I was honoured to participate in a panel the other week with the title, “New Trends in China, New Opportunities in Trade.” This was the second in the Export Horizons series jointly sponsored by Thunderbird School of Global Management, the Global Chamber and the Arizona District Export Council. Thank you to all three organisations for your support and contributions.
We examined China through a different lens than trade disputes, sanctions and tensions with the US. Our aim was to draw out a more complete view of the complexity of China and suggest some under-utilised opportunities, especially in lower tier cities. Of course the focus was on US companies, but most of the points are equally applicable to other countries.
I’d like to provide a brief summary here of some of the main points discussed and you can find a recording of the entire discussion below.
Who were the speakers?
Dr. Min Chen, Professor of Practice, Thunderbird School of Global Management
Dr. Min Chen is vice president of Kuester Group for Asia-Pacific and visiting professor to Antai College of Shanghai Jiaotong University. He was associate professor of international business at Thunderbird School of Global Management (1991-1997), also having taught executive education for many multinational corporations including GM, TRW, Honeywell, Allied Signal, etc. Dr. Chen now serves as a Thunderbird Professor of Practice.
On the business side, Min was vice president of Asia Pacific at Teleflex (1997-2008), covering its automotive, medical, aerospace, and marine businesses in Asia. From 2009 to present, Min has been focused on the automotive business as vice president of Asia Pacific at Kuester/ECS.
Dr. Doug Guthrie, Professor of Global Leadership and Executive Director of China Initiatives
Dr. Doug Guthrie has spent his career researching, writing, and teaching about three topics: organizational development, where he has focused on issues of leadership, organizational culture and corporate social responsibility; the Chinese economic reforms; and strategic economic development for cities in the US economy.
From 2014-19, Dr. Guthrie was the Senior Director at Apple, leading Apple University efforts on leadership and organizational development in China. Prior to joining Apple, from 2010-14, he was Dean of the George Washington School of Business, Vice President for University China Operations, and Professor of International Business.
Dr. Guthrie received an A.B. in East Asian Languages (concentration in Chinese literature) from the University of Chicago and MA & PhD degrees in organizational sociology from the University of California, Berkeley. Fluent in Mandarin Chinese, he studied in Taipei, Taiwan, during his undergraduate years and conducted PhD research in Shanghai, China. He has authored and edited books, academic articles, popular articles, reports on Chinese economic reform, leadership and corporate social responsibility, and strategic economic development in American cities.
Stephen Green, Deputy Senior Commercial Officer, US Embassy, Beijing, China
In March 2019, Stephen Green assumed the duties of Deputy Senior Commercial Officer at the U.S. Embassy co-managing the U.S. Department of Commerce’s 130-strong team in Beijing and the five Consulates General across mainland China.
From 2016 to 2018, Mr. Green served as Deputy Director in the Office of Foreign Service Human Capital (OFSHC) providing human resource services to more than 1,600 employees, including Foreign Commercial Service Officers (FCSOs) and locally-employed foreign nationals around the world as well General Schedule (GS) employees based in the United States. In this capacity, Mr. Green was senior advisor to the OFSHC Director on the gamut of human resource issues and managed the annual FCSO overseas assignments selection process.
From 2013 to 2016, Mr. Green served as Principal Commercial Officer at the Consulate General in Shenyang responsible for helping American companies develop relationships with business partners in the three provinces comprising northeast China, including Liaoning, Jilin, and Heilongjiang. Mr. Green was also responsible for promoting Chinese direct investment in the United States in support of the U.S. Government’s SelectUSA Initiative.
& then there was me as well 😄
The Starting Point: 3 points of focus
Over the last decade, China has had a significant strategic focus on developing the country’s 2nd, 3rd, and 4th tier cities. When foreign companies think about building relations in China, they typically think about the famous sites — Shanghai, Beijing, Shenzhen, maybe Chongqing. But the vast amount of economic growth in China is coming from the inland, lesser-known cities.
In addition, China has increased its support of Chinese companies going global. The Belt and Road Initiative and the new European Union deal are perfect examples of this pivot. Policies such as these have deep implications for companies that aspire to build relationships in China.
Lastly, there are questions about how China’s supply chain is rebounding in the post-COVID-19 world and what business relationships are going to look like in the coming year. China is one of the few countries world wide where many industries can still find their whole supply chain domestically if need be, but still going global is increasing a discussion.
