Along the way, he established a reputation as an autodidact who, despite having ended his formal education at the age of 17, read every business and management book he could lay his hands on.
To gain access to better technology, he set up a joint venture with Liebherr, a German maker of high-end refrigeration equipment. Inspired by his reading of Japanese management books, he focused on instilling discipline into his workforce. Work processes were improved, and every employee’s performance was evaluated on a daily basis.
The company began to acquire a reputation for innovation, especially for products that met specific local needs: refrigerators with extra-tough cabling that could resist gnawing by rats, and freezers that could stay cool even when their electricity supply was cut off for 100 hours.
This is a time when everything is changing so fast. The key factor of traditional sales was location. If you had stores in good locations in a city, that gave you the biggest advantage. During the PC Internet era, the key factor was traffic — whoever had the greatest traffic was the winner. And now in the mobile Internet era, the key factor is time. So my stores are changing from seeking good locations to pursuing the time of customers.
China is the only country with the economic scale and robust activity to match that of the US. Unlike the US, however, China is still at a relatively early stage of economic development. Its markets have progressively opened wider, and much basic infrastructure has been put in place, but its business environment is still raw and volatile, with a rate of change and pace of activity that is rivaled possibly only by Silicon Valley.
Chinese consumers, presented with a bewildering range of products from domestic, Asian, and multinational brands, are also perhaps the world’s most fickle customers. Studies of consumer behavior have repeatedly found that most Chinese show little brand loyalty, whether shopping for everyday goods or big-ticket items. Three-quarters planned to switch brands when buying their next car.
When companies struggle to hold on to any form of competitive advantage, sources of long-term profit become harder to find and retain. As Zhang Ruimin likes to point out, companies can no longer think about establishing a defensible position for themselves and their products; instead, they can only think of creating the means to transform themselves over and over again.
Through the 1990s and 2000s, a lot of Chinese companies set themselves the goal of catching up with multinationals, often benchmarking themselves against what they saw as Western “best practices.” Today, having closed the gap, many have realized that they will need to figure out their own paths forward. This is leading to much experimentation, in particular in the area of business strategy, where China’s complex, fast-changing, and often ambiguous business environment is making companies rethink how they plan for the future. Rather than setting goals or targets, companies are instead concentrating on ways of strengthening their capabilities to improvise and innovate in the face of immediate challenges and opportunities.
It is important to bear in mind that the new Chinese entrepreneurs do not have preplanned answers to many of the problems that confront them. Their strengths are those of skillful adaptation, in both strategy (what they do) and execution (how they do it). They firmly believe that success will come from pushing onward, taking risks, and reacting quickly to opportunities; from constantly searching for small advantages that will allow them to steal a brief march on their immediate competitors, and larger ones that will enable them to enter a new business area; from building a scale that will make it hard for others to rival their cost base; and from finding new markets, be they emerging new centers of consumption within China or overseas. These entrepreneurs have more options and opportunities than they can follow. They need to choose which industries to enter, what acquisitions to make, and what technologies to develop.
Ma then had what was probably the single greatest inspiration of his career. If China didn’t have a payment system, why not create one?
Alibaba isn’t following the traditional business strategy of having a core competence. Instead it’s constantly looking for the right combination of opportunity and competence — where we can bring together the biggest opportunity and the most important leverage point. We don’t jump randomly, we do this in a very disciplined way.
That order, however, came at a high cost. Mao’s view of order was based on a system that did not allow anyone to visibly excel at the expense of others, except through the Communist Party. Free-form entrepreneurship was not just exploitable, but contrary to the notion of how the world was supposed to work.
In Fujian, farmer Xu Lianjie and his partner Sze Man Bok spotted an opportunity to improve women’s lives and started a business making sanitary napkins. In central China, engineer Ren Zhengfei left the army and moved to Shenzhen to found a firm, Huawei, that bought used office telecommunications equipment from HK for use in mainland China. In Beijing, a group of engineers from the Chinese Academy of Sciences established Legend, the precursor to the modern computing giant Lenovo, to import televisions. In Taizhou, Li Shufu established a refrigerator components firm, paving the way for his motorcycle and car-making business, Geely, in the following decade.
