December 27, 2010

7 Things You Need to Know About China

The Stanford Graduate School of Business 2010 Global Study Trip to China included two weeks on the ground in Hong Kong, Shenzhen, Shanghai, and Beijing. After meetings with scores of executives from 19 different organizations across a variety of industries and in-depth dinner conversations with alums and friends, I felt like I’d learned a lot about this incredibly complex and changing country. A few days of reflection and a re-read of 28 pages of notes in impossibly small script, I’ve synthesized 7 themes from this eye-opening trip:

1. Despite lofty goals, Chinese companies aren’t going to take over the world just yet.
Early in the trip, I noticed something interesting about the behemoth companies we visited: like most large, successful businesses in China, they had risen to power by keenly tailoring their products to the Chinese consumer, and they were quick to criticize American companies who had failed to do the same. In particular, they pointed out the hubris of companies like eBay which seemed to insist that successful products in their home country would translate seamlessly into the Chinese market. Although hyperbolic, a statement from an Innovation Works executive summed up the trend: “Zero foreign companies have been successful in China.” After learning about the uniqueness of the Chinese consumer, I understand this criticism. Many of the companies we met with achieved noteworthy financial scale by creating customized products that the massive Chinese population loves, and they have aggressive growth goals that include expansion abroad. Automaker BYD, Internet powerhouse Tencent, gaming leader SNDA, supply chain expert Li & Fung, and steel manufacturer Baosteel all shared goals of international expansion in their presentations. But when pressed about their strategies for growth, they seemed to exhibit the same hubris they criticized in American companies. “Our products are successful in China,” one executive said, “so we will bring the exact same technology to other markets.” This seemingly inconsistent message smacks of the unsophistication one Chinese national and GSB grad told me about at dinner. She suggested that Chinese companies aren’t yet ready to expand aggressively beyond their borders. They certainly deserve respect for their success in China, but they’re somewhat blind to the fact that they’ve operated in an anomalous market with a very unique government and approach to IP. I started to think that “good in China” doesn’t necessarily mean “good everywhere.” A media executive put it best when he said, “Chinese companies are world-sized, but they’re not yet world class.” He suggested that unless a company has a truly innovative technology or hard products, it will struggle outside of China. When asked if Chinese companies will be successful abroad, another executive at Innovation Works said “probably not anytime soon.” He advised that they look first to similar markets with young populations (Brazil, Russia) and other developing countries (in Southeast Asia) before an aggressive push into western, developed markets. My takeaway from the trip was that Chinese companies are definitely big and successful, but – at least in the short to medium term – I’m going to heavily discount the western media’s fearful handwringing about Chinese companies taking over the world.

2. “Real China” isn’t in the big cities.
Time and time again, we were told that second-, third-, and fourth-tier cities are where it’s at in China. Representatives from the American Chamber of Commerce in Shanghai and executives at Innovation Works both warned the aspiring entrepreneurs in the room that “almost every business idea you could have has already been done in the big cities.” They suggested looking at interior China for the real growth opportunities. When asked about cost competition challenging China’s long-time position as the world’s top manufacturer, a representative from Li & Fung said, “Who can replace China? China!” and went on to praise businesses in the interior cities who are driving down prices and “getting better.” An executive from LVMH talked about the raging success of luxury stores in these cities and what it tells us about China’s diversity: “Different languages, different cultures, different food…it all means different tastes and a need to adapt when you move inland.” A CCTV executive talked about “50km Beyond,” his suggestion to westerners that they travel 50 km beyond the borders of the “wealthy and beautiful” metros of Shanghai and Beijing to find the real China.

3. The nouveau riche are driving China’s economy.
“New money” consumers and China’s growing middle class are the engine behind much of China’s recent economic strength, and they will serve as an attractive market for new companies looking to supply to China rather than just source from China. Executives from both HSBC and the Hong Kong Monetary Authority jokingly referred to the Hong Kong stereotype that mainlanders are “country bumpkins,” but quickly acknowledged that the impression is changing as dollars increasingly flood out of Chinese tourists’ wallets and into Hong Kong’s retail economy. What are they buying? Both speakers pointed out the window toward Hong Kong’s Central district where streets are lined with designer retail shops. We heard more direct from the source – an executive at LVMH’s China’s branch: “China is a country full of nouveau riche.” Thirty years ago, he told us, the lifetime maximum currency conversion from Chinese RMB to US Dollars was $30.00. Now it’s $50,000 per year. In just a few decades, China has gone from a country where no one has personal cars, to the largest auto market in the world. The demand for luxury goods, even just aspirations for them, has driven immense growth for LVMH’s 60 premium brands. At Innovation Works, an executive told us about the “newly rich social phenomenon” in which women, in particular, are buying cosmetics, fashion, and lingerie – he suggested that businesses catering to this demographic may do very well entering China.

