allows them to grab a larger share of the Chinese consumer’s wallet.

Essentially, Xiaomi has been too slow to match its products with the fast-changing value propositions of young Chinese consumers, who aspire for a more individualistic and personalized lifestyle.

While Xiaomi has continued to expand its product portfolio, the brand has failed to maintain its hype and has become overly diversified. General consumers have begun to lose track of what the company stands for and the benefits of joining their ecosystem.

With the company’s recent expansion to emerging markets comes a new set of problems. Factors such as supply constraints, limited local market understanding, and legal issues have hampered their efforts overseas.

What did other Chinese players do?
Local competitors like Huawei, Vivo, and Oppo are focused on establishing premium brands. For example, Vivo focuses on high-end devices with leading technologies such as high resolution phones, fingerprint readers, and extra software features. The same can be said of Huawei, but more in the mid-end products range.

As Chinese consumers begin to trade up, these competitors are much better equipped to capture the market.

Xiaomi has traditionally sold its devices online to bypass costs of offline marketing, retail stores, and dealerships. In comparison, rivals such as Vivo and Oppo have heavily invested in traditional retail and distribution channels and expanded their dealership network.

These competitors have also managed to offer more effective and differentiated marketing. This includes product placement, out-of-home advertisement, brand ambassadors, and sponsorships for popular TV shows. For example, Oppo is the official phone partner of America’s Next Top Model.

Xiaomi is left in the unenviable position of trying to reestablish relevance amidst a highly competitive market.

Implications to Xiaomi and beyond
Xiaomi’s customer-centric, crowd-sourcing, community-driven approach and its founder’s mindset was once very well received among Chinese startups and even multinational companies. However, the initial hype seems to have faded, replaced by questions of the company’s value and long-term sustainability.

In a way, Xiaomi’s story demonstrates the speed, complexity, and dynamism of the Chinese context. The changing consumer landscape, hyper-intensive competition, and rapid technology development require companies to be alert at all times and to create sustainable competitive advantages.

Xiaomi needs to re-examine its strategy with a flexible mindset in order to avoid further market decline or even death.

With this story, many questions arise. Does this ecosystem approach work for every company? Could every industry take a lifestyle-driven, customer-centric business approach? How do you build a sustainable business in the new economy?

It is time for brands with Xiaomi-esque tactics to re-evaluate the sustainability of their consumer engagement approaches. ( Editing by Jaclyn Teng)

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of “China’s Disruptors” (Portfolio, 2015).

 

SCMP | Claim the Future

Hong Kong’s angry youth can find hope in innovation and entrepreneurship
Edward Tse says a chance of upward mobility through business may placate a young generation frustrated with the status quo, and they can learn from successful peers on the mainland

It is no understatement to say that, over the past several years, Hong Kong’s youth have displayed increasing frustration. Occupy Central, riots at Lunar New Year, campaigns against parallel goods traders, the Hong Kong independence initiative, along with the controversy over the Wang Chau housing plan, clearly reflect the frustrations of our young generation.

So, what’s behind this? There is probably no single reason, but rather a variety of political, social and economic factors.

Hong Kong’s young people today live in a city that is very different from the one their parents grew up in. Hong Kong in the 1970s and 1980s was tough, but the city was growing and there were plenty of opportunities for young people. There was potential for upward mobility and young people working hard could build a better life for themselves.

However, today’s youngsters have it pretty hard. Hong Kong’s economic structure has become much more narrow. There are still some good jobs available offering upward mobility, such as in the top-end financial services sector, but our youth do not have any distinctive edge over mainland or overseas competitors.

So, what is the best way for Hong Kong’s youth to find new opportunities for social mobility? I believe the answer lies in innovation and entrepreneurship.

Innovation is a process of creating substantial value through new ideas. These “new ideas” could come from existing concepts, tools or technologies. It is different from invention, which often refers to creating a product or introducing a process which is entirely new.

So, in business, it can take the form of product innovation, service innovation or business model innovation. Sometimes, the core of the innovation is due to the introduction of new technology; sometimes, it is simply enabled by existing technology; and, at other times, it can have no relationship to technology at all, simply a new way of doing things.

