Is the Red Carpet Fading China

 

Is the red carpet fading? - China's evolution and engagement with the world: Imperatives for MNCs in China Saurabh Sharma and Mickey Chak WPP Atticus Awards Winner, 2010

 

 

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Is the red carpet fading? - China's evolution and engagement with the world: Imperatives for MNCs in China Saurabh Sharma and Mickey Chak WPP Atticus Awards Winner, 2010

 

Is the red carpet fading? – China's evolution and engagement with the world: Imperatives for MNCs in China Saurabh Sharma and Mickey Chak Ogilvy Contents Introduction The Evolution of China and the Chinese Economy Globalization of China's Needs and Globalization of Chinese Corporations Building China 1.2 Recommendations Conclusion Executive Summary Many foreigners and expats think Chinese are dumb or strange or both. They think that China is a sinister force and that the average Chinese is poor and are frustrated with the lack of freedom and self-expression. Similarly most of the MNCs think that the Chinese government is unfair and biased and there persists a deep-rooted deficit of trust. History, the impact of the Western media, spending too much time with other expats and failing to bridge the understanding gap with China, partly due to language and partly due to a lack of initiative, are just some of the reasons behind such perceptions of China. For many expats, their first-hand account of China is limited to what they see and hear from their English-speaking colleagues, secretaries, drivers, or through reports compiled by foreigners who themselves are only beginning to understand China. Contrary to the general perception of China and the Chinese, the reality is very different. Once one gets past the language barrier, one realizes that China and the Chinese are progressive, pragmatic, intelligent and ambitious. They have a unique sense of mission. And unlike in many other developing countries, in China, some of the smartest Chinese work for the government and are busy shaping the future of the country and the global economy. While many MNCs have sophisticated systems and templates to understand consumers, customers, clients and prospects, and transmit this knowledge to their headquarters, they do not have an equally developed mechanism to understand, interpret and explain the government of China. This is because many of them still do not realize that the Chinese government exercises Downloaded from warc.com

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a tremendous degree of control of almost everything that happens in the country. Other than things such as obtaining regulatory clearances and paying taxes, the government is usually the last agency on the minds of many MNCs, and especially their overseas headquarters. On top of this is the fact that China is changing rapidly. As the country transforms – from a poor backward communist state to a progressive, prosperous and pragmatic socio-capitalistic society, the way China views the world and MNCs is bound to change. This paper observes and explains this change and proposes better ways of working with the Government of China. This paper is primarily targeted at in MNC leaders stationed in the company Headquarters in the West and MNC executives who are relatively new to China. The paper looks at some of the MNCs in the recent past and tries to explain their experiences in China by tracing the journey of China's development. The paper is not intended to be prescriptive – China is changing way too fast for anything like that. However, it tries to outline a way of thinking and lays down some fundamental principles for MNC engagement in China. The paper also highlights the point that due to historical, cultural and political differences a fast changing and visibly Westernized and developed China cannot be compared with the developed countries in the West. Instead, it is more realistic to compare the China of today with the China of the past. The best way to make use of this paper is to visualize futures where China's on-going rapid growth could lead to and use the principles outlined here to stay flexible in that future. Staying flexible, for example, is one of the many things that MNCs can learn from China. China is learning from the world – there is nothing stopping MNCs from learning from China. Introduction Can you think of even one country in modern history that does not have an oil lobby, a real estate lobby, a steel lobby or an auto lobby? Well, China has none. Out here, government directly controls all these sectors. In China — the government does not just care about business – it is hands on with business. It is not just industry; the government controls almost everything that happens in China and all that does not. It controls the judiciary, it controls most of the large businesses across various sectors and it controls the flow of information through a tight grip on all forms of media (Internet included). The Chinese government even controls the weather – Beijing enjoyed clear blue skies during Olympics because the government created rain regularly. It is this extent of control that helps government make things happen. That's how in December 2010, the Beijing government passed a new regulation stipulating that no more than 20,000 new cars could be bought in a month. This number is almost one third of the number of new cars that were streaming into the city roads before the regulation was passed. The same control helps government tell retailers not to increase prices without asking first. In December 2010, Wal-Mart and Carrefour SA, along with four other retailers, received government orders to justify and give advance notice of price increases. This was aimed at curbing Kunming's sky rocketing consumer prices! Such dramatic controls help the government trigger and tame events, and help bring about the fast-paced change that China has now become famous for. The government's all-pervasive role is even reflected in the popular interpretation of the 4Ps of marketing in China:

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MNCs need to learn quickly that working in China is very different from working in almost any other developed or developing country elsewhere in the world. They need to quickly understand and accept the fact that the Chinese government has unprecedented power and control over what goes on in China. The other thing that MNCs need to realize quickly is that 150 years of foreign domination and duplicity have left the Chinese distrustful of foreigners. There is widespread belief, deeply embedded in the common psyche, that foreigners strong-armed their way into China and plundered the country's wealth. They are still taught that at one time China was the mightiest empire on the face of the planet, and that they were very best in just about everything, until foreigners showed up1. Such an all-pervasive historical distrust and government control not withstanding – 30 years ago China opened its doors to foreign enterprises and their expertise and capital. Since then, the long march to development and modernization of this land of 1.3 billion people has not just benefited China, but also helped the many MNCs who came here and learned fast and grew with China. China's opening up and reforms, which started with the idea of economic development and a better life for the Chinese, have brought the country to an important stage in its development. Today it sees a distinct possibility of regaining its glory as a global economic power that it was for most of the documented history except in the last 150 years. (See chart 1)

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(Chart 1) China's Historic Share of World GDP In spite of this, many in the MNC circle consider China's rise as a recent anomaly. They have a habit of considering the most recent changes and developments as the most striking ones. We love to hold the telescope pointing at the future, but we seldom do the same by trying to understand the past we are easily content with the more recent past. This view is strategically flawed. China is not just emerging as a world-leading economy; China is reclaiming its place in the global economic order. Also, contrary to the popular sentiment in the Western media, which is largely driven by distrust and a fear psychosis of the ‘Red Menace'2 – a legacy of the cold war, anti communist sentiment and lack of understanding of the nuances of the nondemocratic fashion in which China works - China is not a self obsessed, power-hungry rogue state lead by some quasi military junta trying to control the whole world. China is a responsible global power with a vibrant economy and a pragmatic leadership. The country's economy is increasingly integrated with other Asian economies, (See Chart 2) and she is a part of the World Trade Organization (WTO) – thus it is unequivocally committed to upholding the principles of international conduct – economically, politically and militarily. Also, China does not have an ideology to export. Development is more of a commercial activity; it is not a ‘development ideology’.

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(Chart 2) China Integral to East Asia – Exports to China as a % of Total China's rise is peaceful and it is filled with a desire to regain its global economic leadership as a vibrant economy and society with tremendous influence. There are reasons to believe that as China strides towards this end goal it will also lift all the corporations – national and multi-national – that trust and work with China today. Companies that win in China today will have the best shot of being the global leaders of tomorrow. Caterpillar Inc. of the United States said something similar when it articulated the seven key success factors for achieving its 2020 Vision at a supplier show in Tuscon. Three of the key success factors involved people, products and quality; three dealt with distribution, speed to market and the company's ability to be profitable through innovation; and the seventh was simply – China. The company told its suppliers that if it wasn't No. 1 in China by 2020, its position as a global leader would be called into question3. How closely are MNC fates tied to China can also be gauged form the fact that share prices of almost all major automotive companies, especially BMW and Volkswagen, declined on December 23, 2010, after the announcement limiting the number of new cars on Beijing roads. Such regulations notwithstanding, companies of all sizes and origins are investing heavily in China. During his visit to China in November 2010, Jeffrey Immelt, the CEO of GE, pledged to invest $1.5 billion in four new joint ventures and pour $500 million into research and development in the country4. Siemens of Germany is pegging its future growth on China in a big way. The company looks at China as its No.1 or No.2 market for almost everything that it makes. IBM too looks at China as one of the most strategic markets in its global portfolio. The company aims to grow its China operations exponentially. Volkswagen, with its nine plants in China, is now counting on China as its biggest market. The company has committed to spending $13.9 billion in China through 2015, and it plans to add two factories to double production. In spite of this close relationship that MNCs have with China, and in spite of the fact that the country plays a critical role in shaping their future fortunes globally, the past 24 months have not been easy for MNCs. Google – the biggest Internet Company and the second most valuable brand on the planet5 could not work with the government of China. On March 2010 after a prolonged war of words between Google's China operations and the Downloaded from warc.com

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government, the company decided to exit Mainland China and www.google.cn ceased to exist. Even as the company shifted its operation to Hong Kong, most of the over 700 people from its Mainland operations left the company and Google lost valuable market share.

Goodbye to Google (March 2010, Beijing) HP China represents, arguably, the oldest Sino-US technology Joint Venture and the company is perceived to be closer to the Government than many. Todd Bradley, Executive VP of HP's Personal Systems Group in China was even awarded the 2009 Friendship Award6.

Todd Bradley, Executive VP of HP's Personal Systems Group, accepts the 2009 Friendship Award (Photo: China Daily) When HP received customer complaints that some HP laptop computers were overheating, and the company pointed to the problem of pests infesting the machines due to poor cleanliness conditions in the student dorms as the reason, the company’  response was put all over web. The next thing HP knew was CCTV's prime time news was discussing the company's clumsy customer service and inability to resolve genuine customer complaints. (CCTV is China Central Television; state controlled and Mainland China's most watched TV network.) Coca Cola has a strong presence in China and is also seen as a company with extensive government relations. Yet the company failed to buy Hui Yuan Foods (a Chinese food and beverage company) in early 2009 because the government believed that with Coca Cola holding a 52% share of the market, another big acquisition would give it monopolistic control in beverages.

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Packs of Hui Yuan Juice at a Supermarket China's high-speed-railway system – a market estimated to be worth $30 billion a year – is another case in point. In the early 2000s the superior technology of international companies like Alstom (France), Kawasaki (Japan) and Siemens (Germany) led them to control almost two-thirds of the market. But in the beginning of 2009 the government started requiring foreign companies wanting to bid for high-speed railways projects to form joint ventures with state-owned equipment producers like CSR and CNR. MNCs could hold only a 49% stake in the new companies and had to transfer the technology and designs to the JV Company; and on top of this 70% of the system had to be produced locally. Further, from 1996-2005, MNCs held nearly 75% of China's market for wind energy projects. When the government decided to grow the market, offering new subsidies to buyers, it also increased the local-content requirement on wind-turbines from 40% to 70% and increased tariffs on imported components. While the market exploded, foreign manufacturers were unable to scale up given the regulations. Today MNCs are left with just one fourth of the market that they once dominated. Does this mean that China does not want MNCs to succeed and grow here? Susan Schwab, U.S. Trade Representative during the erstwhile Bush administration7, stated in a panel discussion that “Foreign firms are in fact discriminated against in this market,” arguing that the government was willing to let MNCs take market share as long as they transferred the technology. But “the outcome for major multinationals that took this approach has been very mixed,” she said. Even European Union Chamber of Commerce was quoted to have said that there is uneven enforcement of laws and unfair restrictions on foreign investment that was deterring international companies from expanding their operations in China. Surveys by both American and European chambers of commerce in 2010 showed overseas companies are increasingly unhappy with the way they are being treated in China. What does all this mean? Are MNCs not welcome anymore? Is China becoming protectionist? Will China not allow a level playing field for MNCs in China and keep siding with local state owned companies?

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Some experts believe that Chinese Central Government's attitude towards MNCs is similar to her attitude towards provincial governments. While it needs them, it constantly keeps a close eye on their operations and every once in a while reprimands  them by using the media to expose their weaknesses, and look better than them in the bargain. Others believe that starting in 2006, MNCs have begun facing the real China outside of the Special Economic Zones (SEZs) that they have grown used to working in. Regulatory challenges are also seen as the price that they have to pay to gain wider access to the large Chinese market. Such talk notwithstanding, there is no doubt about the role that MNCs have played in the construction of postmodern China. MNCs still have, and will perhaps always have, a lot of value to bring to China. A quick review of the contributions made by foreign invested companies to the Chinese exchequer reveals a lot. MNCs and foreign invested companies account for 22% of tax revenues, 28% of added industrial value, 55% of foreign trade and as much as 45 million jobs in China. These are not small numbers and no government could ignore them. In October 2010, Premier Wen Jiabao, during his visit to one of the Siemens factories in China said “All companies in China employing Chinese people, making products and services in China, no matter where they come from, are Chinese companies.”

