Covering the progress Chinese companies are making as they move into international markets

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.

 

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.

Three Hurdles That Will Define CTrip

The OTA that recorded the strongest performance in 2015 was Ctrip, which grew by an impressive estimated 58%, to reach gross bookings of $27 billion, driven by the booming Chinese domestic and outbound travel markets. Ctrip is today the third global OTA player, and is forecast to be able to challenge Expedia Inc and The Priceline Group for global leadership by 2019.

Source: State of Online Travel Agencies: Ctrip Joins Priceline and Expedia as Global Giant – Skift

Ctrip has, it seems, now officially (and to us in China, somewhat belatedly) joined the ranks of the world’s largest online travel agencies.

In fairness, the company offers the most comprehensive travel agency service in China, and has worked hard to fend off challengers for the past 15 years, either crushing them with size or, when all else fails, buying them out or co-opting them.

Now China’s leader must master three new challenges that come along with its newfound status:

Build a Better Outbound Service. First, the Chinese challenger must figure out how to match the listings and relationships that Expedia and Priceline have built around the world outside of China. Offering a handful of cheap alternatives in major cities is not going to keep hold of China’s 125 million outbound travelers, in particular as many of those who can speak English are already skipping Ctrip for international journeys and going right to Expedia and Priceline.

Defend against tougher local competition at home. Second, it must fight a growing number of challengers at home, both hungry local players all seeking to grab part of the market; platforms like Airbnb and its local imitators that are increasingly offering shared alternatives to traditional travel; and Expedia and Priceline as they bring their challenge into Ctrip’s home market.

Break out of China. Finally, at some point Ctrip must figure out how to evolve beyond the core Chinese market. Massive the travel base in the PRC may be, but the world beckons, and continued growth will eventually depend on deft expansion abroad.

The extent to which Ctrip can address these three challenges will determine whether it will remain a specialized, local player, or whether it will one day be feasting on the remains of Expedia, Priceline, or both.

 

 

Friday Irrevrence: Labels are Important

IMG_0060

My wife’s aunt brought this bottle of wine to a recent family dinner at the Liu Family Restaurant next to the National Art Museum of China (Meishuguan) in Beijing.

Nobody is happier than I to see Chinese vineyards jumping into the wine business. But someone should alert this particular winery that selling a wine without a year on the bottle makes it very hard for all but the utter tyro to trust what is in the bottle.

China: State Multinational or Global Superpower?

America fights, in other words, while China does business, and not only in Afghanistan. In Iraq, where U.S. troops brought down a dictator and are still fighting an insurgency, Chinese oil companies have acquired bigger stakes in the oil business than their American counterparts. In Pakistan, where billions in U.S. military aid helps the government keep the Taliban at bay, China has set up a free-trade area and is investing heavily in energy and ports.

via China succeeds by behaving more like a multinational company than a global superpower.
A
nne Applebaum
Slate
September 27, 2010

This was a clever observation when Anne Applebaum first made it five years ago, and there is still some validity to it. Nonetheless, one cannot help but wonder if things will stay this way much longer. China’s military posture overseas continues to rise, and its companies are beginning to discover that the easy fruit has fallen. We may well have witnessed either the high point of China’s overseas expansion, or, more likely, the end of China’s purely commercial overseas expansion strategy.

 

Making Crepes is Not Cultural Theft

US Jianbing Maker Accused of “Stealing Chinese Culture” | The Nanfang.

A young American goes to China. She finds out how to make jianbing, a popular local street food. She goes home to Portland, and she opens up a shop to make it.

And is promptly excoriated by Chinese netizens for “stealing Chinese culture.”

Leave aside unfathomable presumption (or cultural chauvinism) that would prompt someone to suggest that only Chinese should be allowed to make Chinese food (or that only French should make French food, or that only Italians should make Italian food.)  Those who have issues with Alisa Grandy making her living on making Chinese crepes miss the bigger point:

This is exactly the kind of cultural diffusion that the Chinese should be applauding as a natural result of China’s rise. The world is discovering Chinese culture, and in the process more and more aspects of China will wind up woven into the world’s cultural fabric.

If Chinese chefs can make hamburgers, pizzas, and fajitas (and I know more than a few who do, and some very well), American chefs should be allowed to adopt – and extend – Chinese cuisine.

New York’s Transparent Buildings

Full Bank Accounts, Empty Storefronts: The Economics Of High-Rent Blight.

Fascinating little story that somehow brings to mind places like Kings Garden Villa in Beijing, and much of the city of Ordos.