During the first dotcom era at the end of the 1990s, Hong Kong had a short period of pretty vibrant innovation and entrepreneurship. Quite a number of entrepreneurs emerged and some were able to create a mark for themselves. Unfortunately, those roots were not planted firmly enough.

When the dotcom bubble burst, Hong Kong’s wave of innovation and entrepreneurship vanished. The city’s economic structure reverted to being driven by property development, financial services, travel, tourism and retail and, in this process, the possibility of upward mobility for our youth faded.

Meanwhile, mainland China has thrived on innovation and entrepreneurship. Entrepreneurs are getting younger (many are post 80s or post 90s). They are not only in big cities like Beijing, Shenzhen or Shanghai, but also in Hangzhou (杭州), Chengdu (成都)and Chongqing (重庆). They are all over China.

From the end of the 1990s, the private sector in China has grown much faster than the state sector in terms of both overall revenue and profit. Many of the noteworthy entrepreneurial companies are in the internet sector, but there are also many in non-internet-centric technology areas, financial services, connected mobility, retail and health care. While some of these thrive on technology innovation, many derive their growth from business model innovations.

There are a number of reasons why China has become a major breeding ground for business innovation. The years behind the gradual transition from a planned to a market economy has created many discontinuities, exposing society’s “pain points” and thus providing many opportunities for observant entrepreneurs. The prevalence of technology, especially wireless internet, has acted as a major enabler. Coupled with that is the massive market allowing business innovation to rapidly scale up; and last, but not least, capital is abundant through well-funded venture capital and angel investors.

For Hong Kong’s youth, mainland China can provide real opportunities for entrepreneurial pursuits for those who are willing to see it in this way. Increasingly, the mainland is putting more value on knowledge and the environment is tolerant of multiple trials and errors. In terms of intrinsics, Hong Kong’s youth are not so different from those on the mainland. China’s operating environment for businesses has many flaws but those who make it are those who can achieve things in spite of these imperfections. Hong Kong’s youth just need to try. In fact, the mainland can become the platform for Hong Kong youth to become the world’s best in their own chosen area of focus.

There are cases of Hongkongers making it in China, such as Martin Lau Chi-ping, president of Tencent, and Victor Koo Wing-cheung, founder of popular video hosting service Youku.

Today, exponential value creation increasingly comes from entrepreneurs’ command of knowledge. Of course, there will still be people who can create wealth in other ways, both on the mainland and in Hong Kong. However, as technology and other factors drive down artificial barriers, knowledge is becoming more prevalent in value creation. And, innovation and entrepreneurship are merely the means to capturing and leveraging knowledge.

Hong Kong’s youth must focus on capturing knowledge, and use it for innovation and entrepreneurship to create value. Entrepreneurship is by definition difficult. Only a very small percentage will succeed. However, that small percentage could capture significant value and can become role models.

The Hong Kong government’s creation of the Innovation and Technology Bureau is a good move. It allows a top-down approach of driving innovation and entrepreneurship. However, this isn’t enough. Success requires a partnership between the public and private sector, as well as collaboration between Hong Kong and the mainland. Shenzhen and neighbouring cities in Guangdong, given their proximity to Hong Kong, would make the most natural partners.

For this to take off, it only needs a few successful cases of Hong Kong youth making it big, serving as role models for the next generation of entrepreneurs. This multiplier effect can lead to significant upward mobility for Hong Kong’s youth and is a way for them to truly take back the initiative for their future.

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

 

Nikkei Asian Review | Newcomers Shake up China’s Mobile Payment Industry

September 22, 2016 12:00 pm JST
Dr. Edward Tse, Ian Meller and Jackie Wang

Mobile payments have been embraced in China at a rate unseen anywhere else in the world, reaching approximately 16.3 trillion yuan ($2.5 trillion) in 2015. Whether it’s buying plane tickets or electronics or even paying utility bills, the Chinese consumer instinctively reaches for his or her smartphone. This is largely due to a consumer class that has leapfrogged the era of the personal computer and jumped directly into the smartphone age. China’s mobile payments industry has entered a new and exciting phase.

