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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
How to adapt your firm’s competitive strategy to the modern reality of Chinese enterprise
Enterprise China: Adopting a Competitive Strategy for Business Success delivers a roadmap for business executives competing in and with China. Prepared by a team of renowned management researchers and strategists, the book examines the often-misunderstood interconnectedness of the Chinese state and Chinese businesses, demonstrating that individual firms and companies are often just the tip of the iceberg. The authors explain how the overarching vision, ambition, and strategy of the State impact and guide key commercial enterprises and how this affects Western business interests.
In the book, you’ll also find:
- Explorations of the competitive strategy and associated tactics of Chinese enterprise
- Strategies and tactical options for Western business executives as they compete in and with the Chinese state
- Descriptions of the key factors business executives must assess as they do business in and with China
An essential discussion of one of the great economic powerhouses of contemporary history, Enterprise China belongs in the libraries of business executives, policy makers, and thought leaders seeking perspective on an unavoidable and determined competitor.
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Veröffentlichungsjahr: 2022
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Table of Contents
Cover
About Thinkers50
Title Page
Copyright
Preface
Acknowledgments
Chapter 1: A NEW TYPE OF COMPETITOR
THE RISE OF CHINESE ENTERPRISES
EMBRACING THE CHALLENGE
THE RISE OF ENTERPRISE CHINA
STRUCTURE OF THE BOOK
NOTES
Chapter 2: STRATEGIC PILLAR I: REVERSING DEPENDENCY
WHY REDUCE DEPENDENCY?
TO TRUST OR NOT TO TRUST; THAT IS THE QUESTION
HOW WILL CHINA REDUCE DEPENDENCIES?
COMPREHENSIVE EFFORT TO REVERSE DEPENDENCY
CONCLUSION
NOTES
Chapter 3: STRATEGIC PILLAR II: DOMINATING DOMESTICALLY
WHAT DOES DOMINATE DOMESTICALLY LOOK LIKE?
WHY DOMINATE DOMESTICALLY?
PATHS TO DOMESTIC DOMINATION
THREE TACTICS TO DOMINATE DOMESTICALLY
CONCLUSION
NOTES
Chapter 4: STRATEGIC PILLAR III: WINNING GLOBALLY
ACQUIRE INTERNATIONAL PRESENCE AND POSITION
LEVERAGE DOMESTIC STANDARDS FOR GLOBAL LEADERSHIP
PIGGYBACK ON FOREIGN POLICY INITIATIVES
MOVE FROM DOMESTIC TO GLOBAL LEADERSHIP
GOAL: FLIP THE DEPENDENCY RELATIONSHIP
CONCLUSION
NOTES
Chapter 5: HOW TO COMPETE
IN
CHINA: STRATEGIC OPTIONS AND ACTIONS
STRATEGIES FOR FOUR TYPES OF PLAYERS
CONCLUSION
NOTES
Chapter 6: HOW TO COMPETE
WITH
CHINA: STRATEGIC OPTIONS AND ACTIONS
TWO COMMON REACTIONS
REASONS FOR
NOT
BEING IN CHINA
WHY IT'S HARD TO HIDE FROM ENTERPRISE CHINA
COMPETING WITH ENTERPRISE CHINA OUTSIDE OF CHINA: STRATEGIC OPTIONS
CONCLUSION
NOTES
Chapter 7: CAN ENTERPRISE CHINA BE DERAILED?
CROSSCURRENT DERAILERS
DERAILERS OF REVERSING DEPENDENCY
DERAILERS OF DOMINATING DOMESTICALLY
DERAILERS OF WINNING GLOBALLY
CONCLUSION
NOTES
Chapter 8: PREPARING FOR THE TURBULENT WATERS AHEAD
ARE WE ON THE ROAD TO DECOUPLING?
CLARIFYING MISPERCEPTIONS
ADDITIONAL RECOMMENDATIONS FOR FOREIGN EXECUTIVES
CONCLUSION
NOTES
Appendix
Methodology
About the Authors
Index
End User License Agreement
List of Illustrations
Chapter 1
Exhibit 1.1 China's Rise as a Source
Exhibit 1.2 China's Rise as a Market
Exhibit 1.3 The Rise of Chinese Firms
Exhibit 1.4 Goods and Services Export Value ($US)
Exhibit 1.5 Share of Goods and Services Export Value
Exhibit 1.6 China's Cumulative Expenditure on Physical Infrastructure
Exhibit 1.7 China's Expansion Overseas
Exhibit 1.8 China's Vision and Competitive Strategy
Exhibit 1.9 SOE Debt
Chapter 2
Exhibit 2.1 Imports into China
Exhibit 2.2 Imports as a Percentage of GDP
Exhibit 2.3 R&D Financed by Business and Government (2018)
Chapter 3
Exhibit 3.1 POE and SOE Share of GDP and Debt
Exhibit 3.2 SOE Debt‐to‐Sales and ‐Profits Ratios
Exhibit 3.3 Debt‐to‐Asset Ratio and Growth
Exhibit 3.4 China SOE Total Assets and GDP
Exhibit 3.5 Central SOE Numbers and Size
Exhibit 3.6 Central SOE Relative Size
Exhibit 3.7 Alibaba's Ecosystem
Chapter 4
Exhibit 4.1 Number of International M&As by Chinese Firms
Exhibit 4.2 China's International Acquisition Value
Exhibit 4.3 Average Chinese Foreign M&A Deal Value
Exhibit 4.4 China's Outward FDI Flows
Exhibit 4.5 Top 10 Countries for Chinese Construction Activity (2005–2019)...
