State of the Union: American Business and The China Challenge

In the wake of the inauguration of Donald Trump, I have been getting calls from clients, from past clients, and from perspective clients all asking what this is going to mean to them. I expected to get the calls from US and European companies. What surprised me – and probably should not have – was the number of calls coming from Chinese companies. On the surface, one is tempted to ascribe this preoccupation to Trump’s acerbic anti-trade rhetoric.

But concerns about China are nothing new to American elections. The role of China in business and the US economy has been on the national docket since Bill Clinton ran for his first term. What is more, the concerns coming from the people I was speaking to were both immediate and urgent. They weren’t worried about some abstract degree of market access in the coming years: they wanted to know what would happen to their plans over the next twelve months. All of this stands as circumstantial evidence that, more than at any other similar juncture in the past, Chinese companies appear poised to leap into the American sea, and right soon.

Challenged but Determined

Perhaps the most urgent challenge facing China’s enterprises today is learning how to reach successfully beyond the home market and build viable international, if not global, businesses. China’s more thoughtfully-led companies are figuring out that in order to “go out” they need to learn how to operate in environments where local government and consumers are at best indifferent, and at worst hostile. They are learning that they will need to figure out how to innovate consistently and meaningfully; and that creating, building, and defend their own brands against local and global competitors overseas (and especially in the US) is going to require a new thinking, a lot of money, and outside help.

Of course, understanding this intellectually and actually doing it are two different things,  and considerable cultural obstacles lie ahead of China, Inc. But leaders of US, European, and Japanese companies would be foolish to assume that China’s companies will all fail in that effort. Some, possibly many, will succeed. The challenge for which we should all be preparing, then, is how to compete with – and beat – China’s emerging global companies.†

We’re From the Government, and We’re Not Here to Help

For the moment, let’s leave aside the rhetoric coming out of the Trump administration. Belligerent bombast aside, there is not much that the White House can do to halt the slow but inexorable globalization of Chinese brands. Raising barriers to protect domestic enterprises against a Chinese onslaught requires more than the election of a populist president with anti-trade chops. Without a broad national consensus against trade, Congress and economists remain too haunted by the ghost of the Smoot-Hawley Act of 1930* to raise significant barriers to a global trading giant like China, and the number of US jobs that depend on exports to China is significant and continues to rise.

Even if legislators found the resolve to act, the speed of business and the nature of lawmaking limit the ability of legislation to respond to specific commercial threats. Ditto the creaking machinery of the World Trade Organization: even when a government can be persuaded to lodge a formal protest against China, such cases require years to work their way through the process and evoke an outcome.

And all of this ignores the expanding influence of Chinese investment in US and European business. High-profile investors like the Dalian Wanda Group and Anbang Securities are just the visible apex a vast and varied group of companies and cash-rich entrepreneurs setting down commercial roots in America. Except in matters of national security, legislating against such inflows would be political suicide, especially as Chinese investments reach ever deeper into the rusting industrial hinterlands of the developed west.

We Are On Our Own

In short, the Chinese competition is coming to America and Europe, and companies need to rely on themselves to address this new threat.

Doing so will mean approaching the China challenge with the same resolve and flexibility with which American enterprise addressed the Japanese challenge, but doing it sooner and with greater alacrity. Japan’s economic expansion in the 1970s and 1980s wrought unprecedented disruption to US business in no small part because most executives didn’t see it coming. They were too late to realize that the iron triangle of government, enterprise, and organized crime in Japan left many US industries facing an existential threat.

The US business community cannot afford to be as slow on the uptake with China. Forget wait-and-see: a nimble and aggressive Chinese company with a deep home market in China is an existential threat even before you find out they’re looking in your patch. Assume they’re coming, and will hire the local expertise to disrupt your markets, undermine your customer relationships, and beat you to innovations.

Winning demands insight. Executives have to understand how Chinese companies work, how they make use of relationships and government support, and the strategy they will use to take markets away from global competitors. Then they need to drill into their specific competitors, learning the strengths of a Chinese challenger so as to use those strengths against them.

(Such strengths vary from firm to firm, but you won’t go far wrong to assume that they come with a) a deeply supportive government at home; b) the world’s largest home market, able to provide global economies of scale before they make their first sale overseas; c) a readiness to play fast-and-loose with intellectual property; and d) momentum.)

The discussion America’s business leaders should be having about China, then, must go beyond “how do we make money in China?” If that question isn’t academic by now, it soon will be. It must also be “how do we meet – and crush – our Chinese competition both at home and around the world?”

 

 

† The use of “we” here is not an affectation. China, Inc. it is no less a challenge in business services than it is with manufacturing. Sometime in the next five years, the leaders of the marketing and PR business in the US are going to face severe disruption from China. 

* Also known as The Tariff Act of 1930, The Smoot-Hawley Act was a protectionist measure passed by the US Congress that wound up inciting a trade war, one that arguably deepened the Great Depression and helped speed Europe into conflict a decade later.

 

The One Belt Test

Source: China’s New Silk Road Is Getting Muddy

The reason the “One Belt, One Road” initiative is going to be so interesting to watch carefully is that its outcome will be a litmus test for governance in China.

More than just a simple question of whether the initiative makes economic sense, the results will determine the degree to which such centrally-planned and -driven initiatives are either workable or relevant in modern China.

Rhetoric about strongmen aside, this is not the era of Mao. China is a larger, more complex, and more decentralized country than it was forty years ago, or even in 1999 when Jiang Zemin launched his “Go West” initiative. If the nation faces challenges with OBOR, it does not follow that the strategy is wrong: what it points to, more likely, is how the role of government in these initiatives must be to instigate and enable rather than to plan and oversee.

