In-depth interviews with the founders of 20 private Chinese companies provide useful insights for anyone doing business in this vast but complex market.

BY LAURA TYSON LI

Made in China: Secrets of China’s Dynamic Entrepreneurs

By Winter Nie and Katherine Xin, with Lily Zhang.

John Wiley & Sons (Asia), Singapore, 2009.

210 pages.

ISBN-10: 0470824360. ISBN-13: 978-0470824368

China business books have proliferated in recent years. This is one that will stand the test of time. Indeed, while many China books are very much a product of the go-go years of double-digit growth and are already obsolete, the deepening economic crisis in the United States and Europe makes “Made in China” more timely than ever. This is a book that executives heading to the Middle Kingdom will want to tuck into their carry-on bag.

To date, at least, China’s economy has been less hard hit than elsewhere by the widening global crisis and in the case of some multinationals, China was one of the few bright spots on their balance sheets in 2008. Even as they hunker down at home, many of the multinationals that have invested heavily in China continue to expand their presence there. China is seen not only as a vital market, but as a driver behind an eventual turnaround in the global economy, and in the long run possibly the best opportunity for future growth for the many multinationals with operations in China.

As Sun Tzu, renowned military strategist of ancient China, famously advised, “Know thy enemy.” That is the essential credo of this book. Targeted toward executives working at multinational companies, “Made in China” offers valuable insight and analysis – along with a few cautionary tales – of the business strategies that have led to the expansion of China’s private sector in recent years. The book argues that multinationals face their toughest competition in the China market not from other multinationals, but from China’s new class of emerging private companies and the resourceful entrepreneurs behind them. Members of this burgeoning entrepreneurial class often outwit foreign competitors due to their deep understanding of the Chinese consumer, nimbleness in adapting to changing conditions, ingenuity, persistence, and on occasion, sheer wiliness.

Instead of focusing on large, established Chinese private companies, however, the authors make the case that foreign executives need to recognize that their “enemy” in the China market will often emerge in the form of unknown small and medium-sized private companies who get little media exposure, and whose founding entrepreneurs often lack the advantages of advanced degrees from abroad, gold-plated resumes, political contacts, family background, or wealth.

Both authors are China natives, earned their Ph.D.s in the United States, and are professors at IMD, the Swiss business school. Winter Nie is an expert on operations, service, and supply-chain management. She has also consulted extensively for multinationals in a variety of sectors. Katherine Xin is a former editor of the Harvard Business Review’s China edition. Her research interests are leadership, organizational behavior, and human-resources management. In particular, she has looked at how management teams of Sino-foreign joint ventures can work together to effectively manage cultural differences. Lily Zhang, a research associate at IMD who helped write the book, has worked for both Dow Jones and the Economist group in China.

China’s transformation over the last three decades from a state-owned economy to one that is substantially in private hands – in the process lifting hundreds of millions of people out of poverty – is one of the most astonishing stories of the modern era. By 2005, according to the authors of Made in China, privately-owned enterprises already comprised half of China’s gross domestic product and about three-fourths of both exports and national tax revenues.

The book begins with three case studies of competitive engagements between Chinese and foreign companies in China in recent years. First is a detailed account of French food and beverage giant Danone’s well-publicized legal skirmishes with its Chinese joint venture partner, Wahaha, a textbook saga of a dream Sino-foreign joint venture gone sour. Next is a fascinating description of how an agile Chinese company gave consumer products group Procter & Gamble a fierce run for its money in the laundry detergent market. This is followed by a David-and-Goliath account of how Chinese internet commerce firm Alibaba, through its subsidiary Taobao, managed to thwart eBay, the world’s leading online auction site, in its effort to dominate the Chinese market.

The authors then step back to offer a concise and lively history of the development of Chinese commerce and entrepreneurial endeavor from the origins of the Silk Road to Cheng Ho’s seven sea voyages during the Ming dynasty to the rise of the sophisticated and innovative Anhui and Shanxi merchant leagues in the Qing dynasty, based on clan and geographical ties. The book covers the opening of trade with the West following the Opium Wars, the rise of the Ningpo merchants and the role of the comprador in Sino-foreign trade, the emigration of Chinese traders and entrepreneurs to Southeast Asia, Hong Kong and Singapore, and their significant economic impact on those countries. Although the authors avoid drawing direct comparisons, readers with even the slightest experience working in China will see that the tactics of long-ago merchants are still very much relevant to doing business in China today.

The authors also cover the increasing limitations on private enterprise in the wake of the Communists’ rise to power in 1949, beginning with collectivization of farming and light industry amid increasing tax burdens and political campaigns targeting business owners. Whatever private enterprise survived the 1950s was strangled during the Cultural Revolution, when such activity was either nationalized or banned, and denounced as “illegal profiteering and speculation” and “anti-revolutionary economic activity.” Most readers will be more familiar with the post-1978 era of economic reform ushered in during the rule of Deng Xiaoping, when experiments in individual farming and other reforms began. Interestingly, the book discusses the significant setback to economic reform in the two or three years following the Tiananmen Square massacre in 1989, without mentioning the incident that precipitated it. The authors write only that a “nationwide ideological debate over ‘capitalism versus socialism’ halted the development of the private economy” during that period.