4. The western media sometimes gets it wrong.
Although it’s difficult to parse out everyone’s biases, particularly when some speakers are employed by state-owned enterprises, we heard from several different sources that media coverage in the developed world frequently misrepresents China and its culture. An HSBC executive closed her remarks with a warning: “Don’t believe everything you see on CNN.” Although she was educated in the US, she was highly critical of our media's representation of Chinese news stories, in particular the Chinese railway from Beijing to Tibet and China’s role in African development. A leader at a state-owned media company waived an issue of The Economist in front of the group saying that western media focuses too much on prosperous China and forms incorrect opinions. “The government’s control is exacerbated and overemphasized in the western media. The so-called free press in the west is questionable – they’re biased and inaccurate.” He illustrated his perspective when asked about China's coverage of Nobel Prize winner Liu Xiaobo. “We did report on this criminal receiving the award, but it is clear that the Nobel Prize has been politicized. Mr. Liu’s contribution to China has been virtually zero – he’s a big self-promoter.” If you think state-owned media representatives may be biased, I have another example from someone with a finger on the pulse of Chinese dissonance with government censorship -- even he shared similar perspectives on this topic. A blogger at ChinaSMACK, who also moonlights for NPR, lamented US and European media’s tendency to mold Chinese stories into a western perspective. As an example of those biases, he cited an article in the UK’s Telegraph that misinterpreted a Chinese internet post, overlooking its intended satire. According to the blogger, Chinese netizens cope with censorship by hiding a lot in their satire and humor. Especially coming from a society that greatly values what it considers to be the freest press in the world, it can be easy for us to dismiss the Chinese perspective that our media is biased. However, seeing the country for myself and hearing from folks on the ground has inspired me to question more critically and realize that everyone has a bias.

5. The vibrant secondary market for virtual goods is a metaphor for the Chinese economy.
In an environment where consumer credit cards are uncommon and IP protection is limited, profitable online business models require innovative product design. Chinese internet companies have thrived by pioneering the market for virtual goods and micropayments. Tencent brought in revenues of $1.8B in 2009, driven overwhelmingly (93%) by micropayments for “differentiated privileges” in their popular instant messaging and social networking platforms. The market for these virtual products (as simple as customizing the color of your user name) feels a lot like a market for “real” goods and services. Similarly, SNDA’s come-stay-pay model for monetizing online games has spurred competitive second markets for their products, so lucrative that it attracts users who only play to resell their virtual achievements. But even though these markets for virtual goods and services feel like a real economy, it’s a false sense of a free market. Ultimately, the availability (and hence, the value) of these products is completely controlled by product architects at companies like Tencent and SNDA. What on the surface looks and feels like a free market is actually a planned economy whose adherence to capitalistic principles is entirely dependent on the whims of its omnipotent governing body. Sound familiar? Especially given all the hubbub about virtual markets in China, it really struck me a demonstrative meta-economy within an economy.

6. Despite its differences from the west, the one-party system seems to work for China.
An executive at HSBC admitted that corruption is a problem, especially at the local levels, but she can’t see a multi-party system working in China at this stage. "Despite its shortcomings, the Chinese government has lifted millions out of poverty in the last two decades – no small feat. If change comes, it will be slow,” she explained. “Students will push for evolution, not revolution.” In her opinion, there’s still too much complexity to manage, and they don’t have time for bi-partisan politicking and trying to appeal to the masses. I brought up this idea with our trip leader’s husband, a Chinese national with a seriously respectable background in finance and government. He, too, was honest about the government’s weaknesses, but when I asked him about the upside benefits he shared some interesting insight. I suggested that because a one-party system doesn’t need to worry about catering to the public’s short-term whims, it may be better suited to making the hard, long-term decisions for the country. He agreed, citing the government’s mandated energy usage reductions for municipalities – a forward-looking policy that appears to be designed with the public’s best interest in mind, a task that seems almost impossible for American politicians who kowtow to interest groups. Also on the topic of the public good, representatives from the Chinese media had similar thoughts on the government’s role in preserving public good. Although one man claimed to “never experience pressure" to change his reporting, the government's desire for “harmonious” content was evident in his opinions on the role of journalists in society. “Journalists need to report the facts,” one executive explained, “but they also need to make the world better. Stories that divide people and upset them are not suitable for the public…I almost wish the government would regulate more. Some of the content in the citizen press is downright crazy.” Although this notion smacks of censorship to an American sensibility, it’s worth considering how this approach may have helped maintain stability in the country. I’m not saying I agree with this perspective, but some very smart people seemed to think there were some tangible benefits to a controlling, one-party political system.