I would wager that at least some of the money that has found its way to Manhattan is coming from Chinese investors who would rather wait for tenants who can afford their desired rents than rent out at less and undermine the likely ridiculous sums they paid for the properties.

This is not a uniquely Chinese behavior, but it is a practice that is notably common among property owners in China. What is more, the sources of cash flowing out of China and into North American investment properties are certainly not limited to giant, high-profile developers like Wanda. So while it would assume far too much that Chinese money is the cause of High Rent Blight in New York, it is likely a contributing factor.

 

Lu Wei’s Facebook Gambit

Hutong West
Writing the Book
0935 hrs.

In all of the brouhaha around Facebook founder Mark Zuckerberg’s pandering comments to Chinese Internet czar Lu Wei recently, the China commentariat are lining themselves up on both sides. One side is morally outraged at what Jimmy Sonni at the Washington Examiner called “Zuckerberg’s efforts to ingratiate himself with an authoritarian regime – a regime that Facebook has an enormous incentive to placate…” The other side rejects the moral outrage. They believe that Zuckerberg should be applauded for attempting to position Facebook as a means to give Chinese more access to the global Internet.

Both sides (ostensibly) share a disgust with the regime in Beijing. One seeks to undermine it via isolation, another by assimilation. Yet both are naive; isolating China’s internet, thus compelling China to develop its own social media, will no more back China into a corner than did compelling it to develop its own newspapers and television networks; similarly, the belief that the Party will sit back and allow foreign social media to undermine its position belies history and underestimates the efficacy of the Party’s methods.

If Mark Zuckerberg wants to help Facebook make a fortune in China, all while serving the interests of the Chinese people over those of the Party, he start by asking himself a hard question. Why did Lu Wei really come visit Facebook?

Because it is entirely possible that Beijing needs Facebook almost as badly as Facebook needs China. Lu Wei is a good poker player, and he is surely not showing any of his cards, but it may be that in order to accomplish the Party’s goals, it needs Facebook’s cooperation and assistance, willing, witting or otherwise.

Zuck needs to pull his best, smartest people together and think this through. Because if they figure it out, they may not have to behave like lickspittles, handing over the keys to the empire in return for a handful of vague promises. Instead, they can improve their negotiating position and either stroll into China with heads high, or walk away knowing that it was the best alternative to doing so.

There is much more too all of this than meets the eye. Facebook’s founder has the wherewithal to suss this out. He should do so, and soon, before the company finds itself a pawn in somebody else’s game.

 

Wanda Arrives Arrives in Beverly Hills

“China Developer Buys Robinsons-May Site in Beverly Hills”
Julie Makinen
Los Angeles Times
August 8, 2014

The Times scored a win in picking up this story about how Chinese development giant Wanda is raising its bets on US real estate. Based in Beijing, Makinen can be forgiven, though, for not addressing what the real story is likely to be: the challenges the company is likely to face in gaining approval for its project.

Wanda has yet to reveal plans for the site, but the location has some particular challenges familiar to locals. Traffic is already very heavy going into the area on both Wilshire Boulevard and on Santa Monica Boulevard, which border the site, and during large parts of the day the proximity of Century City makes Santa Monica Boulevard a parking lot for several miles of its length. The development of a high-density complex on the eight-acre site would only exacerbate the problem.

That issue alone is likely to provoke public opposition to a sizable development. The NIMBY factor in the area is high. I know: I grew up three blocks away, and worked at the recently-demolished department store between college and grad school.

If Wanda is wise, it will embark on a campaign to woo local residents, most of whom live in homes with values far in excess of $3 million (and who are accustomed to wielding political clout with the local government,) as well as the Beverly Hills City Council. It will have architects focus on creating a site that integrates elegantly with the Century City, downtown Beverly Hills, with the Hilton, and with the elementary school and neighborhoods to the north.

If the project is clearly woven into the broader fabric of Beverly Hills, seeking to update an enhance rather than just plonking another Chinese multi-use center like it created in Beijing, Wanda will wind up with a flagship property and the respect of the business community in Southern California.

That costs money, of course. But Wanda has plenty of money, and it has every reason to make nice in the US as it diversifies its portfolio beyond China’s increasingly uncertain real estate market.

Electric Cars and China

“The mechanical value of the automobile is falling, but the electric value of the car is rising.”