Exhibit 4.6 Top 5 Construction Activity by Sector (2005–2019)
Exhibit 4.7 Examples of US Company Exposure to China Revenue
Chapter 5
Exhibit 5.1 Foreign Players in China
Chapter 6
Exhibit 6.1 Strategic Options for Foreign Firms Outside China
Chapter 7
Exhibit 7.1 Number of
Fortune
Global 500 Firms by Country
Exhibit 7.2 The Rise and Fall of Working Population in Japan and China
Exhibit 7.3 The Fall of Young Workers in China
Exhibit 7.4 China's Slowing Productivity
Exhibit 7.5 Number of Migrant Workers in China
Exhibit 7.6 Earning Increases of Migrant Workers in China
Exhibit 7.7 China's Relative Exports
Exhibit 7.8 Foreign Stock as a Percentage of GDP
Guide
Cover Page
About Thinkers50
Title Page
Copyright
Preface
Acknowledgments
Table of Contents
Begin Reading
About the Authors
Index
Wiley End User License Agreement
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ABOUT THINKERS50
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ENTERPRISE CHINA
ADOPTING A COMPETITIVE STRATEGY FOR BUSINESS SUCCESS
ALLEN J. MORRISON / J. STEWART BLACK
Copyright © 2023 by Allen J. Morrison and J. Stewart Black. All rights reserved.
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PREFACE
As senior professors of leadership and strategy, our research and writing go back more than 30 years. Over that time, collectively, we have traveled to China (including Hong Kong) more than 120 times. We have written more than a dozen business case studies on Western companies in China and Chinese companies expanding abroad. We have served as visiting professors at leading Chinese business schools and have taught scores of executives and senior Chinese government officials. As well, we have run workshops for more than 3,000 Western executives about doing business in China or working with Chinese companies. In addition, we have interviewed dozens of Chinese executives and government officials, including mayors and members of Chinese state regulatory agencies and planning offices in China, as well as equal numbers of US and European officers in trade associations and business roundtables and Western executives with significant experience in China. We have served on governance and advisory boards of publicly listed Chinese companies and distinguished Chinese universities.
Our interest in China has only grown throughout the years. The country's growth and prosperity have surpassed everyone's expectations, including our own. We each traveled to China for the first time in the summer of 1989—one to Beijing and the other to Shenzhen. The impact of the protests in Tiananmen Square had a profound impact on the country and each of us. One of our first joint research trips to China took us to Shanghai in the early 1990s. The airport was not the shiny, sprawling edifice that people see today. In fact, part of the concourse was being repaired with only a dirt floor to walk on. We had to walk from the international terminal to the domestic terminal through the town streets. Flash‐forward a few decades, and we recall a recent trip on one of the country's high‐speed trains from Nanjing to Beijing. The journey of about 640 miles is not much different than the distance between Nashville, Tennessee, and Orlando, Florida, which by car would normally take between 10 and 12 hours. The trip took just over 3.5 hours. The train and the ride was as nice as any in Japan or Switzerland. Today the country's airports, seaports, subways, roads, and bridges are among the best in the world. We have been equally impressed by the level of digitization and advances in the cloud and online services, as well as by the staggering number of Swiss watch shops, glitzy high‐rises, and German luxury cars on the roads. More recently, we were surprised to find panhandlers flashing QR codes instead of presenting tin cups at passersby.
These modern sights, sounds, and impressions have been experienced by virtually anyone and everyone who has traveled to China in the last decade. Those with long experience in China are astounded at the degree and pace of change. Those who have only visited China for the first time in the last few years are often shocked by what they see and experience. As one tourist we ran into before the COVID‐19 pandemic stated, “I didn't expect rickshaws and people in Mao suits, but I also didn't expect this. The level of modernization hits you smack in the face.” We agree.
As impressive as is the “what” of China's modernization, our fascination and research has always focused on the “how,” especially over the last two decades. How China got to where it is today is amazing. If this were a history book, that would be our primary focus. However, this is a business book, written for business executives. Consequently, we focus on where China and its commercial enterprises are going and how they plan to compete and win along the way—their competitive strategy.
We say “their,” but we really mean “its,” and the change from plural to singular pronoun goes to the heart of one of the most common misperceptions foreign executives have about commercial China. Most Western executives, as they are trained to do, analyze the competitive strategy of suppliers, strategic partners, or commercial rivals with the individual company as the unit of analysis. Sadly, this approach has a fatal flaw because where a Western executive is trained to see an independent, multibillion‐dollar enterprise, it is only the nose of a multitrillion‐dollar beast. That monolith we label “Enterprise China.” It consists not just of the company in focus but an entire ecosystem of companies tied together by the largest entity on the planet by employment and the second largest by revenues—the Chinese state, which includes the central, provincial, and municipal governments. But contrary to what most foreign executives imagine, the Chinese state is not working behind closed doors in smoke‐filled rooms whispering its desires to commercial entities hoping that they will listen. No, because the state outright owns entities that account for 30 to 40% of the economy, it operates in the open. It is public about its intent of ensuring that no daylight comes between the vision, ambition, and strategy of the state and key commercial enterprises. However, Enterprise China extends far beyond this core cluster of state‐owned enterprises (SOEs) and includes virtually all privately owned enterprises (POEs) of any significant size or importance. How, and the extent to which, this happens is a core part of the first third of the book.
