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Five Windows on Where China is Headed Next

 

Alibaba Headquarters

On a lecture tour in China last month, I spotted plenty of Bentleys, Audi’s, BMWs and Maseratis –- even a Tesla or two. But I never saw a single person laugh out loud for joy. On the busy streets of Beijing, Guangzhou, Shenzhen and Hong Kong, I saw no homeless people, no graffiti or potholes, but few smiles. In conversations with managers, academics, and grad students at two of China’s leading universities, I began to sense that this heads down, industrious, smartphone-obsessed nation of 1.4 billion people is in a state of rapid transition.

As readers of this newsletter know, I research and speak on the best practices of the world’s most innovative companies. China, it turns out, has a growing number of them. And thanks to my hosts, professor Jin Chen of Tsinghua University in Beijing, and Dr. Baohua Song (who was kind enough to guide me around throughout the trip), I was able to visit some of these companies, and interview their people. Here are five windows on where China may be headed next:

1. Despite recent setbacks, China is not on the brink of collapse. Much publicized has been the slowdown in China’s GDP growth (from 10 percent to around six percent). So has the ballooning debt burden of some Chinese companies, especially ones in commodities industries and real estate, which are suffering from overcapacity and falling profits. Add to this the reports of polluted ground water and toxic air (which the World Health Organization estimates that 97 percent of Chinese breathe). Combine this with a still-growing government crackdown on journalists and publications and a disappeared Hong Kong bookseller, tack on the pullout of Google and the banning of Facebook, and the censorship of a growing list of foreign publications, and you have a less open, more controlled environment that stifles information flow, cultural exchange, and may be responsible for the lack of smiles I witnessed. Mix in a less-welcoming business environment for foreign firms doing business in China. And don’t forget those video images of China’s “ghost cities,” row upon row of vacant buildings, the result of government over-investment and corruption. Then, last year, when China’s stock market plunged 30 percent, what I’ve come to call the “brink of collapse” narrative really took off. China’s wealthy were seen buying up “safe haven” properties in New York and San Francisco.  Surveys showed high intention of wealthy Chinese to leave the country. Morgan Stanley’s chief global strategist may have put a coda to the “collapse” narrative when he warned: “China is a threat to the United States not because it is strong, but because it is fragile.” The only problem with this narrative: none of these destabilizing forces appear to have slowed up China’s relentless march forward. My takeaway is that China is in transition from one phase of its ascent to the next, and it is not without tumult.

2. China’s is shifting from one economy to the next. In the 10 days I was in country, the government announced an array of measures designed to fuel China’s future. One of them was a trillion-dollar infrastructure project called Belt and Rail. This project, when complete, will link China by high-speed rail to trading partners and travelers in Eastern Europe and Asia, and beyond. Belt and Rail received press attention, but it was one of dozens of innovation infrastructure initiatives that filled the pages of China’s English language newspapers. Among them: incentives for China’s state run enterprises (about a third of the economy) to embrace innovation; an announcement that China has built the world’s most powerful supercomputer; a report on the coming boom in “service robots” to help serve China’s aging population; a huge innovation conference in Western China; China’s own Davos conference and this year’s theme of “the fourth industrial revolution.” The launch of yet another Chinese rocket called The Long March. A report on governmental investment in biotechnology, 3D printing, drones, solar. After a while, you start to wonder: if they keep announcing all these initiatives, where will China be in ten years? Clearly, the country is moving away from cheap manufacturing to higher end, highly automated manufacturing; from being an export led economy to a service economy; and from a rural and developing country to a developed and urban country – all at dizzying speed.

