The World on Chinese Terms

China's government and companies no longer need Western investment, technology, or management expertise. Or so they may think

Despite the Olympics next year and the World Expo in Shanghai two years later, there are signs that China is closing, not opening, to much of the world. Last year this became noticeable in the government's restrictive new mergers-and-acquisitions regulations, which made foreign investment next to impossible in key industries. The list of industries defined as being important to the national interest has grown to include ball-bearing manufacturers and meat-processing plants. Add to this trend the growing evidence discussed by the European Union and the U.S. that China is holding rather tightly to the word but quite loosely to the spirit of many of the World Trade Organization agreements. And executives who have worked in China for many years complain that working and negotiating with their joint-venture partners is becoming tougher; agreements made earlier are often retracted. Being old friends, lao pengyo, was supposed to make it easier, but instead it is more difficult.

This could all be attributed to politics, of course. The government perhaps wants to show it is strong and ensure that foreigners do not get too good a deal. After all, everyone wants to get into the Chinese market: Those tantalizing 1.3 billion consumers await you! Perhaps too, the government and Chinese corporate executives have learned what they need to from foreign companies and no longer require investment, technology, or management expertise from the West. They have got it all already. The 17th Party Congress just underlined the resolve that China must become an innovative society. As far as investment goes, China already bankrolls U.S. Treasury bonds and a German airport, and is making interesting and increasingly diversified investments in Africa. Why should they need foreigners?

Preference for Chinese Brands

So is it the government? Certainly nothing really happens here for long without official support. But there are other signs that this anti-foreign sentiment is far broader. McKinsey, the management consultancy, recently published its newest study on Chinese consumer preferences, and the results are startling. The number of Chinese consumers stating that they trust and prefer Chinese brands over foreign brands has grown to an overall 53%. In some sectors, including pharmaceutical, health-care, and beauty products as well as household goods, the number rises to 70%.

Only in automobiles and electronics are the Chinese as likely to prefer a foreign brand as a domestic one. This is striking in a country where until recently Chinese would ask their friends traveling to Hong Kong or farther afield to purchase them cell phones and other goods that are easily available in China at a lower price. When asked why, the typical response was that they prefer to have an original, rather than the same product manufactured in China, perhaps by a joint venture. Surely, they implied, the original must be better.

There is a twist to the McKinsey survey, as the Chinese considered 50 of the best-known consumer multinational brands to be Chinese brands. But the implication remains the same. As Andrew Grant, managing director of McKinsey's Greater China practice, said, "This survey shows multinational marketers that emphasizing their product's foreign country of origin will not necessarily resonate with Chinese consumers." Indeed.

Little Global Perspective

It is not just consumers and probably the government that are demonstrating national pride. Chinese executives too have divided attitudes toward overseas partners and markets. A survey of Chinese managers by New Leaders International published in Fortune China in April, 2007, identifies some of the major gaps between Chinese management skills and global best practice. The "How Global Are You?" survey looks at a number of aspects, but the major difference between international best practices and Chinese manager responses is how open they are to the outside world.

The largest gap reported by the survey is whether managers have a global perspective. The survey respondents answered all questions on a scale of 1 to 100, with 1 being no competency and 100 being an expert. Respondents rated having a global perspective as highly important, at 88%, while seeing their own competency at only 22%. Clearly this difference rings alarm bells, suggesting that Chinese managers need to quickly raise their global perspective. They lag dangerously behind the global best practice of 100% competency.

Yet surprisingly, the same respondents said that global knowledge ranks only 34% on importance, while their actual competency in this area is 50%. So they think they know more than they need to but they are still 50% below global best practice. In a third characteristic, "Appreciating and managing cultural diversity," the respondents rated it as 78% in importance and rated themselves at 72% competency. These responses build a contradictory picture, especially when the survey authors go on to show that the respondents have little international exposure and do not have a track record of sharing best practices or maintaining global professional networks.

Competencies vs. Culture

How are we to understand these results? The survey concludes that Chinese managers need training and exposure to a range of global skills. Yet I observe that the Chinese have excellent relationship-building and networking skills. A study comparing the emotional intelligence (EQ) of U.S. and Chinese CEOs put the Chinese ahead by 15 points, especially in the areas of getting to know colleagues, making joint decisions, and following through on commitments. So perhaps the issue is not competencies but culture: Chinese leaders do not use those EQ competencies to build networks with people different from themselves, people they do not understand, or do not see often. If this is the case, then developing a more global perspective should encourage the same leaders to put their excellent relationship skills to work with a broader range of people. The Chinese could be formidable global network builders.

They will not do this, however, unless they see an advantage in it. If they already have the power, the technology, the financial strength they need, why should the Chinese care about the outside?

Africa is an interesting case to observe. While the initial Chinese investments in Africa were and still are driven by the desire for energy, Chinese business increasingly seems to be looking at the continent more holistically. The announcement in late October, 2007, that the Industrial & Commercial Bank of China bought a 20% stake in South Africa's Standard Bank shows a new approach. Standard Bank has been establishing itself as a specialist in emerging markets, spreading into many of the African countries as well as making initial forays in South America.

From One BRIC to Another

Why would a Chinese bank go this route, rather than making those investments itself—say, from one component of BRIC (Brazil, Russia, India, China) to another? The easy answer is that the Chinese don't have all the technology and know-how yet. On the other hand, the investments of foreign financial institutions into Chinese banks such as Bank of America's (BAC) purchase of China Construction Bank shares and Royal Bank of Scotland's investment in Bank of China have not produced the knowledge transfers, or rather the behavioral transfers, originally envisioned.

So there is another piece: Maybe the ICBC envisions an easier route to becoming a global bank if it does not have to do everything the Chinese way.

Paradoxically, while private companies contribute most to healthy growth in China, it is the state-owned enterprises (SOEs), normally the least profitable firms, that go international, at government behest. This makes one wonder about the business logic or lack thereof behind many overseas investments. Given that they often lack a business edge, these deals may lead to hemorrhaging of Chinese funds. SOEs regularly overpay for assets. Even the ICBC investment in Standard Bank has been questioned. Certainly the China Investment Corp.'s investment in the Blackstone Group (BX) has been deleterious.

The Chinese are known for overpaying for resource assets, for instance with Sinopec recently bidding 100% more than the next highest competitor in Angola. One therefore must ask whether these firms are ready with sustainable business plans, or whether their logic is completely different.

According to Chinese Logic

Given the New Leaders International survey results, and Chinese cultural patterns of relying on a small in-group, one gets the feeling that Chinese overpay to control assets because they do not trust. They do not trust contracts, laws, the rule of the market, or people who are not in their own tight networks, i.e., almost always people like themselves. By increasingly protecting their domestic market from international competition on a level playing field, the Chinese also rob their own firms of the opportunity to practice this kind of competition and trust on home turf. Instead, they assume the world works according to Chinese cultural logic. The outcome has so far been expensive.

China is now a formidable player in global politics and economics. As a country it has every reason and right to feel proud, but it still has enough problems that it should not become arrogant. Yet finding this balance is difficult. Luckily for all of us, despite China's 1.3 billion consumers, but according to the logic of trade deficits, China still needs the markets (and hence, the goodwill) of the West. For the time being.

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