Because most Western executives focus on individual enterprises, they also center their attention on the competitive strategy of that entity. However, just as there is an overarching Enterprise China monolith, there is an overarching vision and strategy that supersedes any individual Chinese business. Focusing on specific entity strategies is like looking at individual pieces but not seeing the picture of the overall puzzle. The good news is that the strategy for Enterprise China is not a state secret. It is not locked away in a vault. It has been laid out in public documents for all to see, but about which most foreign executives have only a passing awareness. In this sense Enterprise China's competitive strategy has been hiding in plain sight for nearly two decades. Consequently, the middle portion of the book is devoted to laying out Enterprise China's competitive strategy and the associated tactics.
Because this is a book written for executives, the final section focuses on the business implications of Enterprise China and its competitive strategy. Specifically, we ask and answer the question: What strategic options and actions can Western business executives take in competing in and with Enterprise China?
While there is no debating the impressive progress that China and its commercial enterprises have made, as all safe harbor statements stress, past performance is no guarantee of future success. Consequently, China's past may be prologue, but it is not prophesy, nor is it destiny. In 2019, we published a Harvard Business Review article that outlined many of the key factors that could derail Enterprise China. At the end of this book, we dive deeper into this topic.
We are neither in the camp that predicts that China will take over the world nor aligned with those that predict the coming collapse of the country. Rather, we take a pragmatic approach. Our perspective is that foreign executives ought to understand the nature of Enterprise China, should appreciate the elegance of its strategy, and acknowledge the focus and discipline of the Chinese. They would be wise to plan their own strategies accordingly and ought to take up a mantra of Navy Seals—assess and adapt. To best facilitate this, we lay out those factors that foreign executives should monitor as Enterprise China moves forward. We explain how those factors could help or hurt Enterprise China's strategy so that executives can adjust their own strategies as needed.
When we decided to write this book, it was in the middle of the COVID‐19 pandemic, and the political tensions between China and the United Sates were high. Decoupling between the two was the talk of the time and persists in many circles. We are not ignorant of the importance of political relationships in the course of commerce, but we wanted to approach the topic of Enterprise China and its competitive strategy largely free of politics. We leave it to others to measure out blame or policy disagreements when it comes to ongoing or future tensions between China and the United States or any other country for that matter. Our goal is simple: Help executives make more informed and wise strategic choices for their companies relative to China. We hope our insights and recommendations will be relevant to executives regardless of whether they lead small, medium, or large companies or whether they have large investments and operations in China or none at all. We believe they are.
ACKNOWLEDGMENTS
We are grateful to many people who helped guide our thinking in preparing this book. These include those who participated in our research and who shared with us their rich experiences and challenged our thinking. We specifically recognize the guidance and input of Bob and Jenny Theleen, David Young, Doug Guthrie, Brian Hu, Dave Ulrich, John Nossiff, and Ali Jawad. We are also grateful to our editor, Daryl James, for his thoughtful comments. And finally, we express our deep gratitude to our families, who have put up with us over the many months we dedicated to composing this book. Their decades of support have been pivotal in shaping our worldviews and in allowing us to indulge in our fascination with China.
Chapter 1A NEW TYPE OF COMPETITOR
China has the world's attention. Most Western executives, whether their firms operate in China or not, can easily list key Chinese competitors. Many of these rival companies did not exist 30 years ago, but today they command respect—even if foreigners struggle to pronounce their names or simply refer to them by their initials, such as SAIC (Shanghai Automotive Industrial Company), ICBC (Industrial and Commercial Bank of China), or CNOOC (China National Offshore Oil Company). Unfortunately, the formidable Chinese foes that Western executives see do not capture the full picture of the challenges they face. Where a foreign executive sees an independent, individual multibillion‐dollar Chinese company, it is merely the nose of a larger, multitrillion‐dollar monolith. The real rival includes not just the individual companies on which Western executives typically focus their competitive analysis but an array of interconnected firms in a much larger ecosystem. More importantly, this monolith includes the largest entity on the planet by number of employees (386 million1) and the second largest by revenue ($1.3 trillion2). We're talking about the Chinese state, which includes national, regional, and municipal governments. We refer to this commercial totality as “Enterprise China.”
Without taking this full picture into account, foreign executives can easily misunderstand their opportunities and challenges and miscalculate their responses. Consequently, we have two main objectives with this book. First, we provide a comprehensive review of Enterprise China with a focus on the competitive realities that Western companies face. Second, we lay out the strategies that Western firms might take as they compete in and with Enterprise China. To appreciate the challenges involved, foreign executives first must consider the distinction between Chinese enterprises and Enterprise China.