As the basis for the book, the authors conducted in-depth interviews with 20 Chinese entrepreneurs from various market sectors and geographical areas. They deliberately chose subjects who had embarked on their career paths essentially from scratch, without significant family support either politically or financially. Some rose from rural poverty, and were greatly motivated by a desire to improve their lives and those of their families.  Others worked as government officials in various capacities but grew rebellious or bored, prompting them to “leap into the sea,” as the Chinese say, and enter the private sector. Some were technicians or experts in scientific or technology-related fields, who saw market opportunities and started companies to capitalize on them. Still others were professional managers, often with experience working in foreign-owned or Sino-foreign joint venture companies, who grew frustrated after reaching the “bamboo ceiling” for Chinese employees.

Some started their own businesses with very little capital; others raised money through family and friends; still others had saved enough money working elsewhere to set out on their own. The authors found that what they term “American” business models did not work in China: few of the entrepreneurs studied had venture capital or “angel” funding, or even bank financing (except in a few cases in which bank loans were obtained through personal connections), both of which are less readily available in China. Unlike the U.S., it is hard to find financing to develop products based on new technology and bring them to market. In China, the authors argue, the focus is on the final product, not the technology, so there must already be an existing market for the product.

Even though the entrepreneurs mostly followed business models found elsewhere, the authors found that private Chinese businesses share certain “Chinese characteristics.” Paramount among these – particularly in industries that are highly regulated, require government approvals, or involve working with customs – is the fact that personal relationships (guanxi in Chinese) are critical to success. This will not come as a surprise to anyone with experience in China, but the authors provide numerous useful, concrete examples of how their subjects went about handling this critical aspect of their business.

Private enterprises are especially vulnerable to the political risk that “helpful” officials in key positions in government agencies may be replaced. As it was under dynastic rule in earlier times, private entrepreneurs today are therefore compelled to devote enormous amounts of time, energy, and resources to building and nurturing personal networks among government officials. As one of the entrepreneurs profiled says, “The lack of clearly defined regulations makes our operations relationship-dependent. I don’t have a sense of certainty for the future.”

Instead of giving expensive gifts to curry favor, as is often practiced, one of the entrepreneurs interviewed for the book instead used the unique and subtle technique of befriending influential people. He found that often key officials were older and had limited education, so he would frequently invite them to tea to discuss what were for them rarefied subjects, such as golf and art, to expand their knowledge. He would also advise them on their investment portfolios, technology purchases, and the like. He hired the brother of one influential person in order to get things done more easily, thereby avoiding having to give gifts to elicit cooperation. He also found it highly effective to casually, and with an air of mystery, let it be known that his company was backed by someone important. The authors conclude that most of the entrepreneurs did not especially enjoy operating in this manner, and would have preferred a well-regulated environment in which they could compete on product, service, and price.

Similar to entrepreneurs elsewhere, many of those profiled in the book encountered serious setbacks and even failures along the way, but learned from them, regrouped, and eventually succeeded. Some became determined to succeed after being denied something they badly wanted. One failed the intensely competitive college entrance examinations; another was rejected by his girlfriend because he was not wealthy enough. A few keenly recalled the humiliations of their impoverished childhoods. These painful experiences helped them to persevere until they finally succeeded.

The typical path for private enterprises in China is a three-stage transformation, starting with trading, then adding manufacturing, and finally moving into research and development. Companies often began as an agent for foreign brands, gaining sales, marketing, and management skills; then they mastered manufacturing and production, usually under contract to other brands; and finally they developed their own brand, with multiple product lines. The book details the entrepreneurs’ struggles with shareholders and partners, as well as handling conflicts between insiders (family members who can be relied on, but may not have the appropriate skills) and outsiders (professionals with experience, but who might not be loyal or dedicated enough). The biggest bottleneck faced by nearly all the companies studied was in human resources – recruiting and retaining staff with the necessary skills and experience, due to a shortage of talent across industries.

The strengths of China’s start-up private enterprises are that they are quick to spot a market niche and to fill it; they are highly efficient, flexible, and adaptable; and they are well  versed in the art of working with the government authorities and bureaucracy to get things done. On the other hand, they tend to lack experienced management teams and standard procedures. As they often engage in businesses with relatively low barriers to entry, they are at risk of competition from new entrants in their markets. They also are prone to relying on a few large customers, which can be risky.

It is perhaps a sign of the times that a respected publishing house such as John Wiley should put out a book whose uneven editing unfortunately distracts from what is otherwise a fascinating and engaging book. Acronyms and jargon are overused, and the reader must flip back to the notes at the end of each chapter to learn the meaning of terms that could have been briefly and seamlessly explained in the text.

There are also a number of odd turns of phrase – such as “ice-creams,” “competing in the local turf,” “petrol-chemicals,” and “evolvement,” to mention just a few – which should have been caught by the editors. In one case, the name of a European executive at Danone is given in its Chinese version, when it should have been a simple matter to check with the company to learn the executive’s actual name. The book occasionally lapses into an academic tone, and there is some repetition. The target audience of the book is foreign executives, but these flaws may render the book less accessible to a wider readership than the authors probably intended.

A quick internet search reveals that that at least half a dozen other recent books also have “Made in China” as part of their title, so a more distinctive title might have been helpful. It could also have been useful for the growing number of foreign readers who have knowledge of the Chinese language if the authors had provided an English-Chinese glossary of terminology as well as the Chinese names of some of the leading companies and entrepreneurs mentioned in the book.

The book does an excellent job of showing how Chinese entrepreneurs think and operate, which is immensely valuable for foreign executives. It is not as strong when it comes to the pros, cons, and potential pitfalls for multinationals considering cooperating with private Chinese companies, but this may be a subject for another book.

— Laura Tyson Li, a former Financial Times correspondent in Taiwan, is the author of Madame Chiang Kai-shek: China’s Eternal First Lady (Atlantic Monthly Press, 2006).