These are some of the questions asked at my guest lecture during the INSEAD China Strategy course (over Zoom). I thought some of the answers might be useful for a broader audience:
1. China has its own ecosystem, unlike a lot of other countries. A lot of international business practices are not applicable there. How to adapt to that?
Well, the same can be said about Indonesia, about India, and about Saudi Arabia. To operate efficiently and effectively in each major market, you probably have to learn, or at least understand, the nuances and the tricks.
Avoid making simplistic judgements – be humble, be on the ground to understand.
That is the same advice we gave Chinese companies expanding outside China. The good thing is, often as foreigners you are not really expected to be fully compliant with local business practices. It is actually the best if you fully understand, but are not expected to fully comply. Use that to your advantage.
2. Experience working for Rocket Internet in SEA, how do we bridge the gap between the culture of European HQ and local teams?
See the answer to question 7.
3. Are Southeast Asian countries better placed to enter China compared to Western ones?
Current generation not necessarily. But the big family-owned conglomerates of Southeast Asia, especially the ones from Singapore, Thailand, Malaysia and Indonesia, have been very successful in China.
Reason is actually simple: they are often run by older generation of ethnic Chinese businessmen who understood deeply the culture and also the government of China. They were also early in entering the market, often before it was fully opened up – that gave them a very good advantage to ride waves of growth that happened afterwards, and learnt how to operate more seamlessly in that complicated market.
4. Examples of failures entering Chinese markets
A lot. Think about Amazon – they insisted on the US methodology and maintained a clean interface; while Alibaba was almost an advertising company (messy interfaces with lots of ads and promotions) and also focused on delivery time.
Groupon – whose Chinese business, although a JV with Tencent, was actually run by the founders of Rocket Internet. They sent 200+ city managers from Europe to operate in China – big big failure. They were not nimble enough facing hundreds of competitors, and often made uninformed decisions. Meituan eventually prevailed.
There are a few other examples but generally the reason is the lack of deep understanding about the market (and its consumers) and willingness to adapt to those market characteristics. The same challenges big companies tech companies face when they expand outside China.
Uber’s case was a bit more debatable. I would see it as a success, though it did not conquer the market, from the value of the shares it got from Didi during the merger versus its investment in China, it was a profitable undertaking. However, that was based on a very cool brand name (they could hire some pretty good talent) but more important reckless cash burning which was not sustainable, but appealed to Didi which was so eager to end the war.
5. What makes Chinese companies competitive in global markets? e.g. BYD with lots of subsidies is not particularly successful, but Huawei is very successful?
Huawei is an extremely rich case and it would probably take days to explain its success (and its extreme resilience). It survived many harsh periods since its founding – which makes survival an instinct for the company. Think about Singapore and you might see some parallels.
Also think about the traditional Chinese saying “生于忧患 死于安逸” or “crisis makes you thrive but comfort kills you”. I think that alone is enough to answer this question.
So the companies that made it to the top in China often faced stiff competition with hundreds if not thousands of competitors. They are not ordinary, linear growth companies, but battle-hardened warriors.
that said, when you transfer these warriors to another battlefield (overseas markets) where the rules of the game are different, they might not survive.
6. In Portugal, lots of Chinese companies have bought assets and businesses. How do you see the trend?
Fosun was very active in acquiring assets in Portugal – however the last two years Fosun, as well as a few other large acquisition-driven groups, have slowed down their M& activities outside China. This is due to a number of reasons: 1) the tightening of liquidity in China (debt financing becomes more expensive and harder to get); 2) the capital control imposed by the government; 3) general business sentiment in China.
This might change – as you might know, policy making and regulating in China are a very fine balancing act. Circumstances often force you to move towards directions that are not ideal in the long term but absolutely necessary in the shorterm.
But the trend of internet, high tech companies/investors increasing their presence outside China is continuous, and will probably accelerate.
7. Similarities and differences of European/Chinese way of making decisions?
Rocket Internet is very data driven, very fast but in a way not very nimble. To give you an example, when a Rocket fashion ecommerce company hit a major roadblock of growth, the executives would just push the same KPIs harder, rather than finding ways to pivot/modify business models.
However, what Rocket experienced does not necessarily correspond with other big European internet companies; likewise, what Alibaba is experiencing does not necessarily correspond to other big Chinese internet companies.
Anyways, for people involved in the business or the value chain, it is important to map out who are the decision makers, who are the influences, who do decision makers surround themselves with, and what the limitations in terms of experience and understanding they have.
Avoid making simplistic judgements about people.
8. The decoupling of East & West and de-globalisation that are often talked about?
I think the mistrust is already there – and hard to bridge. Recently there are a number of commentaries in China reminding leaders and also the public about what Deng Xiaoping said “韬光养晦” or “To hide one’s strengths and bide one’s time”; Deng had a second part of the saying which was often omitted in reporting: “有所作为” or “focus on making tangible achievements”.
The Covid-19 pandemic and the associated noise/social media rage are not helping. Businesses are usually more practical but they would probably need to navigate through this complicated political environment, and in the meantime plan their supply chain to avoid more trade-war like disruptions.
Governments of small countries might also face the pressure of choosing sides, which can be destabilising. I think smart leaders (like the ones of Singapore) will try to play a balancing act – not easy but it is the best strategy.
9. If you were Xi JInping, what would you do?
To the contrary of what many from outside might believe, human life is of utmost priority of the government in China. There is a saying in Chinese “人命关天” or “Human life is of utmost importance”.
If you run a manufacturing business in China you would understand what I am talking about. All the inspections are prioritised towards production safety and prevention of lethal accidents. Same for traffic, mining and other areas.
This also explains why the government took such drastic measures to lock down cities and put severe restrictions on movement. They are sacrificing the economy for life, which is very important for the regime’s legitimacy.
I also find the recent noise about potential cover-up of real Covid-19 numbers by Chinese government baseless. Those who understand the political system will know that there is no incentive for the central government to cover up anything; and cover-ups done by local governments in the past were mainly because the punishment for allowing such things to happen is severe. In the age of social media, it is difficult for local officials to hide anything.
Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at [email protected].