The Year of the Dog for Globalization – by Kyle Hegarty

The Year of the Dog begins this week which means, among other things, this is the season when western companies fall over themselves by slapping zodiac animals on their products in hopes of appealing to Chinese consumers. Gucci dog purse, anyone? At the same time, digital payments in China continue to accelerate. Last year, the Chinese New Year tradition of ‘hong bao’ – where cash-filled red envelopes are given as gifts – saw 46 billion electronic transfers.

China’s transformation continues to play out in astounding ways both internally and globally. The country’s growing relevance on the world stage should not be underestimated. Globalization has never been so confusing as it is today thanks to the Middle Kingdom.
The mere mention of China triggers consumer brand executives to salivate over the growing army of shoppers and their wallets. Conversely. the same word causes western technology executives to back away with their tail between their legs.

Consider Google, Facebook and Twitter – three companies not allowed to operate inside the country. Scores of other western companies, both small and large, have failed in China, not always because they were banned but because of factors that include protectionism as well as misunderstanding local preferences. (Gucci dog purse, anyone?)

As their consumer population continues to grow, so too does the top-down control from the government including its master, who truly controls the leash, the communist party. This is the real reason why technology companies are scared. They want in on the action, but don’t want to play by China’s, at times, authoritarian, rules.
The planet is witnessing an inflection point where Chinese power, both politically and economically is rising while, at the same time, power from the west seem to be in decline. Xi Jinping, General Secretary of the Communist Party of China and President of the People’s Republic of China recently said, “Today we…live in a world of contradictions.” That may be the understatement of the decade. Contradictions, in fact, is a good starting point to understand where globalization goes next.

From a business perspective, the rise of competition from China coupled with the protectionist-rumblings coming from all corners of the earth, means we are witnessing the end of an era of western-led globalization.

China wants to take a larger global role but at the same time comes from a history of isolationism and protectionism. They have the Great Wall (and no, it cannot be seen from space) and more recently have built a digital firewall. VPNs which used to enable people inside China to get around the firewall, no longer work. That’s important because the government has pretty much taken control of internet content, something unthinkable only a few years ago.

Has the ‘invisible hand’ of western-style open markets abdicated to the closed fist of a non-democratic world order?

Are western companies heading into a war against Chinese companies – a corporate version of the Thucydides’s Trap? Or can this be avoided?

For many western businesses, the China opportunity continues to exist but in ways that may challenge previous market expansion strategies. China success may be dependent on partnerships with local companies rather than a go-it-alone approach. Some businesses have been doing this in China for decades. Others built out wholly owned foreign entities. Based on Chinese leaderships newfound powers, and the fact they are using them, suggests that if companies want to succeed in China, they may need to find a new path.

Consider Uber’s experience in China. They were skewered by western media when they left the market and sold their business to the local player Didi. They spent billions trying to win market share and the experience provides an excellent case study in misreading local market conditions. Did they lose? Hardly. Uber ‘retreated’ with a 20% stake in Didi plus a billion dollars in cash. Their investment is currently valued at over $11 billion USD. Failure has never been so profitable.

Other companies with long term local partnerships in China include Disney, Apple and G.E. It might not be the ideal solution, but globalization in the past has never been fair. Moving forward it appears it will be even more volatile and uneven. New efforts towards collaboration and partnership may keep companies relevant in a contradictory market like China.

Western companies should be closely studying the China market to understand how they may, or may not fit in. It’s an immense and complex situation overflowing with opportunities, threats and contradictions. Perhaps the biggest threats are the mindsets of those tasked with expanding into new markets. Hubris is no stranger to the tech industry and opinions of exceptionalism – be it a culture or a product – can turn into a giant stumbling block when trying to succeed in foreign spaces. For companies that do spend the time to understand China, one common realization is that local businesses, often those who may be potential partners, are looking at ways at expanding into new markets themselves. They’re trying to figure out how to grow into western markets and are wrestling with the same challenges. Open minds tend to find new opportunities.

Kyle Hegarty

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