What Business Leaders Need to Know About China Now – Harvard Business Review

ALISON BEARD: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Alison Beard.

Several years ago some scholars in international relations made a big prediction: the 21st century would be the Chinese century. Just as the British dominated the 18th and 19th centuries, and the United States the 20th, China would lead the world geo-economics and geopolitics for the next 100 years.

Now, some experts disagree, but there’s no doubt in China’s rise and the need for organizations around the world to better understand the country. It’s not just a growing source of both supply, demand, and competition. It’s also an emerging superpower. And yet, according to today’s guests, most Westerners still don’t really get China. They approach with their own assumptions and biases about the connection between political and economic systems and the role that the state can and should play in business.

Rana Mitter is a professor at Oxford who studies the history and politics of modern China, and Elsbeth Johnson is a senior lecturer at MIT Sloan school of management and founder of the consulting firms SystemShift. Together they wrote the HBR article “What the West Gets Wrong About China.” Rana, Elsbeth thanks so much for coming on the show.

ELSBETH JOHNSON: Oh, you’re welcome. Nice to be here.

RANA MITTER: Nice to be here, Alison, thank you.

ALISON BEARD: So Rana, as I said, your focus is on the history and politics of China. Why does that perspective matter so much for business people trying to do business there?

RANA MITTER: The simple reason, Alison is that I think that of all the major societies around the world, particularly ones with which we in the Western world do business, China probably thinks about its own history when it makes decisions about its present and future more than any other comparable society. Perhaps more than Japan, more than Southeast Asian countries, more than South American countries. And that’s particularly true because in some ways China’s history has been more variable, more unpredictable, more traumatic than that of any other major economy as well.

So if we think of China today as the, not just the major superpower with the skyscrapers and the high speed trains and the burgeoning economy, but also as the inheritor of something that every school child in China knows about the repeated invasions from outside in the 19th and 20th centuries, huge numbers of natural disasters, floods, and famines, and so forth. And also a real sense that the outside world is a threat as well as an opportunity. All of these aspects of China’s longer history go to shape the way that it thinks about how it engages with the world today. And that certainly encompasses the world of business.

ALISON BEARD: And Elsbeth you come into this from the business side. What are we getting wrong about the way companies operate there?

ELSBETH JOHNSON: I think your question is actually predicated on part of that misunderstanding, which is, in China business and politics are not actually as separate as we very often think of them as being in the West. So as we say in the article, one of the things that I think is very different in China is that not only is it a communist state, but it’s also a Marxist London estate. And I think the relevance of that for people trying to do business in or to invest in China, is that the Chinese state is not just interested in economic growth, although that matters. They’re also interested in controlling their own future.

And I think for me, the big contrast is with how Eastern Europe and Russia opened up in the late … well the mid and late 90s. I was a banker at the time in London doing quite a lot of work in privatizations, in the opening up of those economies. And really the burgeoning use of private capital was almost taken as a natural maturing of these economies. It’s very different in China. In China, when you go in to either trade with China or to invest in China, because as you say, it’s a huge prize, this giant market. You have to accept that the Chinese government will have not just an initial role, but an ongoing role as co-investor, as owner of IP, as a regulator, and they take that role very seriously.

And I think the critical difference with, as I say the contrast with this Europe is, that’s not a temporary situation. This is the state that they want to have on an ongoing basis. And so, as I say, the need for them to have a role and a place at the table, whether as owner of IP, or as an investor, that’s not going to go away. And I think for me, that’s the big difference that’s very often missed by businesses seeking to invest in China.

ALISON BEARD: So one of our big and faulty assumptions is that economic growth and freedom will lead to political freedom, but that’s not the case. Isn’t that worrisome though?

RANA MITTER: I would say that overall, the major assumption that people make, that the liberal society is a norm is one that actually has been questioned quite a lot in the wider world in recent years. We’ve seen both the chipping away or some of what we assumed were kind of freedoms and normal democratic practice, in a lot of countries around the world – India, the Philippines, Turkey might be examples of that.

But more than that, we’ve seen that actually in China itself, there is this huge growth in their own self-confidence. So the idea that actually you have a system in which when business people are doing what they’re doing, they’re not doing it with the idea that they’re going to be independent courts to arbitrate things. They’re not doing it with the idea that by lobbying politicians, you’ll be able to get, one party to do this or another party to do that.

Instead, they’re very upfront about saying, we have this system, it’s not liberal, it’s not democratic in the sense that you understand it in the West, although they actually speak of it themselves as being democratic. It has lots of elements that actually will be very worrying to liberals. There’s an institution called the Central Discipline Inspection Commission, which is basically an anti-corruption organization. It has the power to arrest and hold people for months on end, without any kind of recourse to the courts.