Chinese Premier Wen Jia Bao (Left) and Vice Premier Xi Jin Ping Further, Vice President Xi Jinping (who is tipped to succeed President Hu Jintao in 2013 as the next president of China), has Downloaded from warc.com

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even vowed to treat foreign firms equally in government procurement. He has been quoted as saying, “With regard to government purchases and construction projects, the Chinese government will adopt an open, transparent plan to let foreign companies and technological products enjoy equal treatment.” He went on to say that the “China was taking a serious and responsible attitude” in talks to join the World Trade Organization's Government Procurement Agreement8. In spite of such reassurances, MNCs in China continue to be worried about their future in this market. In many cases, the China operations of many MNCs are unable to explain to their bosses in the headquarters the way things move in China, what to really worry about and what not to worry about. How many exceptions are too many exceptions for the China operations? As a result many within MNC circles are unsure of how to classify the China opportunity – is it a gold mine or a mine field? Such concerns made us step back and take a long view of what is happening in China. We tried to examine the fundamentals of MNC – China relationship; the changes that are changing China and its impact on MNCs; and the future outlook of China as a country, society and as a market. By talking to select MNC leaders, Chinese academic and policy experts and by closely studying developments as they have been reported in Chinese and foreign Media, we have tried to answers some of these questions. Further, this study has helped us evolve a point of view and lay out some fundamental principles that can help MNCs navigate in the high seas of Chinese policy and markets. It is rather ironical that the imperatives for MNCs today are similar to what Deng Xiaoping said in 1978 during his speech at the 11th CPC Central Committee: “Emancipate the mind, seek truth from facts, and unite as one looking to the future.” Today, more than ever before, it is the MNCs that need to free their minds, open their learning portals, and think of newer ways to work with an ever-changing China. They need to seek the truth about the ‘Chinese way of doing things', not just get carried away with the hyperbole of published facts about the size and scale of the ‘China prize’ And they need to unite their global energies and make themselves indispensable for the construction of a better China that represents over 1.3 billion people – the largest part of humanity on the face of this planet. MNCs have a stake in the future of China and China has a stake in the future of the global economy, it is this fact that will always bind the two together. We need to acknowledge this reality, and while doing this; we need to look at China in a new light – one that is beyond the media mediated projection, which usually sways between the extreme fear and cynicism of the Western media and the overzealous jingoism of the Chinese Media. To be able to do this, we can't just study the present and make a conclusion. We need to trace the evolution of China and the Chinese economy over the past 30 years and flag key turning points that might have important messages for MNCs. This long view can only help us better understand China's place and role in the world economy, project its future course and help visualize the role(s) that MNCs can play in that future. We also need to closely study the principles that lie behind the construction of the modern society that is underway. Only this broad based understanding can help us work with China better and to prepare a strong foundation for long-term and mutually gainful engagement.

THE EVOLUTION OF CHINA AND THE CHINESE ECONOMY “IN JAMES MCGREGOR'S SUCCESSFUL ‘ONE BILLION CUSTOMERS’, HE WROTE THAT CHINA IS SIMULTANEOUSLY THE WORLD'S LARGEST STARTUP AND TURNAROUND. TODAY, CHINA HAS MOVED FURTHER—IT'S TURNING THE WORLD AROUND.” Downloaded from warc.com

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Summary Of Key Shifts Detailed In This Section

China has come a very long way since the launch of Reform and Opening Up that began in 1978. The Evolution of China and the Chinese economy over the past three decades can help put things in perspective and answer why some MNCs feel that they are not interacting with the same China that they have known for years. This evolution can be broadly divided into four phases. Phase I China Needs the World (1980s and 90s) By 1978, Mao Zedong's policy of perpetual revolution had caused the country to stagnate economically. China badly needed foreign capital. Deng Xiaoping started to change this. The sense of urgency that leadership felt at the time could be gauged from the fact that the leader of a communist country went on to say something as dramatic as “Poverty is not socialism, to get rich is glorious!” Through the introduction of ‘Socialism with Chinese characteristics’9, Deng conceptualized an entirely new model of capitalistic economy with tight ‘government controls. Shenzhen's Special Economic Zone was the place where the concept was experimented with first and it yielded dramatic results. As investments from overseas Chinese in the US, Downloaded from warc.com

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Singapore and Hong Kong began to slowly pour in, and as investments from big US and European MNCs started driving industrial growth, the model was replicated in more coastal provinces in the south and east and finally across all of China. This adoption of the new model continued all the way up to the 1990s. All this while China's domestic market was not significant-it didn't matter much then because the focus was on exports not internal demand and consumption.

Phase II China Joins the World (2000-2008) During the next decade China's manufacturing capability started to expand. The country joined the World Trade WTO with a wider objective of expanding the reach of its exports. When Thomas Friedman, the author of “The World is Plat,” visited China in 2006 and talked about the huge opportunity that stared developing countries like China in the face, it gave China renewed confidence about the role that the country could play on the global scene This newfound confidence, desire for a larger canvas and a unique sense of destiny on the world stage culminated in the mega show of Chinese abilities during the 2008 Beijing Olympics. The media rightly called the event “China's coming out party”. While change had already been happening in China for a long time, it was the Olympics, and then the Shanghai Expo and Guangzhou Asian Games in 2010, that actually helped the world see the China of the 21st century.

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By 2008, China had not just come to represent a large proportion of the global economy and trade – it had become the world's largest consumer of coal, cement and steel, the second largest consumer of oil, the second largest market for air travel and the third largest producer of automobiles. Furthermore, as early as 2000, it had pulled millions of Chinese out of poverty. (See Chart 3).

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With poverty increasingly behind her, China saw the emergence of a resurgent middle class that triggered the birth of China's consumer markets. Also, with a large population of 1.3 billion, and over 60 cities with a population of over 1 million, China's middle class started moving into swank new cities by the millions – stoking the largest wave of urbanization known to mankind. Phase III China Rescues the World Towards the close of 2008, as the world plunged into a US-led financial crisis, China once again surprised economists and industry watchers with the scale and speed of its response. Wasting no time, the government announced a $586 billion economic stimulus package. And not just that. By October 2009, when the US Congress was still debating many aspects of its stimulus package, China, through its nationalized banks, had already disbursed as much as 70% of the stimulus spending, a good three months ahead of schedule! As a result of the timely and well-proportioned financial help by the government, weak exports were offset to a large extent by the increased internal demand triggered by subsidies and special incentives as Chinese farmers across the country came in droves to buy their first cars and cheaper flat panel TVs among others. Together this helped China come out of the recession faster and stronger. (See Chart 4)

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(Chart 4) China – Strongest Economy Coming out of Recession (Bloomberg) China's response did not just help the country herself but also rescued many other smaller South East Asian economies dependent on China. Not just Asia and the developing world but even the developed countries lead by the US looked at closer financial ties with China. China's investment of billions in the US Treasury bonds are already known to have helped the US at the most critical moment while it was waging the recessionary war at home. It is believed by some economic experts that the US needs Chinese money for the recovery and by having closer ties between the US and China more trade issues can be sorted out faster. The global crisis made the whole world realize the role-played by China's huge and growing economy, and not just as an exporter of toys and low-value products, but also as a responsible new global leader and a savior. From a China standpoint the overall impact of the economic crisis reminded the experts of the literal meaning wei ji – the Chinese word for crisis. Together they are used to describe a crisis but literally it means ‘danger-opportunity’. There is a hint of optimism built into this word. The economic crisis had a similar effect on China. While it was a huge jolt to exports and employment, as thousands working in small export oriented units in coastal provinces of southern China lost their jobs as one factory after another closed shop, it also came with a blessing in disguise. Not only did many of the inefficient and environmentally damaging and marginal units have to close shop, but also the weaker Western economies in Europe and the US gave China tremendous leverage in global affairs. It would not be inaccurate to say that the global economic crisis actually fast-forwarded China's role in the global economy by at least 5-10 years. Phase IV China Leads the World China's growing global economic clout has lead to the country being granted increased voting power in the World Bank. The country now has the third largest number of votes in the World Bank – behind only the US and Japan. With this new voting structure, 3% of the votes have been shaved off the developed world, making China the biggest gainer in the developing world. This is reflective of the much larger role that China is playing in global economic affairs. China's stature as a rising global power is also reflected in her economic health – it has one of the largest foreign exchange reserves (See chart 5) and the largest share of global exports (See chart 6). Downloaded from warc.com

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(chart 5) China Among the Countries with the Largest Foreign Exchange Reserves

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(Chart 6) China's Large and Growing Share of World Exports Also, while Europe and the US have faltered, especially after the global financial crisis, China has scaled up its stock of Foreign Direct Investments and has already overtaken Japan in terms of its overseas FDIs. (See Chart 7 and Chart 8)

(Chart 7) China's Rising Share of Global FDI

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(Chart 8) Growth Rate of Chinese Overseas Investment With China's rising economic strength some international analysts have echoed a sentiment that various global economic groups viz. G8, G12, and G18, are vital, but what really matters is the balance between the ‘G2’ i.e. the US and China.

China's Widening Role in The World Bank and the Talk About ‘62’ as Key Custodians of the World Economy Bullishness about China's ability to continue the development drive is also reflected in the sentiments of people from various countries across the globe. Most of them think that China is going to become an economy as large as the US. (See Chart 9)

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(Chart 9) Response to the question ‘Do you think that it is more likely that someday China's economy will grow to be as large as the US economy or that US economy will always be larger than China's?10 It is because of China's huge size from the point of view of its geographic expanse, large population, and increasing economic and military might that China cannot be viewed the same way as MNCs look at the rest of the BRIC countries and emerging markets. China of today is not just an emerging market; it is an emerging global power with extensive international reach and distinctly strategic interests. China's economic footprint can be gauged from her strategic links with African nations (See Box ‘China in Africa’), and closer ties with Latin American countries. (See Box ‘China in Latin America’) Together these two regions have not just helped the country secure energy sources to fuel its economic growth, but have also given it unprecedented reach beyond the classic (and limited) sphere of influence in North Asia. China in Africa: The Boom in Resource Trade and Infrastructure11 “The 21st century is the century for China to lead the world. And when you are leading the world we want to be close behind you. When you are going to the moon, we don't want to be left behind” – Nigerian President Olusegun Obasanjo to Chinese President Hu Jintao, April 2006 The Nigerian President said this on the occasion of the China-Africa Summit in Beijing in 2006, where China had invited as many as 25 heads of state from the continent to come to China. This is trade and diplomacy Chinese style – large scale and with no holds barred. Trade between China and Africa started from as low as $12 billion in 2002 and by 2009 it had jumped to over $100 billion. China's comprehensive commercial engagement with many African countries has the potential to transform the economic destiny of the whole continent. Among the BRIC countries, China is by far the largest, accounting for around two-thirds of BRIC trade and ranking as Africa's top national trade partner. The sheer intensity of China's appetite for energy, minerals and Downloaded from warc.com

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resources creates competition for the US, EU nations, Japan, South Korea and other BRICs, helping to drive up the returns for African suppliers. Chinese demand for African products is set to surge because of its sizzling domestic growth rate, rapid domestic urbanization and the country's prowess as a manufacturing centre. In addition, trade with Africa will be further boosted by a plethora of state-sponsored and private investment deals. According to FDI Markets, between 2003 and 2009, China invested $28.7 billion in various projects in Africa. The average annual growth rate of Chinese FDI in Africa between 2003 and 2009 was 58.2%, the fastest rate of increase by any country. Such numbers are set to rise sharply in coming years. The speed of some recent project completions by Chinese companies have also impressed African officials and helped Chinese contractors win a reputation in Africa for being able to “get things done”. One 200MW gas-fired power station being built by Shenzhen Energy in Ghana was almost finished within just 20 months. Many Western companies don't believe that Chinese are moving so quickly. Chinese direct investment levels, both sponsored by the state and privately motivated, are expected to rise sharply in the coming years. Standard Bank of South Africa, for example, has three or four multi-billion dollar deals in the pipeline. The eight pledges unveiled by Premier Wen Jiabao appear set to add impetus to investments. Those pledges include: the provision of $10 billion in low-cost loans over the next three years, the elimination of tariffs on 60% of exports from least-developed nations by end-2010 and 95% by 2012, the construction of 100 clean energy projects for Africa covering solar power, bio gas and small hydro power, debt forgiveness for several nations and a $1 billion loan for small and medium-sized African businesses. China's engagement in Africa is deep and focused. It is a long-term relationship in making. Chinese Assistance Offered to African Nations12

