What’s the business landscape in China today?

Q: What is the businesses environment in China today?

In China right now, there’s tremendous confidence and a pervasive sense that Western-style democratic capitalism has failed, and that America particularly is in decline. There’s a feeling of, “We don’t need to worry about America. We are not only rising, we have risen.”

At the same time, it’s a very, very competitive, insecure business environment. People feel enormous pressure to reap their gains as quickly as possible, because they really don’t know how it’s going to evolve. They’re positive and they’re quite optimistic that they can do it, but they are also anxious and uncertain. The rules of the game have changed so often—what worked last year may not work this year.

Risk is a big topic. Mitigating risk as a Chinese entrepreneur means learning how to diversify your investments beyond China. In other words, how to carry on your business outside regulation by the government.

It’s what Apple and HP and every other U.S. corporation does. They compare the relative burden of the tax laws and how to work most effectively in a global environment. Chinese businesses are in exactly the same position. They’re saying, “Okay, we have this capital, where should we put it? Are we just going to park it in Hong Kong real estate? In Manhattan real estate?” Currently it appears that diversification through real estate is one focus, but so too are investing in existing businesses and startups.

Q: There is ongoing concern in the U.S. about China’s approach to intellectual property. How is that issue seen within China?

For all the concern in the U.S. about Chinese piracy and stealing trade secrets, the fear is even greater within China. Manufacturers aren’t only competing with international firms, they are competing against their fellow Chinese entrepreneurs. They are constantly worried that someone they hire might pick up their prototype, take it down the road, and make it for half the cost. It is not hypothetical.

Q: How do Chinese business people deal with the regulatory environment?

Clearly as a socialist-market economy with a single political party and no independent judiciary, the regulatory environment in China is very different from that of North America or Europe. Moreover, because personal connections or guanxi are critical at all stages of business, reliance or engagement of regulations differ. Businesses cultivate connections all over the world in order to maximize trust and minimize uncertainty. But in China, they are of particular centrality and consequence.

Where laws are vague and enforcement irregular, people will turn to relationships they feel are trustworthy, and in most societies those will start with a family relationship, because those will endure. You see it in Latin America, the Middle East, even parts of North America. The family is the inner circle; they are going to be the ones from whom you’ll borrow, with whom you will share a secret or an idea that you don’t want your competitors to have. Certainly that’s true in China, too.

What will be interesting is how entrepreneurs handle going outside their culture. Do they focus on cultivating guanxi or find different ways to deal with the need for trust and some degree of certainty? People within China may say guanxi is “the Chinese way,” but that doesn’t mean they themselves prefer that way. In fact, for many Chinese people, whether they’re in business or not, their top priority is a better regulatory environment.

Q: Is there broader acceptance of state involvement in the private sector, at least in the form of government ownership?

In the New York Times this morning, I read about how the business community in New York is positioning themselves towards the city council election. It was very straightforward; business needs to have people to represent their views. If we look at the growth of lobbies in Washington in the last 20 years, the very significant increase in the number of people representing specific industries, it is clear that the private sector not only needs connections to government but also seeks out those connections.

All over the world, people and corporations position themselves vis-à-vis the levers of power. Usually, it’s done collectively, through lobbying for entrepreneurial and business interests, but there are different ways you go about that.

I would say that business people in China are very well aware of political power and how it’s exercised. The largest, most-profitable enterprises are owned by the state or led by people appointed by the party. So it’s actually in some ways fairly transparent.

In the age of the internet you can not only find everybody who’s in the party’s politburo, you can find out their history and their family. That’s what the New York Times did to track down the business interests of the former prime minister’s family. It was all in the public domain.

Q: In the broader population, how much is there a desire to be a part of transnational systems and be able to trade freely, to move money around, travel? Or how much is nationalism—

I don’t think those things are opposite. Chinese citizens can be intensely patriotic, nationalistic. People are extremely—and rightfully—proud of what has been achieved in these last 30 years. They’ve virtually eliminated subsistence poverty, grown the infrastructure, improved education, and extended life expectancy. People are aware of what they have gained and they are proud of their country.