THE RISE OF CHINESE ENTERPRISES
As professors, we each took our first trips to China in June 1989. One of us traveled south to Shenzhen, and the other headed north to Beijing. Most readers will remember the momentous events of that month and year in China, when troops moved against protesters at Tiananmen Square. We certainly do. In the three decades that followed, our research, case study writing, and consulting on China have primarily focused on how Western firms compete in and with China. In the process, we also have directed and taught hundreds of executive development programs involving over 3,000 executives in which “Competing in and with China” was a central theme.
Competitive analysis was almost always a core topic in these programs. Typically, assessing Chinese competitors was a central element of that analysis. In starting these sessions, we regularly asked a simple question: “Who are your Chinese competitors?” Back in the 1990s, we invariably got one of three responses:
I'm not sure.
We don't really have any Chinese competitors.
I can name a few, but we are not really worried about them. They aren't serious competition for us.
The story is different today. When we ask Western executives to name names, they typically have no problem identifying their key Chinese competitors, as well as those competitors’ tier 1 customers and suppliers.
Domestic Strength: Growth as a Source and Market
What explains this change in response? The answer is as straightforward as it is profound: China has exploded as a supply source and as a market over the last 30 years. Because most readers are no doubt familiar with the story of China's growth, we will summarize it with just two charts.
The first shows China's fivefold increase as a supply source over the last 20 years (see Exhibit 1.1); China rocketed from No. 4 to No. 1 in the world. Today, it is at the top of the chart by a wide margin, with the United States a distant second.
Because China so strongly dominates global manufacturing, it is often referred to as the “world's factory.” In some areas China is not just the top producer globally, its production is greater than all other countries combined. For example, in terms of steel production over the last 20 years, China has gone from producing about 16% of the global supply to 53%, or slightly more steel than the rest of the entire world combined. Likewise, China is not only the No. 1 producer of refrigerators in the world, but as with steel, it produces more than all other countries put together. In mobile phones, it is not even a close race. China produces roughly 65% of all the smartphones made on the planet. In terms of televisions, more than 70% of all the televisions produced in the world are made in China. The same is true for air conditioners. And the list goes on. With this large and strong position in supply and manufacturing, it is little wonder that Western executives can name key Chinese companies, especially those in their upstream value chain.
Exhibit 1.1 China's Rise as a Source
Source: World Bank.
The second chart illustrates how far China has come as a market (see Exhibit 1.2). The country has soared from No. 11 to No. 2 in the world as measured by its share of global GDP. Although the slope of the line representing China's rise as a market may not look steep, it represents a 900% increase over the past 30 years.
While China as an overall market is second only to the United States, it is No. 1 in several areas. For example, China is now the largest retail market in the world. Within retail, China is the largest e‐commerce market in the world both in terms of total revenue and number of customers who purchase online. China is also the largest car market in the world. And it is the world's largest market for luxury goods such as designer handbags and Swiss watches. Again, the list goes on.
China's explosive growth as both a supply source and market have given birth to and nurtured a host of new, large, and strong Chinese companies. Again, most readers either know or can intuitively understand this dynamic, and consequently it needs little further explanation. However, a single chart provides a useful summary (see Exhibit 1.3). This chart shows the number of Chinese firms on Fortune's list of Global 500 firms from 1995 through 2021, representing the largest 500 firms on the planet by revenue.
Exhibit 1.2 China's Rise as a Market
Source: World Bank.
Exhibit 1.3 The Rise of Chinese Firms
Source: Fortune Global 500.
To appreciate the growth of large Chinese companies, consider that in 1995 when Fortune launched its first list of the top 500 global companies, China had only three firms on the entire list; 19 other countries had more. In 2021, China had three firms just in the top 10. With 135 Chinese firms on the total list, no other country had more, including the United States (122 firms), the second year in a row that China was No.1 and the United States was No.2.
As a consequence of China's size and scope as a source of supply and as a market, most large foreign multinational firms have at least some operations in China. Those operations may be primarily upstream or downstream, but many firms have operations in China across the entire value chain. For firms without much or any presence in China, they nevertheless have likely encountered Chinese competitors exporting products into their home markets or setting up shop next door.
Foreign Strength: Growth as an Exporter and Investor
The proposition that indigenous Chinese firms would have an inside track when it comes to competing on their home turf is easy to understand. How they have achieved that domestic strength and how they plan to elevate it will be the focus of an important part of this book.
However, as we will explain and examine, Chinese firms are not content with dominating domestically. Through exports and foreign direct investment (FDI) abroad, they plan not only to compete overseas but to lead globally. This is why firms with no presence in China, whether they are small, medium, or large, which are completely content to stay home and not engage in battles with Chinese firms, will nonetheless find themselves in a fight going forward—if they are not already struggling today. The next five charts help to illustrate the development of this competitive battlefield.
Export Strength
Most firms with no presence in China first encounter Chinese competitors via exports from China (see Exhibit 1.4). Given the significant rise in Chinese exports over the last 20 years, many firms already have felt the pain of losing market share because of Chinese exports appearing on their shores. For example, US firms have seen imports from China explode from $103 billion in 2000 to just over $500 billion in 2021. China's successful expansion via exports has enabled it to overtake historical export leaders such as Japan, Germany, and the United States. Today, China is the world's largest exporter.
