China and the Olympics: A cause for celebration or protest?

The upcoming Olympics have propelled China into the international spotlight, but China is not receiving the purely positive publicity the government might have hoped for. Protesters have used the occasion to draw attention to the issue of Tibetan independence and to highlight China’s poor human rights record. Although protestors are undoubtedly pursuing their agendas with the best of intentions in mind, they may actually be doing more harm than good. History has shown that China’s relationship with the international community has been complicated by years of humiliation at the hands of Western powers. By launching direct frontal assaults on the Chinese government’s policies, protestors may be alienating the very citizens they are trying to help. In a recent poll by the Ogilvy Group, 72% of Chinese people are proud of the fact that China is hosting the Olympics and protestors should be aware of such nationalism and fear a backlash if their criticisms become too harsh. Granted, unjust behavior should not be allowed to continue unchecked, but protestors should make their case with more sensitivity to the notion of cultural “face” which permeates Chinese society. In fact, the Olympics should be a time to showcase how far China has come since Deng Xiaoping began to open up the country in 1978. As China’s economic and political power continues to grow, Western political leaders should enact a policy of engagement with China instead of isolating China by boycotting the opening ceremony as some leaders have planned.

MNCs are not immune to the political rumblings caused by China’s role as host of the Olympics. The Chinese government is very sensitive to any criticism leveled against it by the international community and it is keeping a close eye on which MNCs remain loyal in terms of Olympic sponsorship. Placed in a difficult situation, most MNCs appear to be staying to be staying out of the political debate in order to avoid angering the Chinese government and risking their access to the growing Chinese market. Although a MNC may experience a boycott from some non-Chinese customers over the short term, maintaining a neutral stance towards Chinese government policy and continuing to sponsor the Olympic makes both economic and political sense over the long term. As the Chinese economy continues to open up, it citizens will begin to demand more and more freedoms and change will be enacted from within. MNCs are in a prime position to help this change come about and there is therefore no reason to risk their long term presence in China or their future profitability by refusing to sponsor the Olympics.

The managed transition of the Chinese economy from a centrally planned system to “socialism with Chinese characteristics” has prevented the country from plunging into chaos. Although the Chinese government may not be perfect, it has improved the lives of it citizens and China remains one of the fastest growing economies in the world. We have seen how the rules of the economic game have gradually evolved since 1978 to the benefit of Chinese companies, Chinese consumers and MNCs alike. As China becomes ever more influential in determining things such as the cost of raw materials to the amount of pollution in the atmosphere, it is in the international community’s best interest to maintain a direct dialog with the Chinese government. If China continues on its present path, market forces will open the country up to democratic change from within. Therefore, protestor should voice their opinions with a more cultural sensitivity and allow the Olympics in China to be a celebration of the accomplishments of the past and of the expected transformations in the future.

MNCs and Hidden Dragons: Does a Pure Global Business Model Even Exist?

The nature of China’s unique culture and ever evolving society requires MNCs to evaluate whether their existing business models will succeed in the Chinese market. This is not a phenomenon unique to China, however, or to MNCs for that matter. In fact, differences in culture, market environment, and technological advancements are just a few of the differences any size company must consider before attempting to execute their domestic business model in a foreign country. When Dell first entered China, for example, it made a drastic change to its business model and chose to initially sell its computers indirectly through distributors rather than through the direct B2C method that had made it successful in the US. Dell had learned from Whirlpool’s earlier mistake and did not assume that Chinese customers knew its brand. Dell knew that it first had to establish a reputation for quality and that its Chinese customers would not spend the equivalent of two to three month’s salary on a computer that they could not examine in person. There were also initial concerns whether the appropriate channels existed to support the just-in-time inventory management that was required to make Dell’s direct sales model a success. It was unclear if Chinese suppliers could deliver needed parts on time, if there were domestic carriers who could deliver computers in a timely manner, or if there was a domestic sales force capable of applying the direct sales model. Dell’s website had also become an extension of the direct sales model in the US, but China’s low Internet adoption levels was another cause for concern that the direct sales model would not work in China. Eventually, Dell did adopt the direct sales model in China, but only after cultural perceptions, the market environment, and the implementation technological advancements were given enough time to evolve and create an environment that would support the direct sales model. Perhaps pure global business models do exist, just at staggered stages of implementation.

