Big Think Interview With Edward Tse

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-day\r\nbasis? 

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Edward\r\nTse:  Sure, I consult to my\r\nclients and these are usually large companies, both foreign companies trying to\r\noperate in China, as well as Chinese companies who want to be able to […] and\r\nsometimes expand outside of China, so I help with the business strategies and\r\noperations and so on.

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Question: What are the major components of your “China\r\nstrategy” for the West?

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Edward\r\nTse:  Sure.  You know in my book called “The China Strategy”\r\nI talk about four major themes. \r\nThe first theme is open China, meaning you know China has been trying to\r\nopen itself up since the economic reform started by Deng Xiaoping in 1978 and\r\nover the last several decades China has indeed continued to open up itself to\r\nthe rest of the world and try to integrate itself into the rest of the world\r\nand at the same time, there is a large scale organization that is going on in\r\nChina where China is trying to turn itself into a largely urban society and\r\nactually that would mean that there will be new groups of Chinese consumers\r\nthat will be emerging and these new Chinese consumers will have the\r\naffordability of buying the products and services that many multinational\r\ncompanies or foreign companies will be selling into China, so that is the first\r\ntheme.

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Second theme is what I call entrepreneurial China.  That means you know I think as many of\r\nyou know the Chinese are very entrepreneurial.  Historically, you know we are very good businessmen, but\r\nwith the communist rule starting in 1949 for several decades that\r\nentrepreneurism has been suppressed, but since the economic reform the Chinese\r\ngovernment is allowing the blossoming of the entrepreneurism and today we’re\r\nseeing all sorts of Chinese privately owned companies who are into you know\r\nvarious industry sectors and many of them are doing really well.  So this widespread […] that is caused\r\nby the, or is driven by the entrepreneurism is very pertinent in Chinese\r\nsociety. 

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The third theme that I talk about is official China and as\r\nmany of you know the Chinese government has been taking a very major role in\r\ndirecting the development of the country, in particular in the Chinese economy\r\nand we have seen over the years that the Chinese government has actually been\r\nable to direct the resources very effectively to areas that China needs, in\r\nparticular in laying the basic infrastructure for businesses to do their\r\nbusiness more effectively. 

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And the last theme, the fourth and last theme that I talk\r\nabout was what I call one world and increasingly what we’re seeing is that for\r\nglobal companies no longer China is just a place to do business.  China is a growing market, a potential\r\nmarket, nor China is just a base for sorting products and export products back\r\nto the home countries. \r\nIncreasingly China is a base where, you know, companies need to do\r\nresearch and development, do product development and then integrate the China\r\noperations into the global operations, so in other words, for global companies\r\nwe’re recommending that they need to treat China and for that matter India as\r\nthe core when they consider their global strategies.

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Question: How can U.S. corporations cater more effectively\r\nto the Chinese market?

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Edward\r\nTse: The U.S. corporations have to recognize that, you know, China is\r\nindeed a very different place to do business compared to the U.S. or for that\r\nmatter any other, you know, other places where the U.S. companies may be doing\r\nbusiness with for a long time.  The\r\nfirst thing that I would recommend a U.S. business to do is to have a deep\r\nunderstanding of what I call a Chinese context.  The context in which, you know, you need to understand the\r\nChinese history, the Chinese culture, just about the Chinese way of doing\r\nthings and for many U.S. companies that is not…  I don’t think, you know, the companies have done well enough\r\nto have that deep understanding. 

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I think a lot of American companies would assume that, you\r\nknow, they can take whatever products or service offering or business model\r\nthat they have developed in the U.S. and they could directly apply those to\r\nChina and expect that they will work in China.  In reality it’s not that easy.  You need to understand the China market, the China context\r\nand adapt your products and service offering to the local market.

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Question: Will China need to adopt Western-style democracy\r\nin order to keep its economy growing?