Feng’s department was closed. He moved to Hainan, China’s southernmost province and traditionally a place where disgraced officials were sent into exile as punishment.
There, on a subtropical island 1.5K miles from Beijing’s grim political climate, Feng found himself in the middle of a spectacular property boom. As speculative money flooded in from across China, Hainan’s GDP growth rate leapt to an astonishing 42% in 1992, and Feng abandoned his official post to start a property firm.
The government invited multinationals into the country, guiding them wherever possible into joint-venture partnerships and encouraging them to share their technology with local firms in return for access to the China market. Significant numbers of Chinese started going overseas to study, work, or just see the world. Much of the decade was spent in experimentation and learning.
Zhu’s message was uncompromising. For China to succeed, Chinese companies would have to be able to compete with the best, and the only way that could happen would be if barriers to such competition were pulled down, regardless of the consequences for those enterprises unable to cope. Through the late 1990s, he oversaw the closing or merger of hundreds of thousands of poorly performing SOEs, which led to 10s of millions of people losing their jobs. Then, in the early 2000s, Zhu pushed China into the WTO. The market-opening measures that followed saw foreign inflows more than double and exports embark on their relentless rise, which would see China become the world’s biggest exporter in 2009 and its biggest trader by 2013.
One question is in the mind of every fledging entrepreneur in the high-tech startups of Beijing’s Zhongguancun neighborhood, the fabrication hubs of Wenzhou, the industrial region of Dalian, and dozens of other Chinese business centers: “Why not me?” Success is all around them. Young Chinese businesspeople are driven by materialistic desire, eager to “catch up” with the rest of the world, and almost giddy with a sense of multiplying opportunity.
Figures such as Jack Ma, Pony Ma, and Robin Li never questioned China’s system as such, but they moved beyond it rapidly, displaying a sense of self-assurance, as if they felt entitled to succeed, that would have been impossible to imagine in the previous 2 generations. They backed up this confidence with a high-speed energy and agility that kept them 1 step ahead of constraints. To circumvent rules barring foreign companies from holding stakes in Chinese Internet firms, they created new forms of legal entity that would allow them to list in the US and other overseas markets. That brought them access to foreign capital — and also brought in foreign expertise.
Now there is a 4th wave of Chinese disruptors: members of the entrepreneurial generation born from the 1980s on, who never experienced Mao’s regime firsthand.
Pride is the most straightforward of these elements. “Chinese entrepreneurs see an important part of their mission as playing a major role in the achievement of national prosperity.”
His effort to do this has centered on organizing Haier’s staff into approximately 4K small teams, each of which operates like a small business in its own right. The vast majority of these teams are product-based, making and selling Haier’s goods. A small number handle specific functions, such as HR or financial planning, and even smaller number look after the company’s overall strategic direction, overseeing the creation of new teams for new products or the closure of teams which no longer serve any need.
Much of subtlety and interest in Confucian thought is in teasing out exactly what is right behavior and how this can be encouraged or enforced. The point that I want to stress, however, is that ruling in principally about intervention and not about allowing matters to find a natural balance.
At one level, their having been raised in such a tradition points to why China’s entrepreneurs often appear to have a paternal approach to running their businesses, ensuring order via a top-down management style. But on another, deeper level, Chinese leaders tend to harbor an underlying assumption that the natural tendency of the world is to run toward disorder. Control is always necessary.
Many Westerners believe that the world, if left to its own devices, will find a natural order of its own — and that this is especially true of markets and other economic systems. The Chinese tend to believe that markets, like all complex systems, require constant monitoring and supervision in order to deliver their best results.
Just as many Westerners are waiting for the inevitable moment when China drowns itself in sub-optimal command-and-control-style bureaucracy, many Chinese leaders take it for granted that the US and other countries will render themselves impotent through cacophony and inefficiency.
If you don’t create channels for people to rise and don’t tackle issues of fairness or a lack of legal knowledge, then you can create a society with a large underclass that’s poor and a society that’s unstable.
Every week it updates the Android-based UI it uses for its phone, using suggestions sent in by fans. “Xiaomi is not selling a product, but an opportunity to participate.”
