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On the Challenges and Opportunities we see in China

By : Ziad K. Abdelnour| 3 May 2010
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The practice of doing business in China has come into question early this year. The disputes between Google Inc. and the Chinese government have been one factor; others have included the continued concerns raised in the West about China’s currency policy, and in China about Western financial policies. Moreover, questions about intellectual property protection in China have not gone away. At the same time, the consumer markets within the country are more vibrant as its pace of growth increases, and Chinese businesses are becoming innovative, fierce competitors within their country, and increasingly in the world outside. There has never been a time when getting China right is more important — or more difficult.

How do we view China in here at Blackhawk?

What is our investment policy vis a vis China given the increasing tensions that are raising concerns among some businesspeople out there and given our increasing exposure to China through our strategic investments in Linktone and China Security & Surveillance Technology?

It is clear today that no capitalistic entity on Planet Earth can afford to ignore China’s role in global political and business affairs.

Whatever friction there is between US companies and China, I think it is time for us all in the West to step back and try to understand what China means to their business. We also have to understand what China has been achieving over the last couple of decades, since it started its economic reforms. Ignoring China is not an option. The only way any company can take advantage of its massive opportunities is by placing its China activities in a global context — as part of an integrated web of capabilities, including manufacturing, marketing and sales, innovation, new business model incubation, and talent development.

Hence, we would recommend that global executives not pay too much attention to the day-to-day news. Instead they should step back and take a longer view.

You could begin by looking back to the start of economic reform by Deng Xiaoping in the late 1970s. And, more precisely, to 1992, when Deng made his now famous visit to Shenzhen. It was called the “Southern visit” at the time, to one of the places where entrepreneurial China got its start. And it was basically to set the tone: We’ve got to continue to open up and integrate ourselves into the global economy. Over the decades since, China has held true to that path — and it will continue to do so, at least for the next couple of decades.

It’s of course important to recognize that China is still undergoing tremendous changes. In the early 2000s, China was seen as principally a source of goods for export and a potential market for multinationals. Now we believe we’re going to see a wave of Chinese-developed products, Chinese multinationals, and Chinese money entering the global economy.

For example, China has become an incubator for every kind of business — from tiny startups to giant multinationals, both foreign and homegrown. Local companies are building platforms with sufficient scale to take their business worldwide. International companies will go to China to integrate this vast market and sourcing hub with their global strategies and operations.

Historically, China has without a doubt been a largely rural society. But the government has decided that China should urbanize itself to a large extent. We at Blackhawk believe we’ll see a fundamental change in the nature of Chinese consumers: in the number of people who can afford consumer products, and the way that they think about buying products and services. No longer are they just one large army of people with similar clothing styles. This provides major opportunities, still untapped, for global companies that are interested in the Chinese market.

Hence, it’s imperative that multinational corporations understand the potential and complexity of China’s markets — in particular the extraordinary growth trajectories of the country’s regional markets. Only then can they develop the distribution networks and understanding of consumer culture that they will need to target their efforts.

Some observers, such as Paul Krugman, argue that the Chinese government is actually mercantilist: It’s trying to move in directions that benefit its own economy at the expense of the rest of the world.

We at Blackhawk do not see China as a threat to global companies. On some issues, Chinese officials may have a different point of view than their counterparts in other countries. This is only natural. But over the long term, I think there will be even more integration between China and the rest of the world, because China can become a stronger global power only by becoming ever more integrated into the global economy.

There are industries in China where foreign companies will find it hard to succeed against local businesses with local knowledge, particularly in politically sensitive areas, such as the media and the Internet. Yahoo and eBay both failed to find success in China. And Google is still struggling to take market share from the country’s leading search site, Baidu. In our view, part of the Google story is that it has decided to concentrate its efforts elsewhere. So please let’s not generalize on issues that are particular. Let’s not forget though that the Chinese have been fairly disorganized and inconsistent for many years.

Most importantly however, the Chinese have always been known as good entrepreneurs, and particularly good small-business people. This has been in the blood of the Chinese for maybe as long as the Phoenicians (Lebanese).

So you’ve got entrepreneurial people at the grassroots level who are very independent-minded. They’re very quick on their feet. They’re prone to fearless experimentation: imitating other companies here and there, trying new ideas, and then, if they fail, rapidly adapt and move on.

On the other side, the Chinese government has channeled its efforts deliberately: It has been building good infrastructure across China, enabling companies to do business in a very efficient and effective manner. The Chinese have put in place institutional money — from sovereign wealth funds to pension funds — to channel into the investment community within and outside of China.

Bottom Line:

We at Blackhawk strongly believe that China will definitely continue to grow over the next decades. It will increase not only its economic power, but also its geopolitical power in the world. It will be not only a large consumer market, but a strong breeding ground for innovations. Twenty years from now, for a lot of global companies, China will be at the center of their strategies.

I think it is high time for large US multinationals to start facing the real issues in here. What does China — or, for that matter, China, India, and all so-called emerging markets — mean to them? US companies are coming to realize that they need to integrate more and more of their value chains into China and India. They need to be close to these markets, because of their size. They need the ability to understand the needs of their customers in emerging markets, and turn them into product and service offerings quickly, by having on-the-ground facilities for product development and R&D.

China’s business culture is built around fast decision making in an environment that often seems opaque. Companies that need to collect a lot of data and analyze it before they can move will clearly be at a disadvantage. The challenge for most Western enterprises and particularly US corporations will be to figure out how their own strengths can be applied in a business environment that moves quickly and produces opportunities overnight, but that is also hard to predict.

Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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