A conversation with Booz & Company’s Chairman for Greater China.

Edward Tse: Yeah, my name is Edward Tse. I’m a senior partner with Booz and Company. I’m also Booz & Company’s chairman for greater China. We do management consulting.

Question: What does your work consist of on a day-to-dayrnbasis? 

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EdwardrnTse: Sure, I consult to myrnclients and these are usually large companies, both foreign companies trying tornoperate in China, as well as Chinese companies who want to be able to […] andrnsometimes expand outside of China, so I help with the business strategies andrnoperations and so on.

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Question: What are the major components of your “Chinarnstrategy” for the West?

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EdwardrnTse: Sure.  You know in my book called “The China Strategy”rnI talk about four major themes. rnThe first theme is open China, meaning you know China has been trying tornopen itself up since the economic reform started by Deng Xiaoping in 1978 andrnover the last several decades China has indeed continued to open up itself tornthe rest of the world and try to integrate itself into the rest of the worldrnand at the same time, there is a large scale organization that is going on inrnChina where China is trying to turn itself into a largely urban society andrnactually that would mean that there will be new groups of Chinese consumersrnthat will be emerging and these new Chinese consumers will have thernaffordability of buying the products and services that many multinationalrncompanies or foreign companies will be selling into China, so that is the firstrntheme.

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Second theme is what I call entrepreneurial China.  That means you know I think as many ofrnyou know the Chinese are very entrepreneurial.  Historically, you know we are very good businessmen, butrnwith the communist rule starting in 1949 for several decades thatrnentrepreneurism has been suppressed, but since the economic reform the Chineserngovernment is allowing the blossoming of the entrepreneurism and today we’rernseeing all sorts of Chinese privately owned companies who are into you knowrnvarious industry sectors and many of them are doing really well.  So this widespread […] that is causedrnby the, or is driven by the entrepreneurism is very pertinent in Chinesernsociety. 

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The third theme that I talk about is official China and asrnmany of you know the Chinese government has been taking a very major role inrndirecting the development of the country, in particular in the Chinese economyrnand we have seen over the years that the Chinese government has actually beenrnable to direct the resources very effectively to areas that China needs, inrnparticular in laying the basic infrastructure for businesses to do theirrnbusiness more effectively. 

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And the last theme, the fourth and last theme that I talkrnabout was what I call one world and increasingly what we’re seeing is that forrnglobal companies no longer China is just a place to do business.  China is a growing market, a potentialrnmarket, nor China is just a base for sorting products and export products backrnto the home countries. rnIncreasingly China is a base where, you know, companies need to dornresearch and development, do product development and then integrate the Chinarnoperations into the global operations, so in other words, for global companiesrnwe’re recommending that they need to treat China and for that matter India asrnthe core when they consider their global strategies.

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Question: How can U.S. corporations cater more effectivelyrnto the Chinese market?

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EdwardrnTse: The U.S. corporations have to recognize that, you know, China isrnindeed a very different place to do business compared to the U.S. or for thatrnmatter any other, you know, other places where the U.S. companies may be doingrnbusiness with for a long time.  Thernfirst thing that I would recommend a U.S. business to do is to have a deeprnunderstanding of what I call a Chinese context.  The context in which, you know, you need to understand thernChinese history, the Chinese culture, just about the Chinese way of doingrnthings and for many U.S. companies that is not…  I don’t think, you know, the companies have done well enoughrnto have that deep understanding. 

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I think a lot of American companies would assume that, yournknow, they can take whatever products or service offering or business modelrnthat they have developed in the U.S. and they could directly apply those tornChina and expect that they will work in China.  In reality it’s not that easy.  You need to understand the China market, the China contextrnand adapt your products and service offering to the local market.

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Question: Will China need to adopt Western-style democracyrnin order to keep its economy growing?

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EdwardrnTse:  It is hard to predictrnprecisely how the evolution is going to sort of evolve, but if you look at thernsteps of today and look at you know how the Chinese people are looking at therngovernment I say you know while obviously you know just like you know people inrnany other country, many of the Chinese people will have criticism towards thernChinese government, but by and large you know with respect to the development,rnin particular economic development, that you know Chinese… that China has gonernthrough in the last couple of decades I would say you know the Chinese peoplernhave been very supportive of the Chinese government’s policies and you knowrnwhat they have been able to achieve in terms of lifting the living standards ofrnthe Chinese.  Over time you knowrnone will expect that as the Chinese people become wealthier and many of themrnwill you know go outside of China to become more worldly you know you will expectrnthat there is going to be some more feedback from the Chinese people on how thernChinese government ought to be conducted and in fact, within the Chineserngovernment they also do recognize that in fact things cannot be sort ofrnstagnant or it cannot be just you know stay where it is today and there isrnalways a lot of discussions within the Chinese government as to how therngovernment ought to be changed over time, but unlikely we’re going to see arndrastic change overnight.  We’rernprobably going to see a gradual evolution and in fact, right now within therncommunist party there is quite a bit discussion about a so called internalrndemocracy.  In other words,rncreating some competition within internally within the party on certain keyrnposts of the assignments and we expect this evolution will continue to happen.

