Introduction
We are in Kuala Lumpur, Malaysia, at a training session for the Asia-Pacific sales team. Despite the long flight from California I'm excited to be there, because an integral part of my role is getting as close to the sales teams as possible. The regional teams also appreciate visitors from corporate headquarters because the visits underscore the importance of the area to the larger business. My objectives are twofold: to gather competitive intelligence and to understand the challenges of this region's sales teams and the support they need from the company in order to be more successful.
We were there to learn together—after all, if we were going to get smart about competing with the Chinese, understanding the principles and practices of their strategy was essential. Although this was the Asia team and it was well versed in Eastern business culture, Western business practices were still the standard mode of operation because we worked for a U.S.-based company.
Our guest speaker was an eccentric Chinese professor who lectured us on The Art of War by Sun Tzu. He was fascinating. Unusually tall even by Caucasian standards, he was heavyset and commanding, both in his physical presence and in his persona. He had a colorful personality and spoke with flair, with an unsubtle confidence that bordered on arrogance. His disposition may have been fueled by the fact that professors or “knowledgeable ones” are especially revered in Chinese culture. His fingers were covered with ornate rings adorned with large gems—it was clear that he wanted to make a statement proclaiming his boldness and stature.
I discovered that this fascination was mutual. He wondered how such an important, top-secret competitive-intelligence role at corporate headquarters could be awarded to a woman who didn't remotely look Chinese or speak the language. How competent a spy (his word for me) could she really be? He inquired about my mandate and about our strategy. In a land where information is currency, literally and figuratively, I politely replied that I wouldn't be a very good spy if I answered his questions. I suppose I was practicing the Art of War principle of “keeping them guessing.”
Where Is This Book Coming From?
The China Factor offers Western companies actionable business strategies and competitive tactics to succeed in their global expansion, while encountering emerging competitors like those from China. This book is based on my first-hand experience at a renowned high-technology multinational, Cisco Systems, where I was the global lead for a CEO-sponsored competitive sales support program. I was tapped for the role due to my persistent proposals to executive management on the importance of concertedly pursuing emerging markets. This passion and conviction around the exponential growth possibilities of emerging markets grew stronger over years of research and analysis, starting with my graduate studies in international business and continuing through my practical experience in the high-tech industry.
The essence of my role as the corporate leader of this program was to assist sales teams worldwide to win strategic deals when challenged by a primary Chinese competitor. These deals were escalated to our program office at Cisco's corporate headquarters when they were in jeopardy and salespeople could not address issues at the regional level. If a team had challenges from a company such as Huawei, whether that company was competing with us in Belgium, Dubai, or Kenya, we brought the resources and know-how to the table and figured out how to save the deal.
Another primary part of my role involved proactively advising and training sales teams in all regions on a new way of selling and positioning. In so doing, we could shift our strategy and become more knowledgeable about doing business differently with emerging competitors and in new market environments.
The mandate was large, the resourcing was thin, and the learning was exponential—across the entire organization and up to the executive levels. This was a type of competition that we had not experienced before—at least not to this extent. We soon learned that we needed to do business differently—significantly differently—in order to be more successful globally, particularly in emerging markets. The power of understanding cultures, the impact of politics on business, the urgency of establishing a value-selling defense, and the need for new solutions and new innovation practices were just a few of the discoveries and evolutions. One function at a time, the innovation of our new approach to global business began, as we defended and grew approximately $750 million per year in strategic deals across more than 50 countries.
I subsequently created my consultancy practice as I felt compelled to share these new ways of accomplishing global business success, which involved being more innovative in our approach, evolving our sales strategies, and rallying the organization to adapt and change. The interdependency of developed and emerging economies is stronger than ever before and there is no escaping this new reality. China sits in its center and other emerging countries are following.
Time has passed and my passion for this topic continues. However, I no longer want to “keep others guessing”—instead, I want to share what I've learned in the interest of helping other companies compete effectively in this new global landscape.
And so the story begins….
