The 19th Century was Britain’s, the 20th Century was the United States’, and the 21st Century is____? China’s, of course! (Said he to resounding acclamation, being congratulated on stating the obvious.)
So, is it?
Truth be told, the most honest answer I’ve heard lately was provided by the managing partner of an AmLaw 25 at the Law Firm Leaders Forum in San Francisco which I attended two weeks ago. Opined he: "China has to be the biggest opportunity in front of us. The key questions are, how big and how fast? The answer is: No one has a clue."
I’m not in a position to offer faux wisdom on China-business or China-business demand for legal services, but fortunately I don’t have to because McKinsey has surveyed hundreds of C-level executives in Asia and has some numbers to report. With the caveat that surveys can be only as good as the enlightened self-interest of those agreeing to respond, I thought you’d appreciate the results as some are especially counterintuitive.
Understanding that this survey covered only executies in companies already doing business in Asia, two key data-points struck me off the bat:
- Almost 40% report they do no business in China at all; and
- Another one-third say their revenue would be unaffected if China’s growth rate dropped to zero.
Here are some other top-line items:
- Half of the total sample say they earn some revenue in China, but among $1-billion+ firms it rises to two-thirds.
- But there’s a big difference between "earning revenue" and operating: Only 14% of respondents own a manufacturing plant, service facility, or retail store in China.
- But/and 90% expect to be doing business in China in some form within five years.
Competition from China-based companies? Aside from the obvious labor-cost advantage, they are frankly not seen as formidable: In production/manufacturing, 27% deem them stronger or overwhelmingly stronger, but in services only 11% say the same (indeed, 27% in service-land say their Chinese competition is weak).
What could go wrong?
- Rising income inequality, 40%
- Poor or arbitrary enforcement of commercial laws and regulations, 26%
- Shortage of talent, 21%
- Weak financial institutions, 20%
- Official corruption, 19%
- And a variety of environmental factors were also cited, although they were deemed of less importance. For the record, they included pollution (63%), shortages of clean water (20%), and the threat of pandemics (15%).
So, will China overcome these problems? Again, this advice may be worth what McKinsey paid for it, but at least these executives were marginally confident. However, compare their confidence in China to their confidence in India, facing similar challenges.
- Very/somewhat likely they will address these issues successfully in the next five years:
- China 47%
- India 69%
- Somewhat/very unlikely they’ll succeed:
- China 27%
- India 18%
Finally, the critical areas for investment in China were deemed to be infrastructure and logistics (72%) and education and training (70%). Nothing else came close (for example, health care and social security were at 30%, combined).
Where does this leave us? First of all, with a very uncharacteristic piece on "Adam Smith, Esq.," but I think it’s germane to your challenges because everyone is talking—and many are acting—as if China really matters, and here are at least a few data points worth pondering: This is a small attempt to shed light on what your clients are thinking about China.
But the other reason it’s germane ties back into a theme I hope you’re familiar with if you’ve spent any time here: I don’t believe in one or two great big strategic bets. I believe in a diversified portfolio of strategic bets. Put some of your chips on a bunch of different hands, not all of your chips on one or two big hands.
Today everybody thinks China is the big hand. (If you don’t think that’s the received wisdom, go back to the first line of this piece; you knew how to finish the sentence, didn’t you?) Understand: I’m not saying it’s not.
I’m saying committing to China will require a sustained, expensive, investment over time. Like your London office; remember how many years of losses you incurred there (or may still be incurring) before emerging into the clearing in the forest? China may be similar, only massively larger, farther away, and wholly free of Anglo-Saxon tradition. En garde.
