The muscular Mandarin – China’s real stand in the world

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)