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Edward\r\nTse:  It is hard to predict\r\nprecisely how the evolution is going to sort of evolve, but if you look at the\r\nsteps of today and look at you know how the Chinese people are looking at the\r\ngovernment I say you know while obviously you know just like you know people in\r\nany other country, many of the Chinese people will have criticism towards the\r\nChinese government, but by and large you know with respect to the development,\r\nin particular economic development, that you know Chinese… that China has gone\r\nthrough in the last couple of decades I would say you know the Chinese people\r\nhave been very supportive of the Chinese government’s policies and you know\r\nwhat they have been able to achieve in terms of lifting the living standards of\r\nthe Chinese.  Over time you know\r\none will expect that as the Chinese people become wealthier and many of them\r\nwill you know go outside of China to become more worldly you know you will expect\r\nthat there is going to be some more feedback from the Chinese people on how the\r\nChinese government ought to be conducted and in fact, within the Chinese\r\ngovernment they also do recognize that in fact things cannot be sort of\r\nstagnant or it cannot be just you know stay where it is today and there is\r\nalways a lot of discussions within the Chinese government as to how the\r\ngovernment ought to be changed over time, but unlikely we’re going to see a\r\ndrastic change overnight.  We’re\r\nprobably going to see a gradual evolution and in fact, right now within the\r\ncommunist party there is quite a bit discussion about a so called internal\r\ndemocracy.  In other words,\r\ncreating some competition within internally within the party on certain key\r\nposts 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 the\r\nU.S.?

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Edward\r\nTse:  Yeah, certainly.  Anytime you owe money to other people\r\nis always […].  I think it goes\r\nwithout saying at the country level as well.  From the Chinese standpoint Chinese obviously see that, you\r\nknow, as a way to invest their money. \r\nAt the same time China is also a bit concerned whether or not, you know,\r\nwe’re putting too much within you know one basket, but at the same time you\r\nknow are there are other sort of better alternatives one also needs to argue,\r\nso it’s a bit of a tenuous situation, but China is also sort of revealing or\r\nmonitoring, you know, how we should be making our investments. 

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Question: Will China rival the U.S. as an economic\r\nsuperpower in the 21st century?

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Edward\r\nTse:  I think most of the\r\nChinese will expect that, you know, China will continue to rise in the next\r\ncouple of decades overall speaking, economically and perhaps geopolitically.  For the Chinese, you know, we believe\r\nthat, you know, for centuries in the past we’ve been in the center of the\r\nworld.  In fact, you know, China in\r\nChinese means the middle kingdom that we are in the middle of the world.  Rightly or wrongly that is the belief\r\nand so this is a… you know, this current or recent rise of China is for many\r\nChinese it is just the way that we get back to where we ought to be, but the\r\nrelationship between China and the U.S. will in particular U.S., need to be\r\nkept within a context of what I talk about in my book, which is open\r\nChina.  China actually is a\r\nrelatively open society.  China has\r\ntremendous motives of wanting to integrate into the rest of the world and the\r\nrelationship with the U.S. for example I think, you know, is a very different\r\ntype of relationship compared to let’s say the U.S. and the Soviet Union\r\nrelationship in the Cold War era or even you know when Japan was also rising in\r\nthe ‘80s the relationship in the U.S. and Japan.  I think today if you look at China and the U.S. a lot of\r\ninterests are quite intertwined. \r\nThere is a lot of mutual interests.  Of course there are differences as well and that a reason…\r\nthat is to be expected, but at the same time there is a tremendous amount of\r\nintertwined interests between the two countries, in particular, in terms of\r\nbusinesses that in fact as China continues to rise China will have to learn\r\nabout, you know, how to play more effectively in the global geopolitical world,\r\nbut at the same time it’s not like China will have to sort of threaten or sort\r\nof rival itself with the U.S.  I\r\ndon’t think that is the motive.

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Question: Is China trying to mimic the economic rise of its\r\nEast Asian neighbors?