Why “lower-tier” cities?
Just as people have a tendency to refer to “Africa” as a trade destination without distinguishing the differences – sometimes profound – between countries, so too do most of us refer to “China” as though it is a monolith. But China’s opportunities are as vast and diverse as its territory, and in our discussion we wanted to explore China’s second and third-tier cities and regions – not the big names. Less known but no less interesting.
It’s important to remember that China is a vast diverse territory, more comparable to a continent than a country, where a wide range of cultures are represented and there is a wide range of opportunities for companies looking to do business who are willing to adapt to new trends in China.
It’s also good to realise that the “tier” classification isn’t something official from the government, but is a system widely used by analysts to classify Chinese cities. In 2019 a number of cities were reclassified into so-called “new tier 1” cities, and these together with the remaining cities in tiers 2 & 3 are presently the main engine of China’s economic growth. Let’s say it’s cities other than Shanghai, Beijing, Shenzhen and Guangzhou.
In those cities consumption is still growing fast and there is a hunger for innovation.
What kind of opportunities does that bring?
Many so-called lower tier cities have specific industry clusters, specialised on certain kinds of products. Eg Donguan has a cluster for smart manufacturing, there are other clusters focusing on electric vehicle batteries etc.
The authorities of those cities work with a great degree of autonomy and usually rather entrepreneurially, as their KPIs are set in this way. That means that companies looking to enter China should think about a city with the right “industry match”. This can result is significant benefits in the form of warehousing with delayed payment terms, tax breaks, office space being provided at a nominal price etc.
What’s more, China has excellent infrastructure between cities with a dense high speed rail network, regular network and plethora of regional airports, making it easy for visitors to get to almost anywhere.
Concrete Examples of (US) Industries with Opportunity
- Apple is still growing strong (seen as a status symbol)
- GM is still competing with German car manufacturers, although the Chinese are catching up fast, & especially for electric vehicles may soon be ahead
- Entertainment & theme parks eg. Disneyland brand or sports team brands
- Agricultural/food products
- Health and wellbeing
- Sports equipment
- Everything around caring for pets
Developing Guanxi – Building Relationships in Lower Tier Cities
I have always believed that relationships are key to success in any country, but sometimes language and culture can create impediments between people. In the biggest cities there usually are resources available to help overcome these difficulties, but often this is less true in smaller places. Particularly when political tensions rise business can become complicated.
Relationship building in a complex and rich culture such as that of China is a challenge, especially when you don’t have fluent command of the language, however it’s not impossible. You can find also details on this topic in my earlier post.
There are a few key points that you need to take into account. These are valid everywhere in China, but even more so in lower tier cities.
Don’t assume things
When people hear the word “Guanxi” they often assume it means something sleazy and rather corrupt, but in the original meaning of the word, it is genuine relationship building.
Also, don’t assume that lower tier cities means something rural or that the population has a poor standard of education as that couldn’t be further from the truth.
Go slow to go fast
China is a really high context culture so it’s necessary to invest in relationships up front before moving onto the tasks in hand. That may take the form of drinking tea first thing in the office, or having a huge banquet on the night you arrive, but time invested in this way will repay itself many times over.
If you take a humble approach and show a genuine interest in learning about the markets, you can build strong relationships.
This is true in all areas of China, but especially so in lower tier cities where you may need support from the local government for your project to be successful. If you’re doing business in China, you have to also accept that the government has far more influence on companies than would be the case in the west, so even private companies are affected by politics to some extent.
Meetings are often used as a way to further relationships rather than to reach decisions, which can be frustrating, but staying calm will bring you further than trying to create pressure.
Mianzi – The Art of Saving and Giving Face
Never push a Chinese into a corner on a decision or make them look bad in front of others. That might sound like standard good manners but is easier said than done when it comes to business meetings.
Just don’t do it, as it is one of the fastest ways to destroy relationships.
Chinese negotiators can be famously non-committal, so it really pays to remember that if they say “yes” to something it doesn’t necessarily mean that they agree with you, just that they heard the point you made.
Relationships, like Rome, are not built in a day. Indeed that’s one of the hardest parts about doing business during a pandemic, as building new relationships in a virtual world with Chinese companies is almost impossible.