Because international trade also has grown over the last 50 years, a better way to appreciate the success of Chinese exports is to view them from a relative perspective—that is, their share of total global exports (see Exhibit 1.5). Here the results are visually even more stunning. China's global share of exports has soared 1,665%, while those from Germany, Japan, and the United States have declined 12.5%, 39.0%, and 39.2% respectively. To put it bluntly, China's export gains have been the previous export champions’ losses.
Exhibit 1.4 Goods and Services Export Value ($US)
Source: World Bank.
Exhibit 1.5 Share of Goods and Services Export Value
Source: World Bank.
Books have been dedicated to explaining the dramatic rise of Chinese exports, so there is no need for us to do much more than hit on two highlights. The first driver of Chinese export success has been the country's abundant and cheap labor. All experienced executives understand this factor, though the key behind it and the strains on that source are typically less well understood, so we will take some space to highlight them here. The second driver of China's export success, improved infrastructure, is one that is often underappreciated by many outside the country. Consequently, we will devote a bit more space to this factor and illustrate it with some impressive numbers and charts.
Abundant and Cheap Labor. Few would debate that China's abundant and cheap labor has been a critical component of its export success. However, there is an element to this part of the story that typically goes underreported—internal migration. Many foreign executives underappreciate how vital internal migration has been in China, as the country has scrambled to staff its urban factories. In fact, during China's historic economic explosion, over 200 million Chinese migrated from low‐paying, unproductive, rural farms to much higher‐paying, productive urban factories. The potential of this cheap labor, which was larger than that of Japan, Germany, France, the United Kingdom, and Italy combined, would have gone uncaptured without this population shift. Had these 200 million workers stayed on their farms and not moved to urban factories, China's massive explosion of exports could not have happened.
Impressive Infrastructure. This migration could efficiently and effectively produce products for export only if the infrastructure required to (a) move raw materials and components into the country, (b) transport them from one subassembly location to another and ultimately to final assembly, and then (c) transfer finished products to ports for export was superior. Cheap and abundant labor with poor physical infrastructure would not have produced a winning combination. Any experienced executive understands this. What many Western executives might not realize is how much China has invested in infrastructure. To upgrade its physical infrastructure, the country has spent more on building and improving its roads, rails, and airports than the United States and Europe combined (see Exhibit 1.6).
This investment pattern continues unabated. Li Xiaopeng, China's minister of transport, announced in 2019 that during the previous year the country had invested the equivalent of US $460 billion in transportation fixed assets.3 This included the development of an additional 8,000 kilometers of railway lines and 330,000 kilometers of roads, as well as five new civil transport airports. Morgan Stanley estimates that China on average will spend around $180 billion each year for the next 11 years—or $1.98 trillion in total.4 That annual figure is almost double the past three‐year average in China. In contrast, US public investment on infrastructure fell by nearly 11% from 2003 to 2017 when adjusted for inflation and the cost of infrastructure inputs. Today, China continues to invest more in physical infrastructure than the United States and Europe combined, even with the US's infrastructure bill passed in 2021.
Exhibit 1.6 China's Cumulative Expenditure on Physical Infrastructure
Source: OECD.
Abundant and cheap labor that shifted rural farms to urban factories and aggressive investment in physical infrastructure have been key factors enabling Chinese firms to flood the world with exports. These were not the only factors, but they were pivotal and are often underappreciated. As a consequence of these exports, many wholly domestic firms across the planet that otherwise were content to mind their own business at home have nonetheless found Chinese exports eating away at their market shares and livelihoods.
Foreign Investment Strength
Exports were only the beginning of the disruption for firms that had no presence in China and no desire to compete with Chinese firms. The second major disruption for these “stay‐at‐home” companies was FDI by Chinese firms. Over the last 20 years, not only did the boom in China spur the formation of an astounding array of indigenous companies with sizable fortresses at home that facilitated exports abroad but also many decided they were big enough and strong enough to invest, expand, and set up overseas outposts. No doubt, the prospect of even greater international revenues drove Chinese firms’ outward FDI. Exports make the most sense (and money) when they can be standardized and made the same regardless of where they are to be sold in the world. Any customization hurts the capture of economies of scale. However, not everyone everywhere wants the same thing. The more exports need customization in order to penetrate a foreign market, the more sense it makes to produce localized versions not in China but in, or close to, that market.
Exhibit 1.7 China's Expansion Overseas
Source: Adapted from UNCTAD World Investment Report 2020.
This is often what motivates firms, including Chinese firms, to move from exports to FDI.5Exhibit 1.7 illustrates the dramatic rise in Chinese firms’ investments and accumulation of overseas assets (as measured by FDI outward stock). As a consequence of these overseas investments, even executives who thought they were safe from competitive confrontations with Chinese firms have found no reprieve or escape. Though China's increase in foreign assets is absolute and as a percentage of GDP (now 15%) is impressive, as a percentage of GDP it lags far behind Switzerland (230%), Germany (59%), France (66%), Japan (42%), and the United Sates (39%). Therefore, there is likely even greater outward Chinese FDI flows to come going forward.