As a liberal myself, I find this absolutely terrifying, so I have no hesitation in saying that. But the fact is, that this is the way in which the Chinese Communist party state has put together the way that it thinks that the polity and the society should be.

And the argument that it uses is the following, just because we are a communist society, people make the mistake of thinking, that means we shouldn’t be a prosperous society, and we have disproved that particular assumption by making ourselves at last count, the second biggest economy in the world, bringing ourselves to a level of average income, about $10,000 US per capita GDP, and the aim to excel in all sorts of areas from nanotechnology to quantum computing, to space technology, to artificial intelligence.

Now my own personal belief is that nonetheless, there are all sorts of areas in which actually Chinese society can. And if I’m taking a personal view should be more liberal than it is. But the point here is not what I think, the point is the way that the Chinese communist party is able to portray its system as being one that it would say the vast majority of its people find effective and acceptable. Not because it is a democratically free in the way that we would be in the West, but because it provides both an economic benefit to them, but also a form of politics, which stresses ideas of confidence, nationalism, and identity in a way that as far as we can tell from opinion polls surveys and they do exist in China, gets pretty good responses from the wider population.

ALISON BEARD: So this prosperity and confidence is leading an increasingly educated and wealthy population to accept a level of state control that to Western eyes would seem quite intense?

RANA MITTER: And not just accept, but actually in some ways welcome it. Chinese middle class citizens let’s talk about, say the people who are creating one of the fastest growing consumer societies in the world, they’re starting from a very different place. Their grandparents and their parents lived through the horrors of the culture revolution of the 1960s. Now you might point out and I have pointed out that the cultural revolution was of course caused by the Chinese Communist party of the time and the shape of Chairman Mao and his desire to overthrow society.

But nonetheless, for many middle class Chinese today, particularly living in the cities, they would suggest that because lifestyles have improved so much in the past 20, 30 years, what they’ve gained from that improvement is basically a government and a society that they’re quite pleased with. But they say that there is one particular problem, that’s a problem to do with trust.

China is overall a pretty low trust society. One of the things that we talk about in the article is the way that many of the assumptions that you might get in a high-trust society somewhere like Norway, which is relatively small, relatively homogeneous, where people will tend to take each other on trust, that doesn’t exist in a society like China, which has a huge population, huge geographical variation, and a very violent and variable politics over more than 50 or 60 years, in which people don’t know whether they might be turned in by their neighbor after some kind of political problem has gone wrong.

So in that context, many of the things like using artificial intelligence for surveillance, the huge gathering by the state of massive amounts on data, on everything from people’s finances to indeed their political positions. For many ordinary Chinese today, these are seen as a way of ironic, though, it may seem to us of building trust or building a society in which the party is keeping an eye on you. And this is a way in which the society is actually made to hang together.

ALISON BEARD: So Elsbeth, let me ask you, does a belief that the government is strong and competent and helpful, not just authoritarian or oppressive, does that actually give Chinese companies and workers a competitive edge over Western companies?

ELSBETH JOHNSON: I’m not sure that it’s that that gives Chinese companies a competitive edge. Certainly when I look at Chinese companies and Chinese workers and their attitude towards work, I think that they work very hard. Their readiness to work hard is I think something that certain companies in the West haven’t forgotten that too many have.

I think the other thing that in my view definitely gives Chinese companies a genuine competitive advantage. And I think this would be certainly true in high tech, in CapEx intensive sectors, is the Chinese government’s willingness to act as a guarantor, an investor, a creator of markets.

Now of course, at certain times in the West, particularly in the United States, the government has played exactly that role. Silicon Valley wouldn’t exist without the Department of Defense, the intelligence community’s significant investment in high-tech industries that essentially … essentially Silicon Valley was a public private partnership.

China has no pretense around the legitimacy of government, it is legitimate, and therefore they do so openly. And so when I look at the speed with which China has not just entered, but come to lead certain of the high-tech sectors, particularly around AI, telecommunications, space technology, that just wouldn’t be possible without the unapologetic level of investment from government. And so I do think it helps to create and grow at stellar speed those sectors. And I think that is something that the West could really start paying attention to because otherwise, as I say, the capital intensive industries of tomorrow are going to be set up to succeed in China in a way that liberal more or less safer, more market-driven economies. They’re going to lag behind, because it’s just the nature of the capital required.

ALISON BEARD: Moving on from market creation, how does this long-term communist rule impact the way existing businesses are run and how consumers interact with them?

