In the Shadow of the Dragon

The Global Expansion of Chinese Companies--and How It Will Change Business Forever

 In the Shadow of the Dragon

Authors: Winter Nie, William Dowell
Pub Date: May 2012
Print Edition: $27.95
Print ISBN: 9780814431702
Page Count: 304
Format: Hardback
e-Book ISBN: 9780814431726

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Excerpt

PREFACE

Knowing others is intelligence; knowing oneself is true wisdom. Mastering others is

strength; mastering oneself is true power. —Lao Tsu

Napoleon Bonaparte’s famous prophecy that “When China awakens,

the world will tremble” has not fully come to pass yet, but it is

clearly on the horizon. The Economist recently noted that although

China is now the world’s second economy, its share in global business

investment is still only around 6 percent, and most of that is in

wealthy countries, and to a large extent in the United States. In contrast,

Great Britain accounted for more than 50 percent of overseas

investment in 1914, and the United States accounted for a larger

share than that in 1967. Whether or not it eventually surpasses the

United States as the world’s next leading power, China is already

having an important impact in the international world on everything

from business to employment.

Anyone who doubts China’s importance only has to look at the

figures. China’s population is more than four times the size of the

population of the United States, and China has already absorbed a

large share of the world’s low-cost manufacturing, ranging from

consumer electronics to textiles, plastics, shoes, clothing, and bicycles.

The affordable prices of the goods that flood into the Walmarts,

Costcos, and Best Buys of the world are made possible by

the continuing willingness of Chinese workers to put in long hours

at low pay. China’s low-cost–high-productivity approach helped

fuel a worldwide boom in consumerism without creating runaway

inflation. The downside has been the loss of thousands of low-end

manufacturing jobs in the United States and Europe. They are not

likely to return.

Other countries have also provided cheap labor for routine

manufacturing, but several important factors make China different.

The enormous size of China’s internal market and the density

of the population in its cities make it possible for new business to

obtain a critical mass much more quickly than in other countries.

They also create fierce competition. Those companies that make it

through the Darwinian struggle that is now taking place in China’s

private sector have streamlined themselves for maximum efficiency,

and even more important, they’ve learned to respond to

changing market conditions with impressive speed. The lesson

emerging from China’s turbulent marketplace is that profit margins

are razor thin, competition is ruthless, and only the best and

quickest can survive.

Cornering the lion’s share of the world’s basic manufacturing

has given China an advantage when it comes to systems and infrastructure

that makes it even harder for other countries to compete.

Chinese ports can ship goods faster, cheaper, and more efficiently

than any other emerging economy and more conveniently than

many advanced economies. China’s high-speed rail links and

improvements in transportation and power generation mean that

start-up companies can get support in China at a level that other

countries have difficult matching.

The enormous scale of China as a manufacturing powerhouse

has also given it considerable leverage when it comes to attaining

access to new technologies developed by the leading industrialized

countries. In early 2009, when the Chinese government put out bids

to build its high-speed rail system, it forced foreign companies to

enter into joint partnerships with Chinese companies. The foreign

companies could have only a 49 percent equity stake and had to offer

their latest designs. At least 70 percent of each system had to be made

locally. Today, foreign multinationals still supply some of the most

highly sophisticated equipment to China, but for rail transport, they

account for only 15 to 20 percent of the market. Chinese companies

have already mastered many of the core technologies.

The business relationships that China has created around the

world make it easier for Chinese start-up companies to put together

efficient supply chains and obtain needed resources, giving the

Chinese advantages that competitors in other emerging economies

simply don’t have. While China still has a pressing need for highly

qualified managers, it has been sending thousands of students to

the world’s best business schools for advanced training, and it is

catching up fast.

Within China, the country’s amazing growth rate is likely to be

prolonged by the rapidly rising level of skill and education of its

population and the readiness of recent graduates to work long hours

to get ahead. It’s possible to hire a college graduate in China for as

little as $300 a month, and there are more and more of them. The

United States, for example, currently graduates around 40,000 engineers

a year. In contrast, China graduates 280,000—more than the

rest of the world combined. And all of this is happening in a remarkably

short period of time. In 1998, China had around 830,000 students

studying in colleges. Today, it has more than 6 million, and the

quality of the education being produced by these colleges is very

good. It is no secret that China is rapidly moving in the direction of

becoming a first-rate power in science and high technology, and

some of its leading corporations, such as Huawei, are already there.

In areas like clean energy, China is already taking the lead.

President Barack Obama had intended to make solar and wind

power a major focus of U.S. investment in technology, but shortly

after China began focusing on the market, most of the production

had shifted to China.

China’s vision of its place in the world is also evolving fast.

Chinese companies that conquered China’s domestic market a

few years ago are now determined to go global and to compete

internationally with established Western multinationals. These

companies do not really have much choice. Pressure from price

wars and intense competition inside China, as well as from the

multinationals that gained access to China’s internal market when

China joined the World Trade Organization in 2001, is forcing

China’s major companies to expand internationally in order to

keep growing.

Western companies that find themselves increasingly challenged

by this new situation have the choice of competing head-on

or of forming new alliances with Chinese partners. A growing number

of these Western companies are being bought outright by

Chinese investors. Understanding China’s internal frame of reference,

what the Chinese are trying to do and why, is increasingly critical

to corporate survival.

While a flood of books have described the China phenomenon

from a Western point of view, hardly any have been written from

the perspective of how China sees the world and how this vision

relates to what is actually happening on the ground inside China.

This book examines several of China’s top companies that are now

beginning to create a presence outside China. Each of these companies

is a dominant leader in a different segment of China’s economy,

whether it happens to be energy, electronics, low-cost

production, financial services, sophisticated industrial equipment,

or household appliances.

It is important for Western businesses to understand how and

why these companies function the way they do. China’s new

entrepreneurs—particularly the ones that have grown up in the

private sector following the Open Door Policy initiated by Deng

Xiaoping in the late 1970s—are playing by rules that are radically

different from the ones that Western corporations and multinationals

are used to.

While strategies in the West tend to resemble a chess game, in

which powerful pieces attack their target from various directions,

the strategy adopted by many of China’s new companies more

closely resembles the oriental game of Go. In Go, the target is surrounded

by pieces that have little strength as individuals but that

eventually work together to envelop and lethally submerge the target.

In Go, positioning and timing is everything. Mao Zedong used

a similar strategy to defeat the Nationalists in China’s civil war in

the 1940s. He referred to it as “occupy the countryside and surround

the cities.”

How the West responds to China’s emergence as an economic

power will have a crucial impact on both international business and

the current trend toward globalization. There is a natural tendency

in the United States to see Western purchases abroad as investments.

Yet when the Chinese try to secure reliable energy reserves or

to buy up foreign companies in order to get access to technology, it

is often treated as an invasion or a grab for power. But China today

is not a monolith, and it is very different from the communist

China of the 1950s and 1960s. The Chinese companies that are

emerging today as the most competitive are those that have managed

to survive in a harsh, free market environment, with little government

support to help them get started. Many Chinese admit

themselves that they still have a long way to go in terms of development,

but they are learning fast.

What makes these companies unique is their extreme readiness

to adapt to unforeseen situations, and in many cases to gamble

the entire company on a single strategic decision. While major

Western corporations have a tendency to diffuse responsibility by

turning to committees to set strategies and make crucial decisions,

the new Chinese entrepreneurs often act on instinct. The result is

that they often close the deal before an unsuspecting multinational

competitor can react. Few Western companies would be allowed to

take the kind of risks that many of China’s best entrepreneurs have

engaged in, yet to survive, many Western multinationals may need

to learn how to do just that in the future. This book explains why.

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