Macroeconomics and the Interdependency of Nations
Like it or not, you have no choice but to figure out how to position your business in light of the changes.
—Ram Charan, Global Tilt
My small story leads into the bigger macro story, and it's one that businesses need to be more knowledgeable about, because failure lurks where understanding is lacking. China's role and identity have been transformed profoundly into a newly resurrected powerhouse that is challenging long-existing rules of competition. International business dynamics have shifted and changed in a significant way.
The Chinese stock market crash in the summer of 2015 and the uncertainty it created as it shook the United States and other stock markets was proof of how intertwined the world is today. Headlines like “Global fears about China's economic slowdown are shaking stock markets around the world” and “World markets plunge as China stocks crash” reinforce this precept. It is no longer us versus them. Of necessity, we must build on each other; there is an interdependence that cannot be denied. Past successes in international trade and historical economic strength aren't always indicators of the future. It's crucial that we no longer separate politics from business or ignore how a country's culture affects business. We're going to delve deeply into those issues in this book.
The interdependency of nations—developed markets and emerging markets—exists on many levels, whether looked at through the lens of a demand-and-supply equation (manufacturers versus consumers), a trade balance discussion, or stock market movers.
As dramatic as it sounds, there is a new global paradigm: Western companies cannot simply recycle their domestic strategies in emerging markets and trust that they will succeed. China has redefined the competitive landscape and is here to stay as a formidable global player and competitor to Western companies. Both sides need to better understand the other and the methods by which they succeed in business—and thus far, China has been more zealous than the West on this learning front.
For Western companies, knowing how to compete within this new environment is no longer a nice-to-know but a need-to-know. These are survival issues, not merely strategies. Emerging markets have become critical targets—for existing and aspiring multinationals—and learning how to play in a new and larger sandbox with diverse participants and different rules is imperative. According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2014, foreign direct investment (FDI) in developing economies reached a new high of $778 billion in that year, and $108 billion of FDI went to transition economies, such as China and the former Soviet Union (see Figure I.1). Developing and transition economies now constitute half of the top 20 economies in terms of FDI inflows.
Figure I.1 FDI Inflows, Global and by Group of Economies, 1995–2013, and Projections, 2014–2016, in Billions of Dollars
Source: UNCTAD World Investment Report 2014: Investing in the SDGs: An Action Plan, xiii.
Cross-cultural understanding of your competitors, as well as your customers, is paramount to success in your global expansion efforts. The strength of relationships with customers in emerging markets will often trump product quality or company brand status. Traditional advantages, such as innovation and product superiority, are no longer enough to win business in international markets—particularly in emerging markets, where China is now a big player. Flying into an emerging-market country, say in Africa, for a few days of meetings, then doing a 24-hour safari and heading back home does not resonate well with emerging-market locals.
It is important to note that we are not only talking about Western companies knowing how to do business in emerging markets—it has become much bigger than that. It is also about Western companies encountering emerging competitors in developed markets; their home turf now has new foreign players that use different tactics. For example, foreign direct investment (FDI) outflows by emerging economies surged in 2014, accounting for 39% of total global FDI, according to figures compiled by the Geneva-based UNCTAD. And that surge was driven almost entirely by Asian investors, who also overtook North America and Europe as the world's biggest regional source of foreign direct investment.1
Go Global, Be Global, Know Global
California is becoming the east coast of Asia and Asia is becoming the west coast of California and Silicon Valley is in the center of it all.
—Comment made at Churchill Club presentation with guest speaker Michelle K. Lee, Undersecretary of Commerce for Intellectual Property
Emerging markets are no longer a novelty pursuit for companies, as they often have been in the past. A key theme of this book is that going global and being global is a must-do for corporations. A report by Franklin Templeton Investments, Nov. 13, 2015, confidently concurs, saying, “In our view…emerging markets simply can't be ignored. They are a significant part of the global economy today in terms of world land mass, population, gross domestic product (GDP) and equity market capitalization.” See Figure I.2.
Figure I.2 Emerging Markets Can't Be Ignored
Source: Economist Intelligence Unit; Consensus Economics, Sept 30, 2015.