That doesn’t mean they don’t want to travel outside of China. In fact, international travel is usually one of the first “luxuries” families purchase. Opportunities for travel are really, really exciting. But that’s not in opposition to being very proud about what their country has achieved.

Chinese travelers are having increasing impact on international travel. Last year Hong Kong had 37 million visitors from China. The tourist industry is a huge piece of the Hong Kong economy and it turns primarily around satisfying Chinese consumers.

China is now considered a lower-middle-income country but wealth is underreported. There is immense wealth in China. Tens of millions of people have large amounts of discretionary income. We generally think these people are residents of the largest coastal cities, like Beijing, Shanghai, and Guangzhou, but that’s not necessarily the case. High-spending tourists come from all over China.

China is the number one luxury market in the world and consumers are increasingly sophisticated and demanding. Older people who have saved a lot of money are shopping for other family members. Gold is big. It’s cheaper outside of China so they travel to Bangkok or Hong Kong.

At the moment, a perception that genuine goods can best be purchased outside of China means there is a great deal of travel to buy things like high-end jewelry and high-end consumer goods. But increasingly there are high-end malls for these luxury goods inside China. Thus in past few years, diamond merchants from Israel and Amsterdam go directly to China on business.

Other types of consumption that are creating opportunities for business people include healthcare, old age care, tutoring for children. They might have been called social services, but let’s just call them services now that have been privatized. Many people believe services are the next major growth area and the government also makes this case.

Q: China has experienced tremendous growth. That growth is slowing. Is there concern about stagnation? Are they looking over their shoulders at other countries that are still rising quickly?

I don’t think anybody’s too worried about stagnation, because it’s such a huge population. There are so many people who are ready to invest, spend, and have a better life. You don’t want to overplay the numbers game, but there is an element in which that does have to be put in the calculation.

One area where China does have an eye on competitors, at least on the blogs that I read, is the military. They see themselves in competition for claims to territory with Vietnam and the Philippines over the South China Sea where the oil is. In the north, they are in a dispute with Japan over islands. The military competition is a concern for some at the elite level. It is part of the push to have a blue-water navy that has the capacity to control wide stretches of the ocean.

Q: What about competition in the manufacturing sector?

Manufacturing has been a declining sector in terms of employment for some time as they move up the food chain in terms of robotics or shift into the service sector.

At one point more than 60% of the shoes in the world were produced in four counties in Southern China. That’s 4 out of over 2,400 counties that supplied the world. We saw similar trends with t-shirts, cigarette lighters, and volleyballs. The spatial concentration boggles my mind. Imagine if one county in North Carolina produced 80% of any one consumer item.

Recently Bangladesh and Vietnam have been taking market share in some of these areas. Taiwanese manufacturers who first went to China 25 years ago moved to Vietnam because they felt it was a more secure place where they could make long-term contracts and they could deal better with the government, and they could more easily repatriate their profits.

When you make light consumer products you can be extremely nimble; you set up the factory in a week and you can walk away from the factory and you’ve lost almost nothing. The main discussion in China now, as I understand, is the movement of industries inland in China in pursuit of cheaper labor.

Foxconn, which makes Apple products among many others, has 1.2 million employees in China. They began moving a quarter of a million jobs from Southern China to Sichuan 18 months ago. That’s a lot of people.

What would happen if a company in the U.S. moved a quarter of a million jobs from one place to another? The state of Connecticut worries when 400 jobs are lost. This one company had the capacity to say to a quarter of a million people, “If you don’t want to go that’s your decision, but we’ve got folks there in Sichuan who want the job.” The scale of this labor piece is remarkable. Most people didn’t move because they did not want to live 1,000 miles away in a different part of the country. So the company partnered with vocational schools and most of the new workers were young people who hadn’t yet migrated.

All of this underscores not merely the tempo of change in China today but the vast scope and reach of the change, as well.

Interview by Jonathan Weisberg.