7. Pollution is one of the biggest challenges facing China.
In the west we frequently point to censorship, human rights violations, and poverty as China’s biggest hurdles in the coming decade, but environmental degradation came up many times in our meetings with Chinese  leaders. Executives at HSBC, the Hong Kong Monetary Authority, and in the government all named pollution as one of China’s greatest weaknesses. BYD and State Grid shared their concern for China’s consumption of fossil fuels and its effect on the environment. I read a lot about China’s pollution problem in the lead-up to the Beijing Olympics, so I was interested to see it for myself. I have to say, it was worse than I expected. I lived in Southern California for the last decade, so I’m no stranger to smog and pollution, but China brought a whole new level of gross to my breathing experience. Views from the Hong Kong Monetary Authority and the Shanghai World Financial Center observation tower were limited due to the thick layer of brown sludge in the air. But nothing could have prepared me for Beijing. When we stepped off the plane at the airport, it was like huffing an ashtray. The air was thick with smoke and our delicate California lungs ached. Between burnt orange sunrises and sunsets, there were times we couldn’t see more than a couple blocks down the street. It’s just one of many hurdles the country needs to overcome, but pollution in light of China’s burgeoning population – particularly in the big cities – is definitely near the top of the list.

other china trip posts


Arbitrage said...

awesome post - thanks for sharing your thoughts

Joyce Lau said...

Hi Ani,
I’m a Canadian-Chinese working in Hong Kong.
I loved your post. Your observations on business were spot on. I’m glad you had a fun, eye-opening trip.
But I would take the media / censorship / politic talk with a grain of salt.
The people you met – as successful, helpful or educated as they are – are businesspeople “giving face” to China. Their goal was to appease and impress a foreign visitor.
Their criticisms of a free media and elections toe the Party line. Their arguments are the same thinly veiled justifications for censorship we hear all the time.
It's a little routine: First, lay on the insults (the “so-called free press” is “biased and inaccurate”). Then pick an example to criticize the Western media (the Telegraph didn’t get Chinese satire). Then dismiss controversial topics (jailing of the Nobel laureate, rights issues in Tibet). Then play the “stability” card – argue that critical news is too “upsetting” and “unsuitable” to be shown.
We all know that the media and democracy are imperfect. But the Chinese alternative is Big Brother paternalism.
Democracy is waved off as silly politicking. If the public wants it, then it’s a “short-term whim.” But if the government wants it, it’s in everyone’s “best interest.”
I see you’re into LBGT issues. What if some anti-gay official dismissed your views this way?
I liked the honesty of your post – and seeing China through other people's eyes. I think it’s important to take those foreign ideas and try to see them from your own perspective.
Imagine returning to California and not being able to use Facebook or Youtube. Or having one party taking over the White House – and never holding another election again. Or the Pentagon deciding that the Afghan war was “upsetting” and barring CNN. No American would put up with it.
I mean no disrespect to your hosts, who seemed warmed and welcoming. I don’t mean to pick on them personally – I don’t know who they are, and their views are not uncommon here.
This is just a gentle reminder not to take those arguments unthinkingly, either.
P.S. Hong Kong is Chinese. We have a free press and (some) free elections – and it’s worked for us!

anneke jong said...

Thanks for your comment. I understand your perspective and assure you we were almost dehydrated by all the grains of salt we took on this trip. The group certainly understood that some of our hosts were playing the game, but it was still interesting to hear the party line directly from the horse’s mouth instead of through the western media. The biases of the east and west are sometimes irreconcilable, degrading easily into a he-said-she-said routine. We perpetuate this history of misunderstanding unless we take these differing viewpoints and share them, break them down, and try to find the glimmer of truth beneath the hyperbole and knee-jerk reactions. I’m not advocating relativism – I’m a proud American who relishes all the freedoms my country has provided for me. This trip reminded me not to take those freedoms for granted. What I am trying to do here is share the themes I noticed, even if they seem inconsistent with our opinions in the west, because that is the only way we learn. Not believe, not accept. Just learn.

parisreview said...
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Hernan Gerson said...

Hello Anneke
Hope you are doing great

I got to your blog through the Stanford GSB website and I think it is great!

I really loved this article about China. I spent there more than 2 months working in Beijing with McKinsey and got the same impression, in particular towards the "one-party government" and the small cities!

I am currently applying for Stanford GSB for my MBA and would love to get in touch if you can

Thanks a million

Ray Brilus said...

Thanks for Sharing very useful and informative information with us. Sourcing Agents in China

Tom said...

I‘ve read you blog, and I think its very well thought out, despite the first post saying that you accept the opinions of your Chinese hosts unthinkingly. Having lived in China for quite a few years, I believed that you have covered pretty much all of what people should know about China, and therefore I don't have much to add. As for the one party system, I agree that it is inhumane, unjust, and disrespect humans rights but hey, its working in China so lets not tell them how to run their country. Why is it working in Hong Kong? Despite Hong Kong being officially part of China, it is still treated as a special district even to this day and they are given special privilleges and benifits that no other province or city in China could imagine. To sum it up in a nutshell, the Chinese pretty much allowed Hong Kong to continue however they were being run under British rule. However, that does not mean that you can take how Hong Kong is run and apply it to the entire country and expect it to work.