Just a few weeks ago, we held a special event at the Rosewood Hotel, in the heart of Silicon Valley: “Innovation 2015: From China to Silicon Valley, Expert Analysis and Inside Look into the Future of Innovation in China and the U.S.” Conferences with titles like this one, unthinkable only a decade ago, are becoming commonplace. The course of events has seemingly catapulted us into a new era. Similar to the shifting of tectonic plates, the old world order is being ground down and is gradually giving way to a new one. The developing world, until only recently viewed as incapable of the kind of innovation that would enable a nation to gain prominence, is rising; and at the forefront is China.

There are now stronger players than ever before from developing countries. The era in which British Petroleum, aided by the CIA, can depose a Mossadegh and replace him with a Shah in order to head off nationalization is gone forever. Instead, the economies of the developing world are beginning to produce global companies themselves, which are challenging the hegemony of the Western giants. China, and eventually the entire so-called developing world, is no longer exclusively on the receiving end of Western policy and competitive action. China in particular is now beginning, in some areas, to dictate policy to the West.

Not all aspects of this ultimately massive shift are proceeding at the same rate. This is why we are experiencing what many of us perceive as a kind of schizophrenia on the part of China. While I was in China for over four years, leading the creation of a joint banking venture between Shanghai Pudong Development Bank and Silicon Valley Bank, I experienced this firsthand.

On the one hand, China appears, as a nation, to be suffering from an immense inferiority complex. Underlying this complex is China's belief that it has suffered “150 years of humiliation” at the hands of the West. According to this view of history, beginning with England's forced entry into China's markets, now known as the Opium Wars of the 1840s, through Japan's brutal invasions of Northeastern China, Shanghai, and Nanjing in the 1930s, and continuing with the U.S. “invasion” of Korea in the 1950s, the West has systematically repressed China. This view is captured in the words on the plaque at the entrance to “The Road to Rejuvenation”—a permanent exhibit at the National Museum of History in Beijing:

After Britain started the Opium War in 1840, the imperial powers descended on China like a swarm of bees, looting our treasures and killing our people.…Achieving national independence and liberation of the people and making the country strong and prosperous and the people happy became the two great historic missions of the Chinese nation throughout its modern history.

This view of history provides the justification for the uneven playing field that many Western companies find today when they seek to do business in China and when they compete with the Chinese in global markets. The most lucid defense of this uneven playing field that we have seen can be found in a book by a Korean economist, Ha-Joon Chang, entitled Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, in which the author argues that Western countries owe it to developing countries to allow them to create slanted playing fields until they can catch up with their Western competitors. According to this view, the West is superior, the East is inferior, and that is why the West should give the East a hall pass on adhering to the standards of the WTO.

At the same time, China often appears to be suffering from a superiority complex. The other aspect of the myth cited is that since the beginning of time until the British invasions in the 1840s, China was the most advanced country in the world, and therefore now deserves to return to that, its original status. The desire to document this truth through great works can be seen in the colossal infrastructure projects. In just one city—Shanghai—China has produced three remarkable feats of infrastructure development in the past 10 years: the deep-water port, capable of hosting larger ships than literally any port in the United States today; the “Maglev,” a magnetic levitation train, far more advanced than any train in the United States; and the recently completed Shanghai Tower, one of the tallest buildings in the world. These are all intended as proof statements: China is indeed superior to the West. Equally symbolic of China's rise is the newly established Asian Investment Bank, an Eastern counterpart to the World Bank, only this time led by China, and with the mission ultimately to be far larger and better than its Western precursor.

These tectonic shifts have been made possible only by corresponding shifts in the Chinese economic model. Since the demise of Mao and the onset of capitalism as introduced by Deng Xiaoping, China has shifted from more or less true socialism to “state capitalism,” which is decidedly un-socialistic. At the same time, and somewhat ironically, the United States has shifted from “private capitalism” with elements of socialism, to private capitalism with strong elements of socialism. Our Medicare and Social Security systems are, on a per capita basis, the most expensive in the world today. Ironically, one could argue that they are being financed in significant measure by China. Put simply: We buy vast quantities of inexpensive goods at Walmart, most of which we import from China; China builds up a huge trade surplus, which it then invests in U.S. Treasuries; and the United States uses those ever increasing borrowings to finance our socialist system, namely Medicare and Social Security.

Against this backdrop of two superpowers, almost perversely economically intertwined, highly ambivalent in their respective views of each other, Western companies come to this leader of the developing world looking for opportunities for growth. The ambivalence continues. On the one hand, Westerners are amazed at the enormous infrastructure projects, but on the other hand, they are frustrated by the poor air quality, the systematic obstruction of the Internet, the insidious corruption, and the seemingly intentional mysteriousness of the political system.

Once they get past these initial impressions and settle into the routine of trying to do business, they will face the reality of doing business in today's China. It turns out that James McGregor, the author of One Billion Customers, meant his title to be ironic. Although the American Chamber of Commerce in Shanghai, as well as McKinsey, will continue to publish reports suggesting that most Western companies in China are doing very well (some actually are), the stories that get told around the tables at the Camel (a local bar in Shanghai frequented by the trailing spouses of Western expats) and around the conference table at the semiannual meetings of The Conference Board (an international association of multinationals with a branch in Beijing) reveal a different truth. Westerners also experience similar challenges with the Chinese when they are doing business in other countries.