There have always been alternatives to the dominant Alipay and WeChat Pay sevices, but in the past year credible challengers have started to emerge. February saw the launch of Apple Pay, in partnership with state-owned payment processor China UnionPay. Samsung Pay arrived a month later. Viable alternatives backed by companies including Huawei Technologies, Xiaomi and LeEco are the latest to arrive.

Alipay, owned by Ant Financial Services Group, an affiliate of Alibaba Group Holding, remains the largest mobile payments player in China. It had a market share of 68% at the end of 2015 and has more than 400 million registered users, thanks to its links with Alibaba’s Taobao and Tmall shopping sites. WeChat Pay also has backing from parent Tencent Holdings that helps its reach. It is linked into WeChat, China’s largest instant messaging and social media platform.

Last year, WeChat Pay’s market share was 20%, making it a distant second to Alipay. But WeChat’s growing number of users and the increasing popularity of social media are helping it gain market share. This past Chinese New Year’s eve, some 8 billion “red packets,” gifts of cash traditionally exchanged at the holiday, were given through WeChat Pay.

The competition between Alipay and WeChat Pay has reached new heights as both are transforming into global e-wallets not only for Chinese domestically but also overseas. Both services have been building partnerships with foreign retailers and e-commerce platforms allowing customers to purchase products in yuan while abroad and on foreign websites. Travelers can also get tax refunds abroad through Alipay, which can save time at the airport.

NEW PLAYERS The emergence of Apple Pay in the China mobile payments market is significant, marking the arrival of the first legitimate foreign competitor to Alipay and WeChat Pay. For once, the two incumbents face a competitor whose ecosystem can rival their own.

Apple is one of the top smartphone companies in China, where it has been aggressively expanding. Yet before Apple Pay had even launched in China, analysts had discounted its ability to match the range of functions offered by Alipay and WeChat Pay and noted the lack in China of near-field communications, or NFC, terminals for contactless payment. When Apple revealed a partnership with UnionPay rather than Alipay, analysts again called it a mistake.

Within two days of Apple Pay’s launch in China, more than 30 million bank cards were connected to the service, implying linkage with one-third of the phones in the country then equipped to support NFC payment. By partnering with UnionPay, Apple gained access to China’s largest banks and thus a majority of China’s consumer class.

Before Apple Pay’s launch in China, Apple had already ensured that popular Chinese apps, such as those of food delivery service Meituan, e-commerce site JD.com and online travel agent Qunar, would support its payment service. Crucially, Apple Pay could soon be used on Tmall due to a new Chinese law requiring that e-commerce websites allow payments via competing systems, eliminating one of Alipay’s major competitive advantages.

PHONE MAKERS Apple isn’t the only one diving into China’s mobile payments market. Samsung Electronics, Huawei, Xiaomi and LeEco, the parent of Leshi Internet Information & Technology, are all making their own plays. Samsung followed Apple by partnering with UnionPay and getting the backing of China’s major banks for Samsung Pay, but Samsung has also integrated Alipay into its e-wallet.

When Huawei, now the largest smartphone company in China, originally announced its mobile payment service in March, it had the backing only of Bank of China(BOC). But by the time it launched in August, Huawei had added another 24 banks. In addition, its latest flagship smartphone, the Huawei P9, allows users to directly activate HuaweiPay through a fingerprint scanner on the back of the phone, even when the keypad is locked.

Other Chinese companies are in various states of building their own mobile payment systems. Xiaomi, one of China’s highest valued startups and the creator of the popular Mi series of smartphones, launched Mi Pay in early September. LeEco, which recently started offering mobile phones, has been building up its payment infrastructure by hiring a think-tank in Beijing to study internet finance and mobile payments.

For dedicated hardware providers like Xiaomi, Samsung, Apple and Huawei, mobile payments are another node of their ecosystems. The payment systems are features designed to increase the loyalty of consumers and help keep them hooked on the companies’ hardware.