Of the 4 components of this SOOT formula, scale is the easiest to recognize. It is generally understood that when per capita GDP reaches about $5K, a tipping point is triggered, and the general population enters a consumer economy. The billion-person Chinese population crossed this threshold around 2005. Since then, per capita GDP has more than doubled. In addition, China’s urbanization drive created hundreds of new city markets across the country. The scale of the Chinese consumer economy is now beyond any other country in the world.
Its commerce ministry expects that, by 2015, China will have overtaken the US to become the world’s largest consumer market, with retail sales of more than $5T. Soon, for any product or service you care to think of, China will be the biggest buyer.
The liberalization of China’s markets has engendered ferocious competition. With companies continuing to take features and functions from their rivals as fast as they can, a single product’s advantage may be very short-lived. Piracy and counterfeiting remain major problems, but increasingly companies are also finding themselves having to cope with streams of perfectly legitimate updates and upgrades. One of the reason why Xiaomi iterates its products week by week is because it has to keep up with Lenovo, which offers 40 new smartphone models annually, and Huawei, which maintains a similar pace of launches.
Foreign companies are no longer needed to play the enabling role that Chinese businesses sought from them in the 1990s and 2000s. Chinese companies may not have all the access they would like to capital, technology, and know-how, but they are no longer starved of these things as they were 20 years ago. And when it comes to coping with the complexities of China’s markets and business environment, they are usually far better placed to come up with answers than even the most experienced of multinationals.
Despite all this progress, major inefficiencies remain. Distribution, for example, continues to be a major headache for many companies, especially foreign ones. China’s logistics costs, at 18% of GDP, remain stubbornly high — well above India’s and double the level found in developed countries. Transporting goods from one part of the country to another usually involves multiple companies, each of them responsible for only part of the journey, many of them protected by local officials.
Although the Chinese government plans ultimately to liberalize financial markets, for now it will continue to maintain capital controls that prevent money from flowing into or out of the country in destabilizing volumes, a managed exchange rate that allows it to support export industries, and officially set interest rates that give banks the cheap money they need to make policy loans. And it will continue to pour enormous resources into scientific and technological research.
Tencent’s Pony Ma and Xiaomi’s Lei Jun are members of the country’s parliament, and Baidu’s Robin Li is a member of the Chinese People’s Political Consultative Conference, the country’s leading political advisory body.
Though the government has kept the network backbone under total state control, private enterprises have from the start been free to rent bandwidth and establish almost any type of business. In doing so, they take full advantage of the infrastructure built by official China and the assistance it has given in hindering access by companies such as Google and Facebook.
Until recently, each of the BATs occupied its own demarcated space, Baidu in search, Alibaba in e-commerce, and Tencent in online games and messaging. The arrival of the mobile internet has upset this balance. With more people now accessing the Internet from their phones than from desktop computers, both Alibaba’s dominance of e-commerce and Baidu’s of search look vulnerable to Tencent, thanks to the near-universal presence of its WeChat messaging app on people’s phones and the possibilities this offers the company to link directly to its own e-commerce and other services.
Though not related, the 2 Mas share both a surname and a take-no-prisoners attitude to business. Pony Ma, however, has the greater reputation for fierce competitiveness. He once went so far as to claim that “To copy is not evil,” and he is well known for using Tencent’s financial muscle to steamroller smaller companies into selling or sharing him the software.
Tencent entered the 2000s desperately short of funds, barely able to keep its servers running. Casting around for sources of even the smallest cash flow to tide them over, Ma and his team launched a handful of low-cost add-on services, each priced at just a few cents a month. Unexpectedly, one of them, an application that allowed mobile phone users to send QQ messages to computers, proved hugely popular. Almost by chance, Tencent had stumbled over its business model: selling value-adding extras to users of a product given away for nothing.
By 2004, Tencent was doing well enough to list on the HKSE. The company used some of the $200M it raised to launch a handful of online games. Distributed for free via its QQ user base, the games were a hit — and they revealed a whole new market for virtual goods, far greater than the market for its QQ add-on services. Through the remainder of the decade, Tencent devoted itself to becoming the main force in Chinese online games, buying up popular games from around the world, adapting them for the Chinese market, then cashing in on sales of virtual extras.
