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.