China 2010: insights from Microsoft, Symbio, Lip-Bu Tan

Part 1 of 2. Part 1 here.

Does success in China depend on successful government relations?  Is it really possible for foreigners, Chinese from Hong Kong and Taiwan, and “sea turtles” who have lived abroad for a long time,  to truly penetrate the inner circle of business and government or are they always to be disadvantaged vs. their mainland Chinese counterparts?

I attended an event called “China 2.0: New Rules, New Opportunities” in Silicon Valley that weighed in on these issues.   Hosted by the Churchill Club and sponsored by Symbio,  panelists included Linda Chen (Partner, KPMG), Jacob Hsu (CEO, Symbio), Harry Shum (Corporate VP, Search Development; Microsoft), and Lip-Bu Tan (President & CEO, Cadence Design Systems, Inc.).  Note: post is draft.  I will add links to this post soon!

Part 1 covered the interesting topics of innovation, the myth of cheap labor in China, and how to best retain valuable staff.  In reaction to the discussion about cheap labor in China (and how it is not to be found in Beijing and Shanghai), Paul Denlinger (blog, Twitter) added an insight into how foreigners and outsiders often fail to see the diverse and fragmented character of China today:

The mistake most outsiders make re China is that while most outsiders look at China as a single economic entity, it is in fact only a unified political entity. As economic growth around the world slows, it is fair to say that different regions within China will break out into winners and losers. Those regions with better universities will do better in research and innovation, while those areas with a large number of poor will do less well. Also, those regions which do not depend on exports orders and are more self-sufficient will fare better.

For example, Guangdong province, which depends on contract manufacturing for leading western brands has been hard hit, while Zhejiang province, which does more ODM work of consumer goods and has more local ownership of factories, has done better.

It is very hard for outsiders in China to understand that the country is so diversified on the economic level. The view of China as a single monolithic entity is one that not only the Chinese central government wants to perpetuate, but also critics of China in the west.

This fragmented nature also means that provincial and local governments are in competition with each other for jobs, investment, knowledge transfer and economic development.  This aspect highlights some of the issues raised at the panel related to working with the government.  Without further ado, here’s Part 2:

Working with the government

“In the US, when you think of the government, you mostly think of them as who you pay taxes to and that’s pretty much it,” said Jacob Hsu.  “But in China, the government is much more involved in everything.  When you work with the government, you can get tremendous leverage, and get a lot more clarity and certainty around your plans.”   I’ve also heard other entrepreneurs say that their strategy is to stay as far as way from the government as possible, so clearly this advice is situational.  But some industries, such as software outsourcing, are viewed as important industries for China to develop.  China’s Ministry of Commerce has launched the “1000-100-10 project” to develop China’s outsourcing business – 10 target Chinese cities, 100 international companies, and 1000 outsourcing vendors serving multinational customers (source: KPMG).  KPMG also has a nice white paper entitled A New Dawn: China’s Emerging Role in Global Outsourcing edited by Rebecca Fannin (blog, Twitter) author of Silicon Dragon.  Jacob advises carefully considering how your business can be seen as supportive of government’s own objectives and they can become a self-interested ally in enabling you to do what you want.

Getting into the inner circle

One of the most interesting mistakes that Lip-Bu Tan shared from his experience as a VC at Walden International was his backing of top executives from Hong Kong and Taiwan.  According to Lip-Bu (who is also not from mainland China), these executives were never accepted “into the inner circle” by Chinese.  This then became a handicap for his portfolio companies.

I found this comment to be concerning.  If foreigners (including Chinese from Greater China) are never allowed into the “inner circle” then doesn’t that mean that China is an unattractive place for foreigners to be?  Is there a “glass ceiling” that non-mainland Chinese face?

From other conversations I’ve had with business leaders and entrepreneurs, I think there is no question that there are major disadvantages to being “outside the club.”  My rudimentary view on this as an outsider is that:

1. The period prior to China’s opening in 1978 was a powerful bonding experience for Chinese and its hard to be in the “inner circle” if you are in your 50s (or older) and don’t share that experience.
2. The period between 1978 and 1989 was also a period where a lot of deep-seated relationships were built as elites first got access to universities, overseas education, and a sense of shared mission around China’s development.
3. 1989 to 1993 was also a period of intense introspection and soul searching.  Do the Chinese that stayed have resentment toward the ones that left?
4. 1993 – present.  Access to the inner circle also depends on just raw total time in China post-1993.  Trust and relationships take time to build.  Creating a web of interlinked and trusted relationships takes even more time.

