Business Case Studies, Executive Interviews, Kai-Alexander Schlevogt on The China Factor

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Executive Interviews: Interview with Kai-Alexander Schlevogt on The China Factor
January 2008 - By Dr. Nagendra V Chowdary

Dr.Kai Alexander Schlevogt
Professor of international strategy
leadership at the National University of Singapore Business School
He serves as a Program Director of the Nestle Global Leadership Program
delivered in association with London Business School.

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  • BRIMC (Brazil, Russia, India, Mexico and China) economies are hogging the global economic limelight. What makes these countries and other emerging economies attractive?
    Many investors and managers regard emerging markets as the magic solution to their most vexing problems. With an ever increasing supply of capital becoming available globally and a limited number of highquality investment opportunities that can absorb it, returns come under pressure. Many executives face stiff competition in mature markets and are desperate for growth opportunities elsewhere.

    Emerging markets are attractive, because they offer new outlets for the goods and services of companies from developed countries, helping them to increase top-line growth. At the same time, the bottom line can be improved through savings in the costs of labor and material. In emerging markets, employees often do not enjoy the same rights and working conditions as in developed countries. Even if the multinational company implements socially responsible practices at its own operational sites, it may still intentionally or unintentionally profit from ethical shortcuts through the backdoor. For example, employees in supplier firms may have to work much longer and be exposed to more safety hazards, while receiving significantly less than their counterparts in the developed world. There were even reports about colonies of "slave workers" and child labor in China. In their home base, multinational companies may benefit from wage restraints, achieved by their constant threat of shifting operations abroad. Emerging markets thus exert a similar influence as the "reserve army" of unemployed people, which kept wages low in the early stages of the industrial revolution and was skillfully attacked by communist agitators. There is another advantage that is overlooked by the public: Multinational companies can move pollution to countries such as China and thus economize on expensive environmentally friendly technologies. To be fair, people in the West should not blame China for global environmental degradation if they benefit from it.

    Leveraging emerging markets as manufacturing and export platforms has similarly increased the growth in the top line and bottom line of multinational companies. Additional benefits include the possibility to source talent and ideas from the new frontiers, including new ways of conducting business. In a virtuous circle, improved capabilities and assets in turn may improve the competitiveness of multinational companies in other markets. In the future, more foreign firms may tap into the ample supply of domestic capital, too.

    In many respects, the new patterns of investment and exchange are reminiscent of the benefits reaped from colonies in the age of unrestrained capitalism and imperialism, when there was a dramatic expansion of industrial production and trade. Fortunately, in contrast to the past, this time more people in emerging markets profit in at least equal measure.

    What is new is that multinational companies increasingly have to pursue preemptive moves and fight potential future global champions from emerging markets on their home turf. Like a river, those competitors are most easily stopped at source. If multinational companies do not engage domestic firms there, those may achieve tremendous increases in production volumes, which would help them to drive costs down, as well as generate higher revenues, profits and cash reserves. They would then possess an even larger cost advantage and war chest to ferociously attack multinational companies in other markets.

  • Why do you think "The China Factor" evokes such an interest across the globe? How significant is it for the global economy and global corporations?
    Among all emerging markets, China is in a class of its own. Measured by total GDP, economic growth, saving rate, infrastructure buildup, installed manufacturing base, contracted foreign direct investment and several other indicators it far surpasses other emerging markets, including muchtouted India. Besides, its authoritarian and technocratic system in many respects outperforms parliamentary democracies, making it a candidate for export, and potent traditional values are deeply ingrained. As a consequence, China has the potential to shift the needle eastwards by becoming the world's leading power in political, economic, military and cultural terms.

    Already now, China exerts a significant impact on global events. Here are a couple of examples: It is the political arbiter in Asia. The outcome of negotiations with North Korea and Myanmar hinges on Peking's will. China also has established strong connections to many governments in Africa, where it has invested large sums of money in the resourceextracting industries. China is likely to become a leading foreign direct investor in other countries, too. In many product categories, the export juggernaut has become the factory of the world. The "China price" is a much feared benchmark for producers around the world. Global commodity prices have increased significantly due to a combination of increased demand from China and other factors. Due to a large home market, the Middle Kingdom increasingly is able to set standards. Unfortunately, China has also become a global giant in terms of pollution.

    Spending power and spending patterns will also change dramatically in China. Because of its scale, this will significantly shape the global demand for goods and services. During my work for the McKinsey Global Institute (MGI), the economic think tank of the global consulting firm, I studied the development of the Chinese consumer market. Various scenarios of future changes can be envisioned. In the base case, the lower middle class will encompass 290 million people in 2011. An estimated 520 million people will belong to the upper middle class by 2025. Spending patterns will change dramatically as more people will be able to afford goods and services beyond basic necessities. Whereas, at the beginning of the reform and opening era, there was pent-up demand for TVs, refrigerators and washing machines, and subsequently phones, computers and air-conditioners; in the future more people will be eager to buy cars, houses, education, overseas travel and sophisticated investment products.

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