At the end of last year, Daimler AG acquired a 12-percent stake in its partner BAIC Motor, the passenger car unit of BAIC Group, becoming the first foreign automaker to hold a significant equity position in a Chinese original equipment company. Explaining the strategic move, Daimler Chairman Dieter Zetsche said that China is a "key market" for the group with "enormous opportunities." With this assessment, Daimler is certainly not alone. China has long evolved from being the world's manufacturing base into being a sales market of giant proportions. And more and more large and medium-sized German companies are longing for a piece of the pie. But China is also undergoing a phase of major economic and social change posing both opportunities and risks to foreign investors. So what does it take to succeed in China?
This question is addressed by the recently published book Can China Lead? Reaching the Limits of Power and Growth by the three senior academics and leading China experts Regina M. Abrami, William C. Kirby, and F. Warren McFarlan. The authors look at the topic from a historical, economic, and management strategic perspective offering a holistic view of the challenges the country, and everyone trying to do business there, is facing. Based on some thirty case studies of local and foreign companies, the authors identify the biggest obstacles and most important success factors for operating in the second biggest economy in the world. They also venture a critical and thought-provoking outlook on China's future global leading role.
Overcoming Challenges and Seizing Opportunities
Despite recent reforms efforts, the biggest challenge for foreign investors in China remains the omnipresence of the Party-State and the political instability of the country, the authors argue. "China's political system is at the heart of understanding the kinds of strategies that have let to business success and failure," they say. While there is a robust private sector, it is limited in scope due to political favoritism toward state-owned corporations in key sectors the Chinese government considers strategically important. Without the support of the party at all political levels, it is more or less impossible to do business in China. The authors stress: "The goal of making a profit is an insufficient reason for the government to support you. You must show, both at the national and local level, how your organization provides value for the country and the province/city. If you facilitate technology transfer, improve the standards of living, extend life expectancy, and so forth, your are welcome." Therefore, establishing lasting relationships with the party is one of the most important parts of any China strategy. The authors advise companies to set up a team of public affairs specialists to perform this key task.
Corruption at all levels, the lack of legal certainty, and the arbitrary interpretation and execution of laws and regulations also remain a cause for concern for foreign investors. Particularly the protection of technical know-how is a great challenge. Not only product piracy, but even the copying of entire business models and processes art still widespread in China.
Another important factor that is often underestimated by Western corporations that plan to expand into China are the huge regional differences within the country in terms of language, culture, economic interests, and political power. The authors believe that one of the key lessons for foreign investors is that there is no unified national market in China. "China instead is a series of interlocking regional economies, with the populations the size of European nations, or larger." There are only few products for which a national market exists. At the same time, the local administrations and party officials have great influence on the success of businesses. Therefore, foreign firms are well-advised to complement their national China strategies by "focused regional strategies," the authors say.
China's infrastructure offers international corporations both opportunities and risks. In the recent past, the Chinese government has been investing heavily into "hard" infrastructure, that is the transport and traffic routes which form the basis for further economic growth. The infrastructure of the economic centers in the East of China already match, in some cases even exceed, the levels of Western industrialized countries. In the next few years, the central and western parts of China will be systematically developed as well, which will immediately benefit the automobile, aviation, railway, and logistics industries. In the mid-term, however, the development of a highly efficient infrastructure and the corresponding increase in demand for products and services will provide interesting perspective for other industries as well. China's "soft" infrastructure, that is the human capital and the institutions that cultivate it, on the other hand, is not yet sufficiently developed, the authors assert. There is a lack not only of skilled workers across industries and functions, but especially of leaders and creative thinkers. This makes it difficult for foreign companies to recruit suitable staff locally.
Last but not least, China is on its way to evolve from the world champion in exports to the world champion in consumption. By the end of this decade, growth is expected to be driven mainly by domestic demand. Key driver for this development is the rising income level which strengthens the purchasing power of consumers. The needs of this rapidly developing consumer society cannot even remotely be covered by the state-owned enterprises, the authors point out. Both the mid and upper market segment offer huge opportunities for local and international companies. In fact, China already is the world's largest luxury market before the United States. Whether these developments will result in social unrest remains to be seen, though, the experts warn.
China's Future Role as Leader
Due to the political instability of the country, the authors of the book do not share the commonly expressed view that the twenty-first century will be the Chinese century. Respect for human and civil rights and the promotion of a free, innovative entrepreneurship are prerequisites for a moral and economic leadership role in the world. "[…] until the big political questions are answered […] and until a political system of enduring legitimacy and confidence is erected, China will thrive, but it will not lead," the authors conclude.
The book is written primarily for managers and strategists of multinational corporations already doing business in China or planning to do so. It is easy and entertaining to read, and the questions posed by the authors at the end of each chapter are very helpful in developing sound China strategies. Can China Lead? - highly recommendable!
Abrami, R., Kirby, W.C., McFarlan, F.W. (2014). Can China lead? Reaching the limits of power and growth. Harvard Business Review Press.