Chapter 12
China: Politics => The 5th P—The Geopolitical Dimension
The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin.
—Sun Tzu, The Art of War
If there is one primary differentiator or predominant success factor of Chinese emerging entrants it is their shrewdness in using political influence to achieve successful commercial results. This factor was a major learning point for us at Cisco—the power of this dimension often caught us by surprise. As a renowned Western company with a solid brand, we had not needed to use governmental politics (at least not much) to close business within our usual customer base. However, with the expansion into emerging markets the components of influence changed—and the Chinese understood this well. As emerging entrants trying to break through into new markets and industries, playing politics was a necessary and effective tactic.
Politics: The Geopolitical Dimension
The Chinese are very skilled at managing politics at different levels within an organization, right up to the top executives. And it doesn't stop at just the organizations. They reach beyond those and into the upper echelons of the governments of the host countries. If they are rejected at the RFP level (or even before they are rejected), they apply their influencing skills with political figures, all the way up to the country's presidential level.
One way they do this is by incorporating a particular deal into trade agreement negotiations with a country. In the bigger scheme of things, it is easy for an emerging-market country to agree to award a $10 million technology purchase to the Chinese supplier and a minor consideration relative to the billion-dollar infrastructure investment it will be receiving from the Chinese government. The edicts that trickle from high levels of government down to the company level are astounding. And this influence doesn't just occur in the developing world, but also in developed countries.
Nationalistic Philosophy—Venturing Out with Team China
Let's take a deeper look at the activities that influence politics: the intentions and desired outcomes.
One major advantage of the Chinese business model is the backing and support of the Chinese government. As stated earlier, a Chinese company looking to expand internationally often does not have to go it alone. Some companies have the advantage of being part of Team China, which essentially means they are part of a group of companies, government agencies, or government corporations that go out into the world seeking business together as a high-level government delegation. The idea is that there is greater negotiating power when the deal is presented as a bundled proposal from the national level. This is particularly successful in emerging markets, in which the China government can offer much in terms of infrastructure build-outs, job creation, and the like—that is, contributions to socioeconomic development that are highly needed in the target country.
What happens is this: Team China (or, China Inc.) ventures out and uses trade agreements with the visited country as a means of getting business for Team China companies. They look at all RFPs currently in the pipeline for these companies and decide which ones they will use as negotiating tools. When government officials in the targeted country see the whole picture of what China Inc. can bring to their economy, they are more apt to encourage or even coerce the targeted company to choose the Chinese vendor over what may have been the company's preferred, objective choice.
I've seen this occur in both developing and developed countries. In one case, it was a deal in Latin America that our sales team had been working on and nurturing for two years. Our team's solution was by far the winning choice, satisfying all components of the RFP. The team had the verbal acceptance and was ready to sign, but at the eleventh hour, at the very last minute, the deal was awarded to a Chinese vendor. Why? The choice was government-mandated and included as part of the government's national trade agreement with Team China. Something similar happened in a developed country in Europe.
And the Chinese are not shy about admitting to the ties between their commercial objectives and higher-level political goals. As Huawei CEO and founder Ren Zhengfei once openly stated, “Huawei's international marketing policy follows our country's foreign policy line,” implying a level of coordination with government that most multinationals would never acknowledge.
However, Huawei's expansion is often challenged in the United States; an example is when the NSA (National Security Agency) intervened in a potential deal to prevent Huawei from getting a piece of an AT&T contract for security reasons.
As collaborative as the Chinese are at a national level, there is internal competition among Chinese companies in the same industry. Team China is not always a unified front. One example is when Huawei and ZTE filed lawsuits against each other for patent and trademark infringements in countries outside of China, including Germany, France, and Hungary.1
A Partnership Approach
Strong emerging entrants, such as those from China, are astute at identifying opportunities within emerging markets to partner on socioeconomic development goals for the country in question. And because China comes with a bigger picture in mind, and a longer-term view, emerging-market countries are inclined to collaborate or partner with it in the spirit of advancing their own development goals, based on what the Chinese promise in return for access to their markets. For example, China Inc. has been known to promise road infrastructure build-outs and extensive naval security on the coasts of Africa in return for access to its coal mines. At the supplier level, Chinese companies have promised to build factories and hire many locals in the target country.
At times, a requirement to hire locals doesn't necessarily come from a Chinese company or Chinese government being proactive about investments in the local economy; the requirement may be part of the vendor selection criteria. For example, BSNL (Bharat Sanchar Nigam Ltd.) of India included a clause in its vendor selection criteria that made it mandatory for manufacturing to be done in India. While the Chinese supplier, Huawei, was initially barred from bidding on the BSNL tender (because it had failed to supply equipment for another recent contract), the Department of Telecommunications in India lifted this restriction close to the tender date. However, since there was not enough time to obtain the requisite government-imposed clearances and provide the documentary evidence for manufacturing approval before the tender date, Huawei sought to partner with Motorola for a part of the bid, since Motorola already had the clearance.