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Trend in Sino-African Trade and Investment11 China in Latin America: Reaching out to the Farthest Corner13 China's push into Latin America has been strategically planned to reduce its over reliance on exports to the US and Europe. Latin America – with a population of 500 million and an economy valued at USD 3 trillion — is an ideal market for Chinese products and a source of basic commodities that China needs. The expansion of China's relationship with Latin America has affected each of the countries of the region. On the economic spectrum, China has significantly expanded its exports across a broad range of sectors, from such labour-intensive, low-end manufacturers as toys, textiles and footwear to more sophisticated products, such as motorcycles, automobiles, telephones and computers. At the same time, many Latin American countries have also increased their exports to China – particularly aquatic and agricultural products, petroleum, metals, minerals and more. There is widespread bullishness about the opportunity to do business with China. Such bullishness is reflected in a proliferation of China-oriented business programs and Chinese-language offerings in institutes and universities across Latin America and also in increasing opportunities to attend trade fairs in China, and in new service companies to help producers place their products in the Chinese market. In addition to expanding economic ties, China is establishing an array of new political, social, and cultural links with Latin America. In the political realm, in the past decade alone, 74 Latin American heads of state have visited China while Chinese top leaders have visited as many as 19 Latin American countries. Exchanges are increasingly occurring across all levels; they include trips by party delegations and by military officers; the establishment of cultural programs, such as the Confucius Institutes, which promote the spread of Chinese language and traditions in the region, and almost 100 sister-city relationships. China has been involved with multilateral and super national institutions in the region such as the American Development Bank (IADB), the Caribbean Development Bank (CBD, the Organization of American States (OAS), the Latin American Parliament and the Corporacion Andino de Fomento. Many in China now believe that the time has come for China to decide what role it wants to play in the death of the Monroe Doctrine, in which Latin America falls within an exclusive US sphere of influence “off limits” to other foreign powers. Not just in the developing third world, but also in the West, particularly the crisis laden European nations – China is looking for new economic opportunities to invest and gain a foothold. (See Box ‘China in Europe’). Such financial investment and building of strategic assets as ports and roads helps China gain influence in a region that has classically been distant to China – both politically and culturally. China in Europe: Strategic Investments14 “The support of our Chinese friends is fortunate for us.” – Greece's minister of state (2010) Downloaded from warc.com

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In the spring of 2010, Europe overtook the United States as China's largest trading partner. When Prime Minister Wen Jiabao visited Athens in November 2010, he came bearing gifts: billions of dollars worth of business deals and a wave of favorable attention from a crucial foreign investor. Greece is a foothold for China's broad, strategic push into Europe. It is investing in assets depressed by the global financial crisis and becoming a significant partner of European nations hard hit by recession. Ultimately, analysts say, Beijing hopes to achieve not just more business for its own companies, but also greater influence over the economic policies set in the power corridors of Brussels and Germany. Soon after Premier Wen's trip, China's president, Hu Jintao, visited business executives of Portugal and France. China is reaching out to troubled economies with downgraded government debt such as Greece and Spain, and it's investing in ports, highways and industries in these eastern and southern edges of Europe. Ireland and Hungary, among others, are also competing to lure Chinese investment, in the hope that they will create thousands of new jobs. China is concentrating its efforts on ports in Greece and Italy and highways that link Eastern Europe to Germany and Turkey, and aims to secure larger infrastructure investments over time. It has provided billions of dollars in state financing for key public works projects that support Chinese state-owned companies and Chinese workers. Such moves could give China a bigger presence in the European chain of distribution and production, while also allowing it to build a track record of investments that it hopes will also encourage Europe to support its position on various international issues. During his recent European tour, Premier Wen reminded politicians in Brussels that China had acted as “a friend” to Greece, Spain, Italy and other troubled European countries in their darkest hour by buying bonds as other investors fled. In the past several months, China has pledged to buy Greek bonds when the government starts selling again, and purchased $625 billion in Spanish debt. On his visit, Mr. Wen hailed scores of business deals in Italy and Greece, including one that allows a Chinese state firm to run Greece's top shipping port – one of the largest European gateways for Chinese goods. For China, plowing a small but growing share of its more than $2.3 trillion in foreign currency reserves into European investments instead of low-yielding United States Treasury bills, helps diversify its portfolio. While Chinese foreign direct investment in Europe is still small compared I to its investments in other regions, it has grown quickly over the past two years. The investments also allow Beijing to advance the interests of Chinese companies as they go global. Mr. Wen last month spoke of a $4.5 billion credit line that troubled Greek shipbuilders could tap – although they have to almost exclusively purchase Chinese-made ships. An additional $5 billion is flowing to Greek coffers from China's state-run Cosco shipping company, which is leasing Piraeus, the port of Athens, to transform it from Europe's largest passenger port to a much bigger hub for cargo, with an aim to more than double traffic to 3.7 million containers in 2015. In Italy, Cosco is expanding the port of Naples, while HNA, a logistics, transportation and tourism group based in Hainan Province, is in talks to build a giant air terminal north of Rome for cargo arriving from China. Mr. Wen pledged an additional $100 billion in trade with Italy through 2015, and heralded 10 business deals between Chinese and Italian businesses. In the coming decade, Europe will be considering numerous new projects, such as clearing the Danube River of wartime ordnance to use it as a transportation passageway; building railways between countries like Germany and Macedonia; and carving new highways from Germany to Turkey. China's investments in Europe are aimed at finding new markets for its own infrastructure companies and ensuring a sound channel for its product and commodity trade. China as the Driver of Global Economy & Demand China's growing economic strength, its foreign trade and its rising influence in various regions of the globe has also coincided with the overall impact of the country's economy on the global economy. According to recent economic data from International Downloaded from warc.com

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Monetary Fund (IMF), an 1% increase in China's growth rate sustained over a period of five years means an extra 0.4% percentage point of growth for the rest of the world. The IMF experts who found this also discovered that between 1963 and 2007 the spillover effect of China's growth has increased. Also, the geographic distance that used to affect the strength of the spillover effect, viz., the closer a country is to China the stronger the impact, has now started diminishing.15 A large part of this widespread economic impact is also attributable to China's attempts to generate more demand from itself. Such internal consumption in China will likely become the engine of the world economy in 5-10 years. The former chief economist of the IMF has said that China's focus on triggering internal demand is already showing results. According to recent statistics, as much as 52.5 percent of China's gross domestic product (GDP) growth in 2009 was attributable to domestic demand. Could China Be A New Role Model for the Developing World? China's dramatic growth has also earned it a new kind of political influence that could not have been imagined even five years back. The country's dramatic rise has attracted attention from many other developing countries. In spite of the fact that many developing countries are skeptical about China's rising power and its potential future impact on prevailing world order, China's rapid success has given such developing countries in Asia, Africa and Latin America both hope and food for thought. (See Box: ‘The Chinese Model as an Alternative Development Paradigm?’). Countries and economists are closely studying the Chinese model and are trying to find ways of implementing parts of it in the way they work. After all there is no other developing country that has transformed itself as quickly as China is transforming itself. Add to this the fact that the results of the past two decades have been particularly disappointing for countries that democratized at low levels of wealth, such as Cambodia, Pakistan, Indonesia, and Bangladesh. Adherents to the East Asian Model, such as China and Singapore, have seized on these examples to support a broader message that the Western template for democratic governance may not be universally applicable in the developing world.18 The Chinese Model as an Alternative Development Paradigm?16 None of the prevailing models of governance have proven to be perfect. For example California's ‘extreme democracy’ (as Economist recently put it) cost the once most successful province, in one of the most successful democracies of the world, a lot. India, world's largest democracy, in spite of its checks and balances has failed to curb rampant corruption that has stymied progress and failed to distribute the fruits of economic progress among the masses. China has its weaknesses too, but what makes the Chinese model attractive is the simple, political equation behind it: the power of the market plus the stability of authoritarian rule. The government embraces certain tenets of liberal economic policy, such as opening the economy to foreign investment, allowing labor flexibility, keeping tax and regulatory burdens low, and creating a first-class infrastructure through combined private-sector and state spending. It also keeps a firm grip on government, the courts, the army, the internal security apparatus, and the flow of information. This formula strikes a new kind of capitalist bargain between the people and the government. The state continues to improve living standards for the people; in return, the people let the state rule as an authoritarian regime. It is a bargain, says Robert Kagan, with a single, practical rule: “You can have whatever private life you want; no one's going to come in and tell you what to read or how to think as long as you keep it to yourself; you can make money, you can prosper-just keep your nose out of politics or we'll cut it off.” China hasn't moved to impose its own market-authoritarian model on others-but has made others aware of its approach and doesn't object if others wish to replicate it or learn from its management expertise in various areas: state control of strategic Downloaded from warc.com

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investments and a semiprivate media; macroeconomic policy on containing the inflationary pressures of large trade surpluses with sterilized foreign-exchange interventions; or boosting foreign direct investment through central regulatory mechanisms such as tax holidays and other subsidies. Others countries among prominent examples of such a model are – Singapore, Kuwait, and South Korea. Although the model is not entirely new – yet it is special because of its scale. Singapore's former leader and founding father, Lee Kuan Yew, spoke for a consensus among regional leaders in 2008: “With few exceptions, democracy has not brought good government to new developing countries. What Asians value may not necessarily be what Americans or Europeans value. Westerners value the freedoms and liberties of the individual. As an Asian of Chinese cultural background, my values are for a government which is honest, effective and efficient.” As Lee also pointed out, democratic processes can have illiberal outcomes. In parts of Africa, Asia, and Latin America, supposedly democratized nations have reverted to various forms of authoritarianism or have become mired in dysfunctional stages of democracy. Here social groups have often lacked the resources to participate effectively in the policy-making processes. Social and political cooperation have been undermined by internal disagreements and general distrust among ethnic groups, while elites from the previous regime have continued to control political power and key state resources. This upends what has been a cornerstone of Western thought, namely, that economic freedom needs political freedom and a minimal role for the state. A growing number of countries are starry-eyed about the new alternative development model-and its billboard in Beijing. Former Singaporean ambassador, Chan Heng Chee, is reported to have said – “developing countries may benefit from a postponement of democracy. If and when it does arrive, Asian democracy has to be expected to look different from the Western type-less permissive, more authoritarian and focusing on the common good rather than the individual rights. Increasingly, middle-sized regional powers are seeing an advantage of these management practices particularly at a moment when Western financial competence, is the topic of derision. These include Indonesia, Vietnam, Nigeria, Turkey, Saudi Arabia, Venezuela, Brazil, South Africa, Ukraine, and Egypt, among others. Some have proven to be are shaky “democracies”; others are inspired by China's pioneering “path around the West.” Research conducted by Harvard's Robert Barro suggests that nondemocratic regimes as China's and Singapore's have delivered good results. Barro's work went on to show that too much democracy wasn't necessarily a good thing for economic growth. He discovered that at very high levels of democracy, income redistribution becomes a dominant force, which serves to restrain entrepreneurial endeavors. And democracy places a disproportionate weight on winning ‘current votes’, potentially at the expense of ‘future votes’ and therefore hinders the investment required for long-term development. Overall non-democratic or authoritarian regimes can deliver economic success if the system manages to set in place the incentives that market-based system naturally delivers, namely competition and motivation to drive efficiency. In this context, it is not surprising to note that officials from Vietnam, Burma, and Cambodia have traveled to China in droves to examine the Chinese example for parts that might be applicable in their efforts to promote development while staving off political liberalization. Iran, for example, has publicly stated that they hope to copy a Chinese model of development that can grow the economy and control political dissent that distracts the nation from its path to progress. China's growing economic prosperity has brought with it a newfound global influence – both economic and political. This makes the country a front-runner among the select club of nations that are global power centers, and not just large and growing market.

GLOBALIZATION OF CHINA'S NEEDS AND CLOBALIZATION OF CHINESE CORPORATION IN 1421, THE RETIRED ENGLISH SUBMARINE COMMANDER GAVIN MENZIES SUGGESTED THAT A DETACHMENT Downloaded from warc.com

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FROM ZHENG HE'S17 SIXTH EXPEDITION VISITED AMERICA AS WELL AS AUSTRALIA, NEW ZEALAND, THE ATLANTIC COAST OF BRAZIL AND CAPE VERDE ISLANDS. SOMETHING SIMILAR IS HAPPENING AGAIN AS CHINESE CORPORATIONS ARE STARTING TO REACH OUT TO THE WORLD.

