We’re often told that mixing business and politics brings nothing but trouble. But in today’s China, business leaders ignore the ebbs and flows of Chinese political sentiment at their peril.
That is the core argument of The War for China’s Wallet, the latest work by leading China expert and Director of the China Market Research Group, Shaun Rein.
In this exclusive interview with China Economic Review, Rein explains why brands need to be more politically savvy than ever before to succeed in China, which economic trends we should watch out for in 2018, and why US President Donald Trump is actually handling the Chinese rather well.
Q: The overriding message of The War for China’s Wallet is that brands need to have a real understanding of Chinese politics to succeed in today’s China. Why is that?
A: China’s market has always been big for multinationals. But a lot of brands haven’t thought about the political risk implications of doing business in China, and that’s why I wrote the book. What we’ve seen in the last three to five years is that the Chinese government is using economic carrots and sticks to punish and rewards countries, and increasingly companies. For instance, in the last month you’ve seen how Marriott called Taiwan a separate country [on its website], and what did China’s government do? They handed out punishment, with a massive hammer. They blocked all of Marriot’s websites in China for one week. That’s a massive amount of loss of revenue.
So, the thrust of the book is: China is increasingly using economic punishments and rewards, and how do companies adjust to that? Do you kiss ass, like Cambodia has done? Do you go completely against China, like India has done? Or do you go somewhere in the middle, somewhere I like to call the ‘warm partner’ category? That’s countries like Canada, the UK and France. Those countries will be nice to China, but they’ll also stand up to it, and that’s probably where you want to be.
Q: How can companies avoid being caught up in a political furore in China?
A: It’s not easy, frankly. Your employees, from the top to the bottom, now have to become political, almost State Department-like analysts. You can’t just rely on PR people to deflect anger. You have to start at the very beginning, understanding that China wants to be a superpower—you have to listen to what it wants or be punished.
It’s not an easy thing, because if you take the example of Cambridge University Press from the UK, they bowed down to China and blocked a lot of articles and books on their websites at the government’s request. But then the backlash came in the West, with people saying that CUP was censoring its content. So, you kind of have to play that middle line. You have to weigh money vs. morality.
Some companies, like Apple, are shameless. Tim Cook stands up at the World Internet Conference in Wuzhen and says that China has a flowering internet ecosystem, and doesn’t even mention censorship. That’s mealy-mouthed and pathetic. But he does that because Apple makes so much money in China and they have their entire supply chain here.
If multinationals are going to hedge, you can’t invest too much in China. You can’t have your entire growth strategy in China only. You can’t have your sales and your production in China. And this is bad, this is killing me because I’m a China consultant who doesn’t have operations elsewhere, but that’s what you need to do.
Q: And if the Chinese government does decide to punish a company, what would be your advice for them? How can they deal with that situation?
A: Well, in the recent hubbub with Marriott, the CEO Arne Sorenson said, “We’re so sorry, we didn’t mean to upset the Chinese people.” He went out there and kissed ass, and he looked weak. I didn’t like that.
But look at a company like Zara, which also got caught up in [the same controversy over Taiwan references]. They apologised immediately and said, “We like China, we were wrong and are going to fix the situation.” But this was done through their China team. The global CEO didn’t apologise, and I think that’s the way to do it. Because once the global CEO apologises it becomes a bigger issue, the Western media starts to cover it. Did you know that Zara was hit? Probably not, but everyone knows that Marriott was hit. So, apologize, and then go slowly, wait a little bit, and see if everyday consumers are really angry at you. You always want to keep a low profile here.
Now, if you start to get a lot of anger from the Chinese consumer base, then you might need the global CEO to come in, but as much as you can you want to localise, and not go too far. I think Craig Smith from Marriott also went too far. He called it the “worst, most egregious mistake of his career.” I mean, come on! In my mind, the Chinese government knows that whatever it wants, Marriott will now do. And that’s a very dangerous situation. The Chinese government respects you if you’re respectful, but strong.
Now, this might sound kind of crazy, but Donald Trump, I think, has played China extremely well. I think on China-US relations, he has played that relationship better than any of the last three or four presidents. He comes in, has his goddaughter sing Chinese and tells Xi Jinping that he’s great. But then he also criticises at the same time, and says, “It’s unfair that you’re extracting so many business deals from us due to protectionism, and this needs to change.” Strong, but respectful.
Q: Do you think that Trump’s stance will actually help US companies do business in China?
A: Absolutely. I also think that he’s going to get a lot stricter this year, tensions are going to rise. I think his first priority was the tax cuts. Now that he’s gotten those down, he’s going to focus on trade. What’s smart is that he doesn’t attack human rights, he doesn’t attack democracy… Those are things that piss off Chinese leaders and also piss off a lot of the Chinese population, because they’re going to say: “What, you think we’re evil?”
Because when you say that you have human rights abuses, you’re basically saying to Xi Jinping that you’re an evil person. But he’s not an evil person. He’s just acting in a way that he thinks is good for himself, like all political leaders, and good for the country.