Further adding to the shift toward emerging markets are younger generations who are seeking careers with a greater sense of purpose and impact. Millenials are demanding programs from universities specific to emerging markets, and the likes of MIT and NYU are responding.
Global leaders from Silicon Valley and organizations like 500 Startups are leading the charge in this new view that emerging markets aren't areas to simply dabble in and that they are the dynamic source of the next growth wave. Later in the book, we analyze Apple CEO Tim Cook's emerging-markets strategy and highlight how Mark Zuckerberg, the founder of Facebook, makes emerging markets a priority.
The lines continue to blur between competitors and collaborators, producing a hybrid strategy that we call coopetition. Rivals need access to each other's markets as well as their respective areas of expertise in order to grow and accelerate time-to-market at an exponential pace. China and the United States, the East and the West, are becoming more intertwined and are capitalizing on each other's strengths in order to expand in new ways and into new territories.
This dynamic requires Western companies to revisit their sales and marketing strategies and reposition themselves in order to meet new types of customer demands, compete more effectively with up-and-coming competitors, and hopefully avoid some of the competitive losses of recent years. For example, the U.S. solar industry was decimated when the Chinese came in and undercut U.S. suppliers. And although the Chinese steel industry had neither economies of scale nor a technological edge, steel from China has been selling for 25 percent less than U.S. and European steel. Similarly, in spite of the fact that China has one of the smallest areas of forest per capita, China has become the world's largest paper producer, selling at a substantial discount compared to U.S. and European producers.
The Power of Politics in Business
How do you navigate the political systems in other countries (and sometimes in your own) to achieve success? Politics and industry are more tightly intertwined than ever. The power of politics in the global business environment, particularly in emerging markets, cannot be overstated. The West has not been a strong performer in this area, nor has it realized until recently how significant a role politics plays in business, the repercussions of playing incorrectly, and the losses from not playing at all. The East, on the other hand, is very savvy in this domain and has quickly taught the West how it is done during its disruptive growth and ascent.
The Chinese have been very astute in negotiating trade agreements with countries en masse, as China Inc. Huawei, the Chinese telecommunications giant, was one benefactor of such government and political support, as they grew exponentially in the global marketplace for over a decade. This was not only achieved by initially undercutting its rivals on price—sometimes to the point where complaints were raised to the World Trade Organization—but also purportedly by financing their customers' purchases with government subsidies. This is the kind of politics-in-business tactic we'll look at throughout the book.
Some Silicon Valley companies have taken hits in China because of politics, while others have taken certain actions because of it: Google's decision to exit China due to the government's insistence on censorship, for example, not only impacted the search company, but also affected 1.4 billion Chinese end users and all visiting foreigners who were denied access to its service. The ripple effect of political decisions can be extensive.
Edward Snowden's revelation that the United States was spying on China resulted in further protectionist actions by the Chinese government, which shut out U.S. companies from the massive China market. However, the resiliency and persistence of U.S. companies continues, as innovators find creative and collaborative ways around the barriers. Hewlett Packard (HP), not wanting to forgo the significant revenue potential of the Chinese market, agreed in the spring of 2015 to give 51 percent of their Chinese server business to a Chinese partner as a concession, in order to maintain access to this market. Says the CEO of HP, Meg Whitman, “HP is making a bold move to win in today's China.”
Cisco also understands well the necessity of being tenacious despite political hurdles and the need to swim in the tricky political waters of the East. It established a joint venture with Inspur in China in the fall of 2015 and is boldly taking a collaborative, local partnership approach in order to further grow its business in China. This is another example of coopetition, a concept and practice that we'll look at further in the book. In coopetition, business competitors collaborate or establish practical alliances and even partnerships with the intention of mutually beneficial results. These alliances might be for a single venture or for project-to-project joint efforts, but regardless—the old competitive rules don't apply.