Summary Of Key Shifts Detailed In This Section

Along-with China's economic rise and development has come the rise of Chinese corporations. Many among these Chinese corporations had acquired capabilities to go overseas as early as 2005-06 (See table 1) – but today we are beginning to see the impact of their global presence.

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(Table 1) Chinese Corporations with Globalization Potential (IBM, Study 2006) As China expands its global reach in search of energy and other commodity resources; Chinese corporations are in step with it. In most of the cases, China's overseas resource acquisitions are lead by various state-owned enterprises. Yet trade in resources is followed by entry of Chinese products and services to international markets. Chinese corporations are thus not just seeking resources; they are seeking markets. China's foray into Europe and investments in ports there shows the country is building infrastructure for international trade while also creating a future market for her own shipping industry.

Chinese Corporations in Resources and Infrastructure

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The State Grid Corporation of China has agreed to a deal worth nearly $1 billion to buy seven Brazilian power transmission companies, the latest in a series of big bets by Chinese companies that rapid economic growth in South America will ignite energy demand.

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PetroChina Corporation has agreed to buy a 50% stake (worth $5.46 billion) in gas assets of Encana Corporation Canada's biggest natural gas producer. China Petrochemical Corporation recently bought from Repsol SA of Spain as much as 40% of its Brazilian assets for close to $7.1 billion – this is said to be a giant leap for Chinese energy companies in Latin America.

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CSR and CNR are cutting their teeth into the $110 billion global rolling stock markets. They are bidding for California High Speed Rail Projects in partnership with 6E. CNR has also carried out projects in Africa and the Middle East – including the coveted Mecca Rail Project, and has recently won contracts in New Zealand and Australia.

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Huawei and ZTE, China's two large telecom equipment companies, are setting up international operations, and have lately made inroads even in India – traditionally one of the toughest markets for Chinese corporations. (See examples of their international advertising below)

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International Advertising for China's ZTE (left) and Huawei Chinese Industrial Corporations l

Another sector where Chinese corporations are making rapid international forays is automobiles. China became a net exporter of automobiles as early as 2005. Chery Auto18 currently operates a factory in Egypt, with an annual production capacity of 25,000 units, and has announced plans to set up a production line in Iran as well. Chinese Car Brands are also making forays into the Middle East and North Africa. Like their counterparts in the high-tech, fashion, and wine industries, Chinese automakers have made a strong push in the last few years to move up the value chain, with the ultimate goal being increased exports not only to emerging countries, but also developed markets like the US, the Euro Zone and Japan. A share in developed markets is yet to come, but Chinese automakers have found modest, but growing success in places like Latin America and the Middle East/North Africa (MENA) region. With exports of Chinese vehicles expected to surpass one million units by next year, and Chinese brands working to increase local dealer and distribution networks overseas, the presence of Chinese automakers in the Middle East and North Africa, in particular, may become far more pronounced in the next five years. Consumers in the MENA region who are used to buying small and low-tech made-in-China commodities are now showing increasing interest in trying something bigger – China's homegrown sedans.

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Chinese companies have now also come to dominate the global silicon wafer-panel-business, and names such as Suntech, Yingli and JA Solar control half of the German and a third of the US solar panels market.

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Chinese Internet companies are making forays into international markets. Alibaba sees a lot of opportunity in a large and growing market like India and has made strategic investments there.

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Key Chinese corporations are also hoping to make a breakthrough in consumer services. China Mobile's cellular service in Pakistan, Zong, has had a tremendously successful operation in the past three years. The company is said to be looking at newer markets for expansion, especially in Africa, both through Greenfield projects and acquisitions.

Chinese Corporations in the Global Financial System

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The post-crisis global financial order has Chinese Banks leading the sector. Among the top-10 banks in the world as many as four are Chinese (See Chart 10)

(Chart 10) World's Biggest Banks by Market Capitalization (July 2010) China Inc's Fast Track to Branding and Innovation l

Companies from China are buying Western Marques and are fast-tracking their way to branding for greater success in international markets. Geely Auto of China recently bought the Volvo brand from Ford and Nanjing Auto bought the rights to MG Rover in as early as 2005. The company has been marketing the MG Brand successfully for almost 5 years.

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Many of the Chinese Corporations are ‘acquiring innovation’ by buying relatively smaller Japanese companies with specific knowhow. These acquisitions are not for the stagnant Japanese market; instead they are aimed at technology and skill acquisition to grow in China and international markets. (See Chart 11)

(Chart 11) Number of Japanese Firms Acquired by Chinese Companies l

BYD, the automotive company, although has been facing its share of challenges in the recent past has still earned international repute. Not just because Warren Buffet has bought a stake in the company but also because it has recently been ranked as the most innovative among the Emerging Market Companies. The company is engaged in manufacturing energy efficient and eco-friendly cars in addition to having a large sized passenger car manufacturing and marketing operation in China.

China's Most Valued Brands Owing to the sheer size of Chinese consumer markets and the clout of many of China's state-owned enterprises, Chinese brands have also begun to appear among the global top ranked brands.

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According to 2010 BrandZ data – out of the top five Financial Brands in the World, three are Chinese and among the top 10 brands in Asia, five are Chinese. Chinese corporations are not global leaders and yet they are making rapid strides and learning quickly. China's rising economic clout and focused development and industrialization is going to create more and more Chinese corporations with global stature. The way things are progressing, in the not so distant future, it would not be surprising to find at least one Chinese Multi-National Corporation among the top 5 or 10 global corporations in each of the strategic sectors like renewable energy, biotechnology and information technology. As China strengthens itself economically and creates global corporations in the process, it is also trying to change the way it manages economic and social development within China. There is a unique social construction underway but it often gets Downloaded from warc.com

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overlooked in the high decibel international reporting about the lack of democratic systems and the absence of free flow of information in China. The China model is not perfect but this does not take away from the fact that there are many positive changes underway. The next section tries to bring forth some of the more important among these changes as it narrates the making of a new kind of China.

BUILDING CHINA 1.2 IT CAN BE SAID WITH SOME CERTAINTY THAT CHINA COULD EMERGE AS A COUNTRY WHICH IS A CROSS BETWEEN THE GOVERNANCE OF SINGAPORE, THE ECONOMY OF THE SIZE OF US, AND WITH GEOPOLITICAL INFLUENCE THAT MATCHES THAT OF THE US TODAY.

Summary Of Key Shifts Detailed In This Section

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said about the changes that are being brought about to build a modern and progressive Chinese society is also true.” -Social expert in Beijing. There is both linkage and leakage between the international image of China and the real China as it is today. It is true that the China of today still has regimentation in everyday life. It is true that China's education system does not encourage imagination and investigation among young minds. It is true that this – along with the overall lack of soft infrastructure—has lead to a not so vibrant system of innovation and creativity. It is true that the informal networks and strong sense of kinship leads to a lack of equal opportunities, while relationships, contacts and guanxi (See box ‘Guanxi on p. 60) is seen to be vital for success. It is true that China's rapid economic development has come at great environmental cost. It is also true that based on its present system of developmental autocracy the whole world doubts if China can actually transition successfully into the next stage of growth driven by innovation. And yet, it is also true that China is actively working towards trying to overcome these very bottlenecks and continue down the path of China's progress and all round development. In addition to the wider role that China is playing in global economic affairs, China has also set very ambitious and increasingly people centric goals for its continued national development. China's vision 2020 gives a glimpse of the future of China. With some visualization one can easily get a preview of the kind of China that Zhongnanhai19 envisions in the future. Summary of China's Vision 2020 1. Improve the quality of life for the masses 2. Boost per capita GDP 4 times from 2000 levels 3. Build a superior healthcare and social security system 4. Move from a manufacturing to a services economy; services to account for as much as 50% of GDP 5. Move from made in China to created in China through Indigenous Innovation 6. Refresh and redeployment of soft power – intellectual property protection, Rediscover, enrich and leverage China's cultural heritage 7. Focus on Sustainable Growth – Reduce the carbon footprint, achieve energy efficiency, and lead in new energy solutions When we look at Vision 2020 and try to correlate it with the outline of the 12th Pive-Year Plan20 announced in October 2010 (See Chart 12 and 13), we can easily join the dots and observe how these two are parts of a larger intent to uplift China to a new level of development through 2015 and beyond.

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(Chart 12) Theme of the 12th 5-Year Plan Outline -From “Powering the Country” to “Enriching the People”

(Chart 13) Summary of Key Strategic Shifts in Government Priorities from 2011-2015 China s future focus is very different from the China that we have seen in the past. The 12th Five-Year Plan outline points to China's desire to shift gears and start focusing on building a different kind of China, one that we call China 1.2 (See Chart 14)

(Chart 14) Building a New Kind of China – Implications from 12th 5 Year Plan Outline This by far is the biggest shift observed in China's development strategy since the start of reform and opening up. It is also noteworthy that the government of China no longer calls its five year outline a Five Year Plan—instead it is referred to as the 5

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Year Strategy. This has a message about the way the government will look at central planning in the future. If the reforms were the first inflection point in the evolution and development of China, then creation of China 1.2 is going to be next. While the first one brought China out of poverty and lead to industrialization, the next one is going to create a new kind of China driven by knowledge and innovation – one that is future proof in all ways possible. This strategic shift is not just nice to have but is critical for China to be able to continue along its growth path. Innovation has been an important theme in China s development debate. The world has often raised questions about the sustainability of China s economic growth owing to its poor soft infrastructure, which does not promote innovation. It is true – the China of today is not an innovation driven economy. Most of the knowhow is imported. Every year China spends lot on buying foreign technology to support its economic development. It is worth noting that while there is extensive talk about China's trade surplus with many countries, what often goes unnoticed is China's growing royalty and license fee deficit with the developed world. (See Chart 15)

(Chart 15) China's Balance of Remittances Towards Technology License Pee & Royalties – A Deficit of USD 10 Billion 21 China hopes to bridge this innovation gap and the resulting deficit. As China builds China 1.2, it is desirous of training its people to innovate. The country wishes to develop minds and grow markets that can transform China from a country big on hard infrastructure, into country that has an equally vibrant soft infrastructure and talent pool. China's educational reforms are the long-term solution to the creation of this soft infrastructure. The country has also been working overtime to lure back Chinese-born scholars working in the West, creating national programs like rencai qiang guo (strengthening the country through human talent). The imperative to innovate has also lead China to invest in stronger innovation capability. The country has been investing in R&D extensively. (See Chart 16)

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(Chart 16) China's Rising investment in R&D This B&D push is especially pronounced in sectors like alternative energy in which it urgently needs to scale up owing to its large-sized carbon footprint and the international commitments that it has made to reduce it. (See chart 17)

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(Chart 17) China Leads Global Investments in Alternative Energy China's desire to innovate and bridge the knowledge gap with the developed world has lead to the creation of new technologies in some domains. These technologies have helped the country become self reliant through its own standards in some of these domains. China's Indigenous Systems & Standards 1. WAPI China has set up its own standard for wireless Internet that runs in parallel to the present WiFi standard from the US. WAPI is now being supported by many Chinese PC makers, chip manufacturers, module suppliers, server providers, network equipment vendors, and platform testing providers. 2. TDSCDMA – China's 3G Technology While the rest of the world follows one of two international 3G standards, China has developed its own TDSCDMA technology and assigned it to China Mobile -the world's largest telecom operator. 3. China's ‘Google Maps' In mid-2010, China launched its own official online mapping service called Map World. The web-based service gives people access to increasingly detailed satellite images of China and high-level images of other nations. The flat maps can be viewed in 3D if visitors download and install a browser plug-in to convert the images. About 80 companies, including Nokia, have bought mapping licenses. This service is widely seen as a response to Google's monopoly on maps. 4. China's own Cloud Computing Operating System Chinese computing platform and information technology application solutions provider Inspur is going to promote its cloud computing business, and it plans to launch China's first self-developed cloud computing operating system. Development of Chinese cloud technologies needs to meet the actual demand in China where industry users account for over 50% of the Chinese digital information market. 5. China's Indigenous Search Engine Earlier in 2010, China Mobile (the largest wireless carrier in China and the world) tied up with Xinhua News Agency (China's official news agency) to create Search Engine New Media International Communications Co.. The new joint venture will focus on creating a leading search engine while actively developing other businesses, including Internet, print media and advertising. This search platform could eventually rival Google's and would be usable both 6. China's own GPS Navigation System China is about to release its own GPS navigation system called the Beidou Xing (Northern Star). Beidou will start offering a GPS service aimed at drivers in 2012. The system was originally designed for military use but is now going to be offered for grassroots civilian use. State-owned Enterprises Opening Doors to Global Talent in Leadership Positions Downloaded from warc.com

