Briefing

Dalian, People’s Republic of China 6-8 September 2007

Key insights from sessions on Saturday afternoon 8 September
Key insights from sessions on Saturday morning 8 September
Key insights from sessions on Friday morning 7 September
Key insights from sessions on Thursday afternoon 6 September
Key insights from sessions on Thursday morning 6 September

Some key insights from sessions on Saturday afternoon 8 September

• The best way to deal with the problem of staff retention in China is to get your first hires right. You need the right selection process. In addition, aim to set out a roadmap for an employee's professional development. Taking a benign paternal approach to staff can generate loyalty. Having staff and other associates sign a code of conduct can cultivate a sense of family in an organization.
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• To support what you are doing in China, make sure that senior management come to visit often. You need a champion in the home office, ideally somebody at the board level. But if a visit from the CEO is inappropriate or unnecessary, say so.
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• Three keys to running a successful China business: First, you need to have a "go-to-market" value proposition. Second, you need to insist on operational excellence, which is not just about processes or functions such as sales, but about all aspects of corporate governance, including leadership development. Third, you need to ensure delivery of the promised product or service. Execution is essential.
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• Do your due diligence. Put the time in to get to know the market. It's not about getting the right recipe to succeed in a market; it's about being attuned to the market.
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• The IP situation in China is improving but it is still a problem. Your IP is in China whether you business is there or not. The bigger and more successful you get, the more genuine your customer will become, making it easier to defend your IP.
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• Good government relations are important, but playing golf or a karaoke night with officials is not the way to go. Elevate the relationship. Keep it serious and wide in scope. The professionalism and quality of government officials at every level are impressive.
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• Hesitate entering the market and you may find yourself lagging badly behind your competitors. China is one of the most competitive markets in the world, with strong domestic and foreign competitors in many sectors. Do not underestimate the speed at which the market for your product or service will change. Review and revise your business model as often as necessary.
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• Do not think of China as a market that is somehow X number of years behind the US or another developed country. The likelihood is that, even if it is behind now, China will leapfrog ahead and will not converge with the developed markets. Plan your business's development and staffing requirements according to what conditions may be in 5 or 10 years - not according to the current situation. Otherwise, you will find yourself lagging behind from the beginning, unable to scale up or recruit sufficient talent.
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• The depth of talent in China is significant, among both men and women. To improve staff retention, focus on creating the right roles and career paths for women in your organization.
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• When brand loyalty is minimal or non-existent, your focus must be on frontline sales - the "last minute". Most Chinese consumers will not have a particular brand in mind when they go out to buy a particular item and will decide which one to buy only at the last minute based on price, the marketing pitch of the salesperson, or both.
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• Economists differ over how vulnerable Asia’s economies are to a downturn in the US, which now appears to be a growing likelihood. Some believe that the region’s export dependence leaves it susceptible to a knock-on effect, while other believe it has generated sufficient intra-regional and domestic demand to offset a US slowdown. Most economists agree, however, that Asian countries need to concentrate on further rebalancing their economies - as China has - to derive more growth from domestic demand and investment, as opposed to exports and foreign investment.
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• Relying on external demand also leaves Asia's economies susceptible to political pressures from their key markets, such as protectionist legislation from the US. Weakening economic signals from the US during a presidential election year raises the likelihood that legislation imposing trade sanctions on China will be passed.
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• Whatever political system a country may choose, it is vital to the dynamism of its economy and the growth of its companies that it promote a meritocratic culture ensuring that the most talented individuals are elevated to key decision-making positions. Employees should also be offered a meaningful incentive system.
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• Investment overseas requires knowing both written and unwritten rules in countries where a company invests. Companies must familiarize themselves with the political and cultural issues that could affect their investments to help smooth their entry and avoid confrontations.
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• Growth in the Middle East is less dependent on oil than it was a decade ago thanks to economic diversification. But continued growth in domestic demand will depend on continued immigration. This will have important long-term implications for the cultural composition of the Gulf countries.

Some key insights – Saturday morning 8 September

• The Middle East is basking in another oil boom, with the price of oil having soared above US$ 70 a barrel. But to ensure more lasting growth, leaders must redeploy some of the proceeds towards infrastructure that can improve its longer term prospects. Too, unless the region achieves political resolution, volatility and uncertainty will continue to cast a pall over the oil windfall.
  
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• Amid an ongoing devolution of power from the central government, India’s provinces are expected to step up their competition for corporate investment. Some of the best known growth hotspots, such as Bangalore, are running into infrastructure bottlenecks, so new localities are vying to take their places. One of India’s greatest challenges will be to muster bipartisan support at the federal level for a broad reform agenda.
  
