Why China Is Getting Easier to Play, But Tougher to Win

A generation ago -- remember? -- Japan was eating America's economic lunch. American business rightly railed at the island country's protectionism; at one point, Japan risibly resisted importing apples from Washington on the pretext that Japanese stomachs were different. The U.S. ran a trade deficit with Japan that, economists assured us, would sap America's economic might. Some American CEOs spent more energy lobbying Washington than winning back the wallets of their customers. If this sounds a little like what's happening now between the United States and China, it is -- but not for the reasons you may think.

Because so much of our noise -- er, news -- emanates from Washington, it's easy to confuse political economy with corporate strategy. It's the job of people who work in Washington to think about these things in terms of national interests; and when you're deciding who you'll vote for, you should do that, too. But if you look at the U.S.-Japan story from the standpoint of company performance, a very different tale emerges.

First, many American companies became infinitely better competitors at home and abroad. GM didn't: 2008's impolitic corporate-jet visit to Washington was the final (one hopes) act in a multi-decade history of trying to solve problems through Congress rather than competition. But thousands of others did, from Alcoa to Xerox, in an exhibition of executive education not seen since Japan itself bootstrapped its business brainpower by studying the ideas of Americans like W. Edwards Deming.

Second, when Japan's bubble burst in 1991 and the country entered a "lost decade" that lingers even now, many Japanese-based companies stayed wide awake. The period was anything but somnolent for Toyota, Honda, and Nissan. And though Japan lost its dominance in consumer electronics, whose fault is that? Did Japan lose to Korea -- or did Sony lose to Samsung? And today (to change continents) are Nokia's struggles Finland's fault?

Last week I was in Shanghai, a city that in the seven years since I saw it last has become unrecognizably more cosmopolitan, cool, and -- Effie, brace yourself -- clean. (By contrast, the air in Beijing had the color, texture, and taste of a week-old Brillo pad.) At a conference Thursday night, three people spoke: Yon Hua Xu from IBM, talking about its recent CEO survey; Handel Jones, CEO of Silicon-Valley-based International Business Strategies and author of a book called ChinAmerica; and my colleague Edward Tse, dean of the consulting industry in China and himself the author of a new book, The China Strategy.

Among many things I heard that night, here are three anyone competing in China should take to heart:

• Competitive context varies enormously from one industry to the next. Some are still ruled by the old competitive necessity of guanxi -- Chinese for "old-boy network" -- but most are steadily becoming more open and some, like consumer packaged goods, have pretty much completed the journey. This is the trendline: The source of competitive advantage is shifting from connections to capabilities. Know where your industry sits on the line.
• China's development strategy profoundly shapes the business environment. Again, there's a clear trend; as Jones points out, it's a move from brawn to brains, and the government will put plenty of money behind it, for example by massive investments in human capital formation (via education), mobility (via the Internet and high-speed rail), in support for key technologies, and in environmental clean-up. Some of that money can be yours -- but public priorities will keep a lot in Chinese wallets. Know what's what.
• China's management talent is getting formidable -- and innovative. Only a few years ago China had few smart, experienced executives. (This isn't surprising, given the catastrophe inflicted on education by the Cultural Revolution; it ended in 1976, when today's 55-year-olds were 21 and should have been in universities.) Today, the IBM survey says that Chinas' CEOs, even those of state-owned enterprises, rank "creativity" as their No. 1 priority. Not only that, they show more interest in business-model innovation than just about any other group on earth. That is, they have an enormous appetite for large-scale corporate transformation (of operating model, financial structure, face to the customer, price-value equation) and the increasing confidence to undertake it. This will make them tougher rivals in any market, regardless of who has a home-field advantage. Get to know them as individual rivals, not faceless foes.

While the trio spoke on Thursday night, twelve time zones away and virtually simultaneously -- Thursday morning in Washington -- Treasury Secretary Timothy Geithner criticized China for not moving fast enough (not moving at all, truth be told) to let its undervalued currency rise. Geithner was right. He was doing his job. But it is not the same as a strategist's job.

Read more:

• Complaining About China Is Not a Strategy