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 China’s challenge: The
opportunities and risks that
China’s booming economy
provides

Ronald Jean Degen

International School of Management Paris

2009

Working paper nº 36/2009

 2

globADVANTAGE
Center of Research in International Business & Strategy

INDEA - Campus 5
Rua das Olhalvas
Instituto Politécnico de Leiria
2414 - 016 Leiria
PORTUGAL
Tel. (+351) 244 845 051
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E-mail: globadvantage@ipleiria.pt
Webpage: www.globadvantage.ipleiria.pt

WORKING PAPER Nº 36/2009

August 2009

Com o apoio da UNISUL Business School

 3

China’s challenge: The opportunities and risks

that China’s booming economy provides

Ronald Jean Degen

Ph.D. Candidate at the International School of Management Paris
Vice Chairman of Masisa Chile

Address:
E-mail: degen@lomasnegras.com
Phone: +55 41 9918 9000
Cabanha Orgânica Lomas Negras Ltda.
Caixa Postal 95
Campo Alegre, SC
89294-000 Brasil

Ronald Jean Degen is in the Ph.D. Program of the International School of

Management in Paris, and the Vice Chairman of Masisa in Chile. . He was a
Professor at the Getúlio Vargas Graduate Business School of São Paulo where he
pioneered the introduction of teaching entrepreneurship in 1980 and wrote the first
textbook in Portuguese on entrepreneurship published in 1989 by McGraw-Hill. He
just published a new textbook on entrepreneurship that was published in 2009 by
Pearson Education
 4

China’s challenge: The opportunities and risks that China’s booming

economy provides

ABSTRACT
The capability of designing to very low cost, and to compete successfully in
the tough Chinese market can be transformed into a competitive advantage
in other markets. On the other hand, MNCs that are not successfully in
China will probably not acquire these capabilities. They will be in a cost
disadvantage to compete against Chinese companies in their own markets.
They run the risk of becoming secondary players to Chinese companies in
the world market, as those competing in the microwave-ovens market
against Galanz found out the hard way. MNCs have no choice; they have to
accept ‘China’s challenge’ to continue world players. They have to win in
China or lose everywhere.

Keywords: China’s challenge, win in China or lose everywhere, risks to

China’s future growth, China’s entrepreneurs, China’s disruptive innovation.
 5

China’s challenge

China’s amazing growth of ten percent a year over the last thirty years
is without precedent. In these years, China has transformed itself from an
economical and technological backward nation into one of the world’s most
dynamic economies. It has opened its doors to new ideas and techniques,
introduced competition to all aspects of production, strengthened its
commitment to widespread education, and taken advantage of the
opportunities offered by its World Trade Organization (WTO) membership.
In 2004, for the first time, China attracted more foreign direct investment
than the United States. The world’s fastest-growing economy is now the
second largest behind only the United States, and by mid-century, it is
expected to be number one. This means that any company that wants to be
a key international payer has to be successful in the Chinese market (ALI,
and GUO, 2005).

China’s rapid and sustained growth created enormous profit

opportunities and risks for foreign companies. They have to learn to win in
the very competitive Chinese market. They have to learn to design
‘products to cost’. Learn to develop the best cost-quality relationship in
relation to their competitor. If they are successful in China they will be able
to succeed in all other markets in the world. On the other hand if they are
not successful in China, a Chinese competitor will probably in this decade
beat them in their home markets.

Many multinational companies (MNCs) were very successful selling

their global brands to the affluent Chinese, particularly luxury brands.
According to the Time global luxury survey (2007, p. 108), 22% of affluent
consumers in China own a Rolex, and the most owned luxury fashion brands
in China are Lacoste, Valentino, Chanel, and Bally (Degen, 2009, p. 5). The
international luxury brand market in China will be harder for Chinese
companies to conquer because they first have to get international
recognition for the Chinese affluent consumer to accept them (Degen, 2009,
p. 18). But this is not true for most other branded products marketed in
China by MNCs where Chinese consumers want affordable prices and
comparable quality, and have no brand loyalty.
 6

An example is the microwave-ovens market. In 1991 the market was

dominated by branded Japanese and European products that had a 5
percent penetration. This small penetration was way below the 80 percent
in most developed markets. Galanz, a Chinese company, entered the
market, matching the foreign brands in performance but beating them on
price. Rather than pursue the obvious strategy of using inexpensive Chinese
labor to make lower cost microwave-ovens for export, Galanz chose to
compete against no-consumption in the domestic lower-end market. Galanz
introduced a simple, energy-efficient product at a price that was affordable
by China’s emerging middle class, and small enough to fit in their kitchens
(Hart, and Christensen, 2002, p 53).