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Many among the MNC circles worry about China's push for indigenous innovation as a symbol of protectionism and shutting out of the outside world. Yet not many talk about the fact that China has never been more open to foreign expertise, even in running the most traditional of Chinese corporations viz. the state-owned enterprises. China's State Asset Supervision and Administration Commission (SASAC) recently announced a global talent search to fill top posts at 12 major state-owned companies. This initiative is a part of the wider intent to turn huge but inefficient government enterprises into global corporations. China wants to build up 30 to 50 state companies as national champions in fields from oil to banking to airlines. State companies such as China Telecom Ltd. and Petro China Ltd. are working hard to become efficient and profitable. The positions announced even include sensitive sectors like those represented by State Nuclear Power Technology Corporation and China Guangdong Nuclear Power Holding Corporation. While many quarters view a developing China as a protectionist China, it overlooks the fact that China is more open today than it has ever been in the past. The Chinese government is exceedingly pragmatic in its decisions, which are influenced by clear focus on development, self-reliance and global reach. Chinese Brands Moving up in China While state-owned enterprises are trying to learn and become globally competitive by attracting foreign talent, Chinese consumer brands are also trying to move up the preference ladder. Although there continues to be a clear preference for foreign brands, local Chinese brands are learning quickly and have ramped up product quality and branding initiatives. As a result, Chinese brands are now beginning to gain traction. (See Chart 18 & Chart 19)

(Chart 18) Performance of Local Chinese Brands22

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apparel industry, in tier 2-4 cities, has witnessed the growth of Chinese brands much faster than foreign ones. These brands are not only catching up on product design and quality, but also on branding. Recently there have been creative videos produced for local brands like Vancl24, Semir25 and Metersbonwe26, which are together drawing increasing youth interest. Also, in the mobile phone market, Chinese brands like the Shenzhen based ZTE has jumped from 7th to 4th spot with just Nokia, Samsung, and LG remaining in front. Huawei (traditionally a telecom equipment manufacturer) recently launched its Ideos Smartphone, an Android-based device that has customers raving about its usability Leadership 1.2 Today's China, which is more prosperous every year and has increasing global interests, extensive reach, and influence – is both a result of and the reason behind the emergence of an increasingly confident new generation of Chinese leaders. Hu Jintao, and to some extent Jiang Zemin, represent a generation that has come of age in a China no longer struggling merely to survive in the international system. Mao Zedong and the leadership who consolidated power during the communist revolution of 1949 inherited a China that was relatively much weaker in military and economic terms. In the yeas following the revolution China was struggling to feed its people while trying to describe communism domestically and position itself between the powerful United States and the then Soviet Union. But the China that Jiang Zemin and his successor Hu Jintao inherited had finally begun to accumulate the economic weight and liberty in the international arena to be able to focus on growth rather than be stuck in the circle of survival. In addition to confident and capable individuals in senior leadership positions, China also as a management and leadership machinery; the Chinese Government in general has transformed itself rapidly. (See Box: True Blue Technocrats – A New Kind of Chinese Leadership). The change is not restricted to Beijing; we observe a dramatic shift at the provincial level. A quick analysis of qualifications and abilities of leaders reveals that in 1982 only about 20% had attended college but by 2002, this number had become as high as 98%. Among younger, fourth generation leaders (under 54), two-thirds hold masters or PhD degrees. As a result of this, today s mid-level Chinese leaders have become vastly more knowledgeable about the outside world, enjoy better access to current events and are more aware. True Blue Technocrats – A New Kind of Chinese Leadership27 On December 25, 2010 – Miao Wei, a native of Hubei Province, was appointed the new vice minister of the Ministry of Industry and Information Technology (MIIT). Miao replaced Li Yizhong (65) who retired recently. Senior executives at several domestic automobile manufacturers welcomed news of Miao s appointment. They all expect that Miao's many years of work experience in the sector gives him a deep understanding of the issues facing the automotive industry. Miao's career has followed a path typical of many new officials. An engineer by training, he worked as an executive at a large state-owned enterprise and then in a government department. He worked in sales, production and engineering before rising to the leadership of the Dongfeng Motor Corporation. He was appointed the party secretary of Dongfeng in 1997, and was appointed as the general manager of the company in 1999. When Miao arrived at Dongfeng, the company was on the verge of bankruptcy and employee morale was low. The company had losses in 1998 of over RMB 500 million ($75 million). Miao vowed to turn the company around within two years, and indeed the company's bottom line quickly improved. The company Downloaded from warc.com

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realized a profit of RMB 16 million in 1999 and continued to grow exponentially to hit a profit of RMB 2.5 billion in 2001. To turn the company around, Miao retooled Dongfeng's business operations, transforming it from a military truck maker into a profitable large-scale auto manufacturer. A series of joint ventures with international giants such as France's PSA Peugeot Citroen and Japan's Honda and Nissan accelerated Dongfeng's growth. “We were part of the national defense as a military industry,” says Miao. “Now we are being transformed into an internationally competitive company.” Miao was chosen as one of Businessweek magazine's Stars of Asia in 2004. In addition to this, as China 1.2 takes shape and the national progress raises millions of Chinese out of poverty, the country is bound to change the way it goes about doing business with the world and how it runs the country internally. MNCs, with longterm interest in this large, growing and vibrant society need not just think about the China of today or even the China 1.2 that is in the making. MNCs need to set their sight on what China 1.2 will make and then visualize what MNCs could make with that. The West's (and thus MNC) notions about China and her future are either fraught with fear (they often view China as some kind of expansionist power without a conscience28) or are driven by their own vested interests wherein they want to see a China in the future that looks and feels like Japan of today – economically powerful, politically similar and cooperative, culturally exotic but strategically dormant and militarily inhibited. Realistically though, it can be said with a good deal of certainty that the China of the future would be unique. It would not become like Europe or the US in the way it thinks and behaves. This is a purely cultural thing – China is a different culture and a developed China will continue to be a different culture. At a high level, it might not be inaccurate to say that China could emerge as a country which is a cross between the governance of Singapore, the economy the size of US (if not bigger), based on a different kind of capitalistic model and with geopolitical reach and influence that matches or exceeds that of the US today. What could all this mean for MNCs operating in China? How can they adapt quickly and develop a win-win relationship with China in the long-term? The next section tries to answer some of these questions. It starts by urging MNCs to take a hard look at what they really want from China. It then proposes two paradigms for MNCs to engage with China and ways to make it real.

RECOMMENDATIONS MOST OM HE MNCS ARM LOST SOMEWHERE BETWEEN THEIR FUNDAMENTAL LACK OF TRUST IN CHINA AND THEIR ACUTE DESIRE TO MAKE THE BEST OF THIS MARKET OPPORTUNITY. AN INCREASINGLY PRAGMATIC CHINA, ON THE OTHER HAND, WANTS IIIIVOS TO WORK WITH THE COUNTRY AND PLAY A MORE CONSTRUCTIVE ROLE IN DEVELOPING THE COUNTRY. CHINA HOPES THAT MNCS CAN LOOK AT HER AS THEIR SECOND HOME RATHER THAN JUST A MARKET.

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Strategic Imperatives and Options

Action Points For MNCs Know very clearly what you want from China We meet so many expats in China who keep grumbling about one thing or the other here. Yet, in the past many years, not many of them have left China. Why? We think they like it here but they are still not sure if they Downloaded from warc.com

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should like it here; they hate it here but they are not sure if they should hate it here. This is perhaps because they have not clearly, or have very narrowly, articulated what they really want from China. Only a clear answer to this question can help them better engage with China. The situation of many of the MNCs in China is not very different. They are lost somewhere between their fundamental distrust and dislike for China and their acute desire to make the best of this market opportunity. For MNCs to be able to chart a long-term growth path in China this attitude has to change. As a first step in this direction, MNCs need to know very clearly what they want from China. The key imperatives and recommendations that we have proposed in this section are a sum total of the learnings from our conversations with various industry leaders, academics and policy experts, and our past two decades of experience in working with various multinational corporations that have operated in China with varying degrees of .success. As outlined in the previous sections, the China of tomorrow will offer a much larger market for most of the consumer and industrial products than any other country in modern history. Add to this the fact that China has a distinct goal to become a preeminent global economy and is busy building China 1.2 – a new kind of modern society. (See Table Below)

Key Implications of China's Vision 2020 In this wider context – China of the future would like MNCs to play a more constructive role in developing China while partnering with it to gain a global reach. In this process, China would like MNCs to treat her as their second home rather than just a market. MNCs would thus need to think hard about how to address this expectation. This question is also linked with the kind of industry that the MNC is in. The imperatives for MNCs operating in non-strategic consumer industries are different from those who are operating in technology intensive strategic industries. Keeping these factors in view, we have proposed two paradigms for MNC engagement in China. 1. China as a market paradigm 2. China as a second Home paradigm

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We would now look at these two more closely. 1. China as a Market: A Transactional View of the China Opportunity Most MNCs have traditionally adopted this approach in China. This paradigm offers a canvas for collaborative partnership between China and MNCs, but is limited to the creation of domestic market and some exports. It relies heavily on public relations and public affairs strategies to bring out the message of the MNC's commitment to the China market. It includes adapting the MNC messaging and the annual/five-year business targets to fit the long-term and short-term Government announcements and plans. This approach is the classic MNC comfort zone because it hinges on local responsiveness29 – something that most of the MNCs have learnt while working across various markets in the world. While the paradigm is ideally suited for MNCs that are operational in non-strategic sectors of China, many of which lie in the consumer products and services domain, it is not enough for MNCs who are engaged in strategic sectors Also, in the wider context of rapid change witnessed by China in the past 30 years, this approach worked well for MNCs thus far. But as China's needs are changing, so are its aspirations and resulting expectations from MNCs. Thus the approach needs to Joe updated and adapted to keep it in step with the China of tomorrow as visualized in Vision 2020 (See Building China 1.2 on Page 35).

Key Implications of Vision 2020 & the Role of MNCs in ‘China as a Market’ Paradigm In spite of the attractiveness and relative ease of deploying China as a market paradigm, this approach is not a cure all. Limitations of China as a Market Paradigm As we saw in the sections above, the past 30 years of revolutionary development in China have given it global stature and influence; it is no longer just an emerging market or a developing economy. China is simultaneously the world's largest economy and a emerging market. It has widespread influence in countries spread across almost all the continents of the globe. In keeping with the size, scale, influence and future potential of Chinese economy, the China of today is poised to be the home country of many Chinese MNCs that would have a stake in global markets for various consumer and industrial products. China as a market paradigm misses this global potential of China. It treats China as a subset of its global operations instead of

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another hub that can give greater reach to the MNC in other emerging markets. MNCs Need a New Mental Model MNCs entering and operating in China need a new perspective to frame the China of tomorrow. This new China requires a new mental map for MNCs to be able to comprehend its full scope and scale and find their own gainful position in it. To be able to think this way, MNCs perhaps need a new way of looking at China – first as a country, then as a society and then as a market. To be able to look at China this way MNCs need to understand the principle behind in China, for China beyond just using it as a public relations and public affairs watchword. It is widely believed that the most powerful of bureaucratic and xenophobic hurdles and attitudes can be overcome if MNCs have China s interests at heart.1 To be successful, MNCs need to take a hard look of how they can serve China s long-term interests – only this can help them build a long-term working partnership with the country. What specifically will MNCs need to do to be able to think this way? What changes are needed in the way MNCs view their business and their origins today? The second paradigm and the accompanying set of recommendations look at these questions in greater detail. 2. China as a Second Home A Transformational View of the China Opportunity This new paradigm is especially relevant for MNCs engaged in China's strategic industries like energy, information technology, financial services, electronics, aviation and aerospace. China is already giving, and will continue to give many reasons for MNCs to view her as more than just a market and instead as a second home. This paradigm allows MNCs two benefits: 1. Strategic localization – in China for China 2. Greater global reach in other emerging markets through low cost solutions developed in and with China Together these two lead to MNC's Strategic Insideration31 in China. This approach is very different from the China as a Market Paradigm that we discussed earlier. China as a second home offers a wide canvas for the collaborative partnership between China and MNCs across all the aspects of Vision 2020.