3. China’s price advantage is disappearing, roiling manufacturing. In 2002, China’s labor costs were just 60 cents an hour, according to the Conference Board. Since then, they’ve increased to $14.60 an hour on China’s coast, compared with $22.68 an hour in the US, according to Boston Consulting Group. Adding energy costs, China is now a more expensive place to manufacture than Indonesia, Thailand, Mexico, or India, and low-end manufacturing is transitioning out of China at a fast clip. Amazingly, BCG projects that U.S. manufacturing costs will be below China’s by 2018. Other trends working against China’s competitiveness, is the movement toward mass customization of products, on demand 3D printing, and the desire of sellers in the West to respond more nimbly to rapidly changing consumer tastes. Churning out vast stockpiles of apparel and other uniform goods to be shipped in giant containers will no doubt continue, and Apple has no plans to start making I-Phones stateside. China’s leaders appear to realize that low cost manufacturing is not the future. As a result, Chinese companies are on a spending spree, buying up whole companies in the West, and dominating whole industries like solar. Governments in Europe are said to be worried that too much technology is falling into foreign hands. Some of China’s manufacturers are even starting to build plants in the United States. Haier, the giant Chinese appliance maker not only built a plant in South Carolina, but just purchased GE’s Appliance Division, making it the world’s largest.

4. China’s startups are moving beyond copying to create unique business models. The common perception in the West about China’s companies is that all they do is copy. That they are incapable of true innovation. To be sure, there are plenty of examples to support this notion. Baidu is a replica of Google. Tencent is a knockoff of Yahoo. JD a version of Amazon. Didi Chuxing is a copy of Uber. And while Chinese companies are in fact great copiers (and expropriators of other’s technology and ideas), a new generation of startups in China is going beyond mere mimicry. These Little Dragons, as they are called, don’t just copy – they adapt, localize, improvise and combine until there is uniqueness. One example of this is Xiaomi, the mobile phone and internet company which professor Chin and I visited in the suburbs of Beijing. Founded in 2010 by serial entrepreneur Lei Jun, Xiaomi sells its sleek handsets (which look suspiciously like iPhones) at cost, thereby expanding the market to consumers who’ve never had a smartphone, never been connected to the internet. It farms out manufacturing to Foxconn, again, copying the Apple playbook. But Xiaomi’s business model is what’s not a copy. Rather it is an amalgamation of ideas that ultimately seem original, and customer centered. Xiaomi makes money by selling accessories like headphones, IoT enabled rice cookers, air purifiers, step tracking wristbands and a growing number of other products to its subscribers, who can also shop at its brick and mortar retail stores, which are direct copies of Apple. Another way the provider differentiates is by constantly interacting with its loyal minions through weekly software upgrades, and crowdsourcing constantly with customers online. Xiaomi becomes a part of the lives of its customers, as it builds loyalty to its unique “ecosystem.”   After growing like a rocket, Xiaomi’s sales have recently hit a down patch. And while there may be more reversals ahead, Xiaomi might just represent China’s homegrown innovation future: a startup that figured out how to differentiate itself and survive in a highly competitive market. “There is only one Steve Jobs,” Licheng Cui, Xiaomi’s Secretary General told me, “but if we gather up good ideas from our customers and our employees, collectively we might just be able to create another Steve Jobs.”

5. China’s rising middle class is demanding service and services. On the streets of China’s biggest cities, I saw delivery vehicles zipping about, possibly filled with packages for China’s growing middle class. Already the country has 721 million internet users (about half the population), and companies like Xaiomi and others are expanding this population with low cost connectivity, greater choice, and competitive pricing. Chinese consumers are demanding convenience, better value, greater transparency in their transactions, and above all speed. At the ferry station in Hong Kong, I watched a long line move swiftly thru checkout at a 7-11 as payment took seconds, rather than the minutes it takes in the States to pay by the cumbersome new chip-enabled credit cards.  Visionaries like Jack Ma, founder of e-commerce giant Alibaba, saw this consumer tidal wave building, and abetted its rise. Today one of the world’s most innovative companies, I was surprised to discover just how huge Alibaba’s headquarters campus is, and how fast the company has grown over the past decade. Row after row of buildings are being erected to house newly hired employees. Stately granite and glass buildings, well-manicured grounds and a quiet lagoon offered thinking space to hard-charging tech workers. One young data scientist we spoke with told us of he is constantly being recruited to work for other startups. But he turns down all offers, on account of his loyalty to Jack Ma and the Alibaba culture.

Final thoughts: Fantastic trip overall, I learned a great deal about China and its time of transition. I came away convinced that China will set the innovation agenda for the foreseeable future.

 

 

 

 

 

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