To bypass rules banning foreign investment in China’s Internet, every one of China’s Internet companies which has listed overseas has done so through a legal structure known as a variable-interest entity. These are companies, registered in offshore financial centers such as the Cayman Islands, with contracts to receive the profits of the Chinese companies, not ownership of their actual China-based assets.
So far, despite existing in a regulatory gray area, these vehicles have withstood legal scrutiny. That could change, especially if the government decided it wanted to exercise greater control over a sector that has long had the habit of operating in areas beyond official oversight.
The challenge China’s business environment poses for its entrepreneurs is how to organize their companies to cope with this environment — to have the vision to see opportunities, the capabilities to seize and develop them, the toughness and resources to see off competition, and the political skills to stay onside with officials.
The authors agreed with this outlook and dismissed the kind of advances seen at companies such as Alibaba and Baidu as “second-generation” innovation — adaptations of existing technologies for the Chinese market, and the kind of routine work companies around the world do day in and day out once someone else has done the blue-sky thinking.
It has turned subway station into virtual stores where people shop with their smartphones by snapping bar codes that appear alongside pictures of products. It is automatically tracking prices for several million goods across 72 competitors’ Web sites. It has installed innovative cross-company inventory-tracking systems with its partners. It has streamlined pallet handling at distribution centers.
The growth in China requires companies to change, not as a reaction to one particular problem, but as an across-the-board need to cope with multiple challenges simultaneously:
- Continuously updating its products.
- Controlling costs.
- Managing talent shortages.
- Coping with wage pressures.
- Overcoming infrastructure shortcomings.
Innovation, in this case, means process and practice innovation as well as product and service innovation. 20 years ago, it was rare to find an ethic of continuous improvement in Chinese companies. Now it is pervasive. Indeed, it has become a prerequisite for business expansion — either into new industries and service categories or outside China to the world at large.
But a government rule saying that all provinces had to buy equipment from at least 2 suppliers opened the door for Huawei to become the 2nd provider in poorer, inland regions. Orders were small at first, which allowed Huawei’s engineers to gain experience at both installing equipment and seeing how what they made measured up against the systems from the international suppliers.
This move catapulted China up the list of national R&D spenders. While the US remains by far the world’s largest investor in R&D, accounting for about one-third of the global total, China has risen to 2nd place, with its total — now well past $200B annually — accounting for nearly 15% of the world total, and more than 4 times bigger than its spending in the early 2000s.
The quality of China’s traded goods is rising rapidly. In 2009, low-value goods such as toys and plastic products accounted for 40% of China’s exports. Now they account for less than one-third, largely due to increasing overseas sales of industrial machinery, automotive components, and other higher-value goods.
One turning point was the 2008 global financial crisis and subsequent recession, when, with many Western companies struggling to survive, Chinese businesses found themselves able to buy businesses at a fraction of the price they would have to pay a few years earlier.
From its dual headquarters in Beijing and North Carolina, it runs manufacturing and R&D operations in 60 countries, and sells its products in 160.
Lenovo did not make itself the world biggest PC maker by copying American competitors. Instead, it applied beyond China’s borders the practices it developed for China, while, at the same time, consciously redesigning itself to be an international business.
Despite talk of growing the company at twice the industry rate, profits failed to materialize as revenue growth remained sluggish, rising a total of just 25% over the next 4 years. Lenovo fell from being the world’s 3rd biggest PC maker to being a distant 4th.
Thanks to its control over China’s main macroeconomic levers, the government retains the power to act whenever necessary. It can support exporters by manipulating the value of the yuan; through its capital controls, it can prevent money entering or leaving the country in destabilizing volumes; and, if necessary, it can stimulate short-term growth by making funding freely available through the state-owned banking system. Beyond this, it willingly allows private companies a largely free hand.
The burgeoning popularity of online entertainment places Youku and its rivals under close government scrutiny. Official media reports have suggested that some 2M “public opinion analysts,” divided between the Communist Party’s propaganda department, state-owned news Web sites, and other companies, monitor content and posts to make sure no sensitive material appears, or if it does, that it is taken down as soon as possible.