Chinese companies are also learning to adapt their domestic business models when expanding into international markets. The Hidden Dragons have been successful in modifying certain aspects of their business models that have made them successful at home to fit the needs of international markets. For example, Haier, a National Champion in the Chinese market, did not attempt to challenge the established brands when it entered the US market, but rather chose to find a niche that had been ignored by its competitors. This proved to be a very insightful strategy because Haier “snuck” into the US market by going after the underserved and ignored compact refrigerator market. Haier was able to use it economy of scale back home in China to produce low cost compact refrigerators that met the basic needs of customers in the US without raising concerns from US companies. Haier gained time to establish its brand in the US and create a following of price sensitive customers should it decide to expand its product offerings in the US.

The Opportunities and Challenges of Western China

As the cities along the east coast of China become ever more crowded with MNCs and their domestic competitors, expanding business operations into western China presents new opportunities and challenges in the battle for the Chinese market. One of the strategic options a MNC needs to implement in order to compete against their domestic rivals is to dramatically reduce costs. Capitalizing on the lower cost of labor in western China would be one way of doing this. Expanding business operations would also allow a MNC to expand its market coverage and build its brand in other parts of China. Although the standard of living is lower in western China, the presence of MNCs and efficient domestic businesses should help to raise the standard of living over time and by lowering the cost of its products more Chinese will be able to afford international brand named goods.

The Chinese government has also recognized the importance of expanding the economic benefits provided by MNCs and their domestic competitors in order to reduce the income gap between the citizens of eastern and western China. There is real fear among Chinese party officials that resentment will develop and spread among the residents of its western provinces if they feel they are being left out of the economic gains being realized in eastern cities. According to a January 31st article on ChinaBiz.com.cn entitled “China to increase investment in rural areas,” China’s central government plans on increasing its investments in rural areas by more than 100 billion Yuan ($13.9 billion) this year, bringing its total investment to 520 billion Yuan in 2008. The money will be used to fund infrastructure projects in water, gas and electricity, as well as provide improved agricultural technology. Such infrastructure improvements will also expedite the westward migration of both MNCs and domestic firms into western China.

Although the expansion of MNCs and their domestic competitors into western China will not happen overnight, it appears that this will be a logical progression as the cost and competition of doing business in eastern China will continue to rise. In order to expedite the process, the Chinese government could take further steps to create an atmosphere more conducive to business by providing incentives for MNCs and domestic businesses to expand westward. They could also encourage the residents of western China to form more competitive networks, thereby becoming more familiar with a market-based economic system and raising their standard of living.

As MNCs are being forced to establish economies of scale due to the efficiency of their domestic competition, establishing business operations in low-cost western China appears to be a solid business strategy. The Chinese government will have to ensure, however, that the appropriate infrastructure exists to make competitive business a real possibility and, as we have seen, they appear to be taking steps to ensure that this becomes a reality. It is also in the best interest of the Chinese government itself to ensure that the income gap among its citizens does not become too large that it creates feelings of resentment or, more dangerous, revolution.

The Maturation of Chinese Competition

China’s adoption of “capitalism with socialist characteristics” has transformed its economy from a state-run, planned system into a profit-driven system in which domestic companies now have incentives to compete against MNCs in the battle for the Chinese market. With their ability to successfully imitate international business practices, Chinese companies have chosen to implement a low cost, high quality strategy in their fight against MNCs. While domestic companies have already succeeded in capturing the low-end market, the quality of their products is now perceived to be approaching that of international brand-name goods, thus fueling appeal in the mass market. This does not bode well for MNCs that choose to pursue a high-end strategy because domestic products of similar quality are priced at a fraction of the cost of international brand-name goods. MNCs cannot compete in the low-end, volume market nor can they complete on cost in the upscale market as the quality gap is quickly closes. MNCs must stay ahead of their domestic competitors by speeding up product development and by relying on aggressive marketing, an area where domestic companies are still weak.

