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Daguo Xintai - China, the New Power of the XXIst Century

Interview with Peter Williamson by Jorge Nascimento Rodrigues, editor of Gurusonline.tv, December 2003

INSEAD Professor, Peter Williamson, recently wrote about China Tomorrow for Harvard Business Review (October 2003 edition). In this interview for Gurusonline.tv he explains the earthquake that China emergence will be for geo-economics and geo-politics. He is one of the co-authors of the Metanational Theory, with Yves Doz and the Portuguese Jose Santos, at INSEAD.

Daguo Xintai = mentality of global power

Interview About the Metanationals Theory

Recently, Goldman Sachs published its study about the emergent powers path to 2050. China, Brazil, Russia and India will account for half the size of the G6 in 2040. In 2050 will account for 60%. China will be the larger in 2050, and India the 3rd. The G6 will have only China, USA, India, Japan, Brazil and Russia. In 20 years those 4 emergent powers will account for 1/3 of the G6. Is this a geo-economic and geo political "earthquake"?

The weight of population and growth potential makes this shift virtually inevitable. Hence the existing G6 will have no choice to respond to the geo-economic and geo-political "earthquake". In practice, this will mean the existing members of the G6 will have to make two main adjustments if they are to maintain their living standards and some of their economic and political influence:
- To link their economies more closely to the emergence of China, India, Brazil and Russia and the large, wealthy economies of US and Japan -- finding ways to benefit from these economic powerhouse through export of products, investment in these economies, and supply of sophisticated services to them;
- Relentlessly proceed with the further integration of Europe to become an economic and political powerhouse in its own right, re-establishing its influence in a world of giants.
Interestingly, although progress is slow, the South-East Asian countries have come to a similar conclusion. Businesses in everywhere from Singapore to Thailand and the Philippines and Taiwan are seeking to connect themselves to the growth wave in China and India as suppliers of products and services. The agenda for economic integration (through APEC and ASEAN), even with the ultimate possibility of a single currency, has received renewed impetus recently.

Relentlessly proceed with the further integration of Europe to become an economic and political powerhouse in its own right, re-establishing its influence in a world of giants.

Regarding the international reports - for instance from ATKearney, Ernst & Young, Cushman & Wakefield - we observe that China is taking the role of the "commodity manufacturing" center of the world (for outsourcing movements from multinationals) and India the BPO leading place (for BPO off-shoring). What's the impact in the world economy of this trend?

The continued shift of commodity manufacturing and services that can be delivered remotely (such as call centres and basic financial services) to China and India will be relentless because for the next 20 years, these economies will continue to have a very substantial labor cost advantage. For the most part, commodity manufacturing and services in Europe will become uneconomic. But those who supply differentiated (non-commodity) products and services should not be complacent! China and India will not be content with staying at the commodity end. Please see numerous examples in our HBR article of Chinese companies starting from the "low end" to build volume, but rapidly moving up to higher value, more sophisticated segments as they gain experience and build their knowledge base.

Where does this leave European companies?

The answer is not simply to try to "retreat" to the "high end" with China and India "snapping at their heals". The answer is to drive for specialization and global scale: asking what are the unique capabilities that we can offer in the global market, including to China, India, Brazil, US and Japan. Most of these unique capabilities will be built on complex, "messy" knowledge -- because ultimately advantage that comes from these kinds of knowledge pools are the most difficult to imitate. This means companies and countries need to ask themselves "what special know-how do we have locally and how can we leverage this in the global economic system?"

But, wrongly, China is mainly considered a manufacturer by the western analysts and policy makers, although China has more than 1 million researchers and an emergent knowledge intensive sector (not only in space and military). What's your comment about that?

Following on from a previous answer, the implication is that focusing on "knowledge intensive" industries per se will not be enough to compete with China long term. Although most people don't yet recognize it, China is starting to compete in knowledge-intensive industries as well (see the section on "technological upstarts" in our HBR paper for examples). So it won't be enough for European companies to compete in "high technology" or "knowledge-intensive" activities. Instead, they will need to choose those knowledge-intensive activities where they have a real and distinctive advantage because of know-how built up by years of experience in the business -- know-how that it will be difficult for China to replicate. It also means that European companies should be looking to China as a potential source of new technology in the future -- building the business by sensing interesting, but under-exploited technologies and knowledge in China and combining this where their own know-how to come up with world-beating "metanational" products and services that hey can sell globally. Its because of this potential that forward-thinking companies like Otis Elevator, Nokia, and Novartis are putting R&D centers in China.