Internet companies like Tencent and Alibaba are playing a much longer game, with mobile payments just a starting point for their bigger ambitions in internet finance.

Ant Financial has built an intricate and elaborate ecosystem that offers a variety of financial services and products to Chinese consumers including Sesame Credit, a credit scoring system based on Alipay payment histories, and policies from Zhong An Insurance. Alipay also offers loans to consumers based on online purchasing records on Tmall and Taobao. WeChat Pay users can also buy investment products.

The early success of Apple Pay in China and its ability to change the mobile payment behavior of the Chinese consumer is the largest threat that Tencent and Alibaba have yet faced on the mobile shopping front.

We are witnessing companies with different ecosystems clashing over the Chinese consumer’s wallet. This is an exciting and innovative period in China’s mobile payments sector. While Alibaba is the dominant player now, new entrants, both local and foreign, which are bringing their own service portfolios and a culture of innovation and disruption, are more than capable of challenging the status quo. It remains to be seen if these new players can ultimately unseat incumbents whose ambitions go far beyond simple mobile payments.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of “China’s Disruptors” (Portfolio, 2015).

Ian Meller and Jackie Wang are consultants at Gao Feng.

 

Nikkei Asian Review | Chinese Companies Lead the Way in Fintech Innovation

September 8, 2016 12:30 pm JST
By Dr. Edward Tse and Ian Meller

With the Chinese government keen to encourage innovation in the financial industry, the fintech revolution is quickly gaining pace.

Financial technologies companies backed by Chinese venture capital raised $2.4 billion in the first quarter of 2016, according to accounting firm KPMG. This represented a 49% share of global fintech investment in the period, bigger than that of North America and Europe combined.

Ant Financial Services Group, Alibaba Group Holding’s fintech affiliate, itself raised $4.5 billion in April, making it the largest round of funding for a fintech company in the world. Four out of the five largest fintech companies in the world by valuation are now in China, according to Jason Jones, chief executive of lending industry events group LendIt: Ant Financial; Shanghai Lujiazui International Financial Asset Exchange, or Lufax, which operates as Lu.com; Zhong An Online Property and Casualty Insurance and JD.com’s JD Finance. And this market is only set to grow.

The majority of China’s leading fintech players are also its internet giants. Their digital platforms have amassed user bases that have then gone on to serve as the launch point for fintech endeavors. Alibaba and Tencent Holdings dominate the online payment market in China, scaling up faster with convenient financial services that traditional lenders can’t match.

Compared with fintech, China’s financial system is relatively immature. According to the Mintai Institute of Finance, nearly 80% of small- and medium-sized enterprises in China are not adequately served by banks. The People’s Bank of China has found that about three-quarters of the general population is “underbanked” and lack access to financial services.

It is these gaps that allow innovative outsiders to enter the market. This is apparent in the area of credit scoring where the lack of an established model has created the opportunity for internet players to step in.

Ant Financial developed Sesame Rating, China’s first credit scoring system. It uses big data to analyze the purchasing behavior of users on Alibaba’s e-commerce platforms to judge their creditworthiness based on a number of factors.

Chinese entrepreneurs’ willingness to experiment means products and services hit the market quickly and evolve quickly. Initially, AliPay, Ant Financial’s payment service, was used only as a payment method for Alibaba’s e-commerce platform. Now, AliPay can be used at brick-and-mortar stores, for utility bills and even for overseas shopping.

China has become fertile ground for fintech solutions. Online wealth management has gained traction among young middle-class consumers. As more risk-tolerant investors, they tend to favor equities and mutual funds over traditional savings accounts. At $66.9 billion in 2015, China’s peer-to-peer lending market is now the world’s largest and more than four times the size of its U.S. counterpart.

However, the P2P market has been plagued by inadequate regulation and hence, a high frequency of frauds and scams such as the $7.6 billion Ezubao Ponzi scheme uncovered last year. Regulators have since started to get a grip on the sector. After an initial series of regulations were issued at year-end, some 1,600 P2P companies shut down during the first half of 2016. Another series of rules issued in August further restricted the scope of activities permissible to P2P companies, barring them from creating asset pools or providing loan guarantees.