With a constant price reduction based on the company’s ever-declining

cost per unit, they made microwave ovens affordable to an ever increasing
number of Chinese buyers. Based on its business model that could earn
attractive profits at low prices, Galanz moved up-market against the
established brands, manufacturing larger machines that had more
sophisticated features. With this move Galanz began to disrupt the
microwave-oven markets in developing countries. This strategy used by
Galanz was christened by Hart and Christensen (2002) as ‘disruptive
innovation from the base of the pyramid.’

Galanz with its disruptive innovation in 1995 already had 25 percent of

the market in China; in 1998 it had 61.4 percent, and in 1999 in started to
sell in the United States. Galanz used the route through becoming an
Original Equipment Manufacturing (OEM) to companies all over the world to
expand its international sales and so grow its production scale quickly. The
fast growing large production scale made it possible for Galanz to use cost
leadership and aggressive price-cutting strategies to capture market share
(Ge and Ding, 2007, p. 668), and in 2002 its price were already 80 percent
below the 1991 level. Galanz with its aggressive price strategy conquered
40 percent of the global market, with a 45 percent share in Europe, and
more that 70 percent in South America and Africa. Building on this success
Galanz started competing in the markets for air conditioners and rice
cookers, aiming to be the world’s largest manufacturer of these items in the
near future (Hexter and Woetzel, 2007, p. 194-195).
 7

Another example is the Chinese appliance manufacturer Haier that

became a global competitor based on an aggressive innovation strategy
focused on three key capabilities: design, manufacture, and distribution.
The aggressiveness of Haier’s innovation plan can be seen in its objective:
two successful intellectual patent applications for every work day. Today
Haier is a dominant player in the appliance world market, selling in over 30
countries, with a product line of 96 appliance categories (DiPaola and Li,
2007, p. 3).

Some multinationals like Procter & Gamble (P&G) realized that the
initial strategy to enter the market, by building market share for selected
products in selected large cities, in what is called the upper-tier cities
premium consumer market segment, was running out of growth
opportunities. This strategy was leaving the door open for Chinese
competitors to grown unchallenged in the lower-end consumer market. P&G
saw the opportunities offered by fast changing and growing Chinese market,
and in 2001 started its expansion into the mid-tier cities consumer market.
This move put P&G in direct competition with Chinese companies that often
had lower operating costs and a better understanding of the local markets.
In some product categories the cost differences between P&G traditional
products and those that the Chinese consumers in the lower-end market
could afford was so wide that just making the product cheaper by changing
some ingredients was not enough for P&G to become competitive (Hexter
and Woetzel, 2007, p. 6-7).

P&G soon realized that to be able to compete against Chinese

companies in the lower-end market it had to develop new capabilities to
understand the needs of the new customers, and develop, market, and
distribute competitive products to these markets. P&G started designing
products in China from the outset to meet a target price point, controlling
the cost required to meet the price. This approach, called ‘design to cost’, is
a state-of-the-art practice followed in the world’s top companies in
developed markets. The twist is that competition in China is much tougher
that in most other countries. P&G product developers in China spend much
more time and attention on reducing product cost that in any other country
(Hexter and Woetzel, 2007, p. 75). Today P&G is the most successful
 8

foreign marketer in China as measured by marked share, with leadership

positions in most of the product categories in which the company competes.
China is among its largest markets measured in sales volume (Hexter and
Woetzel, 2007, p. 3).

