China The Corporate Global Challenge

For twenty years CEO’s and Chairmen of global companies have been satisfying investors requirements for a China presence with one or more joint-ventures , profitability very mixed at best, and led by a junior board member at best, and, more likely subsumed under an Asian regional manager.

Well who can then be surprised that GSK and RTZ found themselves consumed by China crises, which they found irritatingly absorbing of time and intellectual time and resources over extended periods. Their leaders were quite happy with the business progress that their companies made in China, making the same mistake as many, believing that they created the business, when, in fact, it was Chinese demand.

When the Chinese turned on the misdemeanours of both, the halls of those companies responded to Chairmen and Chief Executives trying to fathom the real depth of the phenomena they had tangled with. I have no doubt their Chairmen and Chief Executives enormously regret that they did not spend more time understanding China.

These two stories are the best way for corporate leaders in Western multi-nationals to comprehend their own knowledge and experience gap in dealing with an epoch changing phenomena – the emergence of China – the global Challenge.

China plays the low profile game, and this works well for them, as they position themselves quietly for reactions they expect. Take Paulson who went to China in 2007 to try and face the Chinese down and get them to revalue their currency – he found they were ready and waiting with $3trillion of US assets.

Perhaps this led to Obama’s pivot, but the lesson was: do not take the quiet Chinese for granted.

GSK and all the major pharmaceutical companies knew well that China was a den of corrupt practices, where doctors were being paid to prescribe their drugs. This started in 1992 when their Hong Kong managers established the practices that ended with the bringing down of GSK. The Chairmen and CEO’s were probably reassured that this corruption was just part of doing business, but it did reflect a growing tendency in pharma companies to see the doctors and not the patients as their markets.

Well, GSK can get over this in time, but behind this is something much deeper. Pharma companies have taken full advantage of the booming welfare states and health preoccupations of Western nations, and made fortunes out of prescribing huge quantities of drugs for patients whose direct pay for them is caught in the mists of insurance, medical talk, and personal worries about health.

Whatever the rationale the huge rise in health costs is matched by the huge rise in pharma companies profits.

The deeper story is that the Chinese are about to spike that by containing the health costs for the Chinese, and one of the key policies is to drive down the mass prescribing of drugs, and the cost of drugs. That is what is really behind the assault on GSK, and I doubt their management realise that in their march to heavenly profits the Chinese have seen the Achilles Heal of Western health expense, and will act to drive costs down.

I doubt that the Western pharma companies have even considered what will happen if Chinese companies take their new prices to world markets, or what will happen when Western regulators start to see the gaping difference in costs. Will they launch a huge PR campaign to rubbish the Chinese system to try and discredit it? That will fail and they would then try to stand behind a TPPA, EU-NAFTA circling of the wagons to keep the Chinese out of prized developed markets, but, like the tides of the sea, their sandcastles will start to fall and the new model of a pharma company will be thought through, just as they lose their global grip.

This blinkered and short term approach to Chinese competition is seen clearly in the fate of Nokia and Blackberry, who denied the possibility of Chinese competition, then rubbished it, then tried to manage its emergence. But it was all predictable.

The wise companies are the ones who try to anticipate and manage the global challenge of China. There is plenty of evidence in Germany and in other countries of managing the rise of China to mutual advantage, but the clock is ticking.

I saw, from the 1970’s onwards Western global leadership in many areas slide as they ignored cheaper competition from Asia, and this will increase until Western leaders think through the implications of change, and work out models of cooperation with China and the developing world, which enable fair profits to be made in this field. They need to innovate to maintain leadership and use assets for negotiating long-term structures that are well thought through.

I am not confident that the turkeys will vote for Xmas and instead our short term profit calls for investors will see medium term attempts to hold profits by cost cutting.

RTZ tried to ride the iron ore boom, and keep the Chinese paying. When they asked for the Chinese to participate in a bail out, and then cut and ran on a recovery and political reaction in Australia and Washington to Chinese acquisitions of resources, they found themselves drawn into a conflict which sapped their energy and made them realise the world had changed from cosy rooms in London, New York and Sydney to a world where China and other developing nations were, and are, redefining the resource world.

Again the challenge is met, compromises made, but the instincts of the resource majors will be to circle the wagons, and keep the new guys in check that way. I doubt that they are any match for a sophisticated group of planners and businesses in China, and who are already based all round the world.

All key sectors of the Chinese economy benefit from deeply experienced leaders, most of whom are not known in the West. The Chinese are smart, modest and keep themselves low profile. Simply reactive thinking will not suffice, just as putting China under junior leaders of the Company has already been unhappily tested.

In both cases a new relationship and new ideas need to emerge instead of indignant reactions to challenges from the upstarts.

Am I saying all is lost, and the Chinese will take over the world, backed by BRICS and a march of developing nations? No – the outlook is not that gloomy. The Chinese have no interest in major rocking of the boat, but when left with no option, then they act in their own interest.

I think the world of super profits arising from cheap money, regulation and other forms of protection are going to be challenged and a new global landscape is arriving. The old will not go easily and false dawns will be created. The hope will be that the USA and other Western nations can hold back this spread of the new world, where more balanced objectives than short term profit predominate.

But the need for access to the new markets cannot be met by force – that kills economies. It cannot be met by protectionism, as the dice are not loaded as before. The IMF and World Bank are not the policemen they once were. The Soros type attack on the Asian tigers to weaken their national power is unlikely to succeed in the same ways in the future – certainly in Asia where the Chiang Mai Initiative has prepared the central banks for any more currency wars.

So the Chairs and CEO’s of the major corporates, and their policy makers in Government need to work to find a new order which gives both ways. These new ways will vary from sector to sector, but they will contain the seeds of a new set of relationships and motivations for business and nations.

China is about to change in unimaginable ways in the next 5 years. Deals can be done with China during this period which will be hard to strike in the next period beyond that.

The Barbarians are not at the Gate, but some see it that way – mistakenly. Thinking hats and new advisers who see the New China is the order of the day.

Categories: Corporate, Foreign policy, Uncategorized, USA

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