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Edward\r\nTse:  Actually as China\r\nstarted this economic reform back in the late ‘70s, you know, China was looking\r\nout to other economies to try to sort of learn from other economies about\r\nexperiences and so on, because China was really struck about how backward China\r\nwas compared to the rest of the world, so the first series of economy studies\r\nChina tried to learn from were Hong Kong, Taiwan, Singapore, the so called\r\ntiger states and they you know they learned something and then the next stage\r\nof countries that you know the Chinese were trying to learn from were Korea,\r\nJapan, you know, the so-called East Asian model, and then the first stage was\r\nyou know many of the western countries, the western European countries, America\r\nand so on and the Chinese were just, you know, very curious about what can work\r\nand not work.  And of course, you\r\nknow, every of these markets or countries or economies are very different\r\nbecause the context are very different. \r\nChina is huge.  China is,\r\nyou know, in a way, you know, to start with a very low base, so how can China\r\nsort of accelerate this process, so China would need to learn from the very\r\nbest from the rest of the world and I say that you know China has picked up\r\nvery different things from different economies in the whole process of learning\r\nfrom these various economies, but one thing that is in a way is also quite\r\nshocking to the Chinese was what happened in the global financial crisis back\r\nin the late…2008, and to the Chinese, you know, the abrupt collapse of the\r\nfinancial system and the collapse of many corporations in the west was a major\r\nshock to the Chinese, so it leaves some questions for the Chinese of you know\r\nwhat is actually the best operating model.  I don’t think the Chinese also have figured it out, but we\r\ncertainly have learned a lot during this process.

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Question: Was Google’s recent exit from China motivated by\r\nbusiness or ethics?

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Edward\r\nTse:  Well I can’t say a\r\ncomment on behalf of Google because, you know, I think that Google business\r\nexecutives have a very clear mind about what they’re doing, but I would only\r\ncomment that you know I think when we look at China and also the opportunities\r\nfor foreign companies in China I think we need to take a broader view and\r\nperhaps a longer view.  The media\r\nsector where Google is in is a rather sensitive sector for the Chinese\r\ngovernment for the reasons that I think everybody understands and so, you know,\r\nI think, you know, it is in a way it’s not unreasonable to see you know the\r\ndifferent perspectives between a company like Google and that of the Chinese\r\ngovernment.  I cannot put a value\r\njudgment on who is right, who is wrong, but what my view is that that is you\r\nknow only one of the data points within a broader universe of considerations\r\nand in fact, for many companies that I work with and I talk to, many foreign\r\ncompanies including many American companies they continue to see tremendous\r\nopportunities in China, but also they see competitive threats coming out from\r\nChina, so you know, companies are not very busy in sort of saying you know what\r\ndoes Google mean to me.  Companies\r\nare saying what does China really mean to me in terms of both their\r\nopportunities as well as the threats or the challenges, so I say that, you know,\r\nGoogle is an important case because it is highly visible, but at the same time\r\nit’s only one data point within numerous data points within the universe of\r\ncompanies doing business in China or with China.

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Question: Who will ultimately be forced to relent, the\r\nChinese government or Google?

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Edward\r\nTse:  Well I think yeah, to\r\nwhat extent that China is willing to adjust the policies in this area I think\r\nis, you know, obviously that is what…That is a decision that the Chinese\r\ngovernment should make.  With\r\nrespect to Google, you know, I think they will look at it from their business\r\nstandpoint towards then they can be successful in China within the current\r\nregulatory context and the fact of the matter is for many of the foreign\r\ninternet companies that have been trying, you know, to go into China and try to\r\ncompete within the China context many of the foreign internet companies find\r\nthat it is actually pretty challenging because the local companies are actually\r\nfairly competitive, so that’s a reality that you know businesses is about\r\ncompetition and when you’re facing with strong competition then you know you\r\nneed to be careful about you know what is the next step should you want to\r\ncontinue to invest the resources to try to compete along with the other guys or\r\ndo you want to make a withdrawal. \r\nThen, you know, it’s a decision that every company needs to make, but the\r\nChinese companies are very, very competitive in their own space.

