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Author Jonathan Woetzel answers questions about China and emerging business opportunities there.
 | | Why has China "crossed the Rubicon" to become reliant on the capitalist model? Answer |
| | | | Given its success, why should China go further in its reforms? Answer |
| | | | Why will reforms make China more attractive for business? Answer |
| | | | What has surprised you the most about China's reforms? Answer |
| | | | What is determining the fate of companies in China now: the government or the market? Answer |
| | | | How should business be setting strategy for China? Answer |
| | | | What strategic mistakes are you seeing in China now? Answer |
| | | | What happens if China succeeds with its reforms? Answer |
| | | | For the CEO not already in China today, what would you tell him or her before they decide to invest in China? Answer |
| | | | Do you have any advice for the CEO already in China today? Answer |
| | | | Are you betting on a rosy or a turbulent future? Answer |
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| | | Why has China "crossed the Rubicon" to become reliant on the capitalist model? | | | China's transformation from a planned to a market economy is beyond the point of no return. It is unprecedented in both the size of its undertaking and the extent of its ideological shift. Just 25 years ago, China's leaders were decrying the market. But they also realized that its centrally planned economy was not delivering the services demanded by its people. So in 1978, China started the reforms it needed to introduce competitive markets as its economic engine, with taxation of commercial enterprises rather than state ownership to generate its public revenues. As a result, the State's share of economic activity has shrunk from 80 percent in 1978 to less than 30 percent in 2000, while GDP per capita has quadrupled. | | | | | | Given its success, why should China go further in its reforms? | | For continued investment and growth, without which the risks for China are unimaginably high. They have raised the expectations of 1.2 billion people, for their own standard of living and a better life for their children, and there is no going back. Without growth, the government's social, environmental, health, and educational commitments will go unmet. The Chinese middle class has leapt to the new technologies, financial options, product choices, and retail formats that the reforms have brought, and are demanding more.
Worse, a failure to complete its reforms will leave China with a massive underclass of rural migrants. Already, there has been unprecedented social and labor dislocation in China, particular in its interior regions and rural areas. Without the growth needed to share the economic benefits throughout China, over 700 million people may remain as an increasingly discontent, destabilizing, and irresistible force for radical and destructive change. | | | | | | Why will reforms make China more attractive for business? | | Only by continuing to improve capital and labor productivity throughout the economy can the Chinese government generate the revenues it needs to provide social benefits. That productivity will only come with investment and investors need to be confident of a reasonably open and predictable market. In fact, China needs over $400 billion in investment each year to meet its targets. In 2002, for the first time, China became the world's largest destination of FDI (foreign direct investment), attracting over $50 billion to overtake the U.S. as investment there fell heavily.
Still, ever-increasing domestic and foreign investment is needed. So the government is doing what it can to encourage its new markets, and the companies operating in them, to succeed based on their competitiveness. Many industries are already very open, while WTO accession has set deadlines for many others. The government is investing massively in energy and other infrastructure that would otherwise be a brake on growth. And domestic industries will not be allowed to jeopardize China's export competitiveness and creativity by lagging in their reforms as they have in Japan. Across the board, companies will operate in markets that are progressively more competitive, in which well-run businesses will prosper. | | | | | | What has surprised you the most about China's reforms? | | The pace of mindset change has exceeded even my generous expectations. I had little doubt that China would quickly invest in the hardware of a modern economy – roads, bridges, skyscrapers, and the like. But the speed at which officials, company leaders, and the man-in-the-street have all turned to market-based thinking is amazing.
Compared to previous Chinese modernization efforts-like the Self-Strengthening movement of the early 1900s or the Open Door Policy of Chiang Kaishek-the Opening to the Outside World has had unprecedented impact on the way individuals relate to and act with each other. | | | | | | What is determining the fate of companies in China now: the government or the market? | | Companies mostly determine their own fate. Naturally, government still plays an important role in setting the bounds within which competition may occur. But these boundaries are generally wide enough to allow companies to win or lose on their own. Only a few industries are still wholly in the hands of the State and these are largely in areas where that is often seen worldwide – e.g., defense, energy, transport.
That said, regulatory intervention to support local industry does happen, and foreign investors must meet the needs of both consumers and local governments to succeed. | | | | | | How should business be setting strategy for China? | | Well, that depends heavily on the sector, and views on each of these are detailed in the book. But any company operating in China, be they foreign or domestic, needs to be aware that competitive advantage has replaced government relationships as China's business currency. In every sector, investment, innovation and consolidation are the keys to the game, and there is no more competitive game in the world right now than China's domestic market.
In the highly competitive sectors such as high-tech and consumer electronics, the Chinese are designing and adopting new technologies at a breakneck pace. They are developing their companies into real future competitors for the current global leaders. In these sectors, if you win in China you have a good chance of winning anywhere. In asset-heavy industries such as steel, automotive, and transport, consolidation and restructuring is the order of the day, with Chinese firms still needing a stronger customer focus and global alliances to achieve profitability. Energy companies need to invest carefully in China as the economics of global gas and coal markets are changing rapidly. In the promising retail sector, traditional formats face unprecedented margin pressure and must reinvent themselves to stay viable - department stores need to introduce new entertainment, food and beverage, and commercial formats; and gasoline stations must compete for non-fuel spending to make their economics work.
Finally, in financial services and media, the remaining state enterprises must fully reinvent themselves to compete against new domestic and foreign players who are responding much more creatively to the emerging wealth in China. | | | | | | What strategic mistakes are you seeing in China now? | | | The most common is the failure to appreciate the pace of change in the market. For example, the greatest growth in consumer markets is in the second and third tier cities – cities that range from 500,000 to a healthy 3 million people. Companies that focus only on the largest coastal markets risk missing out. Likewise, companies that fail to anticipate the ferocity of domestic competition can find their margins quickly eroded. | | | | | | What happens if China succeeds with its reforms? | | If China succeeds in this second economic revolution, global markets will never be the same again. Hard as it is to imagine, global companies and commentators still haven't come to terms with the size and competitiveness of China's markets. It is already the world's largest market in many consumer goods and basic materials, having surpassed the U.S.
In overall GDP, China will match Germany by 2010 and, growing by the size of Spain every 5 to 7 years, move past the US by 2040. As with the U.S. in its post-war boom years, a company that succeeds here will succeed anywhere. As a result, China will become a manufacturing powerhouse that will set price and quality standards for commodity and, increasingly, niche goods.
Chinese companies are strategic partners of global leaders in every sector. And, ultimately, China will develop a robust and deep capital market, the largest in Asia after Japan, creating new fundraising options for both local and global companies. | | | | | | For the CEO not already in China today, what would you tell him or her before they decide to invest in China? | | | Make haste carefully – being first does matter. But do not sacrifice rigor in the process. No one will do your homework for you and the market is very competitive. Finally, invest for the long haul, but aim to make money today. If the deal isn't profitable, don't do it. | | | | | | Do you have any advice for the CEO already in China today? | | | Most importantly, support and challenge your people on the ground. They are the only ones who can really make a difference to your success in the country once you have committed. These people look to you for guidance and support. Your role in developing and sustaining a China organization is critical. | | | | | | Are you betting on a rosy or a turbulent future? | | | Sunny but with occasional showers. China typically takes two steps forward and one step back. There is already a considerable amount of speculative excess built up in the system, with bubbles in the stock, real estate and banking markets. As reform continues, some of these bubbles will be popped, and some companies will lose out. But those companies who have developed local sources of competitive advantage will be able to ride out the storms. | | | | |
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