This P&G capability of designing to very low cost and compete

successfully in the tough Chinese market can certainly be transformed into
a competitive advantage in the future in other markets. This capability is in
essence the same that gave Galanz and Haier their competitive advantage
to become dominant world players in their respective markets and beat well
established traditional MNCs. In other words, MNCs that cannot compete
successfully in China will probably not acquire the capabilities needed to
compete against Chinese companies in their traditional markets, and
become secondary players in the world market, as the manufacturers of
microwave ovens and appliances competing against Galanz and Haier found
out the hard way. MNCs seem to have no choice; they have to accept
China’s to challenge to defend their markets positions, and so continue
being world players.

Risks to China’s future growth

Before we consider the opportunities and risks of doing business in

China for those that accept China’s challenge, we have to evaluate the risks
of China being able to maintain in the future its extraordinary economic
growth. To evaluate these risks, we have to understand the key factors
responsible for its extraordinary accomplishments of the last three decades.
The study China: The Balance Sheet (2006, p. 19) conducted by C. Fred
Bergsten and his colleagues under the auspice of the Center for Strategic
and International Studies and the Institute for International Economics
pointed to five factors as key to China’s stunning transformation: “The
embrace of marked forces, the opening of the economy to trade and inward
direct investment, high level of savings and investments, the structural
transformation of the labor force, and investment in primary school
education.” Of these key factors that promoted China’s growth, none is
really at risk if the Chinese government does not deviate from its present
 9

economic policy and keeps up its refinement of its unique social-capitalist

model. The real risks to China’s future political stability and economic
growth are the remaining poverty, the unbalanced and unsustainable
economic growth model, and the bureaucracy and corruption of government
officials.

Paradoxically, writes Johnston (2001, p.7), corruption may have

helped Chinas economic development by helping to overcome some of the
conflicts between state power, represented by its bureaucrats, and the
forces promoting the economic reforms, represented by the fast emerging
entrepreneurs. Corruption served as a kind of lubricant that motivated
government bureaucrats to modify and adapt government policies that
would have hindered the economic reforms by giving them extremely
attractive opportunities for collusion with the entrepreneurs that promoted
China’s extraordinary growth.

Corruption may have helped lubricate the economic reforms but over
the longer term it has potentially explosive consequences for China’s
economic and political future, as Johnston (2001, p. 8) and Minxin (2007, p.
1) points out. Illicit practices such as bribery, kickbacks, theft, and
misspending of public money cost at least 3 percent of GDP, according to
Minxin (2007, p. 1). It is also undermining the legitimacy of the ruling
Chinese Communist Party, widening income inequalities between those that
are benefiting from the economic reforms and those that are being
marginalized, and so fueling social unrest by inciting popular resentment
against the highly-visible new rich class of profiting bureaucrats and
entrepreneurs.

China’s government is aware of these risks, and is taking determined

steps in raining in corruption, as demonstrated by the many crackdowns on
corrupt government officials. The Chinese know that if they don’t control
corruption, the governing Communist Party will be lose its control over the
country as did in the past the Imperial Qing Court, and the Kuomintang
government of Chiang Kai-shek. The same determination by the
government has been shown in alleviating income inequality, environmental
degradation, and in encouraging the transition from an economy dependent
 10

on exports to one where internal consumers have a much more important

role.

Most economists believe that the risks to China’s future economic

growth exist and are a real treats to China’s future, but can be overcome by
the pragmatic and determined Chinese government. The Chinese approach
to political and economic development has been, and will probably continue
being one of trial and error. Government officials describe this trial and
error process as being similar to “crossing a river by feeling the stones
underneath.”

Accepting China’s challenge

To win in the rapidly changing business environment of China, foreign

companies need to learn the right ways to reach emerging customer
segments with new products designed to very low cost, and how to beat
local competitors in the cut-throat competitive markets. Most consumer
product MNCs like P&G entered China in the late 80s or during the 90s
through joint ventures with well-connected domestic partners and began to
sell a wide range of products under global brands. These products were sold
to the affluent Chinese consumers in the premium market of large coastal
cities. Industrial companies selling raw materials, equipments and services
to the emerging Chinese companies followed the same entrance route. The
consumer products and industrial goods were bought by the Chinese at
premium prices either because there were no substitutes, the affluent
consumers wanted foreign brands, or the industrial company’s required
higher-end equipment. The higher prices attracted thousands of MNCs that
flooded China.

