New Exports—Investment, Influence and Innovation
China’s outbound investments—including those enabled by China Development Bank, sovereign funds and corporations—exceeded $150 billion in 2015 and are growing by 40% per year. Initial investments were concentrated in natural resources and the developing world, but are becoming increasingly diverse in both sector and geography. Global outreach also includes more than foreign direct investment and export of China-made products. Echoing the heyday of U.S. engineering giants like Bechtel, advanced services such as construction, engineering, operational support and maintenance have bolstered product deals and enabled long-term contracting.
Notable examples include Geely Automobile Holdings Ltd., which purchased Volvo of Sweden for approximately $2 billion in 2010, and obtained European-grade automotive technology. Wanda acquired AMC Cinema for $2.6 billion in 2012, one of the leading venues for movies in the U.S. Anbang Insurance Company’s purchase of the Waldorf-Astoria Hotel in New York City for a similar amount in 2014 obtained no new technology, but put the acquirer on the map as a player in the field of real estate. A more recent attempt by Anbang to acquire the Starwood Hotel Group failed, although not until it sparked a spirited bidding war with Marriott Hotels, which finally prevailed in its bid for Starwood. In an even more strategic move, ChemChina offered $43 billion for Syngenta’s agricultural business. The spree is likely to continue.
In making these investments, China is pursuing an intelligent and coordinated set of economic and political objectives, namely to secure assets essential to China’s continued growth, obtain or develop domestically the technologies required for China’s core industries, gain access to large markets for China’s exports, and build China’s geopolitical and economic influence.
China is also simultaneously broadening and deepening its influence in international organizations, which Western nations have long encouraged. As a result, consultation with China on key issues is now a necessity across a widening array of domains. The quality of China’s participation in international affairs is changing as well, as China places highly capable actors and delegates in important and influential positions, including the top ranks of the World Bank, the World Health Organization and the IMF.
China’s influence is tied to its rising economic strength and recent recognition of the renminbi as a global reserve currency. China is also spearheading new organizations that more closely reflect its objectives and philosophies, such as the Shanghai Cooperation Organization, the Asian Infrastructure Investment Bank, and the Silk Road Economic Initiative. Notably, China’s soft power initiatives in the past few years have outpaced annual investments by the World Bank.
China’s global role will soon shift from factory to laboratory. Patent filings in China last year surpassed the patent volume filed in the U.S. Originality still lags, but a substantial proportion of Chinese filings (roughly 25%) are now classified as new inventions rather than incremental improvements, and the proportion is growing. Plus, the publication of Chinese research in juried periodicals indicates that Chinese R&D is producing results. Significantly, China is also a major producer of STEM talent, graduating over 7 million students from colleges each year, 30% of whom have STEM-type degrees.
Intellectual property (IP) laws and regulations, woefully inadequate until just recently, are finally in place. Despite uneven implementation and weak sanctions by Chinese courts, there is a real possibility that IP rights will become protectable over the next decade, particularly as more indigenous firms issue calls for such protections and the government recognizes IP’s importance to the future of Chinese economic growth.
Implications for Multinational CEOs
China’s rise should not be feared by CEOs, but should be treated seriously—it requires an intelligent, mature response. “China, Incorporated” is an increasingly powerful act as a result of the new exports noted above—and demands the cultivation of new skills within management ranks and boards of directors of multinational companies worldwide to remain competitive. Fundamentally, the days when interactions with Chinese companies took place solely on Chinese soil are over. Corporations should now expect to contend with Chinese companies across the globe as suppliers, customers and deal-makers. This conclusion bears real implications.
This is the time to examine successful examples of multinationals in China, such as General Motors, Boeing and Starbucks. It is also high time to review the more troubled stories of difficulty and even defeat, such as Best Buy, Glaxo and Google, among others.
CEOs of Western companies—whether already active inside China or still operating mainly in their home markets—must contemplate what competition will be like in a China-modified world.
Having the answers to these 5 key questions is essential:
- Do we understand how the China factor is likely to change our industry and our business model in the next 3-5 years?
- If wholesale changes occur in our industry as a result of Chinese competition, what will it take to survive?
- What actions should we consider to bolster our business before the landscape changes dramatically?
- What kinds of industry alliances will be required to offset the powerful competitive force of large, private Chinese companies operating in concert with even larger state-owned enterprises and government ministries?
- Is there a smart way to immediately monetize our existing China-based business before the business valuation is affected adversely, such as selling some portion to Chinese investors like both McDonald’s and Yum Brands?
Many boards are recognizing that they are approaching an inflection point where their company’s strategy might be driven by China’s strategy instead of vice versa. That is unsettling for obvious reasons and should be a siren call for CEOs to revisit their China strategy to ensure that they are not stalled on China 101 when China 401 appears to be the new requirement.