Formerly a diplomat, Gabor Holch moved to China in 2002 and switched to management consulting. He is the founder and director of Shanghai-based Campanile Management Consulting and specialises in leadership and nurturing personal talent. In addition to Campanile, he is a member of consulting firms in the EU and the US.
I dare you to scan through the headlines of any financial paper and not read about China. But as ubiquitous and lucrative as this new market seems, few foreigners feel confident betting their money on its single-party politics, obscure culture and secretive decision-makers.
According to a joke we told in my native Hungary in the 1980s, “nothing was as unpredictable as the Soviet Union’s past”. Today, it often seems that the best China opportunities are the ones you have just missed. But if you are still contemplating trying to navigate your way across this exciting terrain, here are a few milestones to follow.
At a recent panel for a global consulting firm’s annual summit in Shanghai, we discussed the dilemma presented by China’s top-down innovation culture. Although most Chinese panelists represented multinational corporations, they praised the efficiency of authority-based innovation with state-defined goals and centrally allocated resources in a seamless partnership between state and private equity. Free competition, one explained, doesn’t work in China. The confusion on the faces of some audience members made me want to give them a comforting hug. Instead, here are four things to consider when formulating your China strategy.
Are you ready for China?
While advising and coaching executives, I encourage them to think seriously about whether China is really their ‘cup of tea’ at all. It isn’t for everyone. Neither can I, or anyone else, tell investors and decision-makers whether they are cut out for the task. China’s kaleidoscopic variety of innovation models is scattered all over a recent Harvard Business Review matrix of strategic approaches.
Some Chinese state-owned enterprises (SOEs) – in construction, for instance – are stuck in a quasi-militaristic culture of orders and obedience, while others (like telecom) have been meticulously amassing ‘brain power’ and intellectual property for the long haul. Tech giants, white goods and automobile manufacturers increasingly resemble their international Fortune-500 counterparts (Tencent and Alibaba made the list in 2017), while entrepreneurs perpetuate a volatile culture of ventures in drones (DJI), mobile phones (Tecno), electric vehicles (NIO), e-commerce and basically anything else that you can imagine.
The need to watch long-term China trends
In an environment where the government sets prices, changes regulations, wipes out and launches entire sectors overnight, there is no reliable indication of what will work and what won’t. But one thing is sure: unyielding indicators set by the Communist Party serve as landmarks in a shifting terrain. China’s 2020 target to urbanise half its population was widely ridiculed – until it was realised by 2017. The same will happen to China’s ambitions to manufacture most of its electric vehicles within a decade under its ‘Made In China 2025’ policy, or to increase freight volumes transported by train as set out in the ‘One Belt, One Road’ (OBOR) strategy, which was formally adopted in 2015. There is no shortage of such indicators: China’s current (13th) Five-Year Plan includes targets for patent registration, R&D spending, Internet connectivity, automation and robotics, artificial intelligence, advanced materials, renewable energy and lots more.
The need to choose your targets carefully
While this may sound like perfect predictability, analysts agree on another trend – stumbling SOEs inadvertently inspire private innovation by first monopolising key industries, then failing to fulfill the needs of China’s smart, pragmatic and increasingly quality-conscious population. As happened in the cases of luxury goods, healthcare, education and, more recently, entertainment and technology, China’s wealthiest and best-connected citizens, starting with a Party elite, initially purchase from abroad. Only when firms such as Louis Vuitton and Ferragamo, foreign pharmacies and hospitals, or Harvard and Oxford universities no longer have the capacity to satisfy the needs of a growing Chinese clientele, do SOEs throw money and political clout at the problem, whereas private firms mobilise speed, market acumen and intellect. Eventually, state-sponsored champions become safe bets for investors, while underdogs offer risky but potentially bank-breaking gambles for the future.
Can you spot the underdog?
For the pragmatic foreign investor barred from strategic sectors by state-imposed limitations, the best opportunities often appear through the cracks of a centrally planned economy. Watch the trends set by China’s five-year plans and it’s possible to predict many. It is a safe bet, for instance, that Internet censorship will continue to fuel alternative sources of entertainment. China is the only major economy where cinema profits grow because streaming services are inaccessible to people here, whereas elsewhere online flicks are hammering cinema revenues. Combined with President Xi’s campaign to regain Party control over universities, limited web access will also continue to fuel interest in foreign education, either abroad and through joint ventures (foreign schools cannot operate independently in China). Finally, China’s prohibition of global social media means that it’s Christmas every day for Baidu, Alibaba and Tencent, China’s top search, e-commerce and social networking companies respectively.
In an old Chinese joke, tourists spot a farm where a cat is drinking milk from a valuable antique bowl. They cunningly buy the cat and ask the farmer for the dish as well. “I would never part with that,” the owner says. “It helps me sell a cat a week.” It often seems that China’s main export commodity is hope. But with the right mix of curiosity, courage and discipline, a growing number of international venturers can hope to join the minority of China investors that tangibly benefit from the opportunities presented by the single biggest thing happening in business today.
If you are interested in increasing your understanding of the China market and the potential opportunities for your brand, online or offline, please contact Mark Ray at Sovereign’s Shanghai office.
