During the last phase of Trump administration, they tried hard to divert the focus by way of trade war & decouple themselves from China but it looked more of a trick to hide inefficiency of their poor COVID management & ultimately to take advantage in the upcoming elections. Decoupling China is extremely difficult task, if not impossible for US. The reason being China holds 1 Trillion $ US govt bond holding and has 70% trade surplus over US as major US production is happening in China. US companies’ CEO and board members opine that, it took 13 years to get into China and decoupling from China is not a wise decision.
Off late there has been lot of brouhaha that
virus has been manufactured in China & world has been trying to demonize
China in all possible ways. Even if this proves to be true, penalizing China is
economically difficult & it is even much more difficult to quarantine china
from the rest of the world. One may like dislike or abuse China, but one cannot
ignore them.
To know why, let us understand China first.
Precisely their traits, vision & strategy
Traits of the
Traitor
1. A thoughtful capitalist
China knew the importance of private
consumption and hence they gave economic freedom to spend and invest, to their
people. Their private consumption surpassed
US private consumption & has reached to $ 6 trillion in 2020. This
penetration is just 39% of their GDP which gives a wide array for growth.
They are capitalist in nature & even the private
investments from outsiders are allowed but not at the cost of losing control. If
they were concerned only with economic outcomes, they would have allowed and welcomed
foreign businesses investors and would be treating them as equal partners,
agnostic as to who owned IP or majority stake in joint venture. Whereas they prefer
to hold controlling stake and insist to transfer IP to Chinese company in JVs.
They are mixture of Marxist(capitalist) and Leninist(control owing) thought
process but the intensity of the later approach is of much higher in proportion,
which makes them a thoughtful capitalist.
Benefits
Capitalism without losing political control has
led to controlled mindset of the population. This did not let the outside
thought process get over the minds of people. Political authoritarian state has
helped them in curbing the population (single child policy), poverty and
pollution. India and China were standing at 350$ per capita income in 1990,
from there they have reached to $10000 per capita against $2000 per capita of
India in 2020.
2. Quick changer with highest lived change index worldwide
There has been continuous change mechanism being
undertaken by the govt on regular basis. If you are a 40-year person living in
China, you would have witnessed tremendous changes during your lifespan. One
kid policy being introduced in 1979, economic freedom of becoming entrepreneur,
from controlled educational policies to freedom of education, ability own a
property on family name & again changing the policy of single kid to two
kids recently. These were socialist changes whereas economic changes like
infrastructure development, change in investment polies & etc. are also phenomenal.
On account of the continuous & rapid changing environment, China has the
highest lived change index (An index which uses lifetime per capita GDP to
track how much economic change a population has experienced), they are at 32X
against US 2X and India 5X.
Benefits
Due to rapid changing environment, there has
been change in the overall mentality of population. They prefer to have a short-term
outlook like prefer short term investments over long term, ready to shift the
job for small increment & etc. Its’
like when there is rapid change in the environment, people prefer to buy ripe
mangoes instead of raw fruit.
They have been able to innovate and adapt quite
easily. For ex. In 2014 when open banking was allowed for Alipay and Wechatpay,
there was quite rapid adoption in the entire eco system. At present, 1 billion
population is equipped with Wechatpay which accounts to 84% of smart phone
users of China. This number is way higher than the Apple pay users across
world.
Even certain Chinese innovations are being followed by the rest of the world. For ex. Whatsapp started payment platform post copying from wechat pay, Instagram copied reel feature from Tiktok & Amazon started with prime day sell by taking learning from Alibaba’s success over their Singles day.
Vision of
China
I. Eliminating
the dependence on imports for critical technologies and products. At present,
sectors like IT, robotics, AI, aerospace, shipping, railways, energy, material,
medical equipment, medicines, agriculture and power falls in this segment.
China is planning to reduce their dependence under Made in China (MIC) vision (Started
in 2005) on above sectors and planning to fulfill requirement up to 70% from
indigenous resources by 2025 and have been able to reach up to 40% by the end
of 2020.
II. Facilitating the domestic dominance of the firms through support by way of funding and political authority
III. Leveraging that dominance to build global competitiveness.
Strategy to
achieve the vision
Purchase and investment in global firms to have
competitive advantage. Since 2016, there has been increase in investment by
376% to 55 $ billion in US firms by China. On tightening the direct investment
by US, China continued their journey by the way of venture capital funds (VC)
in US.
