CHINA: Heller on Management - Wake-up call for the sleeping giant - China's potential growth is set to replay ...

CHINA: Heller on Management - Wake-up call for the sleeping giant - China's potential growth is set to replay ... - Heller on Management - Wake-up call for the sleeping giant - China's potential growth is set to replay the challenge the West faced from J

Last Updated: 31 Aug 2010

Heller on Management - Wake-up call for the sleeping giant - China's potential growth is set to replay the challenge the West faced from Japan - only tenfold. But first it must modernise its management style, says Robert Heller.

The world rarely witnesses the sight of a modern giant emerging from a backward industrial society. Opinions differ as to when, and even how, China will complete this transformation but the behemoth is clearly gathering pace.

Last year, China achieved a growth rate of 7.8%. While some economists may doubt the reliability of this figure, it seems reasonable in the light of the state's enormous 28% expansion in capital investment.

The Beijing government has been trying to spend, spend, spend its way past the Asian economic crisis and into the broad sun-lit uplands of a US-style consumerist economy. The effects are highly visible: tall office complexes and luxury apartment blocks now dot the skylines of the capital and other regional centres. The top hotels on the Chinese mainland are coming very close to Hong Kong standards.

Unfortunately, the emptiness of many of these skyscrapers is also striking.

Unlike Japan, however, while their tenantless condition may well continue beyond the millennium, at least the state will not be forced to nationalise banks stuck with duff property lending - since it already owns them.

The economy is semi-closed, semi-open. Some enterprises, led by joint ventures with foreign investors, are modern in equipment and management; others, many in the public sector, have yet to begin the long march towards excellence of product, marketing and service.

Management must develop fast as the wave of westernisation sweeps on, a wave that will plainly engulf all state enterprises with global potential from banking to airlines. It seems inevitable that the Bank of China, with $20.9 billion of revenues ranking it just behind Barclays and NatWest, will become a world financial institution. Air China is on the starting blocks with five times the catchment area of its US counterparts. Its Boeings and Airbuses operate from populous centres such as Beijing and Xian, where new airports are complete or near completion. A domestic joint venture with Northwest Airlines points towards a future in which - once all standards match its flight performance - the airline must rival not only other Asian carriers but the West's champions as well.

The smart money must be on Chinese management joining the 21st Century.

When it does, western business will face some interesting challenges.

In particular, can western management go along for the journey without being taken for a ride? The traffic will not be one-way. If the wagon really rolls, the Japanese challenge will be replayed - but multiplied tenfold - as China's economy doubles every 10 years and 1.3 billion people are attracted to and tackle the tempting markets of the West (and East).

The post-war resurgences in Germany and Japan perhaps provide a foretaste.

Low labour costs combined with high-quality production boosted prosperity in those challenged economies. And a China that already produces 1.4 million cars annually must be taken seriously: even though the products involved may be German, Japanese, or American in origin.

If China is to compete, it must overcome a lack of companies of anything approaching global stature, however. The Qingdan Haier Group, which produces domestic electrical goods, plans to be truly global. It has emerged from a pack of 200 suppliers, absorbing 18 incompetent, money-losing, local competitors in 1998 alone. Last year, its sales were boosted by 50% to a respectable $1.9 billion. It aims to export a third of its output, to generate a third from overseas manufacture, and to sell the rest at home.

It brags about its new technologies - 230 created last year - which it claims underpin its world-class bid.

China still abounds, however, in inefficiencies, including a vast business empire that used to be controlled by the military. The People's Liberation Army itself is in the process of downsizing and has ceded control of this unwieldy conglomerate, whose units provide more in the way of employment than productivity.

Much of the enormous state-owned sector generally fits this description.

Many plants can't even save themselves by downsizing. The wage bills may fall but, without modernisation, the remaining workforce remains drastically uncompetitive, even at China's tiny cost per man-hour. It is these low labour costs that will continue to attract outsiders - Hornby is moving its entire production of model trains to China - but low wages are no path to a golden future.

Haier and companies like it could do worse than draw on the example of Taiwan, which last year managed 5% growth in the teeth of the Asian storm.

The astounding success of Chinese management outside China is built on simple foundations: close family ties, sharp commercial acumen, tight cost control and conservative finance.

The Taiwanese know, however, that more sophistication is demanded by a global economy that is led by high technology.

Mainland China's management can draw on 2,000 years of traditional administrative efficiency, ruthless and despotic, based on high intellect and developed in recurrent bursts of top-down, radical reform.

The brains and reforming urge can still be seen in strength in China but administration and top-down control are yesterday's management motifs.

Tomorrow requires decentralised, democratic entrepreneurship. Developing such management is China's supreme challenge.

Robert Heller was founding editor of Management Today.

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