Chinese fintech players are also moving into the nascent blockchain industry. Ping An Insurance Group, one of China’s largest insurers and the owner of Lufax, in May became the first Chinese entity in a global blockchain consortium with Goldman Sachs and Barclays.

Some Chinese companies are leading the pack. Wanxiang Blockchain Labs, a think-tank that is to host the Global Blockchain Summit in Shanghai in late September, is behind ChinaLedger, an alliance of 11 regional commodity, equity and financial asset exchanges that plan to establish an open-source blockchain protocol.

Existing networks help

China’s internet giants have some of the most sophisticated fintech ecosystems. Apart from Alipay and Sesame Credit, Ant Financial also owns Yu’E Bao, China’s largest money market fund. Yu’E Bao raised $90 billion in its first 10 months and accounts for approximately one-fifth of China’s 4.2 trillion yuan ($630 billion) money market fund sector. Ant Financial’s portfolio also includes digital banking, microloans, securities, crowdfunding and other wealth management products.

Tencent founded WeBank, China’s first online only bank, in 2014. WeBank offers consumer, corporate and international banking services. By May 2015, it had launched a personal credit line service to select users without guarantee or collateral through Tencent’s QQ and WeChat messaging platforms. Unlike Ant Financial, WeBank acts as a platform connecting borrowers and lenders directly rather than from its own balance sheet, allowing it to avoid credit risk.

Lufax, launched in September 2011, is China’s first online investment and financing platform. It became the world’s most valuable fintech startup in January after raising $1.2 billion on a valuation of $18.5 billion before getting eclipsed by Ant Financial. Mostly known for its P2P lending service, Lufax’s larger ambitions are embodied in its “9158 strategy” to offer products across various sectors of the finance industry via its platform. By the end of 2015, it had signed up 500 institutions across more than 300 cities.

Zhong An, China’s first digital insurance platform, was jointly launched in November 2013 by Alibaba, Tencent and Ping An. The idea behind Zhong An was to digitize the user experience and insurance value chain. By using the unique capabilities and user bases of its stakeholders, Zhong An was able to launch innovative insurance products that targeted China’s digital economy as well as more traditional liability and property insurance products. In its first year, Zhong An underwrote 630 million insurance policies for 150 million clients.

Chinese fintech companies are now starting to expand overseas. In September 2015, Ant Financial acquired a majority stake in Paytm, India’s biggest online payment company, to gain access to a massive population just beginning to embrace mobile payments. Tencent’s Wechat Pay has now turned into a global wallet for Chinese consumers after it launched clearance services for nine different foreign currencies and built partnerships in 20 countries. Tencent itself has entered the South African market through an alliance with Standard Bank to launch a mobile payment system targeting the emerging middle class.

While the Chinese government is encouraging innovation and technology investment to modernize the financial industry, it is still trying to draw up an appropriate legal framework that wouldn’t stifle growth. The regulation of financial services in China is overseen by multiple bodies with overlapping policies and sometimes unclear guidelines. But there have been concrete developments over the last year. In July 2015, central government ministries jointly issued guidelines that clarify responsible regulatory bodies and roles, as well as legal parameters for specific sectors of fintech.

China’s fintech revolution is already making huge waves. Opportunities are abundant for those able to provide innovative solutions to address critical consumer needs. The impact of China’s fintech innovation, whether in the realm of online payment, wealth management, crowdfunding or elsewhere will be seen and felt worldwide. The foundation established by this pioneering class of Chinese fintech companies will set the stage for even more exciting players to emerge.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of “China’s Disruptors” (Portfolio, 2015).
Ian Meller is a consultant at Gao Feng.

 

Tech Crunch | Can Foreign Tech Companies Win in China?

Posted Aug 28, 2016
By Dr. Edward Tse

People have often referred to Google, Facebook and Twitter as cases where foreign tech companies are blocked in China. In reality, while Facebook and Twitter were indeed blocked, Google chose to withdraw because they didn’t want to comply with Chinese censorship regulations.

