Tuesday, December 2, 2014

Book Review: Can China Lead?

This book is published by Harvard Business Review and my review first appeared in Amazon.

If the authors had posited the rhetorical question from the geopolitical point of view, the short answer would be: "Yes, China can lead though not in the confrontational style favored by the Americans." When applied to doing business in China or by Chinese companies on the global stage as the authors intended, the answer is more nuanced and complex. The authors tried hard and deserve a "B" for their effort but they missed the bullseye. 

This thought provoking book loaded with information and case histories (in the tradition of Harvard Business School) is highly instructional for those wishing to understand today’s China, especially the business environment of China. While the authors provided a balanced discussion of the complexity of a society undergoing breathtaking rate of change, the analysis that accompanied the discussion was often too light and not fully satisfying.

The book began with a historical review demonstrating that much of China’s centrally planned policies had the roots in the early republic days as proposed by Sun Yat-sen, the founding father of modern China. Contrary to Western perception, many of China’s policies were not invented by China’s Communist Party but preceded CCP’s coming to power.

The authors then described the rapid development of China’s economy alongside intensive investment in infrastructure that has been unprecedented in human history. They attributed the success to China’s leaders being trained in engineering, as opposed to emphasis in law as is the case with western political leaders.

The book presented many successful business cases as well as failures. Both categories included state-owned enterprises as well private ones founded by entrepreneurs. Reasons for their success or failure were useful and instructional. The book also talked about China’s rapid expansion of the capacity to train college graduates and China as emerging source of outbound foreign direct investments. 

While the description of China’s impressive economic progress was positive and fair in giving the policymakers their due, there was an undertone of nagging concern that China’s miraculous development won’t last. Because of China being a single party rule, they expect the nation to eventually hit the wall. As I read the book, I kept waiting the other shoe to drop. That is, I waited for an analysis and explanation of why China will ultimately fail but that conclusion while hinted was never articulated.

It is somewhat unfortunate that the book went to press just after the sentence of Bo Xilai. To the authors’ credit, they did not simply dismiss Bo’s downfall as political infighting between his losing faction and Xi Jinping’s winning faction—as some western pundits have suggested. Had they waited a bit to see the full implication of the anti-corruption drive, still on going today, they might have a more hopeful prognosis on China’s future.

I suppose it’s unrealistic for a less than 200 page book to fully cover the many facets of China, some contradictory and conflicting, and some too complex to lend to straightforward analysis. For example, the authors devoted one paragraph on the likelihood of military conflict with the U.S. and their concluding sentence was: To the extent there is a Chinese-American competition, we believe it will be primarily economic, not military, in nature. Wow, there were a lot of whys and why-not’s that they didn’t talk about.

In discussing the rise of China, especially in the early years after Deng Xiaoping return to power, the authors did not discuss the critical (in my view) roles of Hong Kong businesses relocating into Shenzhen and Taiwan manufacturing companies into Dongguan and Kunshan. They were in China well ahead of significant western presence and their factories began the knowledge transfer of good manufacturing practices to the indigenous factories, heretofore indoctrinated by the “iron rice bowl” mentality wherein quality and productivity did not matter.

While the book drew linkages to early republic days just after the fall of the Manch  dynasty, it barely mentioned the early signs of privatized venture led by the so-called township enterprises (乡镇企业) in the early days of economic reform. To my knowledge no one has really gone to the trouble of figuring out why the TVEs had such meteoric rise and why they flamed out.

The book also did not talk about how failing SOEs were “rescued” by some energetic entrepreneurs, usually an insider, taking the small efficient part of the operation with greatly reduced payroll and restart as a stock holding company. In exchange for a minority equity in the new company, the local government was left to deal with closing and laying off the greater part of enterprise beyond economic salvage. Some newly formed company raised capital by agreeing to relocate to the outskirts and giving up the dilapidated facility located in the heart of town to the local government for cash, whereupon the government would raze the old factory and build new shopping mall or office building or high rise apartments. Everybody won.

The round-trip funding of the newly formed privately held company also played a critical role in the early days of economic reform. “Round trip” refers to the secret transfer of funds from inside China to Hong Kong and then remitted back to China as qualified foreign direct investment, sometimes accompanied by addition of fresh funds from Hong Kong. The motivation for the round tripping was that any enterprise with 25% or more equity belonging to the foreign investor qualified as foreign invested enterprise and FIEs were eligible for favorable tax treatment and other concessions.

“Above are rules, below are ways around the rules (上有政策,下有对策)” is one saying everybody in China is familiar with. It is very much ingrained in the Chinese business culture and something every western business in China needs to keep in mind. The authors emphasized the importance of western companies understanding and getting along with the national and local governments in China. Very true. The challenge is that nothing in China is black or white but in shades of grey--nothing to do with sexual bondage but everything to do with staying out of FCPA related indictments back home. Knowing where the line is and not stepping over the line is the daily challenge for the expat manager.

While there was an impressive collection of cases presented in this book, there were some gaps I could nit pick. For example in discussing China’s rising trend to consumerism, they talked about the competition of Ford and GM to win the hearts and minds of the Chinese consumer. Actually VW, who was in China years before GM or Ford, has been much more a competitor to GM than Ford.  Breathing down their collective necks are the local privately held entities as well as the big state-owned auto companies that are in bed with the western automakers.

Also as part of the discussion on China’s rising consumerism, the authors studied the use of credit card companies as a “growing appetite for consumer debt.” Missing in the discussion is a much needed, more expansive study of the Chinese consumer (or is it the government) that resisted the use of outside credit cards such as Amex, Visa and MasterCard until the introduction of UnionPay, a Chinese version of a universal credit card. What made UnionPay successful? What was the government’s role?

In fact, an entire new chapter could be devoted on how Chinese companies emulated a successful western business and localize the model in order to succeed in China. Examples would include Baidu over Google and Alibaba over eBay and Amazon. The authors suggested that the government tilt the field in favor of the Chinese companies but I believe there was more to it. The Chinese entrepreneurs understood the local culture and practices and made sure theirs was an approach that took advantage of their understanding. An interesting case to watch for possible inclusion in their next edition of this book will be the rise (and more rise or fall) of Xiaomi in the highly competitive mobile phone market.

The authors devoted only one sentence to the turbine maker: Sinovel was also accused of stealing proprietary wind turbine technology from its American main supplier. This was somewhat misleading because the dispute was over alleged theft of software, and as the authors rightly pointed out, software was not a strength of Chinese companies. Actually the authors missed an opportunity to develop a case study on how to develop a strategic partner and avoid a nightmare. (The damaged American company was located in Massachusetts and should have been easy to interview.) Instead of same bed, different dream, based on the Bloomberg report, I suggested that the American executive missed the opportunity to form a classic win-win relationship, a virtue the Chinese love to extoll.

The authors are using this book for one of their China related courses. It is a worthy first effort but I would expect future revisions and editions, if for no other reason because China is still very much a moving target. As I suggested in this review, to do justice to this subject, the book needs to be much bigger, at least twice the number of pages accompanied by more in-depth analysis.