This isn’t really an old Chinese Proverb. I composed it in 2004 to introduce a feature story on the opportunities and threats to be expected from China. Its suggestion, that China will forward-integrate and acquire American assets, including retailers and brands, is now even more prophetic than it was back then. China’s enormous and rapid growth has allowed it to recently surpass Japan as the world’s second largest economy, but has also caused internal and external growing “pains,” which have been exacerbated by the Great Recession. And, one of the major results that will come out of the economic and social issues attendant to such growth (and the necessity to maintain its momentum) will be exactly as the last line in my “proverb” suggests. Therefore, I felt it was timely and relevant to bring this prophecy front and center, which is exactly where I now think it sits on the “dragon’s” agenda.
TO “CAPITALISM ON STEROIDS” IN ONE NANO-SECOND; TO “GLOBAL ACQUIRER” IN TWO
As has been said many times and in many ways, the big irony today is that the greatest capitalists on the planet are in Communist China. Perhaps an even bigger irony is the fact that China was among the first capitalist nations, if not the first, dating back over 700 years to Marco Polo’s trading era.
Further irony can be found in the Shanghai-headquartered Hurun Rich List, which identifies almost 1,400 people in China with wealth of at least $150 million, and between 400-500 billionaires, compared to only 400 in the U.S., according to Forbes.
If capitalism was indeed an original part of the DNA of China, it’s been reborn on steroids (albeit managed by the State). China’s steroids would be defined as entrepreneurship, flexibility, aggressiveness and speed. And when mixed in with the rest of their dominant cultural persona, let there be no mistake that China will be doing a lot of asset- acquiring.
In 2004, according to George Yeo, Singapore’s Trade and Industry Minister, China’s transformation, expected to take over a few decades to complete, would trigger significant shifts in the global balance of economic power, thereby diluting the importance of the U.S. He said: “China is likely to recover its position as the world’s largest economy, which it was for most of human history.”
Beyond its cultural and capitalistic traits, there are other internal dynamics at work which are also driving the need for China to acquire U.S. assets such as retailers and consumer brands.
First of all, as a result of its explosive industrial growth, China has a rapidly growing middle class which equates to an enormous consumer base, which by the way, needs more money to buy things with to continue fueling such growth, which in turn means they have to earn more money working for those growing industrial giants.
According to CIA World Factbook, China’s average annual household income increased from $3,870 in 2005 to $6,600 in 2009, a 70% increase.
However, the quest for a better standard of living increases not only wages, but, also taxes, energy costs, and the need to build infrastructure as well. Herein lies China’s economic conundrum: it is locked into providing an ever-increasing standard of living for its people, while at the same time trying to remain the low-cost manufacturing base of the world. It is difficult, if not impossible, to do both.
China is feeling tremendous external pressure to maintain low-cost-producer status as well. That pressure is coming from customers in the US and Europe, such as Walmart (WMT), Levi (LVISF) and Nike (NKE), and from low-cost manufacturers in other Asian countries such as Vietnam, Bangladesh and Indonesia. So what’s China to do to pull itself out from between the rock and the hard place?
The additional pressure from the U.S. to increase the value of the yuan to help boost our exports simply exacerbates the conundrum.
NEXT STOP: USA
As history’s original traders, they understand better than most that the greatest profits on the global value chain reside on the end closest to the consumer, that is, at the retail and brand level. And currently, of course, the country with the highest level of profitability, and the most robust markets, brands and retailers, is the United States.
It’s also likely they will most aggressively seek assets in those industries that can benefit most from vertical integration, such as apparel, where China already produces about 35 percent of all product consumed in the United States. A leading example of this emergent strategy is Hong Kong—based Li & Fung, the world’s largest apparel sourcing agent, at $15 billion. Among the sixteen brands it has so far acquired are Emma James, Wear Me, JH Collectibles, Tapemeasure, Simply Vera by Vera Wang, Hannah Montana, Intuitions, and Zeeland and Rosetti handbags.
And China has publicly committed to continuing this strategy, which will provide both vertically-integrated control and increasing access to the more profitable U.S. marketplace. From a timing perspective, the iron is hot, as many U.S. brands and retailers have failed or were weakened during the recession. And though the apparel industry may be the “low-hanging fruit,” we believe that China will leverage its experience in that sector to examine every industry, with an ultimate focus on the retail end of the chain. So, instead of continuing to buy U.S. Treasury bills, China will be buying assets.
Vertical integration not only provides China greater profits, thus fueling its rapidly growing economy and standard of living, it also provides total control over both its value chains and markets. For example, China would be the major consumer market for its own products, and would have the power to put pressure on all its former low-cost competitors for even lower costs. With ownership of globally recognized brands, and total control of its value chains, China could market them at home as well as throughout the world.
Furthermore, given their lack of homegrown brands, their inherent impatience and aggressive fast-moving business style, and a higher valued yuan, (making U.S. assets even cheaper), the world can expect the Chinese to accelerate their conquest of our brands.
As observed by Kenichi Ohmae, a consultant who used to run McKinsey’s consulting operation in Japan, most Chinese businesses are broad rather than deep, preferring to diversify rather than concentrate on a core business. While providing more money-making opportunities, it also reflects their lack of patience. He says, “I see very few Chinese managers excelling in one area. They will never spend five or ten years developing a smaller, faster component — it is not in their mentality.”
Thus, the time and patience it takes to build the consistency, quality and, ultimately, the consumers’ trust in a brand, is not yet part of the Chinese management style.
So why should China go to all the time and effort to counterfeit, knock off, or replicate our brands when they can just acquire them?
You may say “that’s a long way off, if it ever happens, and I’ll be long gone.”
Don’t count on it. Chinese companies have already purchased the Hummer and Volvo automobile brands, Hoover vacuum cleaners, and the iconic Frisbee and Hula Hoop toy businesses, not to mention countless industrial brands. And they’re hungry for more. “Well,” you might then add, “even if they do move downstream and buy up all the great brands, they’ll need American marketing and management talent to manage those branded businesses.”
That’s right. So don’t worry, they’ll probably keep you on as the hired help.