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

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Edward\r\nTse: When I talk about nonlinearity, you know, what I usually meant was,\r\nyou know, when you look at the demand side of things in China you typically\r\nwill see that, you know, for sometime there is maybe a gestation period.  Things may be a little bit slow in\r\nterms of the pickup, but then all of the sudden you will see an uptick\r\nrapidly.  That is what we call a\r\ndiscontinuity or an inflection point and you know over the years as we do\r\nconsulting in China we see that sort of discontinuities over and over again\r\nacross many industry sectors and so our recommendations for foreign companies\r\nis that you know when you go into China you cannot just take a snapshot of what\r\nis going in China and try to extrapolate that you know incrementally or\r\nlinearly that will be the case in the future.  Oftentimes you will miss the boat and so we would recommend\r\nbusiness people to go in with the mindset that look, you know, if we anticipate\r\nwhat will happen in China and what will be the basic drivers that will drive up\r\nthe demand side and then try to deeply understand how those drivers are going\r\nto manifest and what combination those driver’s manifestation will actually\r\nmean to companies, so that is what we mean by nonlinearities.

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Question: How do your two home cities, Hong Kong and\r\nShanghai, illustrate this?

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Edward\r\nTse:  Yeah, both these\r\ncities are, you know, leading cities in China.  Of course Hong Kong is, outside of mainland China, is a\r\nspecial economic zone, but it is still part of… officially is part of\r\nChina.  You know Hong Kong has had,\r\nyou know, a very successful history as you know over the last several decades,\r\nin particular under the British rule and even after the handover from the\r\nBritish back to Chinese Hong Kong still retains many of the major elements of\r\nwhat the British have left behind, in particular in the legal system, so you\r\nknow the Hong Kong continues to be a major financial center for the region and\r\nis underpinned by a very reliable and very transparent legal system, whereas\r\nShanghai clearly is a you know the leading city in all of mainland China.  It’s grown tremendously since 20, 30\r\nyears ago and today is a bona fide sort of cosmopolitan city, but in many ways\r\nvery similar to Hong Kong, but at the same time you know it’s still within the\r\ntether of the mainland China, so many things Shanghai still needs to sort of\r\ncatch up, in particular legal system and so on, but at the same time you know\r\nShanghai benefits from what I call in my book official China that, you know,\r\nthe Chinese government as they sort of formulate a strategy has to decide where\r\nto put resources.  In many cases\r\nShanghai is the beneficiary of these kind of national policies and so the\r\ngrowth of Shanghai over the last couple of decades has been truly tremendous\r\nand we will expect Shanghai to continue to integrate with the rest of the world\r\nover time and so both Hong Kong and Shanghai are for me is tremendously\r\ninteresting 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-century\r\neconomy? 

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Edward\r\nTse:  You know, as China,\r\nyou know, continues to rise and perhaps India and a few other sort of so-called\r\nemerging markets I think we’re seeing a redefinition of the global geopolitical\r\npicture.  I think you know we will\r\nevolve more from a you know single superpower to perhaps multiple power, maybe\r\nnot superpower, but sort of multiple power picture where everybody will see to\r\nwork with everyone else in a more closer manner and I believe that\r\nnotwithstanding a lot of discussion about you know protectionism and people who\r\nare trying to protect this and that and so I believe the world will move\r\ntowards perhaps a more globalized environment where countries will have to work\r\ncloser together on a similar agenda. \r\nI think the U.S. will continue to play a major leadership role in many\r\nof these major geopolitical issues. \r\nI will expect countries like China, India, Russia, and of course many of\r\nthe western European powers will also play an important role.  I think a large link to others is, you\r\nknow, the growth of the global multinational companies that these companies will\r\nwork across national borders.  They\r\nwill do businesses you know in various countries and you know in some cases\r\nthey will have to apply the global processes and systems, but in many cases\r\nthey also need to be very local. \r\nYou know, in places like the U.S. and China and Japan and India you have\r\nto be very local, so that ability to combine the globalness of companies as\r\nwell as to become very local is going to be a real challenge of the leading\r\nmultinational companies, but I am very optimistic that you know we’re going to\r\nhave quite a number of these companies who can be very successful, can sort of\r\ndevelop the right model to take advantage of the globalization that we’ll be\r\nseeing over time.

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

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