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Will the current economic turmoil result in a back tracking of globalization?

Many people think that the coming recession will lead governments in the U.S. and elsewhere to become more protectionist thereby slowing or reversing the ongoing march of globalization. I disagree for the simple reason that companies from the mature developed countries need access to high growth markets like China and India more than ever. Any protectionism in the developed countries will be met by a counter response thereby jeopardizing this much needed access.

Globalization refers to integration across economies. As the spread of the U.S. sub-prime crisis to the rest of the world has demonstrated, the world economy is more integrated than ever. As is also clear, a solution to this crisis has to be a globally coordinated one involving the developed as well as the major developing economies rather than isolated actions by individual countries.

Over the next five years, the primary growth opportunities will lie in the big emerging powerhouses (primarily China and India) and not in the developed markets of U.S., Europe, and Japan. Even as the U.S. and Europe head into a recession, China’s GDP is expected to grow above 9% in 2008 and around 8% for 2009. For India the predications are above 8% in 2008 and around 7% for 2009. Thus, for any established MNC, pushing for growth requires a deeper commitment to the pursuit of markets in China and India.

Another likely byproduct of the current recession in the U.S. and Europe will be a more intense push for cost reduction. As a result, companies are likely to be more eager to outsource value chain activities from countries such as China and India where the cost of blue collar labor is 1/20th and that of white collar labor 1/5th of the costs in the U.S..

For companies headquartered in China or India, the current economic turmoil means lower asset prices in the developed world creating more favorable opportunities to acquire valuable businesses. Thus, another outcome of the current economic turmoil is likely to be a more rapid globalization of the emerging dragons and tigers from China and India.

The Corporate Identity of A Global Winner in 2020

Take any industry, whether it is cars or retailing or pharmaceuticals, the global winners are likely of two types.

Some of those would be incumbents, companies like Proctor & Gamble, IBM, Cisco, and Nokia that are giants today and will most likely remain giants in 2020 except that they would have transformed their identities. Today we might call Proctor & Gamble an American company. But by the time 2020 rolls around, if it is still to be a successful company, it would actually, by every measure, be not just an American company but a Chinese company, an Indian company, a European company. Same for IBM or Nokia or Cisco.

At the same time there will be a second group of winners in 2020 and they will be the newcomers from China, from India, from some of the other emerging economies. But if they are to be winners in 2020, they cannot be like the Chinese company of today. They would have to be like the Chinese company of tomorrow. And the Chinese company of tomorrow will have to be not just a Chinese company but also an American company, a European company and an Indian company. And the reason I say that is because the Chinese company that is a global winner in 2020 cannot be exporting mostly out of China. It’ll have to have R&D, manufacturing, marketing and sales, and service activities and employees and managers located in major hubs around the world. And so if the bulk of the company’s core activities are actually sitting outside China, then the company is no longer a historical, traditional Chinese company.

And a perfect example of a company like that, that’s already being created out of China, is Lenovo. Of course, the roots of Lenovo are in China. The chairman of Lenovo is Mr. Yang Yuanqing. He is a Chinese gentleman but his office is in North Carolina and he lives there. The CEO of Lenovo is Will Amelio, an American, who sits in Singapore. The CFO is Mr. Wong Wai Ming whose office is in Hong Kong. And the Chief Marketing Officer is an Indian American and the global marketing hub of Lenovo is in Bangalore. And so is Lenovo a Chinese company? True. Is Lenovo an American company? Yes. Is it an Indian company? Yes.

Roads Ahead for Chinese Companies Going Global

Chinese companies that aim to become the global giants of tomorrow must overcome their weaknesses in the soft skills - organization and leadership. Why? Chinese companies that become global will have their value chain activities geographically dispersed. Their key managers may come from many different nationalities separated by a huge distance of time, language and cultures. And so in that case, a command and control system doesn’t work. Of course, companies will always have hierarchies but if the person reporting to you is sitting 10,000 miles away, the fact that he or she reports to you is irrelevant because essentially it becomes a lateral, horizontal relationship.

Given China’s history of a more of a command and control economy, a culture that respects hierarchy, a country that’s relatively very homogenous, that the DNA of Chinese business leaders hasn’t taught them as a natural course how to work horizontally, how to work across diversity will be an immense challenge. And I think that’s the single biggest area where Chinese companies need to figure out how they build those capabilities.
And they’re working on that. But it’s something that is going to take time. China has the capital and the hard capabilities, but what still needs to be accumulated and cultivated and built are the soft capabilities.