So, Trump is going to go after the economic issues, and he’s going to bang hard against protectionism, bang hard about opening up the auto market, financial services. This is what he should be doing, and its going to benefit the US business community.
Q: Do you think we will see significant action from China to open up its market more to foreign businesses this year?
A: I think there will be more. I think that China’s government will be willing to give up more market access to the US and Europe, but especially to the US, because they won’t feel like they’re being pressured into it, and being called a bad person. They’re going to feel that it’s a partnership, and they’ll be looking for ways to improve. And for them, opening up auto is not a big issue. Opening up financial services? That might actually benefit China, not just for increased competition but it might reduce some systemic risk here, because the domestic banks have been handing out too much and have too many non-performing loans.
So, I think the Chinese government will cede. They’ll say, ‘Let’s give Trump these things.” Trump will then be able to tout his success in the US press, saying that he’s “opening up China.” And Trump, wisely, will not criticise China on sovereignty issues, human rights, and the things that China’s government really holds dear.
Q: What do you think about the recent rise in tensions over trade between the US and China, with both countries imposing new tariffs on imports?
A: They’re fencing, pairing off against each other. The US recently put up new tariffs on solar panels and washing machines, but it was actually a lot less than what insiders expected. You could see that washing machine companies like Haier were thinking, this isn’t actually that bad, this is only going to impact us a little bit. It was a strong thrust that Trump could put in the US press, but it was sort of toothless.
Q: You recently said that you are no longer one of the “big bulls” on China. What did you mean by that?
A: I think for the last 20 years, I’ve called China better than pretty much any other analyst. When I came here in the mid-1990s and put my whole career here, everybody said I was crazy. Literally everyone. I don’t think anyone supported me coming here except maybe my father. But my father is a ballet dancer, so he didn’t care what I did as long as I was happy.
Over the past 20 years, I’ve been very vocal that there is booming business, that it’s a place all companies need to be, or at least think about coming to, because this is the real market. Now, I still think there is going to be strong growth, there are going to be very good opportunities for some companies, and some sectors. Honeywell and General Electric, for example, will benefit from the Belt and Road Initiative. They’re going to make billions of dollars from this. Some other companies like Yum!, Starbucks and Nike will continue to do well here.
But the reality is that the economy is slowing, so it’s not going to be as easy to make money. The cost of doing business is also a lot higher than everyone except Shaun predicted. Real estate costs are very high; salaries are extremely high. We’ve thought about opening up an office in NYC to save costs, because a good Chinese person with many years of experience has to get paid a lot of money.
You also have the political system. It’s a rough time, politically, with the Chinese government more focused on rejuvenating the Communist Party ideologically than pushing the economy. So, a lot of foreign companies are going to ask, ‘Is it worth it?’ If you’re going to invest $5 billion dollars, like Mercedes might have done 5 years ago, is China still the place you want to invest? If I was 20 years old and single, I wouldn’t come to China as a foreigner. I would go to Africa. I don’t know where, but I would look around.
And besides that, Chinese businesses are strong. These companies are well-capitalised, well-run, aggressive and they’re taking market share like crazy. Companies like Bright Food or Mengniu are kicking the ass of Nestle, kicking the ass of Unilever. It’s a tough place. Nestle might be better off investing in Indonesia or India, where you don’t have the same homegrown talent.
Q: So, it’s more the case that you’re no longer bullish on foreign brands investing in China, rather than the Chinese economy itself?
A: The economy is okay, but it’s slow growth. We’re not seeing the 8-10% that we had before. I’m a little different than other people, in that when the economy was growing 8-10%, I actually felt like it was growing 12-13%.
Twenty years ago especially, so much of the economy was underground. A lot of economists said that China’s economy was maybe 30% underground, and that was similar to Russia in the 90s before its economy collapsed. I always pegged it at 50%.
But it’s getting harder to cheat because of WeChat Pay, Alipay; it’s not as much of a cash business anymore. And that’s actually one of the reasons I think that the economy is slowing down. Because if you think about it, going from 10% to 6.5% GDP growth – it’s not that big, right? Over 6% is still amazing, but it feels cold, because before it felt like 15%. That’s a huge difference.
Q: What do you expect to happen with the Chinese economy this year? Do you expect the financial and environmental tightening to impact on growth?
A: No. The environmental tightening won’t have a major impact, because that’s already been tight since 2014. Q4 2013 is when the pollution went out of control, and anger went out of control. The reason for that is that in that quarter Chinese smartphone makers started coming out with affordable handsets that everyday Chinese could buy, with pollution apps.
So, it was really in 2014 when the government started cracking down on pollution. It’s much better now. It’s not great, but its not something I talk about every day like I used to.
I’m actually somewhat bullish this year. The main reason for this is that no business could be done last year because of the jockeying for power [in the run-up to the 19th Party Congress]. Once you have that leadership switch, its going to be a hell of a lot easier.
The only way the economy is going to slow down is if they cut back on the credit, which might happen. But generally, I think that it’s going to be a more pleasant business environment this year, that’s how I would word it. Even if growth is not great it’s going to be a nicer lifestyle. It was very frustrating last year.