"Are Companies Doing Enough to Brace for China's Onslaught"
By Brooke Tuttle, President of LHP Technologies
China has suddenly become the second most important growth economy in the world. On issue after issue, China's ability to innovate and change rapidly is without precedent.
In the past 30 years, 400 million Chinese citizens have been lifted out of poverty. This is about 75 percent of the world's poverty improvement over the last 100 years.
In the past 20 years, China has achieved the same progress in industrialization, urbanization and social transformation that took Europe 200 years.
Last year, China contributed more to global growth than the United States and became the world's largest consumer in several of the basic food, energy and industrial commodities.
Do we truly understand how quickly China is transforming itself and the competitive implications of this?
Two recent global surveys of CEOs by a global consulting company, McKinsey & Company, reveal an uncomfortable dichotomy.
The first reveals that executives from around the world expect competition from Chinese companies to increase, primarily because of their low production costs. Yet few are acting to meet this threat.
The second survey of China-based CEOs based in China reveals their ambitions for entering new markets around the world and expresses concerns about finding the talent to manage these ambitions.
Higher wages, driving up Chinese production costs, may mean that the Chinese are beginning to lose their biggest competitive weapon. However, the McKinsey survey indicates that global executives still see low-cost production is still China's primary competitive weapon and they expect little change by Chinese companies in moving up the value chain in order to compete on a broader scale.
These same executives also felt that subsidies from the Chinese government and lack of intellectual property rights regulation were also competitive advantages. The latter two issues have long troubled executives doing business in China and remain significant issues.
These same executives also view Chinese competition as having little to offer global markets and dismiss Chinese product quality, marketing skills and brand strength.
Few companies have changed their organizational structure, marketing focus and global strategies to deal with competition from China. This lackluster reaction to any potential competition from China raises questions of whether business executives outside China are setting themselves up for some unhappy surprises.
While global competition outside China appears to be letting its guard down, Chinese companies are gearing up their efforts to move outside China. Almost three out of five Chinese executives said their long-term goal was to become a global competitor.
The Chinese understand that low production costs only go so far and that moving up the value chain is more important than ever in order to compete globally. In my recent travels to China meeting with Chinese companies, I heard time and again company executives say, "We are no longer interested in 'copycat' production. We must innovate and improve productivity."
About 60% said they are currently active outside China. Their reasons are increased domestic competition, personal ambitions of company leaders, global moves of domestic competitors and encouragement from the Chinese government.
The biggest obstacle for them is the lack of managerial talent - well ahead of insufficient capital. In my visits to the top university MBA programs in China, there is little doubt in my mind that China will solve this problem the way it is solving other problems - quickly and effectively.
What does all this mean? Every U.S. company competing in the global economy must recognize the reality of China's transformation and reorder their organization, marketing focus and global strategies.
A more competitive and flatter world will soon open new market opportunities. And, at the same time, the reality of this transformation will be the sudden and "unexpected" appearance of new global competitors appearing in their own backyard markets.
For state governments, local economic development organizations and universities, it means taking the same hard look at their organization, global strategy and marketing efforts and to capitalize on these new opportunities to determine how best to partner with and engage, for mutual benefit, China's rising new economy.
This dichotomy in understanding China is reminiscent of the lack of understanding of Japan's global manufacturing and marketing potential in the '60s and '70s. The United States and the rest of the world were caught off-guard at the sudden invasion of Japanese companies and their ability to compete globally.
As China moves up the value chain (and they will), that country's gap between rich and poor will grow. This is a huge concern to the Chinese leaders. Political reform is part of the solution.
China needs a more open, accountable, responsive and transparent form of government. That reform is being debated - much the way the economic rise in Japan was debated in the '50s and '60s. Comparisons to the economic rise of Japan to a global power 50 years ago and the economic rise of China today are a stretch and complex. But in the broadest context, it is, as Yogi Berra said, "déjà; vu all over again."
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