Re-opening China as a destination for U.S. technology exports

Beijing is pushing to replace U.S.-produced technologies with equipment produced in China for key government and industry sectors. China’s policy shift, in a move invoking Chinese nationalism, is intended to drive local innovation and address fears of U.S. spying.

Indigenous innovation or investment in domestic research and development is a key pillar of China’s national agenda. It is intended to help China compete on function, as opposed to just cost, generating more jobs in the services sector, reducing pollution, and hedging against the impacts of currency appreciation. Chinese concerns about U.S. spying stem from, among other things, revelations by former National Security Agency contractor Edward Snowden. To address innovation and spying, China aims to reduce the amount of U.S. manufactured equipment comprising its IT backbone and instead look to source locally.

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The impacts of these policies are already being felt by U.S. companies. IBM’s Chief Financial Officer Mark Loughridge, when talking to analysts and reporters, warned that, "China was down 22 percent” and that “[IBM has] experienced a slowdown in demand across the board, but most significantly in hardware, which was down about 40 percent and makes up about 40 percent of [IBM’s] business in China."

Fortunately, China’s system is not the autocratic model often described, but rather a consensus-driven decentralized bureaucracy. A system that if navigated properly, leaves room for U.S. companies to claw back market share and find advocates willing to deviate from the party line.

This philosophy is exemplified in the process unfolding at Huawei – China’s leading networking and telecommunications giant, and a primary competitor to U.S. companies both in China and at home. The firm’s founder, Ren Zhengfei, who is suffering from health problems and planning his succession, relies heavily on a decision making nucleus and rotates officers of the company through key executive positions, including serving as his co-CEO. Commenting on this approach, Ross Gan, Huawei’s spokesman, has said, “The company’s fortunes will not be beholden to the whims of one person. Huawei will be governed by consensus and collective wisdom.”

This system also holds true in China’s political arena in which provinces and cities are willing to diverge from the national agenda if the circumstances are right and they have a compelling case to do so. Shanghai officials are actively encouraging Shanghainese families to have two children, even the ethnic majority Han Chinese families at whom the national one-child policy is targeted. This break from the party line is to address Shanghai’s aging population and shrinking workforce.

The principal trap westerners often encounter in China is viewing its business model as analogous to those of pre-World War II Japanese zaibatsus or the Korean chaebols of today. This is not to imply that these colossal often family-controlled business conglomerates are completely independent of government influence or are fully centralized, but rather to make clear that Chinese companies are generally run by consensus rather than dictum and are materially influenced by central and local government opinion.

Given these misconceptions, it is critical for many U.S. politicians and businessmen to rethink their style of engagement with their Chinese counterparts. They should avoid searching for an ultimate decision maker, while focusing on relationships and trust over legal contracts. They should strive for consensus at all levels of government and business, trying to reassure local officials and businessmen that indigenous innovation can thrive under the status quo, while defusing the security concerns of central officials. Their success will determine how open Chinese borders remain for U.S. technologies.

Baynham is a Booz & Company and Accenture alumnus, who has worked on a number of transactions both inside and outside of China.

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