If you are a returnee with 20 years out of the country, can you ever be part of the “inner circle”?  If you lack trusted relationships among the older generation who now holds power in China, are you locked out?  How do you think about this approach of thinking about eras of modern Chinese history, and trying to understand the importance of those eras for having established the relationships between key people in academia, business, and government?

I’m interested in hearing your thoughts on this, especially if you are a “returnee” who left mainland China and have returned after time away from China, or if you are an “greater-China Chinese” from Hong Kong or Taiwan.

Someone on the panel (either Jacob or Lip-Bu) made an interesting comment that if you are a caucasian, and you demonstrate your love for China, you can get access to the “inner circle” easier than even Overseas Chinese from Taiwan or Hong Kong.  Jacob gave the example of a Caucasian with perfectly fluent Mandarin, with in-depth knowledge of Chinese cuisine, who had gained more access than his Taiwan and Hong Kong counterparts.

I found this whole conversation disturbing as it forced me to confront the significant disadvantage of being a Chinese-American in doing business in China.  The only reassuring comment I heard was from Jacob, who said that you have to “demonstrate that you love China,” and that’s really what you have to focus on if you want to gain access.  OK, so how do I do that?  Speak flawless Mandarin? Have encyclopedic knowledge of history? Have an apt proverb or historical analogy at the ready all the time?  Appreciate the complexity of Chinese cuisine?

What does it take to be successful in China in 2010?

The panelists gave some good advice:

First, “Bring your A-Game,” said Jacob Hsu.  Success in China requires your most talented people, and your most respected players.  It also requires your best products and technology.  If your fear of intellectual property theft causes you to bring dated technology, then you will not likely be successful in a competitive market.  If you think China is a developing country and doesn’t require your best products, then you will not not be successful.  On this latter point, my own opinion is that this may be true in some markets and less true in others.  Jack Perkowski of Managing the Dragon talks about the different cost perspective of different segments of the market: the foreign, the foreign-local, and the wholly domestic part of the market.  No matter what, you need the best people.  But the best people need access to the right technology and products to serve that market.

Second, have a long-term commitment.  Companies are often afflicted by impatience and focus on short-term results.  For example, this is especially a problem for companies where China still represents less that 5% of their business, but has great promise for the future, said Linda Chen of KPMG.  When you are cutting cost to respond to troubles in your largests market, how do you justify protecting your investments in these emerging markets?

Third, China doesn’t need foreign direct investment anymore.  It needs expertise.  Be conscious of what you are bringing to the table and why it is good for your partners and the country.  As a corollary to the point about having to work with the government, several panelists emphasized the need to have a value proposition for China’s government and people.  This goes far beyond just producing the right products for your target market. The tone of the discussion seemed to imply that a high-profile foreign company must make a case to the government and other business elites that they *deserve* to make money in China because of the value that they are bringing to the country.  This is why the perception that you “love” China is so important.

Fourth, expect constant change.  Jacob Hsu, of Symbio, said that in the 11 years that he has been in China, not one year has he exited the year doing exactly what he expected to do at the beginning of the year.  The panelists began with some initial commentary on how China was bound to be successful, just look at the Olympics, and the infrastructure, and the stimulus package, etc etc.  I confess that this style of China boosterism elicited an internal groan.  But the panelists then acknowledged that many threats and risk face China, including inequality between first-tier cities and the rest of the country, rich-poor disparities, inflation, and unemployment.

Reasons for optimism

Lip-Bu Tan shared one of the best kept secrets from the Western media and public – that there are extremely well-educated, far-sighted people in the Chinese government that understand the global environment, operate in full awareness of the learnings from the rest of the world, and carefully navigating all the constraints they are faced with in solving for continued and stable development of China.  He contrasted these conversations with the rough-and-tumble short-term thinking that comes out of Washington.  Perhaps Lip-Bu is a bit more Singaporean in his view of the right-style of government than I am.  But the economic track record of the government and personal examples of smart, cosmopolitan Chinese leaders/administrators, cause Lip-Bu to see reasons for optimism.

Harry Shum provided what I think is really the best case for optimism for China: the people.  The talent of the people coming from Chinese universities today is representative of a country with deep pools of human capital that is predictive of at least a few decades of hope.