As Chinese companies continue to mature, however, they now aspire to build well known brands and quality products that can compete in international markets. Perhaps international growth is the natural byproduct of a capitalist system, but the notion of “face” which is so important to Chinese culture and the desire to improve the status of their companies internationally are strong factors influencing Chinese managers to expand their operations abroad. Just as domestic managers quickly learned to mimic international business practices by observing MNCs at home, many Chinese companies sought to continue their education by entering the tougher, more established markets first, such as Europe, the United States, and Japan. Not only would such endeavors provide more of a challenge, but it would allow Chinese managers to observe best business practices first hand. One of the ways Chinese companies succeeded in entering international markets was by focusing on niche segments that were either vacated or ignored by the competition due to low profit margins. Such a strategy prevented Chinese companies from competing head-on with a domestic leader and allowed them to gain a foothold in the market. But, perhaps one of the most important concepts Chinese managers were able to learn at home and transfer to their operations abroad was the notion of listening to the needs of the domestic markets. Chinese managers had learned from the mistakes of early MNCs operation in China and decided to employ local managers in order to remain responsive to the pulse of the market.

The competition between Chinese companies and MNCs will be an interesting interaction to watch play out on the global stage. Just as Chinese managers are learning more about international business practices from their MNC rivals and by expanding abroad, MNCs are also learning from earlier mistakes on how to successfully conduct business in China. As Chinese consumers gain more spendable income it will be interesting to see if Chinese companies can satisfy their growing desire for technologically advanced products or if there could be a window of opportunity for MNCs. Similarly, if the economies in Western nations continue down the road towards recession, perhaps the demand for cheap Chinese goods will only continue to grow. But, whatever the outcome, it is only too apparent that we will need to continue to learn from each other and that our futures are intertwined and linked.

MNCs in China Seek Multi-Faceted Leaders

The complexity of the Chinese market not only requires a MNC to give careful consideration to its strategic goals before entry, it also necessitates a MNC to seek out a multi-faceted leader in order to be successful. For those who aspire to one day lead a MNC in China be prepared to do some serious self-examination and long term career planning. In terms of professional qualities, it is a prerequisite to have both managerial and technical experience in your industry. Your Chinese employees will look to you as an expert and they will be terribly disappointed if you prove incapable of disseminating any new knowledge. And, as the Chinese continue to gain expertise in international business techniques, the bar will only continue to get higher. Therefore, as China assumes an ever important role in the international strategies of many MNCs, it is important to distinguish yourself as one of your companies’ top performers. In order to prepare yourself for the nuances of doing business in China, it is also necessary to do one or more stints abroad before you will be considered for an assignment in China. Since Chinese culture is at the opposite end of spectrum of Western cultures, it is advisable to “ease” your career into China. This can be achieved by taking on an assignment in another developing market, in another Asian country, or perhaps both.

As you can see, becoming the successful leader of a MNC in China is not a spur of the moment decision. Not only does it require a long-term career commitment, but it also takes a certain type of personality. It is important to ask yourself if you possess a “multicultural mindset.” Such a mindset involves acknowledging the short comings of your own culture while being able to accept the culture of your host country. It also takes an adventurous spirit, a sense of humor and an open mind to succeed in China. Similarly, you must demonstrate a willingness to learn from your Chinese hosts. Entering China with an authoritarian style and heavy-handed US business practices will only lead to failure. Listening to the advice of your customers, employees, officials, and partners will lead you to discover how business is successfully conducted in China.

Of course, China has also its own unique contractions that can baffle the unknowledgeable Western business leader. One of these contractions is humility and strength. On the one hand, a successful leader in China must demonstrate humility and a willingness to be part of the team. On the other, strength must be displayed when sticking to key principles and the core aspects of the MNC’s corporate culture. Another contradiction is that of patience and speed. It is unrealistic to assume that changes can be made to your China operations overnight. It takes time and patience to gain a thorough understanding of the business environment in China. Conversely, China’s business environment changes at a rapid pace. It is necessary to stay informed and be capable to make quick decisions when the need arises. But, perhaps the most important skill a successful business leader in China must learn is how to implement guanxi. Guanxi, an integral part of the Chinese culture, is the concept of establishing strong, positive personal relationships with both your internal and external business associates. A strong Guanxi network is essential to success in China and you can expect to spend considerably more time developing these relationships than you would expect to spend maintaining similar relationships with Western business associates