The business environment is changing fast in the 21st century China

and things will become a lot tougher for MNCs. The friendly business climate
were customers paid premium prices for foreign goods, that attracted so
many MNCs, is fast turning into the most competitive market in the world
where only the most cost efficient will survive. The massive middle class of
250 million (Degen, 2009, p. 5) and over 400 million cell phone users that
emerged in Chinese large and small cities have a different buying profile
 11

that the early affluent consumers that MNCs sold to in the 90s. At the same
time competition between Chinese and foreign companies for the share of
wallet in every consumer segment and business-to-business category is
becoming ferocious.

The unique social-capitalism economic model developed by Deng

Xiaoping, particularly the liberalization and promotion of the Chinese
entrepreneurs, was extraordinary successful in transforming China from an
economical and technological backward nation into one of the world’s most
dynamic nations (Yueh, 2008). Den Xiaoping clearly stated his support of
Chinese entrepreneurs to fuel economic growth and progress in his
historical ‘Southern China Tour’ of 1992 (Jin, 2003, p. 254) with the now
anthological phrase: “To get rich is glorious” (Malkiel and Taylor, 2008, p.
38). He echoed in his way Schumpeter’s (Schumpeter, 1942) thesis that
without entrepreneurs acting as ‘agents of creative destruction’ there is no
real economic growth and progress, and that the pure socials model was
doomed because it did not promote entrepreneurship.

China’s disruptive innovation

The generation of Chinese entrepreneurs that emerged after the state

eased the control over the Chinese economy are enthusiastically following
Den Xiaoping’s “to get rich is glorious”, are relentlessly acting as
Schumpeter’s ‘agents of creative destruction’, and relentlessly obsolescing
less more expensive or less efficient goods or services. But before the
destruction of the industry leaders, as occurred in the microwave-oven
industry with Galanz ‘disruptive innovation from the base of the pyramid’, a
long period of ‘creative creation’ was developing in China’s backyard (Hart,
and Christensen, 2002, p. 52).

China provides its entrepreneurs, like Qingde Liang the founder of

Galanz, and foreign companies doing business in China, like P&G, all the
essential conditions for ‘creative creation’ that lead to successful ‘disruptive
innovation from the base of the pyramid’. Hart and Christensen (2002, p.
52) explain that the products and services available to Chinese customers of
the lower-end market are deficient or not yet as good as those available to
 12

customers in the premium market of the large coastal cities, and especially
to customers in developed economies. The lower-end market Chinese,
permits companies to experiment with ‘disruptive innovations’, in less
demanding applications, and among non-traditional customers. They can
promote their ‘creative creation’, develop new ‘disruptive innovations’, and
let them grow and mature with almost no competition, before taking them
up-market to more sophisticated customers, and much tougher competition
in the premium market of the large coastal cities. If successful in China,
they then can then conquer the world markets, as Galanz and other Chinese
companies did.

Most well managed MNCs are under pressure to pursue innovation in

markets than can sustain corporate growth rate and enhance their profit
margins. For them investing in ‘disruptive innovation’ seems irrational
(Hart, and Christensen, 2002, p. 52). They prefer the ‘incremental
innovation’ approach to improve their products or services so not to
compromise their substantial investments in these products and their
production technology and capacity. The idea of ‘disruptive innovation’ and
having to obsolete their investments and start from scratch with a new
technology scares them off. For this reason potential disrupters like Galanz
are able to incubate their businesses in the safety of poor markets that their
resource-rich competitors ignore. These upstarts, based on their success in
these less sophisticated markets, will seek to grow up-market by attacking
market tiers that are less attractive to industry leaders, and when they
gained enough product savvy and production scale go after the main
markets.

Gadiesh and Vestring (2006) point out that the MNCs that are
accepting China’s challenge are aware of the threat posed by Chinese
entrepreneurs and the ‘disruptive innovation’. They are doing more than
just competing for the share of wallet of the rapid expanding lower-end
market. They are using the Chinese lower-end market to warm up for the
future worldwide competition. They are building the expertise, business
capabilities and production scale to export their Chinese products and
business know-how to other emerging markets, primarily India and Brazil,
and then building on their success and production scale to developed
 13

markets. These MNCs know that China is the lead market in preparing them
to pursue businesses in other developing markets, it is also clear to these
companies that to continue succeeding globally they have to win in China
first, as P&G is winning.