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• On the climate change front, developing cleaner burning coal will be a top priority in both China and the US. Beijing is likely to employ a market-based approach in pursuing emissions reductions, possibly through tax incentives to support clean energy practices at the provincial level and to encourage consumers to buy more energy-efficient cars.
  
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• Japan has recovered economically, but most of the growth has come from demand for exports in China and the United States. The Japanese have yet to regain confidence in their own economy. But wages are poised to begin rising after a long stagnation, and savings rates are falling as an ageing society begins to unlock its nest eggs.
  
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• Japanese retail capital represents an untapped source of economic might, much of it at Japan Post, and then to be invested in Japanese government bonds. Japan Post's imminent privatization stands to unleash much of this capital on the wider market. With the yen now in decline, there may be more appetite in Japan for foreign investments, and more sophisticated and innovative financial products.
  
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• Japan has failed to internationalize its corporate sector, a fact underscored by the absence of foreigners on the boards of its listed companies. This is preventing Japan from regaining dynamism in the global economy. Japan needs to fully embrace capitalism and liberalize its corporate sector and financial markets.
  
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• Nevertheless, a political backlash is underway against the liberalization carried out under former Prime Minister Koizumi, primarily against what the public perceives as widening gaps in income and a weakening of Japan's post-war egalitarianism. Many see this as only a temporary phenomenon, but it has weakened the hand of reformers of the government of Prime Minister Abe.
  
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• Japan's recovery has led to a degree of complacency among corporations about the need to increase their competitiveness by overhauling management and spinning off non-core assets. A similar complacency is shared among policy-makers concerning the need for continued economic reforms, which appear to be stalled.
  
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• Tensions of the kind that make headlines between Japan and China overstate the situation on the ground, particularly among the corporate sector. Companies from both countries are increasing their cooperation.
  
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• Despite widespread predictions of its eclipse by China and India, South-East Asia has continued to thrive economically and attract massive amounts of foreign investment. The region benefits from its proximity to Asia's new growth giants, both from Asia's vogue among investors and from the region's ability to supply crucial raw materials to China and India. Manufacturers also still favour South-East Asia as a way to diversify the exposure of their supply chains to risks in China.
  
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• South-East Asia is one of the few regions that enjoys a trade surplus with China and India. It has comparative advantages such as rich natural resources and abundant land. Liberalization of trade between members of the Association of Southeast Asian Nation is gaining momentum, slowly turning the region into something more akin to a common market that can take advantage of its more than half a billion people.
  
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• Vietnam's similarities to China have made it a darling of foreign investors: tight political control by a single political party, religious and ethnic homogeneity and a Confucian work ethic that lend it stability. Its oil reserves and investment in oil refining are on the verge of giving the country an oil-driven trade surplus.
  
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• Singapore benefits from its position on the trade routes between India, China and South-East Asia. The island-state is pushing further into services and transforming itself into a hub for foreign business talent, offering incentives, low taxes, and a corruption-free, trusted regulatory environment. It is also striving to improve its already highly rated quality of life. Yet Singapore is still proving a successful centre for manufacturing and manufacturing investment despite one of the world's highest per capita GDPs.
  
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• The Olympics, of course, are an opportunity for China not just to showcase its economic achievements but also to celebrate Chinese culture. Preparations are well on schedule. The biggest challenge for China will be to deal with the unexpected, such as protest action both in and out of the country. Corporate sponsors too will have to expect critics to become more vocal as the Games approach and must be prepared to address concerns. As they have in other countries that have hosted them, the Olympics could be a catalyst forchange in China, particularly in the quality of services, in people's mindsets, in the openness of the society, and in the way the authorities deal with dissent.
  
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• To crack the fast-growing consumer market in China requires strong marketing, distribution and organizational capabilities. It is critical to be world-class because of the highly competitive nature of the market. Pacing is so important. If you go too fast and you don't have the talent, you may spin out of control. Neither can you afford to be too cautious. If top cities become saturated, then it important to move to lower-tier markets. In certain sectors, it is not necessary to have a joint venture partner; what you need is knowledge of the consumer, which is usually obtained from experience and learning from errors. For example, in China, as people get wealthier, they face increasing demands. An individual may feel compelled to buy a refrigerator once he can afford one. But after making the purchase, he may cut back spending on cheap household items such as shampoo.
  
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• The speed of the consumer market expansion in China will depend on how rapidly policies to unlock the large amount of accumulated household savings are implemented.