— Amit Gattani, Micron Technologies

Let’s take Amit’s point one step further: the trajectory of automotive development is such that the car is evolving into an oversized piece of consumer electronics. If there is a single factor that inveighs in favor of China eventually becoming the automaker to the world, this is it.

China Goes West: The Coming Rise of Chinese Brands

China Goes West: Everything You Need To Know About Chinese Companies Going Global
Joel Backaler
Palgrave-Macmillan
May 2014

If there is one question that vexes many observers in China, it is this: how can Chinese companies begin to build – or become – global brands? Thirty-six years after the beginning of reforming and opening, only a handful of Chinese companies – Lenovo, Huawei, Haier, Tsingtao – have made the leap to global leadership in their sectors. This invites a rude comparison: 36 years after it was flattened by the US Army Air Corps, Japan had already produced dozens of leading consumer brands – Sony, Panasonic, Toyota, Honda, Canon, Nikon – that were disrupting industries around the world. Why has China not produced a similar – or even larger – crop of world leaders in the same time frame?

In an intriguing new book, China Goes West: Everything You Need To Know About Chinese Companies Going Global, author Joel Backaler offers us a glimpse into why there are so few Chinese global brands. And some of the reasons will surprise you. I won’t spoil it for you, but the reasons go way beyond marketing competency.

Backaler, who has spent the better part of a decade studying Chinese business and is the author of a highly respected blog on the subject, was given unprecedented access to the companies and their executives, and tapped the knowledge of some of the wisest observers of Chinese companies.

Through the stories of these firms, Backaler explains what drives Chinese enterprises to even consider going global in the first place. He describes the painful path that China’s pioneering Champions followed to get there. And he leaves you wondering why, despite the potential rewards, an more than a handful of Chinese companies would bother.

But Backaler pulls no punches – he clearly believes that we are on the cusp of a major change, one that will see a rash of Chinese companies go global, and in the process disrupt global markets much the same way the Japanese did in the 1980s. You may not agree – but Backaler’s makes a persuasive case, and he makes some pointed suggestions on what the rest of us should do in response.

China Goes West is not a marketing book, but it is a book all of us must read for a simple reason: it describes how China will build global companies, and it gives us the strategic insight we are all going to need to either help them – or to help their competitors stop them.

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Setting the Stage for Chinese Innovation

Near People’s Square, Shanghai
Skyline in Silhouette 
0700 hrs. 

Walking the floor at both CES in Las Vegas and Electronica China in Shanghai within a ten-week space provides one with a clear view of how far Chinese enterprise has come, and, equally important, the degree to which international technology businesses have lost their former dominance in China.

One could conclude from these impressions that multinational tech companies are in a state of permanent decline in China: Beijing’s unstated but ongoing policy of import substitution has succeeded, and foreign companies are fighting a losing battle. You don’t need to go to trade shows for anecdotal evidence. Just look in purses and backpacks: ZTE, Huawei, TCL, Lenovo, and Yulong are five of the top ten mobile device brands, and they’re gaining on the global giants.

But if you dig a bit deeper, as you can at a show like Electronica, you find that the opportunities for foreign tech companies have not disappeared: they have evolved. To understand why and how, it is useful to start by looking back on how the tech business developed in China.

From Buy to Make

Since the beginning of reforming and opening in China in 1978, the nation has essentially gone through three phases of foreign involvement in technology-based industries.

The first phase was imports, when the government focused on bringing urgently-needed products like personal computers, telephone switches, automobiles, machine tools, and other technology-based products into China. The need for these products, most of which were essential to ease key bottlenecks in the development process, was so urgent that key ministries were permitted the use of precious foreign exchange to purchase those goods.

China’s leaders always expected, however, that the nation would begin producing these goods on its own, preferably in local companies, but realistically in joint ventures with global technology companies who would bring three essential ingredients: the products, with their component technologies; production know-how, with process technologies; and the capital to build the production facilities. This was the second phase: the shift to local production.

Fast Followers

By the mid-1990s, though, another shift began to take place. As the global tech giants ramped up production in China to a mass-scale, local firms began manufacturing their own technology goods. Local firms began to dominate production, using a “fast-follower” approach: “maybe we won’t be innovators, or even the first to market with a given innovation, but we will come to market so soon after the innovation leader that we will still reap our share of the market.”

By last year, the payoff of this shift had become apparent. Chinese high-tech companies were long past needing foreign manufacturers to teach them how to build high-tech products, to help them implement cutting-edge production processes, or even to finance the construction of factories. Those local firms unable to bootstrap their own capabilities and finance now had a vast stable of local and foreign companies ready to provide the necessary technology, and finance, thanks to cash flow and capital markets, was no longer a problem.