RANA MITTER: I think that China, has transformed its ecology for consumers faster and perhaps more completely than any major economy anywhere in the world. So if we think about the way in which essentially what we’re just mentioning that kind of combination of private and public provision in the wider market, bearing in mind that China has this huge market of by definition 1.3 billion people. It has actually been able to innovate in a whole variety of really important ways from a consumer’s point of view.

The one that comes to mind most obviously is the level of cashless payment in China, which comparatively speaking is so much higher than it is in most other Western societies. That has also created a whole variety of other things that come along with it. This is a society in which basically consumer spending has these pre pandemic really kept rising and rising year by year, creating a phenomenon such as well, in the Chinese context, the famous Alibaba Singles Day. Which is I think the single biggest consumer spending event anywhere in the world, putting both obviously a lot of money into Alibaba’s pocket, but also creating huge amounts of new data for the state to scoop up for that kind of surveillance technology that I’ve been mentioning. That combination of the civilian consumer economy and the wider state surveillance systems working together very, very powerfully in a way that as I say, in a liberal society, wouldn’t really be acceptable. As well as not just creating new markets, but also of course, taking advantage of the fact that as Chinese people become richer year by year, and also of course, as China becomes more urbanized, China is urbanizing faster again than any other society, on the face of the earth.

All of these factors come together and create really a very new type of consumer. And I think cracking that Chinese consumer market, understanding a lot of people who in some senses are consuming and buying certain sorts of things, because they’re both confident about where they are now, but also concerned about the future in a country, which has a very, very minimal welfare system, quite minimal healthcare system, for those who can’t afford it and need to provide for the future. These are real opportunities. But my sense is that so far, they’re not being fully embraced by Western world, which hasn’t fully turned its attention to how China’s consumer economy is changing. s

ALISON BEARD: Elsbeth, how should international companies trying to operate in China either work with Chinese counterparts or the government, or tap into that huge market that Rana is talking about, how should they change the way they’re approaching things?

ELSBETH JOHNSON: Well, I think there’s two really interesting questions there, Alison. I think the first is when it comes to working in China or investing in China, I think my first advice was just be, you’ve got to be pragmatic and realistic. The idea that I have certainly seen some organizations take, particularly in pharma and tech sectors, is that, if we’re just a good partner, if we help the Chinese JV be more successful or make more money, they will ease up on us and they will stop insisting on IP transfer. I think that’s a naive hope. So for me, things like IP transfer are almost the table stakes that the cost of doing business with a Chinese partner or in a part of the Chinese ecosystem. So I think that’s the first part of the answer.

The second part of the question, I think relates to this giant consumer economy. And here, I think the thing that if you really want to actually make money in the Chinese consumer economy, and by the way not everybody does. I think part of it is to understand that with that huge size, it is a giant market, you kind of have to think of it as a portfolio of many customer segments. Now an awful lot of organizations in the West are weaker than I think they could be, aren’t really understanding customer need translating that into products and services and offers and tailoring them in a way that generates user or customer experience for which users or customers will pay for.

So I think companies in the West can get better at that anyway. But the way to make money in China is you really have to be good at understanding what is the nature of this particular customer segment, because a lot of customer segments in China, whether by demographics or by user profile are essentially the size of a country for the rest of the kind of Western mentality.

And to the need to really understand what is it that this particular customer segment, as I say that might be the size of a small country in the West. What is it that this customer segment actually wants? What is it the user experience it really wants? And therefore what’s the price point at which you should enter the market? I think in China, it’s a pretty unforgiving market for organizations who aren’t really good at that. And I think that’s where we see Western brands who actually are good at that.

And I’m thinking of Apple, I think is a very, very good example that really does understand the user experience and what customers are prepared to pay for and the relationship between brand and price point. So Apple has done very well in the Chinese market, whereas organizations or companies rather that are simply selling the same thing as they sell in their home market, without a more sophisticated understanding of the Chinese customer segment, I think that they will have a harder time. Not necessarily gaining market share because of course you can do that at a certain price, but certainly making money in the Chinese market.

ALISON BEARD: Yeah. So I’d love to hear more about that reverse phenomenon of Chinese companies becoming dominant world players. How is that playing out?

ELSBETH JOHNSON: Well, I think one of the things that’s interesting about as you say the kind of reverse phenomenon of Chinese exports rather than the Western going to China. Is that just as I would argue, Western companies trying to make money in China need to be very disciplined about what’s their offer to what specific customer segment at what price point, arguably, in some ways it’s the same for Chinese companies coming out to dominate a Western market.

