Say With Me: “I am (I AM) somebody (SOMEBODY)!”

In the Hutong
Enjoying the breezes of spring
(and praying they don’t carry dust, sand, and rocks)
1537 hrs.

Reading more of Diligence China (great stuff, I’m not kidding) and one of Andrew’s old posts about different companies in the economy. I tried to write him a comment, but for some reason the blog smacked me out, so I’m posting it here.

This was in response to his post “New China JVs, Look Local, Act International.”

In the post, Andrew discounts the importance of small business-to-business service companies to the overall Chinese economy:

“On paper, these are Chinese companies. Many of these register locally and show up in government statistics as local businesses. The reality is that they usually behave like mini-MNCs, and often make up part of the multinational service supply chain. These are the lawyers, accountants, programmers, consultants, designers, etc. that have been powering the MNCs drive towards success in the China market.

They are important to the Chinese economy, and will continue to make many valuable contributions to the internationalization of places like Shanghai, Suzhou, Hangzhou, Beijing and Shenzhen. But these are mainly vehicles for individual service providers to register and operate. Like many business startups that center on a few talented individuals, they have difficulty sustaining growth and aren’t particularly scalable. While they are invaluable to the MNC supply chain, they probably won’t be a source of significant innovation or large-scale international brands.”

To which I responded:

Andrew,

Great stuff, as always.

Regarding small business-to-business service firms, I generally agree with the post, but I want to address several of your points.

First, while such firms tend to start small and focused around a talent cluster, with the right care they can actually scale. This is a matter of management, not of nature. I’ve seen this happen with four firms off the top of my head in computer services, advertising, and printing.

Second, they start as a part of the MNC supply chain, but they grow outwards from there to service other entrepreneurial enterprises, government, and, increasingly, Chinese firms. Many of these companies are cultivating the expertise to take Chinese brands overseas in the same way they built competency helping MNCs come to China.

Third, regardless of whether these companies grow beyond a few dozen employees, their economic effect is huge. Apart from paying healthy salaries and transferring some essential skills, these companies are hothouses for the corporate counsel, controllers, CFOs, CMOs, designers, architects, project managers, and salespeople who will drive the success of Chinese enterprises both here and abroad.

Fourth, as to innovation, while these firms will not develop quantum computing, room-temperature fusion, or efficient photovoltaic cells, they are driving innovation in service provision that is putting global players in their businesses on their back foot. That’s possible because of the dynamism of the market. Business services in the US and Europe are horribly ossified. Not so in China – we are redefining these industries as we speak.

To dismiss out of hand the significance of such enterprises merely becuase they will not create large scale international brands misses the point: large scale international brands are by no means the sole – or best – measure of economic success. They are simply the most visible.

The fact is, China has built much success so far without international brands. If it can continue to find ways to make the best use of its resources by either buying brands from other companies or serving as the substance behind other global brands, does that make China’s success any less valid?

Love the blog – you make me think.

David