Some of the reasons why these Western companies complain are fairly obvious. IP theft continues to be a serious and ongoing problem. Contracts seem meaningless, in that the Chinese attempt to renegotiate any time they feel that their leverage has improved. Or, worse yet, they frequently appear in the first place to pay no attention to often heavily negotiated contracts. Financial statements are unreliable, and there are often different versions for different constituencies. Business ethics are at best different, and at worst wanting. The Chinese seem to place more value on relationships that on product quality; and Westerners, who by definition don't have preexisting relationships with indigenous entities, naively expect that product quality will carry the day for them. Even when preexisting relationships are not the driving focus, the Chinese seem to value speed and price more than product quality; and both speed and price favor Chinese companies, as Chinese control supply chains (speed) and Chinese competitors are often subsidized (price). Western innovators focus on product and product quality; Chinese innovators focus on business models and distribution systems.

What surprises Westerners most is the extent to which the Chinese government is involved in business—within China and outside of China. There is not a substantive difference between business people and government officials; they are often one and the same. The government not only regulates business, it actually does business as well.

A classic example of how this often works would be that of Gamesa, a Spanish wind turbine company that came to China well over a decade ago. Initially, Gamesa captured a large part of the Chinese market. But then the Chinese government forced it to use local suppliers. Gamesa, in its attempt to avoid creating a local competitor, divided its product into a series of subsystems and farmed them out separately to individual local suppliers, teaching each supplier only the portion of the technology necessary to the production of the individual subsystem that had been assigned to it. Of course, in time these individual suppliers banded together and created a Chinese competitor, with financial support from the government. This Chinese competitor recaptured a large part of Gamesa's market share in China for “China, Inc.,” and it proceeded to compete against Gamesa globally as well. Here we see the modern application of The Art of War in the economic sphere.

In most western countries, Gamesa would have gone to court. That would not have worked in China. The reason should be obvious: The same Party that engineered the entire scheme controls the courts as well. Further, the Spanish government could have registered its discontent, but it is unlikely that doing so would have made a difference.

Western companies cannot change the circumstances described here. Neither can the governments of the countries behind these Western companies, even if they are so inclined. However, they can change their own approach to doing business in China as well as in the greater developing world.

First and foremost, they can recognize the situation for what it is, and they can begin to speak openly about it among themselves. At so many of the conferences we attend, pretense reigns. Western companies talk about their successes, but seldom about the obstacles they face and the setbacks they endure.

In addition, Western companies need to stop resting on their laurels. The doctrine of American exceptionalism has clouded our view of reality. The world has changed. In their own way, the countries of the developing world, first among them China, are exceptional as well, and bring different strengths to the table. Unless and until we recognize that, and start talking about it realistically, progress will be slow, if not nonexistent. Of course, Western companies often have significant advantages over their Eastern counterparts, the first and foremost of which is product quality and innovation. However, they often lose the race in the developing world, product quality notwithstanding.

Western companies need to understand their Eastern competitors' strengths as well as their shortcomings, and they need to understand their own as well. Only then can they begin to address their competitors' strengths and their own shortcomings in ways that will enable them to compete more effectively. This book describes exactly what those strengths and shortcomings are and what Western companies can do to address them and to become more successful in global markets.

So, what can Western companies do to compete?

In The China Factor, Amy Karam does an excellent job of providing very practical answers to this question. Highlights, with which I particularly concur given my experience:

• Western companies can emphasize their strengths. Often as not, their products are technologically superior. And, although less relationship-oriented, they are often much more professional in the way they conduct their business.
• Western companies can copy the strengths of their emerging competitors. Yes, they can learn from China! They can try to be less risk averse, faster, more high touch, longer term, and more and better localized, with respect to all aspects of localization.
• Western multinationals tend not to want to build products for a specific country or geography. Instead, they want to take a product created for the American or European market and then localize it in Asia. This approach does not enable success.
• Western companies should choose the expats they send over very carefully, on the basis of seniority and experience, emotional IQ, resilience, open-mindedness, intellectual curiosity, respectfulness, and gregariousness. Expats should be abroad for longer rather than shorter tours. It takes at least three to four years just to begin to understand the local culture, meet a few important key contacts, and learn how to maneuver in the new environment. And they should have a solid repatriation plan in order to capitalize and grow from their valuable studies.
• Western companies should take action in the event that their competitors engage in unfair trade practices. They should first attempt to deal with the matter themselves, respectfully and behind closed doors. To the extent that this does not bring the desired result, they need to seek help from others, meaning either their own government or the WTO. Also, U.S. citizens in particular, who are not inclined to rely on the government for help, need start leveraging whatever assistance may be available to them in Washington. It is ridiculous for American business to lobby against the Ex-Im bank, as they have, and at the same time complain that Chinese companies receive financial support from their own government.
• Western companies need to develop the right mind-set, if they wish to succeed in their competition against companies from the developing world. They need to think “leverage” rather than “contract” or “fairness.” The need to think “co-opetition” rather than pure “competition.” And they need to focus on clients rather than risk avoidance.

Above all, we need to resist the temptation to rest on our laurels, to rely on the old saw that the “Chinese can't innovate, they can only copy.” Our sense of exceptionalism must be replaced with an even keener sense of paranoia. The developing world, led by China, is rising and its rise will continue. Our “pivot to Asia” needs to be more economic and less military. Our mental models need to evolve. We need to become friends rather than enemies, but this friendship will have to be based as much on leverage as it is on affection. And, in any case, we have to behave in a way that will result in benefit to both sides; we have to demand that the other side do so as well.

It is important to remember—and Amy Karam makes this point very well—that the business relationship between China and the United States is not limited to the geography of the two countries. As China “goes global,” Chinese companies will bring their strengths—and weaknesses—into the global arena. U.S. and other Western companies will be competing in markets they have traditionally dominated, and they must adapt—or pay the price.

Again, in the developing world, and particularly to the extent that it is to be led by China, leverage is king: “Speak softly and carry a big stick,” knowing the other side intends to do so as well. The world has changed, and the way we deal with China has to change along with it.

—Ken Wilcox

Former CEO and chairman, current Chairman Emeritus, Silicon Valley Bank