Innovation, however, remained a challenge. While a handful of local tech companies –  notably (but not limited to) Huawei, ZTE, Xiaomi, and Leovo – had begun to innovate, widespread innovation that would offer a more sustainable competitive advantage (and a larger share of profits) still seemed a ways off.

Enter the Innovation Platforms

And there it remains today.

This gap between efficient production and value-driven manufacturing is the heart of the next opportunity for foreign firms. While the days of foreign brands utterly dominating technology markets in China may be past, more than ever China’s manufacturers need a steady stream of innovations upon which they can base their own innovating.

Technologies that serve as the foundation that allows others to innovate are what we can call innovation platforms. Five factors make innovation platforms stand out from other technical advances:

Significant – The core innovation is a genuine advance that is both useful and relevant;

Substantial – There is a obvious, large, and diverse market for products based on the innovation that offer substantial profit potential, and the technology is easily commercialized;

Shared – The company promulgating the core advance is more interested in creating an ecosystem than a monopoly, i.e., it is content with focusing on supporting and enhancing the core technology and not getting into the business of its customers/licensees;

Stable – Any subsequent changes in the underlying technology are likely to be iterative, not major, for several generations of products. This makes it economically viable for companies to invest in R&D based on the innovation platform.

Supported – Rather than serving as a glorified patent troll, the companies that develop innovation platforms invest heavily in resources designed to assist product developers create viable commercial products, such as on-site engineering support, system validation labs, extensive documentation, or developer groups. In addition, the company continues to invest in improving the core technology.

Early Innovation Platforms

Many innovation platforms take the form of acknowledged industry standards. Examples like Wi-Fi, Bluetooth, and USB could be considered a form of innovation platforms, in that their technologies enabled the creation of products and even companies.

But when we talk of innovation platforms, we are really looking at products and technologies that spawn not only products, but companies and entire industries. Some illustrative examples:

The Xerographic Process: Invented by Chester Carlson and later commercialized by Haloid/Xerox, which begat the photocopier, the laser printer, desktop publishing, and many specialized sectors;

The Intel 8000 microprocessor family, that together enabled the creation of the personal computers, stand-alone video games, and a half-dozen major industries;

Qualcomm’s CDMA: CDMA enabled the commercialization of the internet, created the telematics industry, and is on its way to recreating the automotive, trucking, and healthcare industries, among others.

Each of these companies took an indirect lesson from the failure of Thomas Edison’s Motion Picture Patents Company, an industrial trust that tried to control the film business as well as the manufacture of cameras and film stock. It was, arguably, Edison’s greatest failure. By exercising a modicum of control over the core technology, supporting it, advancing it, and making it available on reasonable terms, Xerox, Intel, and Qualcomm each fostered the creation of immense economic value.

Platforms for the Future

In a world where industrial and engineering capability is a scarce quantity, the easiest way to make a return on a major innovation is to create a vertical industry around it, building the components, creating the product or system, and distributing it under your own brand. The Bell System did this for nearly a century with telephones, and IBM and a handful of other companies did this for the first three decades of the computer industry.

But when the ability to design, engineer, and industrialize complex products is widely distributed, as it is today, robust companies are built on either using innovation to enable industries, or in building on innovation to create industries.

For the time being, Chinese companies are (generally) comparatively better at building industries based on key innovations, and European and particularly US companies are (generally) comparatively better at consistently creating core innovations that can serve as the platforms for those industries. This does not mean that no core innovations will come out of China, or that the US is no longer capable of product development and commercialization.

But it does suggest that the richest opportunities in China for foreign companies, particularly those in science, engineering, and technology-based industries, lies in licensing and enabling Chinese manufacturers, rather than competing with them.

The question facing tech companies, then, is whether and how to make use of the company’s innovations – or an ongoing stream of them – in order to serve as a profitable and indispensable platform for Chinese innovation. And for those of us who watch this market, the pressing question is “in which industries will the next round of innovation platforms emerge?

I leave the first question to the companies themselves. For the second question, my early research points to transportation, healthcare and biosciences, construction, energy, and the environment. I know: I have my chips on a lot of spots on the roulette table. In the coming months, I look forward to sharing with you why I think things are going that way.

Walter Lippmann on China

“The small American businessman has long complained about how difficult it is for him to survive in the competition with the large American corporation,” [Walter] Lippmann warned. “What will he do when he has to face the competition of totalitarian monopoly organized on a continental scale?”