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Implications of Vision 2020 & Role of MNCs in the ‘China as a Second Home’ Paradigm A Different View of Joint Ventures in China Many and opportunities for JVs and collaborative innovation offered by the Chinese government are signals that they want MNCs to check out of their hotels and build a home here. It is up to the MNCs to get the message and interpret it as an opportunity to integrate with China and make it their second home, or look at it as a protectionist ploy aimed at helping Chinese companies who to take away MNC technologies and sell resulting products at a much lower price in other developing markets, driving the Western MNCs out of business. Fast Learning MNCs Some companies are already taking China's signals positively. Siemens China is a case in point. The company proudly states that it wants to make China her second home. The size and growth potential of the China market, the rare opportunity to apply pioneering technologies, and the great government relationship that the company has enjoyed in the country, gives it the confidence that their China venture is more than just an international office. It is their home in the eastern hemisphere that gives them greater reach into the rest of the world. In 2008 the company completed the construction of its 29-storey headquarters in Beijing, built at the cost of RMB 1 billion and owned by Siemens. (There is one more similar sized structure coming up in Shanghai.) Today, Siemens has over 90 operating companies and more than 60 regional offices in China that collectively employ more than 41,000 employees – 99% of whom are Mainland Chinese.

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Siemens China Headquarters in Beijing GE Inc. of USA is another company bullish on China. After an initial lack of understanding of the Government stance on Indigenous Innovation, GE is now going full-throttle on China “Indigenous innovation concerned us as a policy,” Mr. Geoffrey Immelt, CEO of GE Inc., said, referring to remarks he made earlier in 2010 concerning the Chinese Government's effort to promote homegrown technologies that many foreign businesses say discriminates against them. However, he said he now believes that China is committed to a level playing field. The company has recently announced multiple strategic partnerships in China – a 50-50 joint venture with Wuhan NARI Co. Ltd (owned by China's State Grid Corporation) to produce and sell energy-grid monitoring and diagnostic products. The company is also jointly acquiring, with State Grid's Shanghai Electric Power Co., a controlling stake in Shanghai Tianling Switchgear Co., a power-distribution equipment maker. GE has also signed an agreement to form an equally owned joint venture with Chengdu Locomotive & Rolling Stock Works, which is owned by China South Locomotive And Rolling Stock Corporation, to develop new propulsion systems. Finally the company also entered into a 50-50 joint venture with the Beijing National Railway Research & Design Institute of Signal & Communication to supply railway-signaling systems for the local and international markets. GE s success, because of its openness to JVs is not a new phenomenon. Many MNCs have long collaborated with state-owned enterprises to create stronger business positions than they could have achieved on their own. Cummins is an equal partner both in production and R&D with Dong Feng Motor as its largest customer in China. This has allowed the company to develop products faster in China than it would have otherwise managed to and also helped strike more relationships and partnerships with other 52customers such as mass-transit operators in China. All this has helped Cummins non-China operations to export four times the value of products to China because it exports from China too. Bottlenecks in Way of Strategic Insideration In spite of its obvious advantages, and before more MNCs can start to think this way, they need to clear many barriers that have traditionally stopped them from opening up to China. These barriers have to do with the most basic elements of the relationship and the MNC business outlook in China. We have identified three reasons that govern MNC's lack of openness to China. Downloaded from warc.com

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A. Lack of Trust B. Lack of Learning Portals in China C. Lack of Long-Term Thinking We now look at these three closely and propose possible ways in which MNCs can get past them and forge stronger ties with China. Word of Caution Before Committing to Strategic Insideration This approach can have far reaching implications for the organizational culture and the MNC's China operations. Companies need to consider how many differences would they be comfortable with between the head office in the West and the second home in China. This decision will be a test of both -MNC's commitment to its globally accepted operating procedures and its desire to adapt to China by granting a special status to the China subsidiary because of the sheer size of the business. There are many markets in the world that are unique owing to their culture and system of governance and yet not many can make or break an MNCs balance sheet like China can. A. Trust China One hundred and fifty years of foreign domination and duplicity have left China distrustful of foreigners and the same is true of the foreigner's attitude towards China. All the major MNCs, in spite of their pleasantries and smart PR tactics, have a major deficit of trust with China. Such MNC paranoia is reflective to the West's perennial fear psychosis of the East. The extent of distrust and fear of China was also evident when HSBC shifted its headquarters from Hong Kong to London in 1994 – a good three years ahead of Hong Kong's imminent return to Mainland China. The company was not sure of the future of Hong Kong after the transfer. It is interesting to note that in 2009, the company relocated their CEO to Hong Kong. The move – which Stephen Green, executive chairman, called symbolic and practical – was also aimed at cementing HSBC s position in the fast-growing China market. Today China accounts for almost 40% of HSBC's pre-tax profits and analysts predict this could reach 50 per cent in the next five to 10 years. HSBCs move also reflects how confident the company is about China. As the country develops, it would not be surprising to see HSBC move further into China by relocating to Shanghai, the way for example GE, Philips and Intel have done. In November 2010, General Electric Co (GE) appointed its vice-chairman John Rice to head its global growth and operations unit in Hong Kong. Philips, which now has China as its second largest market anywhere in the world, moved the global headquarters of its domestic appliances unit from Amsterdam to Shanghai in January 2011. The unit is expected to have more than 100 staff members, including those who transferred from the Netherlands and local recruits. Philips is also planning to have its kitchen appliances category report to management in Shanghai, relocate its water and air category to the city, and install all end-to-end business capabilities under one roof in China. Almost three years ago, Philips also made its Chinese operations a separate profit-and-loss center as a trial of its ability to develop in emerging markets, so the China-based team had their say on budgets, human resources and other decision-making capabilities. Similarly Intel Corporation announced on in May 2011 that Sean Maloney, one of its two executive vice-presidents, will be based in China as chairman of its operations in the country, which is set to overtake the United States to become the world's largest semiconductor market. But such trust is not common. The all-pervasive distrust has deep roots. It is not just a result of prevailing stereotypes about Downloaded from warc.com

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China (See Box: Key Stereotypes about China) but also has its roots in historical and ideological differences that the West has had with China. Key Stereotypes About China 1. The Chinese are out to cheat me. China has been through a lot of tough history, from ancient to very recent times. Chinese people have had to make difficult choices in a world of scarcity. This mentality has been passed down through the generations. Yet it is equally true that no Chinese does anything that a Westerner wouldn't do if fighting for survival. 2. The Chinese lie. People from every culture lie. What Westerners call lying in China is often just a more subtle form of communication than they are used to. China is what's known as a high context culture: information is assumed to be in the background context. The more you learn about the assumed context, the better you'll get at seeing the meaning behind the words. 3. The Chinese go back on their word. Shaped for millennia by a fickle, resource-poor environment rife with natural disasters, the Chinese see the world as constantly in flux. Circumstances change, and it's foolish to set a plan in stone now for an imagined future, when it might not be a fit for the actual future. It's best to remain adaptable and flexible. Historical and Ideological differences between China and the West 1. A different system of governance – When MNCs engage with China, they do not just face cultural shock in the shape of food, language, processes, etc. – they actually find themselves in the middle of a mindset that is totally alien to them. It questions almost all the principles of society, government and individual contract that they have grown up with and learnt to believe. The Western (and thus the MNC) worldview is rooted in individual freedom and the right to self-determination. The Chinese system on the other hand is rooted in the collective good. For example, in China overall social stability is more vital than individual rights and freedoms. It is a generally accepted fact that small sacrifices need to be made for the larger good of the nation and progress for people in general. Also, it is said that the Chinese believe in Performance legitimacy31 instead of individual rights and choosing the Government 2. Lack of transparency and an independent judiciary – To a Westerner – Chinese decision-making can come across like some black-box management – where important regulations and laws are passed without much consultation. This is a systemic challenge. The way Chinese Government works, does not allow for this approach to be changed anytime soon. China is not murky and bad. It is just different from what MNCs are used to. opaque and unpredictable and thus seemingly sinister. MNCs need to trust the Government – for if we step back and see, most of such regulations have actually eventually helped business, industry and development in general. Similarly, the underdeveloped nature of the Chinese judicial system also bothers many Westerners and MNCs alike. However, if an MNC were to look at these very principles from a Chinese perspective , they would realize that for a fast growing and changing society, economy and country like China's, an independent and developed legal system could actually stifle growth just the way extensive debate and discussion on important regulations can bog the system down and take away its agility. Downloaded from warc.com

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(“Peoples of Europe, guard your dearest goods” – A popular illustration of German awkwardness toward an expanding Japan during late 19th Century) 3. Media Reinforced Historical Baggage – This is a legacy of the Cold War and the perceptions of Communism and Socialist countries being evil forces. Images of the Yellow Peril32 and Red Menace still haunt a Westerner's memories and thus cloud their judgment and prevent them from looking more objectively at China as a country and as a society. Unfortunately, the present-day foreign media, especially from the West, is only adding to such perceptions. The semiotics of the China s portrayal, even in some of the most revered names in the Western media, is at best colored with cynicism and distrust. The Economist cover stories about China still project the country as the land of Chairman Mao, by using his dated pictures and imagery from 1950s and 60s (see below). When there is no Mao, an angry and vicious dragon takes over, and rest of the time China is portrayed to be in some kind of race with India.

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These are just some among many such differences that dot Western notions about China . As long as such fundamental reasons of distrust are not sorted out and the principles of China s workings are not viewed from a Chinese perspective, and as long as foreigners and MNCs keep passing value judgments on the Chinese system(s), they will not be able to understand China, trust China and be able to work with China. Does this mean that beneath its tough and opaque exterior the Chinese government is actually very liberal? There are reasons to believe that inside the government is a divided house between the conservatives and the liberals. (See chart “Two Mindsets within the Government” 33)

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There always is the fear that the some day the conservatives could take over and thus challenge the very foundation of trust that needs to be built. Yet, in spite of such apprehensions, MNCs need to remember a few fundamental facts: l

Leadership in Beijing is evolving – As we discussed earlier regarding Leadership 1.2 – with each passing generation, governance in China is only going to become more and more progressive. China surely will not westernize, but it will modernize fast. This augurs well for the MNC future in China. There is enough reason to believe that in the future, MNCs in China will interact with a far greater number of pragmatic technocrats in the government than the lethargic bureaucrats and seemingly populist but fundamentally corrupt politicians that they interact with today.

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Chinese are not thankless: A Recent paper in the Harvard Business Review quotes how Maurice Greenberg, former CEO of AIG and Bill Gates have worked with the government of China over the years. Greenberg of AIG started cultivating China's leaders in the 1970s, buying and returning stolen Chinese works of art, and 25 years later the Chinese Government rewarded AIG with special privileges when it opened the insurance sector to foreign companies. Microsoft also has taken a more patient and long-term view of the issue of software piracy in China. It is finding new ways to work with Beijing. In return, the Government forced PC manufacturers in the country to load legal software into their computers and required the computers that it bought to have legal software.

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Trust will create space for enlightened self-interest34 Trust will create space for enlightened self-interest – MNCs also need to trust China because only then will China open its arms to them and start trusting them in return. This mutuality can help MNCs play a constructive role in working with the government and bringing about positive change in areas and industries that they are involved in. MNCs

can help in strengthening labour rights (Rule of Law); they can nurture talent Cstoke Indigenous Innovation), and can work for greater respect for copyrights (Intellectual Capital). Thus Internet companies have responsibilities to work together for greater openness of the Internet. Manufacturing companies in China have an opportunity to work together and improve labor laws and their implementation. Pharmaceutical and food companies have a responsibility to work together and improve quality of products and to enhance safety standards. Michael A Santoro has called this – Enlightened Self-interest. It is going to be a kind of tough love! You will argue, disagree, fight and then reconcile. But in the process you will build better understanding of each other, trust each other, and finally be Downloaded from warc.com