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Question: Will debt to China pose a serious problem for thernU.S.?

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EdwardrnTse:  Yeah, certainly.  Anytime you owe money to other peoplernis always […].  I think it goesrnwithout saying at the country level as well.  From the Chinese standpoint Chinese obviously see that, yournknow, as a way to invest their money. rnAt the same time China is also a bit concerned whether or not, you know,rnwe’re putting too much within you know one basket, but at the same time yournknow are there are other sort of better alternatives one also needs to argue,rnso it’s a bit of a tenuous situation, but China is also sort of revealing orrnmonitoring, you know, how we should be making our investments. 

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Question: Will China rival the U.S. as an economicrnsuperpower in the 21st century?

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EdwardrnTse: I think most of thernChinese will expect that, you know, China will continue to rise in the nextrncouple of decades overall speaking, economically and perhaps geopolitically.  For the Chinese, you know, we believernthat, you know, for centuries in the past we’ve been in the center of thernworld.  In fact, you know, China inrnChinese means the middle kingdom that we are in the middle of the world.  Rightly or wrongly that is the beliefrnand so this is a… you know, this current or recent rise of China is for manyrnChinese it is just the way that we get back to where we ought to be, but thernrelationship between China and the U.S. will in particular U.S., need to bernkept within a context of what I talk about in my book, which is openrnChina.  China actually is arnrelatively open society.  China hasrntremendous motives of wanting to integrate into the rest of the world and thernrelationship with the U.S. for example I think, you know, is a very differentrntype of relationship compared to let’s say the U.S. and the Soviet Unionrnrelationship in the Cold War era or even you know when Japan was also rising inrnthe ‘80s the relationship in the U.S. and Japan.  I think today if you look at China and the U.S. a lot ofrninterests are quite intertwined. rnThere is a lot of mutual interests.  Of course there are differences as well and that a reason…rnthat is to be expected, but at the same time there is a tremendous amount ofrnintertwined interests between the two countries, in particular, in terms ofrnbusinesses that in fact as China continues to rise China will have to learnrnabout, you know, how to play more effectively in the global geopolitical world,rnbut at the same time it’s not like China will have to sort of threaten or sortrnof rival itself with the U.S.  Irndon’t think that is the motive.

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Question: Is China trying to mimic the economic rise of itsrnEast Asian neighbors?

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EdwardrnTse:  Actually as Chinarnstarted this economic reform back in the late ‘70s, you know, China was lookingrnout to other economies to try to sort of learn from other economies aboutrnexperiences and so on, because China was really struck about how backward Chinarnwas compared to the rest of the world, so the first series of economy studiesrnChina tried to learn from were Hong Kong, Taiwan, Singapore, the so calledrntiger states and they you know they learned something and then the next stagernof countries that you know the Chinese were trying to learn from were Korea,rnJapan, you know, the so-called East Asian model, and then the first stage wasrnyou know many of the western countries, the western European countries, Americarnand so on and the Chinese were just, you know, very curious about what can workrnand not work.  And of course, yournknow, every of these markets or countries or economies are very differentrnbecause the context are very different. rnChina is huge.  China is,rnyou know, in a way, you know, to start with a very low base, so how can Chinarnsort of accelerate this process, so China would need to learn from the veryrnbest from the rest of the world and I say that you know China has picked uprnvery different things from different economies in the whole process of learningrnfrom these various economies, but one thing that is in a way is also quiternshocking to the Chinese was what happened in the global financial crisis backrnin the late…2008, and to the Chinese, you know, the abrupt collapse of thernfinancial system and the collapse of many corporations in the west was a majorrnshock to the Chinese, so it leaves some questions for the Chinese of you knowrnwhat is actually the best operating model.  I don’t think the Chinese also have figured it out, but werncertainly have learned a lot during this process.

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Question: Was Google’s recent exit from China motivated byrnbusiness or ethics?

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EdwardrnTse:  Well I can’t say arncomment on behalf of Google because, you know, I think that Google businessrnexecutives have a very clear mind about what they’re doing, but I would onlyrncomment that you know I think when we look at China and also the opportunitiesrnfor foreign companies in China I think we need to take a broader view andrnperhaps a longer view.  The mediarnsector where Google is in is a rather sensitive sector for the Chineserngovernment for the reasons that I think everybody understands and so, you know,rnI think, you know, it is in a way it’s not unreasonable to see you know therndifferent perspectives between a company like Google and that of the Chineserngovernment.  I cannot put a valuernjudgment on who is right, who is wrong, but what my view is that that is yournknow only one of the data points within a broader universe of considerationsrnand in fact, for many companies that I work with and I talk to, many foreignrncompanies including many American companies they continue to see tremendousrnopportunities in China, but also they see competitive threats coming out fromrnChina, so you know, companies are not very busy in sort of saying you know whatrndoes Google mean to me.  Companiesrnare saying what does China really mean to me in terms of both theirrnopportunities as well as the threats or the challenges, so I say that, you know,rnGoogle is an important case because it is highly visible, but at the same timernit’s only one data point within numerous data points within the universe ofrncompanies doing business in China or with China.