And at the macro level of coopetition, the United States and China signed an agreement during President Xi Jinping's U.S. visit in October 2015 that neither country would support online espionage. U.S. president Barack Obama said he had reached a “common understanding” with his Chinese counterpart, President Xi, that both sides would not “conduct or knowingly support cyber-enabled theft of intellectual property,” including trade secrets or other confidential information that could be used for commercial advantage.
The Innovation Advantage
An enduring maxim throughout history is the wisdom of learning from the competition. The best U.S. corporations evolve and survive when competition forces them to win in a new environment.…The logical place to start, then, is to understand the strategies of the strongest competitor and then to customize those ideas to fit one's unique makeup and situation.
—Ann Lee, What the U.S. Can Learn from China
Hard lessons are telling us that U.S. and Western competitiveness is in jeopardy. The West needs to retain its innovation advantage by evolving its approach to innovation in response to this new global economy.
We'll analyze the strengths of the West and of China, and the areas of growth for each, in Chapters 1 through 4 of this book. We look at the roles each has played in the global economy in the past, and the journey China has taken to reemerge as the great power it is today. Despite the strengths of and the challenges faced by each side, the bottom line is that the West's innovation advantage is the coveted prize. The Chinese and other emerging challengers are seeking this unique and differentiating capability, which is also sometimes called disruptive entrepreneurialism.
The Chinese are becoming innovative at being innovative. In their striving to acquire this skill, they are in effect creating new innovation models by leveraging their traditional strengths (watching, learning, and emulating) and applying grass-roots market demand variables to create new solutions. They are taking the best from the West and adding their own flavor by capitalizing on their local differentiators. This illustrates our current environment of the interdependency of nations, which learn from each other to grow. More on this in Chapter 19.
Consider that Chinese smartphone manufacturer Xiaomi has become the third largest smartphone manufacturer in the world in five short years, rivaling Apple and Samsung. And this, simply put, was achieved by building on the best of Western innovation and talent. The Chinese applied local Chinese consumer trends and demands to this foundation and created a successful new solution—which resulted in the company becoming a globally ranked player. A detailed case study in Chapter 21 outlines Xiaomi's strategy in achieving this success.
Thus the assertion and fundamental, primary premise of this book is that the West must uphold its innovation advantage by evolving its innovation approach in light of this new global economy. Another aspect of the West's need to evolve its approach is the need to create solutions specific to the needs of emerging markets, as opposed to simply modifying and recycling what was originally intended for developed markets. We explore this through looking at the concept of reverse innovation which holds that innovating specifically for emerging markets can also ultimately revive a developed-market customer base. General Electric provides one of the book's many examples that bring these considerations to light.
The China Factor also explores and systematizes some practical solutions to combat the West's global competitive teetering. In Chapter 19 we cover five different innovation models, including the disruptive innovation model and its application. Intuit's approach is but one of the many case studies that illustrate how new market solutions are derived from disruptive innovation.
Additionally, we explore examples of how corporations such as Nokia, BlackBerry, HTC, Safaricom, and Tata Motors have maneuvered within the global competitive maze, putting a magnifying glass to their business evolutions, dynamics, and the outcomes of their actions.
This Book Is About…
There are many books that explain how to do business in China and others that describe the China Challenge and the threats to Western business that exist at a macro level; however, little information is available about solutions or corrective actions that businesses can take on a micro level. What can Western companies do about these new challenges? How can Western companies compete? What strategies and tactics need to be implemented to ensure success?
The West is being challenged in many ways by the economic emergence of China and other emerging competitors, and its businesses are looking for guidance on how to respond, survive, and thrive.
Western companies need specific ideas about how to do business differently—how to modify their approach so that they will be able to maintain and grow their economic positions. This book provides a synopsis of the current competitive situation between the West and China and practical tools to help the West succeed when competing with Chinese companies (and other emerging entrants) that are doing business in the same international markets.
About You and Your Challenges
Let's talk about you: Why are you reading this book, and what might you get out of it?
You know that there is a new playing field out there and that it's no longer business as usual. You may be part of a Western company that has succeeded in the past through product brand superiority and innovation. In the past, customers were willing to pay a premium price for your product or service but now they are demanding lower price points that are hard to match.