To build market share for their products and services in the domestic market and worldwide, Chinese companies will have to focus on branding and quality. The key is to compete not just on price but more importantly on customer service.

Some key insights from sessions on Friday morning 7 September

• India’s vast population of young people is both an asset and a liability: while preponderance of future wage earners and consumers will provide an engine for India’s continued rise up the ranks of global economies, they also pose a threat to an already inadequate educational system that has left India with a growing skills shortage.
  
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• India’s democracy is another double-edged sword for growth: the devolution of power from the centre to the states has created new centres of economic dynamism, but has reduced the ability of any one government to alleviate the growing gaps in development between states.
  
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• Indian politicians need to embrace a "competitive federalism" instead of the present "competitive populism."
  
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• India may emerge from the current turmoil in credit markets with an even greater ability to make overseas acquisitions: its relatively Westernized business culture has instilled companies with more rigorous corporate governance that will endear them to creditors in a tighter market for funding.
  
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• Biofuels are controversial because they compete with food. But because smaller economies are more reliant on agriculture for jobs and incomes, higher food prices are likely to be a net positive to tier economies and offset the effect of higher costs for poor rural households.
  
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• The greater investment in biofuels could also increase rural productivity in poor economies, therefore improving incomes and lowering relative food costs.
  
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• Talent management is the biggest challenge, and it is particularly challenging to find leaders who can traverse across cultural contexts.
  
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•  Most global growth companies look to Western markets first, contradicting the prevailing wisdom that they look first to their neighbourhood.
  
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• While many on management boards will be over age 60, change is typically driven by lower-level officials who tend to be younger and more globally oriented.
  
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• Some companies just aren’t "true multinationals", but rather domestic companies with certain exports. Such companies often fail in international markets.
  
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• In the euphoria over the success of the New Champions, not enough attention was being paid to the management challenges they face as they go forward.
  
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• The board and the management of companies are often the last to get the idea that going global is an imperative.
  
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• As a leader, it is important to be honest about uncertainty. Emotions lend credibility.
  
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• While "soft power skills" are increasingly valued, hard skills are still essential.
  
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• China is not a country, but a continent. There are huge differences within its borders, a fact that underscores the importance of cross-cultural understanding.

Some key insights from sessions on Thursday afternoon 6 September

• In keeping with their conservative approach, Chinese regulatory authorities will limit the extent of the landmark programme that will allow mainland investors to buy Hong Kong stocks. This suggests that regulators wish to prevent a flood of capital out of the mainland and are concerned that incautious small investors could be hurt in a volatile market.
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• China’s capital markets grabbed world attention last year with triple-digit gains and have continued their stunning upward ascent ever since. Analysts say structural conditions have vastly improved since the nation underwent a boom-bust cycle in the early 90s. 
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• Following multiple reforms over the past few years, China’s capital markets are deeper – with higher quality listings – and wider, now that many institutional investors have boosted their equity exposure. But regulators acknowledge important risks remain, citing such priorities as improving the legal framework and educating investors.
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• China’s so-called second-tier cities are aiming to win more corporate investment with high-tech development zones and big pools of workers with relatively low labour costs. But just like the country’s biggest cities, they’re likely to find it hard to balance fast economic growth and sound environmental policy.
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• The migration of the rural population to urban areas will create major burdens on China's cities, particularly the fast-growing second-tier municipalities such as Dalian, Tianjin and Xi'an. A priority must be to set up adequate social security networks, including education facilities.
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• As with any emerging market, China's investment landscape provides enormous challenges and significant opportunities, both for investors and those enterprises that aspire to attract them. The regulatory environment can be difficult to manoeuvre, and exiting an investment is never easy. Yet private equity investors have proven that it is possible to come into China, add value to a company and turn poorly run laggards into more efficient, high-growth competitors. Such opportunities will only multiply, particularly with increased privatization. Concluded one veteran private equity investor: "China has entered a golden era of wealth creation for the next 50 years."
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• Companies need to play a proactive role in fostering more transparent and progressive regulation of their industries in countries around the world. Whether they are established multinationals or new players venturing abroad, smart lobbying plays an integral role in educating policy-makers and maintaining constructive dialogue.
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• At the same time, companies should not neglect lobbying regulators at home, who can play an important role as advocates in their relations abroad.
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• Light regulation and divergent national standards hamper innovation and scale, so companies need to encourage policy-makers to adopt global best practice in regulating their industries. Teaming up with NGOs can help companies advance the policy agenda.
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• The need for corporations to observe corporate social responsibility in markets where they operate has been well established. But companies should also make sure they do not adhere to different standards from place to place, but rather strive to apply the highest standards wherever they are and no matter how lenient the regulations are.
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• As they venture into new markets, companies should consider tying up with competitors there, creating ventures that can not only combine their strengths, but also help open regulatory doors.
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• The risks to doing business are abundant and will become more apparent to foreign multinationals as China's economic growth and their own growth in the country diverge.
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• China has yet to bear the full brunt of its new and more prominent role in the world. Only when it encounters the inevitable backlash to its spreading influence will it truly be able to consider itself a superpower.
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• Iran is a growing threat to global stability under almost any likely scenario. Even in the absence of direct US intervention against its nuclear ambitions, economic sanctions are likely to ensue, which will affect the price of oil.
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• Arab nations have the most to fear from a nuclear Iran, but have yet to demonstrate an awareness of this risk, instead identifying nuclear non-proliferation as a manifestation of Western power over the Muslim world. Until the West can convince Arab states to join the effort to curtail Iran's nuclear ambitions, progress will not be made.
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• The world will not be able to make progress against terrorism until it addresses the forces that feed it: the intense and growing sense of injustice and discrimination felt in the Muslim world.
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• With most of the Muslim world under the age of 25, it is essential that ways be found to bring its younger generation into civilization's mainstream and to counter the kind of hopelessness and alienation that drive some to terrorism.
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• The challenge posed by radical Islam and terrorism has challenged the very foundations of foreign policy, demonstrating their inability to cope with a globalize world of increasing complexity. What is needed is a fundamental re-evaluation of mainstream values, of a system based on the accumulation of profits, and instead a shift towards a "radical decency".
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• Globalization has created unprecedented opportunities for wealth and its accumulation, but it has also created a global economy that has no mechanism for addressing or ameliorating inequities. It is a system beyond any one government or set of rules. This is unsustainable.