China’s good-enough market

The Chinese market can be segmented into a small premium rapidly

growing segment at the top of the consumer pyramid, mostly served by
foreign companies with prestigious brands making good profits, and at the
bottom a large lower-end segment served by local companies with cheap
low-quality commodity type of products and services that are typically 40 to
90 percent cheaper than the premium offerings of foreign companies
(Gadiesh, Leung and Vestring, 2007, p. 16). Between these two segments is
rapidly expanding a new market that Gadiesh and Vestring (2006) called
‘China’s good-enough market’, building on Christensen (1997) use of the
phrase ‘good enough’ to suggest that start-up companies developing and
releasing new products and services don’t necessary need to aim for
perfection to make inroads against established players.

China’s cities are classified administratively into four municipalities

directly under the Central Government - Beijing, Shanghai, Tianjin and
Chongqing, 27 provincial capitals -Guangzhou, Hangzhou, Chengdu, etc.,
and 310 prefecture cities. Within the municipality, provincial capitals and
prefecture cities' territory are 856 city associated districts, 369 county-level
cities and 1,600 counties. A common approach is to prioritize these city
markets in to four tiers: The four municipalities, 27 provincial capitals, and
a handful prosperous prefecture cities such as Shenzhen, Dalian and Ningbo
into a what is known as the first-tier cities, the more than 300 prefecture
cities into second-tier cities, the 1,200 city associated districts and county-
level cities into third-tier cities, and the 1,600 counties into fourth-tier cities
(Lannes and Zhu, 2009).

The premium market in China was mainly concentrated in the first-tier

cities and the lower-end market in the second-tier and lower cities. Aware
of the rapidly expanding ‘good-enough market’, MNCs have started looking
 14

beyond the premium market to China's more than 300 second-tier cities,
particularly to the 120 that have populations over one million, and
approximately 1,200 county-level third-tier cities. The race is now on to sell
in places like Yantai, Shaoxing, and Wuxi, writhe Lannes and Zhu (2009),
where middle-class incomes is rising the same way they rose in first-tier
cities earlier in the decade. China's second-tier cities now represent about
88 percent of the country's GNP. As a group, those cities experienced a
twelve-fold increase in household disposable income per capita in the years
between 2002 and 2006, while retail sales rose 79 percent. By comparison,
in first-tier cities household disposable income rose 61 percent and retail
sales increased by 80 percent in the same period.

There are many reasons for the rapid expansion of the ‘good-enough
market’. The main reason is obviously the rising income of Chinese
consumer as a direct consequence of the extraordinary growth of the
country over the last three decades. These consumers with rising income
are trading up from the lower-end products they previously purchased.
These new consumer are the driving forces for Galanz and Haier’s rapid and
successful growth, but also for the success of P&G, and specially the
spectacular growth of Kentucky Fried Chicken (KFC) and Carrefour in China.

The success of KFC is an interesting example of a MNC that took full

advantage of the rapidly expanding Chinese middle market in the second-
tier and lower cities. Liu (2008) explains KFC success by its product
localization, the introduction of new products faster and more frequently
than their competitors, and developing products that better fit the Chinese
consumer’s taste. The KFC highly localized menu includes congee or
Chinese-style porridge for breakfast, Beijing chicken roll served with scallion
and seafood sauce, spicy diced chicken resembling a popular Sichuan-style
dish. Their latest creation is you tiao or Chinese dough fritters. All this
adaptation to the Chinese consumer’s taste let to two to one points of sales
advantage over McDonalds in China, whereas outside China it’s the other
way round. Liu (2008) also warns that the success of KFC in China is
already being challenged by fast rising Chinese fast food chains.
 15