It’s important to note that most foreign tech companies were not blocked, and companies like eBay, Amazon, Viadeo and, of course, Apple and Samsung all entered and competed in China.

EBay was beaten by Alibaba more than a decade ago. Amazon entered China throughthe acquisition of a local company, Joyo, in 2004, but was never able to build a commanding position in China the way they did in the U.S. Viadeo withdrew in 2015 due to a lack of market traction mostly because of the entry of LinkedIn.

On the other hand, Apple and Samsung have done well in China, despite increasing competition from the Chinese who are chipping off pieces of their pies. More recently, UberChina and Didi Chuxing reached a mutually beneficial deal, though some see it as Uber essentially surrendering the China market to Didi Chuxing.

This all seems to beg the question: Can foreign tech companies win in China?

Clearly, China’s regulatory regime regarding the internet, in particular social media, isfar more restrictive than that of the U.S. and many other western countries in general. The “Great Firewall” has proven itself repeatedly to be a thorn in the side of foreign companies, and not all have been able to overcome this hurdle. Most have tried, but with varying degrees of success.

It all comes down to the company’s mindset and willingness to adapt. Some firms decidedthey didn’t want to play in such a context, like Google, and withdrew their operations. Some want to play but got blocked, like Facebook, yet continue to lobby the government for access. Some were allowed to play but couldn’t quite get their act together (for whatever reason), like Amazon, Viadeo and perhaps even Airbnb. There was also Yihaodian, which was Walmart’s online business, but eventually Walmart sold it to JD.com in exchange for some of JD’s shares.

China is not easy. It’s tough for everyone, no matter if one is foreign or not.

But there are some who seem to “get it,” like LinkedIn (at least for now). They entered the China market in 2014 with a dedicated Chinese site, Lingying, andwithin two years grew their user base to 20 million subscribers and counting. How did they manage such a feat where several others failed? They adapted to the Chinacontext. Not only did they localize by conforming to restrictions on content, they partnered with local firms Sequoia China and China Broadband Capital to further understand the China market.

LinkedIn also created local leadership by hiring a president for LinkedIn China, giving the team more autonomy to integrate and cater to local needs. Examples include collaborating with Tencent’s WeChat so users could link profiles, launching a Chinese business social networking app “Chitu” and planning to release a Chinese version of its Pulse news reader app.

Another such example is Evernote. They, too, found success through a focus on meaningful localization. Not only did they hire locally, they employed localized marketing strategies by leveraging local social media like Weibo and WeChat, and had localized customer service, which supports real-time customer support on the mentioned platforms. They did thorough market research before entering in 2012, and looked to solve the “pain points” of the Chinese consumer, mainly security and privacy. Lastly, they had an easy-to-recall Chinese name (Yinxiang Biji) with a memorable pun. This strategy paid off; within the first year after launch they had 4 million users in China, and by 2015 their user base reached 17 million.

The notion that lower-quality clones sprung up because of foreign tech companies being blocked is only partially right. One could argue that the major Chinese social websites of Baidu, Ren Ren, Sina Weibo and Youku Toudu are clones of Google, Facebook, Twitter and YouTube, respectively. While the likes of Ren Ren weren’t able to replicate Facebook-like success in China, others have evolved beyond being clones to having their own unique, innovative ecosystems.

One such example is WeChat. Though it was originally inspired by Kik, and had similar features to WhatsApp, it evolved from mere messaging to becoming an integral part of the Chinese connected lifestyle. WeChat users can now link their bank cards to WeChat Pay, make in-store payments, transfer money to peers, buy movie tickets, hail taxis, pay for utility bills and so on. In fact, the list is practically endless, and shows how WeChat’s business model has become so powerful, and has grown from being a simple messaging app like WhatsApp (which, incidentally is also not blocked in China, but cannot hope to compete on WeChat’s scale).

Foreign tech players tend not to be as extensive in ecosystem building.

