China 2.0

Marina Yue Zhang with Bruce Stemming, Wiley, 2010

Reviewed by Graham Mulligan

The opening chapter builds on the metaphor of ‘Internet 2.0’ as a way of understanding the new China. Just as Internet 1.0 was ‘read only’ and shifted to ‘interactive and participatory’ as Internet 2.0, so China has gone from one phase to something much more interactive. The authors develop the argument that Western media misrepresents China and particularly misunderstands Chinese nationalism, for example, after the Olympic Torch incident in Paris. A kind of conflict of civilizations, they say, underlies much of this misunderstanding.  The authors conclude their argument that China 2.0 is a very different China than they assumed although most of the world is unaware “whether through ignorance, prejudice, bewilderment, or deceit”. The charge is not unfounded.

The book is actually a kind of primer for doing business in China and the authors begin by analyzing China’s unique business system, ‘neither black nor white, but grey’, referring to private capitalism, state capitalism or something in-between. Private capitalism and state capitalism competed in the grey areas when changing regulations and practices left openings for some to get rich. Deng  Xiao Ping said to get rich is glorious 30 years ago, but in the China 2.0 era the disparity of wealth and the imbalance between regions, rural and urban, and the revelations of corruption are leading to a new attitude towards reform. Economic reform in the period 1978 to 2005 followed Deng and then Jiang Zemin’s path, but is now giving way to another reform based on Hu Jintao’s ideas of constructing a ‘harmonious society’. The reform process in China is deliberately slow in contrast to the destructive institutional reforms in the Soviet Union and other former communist regimes in Eastern Europe following the breakup of the Soviet Union. In 2008, for example, the central government introduced a new land reform to protect farmers ‘ownership’ of land from exploitation by developers, exemplary of the get-rich-quick grey economy.

The growing gap between rich and poor and the absence of some mechanism to improve wealth distribution are sources of unrest in China. Some worker strikes and the growing numbers of unemployed, especially students, are potentially destabilizing forces in society. Other challenges include environmental degradation, global warming, and a future demographic of an aging population that won’t be as productive.

One business story about China, common in the West, is the knock-off phenomenon. The apparent lag in China’s creative culture, particularly evident in the prevalence of copycat products on the market, is worrisome. The authors see this as a result of three influences: the customary thinking habits of most Chinese to stay in the middle and not be leaders, the absence of the right market mechanisms and the weak institutional framework, such as the legal system. Other Asian countries have followed a path of imitation to innovation with variations of market and institutional influences. Taiwan, with its predominantly family and small business culture, and Japan and Korea with large conglomerate structures all succeeded in establishing strong economies. External influences on the innovation cycle in China are delivered through large global enterprises with branch offices and R&D centers in China. To illustrate the ‘deliberately slow’ thesis the authors describe the history of the giant telecommunications companies (China Mobile, China Netcom and China Unicom) and the way the government manipulated the institutional framework to achieve maximum effect. The path is similar to other deregulated industries in the West, monopoly to limited competition to balanced competition. The three companies, all government owned, offer fixed, mobile and 3G network services across China. The next round of change will see opening to foreign operators under World Trade Organization (WTO) commitments.

The authors link the business story to their social change thesis as they describe the massive usage of the new communications tools, especially by younger Chinese. Mobile usage in China is huge with over 600 million accounts. Internet usage is big too with 300 million accounts. IM or instant messaging is now the preferred communications tool of young Chinese, especially using QQ (Chinese IM software). Other tools such as BBS and blogs have emerged and more recently, social network sites, (like Facebook) and (like MySpace) are capturing users.

Change in consumer markets and the corresponding changes in marketing strategies are part of the Web 2.0 story. External producers like multinational companies, originally targeted the middle class consumers, about 7 percent of the population, with reasonable quality goods (think Ikea and Volkswagon). This white collar group is expected to grow 1 percent per year to around 40 percent by 2020. But the largest group is the not-so-rich rural class. 730 million people with low disposable income but potential consumers nevertheless, represent a new largely un-tapped market. Advertisers are using the Internet and mobile technologies to penetrate this and other sectors of the market, such as young on-line gamers (40 – 50 million). With such a large population narrow market categories can still comprise significant numbers of consumers. Income, geography, race, gender and age can define very different market segments, all becoming more and more connected by technology.

The structure of Chinese State Owned Enterprises (SOE’s), especially since joining the WTO in 2001, is still evolving. Similarly, China’s Foreign Direct Investment (FDI) strategy is more than just financial. It is aimed at securing strategic resources and obtaining critical technologies and capabilities that can be used to drive other investment decisions in the state-run economy of China. However, recently it appears more purely economic motivations are driving business decisions. The low value of the Chinese brand on world markets remains an unsolved challenge. Skepticism, criticism and protectionism especially from developed countries (Europe and North America stand out) remain high. The success of China’s market-driven capitalist experiments are impressive yet there are also some spectacular failures. The tragedy of the 2008 dairy industry story of tainted milk is one example. The authors see this as not just institutional failure but also evidence that fundamental Western business values of honesty, directness and integrity may still be undeveloped in China.

To conclude the book the authors make some recommendations, directed more to the Chinese side than the potential Western business side. The development of a Chinese consumer market is now the main focus of the government and presents the best opportunity for outside investment in China especially through the merger and acquisition process where a Chinese brand can be acquired to gain access to the whole value chain. The next 5-year plan and the change of leadership in 2012 are an opportunity to bring about deep change. The growing disparity between rich and poor and the consequent pattern of low consumption define the challenge ahead. Wealth redistribution is heavily influenced and hindered by the culture of relationships (guanxi) and the separation between government and business is too often not clear so that ‘authority’ becomes more important than ‘capital’. The solution according to the authors, is to develop the institutions that can bring transparency and accountability to the spheres of politics, the economy, the legal system and society in general.

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