EMBRACING THE CHALLENGE
China today is no longer just a source of cheap products or a distant market of 1.4 billion consumers. China has emerged as the world's factory and the world's second‐largest market overall and the largest market in many sectors. As a consequence, it has attracted approximately 1 million foreign firms to set up some type of operations on its shores.6 For these foreign firms, the competitive focus on China is ever present, and the understanding that the battle involves more than individual Chinese firms is growing. Many Western business leaders share a growing concern about falling behind the Chinese. Consider the letter that Intel CEO Bob Swan sent to then president‐elect Joe Biden stating, “A national manufacturing strategy, including investment by the U.S. government in the domestic semiconductor industry, is critical to ensure American companies…lead the next generation of innovative technology [against the Chinese].”7
For firms with no presence in China whose executives may have hoped to avoid the confrontations by staying home, those hopes and dreams are fading fast. Today, Chinese exports reach into nearly every corner and crevice in the world. Where standardized exports are not enough, Chinese firms have invested vast sums to set up local operations to take the fight directly to their foreign rivals.
In the final analysis, executives of large or small, multinational or domestic companies cannot ignore or escape Enterprise China. However, a superficial or headline‐driven understanding of its competitive strategy and tactics can cause foreign executives to miscalculate the size and scope of their challenges and opportunities. The purpose of this book is to fill that gap so that executives can avoid missteps.
THE RISE OF ENTERPRISE CHINA
Although the dramatic rise of Chinese firms on the Fortune Global 500 from 3 to 135 visually illustrates the amazing ascent of large and powerful individual Chinese companies, as we said at the outset, the real story isn't about individual “bigger, badder” Chinese companies at home or abroad. At best this is only half the picture. Competing against Chinese enterprises is not the same as competing against Enterprise China.
A Unique Framework for Analysis
Enterprise China necessitates a different framework for analysis. Instead of concentrating solely on individual companies, executives should focus on the entire monolith that includes the company and the government as one entity. In traditional competitive analysis, as taught in almost every MBA program in the West, executives concentrate on competitors, suppliers, and customers as individual actors. In these traditional models, the company is always in the foreground and the government remains in the background. Traditional competitive analysis does not ignore governments or pretend that they cannot influence business policy via licensing requirements, taxes, and other regulatory controls. But ultimately strategists focus on the company because they assume that it is free to make decisions within the guardrails of government regulation. This is the essence of free market capitalism, which governs most Western firms and their executives.
Domains of Control and State Influence
In the case of Enterprise China, however, the company and the state are both in the foreground. Decisions are coordinated, and companies take indirect cues and direct commands from the state. In the case of China's largest companies, state control and influence is direct and largely based on ownership—most often, complete ownership—which is why we refer to those entities as state‐owned enterprises (SOEs). But the state's control and influence go beyond this. Ultimately, Enterprise China consists of three domains of control and influence.
Central SOEs
When foreign executives discuss Chinese SOEs, they often equate “state” with Beijing and the central government. This assessment has merit. The central government and the State‐owned Asset Supervision Administration Commission of the State Council (SASAC) that owns central SOEs are important for at least two reasons. First, SASAC is not some minor department stuck off somewhere in the briar patch of China's gigantic bureaucracy. No, SASAC reports directly to the State Council of the People's Republic of China. Second, even though the number of firms directly owned by SASAC is small—just 96—their impact is huge. Of the 135 firms on the 2020 Fortune Global 500 list, 49 were owned via SASAC. Few have brand names and none of them advertise their ties to the state.
Provincial and Municipal SOEs
Nonetheless, it is a mistake to equate “state” ownership only with Beijing. The vast majority of China's 150,000 SOEs are owned by provincial and municipal governments.8 These firms are generally smaller, but of the 135 Chinese firms on the 2020 Fortune Global 500 list, 33 were owned by provinces and municipalities.
To appreciate the breadth of these two other levels of governmental ownership and control, consider just a few facts. In terms of provinces, China has 23. The largest has a population about the same as the entire country of Japan. In terms of municipalities, China has 113 cities with populations exceeding 1 million. This is four times the number of cities of this size across all of Europe and the United States combined. Shanghai, for example, has 26 million people, which is more than the entire country of Australia. China's largest city, Chongqing, has more people than the population of Taiwan and almost twice that of the Netherlands.
Privately Owned Enterprises
Even when the government does not own the company, as in the case of privately owned enterprises (POEs), the government exerts significant influence and control through regulations and administrative guidance that is beyond what is typically the case in other countries. This is true whether POEs are publicly listed on stock exchanges or held by private individuals. The case of Alibaba, which we discuss later on and in Chapter 3, shows the extent of this influence.
Reasons for Concern: Why You Should Pay Attention
All this notwithstanding, we have more than once encountered experienced executives who at first were skeptical of the need to think about competition with Chinese enterprises in the context of “Enterprise China.” Their retort often was something along the lines of the following:
Sorry, but we've seen this movie before. We've seen Japan Inc. or Korea Inc. try to use industrial policy to benefit their own indigenous firms. To a lesser degree, countries such as Canada, France, and Brazil have also tried it. In these cases, some indigenous companies might have benefited from their government's helping hand, but eventually they had to stand on their own two feet. Some succeeded and others failed. In the end, things didn't turn out quite as the alarmists warned. In other words, the government was helpful to some domestic firms particularly in the early days, but the industrial policies and actions didn't fundamentally change the competitive game.
True enough. We have no argument with the contention that policy efforts in “Japan Inc.” and elsewhere fell far short of predictions. However, we would argue that China is different and consequently, business executives should think differently about Enterprise China.