The implication is that focusing on "knowledge intensive" industries per se will not be enough to compete with China long term. Although most people don't yet recognize it, China is starting to compete in knowledge-intensive industries as well.

Japan was seen as the "engine" of the world in the 80's and the futurists forecasted an Asian Century for the XX Century. Japan is in serious trouble since the 90's and the XXI Century opened with a new geo-political strategy from the US. Do you think that the XXIst century, particularly its second half, will be the true Asian Century, but with China as its "engine"?

I'm not sure that the concept of an "Asian Century" makes sense. We are in a globalized environment where economies will be increasingly integrated, so you can't look at one region in isolation. The US will continue to be an important driver of the world economy. This is still true of Japan today -- people keep on reminding us how much "trouble" it is in because of slow growth, but we shouldn't forget that Japan remains the second largest single economy in the world and a significant source of new technology (look no further than "flat panel displays"). China is already an important engine of world growth, it will become more important in the future. But what this means is the global economy will be like an airplane flying on 6 engines in the future, not just two.

As you mention in the HBR article, one of the new emergent "actors" in the global scene is the "hidden dragons", the emergent Chinese brands. Do you think the leading present economic "actors" and the present global brands (native from US, EU, Japan) are aware of that trend?

As we argue in the HBR article, I don't think established brands in the US, EU and Japan are paying enough attention to China's "hidden dragons" -- they are myopic about China, seeing it as a market only. But it is also a new source of competition. It's interesting that in the West everyone sees China's entry into the WTO as a big market opportunity. But in China, people also see entry into WTO as a big opportunity: an opportunity to better penetrate US and EU markets with Chinese products! Western companies typically forget this. [The HBR article gives a list of myths that Western companies have about China which leads them to ignore this new source of Chinese competition].

The new Chinese multinationals have been more open to leveraging the knowledge and capabilities of others than traditional multinationals.

What are the main characteristics of these new brands? Are they traditional multinationals?

These brands are mostly based on the capability of low cost manufacturing or low cost R&D in China. But they differ from traditional multinationals in two main ways:
- They are generally focused on segments that existing multinationals have ignored or views as "unattractive" (like Haier's small refrigerators or Pearl River's entry level pianos). These segments are the "loose bricks" in multinationals' competitive walls. There attack is targeted at the weak spots;
- Chinese firms have recognized their limitations and used distributors, advisers, partners etc. to help them fill gaps in their knowledge base more readily that traditional multinationals who tended to want to do most things, except for local sales and distribution, themselves. Quite simply: the new Chinese have been more open to leveraging the knowledge and capabilities of others than traditional multinationals, whether its using European designers to improve their product design, or making acquisitions to provide access to new technology (as China International Marine Containers bought Hyundai's container-making operations in China, primarily for Hyundai's refrigerated-container manufacturing technology). Its not that traditional multinationals haven't do these things, but the emerging Chinese brands are doing them earlier in their lifecycles and faster. This makes them closer to the "metanational strategy".

In your study about metanationals you refer to a new kind of international companies, mainly native from the Asian tigers or Europe. Are you seeing a similar trend in the Chinese or Indian new brands?

As I said, the new Chinese companies are gaining strength by combining their own advantage with knowledge they can obtain from others elsewhere in the world. So they are following a "metanational strategy" in terms of leveraging knowledge from around the world. They are probably more open to this because, having faced strong competition from multinationals inside China, they are well aware of the gaps in their knowledge base. They are not shy about moving to fill these gaps because their moto can be summed up as "what makes you competitive long-run is not what you know today, but how fast you can learn". Indian companies are at an earlier stage in building global brands, but they are following a similar path. In 2001, for example, Tata bought the famous UK tea brand "Tetley" (founded in Britain in 1837) to obtain improved knowledge about international brand building and distribution.


© Gurusonline.tv, January 2004

 
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