Importantly, Chinese innovators are developing new intellectual capital. They are crafting innovative business models and reaching new frontiers of business strategy and organization. Prime examples include Alibaba and LeEco. Jack Ma has built Alibaba into a sprawling internet business through “multiple jumping” from one business area to another, while building its capabilities along the way through a combination of self-built and collaborative partnerships. This disrupted the conventional “core competence” approach that has ruled modern business for the past 30-odd years.

LeEco is, broadly speaking, a “lifestyle” company, with a diverse ecosystem of infotainment content, smart devices and internet-connected mobility. Many commentators by now have pointed out that Chinese innovators are fast, agile and adaptive. However, these are merely phenomenological observations. At heart, the best and brightest of these innovators are deeply reflective on what the new frontiers of business are, focusing on “how can we get it right and do it well?”

Of course, China’s market for tech companies has evolved significantly for over a decade and a half. When Alibaba was competing with eBay more than a decade ago, China’stech market was pretty primitive. Alibaba merely used guerrilla warfare tactics based on its grit to defeat a major foreign player. Today, both the market and the players are much more sophisticated and their business approaches are much more refined. The leading Chinese innovators are digital ecosystem players building scale and creating customer stickiness through their entire ecosystem. Foreign tech players tend not to be as extensive in ecosystem building.

To “win,” foreign tech companies need to adapt to the China context and deeply understand the key factors of success. Local leadership is critical and appropriate empowerment by the global headquarters to the local leadership to do the right things is essential. While for some, the market is not open or they are not welcome, for many, the opportunities are right there. China is not easy, but why should it be? It’s tough for everyone, no matter if one isforeign or not. And no one can be sustainably successful if they don’t observe, learn and adapt.

LinkedIn China’s Chitu, for instance, is struggling to get market traction. Evernote, while achieving early success in China, seems to be facing some challenges forsustainable growth, mainly due to lack of premium paid users and growing competition from Chinese startups. In fact, drawing a line on “who’s Chinese and who’s not” is also somewhat artificial, given that Alibaba’s and Tencent’s largest respective shareholdersare not Chinese, and some of LinkedIn China’s and Uber China’s key shareholders are Chinese.(Sequoia China, whose parent is a Silicon Valley-headquartered VC fund, has its operations led by Chinese venture capitalist Neil Shen, who has a deep understanding of the China context.)

As China’s digital business grows, it’s going to provide more opportunities for many players. Who “gets it” and who doesn’t will certainly not only be a function of “being blocked or not,” but equally (or even more importantly) those who have the right mindset and approach to the China context (and for that matter, China for the world). To this end, it’s a real test of the leadership and capabilities of the companies, as well as the capital behind them.

Dr. Edward Tse is the founder and CEO of Gao Feng Advisory Company, a consulting firm that advises corporations, startups and VC funds on business strategies in China.

 

SCMP | Midea’s Move for German Robot Maker Kuka May be a Turning Point

PUBLISHED : Sunday, 21 August, 2016, 10:00am

Midea’s Move for German Robot Maker Kuka May be a Turning Point for Chinese Manufacturing

Edward Tse says the takeover bid is emblematic of how Chinese companies are shaking off the copycat label in the march towards ‘Industry 4.0’ and ‘Made in China 2025’

Chinese electrical appliance manufacturer Midea’s move to acquire Kuka, the German robot maker, could be a defining moment in the evolution of China’s manufacturing sector. China’s reliance on low-cost, labour-intensive manufacturing to power its immense economy is no longer attractive, mainly due to the rise in labour and other costs. The world’s second-largest economy needs to seek alternative ways to grow and companies like Midea are showing the way.

Midea was founded in 1968 by He Xiangjian as a small township enterprise. Leading a group of residents in Beijiao, Guangdong province, He raised 5,000 yuan (HK$5,834) to establish a bottle lid production workshop. Midea has since transformed into a global player pushing the technology and innovation frontier.

It currently owns some of China’s top home appliance brands and its total group revenue globally in 2015 was over US$21 billion. Its rise epitomises the thriving Chinese innovational and entrepreneurial spirit that emerged after the economic reforms spearheaded by late paramount leader Deng Xiaoping (邓小平).