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Question: Who will ultimately be forced to relent, thernChinese government or Google?

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EdwardrnTse: Well I think yeah, tornwhat extent that China is willing to adjust the policies in this area I thinkrnis, you know, obviously that is what…That is a decision that the Chineserngovernment should make.  Withrnrespect to Google, you know, I think they will look at it from their businessrnstandpoint towards then they can be successful in China within the currentrnregulatory context and the fact of the matter is for many of the foreignrninternet companies that have been trying, you know, to go into China and try torncompete within the China context many of the foreign internet companies findrnthat it is actually pretty challenging because the local companies are actuallyrnfairly competitive, so that’s a reality that you know businesses is aboutrncompetition and when you’re facing with strong competition then you know yournneed to be careful about you know what is the next step should you want torncontinue to invest the resources to try to compete along with the other guys orrndo you want to make a withdrawal. rnThen, you know, it’s a decision that every company needs to make, but thernChinese companies are very, very competitive in their own space.

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Question: How is China’s growth "nonlinear?"

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EdwardrnTse: When I talk about nonlinearity, you know, what I usually meant was,rnyou know, when you look at the demand side of things in China you typicallyrnwill see that, you know, for sometime there is maybe a gestation period.  Things may be a little bit slow inrnterms of the pickup, but then all of the sudden you will see an uptickrnrapidly.  That is what we call arndiscontinuity or an inflection point and you know over the years as we dornconsulting in China we see that sort of discontinuities over and over againrnacross many industry sectors and so our recommendations for foreign companiesrnis that you know when you go into China you cannot just take a snapshot of whatrnis going in China and try to extrapolate that you know incrementally orrnlinearly that will be the case in the future.  Oftentimes you will miss the boat and so we would recommendrnbusiness people to go in with the mindset that look, you know, if we anticipaternwhat will happen in China and what will be the basic drivers that will drive uprnthe demand side and then try to deeply understand how those drivers are goingrnto manifest and what combination those driver’s manifestation will actuallyrnmean to companies, so that is what we mean by nonlinearities.

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Question: How do your two home cities, Hong Kong andrnShanghai, illustrate this?

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EdwardrnTse: Yeah, both theserncities are, you know, leading cities in China.  Of course Hong Kong is, outside of mainland China, is arnspecial economic zone, but it is still part of… officially is part ofrnChina.  You know Hong Kong has had,rnyou know, a very successful history as you know over the last several decades,rnin particular under the British rule and even after the handover from thernBritish back to Chinese Hong Kong still retains many of the major elements ofrnwhat the British have left behind, in particular in the legal system, so yournknow the Hong Kong continues to be a major financial center for the region andrnis underpinned by a very reliable and very transparent legal system, whereasrnShanghai clearly is a you know the leading city in all of mainland China.  It’s grown tremendously since 20, 30rnyears ago and today is a bona fide sort of cosmopolitan city, but in many waysrnvery similar to Hong Kong, but at the same time you know it’s still within therntether of the mainland China, so many things Shanghai still needs to sort ofrncatch up, in particular legal system and so on, but at the same time you knowrnShanghai benefits from what I call in my book official China that, you know,rnthe Chinese government as they sort of formulate a strategy has to decide wherernto put resources.  In many casesrnShanghai is the beneficiary of these kind of national policies and so therngrowth of Shanghai over the last couple of decades has been truly tremendousrnand we will expect Shanghai to continue to integrate with the rest of the worldrnover time and so both Hong Kong and Shanghai are for me is tremendouslyrninteresting and I’m very lucky to be able to live in both cities.

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Question: What makes you optimistic about the 21st-centuryrneconomy? 

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EdwardrnTse:  You know, as China,rnyou know, continues to rise and perhaps India and a few other sort of so-calledrnemerging markets I think we’re seeing a redefinition of the global geopoliticalrnpicture.  I think you know we willrnevolve more from a you know single superpower to perhaps multiple power, maybernnot superpower, but sort of multiple power picture where everybody will see tornwork with everyone else in a more closer manner and I believe thatrnnotwithstanding a lot of discussion about you know protectionism and people whornare trying to protect this and that and so I believe the world will moverntowards perhaps a more globalized environment where countries will have to workrncloser together on a similar agenda. rnI think the U.S. will continue to play a major leadership role in manyrnof these major geopolitical issues. rnI will expect countries like China, India, Russia, and of course many ofrnthe western European powers will also play an important role.  I think a large link to others is, yournknow, the growth of the global multinational companies that these companies willrnwork across national borders.  Theyrnwill do businesses you know in various countries and you know in some casesrnthey will have to apply the global processes and systems, but in many casesrnthey also need to be very local. rnYou know, in places like the U.S. and China and Japan and India you havernto be very local, so that ability to combine the globalness of companies asrnwell as to become very local is going to be a real challenge of the leadingrnmultinational companies, but I am very optimistic that you know we’re going tornhave quite a number of these companies who can be very successful, can sort ofrndevelop the right model to take advantage of the globalization that we’ll bernseeing over time.

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