You want to expand into new, global markets because you know you have to, and you face new competitors who are playing by different rules. These emerging competitors are likely using aggressive price-cutting strategies to penetrate new markets.
You may be a business professional working in a strategic, marketing, sales, or business-development function—or you just may be hearing a lot about China's rapid international growth and would like to understand what the fuss is all about.
You may have even tried expanding into new markets and weren't as successful as you wanted to be, so you came back to what you know best. But you also know that you need to expand the playing field in order for your company to continue to thrive.
What should your company be doing, and how should you be strategizing for the future? You want to know more about this new competitive context—in fact, you need to know more. What is this new economy? Who are these new players and how do you play in this new sandbox?
There is a plethora of information circulating on what is happening in the world due to China's addition to the capitalism equation and a lot of FUD—fear, uncertainty, and doubt. However, what is lacking is advice on what Western companies should do in response to this shift. You already know that the emergence of China and other countries is a challenge—but what are you supposed to do about it at a company level, at a practical and strategic level?
New Territory Requires a Guide
This book will offer suggestions as to what actions you and your company can take in order to change your game and become a winner in this new playing field. There is a lot of opportunity—it just comes down to having the right strategy and effective execution. You need to use a new toolbox.
Competing at the highest levels requires new knowledge and strategies: This is your blueprint. Here's how the book will help.
The China Factor is grounded in real-life experience and practices, as well as extensive and comprehensive research. The book is your toolbox: You will get specific recommendations at a micro level about what Western companies can do to better compete and succeed in global markets, particularly in emerging markets. There are distinct growth opportunities in emerging markets, but they may require you to leave your comfort zone.
The broad goals of this book are:
- To educate the reader on how Chinese companies (and other emerging competitors) do business outside of China, to shed light on their approach to international market expansion, to examine how they compete and win over customers, and to explain how they overcome the innovation advantage of Western companies.
- To offer Western companies actionable business strategies and competitive tactics to achieve success when doing business globally and encountering emerging competitors, including those from China as well as others. To inspire ways that the West can maintain its innovation advantage and also become innovative in the way they do business.
What you will get from this book:
- Section I: An overview of how this new global economic and competitive state of affairs came to be, and details on the comparative strengths and challenges of the West and East.
- Section II: An in-depth cultural and tactical understanding of how the Chinese and other emerging entrants do business and why you may be finding your globalization efforts so challenging. The 5Ps of Global Marketing Framework is used to structure the analysis done in Sections II and III.
- Section III: Actionable suggestions about how Western companies should position (or reposition) their offers for the global marketplace in light of these competitive forces. Explanations of five innovation models and examples of how companies from both the East and the West have applied these models and techniques.
- Section IV: Detailed globalization case studies for three companies—Cisco, Xiaomi, and Pinnacle Engines—each of which offers a unique viewpoint on global expansion approaches. Cisco provides an example of the West expanding to the East, Xiaomi is an example of the East learning from the West, and Pinnacle Engines is an example of the West innovating in the West and then leapfrogging directly to sell to the East.
A New Era
The Western world, with the United States as a focal point, has been a nexus of power, influence, and strenth for many years. But there's always dynamism in the mechanics of power: Players change, steady states go into flux. We have entered a period of flux in global politics, power, and finance. Of course, the West remains a significant, deeply influential agent in international commerce, but the rumblings underfoot aren't merely a passing storm.
China's reemergence has thrown the world off balance. The rules of international relations, commerce, and politics that were reliable and effective in the past no longer apply so easily. This is most powerfully seen in the business world. Change isn't merely coming: It's here.
While China represents a formidable example of the change and is a significant catalyst of it, there are other emerging players following its lead. Invest the time to better understand the characteristics and tactics of emerging entrants and how to apply a new way of thinking to your own global expansion strategy. This is a long-term investment for which the returns and rewards are high. The China Factor can act as a guide in helping you to make thoughtful, confident decisions in this new frontier.