Curiously KFC could not duplicate its Chinese success formula to other
large developing markets like Brazil, were with only four restaurants in Rio
de Janeiro in 2009 it is struggling way behind McDonalds’ 1,144 points of
sale - 541 restaurants, 556 kiosks, and 47 McCafés - in 134 cities, of 21
states and the federal capital. According to Liu (2008) a vital ingredient in
KFC’s success was its leadership team. The team known as the ‘Taiwan
Gang’, because most of the senior member came from Taiwan, had
accumulated at least 10 years of fast-food industry prior to arriving in
China, and though predominantly Western-educated, being ethnic Chinese,
they inherently understood China. The experience and the understanding of
the culture led to an intuitive knowledge of the market context, which then
put KFC China on track to becoming a successful enterprise. Liu explains
this point: “In order to be successful, especially for foreign companies or
non-local companies, a deep and broad understanding of the market
context is critical to success. To the extent that the understanding is even
intuitive, meaning that you don't have to do the market research, you don't
have to have multiple meetings to come to the best solution to a problem,
or to point to a future strategic direction” (Cho, 2009). This means that KFC
had the right team to succeed in China and probably did not in Brazil, were
it has been struggling for decades.

The French hypermarket chain Carrefour, whose name means

‘crossroads’, also took advantage of the fast expanding middle market in
China, and following essentially the same strategy of adapting to Chinese
consumers as did KFC. Tanks of live fish, eels, bullfrogs and turtles
dominate the fresh food sections, while vacuum-packed strips of bacon and
slices of pepperoni lie in refrigerated cases a short distance away. Modern
formats mix with local tastes in the French retailer's stores: Shoppers stroll
down wide, brightly lit aisles, past displays of dried pork snouts and whole
ducks hanging limply by the neck, as "Hotel California" plays on the
speakers overhead (Child, 2006). Carrefour opened its first store in China in
1995, and shot to prominence very quickly in China's retail market with its
strategy of adapting its hypermarkets to the taste of the new Chinese
consumers. It beat its arch competitor Wal-Mart, taking a strong initial lead
among the foreign retailers in the grocery market, lead that Wal-Mart won
 16

back in 2006 with the purchase of Trust-Mart the Taiwanese owned top
retailer in China. However, Carrefour remains stronger than Wal-Mart in
terms of revenue per outlet, and continues to lead the field in many
innovations in the Chinese modern grocery market.

R&D in China

The success of P&G, KFC and Carrefour are based on designing the
right products for the emerging Chinese consumer in the fast expanding
middle market or ‘good-enough market’. The implication is that any MNC
that wants to succeed in this market needs to have the necessary product
research and development (R&D) capability combined with a good
understanding of the needs and aspirations of the emerging Chinese
consumer. Besides doing R&D to serve the Chinese market, an ever
increasing number of MNCs are betting that their product development
capabilities in China will eventually become for their hub for their global
R&D efforts, particularly in categories were competition is becoming
increasingly ferocious like the pharmaceutical and chemical industries, and
specially the high-tech consumer electronic area. The reason being that the
costs of doing R&D in developing countries are increasing, and a Chinese
R&D base could add up to substantial savings, particularly in products were
R&D costs are important component in the final cost of the product (Hexter
and Woetzel, 2007, p. 71).

Hexter and Woetzel (2007, p. 71-72) from McKinsey compared the

cost of doing R&D for high-end telecommunication routers of an American
and a Chinese manufacturer. The R&D costs for routers sold in the U.S.
market were between 20 to 25 percent of the total costs. This means that a
saving of 5 percent in R&D would generate a 1 percent margin
improvement. Now considering that engineers in the U.S. earn roughly
three to ten times more that their Chinese counterparts, and that the
Chinese work nearly 20 percent longer on average. Even considering that
the Chinese engineers were less efficient and so the Chinese operation
needed more engineers, the American company was, in the end, spending
five times more that its Chinese counterpart to develop similar products.
 17

This means that the Chinese company spends 80 percent less on R&D for
their routers, and so have a cost advantage of 16 percent for R&D alone.
The authors conclude: “A company needs extremely persuasive arguments
for it to forgo that sort of advantage by keeping R&D in its developed home
market”. An interesting example of R&D in China is the chemical giant
BASFs that has seven R&D sites in China, covering polyurethane, poly-THF,
construction chemicals, dispersion, coating & specialties, textile auxiliaries,
leather, pharmaceutical solutions, nutrition ingredients, personal care
ingredients, care chemicals & formulators, engineering plastics, plasticizer,
engineering unit, catalysts, electronic material and etc. (BASF, 2009).