Countries with Resources
Oh, and by the way, do you also have any natural resources that you don't need right now?
As we have discussed, target markets are often not selected solely for business reasons—that is, not just for the obvious purpose of making a sale for a company's product or solution; there is often an additional objective or intention for establishing a certain customer relationship or partnership. In the instance of China Inc. (the Chinese government) venturing out on behalf of companies, the big-picture goal is to build relationships with other nations that can provide access to much-needed natural resources. This is a primary benefit of targeting some of the emerging markets in African countries, and China Inc. is not shy about admitting to these motivations. Natural resources are a major draw for the Chinese.
Emerging-market countries desire economic-development support and financing for infrastructure projects, job-creation programs, and more. International development agencies have many conditions. China Inc. has very few conditions, and the return is much higher for the host country. The result is a win-win situation—at least at first glance.
These resource quests take place not just in emerging countries but also in developed countries, such as in resource-rich Canada.
Ethics and Boundaries: Unfair Trade Practices
While most examples of customer relationship practices that we have cited are positive, there are times when the tenacity of the Chinese causes them to cross the ethical lines or principles of other countries. This is when we explore trade rules and grievances.
At times, China's hunger, drive, and desire to succeed can result in its engagement in unfair competitive practices. This can provoke the involvement of international associations, such as the WTO, which are brought in to mediate. Because China really wanted acceptance into the WTO before it became a member, it would often retreat once there was the slightest wind of a case that had been brought by another country or competitor. It is still highly skilled in pushing the limits.
Security Concerns
Companies, as well as nations, cite security concerns as a significant prohibitor to doing business with companies from China. In the high-technology networking industry, for example, there is a fear that China will use the installation of networking equipment at a company as a tool for intelligence gathering and espionage. This is a continued source of contention between China and Western countries and has also resulted in retaliation.
Why Do You All Hate Me?!
There has been longstanding concern about China's intentions in its global expansion efforts, particularly in the West (and most specifically in the United States and Britain), but also in emerging countries, such as India. It has been suggested that at times China's entry into a particular industry is simply a guise, and that in reality the Chinese are there to spy and to gain intellectual property to send back to China. Part of this suspicion is tied to the assumption that the Chinese government is closely tied to Chinese companies and uses the international reach of these companies to acquire desired intelligence. This is particularly true in the high-technology industry, and more specifically in networking, where it is easier to acquire and transport critical information.
Actions to Appease Concerns
One way that China overcomes such security concerns is to set up testing facilities on neutral ground in order to dispel suspicions.
China's top telecommunications equipment maker, Huawei Technologies, has set up a Cyber Security Center in Britain, where its products and software can be examined and tested.
Another approach used to appease security concerns is investing in the economy of the host country. Investments are made in large amounts and significant ways, to an extent that it is hard to refuse whatever the Chinese are proposing. The Chinese determination and tenacity always shines through; with their never give up attitude, they jump through hoops to achieve their goals. They will profess independence from the Chinese government, citing their private company status (despite receiving billions of dollars of expansion money from the CDB), and some Chinese companies have made their financial audits publicly available in the spirit of appeasing concerns.
Huawei has even gone as far as hiring a U.S. company to audit its programs to allay security concerns as it seeks greater market success.2 This step was due to letters and escalations by U.S. lawmakers and the Federal Communications Commission.
It appears that Chinese attempts to alleviate security concerns have been effective in some instances. An article entitled “British Probe Set to Clear Huawei of Allowing Spying” talks about how Britain's national security advisor cleared Huawei of leaving its equipment open to spying and found no evidence of wrongdoing.3
This finding and conclusion came after many years of concern:
Intelligence chiefs have warned that China may have gained the capability to shut down Britain by crippling its telecoms and utilities. They have told ministers of their fears that equipment installed by Huawei, the Chinese telecoms giant, in BT's new communications network could be used to halt critical services.…4
Looking over the fence to the other side, there is also speculation that some Western companies use spying and cybersecurity concerns as a stalling or protectionist technique to lock out Chinese competitors from their domestic markets.
Huawei Technologies, for example, decided to pull out most of its operations from the U.S. market in 2014 because it just couldn't break through—there were too many barriers to doing business in the United States—barriers based on security issues. Geopolitical factors were cited as reasons by Huawei and others, and many blogs suggested that it was Cisco lobbying the U.S. government to help keep Huawei at bay.