They have set aside 500 billion dollars for
subsidizing and funding the Chinese firms for developing the R&D
Extraction of critical information from global firms. For ex. Daikin started their production in China for making affordable ACs, they had to open themselves to China and technology knowhow was extracted by Gree electric & at present Gree holds 70% of AC market of China by taking technology knowhow of Daikin.
Strategy hit to outsiders and probable solutions
For players who are underdogs with existing low
production facilities and low market penetration in China, it becomes exceedingly
difficult to get established in China. Especially in those sectors which falls
under MIC vision 2025. For example, all the S&P companies hold only 2% of
their market share and production in China. They have not been able to grow
their market share and are not able to aggressively enter China for taking low-cost
production advantage. The journey ahead for them is going to be on the rough
roads.
For player who have major proportion of their production
facilities in China but does not depend for market, will have to look for an outside
production facility to have control in long term. Else, they may get into
trouble by losing success formula, as China is having local favoritism due to
MIC plus data breach possibilities, and even may get inefficient, if China
implements high tariff for exports. However, it is hard to get a substitute
production facility to China due to low labor cost, skilled labor availability
due to existing education policy & excellent infrastructure availability in
the country (China’s infrastructure is even better than US at present). For
example, many US firms planned to start their production in Vietnam, but they
could only partially substitute China in terms of production proportion (10%).
By far, India has an advantage of low labor cost but needs to work hard on
skilled labor availability (revamp educational policies) and developing
infrastructure facilities. If timely addressing of above issue is done in
strategic manner, then India will be able to take advantage else will miss
another train.
For companies with no production but have high
dependance on Chinese markets for end products, it is a challenge to survive in
Chinese market. They should focus on “In China for China” strategy to have some
advantage. They should employ high numbers of local people for marketing of
their product or should target backward or forward integration for their MIC
focused sectors. For ex. Danieli, a steel making equipment manufacturer, knew
that China is eying on developing self-dependance in steel manufacturing, so
they entered China market to supply steel making equipment & grew
inorganically. On the other hand, Rolex watches started selling in Chinese
market due to increased per capita income and luxury watch segment was not part
of MIC vision sectors. However, Rolex had to collaborate with local players
like wechatpay & Alipay to increase their market share and again issues of
data extraction and over dependence continued while using their e-payment
eco-system.
Companies with market as well as production
dependence in China, will be at the highest receiving end. For example, Apple does
its entire assembling of phones in China (Foxcon) and having 28% of their
revenues being generated from China market. In case of decoupling from China
due to vision MIC 2025, Apple will face lot of issues relating to production
and may have huge market loss also. To avoid vulnerability, they are focusing
on specialized product features to stay competitive in China market and on
production front, they have started shifting their Ipad and Mac in Vietnams &
have kept their value adding activity of iPhone in US and depending upon China
for assembling of parts only. Again, wechatpay and Alipay continues to trouble
them as they support local firms and being a high network accepted product/apps
for mobile payments, it can have huge say in decision making while purchasing product
(A phone). Nike also belongs to this quadrant, but their situation is better, as
they have their production in 40 countries & their market of China is also
on growing front. Their dependence over China is less in terms of their overall
business and production book size.
Way Forward
for India
China has made their position quite strong during
the last decade and pandemic has added to their overall strength by way of easy
purchasing of firms at low valuations across the globe. They have been seriously
adhering to their vision & can take any means to meet the ends. Only points
where they are lacking is their social security system within country, ageing
working population due to one child policy till recent past and the biggest
threat to them is the world trust issue. If we (India) as a country take learning
and develop an eco-system which may lead to behavior change of large population
of our country just the way China did, we can eat a lot of chunk of their pie. India
must take advantage of China’s shortcomings, as we have been able to build and
maintain a clean image in the world since beginning. Our current & strong
govt. has global acceptance and also capability to pave the way towards success
but the political pollution in our country is becoming a big hurdle in the path.
Reference: Harvard
business review edition May June 2021
By Nirav
Ajmera (IIM Ahmedabad Alumni – 2020960003)