Chinese companies are using the extraordinary growth of the Chinese

economy to rapidly developing their own world class R&D capabilities as
demonstrated by Galanz, Haier, and BYD. According to a recent article by
Gunther (2009) in Fortune Magazine, last fall Warren Buffet’s Berkshire
Hathaway bought 10% of BYD for $230 million. The deal, which is awaiting
final approval from the Chinese government, didn't get much notice at the
time. It was announced in late September, as the global financial markets
teetered on the abyss. But Buffett and is long time partners Charlie Munger
and David Sokol think it is a very big deal indeed. They think BYD has a
shot at becoming the world's largest automaker, primarily by selling electric
cars, as well as a leader in the fast-growing solar power industry.

Buffet and his partners, according to the Fortune article, were

fascinated by Wang Chuan Fu, the entrepreneur that started BYD in 1995 in
Shenzhen, China. The letters BYD are the initials of the company's Chinese
name. A chemist and government researcher, Wang raised some $300,000
from relatives, rented about 2,000 square meters of space, and set out to
manufacture rechargeable batteries to compete with imports from Sony and
Sanyo. By about 2000, BYD had become one of the world's largest
manufacturers of cell phone batteries. The company went on to design and
manufacture mobile-phone handsets and parts for Motorola, Nokia, Sony
Ericsson, and Samsung.

Wang entered the automobile business in 2003 by buying a Chinese

state-owned car company that was all but defunct. He knew very little
 18

about making cars but proved to be a quick study. In October a BYD sedan
called the F3 became the bestselling sedan in China, topping well-known
brands like the Volkswagen Jetta and Toyota Corolla. BYD has also begun
selling a plug-in electric car with a backup gasoline engine, a move putting
it ahead of GM, Nissan, and Toyota. BYD's plug-in, called the F3DM for ‘dual
mode’, goes farther on a single charge - 62 miles - than other electric
vehicles and sells for about $22,000, less than the plug-in Prius and much-
hyped Chevy Volt are expected to cost when they hit the market in late
2010. Put simply, this little-known upstart has accelerated ahead of its
much bigger rivals in the race to build an affordable electric car. Today BYD
employs 130,000 people in 11 factories, eight in China and one each in
India, Hungary, and Romania.

Deploying the armies of laborers at BYD is an officer corps of

managers and engineers who invent and design the products. Today the
company employs about 10,000 engineers who have graduated from the
company's training programs - some 40% of those who enter either drop
out or are dismissed - and another 7,000 new college graduates are being
trained. Wang says the engineers come from China's best schools. "They
are the top of the top," he says. "They are very hard-working, and they can
compete with anyone." BYD can afford to hire lots of them because their
salaries are only about $600 to $700 a month; they also get subsidized
housing in company-owned apartment complexes and low-cost meals in
BYD canteens. "They're basically breathing, eating, thinking, and working at
the company 24/7," says a U.S. executive who has studied BYD (Gunther,
2009).

Another example of how China moves fast in developing new

technologies is China’s lead over the U.S. in generating electricity from
renewable sources. Bradsher (2009) in his article in the New York Times
points out that as the U.S. is taking its first steps toward mandating that
power companies generate more electricity from renewable sources, China
already has a similar requirement almost two years ago, and is investing
billions of dollars to remake itself into a green energy superpower. This year
China is on track to pass the U.S. as the world’s largest maker for wind
turbines, after doubling wind power capacity in each of the last four years.
 19

Win in China or lose everywhere

The title of the last chapter of Hexter and Woetzel’s (2007) book “win
in China or lose everywhere” says it all. The examples of Galanz, Haier, and
BYD clearly demonstrate that the new champions for every industry are
being incubated in China. Companies, Chinese of MNCs, that learn to
compete and win in the fast growing Chinese ‘good-enough market’, will
build strong positions to win in the global market, especially in the large
emerging markets of Brazil and India. The scale of the Chinese market will
give companies that are successful in China a global structural advantage
over companies that did not accept China’s challenge.

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