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able to influence each other. There is also an old Chinese saying for this buda buxiangshi (without a fight, you will not get to know each other). What about Trust and Technology Transfer? Technology transfers, local content requirements, mandatory joint ventures aren't new elements in the development strategies of various Asian countries. Japan, South Korea and India, among others, have used them and were even less tolerant of foreign investment than China is. However the Chinese government is remarkable in how aggressively it applies these policies, in how many of its agencies are involved and in how quickly and radically it changes the rules. Sharing know-how is basically the price that many MNCs in strategic and technology intensive sectors have had to pay to gain wider access to the China market. It is better that your company gives the technology to your joint venture with a Chinese state-owned enterprise rather than some other company doing it. The JV will still help you make money from your technology in China. A Recent HBR article talks about how the Chinese State Owned Enterprises are capable of creating wedges between MNCs and extract vital technologies. Bottom line is that size of Chinese market will finally help China get much stronger bargaining position with the MNCs and international community and Chinese corporations will get the technology anyway. If your business denies the technology to the JV partner it will constantly face hurdles. It is also natural to expect Chinese corporations to make the best of this newfound knowledge and grow – the only solution for MNCs is to continue innovating and stay ahead. MNCs still might have an upper hand in R&D given the fact that 40 out of 50 Chinese companies with the largest R&D expenditure are SOEs. These companies are known for their agility in striking big deals across the globe and executing mega projects, while they are not the best in R&D efficiency. No relationship that can be built on a foundation of distrust. MNCs that want to better bond with China will do well by also looking at things from the Chinese standpoint. One such way of stepping into China s shoes would be to imagine the China of today like the Europe of late 19th and early 20th centuries or the US of the mid -to late-20th Century – economically strong, nationalistic and with a global reach. Now visualize the MNC as a leading Chinese corporation entering the Western turf-what would be West's stance? You get the picture. For the construction of an economically and politically stable global order, MNCs and Western countries have to trust China. After all not trusting a country that is lifting millions out of poverty in a very short span of time does not speak of sound judgment. B. Open Your Learning Portals Like all other markets – China had its own similarities with the globe just as it has its own characteristics that are uniquely Chinese. The similarities help global consumer products such as Motorola RAZRs, Nokia 1100s, Apple iPhones and iPads, Honda Accords, Big Macs, Snickers chocolates, Louis Vuitton handbags, and Kleenex succeed brilliantly in China with minimal or no change at all. Yet, it is equally true that China is a special market in more ways than one. Due to its historical and present-day sociopolitical and economic structure, its large and diverse population, different climates and foods, China requires MNCs to have an open mind. KFC has been offering menu items like its Lao Beijing Zhuan'r (fried chicken strips, lettuce, onions, and plum sauce wrapped in a tortilla) for nearly a decade. Downloaded from warc.com

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Motorola developed its MING line of smart phones in China specifically for Chinese consumers, and launched the device in China in 2006. The device and its successors -also local creations – were huge hits for the company in China, and were eventually exported as well. Volkswagen modified its B2 line (Passat/Quantum) to create a new car for China, the Santana. The Santana was a big seller for VW, and eventually made it to Japan, Brazil, and Mexico as well. Procter & Gamble has been offering toothpaste products designed for local palettes for over five years. BMW, Audi,Mercedes Volvo – just about every luxury carmaker- have adapted their designs to suit Chinese preferences by making them longer on average by 120-144 mm. This is aimed at the Chinese car buyer who believes that when one is buying a car worth half a million dollars why settle for small. From a corporate standpoint, what really separates China form any other developed or developing country is its culture and the speed of change that the country is undergoing. The other critical factor that makes China very unique is the cost structure. Together, these three factors provide many opportunities and challenges for MNCs that come here. 1. Culture It is said that in China piety and kinship almost always win over so called professionalism. This has its roots in culture. Relationships (Read Box – Guanxi on next page) are more important than contracts. One recent and notable example of kinship and relationships was during the 2008-tainted infant milk powder scam in “China, where many brands of milk powder were found to contain melamine that affected thousands of infants in the country. During the crisis, the owner of Mengniu – one of the major dairy companies in China—when faced with a cash flow crisis reached out to his fraternity of local Chinese business leaders. They all pitched in and Mengniu weathered the crisis. This is something unimaginable in many of the Western markets, but not considered surprising in China. In fact, leaders of most local businesses have their own informal inner circles, such as the Shanghai Jiezhang in Shanghai and the Canton Club in Hong Kong and Beijing and the Chang Jiang Business School Club are just some of the well-known places where they discuss business and help each other in times of need. These clubs and groupings are almost like the local fortifications against the MNC onslaught and even government regulations. MNCs can learn from such kinship. There is nothing stopping MNCs from uniting in times of crisis to ward off threats from various quarters both competitive and regulatory. Guanxi The word guanxi describes the basic dynamic in personalized networks of influence and is a central idea in Chinese society. It is about “connections” and “relationships”. Guanxi describes a personal connection between two people in which one is able to prevail upon another to perform a favor or service. Guanxi can also be used to describe a network of contacts, which an individual can call upon when something needs to be done, and through which he or she can exert influence on behalf of another. In addition, guanxi can describe a state of general understanding between two people: “He/she is aware of my wants/needs and will take them into account when deciding his/her course of future actions which concern or could concern me without any specific discussion or request.” A Few Facts About Guanxi

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1. It takes time to cultivate. 2. It is not a substitute for good business sense. 3. It does not make a bad business deal a good one. 4. It should not be used as a way to skirt the law. 5. Guanxi does sometimes make things go more smoothly. 6. The value of guanxi varies from industry to industry. For instance Guanxi is of virtually of no importance in getting your trademark or Wholly Owned Foreign Enterprise (WOFE) registered in China. In China, usually friends and relatives become business partners instead of professionals and business partners becoming friends. It is little surprise that unlike in West where professional/business networking (linkedin.com) has developed independently of social networking (facebook.com), China's online professional business networking is still underdeveloped in spite of its huge and fast growing online population. It also is said that the most talented business people in China are great human observers who can analyze the people elements of a business situation. Lawyers in the West find loopholes and use legal reasoning; the Chinese people find people who can nudge their interests this way or that way.1 It is because of such cultural factors that the MNC needs to hire talent that is a blend of local Chinese, overseas Chinese, and people of other nationalities. As the chief executive of one major multinational put it, “You cannot develop in China with white faces.” If you try, you and your management will be perpetual outsiders. On the other hand, you also cannot develop in China with purely homegrown Chinese faces, or you will not be able to integrate the operation with the rest of your organization. KFC is one company that learned quickly how to do things the Chinese way. In spite of the fact that it entered the China market after McDonald's, today it leads the latter in the fast food market. KFC's success in China is largely attributed to its hyper-adaptive mode of operation. (See Box Below: KFC, China – An American company with Chinese characteristics). KFC, China – An American Company with Chinese Characteristics35 Localization of Supply Chains 1. Unlike McDonald's, which brought along its key strategic partners to China, KFC invested time in understanding the market and developing local partners. 2. The process of preparing the local supply chain took less time and turned out to be a less capital-intensive approach 3. This also yielded greater flexibility to KFC as it could adapt its menu much faster than others 4. Even today, KFC commands superior margins and its innovations are a gold standard in the fast-food retail industry in China Localization of Talent 1. The first generation of senior managers were hired from Taiwan – as Taiwanese are arguably the most attuned to the Downloaded from warc.com

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Chinese way of working 2. By the time the first generation of senior managers retired – KFC had groomed enough local talent to step into their shoes and take the organization forward Localization of Products The company is widely acclaimed for its localized menu that goes far beyond the fried chicken l

Chinese-style porridge for breakfast

l

Fresh salads for lunch

l

Beijing chicken roll with scallion and seafood sauce for dinner

l

Spicy diced chicken – resembling a popular Sichuan style dish

l

Youtiao, (fritters of twisted dough) a very Chinese breakfast item and Danta a Chinese custard tart.

Localization of Government and Public Relations Practices. 1. KFC Food Health Consultative Committee ¡

In October 2000, KFC China invited a number of Chinese health experts and government health officials to join this newly established committee

¡

This was a strategic move to engage the best and most influential minds in China to provide professional expertise in popularizing public awareness and knowledge of maintaining a healthy and nutritional diet (KFC does not engage in such activities in any other market)

2. KFC Health Food Policy White Paper ¡

In 2003, KFC announced this white paper in an attempt to turn around the rising sentiment against Western fast food based on a growing realization that fast food correlates with obesity among children

¡

In the white paper the company pledged its intention to live within the standards set by the Chinese government in all areas of food safety and increase the awareness of nutritional requirements, a balanced diet and exercise

3. Proposal for New Fast Foods ¡

Through this, the company drew a contrast to traditional Western fast food along the lines of menu choice, local taste, balanced nutrition, cooking methods and food safety

¡

Traditional fast food suffers fixed menus with limited product selections -the new fast food would continuously develop new product varieties to better accommodate Chinese taste preferences.

China has an open mind and it is prepared to learn from the world. In fact, the progress that the country has achieved in the past 30 years is a result of its receptiveness to new concepts and ideas, and the desire to make them work for China. The Chinese government is known to consult many international experts in different domains – from economics and Downloaded from warc.com

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management to media and marketing. The question that MNCs need to ask themselves is while China is learning from the world, are they themselves learning from China? What is stopping them? 2. Speed of Change “So much has changed in China that sometimes I find it hard to believe that I have lived in the same country my entire life.” – Middle-aged businessmen in Guangdong China is moving fast and changing faster, but this is an environment that not many MNCs have been structured to compete in. The MNC business model in China needs to be configured to address the many non-stop changes and challenges, especially with respect to regulations and customers1 Regulations: The many new regulations and constantly changing laws and systems are both a result of and the reason behind the speed of change in this market. The Beijing City Government's decision to limit the number of new cars on city roads – an example discussed above – shows how quickly the government can react to bring about change. Another recent example of such regulations is the energy conservation targets that the government handed out to provinces. If we look at the Beijing subway map of today and compare it with that of 2001, we can see how different it looks now from just a few years back. (See map below) It does not require much imagination to realize that for this rapid expansion of the subway network, many houses and structures would have been relocated or removed. China is one of those very few developing countries that can acquire land quickly and develop it as per the master plan. The government's master plan cannot be changed but with more coordinated government liaison teams and a system of connections at the right places one can better prepare for these in advance.

Consumer Desire for Novelty: The consumer in China is relatively new to the whole act of consumption. This newfound romance with products makes them constantly desire new products. Many MNCs in consumer products are not always geared for this trend but many have learnt that to do well in China they need to bring out new products continuously. The Generation Gap: In most societies, developing and developed alike, the generation gap is usually separated by at least 20-25 years. In China, on the other hand, due to the rapid socio-economic changes since the early 1980s, this gap is as narrow as a decade. It is a commonly known that the post 70s generation (70'), the post 80s generation (80') and the post 90s Downloaded from warc.com

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generation (90') all think very differently. This kind of generation gap is not just noticed in consumer markets, but also while interacting with government officials at various levels. The younger among government officials can come across as being globally well traveled and proficient in many Western concepts and languages, too but that does not mean that all of their superiors are like them. 3. Cost Structure Many exporters from China, that we know personally, are often challenged by their overseas buyers about the lower prices that some of the other suppliers are ready to offer for the same product. It is very difficult for them to explain that in China a visibly similar product might actually be very different in performance. The price differences, as one would learn on a closer examination, are due to compromises made on the durability of the product or its energy, fuel efficiency and eco-friendliness. Such differences notwithstanding, MNCs need to still compete with these Chinese manufacturers because they cater to a large market both inside and outside of China. MNCs need to be flexible to find ways of matching the cost structures of the local Chinese manufacturers. GM's upcoming Baojun and Honda's Li Nian are examples of how foreign automobile companies are learning from China and creating brands targeted specially for the world's biggest car market. (Their goal is to boost sales in China's interior, where incomes rose almost 11 percent last year). Caterpillar is another case in point. The company observed, studied and patiently pursued its interests in China. After decades of waiting and negotiation Caterpillar finally made the breakthrough with the acquisition of a local Chinese company that gives it greater reach in China and a foothold to reach out to more low cost markets outside China. (See Box: Making paper cups in the land of porcelain?) Making paper cups in the land of porcelain? The case of Caterpillar in China – Acquiring and Marketing a Second Brand36 In 2009, Caterpillar completed the acquisition of SEM, which it hopes to make a cornerstone of its efforts in the Mainland China. The buyout took a long time, but it was a big coup for Caterpillar. Eager to build its own national champions, Beijing does not always encourage acquisitions of companies that manufacture earthmoving equipment. In 2008-2009, for instance, the private equity Carlyle Group abandoned a three-year effort to buy a majority stake in Xugong Group Construction Machinery; a company Cat has had a joint venture with since 1994. Caterpillar spent many years working to overcome Beijing's concerns. The CEO of the company has made dozens of visits to the mainland since 1983, when he began negotiating a technology transfer deal to gain a foothold in China. By 1987, Cat was selling designs for equipment to a dozen Chinese manufacturers. “We were very weak...(Caterpillar) offered us a shoulder to stand on and allowed us to jump higher,” says Feng Baoshan, a deputy director at the China Machinery Industry Federation, a trade group. Owens even sent a deputy to visit during the 2003 SARS crisis, a sign of support that may have helped Cat win permission to take a minority stake in SEM in 2005. With the SEM acquisition, Caterpillar can now pursue what it calls a “two-tiered”  strategy in China. (SEM products are 30% cheaper than CAT's). While it is tempting to think that at that kind of cost structure, Caterpillar may be compromising on quality, the fact remains that the company actually looks at the market with an open mind. Downloaded from warc.com