For a long time, China’s manufacturers were branded copycats (shanzhai). Even though there are still plenty of shanzhai companies around, many more established companies like Midea are transforming themselves into market leaders and disruptors through innovation, evolution, experimentation and a closer connection with consumers. Midea’s latest acquisition target marks its foray into Industry 4.0.

So why is a maker of fridges and air conditioners interested in state-of-the-art industrial robotics? The heart of the matter can be found in two key phrases, “Industry 4.0” and “Made in China 2025”.

“Industry 4.0” refers to the concept of fully automated production facilities that require minimal human involvement. This fourth stage of the industrial revolution represents the convergence of the internet of things and the control of cyber-physical systems.

‘Made in China’: the smart revolution blueprint set to bring Beijing into the digital age

“Made in China 2025” is an initiative by the Chinese government to drive manufacturing innovation, strengthen the industrial base and promote breakthroughs in key industrial sectors, with the ultimate goal of enhancing international competitiveness and improving the image of Chinese brands. It is one of the most prominent concepts in China’s 13th five-year plan.

China’s latest strategic plan not only involves acquiring foreign companies, but also embracing the principles of Industry 4.0. This was seen in the 2014 Sino-German Cooperation Action Plan under the theme “Design Innovation Together”. This plan facilitates bilateral cooperation where both countries commit to improving collaboration in areas such as mobile internet, the internet of things, cloud computing and big data, along with policy and regulatory support.

Industry 4.0 envisions a future with shortened model and upgrade cycles, and a higher degree of personalisation. For a white goods maker, it means being able to adapt quickly to changing consumer needs while reducing production overheads, costs and the capability to offer solutions based on consumers’ exact needs.

Haier is a good example of a company that has already begun its foray into Industry 4.0 territory. Its latest “Connected Factory Programme” allows it to mass produce personalised products instead of the traditional large-scale factory that only produces one type of product per cycle. Thanks to this new factory model, Haier’s customers will be able to order tailor-made products such as air conditioners that filter out methanol.

While China has traditionally enjoyed low labour costs with a comparatively higher labour-to-production ratio, its workforce of young, cheap labour has become scarce. Facing these new demographic changes, Industry 4.0 stands to shift China’s industry to more automated and labour-light practices. Fang Hongbo, Midea’s chairman, said this was a major motivating factor for their offer for Kuka.

Many regard most industries in China as still operating in the “Industry 2.0” era – a more traditional mass production assembly line system. For these manufacturers, directly diving into Industry 4.0 would be an incredibly difficult leap due to the cost of replacing and upgrading their plants and infrastructure.

This is where Kuka comes into play for Midea. By investing in Kuka, which is heavily focused on digitising its industrial manufacturing solutions, Midea stands to directly benefit from Kuka’s Industry 4.0 expertise and its vast foreign network. Kuka can provide vital technologies to help Midea build up its Industry 4.0 strategy and production lines, while Midea will assist Kuka with its expansion plan and growth strategy in China.

Stuck in the past: how China’s manufacturing powerhouse of Dongguan got left behind

The acquisition would be a turning point that might very well help Midea become part of China’s very own Industry 4.0 vanguard. Other Chinese firms that have recently acquired German companies with Industry 4.0 capabilities include ChemChina (machinery maker KraussMaffei ), Shanghai Electric Group (hi-tech equipment manufacturer Manz) and Shang Gong Group (knitting machine maker H. Stoll).

This trend in acquiring robotics and automation technologies should bring increased efficiency and production to China’s manufacturing. It will also help drive down costs for Chinese companies and assist in reaching their goals of transforming into Industry 4.0 enterprises.

Chinese manufacturers have come a long way from being shanzhai companies, and are now increasingly technology-driven and innovative. Judging from recent developments, it looks like their time has come.

Not many Chinese manufacturers may get there, but some will, and as I’ve always said: “A small percentage of a large number can still be significant.” And, those who do “make it” will serve as role models for many more to come.

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