China Reinterpreting the Trade War
Talking about China has become common since the trade dispute with the US, but how are Chinese companies preparing for the ‘war of civilizations'?
“It is a continuous battle against the current system, against an economic model and who leads it. It is a war of civilizations,” Weber Shandwick executive.
Why should we discuss about China? The influence of this Asian country is so important that, even in academic discussions, it cannot (must not) be omitted. There are increasingly international exchanges between China and Mexico at Tecnológico de Monterrey. For instance, the Executive MBA and Full-Time MBA programs organize international trips to China as part of the academic experience; another example is the Tec-China Innovation Hub, a platform that strengthens the exchange of talent and technology between Tec de Monterrey and China.
It was precisely thanks to one of these academic experiences, during a commercial conflict between the U.S.A. and China, that I thought about writing the "war of civilizations" and how this Asian country is preparing to face it.
One of the first learnings (and mistakes) has to do with the "vision" used to analyzed China. Observing, understanding and even criticizing the country - from a western perspective - is not very useful; it must be understood from the point of view of Chinese companies, its people and institutions. Quoting a senior manager of the Weber Shandwick company: "China knows how to fight its battles. It never takes its enemy to the limit; China understands that an adversary today can be an ally tomorrow." As a result, misinterpretations arise: by analyzing China from a global, and not from a regional point of view; by designing a solution from the West rather than from the East; by seeing China as a cheap-labor, manufacturing country; by confronting Chinese companies instead of working as means of collaborative partnership.
Realities and trends
There are two key challenges that Chinese government identifies quite clearly: one is located in the energy sector (development and leadership in the production of renewable energy sources) and the other in the socio-demographic field (population aging and the imbalance between births of males and females).
To address future challenges and current problems, China has "divided" the country strategically into three levels of cities (tier cities), according to different indicators such as economic development, number of inhabitants, infrastructure, etc. Although only 10% of the Chinese population lives in these cities, they have been the drivers of Chinese growth in recent years. The idea of analyzing the country in through tier cities is based on a key element called "consumption" which, by the way, is highly influenced by the family, not by individual purchase decisions.
For durable goods companies, such as SAIC-VW, understanding the challenges of the Chinese market is their key for survival. According to this joint-venture, consumer sentiment is decreasing; plants are being closed; job creation is slowing; and liquidity and consumption are both declining. For the automotive sector, the "boom" of the electric car market is a great opportunity to grow. However, the Chinese consumption has its own challenges: a car is still a luxury; the primary source of the purchasing decision is the local distributor; there is a mix between online and traditional shopping; young people have no brand loyalty; and, therefore, there is no brand that can remain at the forefront in the long term.
What is happening with the e commerce? Ironically, the idea of creating technological ecosystems such as Wechat - in means to replace traditional buying and payment methods – comes from the need to connect a huge country together; in fact, eliminating terminals and expensive bank branches located in remote areas enhances efficiency. Does confidentiality bother? Quoting the manager of Weber Shandwick: "Convenience weighs more than security and privacy."
Innovation “a la carte”
Every successful Chinese company has a gene called "innovation". It is not just about production efficiency, but how companies reach the customer or how they reinvent production processes; how they integrate many partners with different scales and the "know how" of the innovation ecosystem. This is the new way in which Chinese companies are finding business solutions.
One of the most iconic examples can be found on Li & Fung innovation ecosystem. At first glance, it seems to be a physical space dedicated to entrepreneurs for the development of applications with specific solutions. But, in fact, what Li & Fung wants is to capture the entrepreneur’s vision for each business unit, while the multinational focuses on daily operations. The development of the digital platform, the use of data-based information – is the perfect example on how innovation ecosystem saves time and cost and improves productivity. Li & Fung works with entrepreneurs to change, improve and compete.
But innovation deals, too, with the internal transformation of organizations. And this is no exception for the world's leading brewing company: Anheuser-Busch InBev. China represents a big market, but even with a product as attractive as beer, companies cannot sell the product in the same way. In China, A-B InBev is more than a brewer company; the firm is an expert in the retail chain model. Online commerce is growing, but the real success lies in finding the perfect mix between online and offline channels. Additionally, sales and orders are placed through different technological platforms[1]. Traditional commerce enables reaching the consumer directly, but there is a delay in the delivery; moreover, to be profitable – with a marginal cost of transportation close to zero - the consumer must choose the same type of beer. A-B InBev has reinvented the model: everything begins with knowing the needs and the frequency of purchases[2]; then, the company chooses the type of channel and the convenient place of purchase; finally, SKUs are customized. An additional advantage for A-B InBev is the availability of consumption data which is used to predict purchase preferences, to design appropriate marketing campaigns and online price discrimination strategies[3].
One of the sectors where innovation has drastically transformed the way of doing business is the financial sector. VCredit is a clear example of how Chinese companies integrate financial services with the world of data mining. VCredit provides online financing services, connecting non-banking financial institutions with clients. But behind a credit card or other financial products lies the key of the business: the use of applications to obtain a client’s profile who, in most cases, does not have access to traditional bank credit. The business model is sophisticated; in addition to involving traditional risk management (transaction costs, reserves, insurance, etc.), a variable named "customer profile" is included. For VCredit, credit history is – literally – a thing of the past. Risk management carries out current patterns of consumption, credit management, and, why not, credit profile of the client. This data feeds into a very sophisticated model which is continuously adjusted as more information is filled in. Everything happens in real time with the help of machine learning. In addition to risk management, the pricing strategy has revolutionized the financial industry. Indeed, pricing strategy no longer depends on the customer ability to pay; it is based on a matrix of variables which are as sophisticated as the client's behavioral analysis, the probability of non-collectible credits in the future, the cost of the customized product, etc. VCredit uses artificial intelligence to generate the transactional model, offer personalized financial services, design the pricing strategy and manage risk.
The Chinese model has its own risks, opportunities and challenges, but one cannot ignore the fact that China is one of the economies that has, and will continue to have, a significant weight in business. Understanding and discussing with a critical eye on China should be a necessary condition in today’s business world, not with a judgmental view but with the means of incorporating good practices. It is a must in this "war of civilizations".
[1] According to this brewery’s figures, 38% of the Chinese population is changing from supermarket purchasing to online purchasing, however online purchasing only represents 8.3% of the different sales formats.
[2] 80% of beer consumers in China do so when they are taking part in some kind of celebration.
[3] Delivery costs are lower for the consumer, demand more elastic; there is no brand loyalty; or it is their first purchase. A specific product should not be delivered at different prices.