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It is prepared to provide value for different kinds of consumers at different price points. The company will use SEM at the lower end of the market and it hopes to boost sales of Caterpillar-branded gear at the upper end. With the SEM acquisition, CAT now has 16 manufacturing facilities across China and expects sales of $2 billion plus. It plans to spend $100 million to triple SEM's output and expects to open two new plants making Cat-branded machinery. Cat has pegged its hopes on China's infrastructure boom, which should generate enough business for the company. With SEM under its belt Cat is much more confident of future growth in China. The classic western way of running a business is to cut the non-profitable part of the business and cruise along. Yet the experiences of many a company in China help us to see things in a new light. Perhaps the non-profitable business is an experience waiting to be uncovered and applied. MNCs can gain a lot in China by looking at the market as an opportunity to learn and develop newer ways of doing things. This will not just help operations in China but will open doors for the company to replicate these experiences in other emerging markets. C. Think Long Term China is not about the next quarter; it is about the next quarter century. Any outsider who wants to participate in China must be realistic about the time frame. No part of the process will be instantaneous. Successful efforts take a long time. MNCS must organize for decades, build a base for the future, become not just a branch factory for the home operation, but in many ways a Chinese company. Patience and a long-term view of the market pay off well in China. Way back in the heyday of the opening up of China s economy, SAIC of Shanghai invited partners to start a passenger car Joint Venture. The three big names then – Ford, GM and Chrysler – came over for discussions. During the talks SAIC indicated that initially it wanted to start small and go steady. Both Ford and Chrysler got disappointed and did not pursue the potential venture. GM, on the other hand, took a different view of SAICs proposal, seeing the long-term potential of the partnership, and thus agreeing to work with the Chinese on a smaller scale. That one decision has played a big role in GMs success in international markets – of which China is now the largest chunk. Today GM is neck and neck with VW for market leadership in China. The partnership that was struck then is no longer limited only to China. Shanghai GM (the GM-SAIC JV in China) is now planning to enter other new and emerging markets. GM is bringing the technology and SAIC is bringing in the capital as they eye India's large and fast-growing market for small cars. Ford, which later went to Chongqing and grew slower today, has a much smaller share of the China market. (See Chart Below)

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MNCs need foresight to realize that leading-edge technologies usually emerge in countries where the biggest and the most demanding customers are located; it is these customers that provide the manufacturer global advantage. It does not require much imagination to see where these customers are today. Some companies can foresee this change – Applied Materials, a global leader in Semiconductor – making equipment, recently transferred many R&D activities to China and relocated its Chief Technology Officer here. GE also announced something similar recently, when the company said that it would relocated John G Rice, vice chairman of the company and President of GE Technology Infrastructure, to a new base in Hong Kong. This is in response to the fact that as much as 60% of GE's revenue today comes from outside the US, with a large proportion of this coming from mega-markets such as China. People or Party? Many foreigners often wonder what is more important – government relations or a great job of human resource management, talent cultivation, customer understanding and brand building. There is a commonly held view that encompasses both but has a clear message. Kiss the cadres; embrace your employees and customers. Relationships in any form – guanxi or otherwise — are important just the way it is important to be sensitive to the culture of a place. But cultural sensitivity is not a substitute for good business sense. China needs to sustain the growth, development and rise on to the global stage that it has managed in the past 30 years. For the country to be able to do this, it needs a new kind of growth strategy. This new strategy, as we discussed in China 1.2, leverages innovation and creation. For this to happen, China needs to not just attract the best talent from all over the world, but to also develop local talent. MNCs have a big opportunity here. Through collaborative innovation and investment in people they can groom Chinese to create a new China. The people strategy of MNCs in China needs to focus on grooming employees and understanding customers and clients that they need to serve and satisfy. Careful investment made in these two areas can really help in building brands that consumers want and in creating corporations that employees want to work for. Together these two represent definite paths for MNCs to achieve their ultimate goal of becoming indispensable to China. Conclusion Imagine how the English language will change when 1.3 billion Chinese speak it. While Chinese consumers are replacing the Americans, China's vast consumer markets and her need for a state-of-the-art infrastructure will transform the way MNCs work in China and across the globe. A global realignment is underway and while global politics, vested interests and archaic Downloaded from warc.com

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ideologies are taking much longer to realize the shift, businesses can gain by adapting faster. In 1860 the Chinese scholar Feng Guifen wrote: “There ought to be some people of extraordinary intelligence who can have new ideas and improve on Western methods. At first they may learn and pattern after the foreigners, then they may compare and try to be their equal, and finally they may go ahead and surpass them – the way to make ourselves strong actually lies in this.” After 150 years of turbulent history, China is finally realizing what Feng was hoping for. As China marches towards this future, through partnerships and co-creation, MNCs can not only win in China tomorrow but also be able to enhance and spread their own competitiveness across the globe in ways never imagined before. It is vital that MNC executives living and working in China and in the West believe what they see and feel more than what they read and hear. China is before their eyes and all around them. They can see what is happening here. From cities in the east to villages in the west there is progress and development, there is modernity, there is ambition, there is a desire to learn and improve. You can't get the spirit of the nation wrong. China wants to do well, and like a hardworking and committed candidate in the global arena, she hopes to reap the fruits of its commitment in the shape of better lives for millions. Today, like never before, MNCs have an opportunity to make this happen in China. References 1. One Billion Customers, by James McGregor, Wall Street Journal Books, 2005 2. Red Menace was a term used during the cold war to describe the Soviet Union or an international communist conspiracy 3. Managing the Dragon, by Jack Perkowski Page, Crown Business; 1 edition (March 18, 2008) 4. This includes four new GE partnerships – a 50-50 joint venture with Wuhan NARI Co. Ltd (owned by China's State Grid Corporation) to produce and sell energy-grid monitoring and diagnostic products. GE also is jointly acquiring with State Grid's Shanghai Electric Power Co. a controlling stake in Shanghai Tianling Switchgear Co., a power-distribution equipment maker. The company went on to sign an agreement to form an equally owned joint venture with Chengdu Locomotive & Rolling Stock Works, which is owned by China South Locomotive & Rolling Stock Corporation, to develop propulsion systems. The Fairfield, Connecticut, company signed an agreement to enter into a 50-50 joint venture with the Beijing National Railway Research & Design Institute for Signalling & Communication to supply railway signaling systems. 5. BrandZ Data 2011 6. The Friendship Award is given by the Chinese government to foreigners who have made exemplary contributions to China 7. Susan Schwab is now a professor at the University of Maryland's School of Public Policy 8. Government Procurement Agreement regulates trade in public-sector purchases. China has regularly been criticized for not allowing foreign companies access to large government-backed projects. 9. Socialism with Chinese Characteristics: This is also known as the socialist market economy. It is a concept first proposed by Deng Xiaoping in order to incorporate elements of market economy into the then centrally planned economy in the People's Republic of China. Following its implementation, this economic system has supplemented the centrally planned economy in the pre 1978 People's Republic of China. The high growth rates in GDP during the past decades have been attributed to this concept. Within this model, privately owned enterprises are a major component of the economic system. Downloaded from warc.com

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The fundamental distinction between the Chinese and Western socialist market economy models lies less in the implementation of the mixed economic model and more in the underlying authoritarian political philosophy, which eschews Western notions of democracy, individual rights, and the rule of law. (Adapted from Wikipedia) 10. When China Rules the World, by Martin Jacques, Penguin Press HC, The (November 12, 2009) 11. PRC Ministry of Foreign Affairs, Department of African Affairs, www.fmprc.gov.en/eng/wjb/zzig/fzs/default.htm 12. Adapted from a Financial Times Report on China -Africa Trade 2009 13. China in Latin America – The What s and Wherefores by R. Evan Ellis, Lynne Rienner Pub (April 15, 2009) 14. New York Times http://www.nytimes.Com/2010/11/02/business/global/02euro.html?partner=rss&emc=rss 15. IMF's Finance and Development magazine December 2010 16. Beijing Consensus by Stefan Halper, Basic Books (April 6, 2010) 17. A legendary Chinese admiral in 15th Century, who first sailed across almost all continents of the world 18. Chery Auto is one of the largest automobile companies in China 19. The seat of the central government in Beijing 20. A vital document released by the Chinese Government every 5 years outlining national goals and priorities in the next 5 years 21. China Hearsay Blog http://www.chinahearsay.com/china-innovation-metrics-the-good-the-bad-and-the-worthless/ 22. BrandZ Data 2008/09 China 23. BrandZ Bonding factors deviation from expected, China 2008/09 24. Vancl is an affordable casual wear brand in China that has grown rapidly through clever branding and aggressive online marketing 25. Semir is a top apparel brand in China 26. Metersbonwe is a leading casual wear apparel brand in China 27. China International Business January 2011 28. Kapil Komireddi, Guardian, Saturday 23 October 2010 29. Yadong Luo, Department of Management, School of Administration, University of Miami, Jenkins Building, Coral Gables, in the Journal of World Business, March 2007 30. ° http://www.chinalawblog.com/2010/12/china_business_it_helps_to_know_the_culture_ part_iii_stereotypes_as_excess_baggageethical_gray_zone.html 31. The Confucian belief about a government that if it performs it is legitimized to stay in power 32. Yellow Peril: A color metaphor for a race that originated in the late 19th century with immigration of Chinese laborers to various Western countries, notably the United States; later associated with the Japanese during the mid 20th century due to Japan's military expansion 33. Prof. Wang Zhile has served in the Ministry of Foreign Trade and has also researched MNCs operating in China 34. China 2020 by Michael A Santoro 35. KFC in China by Warren K Liu, Wiley (September 26, 2008) 36. BusinessWeek Thank You! 1. IBM China – from whom we learnt how to step back and look at the bigger picture of China's engagement with the world. 2. Siemens China – from whom we learnt how to look at MNC's role in China differently. 3. Paul D Blackburn (Operations General Manager, Earth Moving Division, Caterpillar Inc.) – For giving us time and sharing Downloaded from warc.com

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Caterpillar's inspiring journey in China. 4. Stephen K W Yiu (Deputy Chairman, KPMG China) – who spent a very cold Beijing morning helping us understand the way financial and consumer markets have been evolving in China and what it means for the future. 5. Geoffrey Enck (president & CEO, Ascension Capital Group, Limited) – for not just sharing his experience and insights about working in China but also helping us connect with many other experts. 6. Mehernosh Pastakia (General Manager, Taj Pavilion) – for his insights on business, economy, geopolitics and everyday life in China. 7. Alan W Hsu (General Manager TSKF China) – for sharing his views on the role of regulations in the healthcare and pharmaceutical sector. 8. TB Song, (Chairman, Ogilvy & Mather, China) – for his encouraging feedback on the earliest drafts of this paper. 9. Shenan Chuang, (CEO, Ogilvy & Mather Group, Greater China) – for her support on this project. 10. Scott Kronick (President, Ogilvy Public Relations Worldwide, North Asia) – for his support and encouragement on the earliest drafts of this paper. 11. Lily Tung (IBM Brand Team Leader, OgilvyOne Beijing) – for being the partner on the IBM business. 12. Eweichee Lam, Xinglun Liu, Raina Zhang and Vivian Guo of Ogilvy & Mather Advertising Beijing – for being partners in the Siemens journey. 13. Joe Zhou (Director Public Affairs, Ogilvy Public Relations Worldwide and executive director, Tsinghua Ogilvy Program for Public Branding) and Xu Dan (Director Public Affairs Ogilvy Public Relations Worldwide, Beijing) – for sharing their experiences and helping us know more. 14. Soonguan Poh and Zhaoxin Teng of Ogilvy Red Works, Beijing – for giving form to our content. 15. Last but not the least, a big thank you to all those who participated in the interviews but chose not to be quoted in this report. This could not have been completed without their support. For more information on this paper, write to: Saurabh Sharma, Planning Partner & Mickey Chak, Chief Planning Officer Ogilvy & Mather, 9th Floor, Huali Building, 58 Jinbao Street, Beijing-100005 Tel: 86-10-8520-3131 People's Republic of China [email protected] [email protected] For business enquiries and to request a presentation on the subject, write to: Scott Kronick, President – North Asia Ogilvy Public Relations Worldwide 19th Floor, Jin Bao Tower Jinbao Street Beijing-100005 Tel: 86-10-8520-6588 Downloaded from warc.com

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People's Republic of China [email protected]

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