China Inc 2.0 – The new way forward for China
As China’s experiment in market-opening enters middle age, two general classes of competitors have emerged as primary drivers of the economy. International MNCs have learned to manage in China – starting out as sourcers or manufacturers and developing into savvy marketers and trend-setters for the young and upwardly mobile. China’s homegrown State Owned Enterprises (SOEs) have morphed from supply-side monopolists into fierce & fast competitors that have learned to balance the strategic goals of their bureaucratic masters with the slippery tyranny of free-market demand.
Lost in the shuffle were independent Chinese enterprises, who have never quite gained the critical mass needed to leave a distinct footprint. Scratch the surface of many successful Chinese private businesses, and you’ll find a government agency or bureaucrat setting strategy and directing big initiatives. Haier, HuaWei and Lenovo are so closely linked to government bureaucracy in terms of lineage and strategic goals that they can’t be considered pure private enterprises. The inherent flaw of this kind of organization is that when times get tough they tend to display the worst of both worlds: bureaucratic decision-making pushing expensive operations and highly paid managerial ranks. We are rapidly approaching the limits of certain types of economic growth. True, Starbucks and China Telecom have plenty of room to expand their operations – but now it is cookie-cutter expansion. It doesn’t require innovative managerial talent – and doesn’t offer big rewards for ambitious individuals.
A new type of economic organization is developing beneath our very noses – a hybrid of MNC and SOE that will come to lead China’s economic development and drive the rise of Chinese brands that can compete both within China and internationally. This hybrid organization will be an amalgamation of new SOEs and old MNCs. They will be made up of former MNC managers that understand the value of systems, procedures and brands and SOE managers who know how to work the Chinese bureaucracy. Ex-MNC types are the corporate animals: the project managers and HR specialists who are comfortable with international systems and understand how to develop and nurture global brands. They will team up with ex-SOE managers who have access to the resources, client lists (of other captive SOE and government buyers), networks, contacts and back-door access to regulatory approvers.
This new type of organization will have ability to brand, but also know how to co-opt SOEs and the bureaucracy for resources and regulatory approvals. They will not be boot-strapping entrepreneurs, but sophisticated teams of savvy MBAs armed with business plans, customer lists and financing. Look out for an entire department or subsidiary of an established MNC to suddenly get hived off or bought out by local Chinese management (funded by international VCs or investment bankers) – and immediately forge ties with the operating division of their main SOE supplier or client.
How will they differ from the small-scale Sino-Western JV that already seems to be popping up all over the major Chinese business centers? They will be large enough to compete with existing MNCs (in specific niches at first) and they will have the resources to develop their own brands, have the scale to challenge incumbent market leaders and accommodate traditional Chinese strengths in networking and ability to interact with the bureaucracy.
This new type of company will be a pure private, Chinese play – not a reconstituted western case study or a returnee slapping a Chinese name on a US business model. It will be designed by a business strategist or financial planner – not an engineer growing a manufacturer organically through low-cost production or boom-town demand. It will focus on developing brands targeting the middle & upper middle segments of the Chinese market, but will make developing true global branding a top priority.
Right now, most Chinese private companies are still working with the worst of both Chinese and western business traditions – risk-avoiding managers seeking quick profits. If China is ever to develop its own Sony or Apple or Siemens, it will have to draw on the strengths of successful Western and Chinese organizations. Until that happens, China will continue to be a busy factory and a growing marketplace – but the lion’s share of the profits will end up in overseas banks and corporate headquarters.
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