That thinking would represent a huge deviation from the Party’s modus operandi, but as Huang Yasheng is fond of reminding us, the greatest leaps in China’s post-Liberation economic progress have occurred when the government sets the tone, and then gets out of the way. Combining such an approach with vigilance over safety, graft, corruption, and the environment will likely emerge as the way forward for the government’s role in development.

 

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An Internet Icon Hints at Big Changes in China Travel

 

Source: Chinese netizens are in love with this female photographer and her life of adventure: Shanghaiist

The popularity of the adventourous model-photographer Xiao Yun Dou (nicknamed “Dou Dou“) among young people in China is a hint at a major change taking place in China’s travel market.

While their parents craved the opportunity to travel, for many young people in China today, the yearning is for much more: it is for adventure, perhaps, but I believe there is something even more prosaic at work here. There is a growing desire in the collective psyche for escape, and escape that is not as part of a herd on a bus or a plane, but for travel and adventure that is deeply personal.

Group travel still dominates the market, but the numbers of independent travelers – and those looking for something unique and out-of-the-ordinary – are growing. One young Chinese man I spoke to the other day was excited about going to Las Vegas for the Consumer Electronics Show. He was not excited about the show, the gadgets, or the gambling in the casino in his hotel, but he was excited about the opportunity to hike in Red Rock Canyon, shoot automatic weapons, and take a side trip to Hoover Dam and the Grand Canyon.

He is by no means typical, but neither is he unique, and his kind of international travel may define the next generation of sojourners from the mainland, inspired by Dou Dou and her rarified ilk.

How Real is Apple’s China Research?

Apple is opening a 300 million yuan ($45 million) research and development center in Beijing, its first ever in China.

Source: Apple opening a $45 million research hub in China to develop hardware, ‘advanced’ tech

On the surface, the idea of Apple opening an R&D center in China sounds logical, and possibly a really good call. If China is not Apple’s largest market it is certainly in the top three, and there are enough cultural and behavioral differences between China and, say, California that it would make sense to have a lab designed to make Apple products more “China-friendly.”

Adding a more urgent impetus would be the growing power of local electronics manufacturers like Huawei, Lenovo, and especially Xiaomi. In contrast with Apple’s “One Device to Rule Them All” strategy, the local players offer features and tweaks developed to match the lifestyles and wishes of China’s consumers. Xiaomi in particular has built a vast business by honing the ease-of-use of Google’s Android operating system to within a hair of iOS, and then adding thousands of enhancements suggested by fans. These tweaks, combined with slowing innovation from Cupertino, have helped locals eat into the iPhone’s former market dominance.

What is more, a series of government-backed measures over the past three years, ranging from attacks by state-owned media to the government-ordered shutdown of Apple’s iBooks store, are provoking speculation that Beijing may have it in for the company.

Against all of this, an R&D center seating 500 would seem to be a smart move.

What will dog Apple’s effort, though, is a justifiable degree of cynicism among both government and consumers in Beijing about whether this R&D center will do substantive research and development work, or whether it is so much window dressing. If all the center does is localization work, not only will Apple waste the opportunity to fully tap China’s pool of engineering talent, audiences in China will dismiss the center as so much PR.

The onus is thus on Apple. Unless the company offers frequent and convincing examples of genuinely innovative work being done exclusively in the China location, it will give local challengers a ready-made opportunity to discredit the iPhone maker with both the government and consumers. Rather than helping the company, it would serve to grease the rails in Apple’s decline in a strategic market.

Wanda Behind the Mask

Wanda’s Wang Jianlin has now made his fourth major acquisition in the US film industry. To his stable of the AMC and Carmike cinema chains and the Legendary Pictures production company he is now adding Dick Clark Productions. But it is rare indeed that something in China is as it seems, and that is why it is worth probing a bit into Wanda’s US acquisitions.

To their credit, US media are trying to do exactly that. Over the past several months, I’ve spoken to experienced reporters from the world’s leading financial news services, all of whom are trying to discern whether to take Wang Jianlin at face value, or whether there is something happening beneath the surface at Dalian Wanda Group that is at odds with its founder’s public positions.

What they’re getting is frustrated. It is always challenging to get information out of a firm unbound by the disclosure laws that govern public US companies. For what are probably very practical reasons related to its China business, Wanda apparently makes a fetish out of opacity.

When the world’s best investigative financial journalists start coming up empty, we are left with seeking answers based on clues rather than on answers. The best place to look is in the behavior of their partners and subsidiary companies. Some potential clues:

  • Check IMDB. Does Legendary look like it’s production slate is shrinking, or its production rate is slowing? Is Dick Clark increasing production, or is production on decline?
  • Check reviews of AMC and Carmike cinemas, especially their bigger, newer, flagship multiplexes in large US cities, on Yelp! and similar sites. Are reviews trending upward, or are they in decline? Are there complaints related to quality of service, of food, of cleanliness?
  • What is the status of partnerships with companies like Sony and IMAX? Are we seeing any action, or have things gone quiet after big announcements? Is Wanda living up to its commitments?
  • And, of course, watch for news on major moves in China’s real estate market, or from the government on restricting Chinese investments abroad.

Good reporters are already doing all of this. But journalistic standards won’t allow them to report on such circumstantial indicators. For the rest of us, they can help us gain a general hunch about where the company stands, how it is operating in the US, and where it is likely to go next.

Longer term, though, Wang will have to learn to operate in a part of the world where deep scrutiny of his operations are encouraged rather than prohibited, and where transparency is a necessary precondition for the trust he will need to sow in order to prosper.