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.
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.
1.
Wal-Mart's Strategies in China Case Study
2. ICMR
Case Collection
3.
Case Study Volumes
|