But what, you might ask, is so different? Why should we think differently about Enterprise China than we did about Japan Inc. or others in the past? It comes down to three factors. First, the level of integration and control between the Chinese state and Chinese commercial firms is something the world has never seen before. Second, the extent to which the state strategizes about this integration in commercial, and not just political, terms is also outside the scope of past examples. Third, the scale of economic power behind Enterprise China dwarfs Japan Inc., and all other comparisons, by a wide margin. With that, let's take a brief look at each of these three points of difference in more detail.
Layers of Integration
As we mentioned, most experienced executives will be at least somewhat familiar with how governments in many countries have used industrial policy to benefit their indigenous firms. However, China is unique. It is not simply formulating industrial policy and cajoling commercial firms to comply. Furthermore, China is not just closely connected to key commercial companies because government officials and corporate executives went to the same universities or belong to the same political party. As we mentioned, the central government owns and controls 96 firms, most of which are among the largest firms in China and typically the largest in their industries in China. When you add the firms owned by the provinces and municipalities, the more than 150,000 SOEs exert a tremendous influence on the Chinese economy. For example, a study by the World Bank in 2019 estimated that SOEs in China accounted for between 23% to 29% of China's GDP.9
To be clear, when we say “state‐owned,” we don't mean that the state holds small minority stakes in these firms. Rather, we mean that the Chinese government—whether at the national, provincial, or municipal level—has a direct equity stake or complete ownership of the company and consequently directs the affairs of the company.
When we say “directs,” we do not mean that the state provides “administrative guidance” (a term some readers will recall from the days of Japan Inc.). Rather, we mean that it controls the company, including its financing, its strategy, and its mergers, acquisitions, or divestitures, as well as the appointment of its executives.
Taken together, this level of integration and resulting control of SOEs is far more than was ever the case in places like Japan or Korea. And it goes far beyond acceptable norms and practices in countries that have in the past relied on at least some state‐owned corporations, including France, Sweden, Norway, Canada, and Brazil. Even compared to countries such as Russia, where at one time government ownership of commercial entities was relatively high, it never reached this level with roughly half the country's total working population being employed by the government or one of its SOEs, which is the case in China. In addition, in the case of Russia or other countries where the government did own sizable commercial assets, the SOE option was not embraced as a long‐term solution. In these other cases, the governments eventually sold most or all of its equity in order to shift much needed capital into the state's coffers. In other cases where the government held controlling interests in large entities, it committed to divesting its holdings at an appropriate time in the future. Ownership was viewed as a transitory and not a permanent condition. This is not the case in China. These SOEs are “national champions” not just because they are some of the biggest companies in the nation but because they champion the interests of the nation, and the state's ownership and direction of these SOEs ensures this.
If this direct ownership were the full extent of what constitutes Enterprise China, it would be more than the modern world has ever seen and would deserve a book on its own. However, the integration of Chinese companies with the government goes beyond SOEs. In China's case, the government also largely controls “national champions” that it helped nurture and grow but which it does not own.
Alibaba is a case in point. While most outsiders have little knowledge of the state's role in Alibaba's growth, even the casual observer would have noticed the dramatic and profound control of the firm that the government asserted in late 2020 and early 2021. For context, in 2020 Alibaba was the second most valuable company in all of China, with a market cap at its peak of $665 billion. Its founder, Jack Ma, was the fourth richest person in the country with an estimated net worth of nearly $50 billion.10 As part of Alibaba's ecosystem, Ma had developed Ant Financial. In 2020, Ant was set for an IPO, which was scheduled to bring in $35 billion (the largest IPO in history) and value Ant at about $315 billion out of the gate. At that level, Ant would have been worth more than Société Générale, Deutsche Bank, Credit Suisse, Barclays, ING, Santander, and Goldman Sachs combined. However, when Ma made comments about the government stifling innovation and the need for reforming the national financial system, the government was not happy and called him in for questioning. The government subsequently determined that important ownership stakes in Ant's IPO were “going to political families that represent a potential challenge to President Xi and his inner circle.”11 At that point the IPO was indefinitely halted. Alibaba was further fined $2.8 billion for breaking anti‐monopoly rules in early 2021. Alibaba, Jack Ma, and anyone else with any savvy recognized that the Chinese government could and would exert control over POEs whenever it felt that they were straying outside the lines. To the CEOs of SOEs and POEs alike, the message was clear: the state is the boss, and don't forget it.
Our point here is that while state ownership bequeaths control, foreign executives should not interpret the lack of state ownership as bestowing freedom to commercial entities and signaling an absence of government control. Nor should foreign executives assume that because state ownership isn't evident, it does not exist. Indeed, Chinese state equity positions are notoriously difficult to determine. This is because most major shareholders of medium and large Chinese companies, including corporate investors, are themselves either fully or partly owned by government entities. It is safe to say that virtually every major company in China today has some level of either direct or indirect government ownership, and all are subject to state control.
Whether one agrees or disagrees with China's actions or ownership roles is beside the point. The point is that one could search far and wide to find a parallel case of government control of gigantic private firms such as Alibaba, and that search would come up empty, except in China. Thus, the high degree of state control over commercial enterprises is not limited to SOEs but extends to POEs and is without precedent.
