SHENZHEN - For most American travelers to China, the effect is almost always
the same: equal parts awe and intimidation. Whether first greeting modern China
in the expansive area that is Shanghai, or seeing the muscular manufacturing
power of Shenzhen flexed as you drive through the midst of the city's sprawl,
it is hard not to feel a certain mixture of aspiration and anxiety at the
promise and peril that is China.
China has been the beneficiary of what could be argued is the most positive
business press over the past several decades, so the reality of China's
economic position - the real capabilities and competencies of its national
champions as well as its more typical traditional manufacturers - can be
difficult to determine. In part, a fully formed understanding of the country's
capabilities is hard to develop because Westerners bring all manner of
expectations into their perspective on China's story. Cumulatively, these cloud
our judgment both of the actual situation within China's economy, as well as
the risks to our economic position which are uniquely related to China's
growth.
Americans in particular interpret China's growth in large part as a consequence
of the worldwide fall of communism and the rejection of its philosophies. For
Americans, the embracing of capitalism by former Maoists is the sweetest of
victories, an ever-present reminder that ultimately the American way of doing
things proved better than theirs. Yet many of China's economic gains have come
at the expense of traditionally labor-intensive manufacturing industries that
had grown up in America's Midwest.
Similarly, America's own realization of the price Chinese paid for their
attachment to communist principals during the mid-20th century - the economic,
cultural and all-too-literal starvations endured by its people - colors the US
perspective of China's ascent, introducing an almost redemptive character to
the country's narrative and its adoption of a wholly different world view.
Additionally, throughout it all - or, as cynics would have us believe - at the
root of all American fascination with China are the Asian country's consumers.
Long gone are the 400 million consumers that Carl Crow mythologized in the
1930s; now we have a multiple of these several hundred million, and business is
even more convinced now than ever that these all represent eager, possible
customers.
In many ways, each of these perspectives is legitimate, and offers both
understanding and a reminder of the good news that is China's story. But now
that China seems to have a sort of upper hand - that it can offer to its
citizens economic opportunities when Americans feel faced with an uncertain
future and at best a sideways moving national economy - people in the US may
have over-reacted, and ascribed to China and its leaders more credit than it
and they are due, and more strength than they actually possess.
Recent headlines about China's property market, specifically the belief by many
analysts that its problems with leverage and valuation may be more acute and
systemic than those posed at the height of America's own recent real-estate
debacle, are good reminders that China's path forward is no more certain than
that of the US, nor less likely to face severe shocks - both internal and
external - than what our own history tells us is probable.
And while yes, China has to be understood in part through its manufacturing
prowess and export strength, and yes, equally its regional aspirations and raw
material pursuits, this is not the whole of China. The whole of China is a more
fragmented country than Americans tend to understand, a country still awash in
subsistence farming, with the majority of its population impoverished, led by a
central government aware of its own tenuous grasp on power and consequently
intent on nothing more straightforward than increasing the standard of living
for its people.
Perhaps most critically, China's business is still deeply entrenched in a
passive mode, relying too heavily on shear manufacturing capabilities versus
innovation, brand equity, or insights into the consumers in either its domestic
or export economies.
This disconnect between Western public understanding of China and the country's
actual capabilities is particularly dangerous, in part because it influences
Washington and Main Street equally. Both see China as an economic and military
near-peer competitor but most are unaware of the profound distances the country
must yet cover if it is to embody the possibility many perceive. This is
perhaps seen nowhere more easily than within the business media and its
coverage of China's national champions, the outward investment by Chinese firms
within the US, and how China is adjusting its go-to-market strategy as part of
the recent recession.
Cover articles like the recent Fortune Magazine story, "American Made ...
Chinese Owned" highlight the very good and interesting possibilities of Chinese
investments in the US, as well as how Chinese companies are adjusting not only
to changes in their export markets, but lost efficiencies in their own.
But the heavy weighting towards anecdotal evidence in looking at China's
businesses can be dangerous when the sheer bulk of China's outbound foreign
direct investment (large and as advantageous to positive global stability and
inter-connectivity as it may be) remains the product of state-directed
enterprise. Easily lost on most is that too many of China's outbound success
stories revolve around a handful of exemplars, companies like Haier whose
position in North America is rarely explained well from either the vantage
point of a US consumer or retail merchandiser.