Alan Brinkley The Publisher: Henry Luce and His American Century

Lippmann was talking about the Soviet Union at the time, but his words do resonate today.

Happy New Year, everyone, from Silicon Hutong.

Five Predictions: China’s Business Environment in 2014

Hutong West
Sunday Afternoon Countdown to Morning in Beijing
1526 hrs. 

Much ink and focus has been given of late to understanding China’s political evolution. Too little, on the other hand, has been given to what it will all mean to those of us who must decide what role China will play in our business plans in the next two to three years.

Futurism is alchemy in the best of circumstances, and nowhere more so than in the case of China. Nonetheless, if we extrapolate from current events, it appears that China has embarked on a course of commercial nationalism, if not outright mercantilism.

In the spirit of the season, then, we offer our five predictions for 2014:

1. China will build a more protected environment at home for its state-owned, state-coopted, and “accidental champion” enterprises through an increase in the use of soft protectionism.

2. Those enterprises will thrive at home, but increasingly will be pushed abroad, seeking prestige, less competition, and faster growth.

3. Trade and industrial policy will test the absolute limits of what China can get away with under the WTO, and Beijing will conduct a propaganda campaign to try and undermine the Trans-Pacific Partnership.

4. Foreign brands will find it more difficult to gain share in China. In addition to soft protectionism, they will face the continued relative decline in the prestige of foreign goods/brands in a growing number of sectors.

5. In 2014 we will see the beginnings of a new crop of Chinese entrepreneurs, more of whom will be starting their companies from second, third, and fourth tier cities, or even overseas. The cost and complexity of doing business in China’s first tier cities – along with the declining quality of life – will shift focus away from Beijing and Shanghai.

I’ll be addressing these more in the coming year.

The Challenge of the State-Co-opted Enterprise

Hutong West
Santa Ana Fever
1124 hrs.

When we talk about broad categories of Chinese enterprises, we focus on ownership: state-owned enterprises, or those companies owned and guided by the government; private enterprises, or those companies owned by other companies or by individuals; and foreign enterprises, those companies legally or functionally owned by non-Chinese corporations or individuals.

You don’t need to work with this taxonomy for long to discover that it is inadequate. Hybrids abound, and there are a growing number of firms that do not fit neatly into these distinctions.

One type that we must address, even if it seems chimerical, is the “state-co-opted enterprise.” This is a private company, one not owned by the state, that has not only submitted itself to the modicum of government oversight mandated by law and policy, but also by intent or action has made itself an extension of state policy. Most often, this is done in order to secure a right to operate in a particularly sensitive sector.

The reason this phenomenon needs to be examined is that there is an implicit belief outside of China that many Chinese companies, while ostensibly not state-owned, are in fact controlled by the Party or some arm of the Chinese government. This is especially the case for large Chinese companies with a growing international presence and opaque ownership structures.

Huawei’s singular employee-ownership structure, for example, vexed US Congressional investigators. The ownership of Qingdao-based white-goods maker Haier remains obscure at best. Lenovo protests that it is “100% market oriented,” but the Chinese Academy of Sciences retains 36% ownership of the enterprise. And Tsingtao Brewery Group, the majority owner of Qingdao’s Tsingtao Brewery, has an ownership structure that remains unclear. These arrangements, unconventional and strange to western observers, seem tailor-made to hide the hand of government or military behind these enterprises.

But ownership is not the sole source of concern. There seems little question that China’s internet giants – Baidu, Youku/Tudou, Alibaba, Tencent, and Sina – are not state-owned by any measure. But their leadership in an industry where foreign participation is limited by government policy gives them the status of what Piper Jaffray analyst Gene Munster called “a state-sponsored monopoly.” Such a status could be seen as leaving these companies inordinately beholden to the government if the Party were ever to call in its chits. Worse, as we enter an era where cyberwarfare is becoming a core mode of international conflict, the capabilities encompassed by China’s internet giants offer the Party and PLA motive and opportunity to co-opt these companies.

None of this is to say that these companies dance to the government’s every pull on the string. But for each of these firms it is going to require more than bold assertions of independence under questioning to convince the world that they are not somehow in the thrall of the Party, particularly if Xi Jinping stokes commercial nationalism.

Those of us who work with, represent, or do business with China’s emerging non-state enterprises either need to be demonstrate their independence from the outset, or we need to address the relationship between these firms and the government proactively, so they are not “discovered” by accident.