EPIC BATTLES: THE NEW EMERGING CHAMPIONS OF ASIA WILL SURPRISE YOU

Montreal, 18 April 2014.

International champions from Asia are moving up the value chain a lot faster than anticipated.  If Japanese companies shook the economic foundations of the Western industrialized nations in the 1970s and 80s, a new roster of champions, notably from China, will challenge anew the Western economies.

My colleague William Polushin and I have been teaching ‘Management and business in Asia’ at McGill since 2007.  Every year we ask students to make a comprehensive study of an emerging champion and tell us how they develop their competitive advantages and what stands up as unique and special about them.  We have thus reviewed over 60 companies since the beginning.

We keep getting surprised every single year.

Japanese companies broke new ground by raising the quality/price ratio beyond the reach of many Western competitors.  Their relentless pursuit of technology, quality and design made them capture whole swaths of markets in cars and consumer electronics.  Epic battles across industries resonated for decades and filled reams of business case studies:  Komatsu vs Caterpillar, Fuji vs Kodak, Sony vs RCA, NEC vs IBM, Toyota vs GM, etc.

Just as Japan floundered through its severe financial crisis of 1990, China was brewing its own industrial revolution.  This time, the challenger is 10 times bigger than Japan, and hungrier.

The race for the new champions

It did not take long for China to capture the manufacturing of low value goods.  The Western consumer was happy to see its standards of living rise on the back of a vast army of low wage workers toiling in the special economic zones of China, and beyond.  Foreign direct investments poured in for 30 years, fueling an insatiable boom.    But the consumer’s gain later turned out to be the blue collar’s loss in the shop floor.   The scale of manufacturing relocation to China was bound to depress jobs and wages in the West.  It also carried a hidden price tag: growth options were slipping away from industrialized nations to emerging countries, and specifically to China.  Bureaucrats and policy makers in the West forgot that up to 8 service jobs are affected when 1 manufacturing job disappears.   Technology is the key for China to avoid the middle income trap.

Ever since the WTO let in China in 2001, many countries are having second thoughts about the bargain.   Yes the Chinese export conveyor belt has worked wildly beyond expectations, but the cost has been steep for Western nations in jobs and wages.  What is now making the bargain expensive has been the real prize for China :  Technology.  Western technology has been steadily leaking and finding its way to China: sold, hacked, stolen, or traded for the ‘lure’ of market access to a billion customers.  But just like Japan and South Korea, China has made its markets more difficult to penetrate for the foreign invader.  There have been winners, but a great deal more of failures.

All Asian nations embrace technology as a basic economic policy.  The Japanese initially acquired technology in joint-ventures overseas, transferring the technology back home for production.  Layer by layer, they built strong competences in technology manufacturing and moved up the value added chain.   Low pricing, product technology and then high quality helped them move from widgets to high value goods.  Eventually the Lexus was launched in 1989 to the disbelief of American car makers, who acknowledged at the time  they could not build this car.

The Chinese played their hand differently.  They promoted joint ventures at home to capture western technologies, by all possible means.  Thus the tech transfer was faster and vaster than in the case of Japan.  We might now argue that Chinese wages are moving up and are denting  their low cost advantage in manufacturing.   This is going to give a reprieve to other emerging countries such as Mexico and Brazil.   But this is not going to help embattled Western nations very much.    Low cost wages have shifted from manufacturing to a new generation of engineers and managers, forming the backbone of the new emerging champions.

China produces nearly 900,000 engineers per year.  They cost less and work harder than their Western counterparts.  On a per-hour basis, they cost 15% to 25% of the typical European engineer.   China had about 200 R&D centers in the early 2000s.  The number has moved up to about 1600 in 2013, of which 1300 are from multinationals.  China ranks now 2nd on the world in R&D budgets and patents filed.  As an example, the Beijing Institute of Genomics has 15,000 researchers under its payroll.

The Japanese were thought to be good makers and not good inventors.   Today many of us think of the Chinese as decent makers and rather poor innovators.  But think again.  Emerging champions such as Huawei, Haier and several others, all have at least 25% of their employees working in R&D.   This enormously speeds up product development and shortens product cycles.  Few western companies can match this up.

Many western executives poorly assess the innovation capacities of emerging Asian champions.  They like to examine the technology capability of their rivals.  But innovation is not just a single pony trick on technology.  Market research and customer insights are equally critical in the innovation equation.  This core competence is developing fast with the emerging champions of Asia.  If you are still a doubter, just look at how Alibaba, Tencent, Weibo, Xiaomi have cornered the Internet market in China.  Samsung was about the only competitor to keep pace and rival Apple when it launched the i-phone.  Many large companies such as Shiseido have adapted  marketing strategies differentiated on city populations across China and the rest of Asia.

Now consider the final bundling of attributes found in these emerging champions:

–          They are adept at bringing the cost structure down and they start with a formidable competitive advantage

–          They are not afraid to tap into the best management practices worldwide

–          They buy the best technology available and improve on it (frugal innovation)

–          They build the most modern plants at a fraction of the cost in the West

–          They are quick to set up R&D capabilities to accelerate product innovation taking advantage of their low cost engineers

–          They develop a culture with a strong unanimity of purpose and immense drive

–          They craft a strong sense of customer relationship and client-centricity in their organizations

–          They often deploy their international strategies in other emerging markets, to gain scale and experience (that is why you don’t yet see them around)

–          They have started to  experiment with organization structures to combine the best Western and Eastern management practices

–          Some are now integrating design and brand into their strategies

If you were surprised by the speed of China’s industrial revolutions, you ain’t seen nothing yet.

New epic battles stand around the corner.

André Du Sault

MBA(LBS), MPA (Harvard)