The Evolution of Chinese Strategy: This New Year’s resolution is to go after your market.

First is was capital, then technology. China Inc.’s next big move is to go after global markets – including the one in your backyard. Happy Year of the Dragon.

Chinese business strategy has been evolving steadily since Deng Xiaoping opened the PRC to the international economy. China has had three big items on its acquisition “to do” list, and it has already ticked off two of them.

The first big “get” was foreign capital and know-how. Strange as it may seem now, during the 1990s China needed access to western capital. It also needed basic management know-how. The main lever of strategy in those days was the older generation of State Owned Enterprises (SOEs) and provincial/municipal governments. This was the age of the government investment trusts – the ITICS. CITIC (China Investment Trust Investment Corporation) was the western darling; GITIC (Guangdong’s vehicle) was not – particularly after it defaulted on its bonds and the “implied backing” of Beijing turned out to be the “erroneously inferred fantasy” of Hong Kong based investment banks. The economic realities were very different at the time, as China was still operating in an environment of shortage and relative poverty. The plan to sell off state assets and privative moribund SOEs worked, and China Inc. started to take shape – with funding and management know-how from the West.

The second item on Beijing’s shopping list was technology, and it spent much of the 2000s climbing the “value ladder” and learning to produce, build and assemble things as quickly as possible. This was the era of the entrepreneur or privateer, who were acknowledged by the party for the first time in 2006. This was also the period when the WOFE became a viable business structure for many overseas businesses. Beijing continued to reform the SOEs, but now the goal was to create a network of sophisticated pillar industries and companies that would be the vanguard of China’s efforts to close the technology gap with the West. SEZs (special economic zones) attracted clusters of high-tech manufacturers, and China’s export-oriented (some would say mercantilist) policies insured that the factories were kept humming as MNCs outsourced their production. China Inc. was learning not only how to manufacture using 21st century methods, but also figuring out how to design, measure, perform quality control, manage and set up a supply chain. (Whether or not they actually did all of these things is another issue – they certainly saw how it was all done). China’s economy was cruising steadily from shortage to surplus, and it looked like smooth sailing for both private and state run companies – until the financial crisis of 2007-2008 roiled the waters.

The 2010s saw an entirely different PRC emerge on world markets. Beijing had the wherewithal and firepower to deliver a huge stimulus package that not only buoyed the economy but also shifted the policy focus back to state sector. Two big trends are shaping the future of China Inc. to start accessing western markets directly. First, the state sector is developed enough to start acting on its international ambitions. SOEs like SINOPEC, state directed monopolies like China Mobile and private champions of governmental policy like Huawei, Lenovo and China Eastern Air are all looking to access overseas markets through acquisition or by building their own distribution channels. Second, Chinese entrepreneurs and private businesses are also trying to open foreign markets – albeit for different reasons. Whether they fret about their future in a policy-driven economy or they want to raise their children abroad, the moneyed Mainlander seems to be clamoring for distant shores in droves – and bringing their investment funds and business plans with them.

The Dragon takes flight
Chinese firms, be they private, state owned, or somewhere in the middle, are going to make a move on US and European markets. Some Chinese firms are ready now – others will be soon. You’ve got 3 choices

  1. Ignore it and hope it goes away.
  2. Fight the trend and stymie China’s expansion plans.
  3. Get out in front of it. Make it work for you.
  • Right now, Option 1 seems attractive to many international managers and corporations. The US market is finally showing signs of firming up but Europe is still shaky and weak. Most American firms have decided to hunker down and ride out this rough patch – even though there is still plenty of cash gathering dust in corporate treasuries. Easier just to ignore the very real possibility that a new threat to top line sales is gathering offshore.
  • Option 2 – Fight the future. This has been a political favorite – and we’ll hear plenty more about it in the election campaigns of US Presidential hopefuls. China has made this the path of least resistance, clumsily leading it’s international efforts with messy natural resource buys or by pushing politically incorrect choices like Huawei in sensitive industries.  Denial and delaying will probably work great for a while – and then not at all.
  • Option 3 – Make the trend your friend and start using your hard-won international skills. When you first arrived in China you didn’t know what you were doing, and couldn’t seem to get a handle on standard operating procedure. Now the situation is reversed. You know everyone here in China and have plenty of contacts back in the States. They want access to the US market – you want to develop your China distribution channels. International managers in China may finally be getting some bargaining power again, but only if you can offer what the other side needs. International markets is the only item left on their to-do list – for now.

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