And I think in some ways, TikTok is almost the kind of anti-case study of Huawei. So TikTok, very much a company of the moment, huge growth on the back of virtual working life for many people. I know a lot of people, certainly in the UK true, and also in the U.S. who didn’t realize what its origin was. A lot of them actually believed it was a U.S. company. In other words, it didn’t have a, if you like a kind of negative connotation because it was Chinese.

As opposed to Huawei, which I’m sure you’re familiar with has been essentially banned and is now being extricated from the 5G network in the United Kingdom deemed by a lot of countries, including places like Australia as a security threat.

So for me, this to some extent is an example of China as an umbrella brand in the sense that whilst in the West, I think we think of brand as existing, purely at a corporate level. We think of Louis Vuitton, we think of Apple rather than at a country level. I think when Chinese companies try to export particularly services or infrastructure to the West, they’re not only bringing a Huawei brand or a TikTok brand, but also bringing brand China. And as we have seen in Huawei’s case that has had a negative impact on the market share that it’s able to build internationally. And in the case of TikTok, was kind of fine until people found out that it was Chinese, in which case, as I’m sure you recall particularly under the Trump administration, certain politicians seeking to ban the use of TikTok, by government officials, because it was deemed as a security threat.

So I think in many ways, the issue for Chinese exports is that they’re having to deal with the potential negative impact of being Chinese companies, at least in certain parts of the world and in certain sectors.

RANA MITTER: One of the areas that again, tends to be under examined, but I think is going to be immensely important in the next decade to decade and a half is the way in which that brand China as you put it, is going to be, I think, much more viable in emerging markets. So I’ve mentioned a couple, but just to take off the top of my head, if you look at a market like Ethiopia, which I think last time I checked was drawing about sort of 11%, at least pre pandemic 11% GDP, year-on-year. Argentina, which actually is not doing well economically is currently looking for saviors to come in and try and reboot the economy, or even some of the actors in places like Southern Europe, part of the European Union, but all the same, like Italy and Greece, which are also looking for ways to kind of kickstart their economies again.

In these places, actually the ability of brands like Huawei to make an impact has been much greater than it has in the developed Northern European and north American economies. So, the space for while we’re in the UK, Germany, US, I suspect is very small if it exists at all these days. But in somewhere like Argentina where the economy has got so bad that the internet has basically been taken into public ownership, a new 5G provider actually is going to get a serious hearing.

And the point of course, of all this is that 5G, unlike a lot of other products is something that brings a lot of past dependency with it. Once it’s installed, it’s expensive. It’s very hard to root out again, as the UK is currently finding in taking its Huawei equipment out of its system. And that provides a really important pathway for China, essentially, probably as a loss leader heavily subsidizing, dumping some might say it’s technology in some of these emerging markets, but then creating the capacity to draw on that for years and maybe even decades to come. That’s a lot of where the value is going to be from China’s point of view.

ALISON BEARD: So apart from reading your article and listening to this podcast, what should people do?

ELSBETH JOHNSON: Well, for me it would be go to China and spend more time there meeting kind of peers in China. There is no – I spent 7 years living and working in Asia. And some of it working in mainland China. And there is no alternative almost to – if you want to really understand a market or a place, you have to go and be there, live there, eat there, gossip there, I mean that’s how you get to understand somewhere.

RANA MITTER: You know, as a historian I would say that understanding any country’s history is something that gives you an insight into who that people are today and what they’re going to be. And the final thing I’d suggest is watch some Chinese TV. And in case you’re wondering whether language or access is a problem, if you go on YouTube you can find plenty of Chinese soap operas, dramas, comedies, all of them with perfect English subtitles, you don’t need to speak a word of Chinese.

If you want to start with a war time thriller, I recommend Autumn Cicada. Which is in a staggering 49 episodes. It’s a kind of spy thriller set in the 1940s, it was a big hit in China a couple of years ago. Wanted to make that a starting point to find out a bit more about what Chinese people do when they go home in the evening, after work, you know, put the food in the microwave or wherever it is and settle down for a bit of TV watching. And get into that mindset.

ALISON BEARD: That sounds fun and perfect for our continued COVID existence. Well, you all have certainly enhanced my understanding of China today. So thank you very much for being here.

RANA MITTER: Allison, thanks very much for having us on.

ELSBETH JOHNSON: You’re very welcome.

ALISON BEARD: That’s Rana Mitter, professor at Oxford and Elsbeth Johnson is a senior lecturer at MIT Sloan School of Management and founder of the consulting firms SystemShift together. They wrote the HBR article “What the West Gets Wrong About China”. You can find it in the May-June issue of Harvard Business Review or at hbr.org.

This episode was produced by Mary Dooe, we get technical help from Rob Eckhardt, Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast, I’m Alison Beard.