Under ‘One World, Two Systems’, US Companies that Stay in China Must Evolve

By Edward Tse and Bill Russo
27 Sep, 2019

Original published by South China Morning Post titled Under ‘One World, Two Systems’, US Companies that Stay in China Must Evolve on September 27, 2019. All rights reserved.

More US companies are staying in China than are deciding to leave, despite Donald Trump’s trade war rhetoric. But there is an increasing need to devise different strategies, as China’s market conditions become more sophisticated and unique

In a recent business report by the American Chamber of Commerce in Shanghai, 77 per cent of the surveyed companies reported that their China operations are profitable. Around 60 per cent are optimistic about the five-year business outlook and nearly half are increasing investment in 2019.

The findings were consistent with those of another report, by the US-China Business Council in August, suggesting that 87 per cent of the US companies operating in China do not want to leave.

Both are slaps in the face for US President Donald Trump, who earlier called for American companies to leave China and to return to the US. Very few, if any, have followed.

In July, 100 academics and policy advisers around the US wrote an open letter to Trump, advising that Beijing is neither an economic nor national security threat that must be confronted in every sphere.

US animosity towards China will eventually damage its own reputation, as well as the economic interests of all nations. There can be no winner in a zero-sum game.

The above-mentioned survey results and reactions are consistent with our first-hand experience of consulting for the senior management of many US companies in China.

As Trump’s trade war drags on, while some foreign companies have chosen to leave China – usually those in labour- or cost-intensive sectors such as shoe and apparel manufacturing – most have chosen to stay, simply because of the size of the China market or the high degree of integration of their supply chain with Chinese suppliers and manufacturers, or both. Paradoxically, after Trump’s plea, US retailer Costco opened its first store in Shanghai.

Also, electric vehicle maker Tesla is set to start production by the end of this year in its wholly owned manufacturing plant in Shanghai.

Among those that have chosen to stay, there is an increasing need to devise different strategies for China and the US. As China’s operating environment evolves, its market conditions are becoming more sophisticated and unique. For example, in the tech sector, some aspects of the two countries are diverging and companies will need to consciously adapt.

Terry Gou, founder of Apple supplier Foxconn, expects a divide in 5G technology between China and the US, because of underlying differences in strategic positioning, development and market needs. As fifth-generation cellular networks and their commercial applications evolve, the divergence will only increase.

On a broader scale but in the same vein, the G2 – the US and China – will replace the G20 in a new leadership framework: “one world, two systems”.

China’s three-layered development model is the key to the country’s resilience. At the top, the central government sets the overarching strategy for developing a technologically advanced, innovative society. At the bottom, the thriving entrepreneurial, private-sector companies are driving China’s business innovations.

In the middle, local governments connect the central government and businesses by building infrastructure (not only the physical kind but also, increasingly, smart infrastructure) and by being a funding source and incubator for start-ups. The smart infrastructure, for instance, is empowering the automotive industry as vehicles become more intelligent, connected and ultimately autonomous.

An integrated smart city allows real-time governance of a city’s major functions. Local governments are raising the stakes: for example, Hangzhou is managing traffic congestion with the City Brain and Wuxi is establishing a pilot zone for autonomous driving.

Some companies are already aware of the importance of a strategy of “one world, two systems”. For example, Toyota has realised that striking a fine balance between China and the US will be critical for its global operations. Meanwhile, it faces the delicate task of creating a strategy for meeting the industry and technological specifications unique to China.

This trend began to emerge even before the trade war began. China is evolving into a leader of innovation with new disruptive technologies such as artificial intelligence, the internet of things and blockchain, and is moving ahead of the US to build the world’s biggest 5G networks.

Businesses – in particular, the entrepreneurs working in concert with governments, both local and central – will take China through new paths onto new platforms.

As a result, the industry structure, competitive conduct and financial performance for all sectors in China will evolve in their own ways. Companies, no matter whether headquartered inside or outside China, should adjust their strategies going forward.

US companies that choose to stay in China need to be much more sophisticated. Copying and pasting business models from the US to China won’t necessarily work any more. Local innovation will be critical and, in many cases, US companies will need to join with local companies and governments.

While differences exist, the world will benefit from cooperation between the world’s two largest economies. Both Andrew Ng, the former leader of the AI teams at Baidu and Google Brain, and Jack Ma, founder of Alibaba, have suggested there is plenty of room for technology partnerships between China and the US.

Huawei founder Ren Zhengfei has said the company is open to selling 5G technology to US companies to create competition and a more unified global technological environment. Companies so far only focus on beating their competition, and the idea of creating competition and sharing advantages would be a breakthrough, if implemented.

There is more room for the US and China to collaborate than fight in the face of global challenges, many of which will transcend national borders.

About the authors

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Company, and a founding Governor of Hong Kong Institution for International Finance. One of the pioneers in China’s management consulting industry, he built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies, investors, start-ups, and public-sector organizations (both headquartered in and outside of China) on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on strategies, state-owned enterprise reform and Chinese companies going overseas, as well as to the World Bank and the Asian Development Bank. He is the author of several hundred articles and four books including both award-winning The China Strategy (2010) and China’s Disruptors (2015) (Chinese version of 《创业家精神》).

Bill Russo is Managing Director of Gao Feng Advisory Company, he is also Founder and CEO of Automobility Ltd.