Once you’ve established a basis of trust with Chinese partners, then those relationships need to be maintained with regular visits. That is likely to be bad for your waistline, not to mention your liver. Chances are you will come home exhausted, feeling like you can never show your face in KTV (karaoke) ever again, but then you’ll know that you probably did the right thing for your guanxi!
Trade continues despite tensions
Even in the face of sanctions and heightened tensions, trade continues. One of the most vital organisations in ensuring the continuity of opportunity is the US Commercial Service, which often is an American exporters’ best friend. Other countries also have equivalent organisations who exist to support companies looking to export (eg. IHK in Germany, British Chamber of Commerce, WKÖ in Austria)
Despite the change of administration in Washington, tensions remain. To some extent this is normal between two superpowers, as long as things don’t get out of hand.
All countries take steps at times to limit the exports of products that they see as being contrary to their political interests. Unfortunately, in the case of the USA that this is rather long right now and there’s no clear sign that that is likely to change soon. Eg bans on exports of nano-tech, blocking Huawei
In the case of Huawei, this has already lead to them developing their own mobile operating system, which launched May 2021. Definitely a contraproductive step by the US.
Threats to Economic Development
China is gradually moving to the double circulation model. This is a change from investment lead growth to consumer lead growth. To achieve that, China needs to perform a balancing act between its sustainability and economic goals for the coming five years.
Increasing tensions with the US and Australia mean that China wants to reduce its reliability on external factors for their economic growth, but that is harder to do than just making the decision.
For one thing, manufacturing relies on the huge groups of migrant workers. These groups are becoming increasingly expensive to maintain, making products less competitive, but also the falling birth rate over the past decades as a consequence of the 1 child policy means that there will come a time in future where there are simply not so many workers available. How will that affect the competitiveness of Chinese manufacturing?
Additionally, the population is aging at a rapid rate which also needs to be supported. This is a social problem, however the present generation of “silversurfers” has purchasing power and shouldn’t be overlooked as a consumer group. This group was in focus during the 2021 Singles Day festival for Tmall, who introduced a seniors version with larger fonts and appropriate products and ads.
What is China doing to try to cope with this?
There is already a realisation that China can no longer rely on comparative advantages as those are rapidly being lost, and that it will be necessary in future to develop competitive advantages. This is already beginning in fields such as applied AI, automation, smart manufacturing.
Some Chinese companies are already starting to develop special measures to ensure that they can keep their employees in a competitive market, whilst others are considering moving their manufacturing overseas.
For overseas companies, they can strengthen their position on the markets if they support their suppliers to make these changes to be more competitive and to rely more on automation than migrant workers. Apple is a great example of this.
Will the recently announced 3rd Child Policy help reverse the problems with the birth rate?
In my personal opinion, no. Not unless the government implements other major changes to make child rearing less horrendously expensive. The announcement of the 2nd child policy didn’t have more than a minor effect on birth rates in China – most families who wanted and could afford a 3rd child would have already had one anyway.
Women are in a strong economic position generally in Chinese society, as in other communist societies in the past. On the one hand, there are strong social pressures to marry and have a child, especially in lower tier cities, however women soon return to their work and careers
Managing supply Chains post-Covid
Whilst there may be a trend to China+1 and diversification it would be unrealistic to believe that every company is suddenly going to pull out of China. What we are likely to see is a diversification of risk so that companies sacrifice a certain amount of efficiency for the sake of not having all their eggs in one basket.
One of the new trends in China is towards sustainability (eg law forbidding food waste at the end of April) and this is likely to be reflected in a greening up of supply chains as well. As this is a sector where overseas companies have more experience there could be new potential for business there.
New Trends in China, New Opportunities in Business for Overseas Companies
China remains a hugely potential market and if you are prepared to dig a little further beyond Shanghai and Shenzhen then there are myriad opportunities for overseas companies to enter into lower tier cities & take advantage of new trends in China & new opportunities in trade. The markets are not easy to gain traction in, but are potentially extremely lucrative.
China will continue to grow in the coming years, even if it sometimes seems like 2 steps forward and one back. The market is however to important to ignore so whilst each company has to do what is right for them, then waiting too long could mean that the opportunity has been missed and the market is then too expensive to enter.
You can find a recording of the entire discussion below:
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