Every day, the government’s propaganda department issues instructions to companies telling them how to handle sensitive topics, for example, by only using reports from government news organs.
While state companies can perform well at such fundamental tasks as building basic infrastructure, they are far weaker when it comes to undertaking the “creative destruction” that an innovative economy requires. This involves the ceaseless testing of new products and processes conducted via a relentless churn of businesses, most of which fail. It also involves the relentless competition for consumer attention, which will inevitably be drawn by those businesses that offer access to information or services that state-owned companies do not provide.
China’s entrepreneurs may be changing China, but they are not the people who are running the country. They know this, and will not overstep their position. Wang Jianlin, the CEO of Dalian Wanda and one of China’s richest individuals, has put it succinctly: “Be close to government, but far from politics.”
Like many Chinese entrepreneurs who started out in the early years of China’s reform era, he began with little knowledge of business: “I was a farmer with no culture. I didn’t even graduate from elementary school. I had no understanding of management; I couldn’t read financial statements.”
These businesses have not based their success on just producing cheaper version of international products — though that has been an important tactic for almost all of them — but on committing to improve their products and their processes continuously. They use Chinese strengths and bring in Western expertise to refine their operations.
First, advantage can only be temporary. For companies to succeed, they must continuously generate new sources of advantage. Change, rather than being viewed as a threat to their existing business, should instead be treated as the key source of new opportunities for growth.
Second, as a result of advantage being temporary, strategy will have to be diverse and emergent, and defy simple generalization. Companies must always consider a broad array of options, with resulting actions likely to involve a diverse collection of loosely linked moves whose overall direction is at best only semi-coherent. Goals and plans will always be shifting in accordance with the opportunities and constraints of the business environment.
Haier has constantly found new niches for its products by adding features — making washing machines that could rinse vegetables, aimed at rural markets, or shrinking its fridges to make them appeal to students living in cramped accommodations.
But when it came to selling into China’s markets, many struggled. Despite their global experience, financial strength, and technological advantages, many were surprised when strategies tested and tried in other parts of the world failed in China. Some were ambushed by local firms. Others were justifiably upset when their partners took their technology and started separate businesses of their own, making a similar or in some cases identical product. Many struggled to cope with infrastructure shortcomings, talent shortages, fickle customers, and lower-priced local alternatives to their products.
They haven’t become rich yet, and maybe they never will. According to Wong, China now has more than 30K cosmetic brands selling their goods through thousands of e-commerce outlets that crowd the Chinese internet.
Failure is frequent for private companies in China, which are exposed to its hyper-competitive business environment. Some entrepreneurs, chiefly those from the generation who launched their businesses in the early 1990s, achieve rapid success that fades away even more quickly than it arrived.
They feel they can never rest, because there are always going to be new competitors, or new technologies, that threaten their secure position.
Surveys have repeatedly found that the country’s people are among the happiest in the world with their current economic situation and with their prospects for the future. The real threat to China’s future is not collapse, but that its ruler will fail to manage their country’s development.
Chinese private firms have all the flexibility and entrepreneurial hunger required to compete in consumer and other markets. But they are also focused on growth rather than quality. China’s entrepreneurs are different from those of other countries. They recognize that they operate in a murky environment where rules have not been established, and that they have a responsibility to establish rules as they go along. This lack of rules forces them to be creative — not just always looking to build the next factory, store, or hotel, but to jump into new areas. As a result, internal corporate infrastructure can be very fragile.
The CCP has reorganized itself since its near-death experience in June 1989 as a body that is capable of change and evolution. Studying how organizations, especially ruling parties, have survived a long time has been a major preoccupation of the Chinese leadership in recent years.
First, financial reforms that liberalize interest rates and compel banks to lend to those businesses which can best use the money rather than those with the best connections. Second, the continuing deregulation of restricted industries, allowing private businesses into sectors such as telecom services. And third, strengthening the legal system and making its operation more transparent so entrepreneurs can trust that their companies will be allowed to operate without official harassment and that their ownership rights are secure — in their businesses, in the IP they generate, and in any wealth they make.