Too many of China's best success stories - companies that are regularly held up
object lessons for where the country's economy is going - owe their success to
a price-only position in the market. And while almost every piece of journalism
dedicated to these companies casually mentions their need to build a future on
consumer marketing, product development, and brand building, the reality is
that extremely few have been able to accomplish this. The disconnect between
the perceived strength of China's manufacturing sector and the extraordinary
weakness of its brands is a critical weakness for the country's future.
It remains an awkward, and some would suggest un-necessarily negative, question
to ask how the brand equity position of China's export successes have changed
since they began to be elevated into the spotlight by the US business media.
Various indices of comparisons between global multinationals almost all show
the upwards trajectory of China's companies, absent one: consumer recognition
and brand equity. The national "China" brand is ubiquitous, but the value of
individual Chinese brands to the consumer borders on the inconsequential. This
is not a new question, and frankly some wonder whether repositioning the China
brand - either its national brand and reputation or that of its businesses -
really matters.
The question goes to the heart of how we perceive the threat that is China's
economy: if China's businesses are unable to build a brand, it will almost
certainly have been because these companies cannot innovate or move up-market.
Beijing understands this, which in part explains the recent rhetoric the party
has directed towards encouraging innovation from the private and public sectors
of its economy.
China's leaders understand all-too-well that to continue creating the positive
economic growth necessary to absorb the laborers transitioning from agriculture
to industrial jobs, they must have vibrant domestic consumption alongside
meaningful exports. To the extent the country has to continue competing in its
export markets, its leadership would like to do this ideally built on
manufactured goods that leave the country because of more than their low price.
The latter is a short-term advantage that China ceded to other regional players
some time ago, and Beijing's leaders (from within both its business and
political groups) know full well that it is only a matter of time before other
regional players couple together the rule of law, commercial infrastructure,
and pro-business orientation and begin to poach jobs away from China.
An equal perception on their part that certain of their export markets are
becoming increasingly protective makes the need to move away from cost-only
manufacturing a critical priority. As a consequence of these realizations,
China's brand does matter. Too heavy an emphasis on manufacturing alone and
ultimately business will find equally stable countries from which to relocate
their industrial production.
This realization then becomes much of why the China brand matters: absent a
transition into more profitable goods and services, China's economy may be
reaching an inflection point that will make the current Western recession pale
in comparison. The legs of China's economy still remain predominantly that of
captive manufacturing, producing products at the explicit direction and design
of North American clients.
This is not a recipe for long-term success, and to the extent China's companies
are never able to capture the aspirations of American consumers or present
unique product offerings to US merchandisers, it is only a matter of time
before either another part of the world strings together a stable, lower-cost
manufacturing center, or export markets are saturated and mature.
Watching China's incredible growth, we forget that the risks are much greater
for China's political leadership than those US leaders have faced for close to
a century; equally, Americans take for granted the ability of the US economy to
weather shocks (admittedly many of its own making), find its footing, and
proceed forwards.
China's growth is impressive; but its current leadership has yet to face a
domestic economic crisis like those that peppered the US during the mid-1800s
through the Great Depression. To the extent these sorts of structural events
are inevitable - the necessary by-product of economic systems taking root in a
particular culture and time - they will happen within China, and likely very
soon.
Just as hindsight provided the most painful sorts of validation to those who,
in the West, had whispered about the unrealistic climb of equity markets, or
the stratospheric costs for US housing, or the unbearable debt loads held by
American consumers, it may well prove that those who had long held concerns
over China's banking system, the unregulated gray areas where the state and
private lending have overlapped, and the inability of Chinese companies to
build brand positions, will be proven equally, if unfortunately, prescient.
Growth brings with it challenges, and no country's story can be told without
its own setbacks and crises. China's story will be no different, a realization
which those in the West who believe Beijing can do no wrong, who tend to
believe that China is the answer and cause to all of America's problems, all
too easily forget.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses
bring innovative technologies into the North American market.
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