Whereto, China?

7/11/11

I recently had the pleasure of taking a two week academic trip to China with Babson’s MBA program, where several dozen of my classmates and I were led through Beijing, Dalian, and Shanghai by the inimitable Robert Eng. During the course of the journey, our group visited with government officials, leaders from state-owned enterprises, and a number of businesses operated by domestic and foreign owners. While there are many interesting and non-trivial idiosyncrasies of doing business in China, such as the need for government contacts, I thought it would be more informative to share some of the broader business trends that became clear during the course of our visit.

First, China is beginning to capture more of the value chain. As the world’s third largest manufacturer, China has developed a solid reputation as a nation that builds products for Western companies to attach their brands. Apple is one of the most famous examples of this. Perhaps more surprisingly, Nike and Reebok both have their shoes manufactured in the same facility. Li Ning, China’s leading sports apparel maker and the number four sports apparel company in the world, also has its shoes made there. If you’ve heard of Li Ning, you’re ahead of the curve. If not, you probably will soon. Li Ning has begun opening stores in the United States and other countries overseas. In the U.S., it decided to launch its pilot store in Portland, OR, which seems like an odd choice until you realize that it’s right in Nike’s backyard. It’s a bold statement from a bold company and serves an appropriate example for the changing mentality of Chinese business; no longer content with the margins available to them making things for others to sell, the Chinese are now looking for ways to move up the value chain and capture the margins commanded by being a globally recognized brand.

Second, China is starting to look inward for markets. While the rest of the world is still staggering from financial crisis to financial crisis, China’s chugging along at a brisk 9 percent annual growth rate. Shanghai has joined the list of top tier metropolises, on par with London and Moscow, complete with a Starbucks and a McDonald’s around every corner. Shopping malls are awash in luxury brands. With that kind of affluence at home comes increased spending power, and Chinese companies are beginning to recognize the potential of the domestic market. (By Chinese companies, I also mean the Chinese government. State-owned enterprises still command roughly half of the country’s industrial assets, and the government has tentacles in just about every successful business in the country, private ownership or no.) As evidence of this, the 12th Five Year Plan explicitly discusses the yawning trade imbalance that China has created with the U.S. and other nations, and proposes to address this dependence on foreign consumption by directing more goods to the domestic market. It’s uncertain what the government will do about Chinese households’ astronomical savings rate.

Third, national stability is not a guarantee. Incidents of social unrest have been growing more frequent in the past couple years. Chaffed by a widening wealth disparity and the trampling approach to development, Chinese citizens are expressing their dissatisfaction in a way that makes government officials and many members of the business community nervous. Restrictions on freedom of speech and the flow of capital have done a great deal to boost the Communist Party agenda of security and growth, but they’ve also created an economic and social pressure cooker. The 12th Five Year Plan seeks to address these concerns by explaining how the government plans to handle rising inflation and housing costs (regulatory controls), the income gap (higher taxes for the rich), and the blistering pace of development (cleaner environmental standards and lower growth targets). Perhaps more revealing, social stability was a concern voiced by several businessmen we visited during the trip. One Chinese business leader who spoke to our delegation put it especially elegantly: “China will continue to grow as long as the Communist Party is in power. The Communist Party will stay in power as long as China continues to grow.”

The state of Chinese development offers an interesting puzzle: free market incentives bounded by strict financial and political controls. The tremendous opportunities of doing business there are matched by equally tremendous challenges. From this point in history, it almost seems possible that Communist China will continue growing in perpetuity, achieving global dominance in our lifetimes. Or the entire system could collapse spectacularly, and we will ask each other why we didn’t see it coming. 

Ryan W. Cohen is an MBA candidate and graduate fellow at Babson College, where he studies information markets and digital strategy. Follow @

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