One of the biggest risks to the world is that its sole hegemon is widely maligned as incompetent in both foreign and domestic affairs. America's dwindling power could be accompanied by not only increased protectionism, but also a neo-isolationism that, in the absence of a successor as superpower, leaves the way open for rivalry and creates the potential for conflict. Asia is particularly vulnerable to such competitive pressures as the US pulls back from its long-standing role as a military and diplomatic counterweight in the region.

Some key insights from sessions on Thursday morning 6 September

• The world's emerging markets, particularly China and India, have become an economic locomotive in their own right, and could insulate global economic growth to some extent from the fallout of the US sub-prime mortgage crisis.
  
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• Asia remains vulnerable to any dramatic downturn in US consumer spending, which would affect exports. Economists differ on how severely US consumers are likely to be affected, with some saying tightening credit will force them to save more and spend less, while others believe the Federal Reserve and the US government are still well armed against any significant economic slowdown.
  
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• Asia is also vulnerable to a downturn in US asset prices because so much of its own savings are invested in American capital markets. A significant downturn in the value of US stocks, bonds, or the dollar will reduce the relative value of these investments.
  
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• A bigger risk to the global economy is that the current market turmoil and the potential for an economic slowdown exacerbates growing protectionist impulses among politicians catering to misgivings among middle-class voters, particularly in the US, to the fact that the gains of globalization are being enjoyed primarily by the very rich and the very poor. In the US presidential election year, protectionist and populist rhetoric is likely to grow more shrill, and could push a retrograde trade agenda to the fore.
  
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• Regulators, particularly central banks, may bear some responsibility for allowing the credit boom to go on so long in spite of seeing the dangers of a meltdown like the one now unfolding. But financial institutions also must bear some of the blame for buying into the boom in spite of evidence that it had gone too far, too fast and that an unravelling was inevitable and imminent.
  
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• With so much focus now being placed on product safety, companies will need to take a more proactive role in devising new standards for quality. Companies expanding globally have to contend with conflicting regulatory standards, and so must emphasize to regulators the need to adopt "best practice" regulatory standards that increase efficiencies for multinationals, attract foreign investment and enhance the ability of their own industries to export their products abroad.
  
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• Banner advertising is one of the least effective forms of advertising.
  
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• Entrepreneurship and growth are associated not only with young people, but also with the retiring baby boomers starting up new businesses in the US. They are well-trained, resourceful and have created a healthy robust and value-generating sector.

Despite the resumption of global trade negotiations at the World Trade Organization, prospects for progress in the Doha Round of global trade talks are low. Trade friction over problems with the standards and quality of Chinese products should not be dismissed as protectionist in motivation.