Commercial Orientation
On top of this extraordinary level of state ownership and control is a level of commercial orientation relative to Enterprise China's competitive strategy that is also unique. Although we will explore this in greater detail in subsequent chapters, here it is helpful to lay out some basics. The good news is that it does not take cloak‐and‐dagger spy craft to uncover China's vision and strategy. Nor does it require relying on the opinions or the speculation of analysts or experts. Fortunately for all, Enterprise China's vision and strategy are hiding in plain sight (and have been for nearly two decades). The problem is that many Western executives haven't really focused on them, while others have dismissed them as political proclamations and therefore of little relevance to their own commercial interests. However, China's vision and strategy are as commercial as any company's vision and strategy in the West.
Vision. Enterprise China's “CEO,” President Xi Jinping, recently rearticulated the country's strategic vision to the 19th Party Congress in October 2017. He stated that China would “become a global leader in terms of composite national strength and international influence.” At first flush, this statement may not seem particularly “corporate” or, for that matter, profound. However, if you stop and consider the structure of China's vision relative to that of most commercial companies, the similarities are striking. For example, most corporate vision statements are some version of the following: “Our vision is to be become the global leader in X (insert the relevant industry or sector).” If you take President Xi's vision statement and make it a bit more direct, he is saying that China seeks to be one of the strongest nations on earth and one of the most influential. There is a clear co‐mingling of economic and political objectives. If anything, Xi's vision is ambitious.
Strategy. Having an ambitious vision is one thing, achieving it is another. To achieve it you need a plan—a strategy for how you are going to compete and win along the way. Enterprise China has exactly that. In fact, it has articulated a three‐part strategy, or what we label “strategic pillars.” The first pillar is to reduce and effectively eliminate China's overdependency on foreign firms for key technologies and products. The second pillar is to ensure that indigenous firms dominate China's domestic market. The third is to win globally. Put simply, Enterprise China seeks to become a global leader in terms of national strength and international influence by reducing its external dependency, dominating domestically, and winning globally. For each of the strategic pillars there are three key tactics designed to achieve the strategic objectives. It would not take a communication executive in a Western multinational more than a few minutes to take these elements and create a nice graphic to put into a PowerPoint presentation for both internal and external consumption. In fact, it might look something like what we put together (see Exhibit 1.8).
Blueprints. As we mentioned, to get at China's competitive strategy, one need not silently slip into a secure government office and take clandestine photos of top‐secret documents with a camera disguised as a pen. One need not comb through stacks of obscure papers and government documents and run them through a complex algorithm to decipher encrypted messages. No, China's competitive strategy is not a secret; it has been laid out in very public documents for nearly two decades. The three key publications that reveal the strategy include:
National Medium‐ and Long‐Term Science and Technology Development Plan (MLP): 2005–2015
Made in China 2025 (MIC 2025): 2015 to 2025
China Standards 2035: 2020–2035
Exhibit 1.8 China's Vision and Competitive Strategy
Based on these and supporting initiatives, the essence and rationale of each of the three pillars in the competitive strategy are quite clear. In Chapters 2, 3, and 4 we dive deeply into each of the three strategic pillars, their rationales, and their accompanying tactics.
For those in the West who typically view governments through a strictly political lens, including the Chinese state in “Enterprise China,” and looking at the whole from a competitive strategy, perspective may be an unfamiliar approach. After all, outside China, corporate and national political interests are often portrayed as at odds with each other. However, in China the two are one. The determinants of competitive strategy are not just the firm or its executives but the state.
Within the context of this three‐part strategy, President Xi has increasingly used the phrase “Dual Circulation” as a shorthand for China's three‐part competitive strategy. The first element of the dual circulation focuses on “internal circulation,” which refers to the domestic cycle of development, production, and consumption. This increased internal circulation is predicated on reversing the country's foreign dependency and facilitating the domestic domination of indigenous firms. The “external circulation” refers to the country's international activities, notably both continued exports from China to the world and the expansion of Chinese firms’ value chains out into the world via FDI and setting standards for the world.
Scale of Power
Up to this point we have made the case that foreign executives should not just analyze their Chinese competitors but should view them within the context of “Enterprise China” because the level of integration between commercial enterprises and the state is unprecedented and because that integration has been deployed in a decidedly commercial context. The third reason that executives should include an analysis of Enterprise China in their competitive plans is because of the sheer scale and power that is being brought to bear. The resources at play are orders of magnitude more than has ever been witnessed before and, in most cases, far beyond what any individual company could muster on its own.
Business executives know that when it comes to businesses, money matters. Consider the largest company on the planet in 2021 in terms of sales revenue: Walmart. It took in more annual revenue ($559 billion in fiscal year 2021) than the GDP of 172 of the 193 member countries of the United Nations. Impressive. Yet neither Walmart nor any other company comes close to having the financial power of Enterprise China. For example, in 2020 China's SOEs generated about $9.7 trillion in revenue,12 which is about 18 times the revenue of Walmart that same year ($519 billion). These firms accounted for 60% of all Chinese firm capitalization and 30% of China's total GDP. SOEs assets were nearly 60% of GDP, or about $8.6 trillion.13 That's a lot of cash, but there's more—debt capital. SOEs have gained access to $13.2 trillion via debt, which is 92% of China's GDP (see Exhibit 1.9).
