Chinese firms have become fierce global competitors, mainly because of the emergence of a group of capable Chinese entrepreneurs. It is critical to develop a better understanding of these entrepreneurs, who seem to differ significantly in background, growth paths, and business models. By classifying them into two generations, we provide insight into how they emerged, and suggest the possible emergence of a third generation.
Over the past two decades, Chinese firms have significantly enhanced their global competitiveness, due in large part to the efforts of a group of entrepreneurial business leaders. These entrepreneurs have helped transform China into a market economy that is increasingly integrated with the global economy. Thus, in order to understand Chinese firms, one has to understand Chinese entrepreneurs.
Much research has been done on Chinese entrepreneurs, both as individuals and as a group. Neither approach is fully satisfactory, since these entrepreneurs differ significantly in terms of their personal backgrounds, development paths, and business models. In our view, a better approach is to identify possible subgroups among these entrepreneurs. Our research shows that Chinese entrepreneurs can be roughly divided into two groups, i.e. two generations of Chinese entrepreneurs.
The criteria for classification include the nature of businesses and industries, as well as specific management and business models developed by the respective generation of entrepreneurs. This generational comparison helps foresee the directions in which Chinese firms are developing and sheds light on the possible emergence of a third generation.
The article will describe each of these generations and the challenges they faced. It is divided into three sections; the first two cover the first and second generations, while the third section discusses the need for a third generation of entrepreneurs.
The first generation: Manufacturing sector
China’s first generation of business leaders are mostly more than 45 years old. In the early 1980s, at the time of China’s opening to the outside, many of them were either college graduates or military personnel. After accumulating first-hand technical or managerial experience, these people and their expertise emerged in the societal transition toward a market economy. This generation was the first to experience China’s new economic policies. Prominent members of this generation include Liu Chuanzhi (Lenovo), Zhang Ruimin (Haier), Ren Zhengfei (Huawei), and Li Dongsheng (TCL).
China’s first generation of entrepreneurs had several common experiences. First, they lived through a period during which it was hard to break away from traditional ideology and systems. Second, they experienced the difficult transition from a planned economy to a market economy, which demanded much versatility and adaptability. Third, many had worked in state-owned enterprises, prominent in many aspects of social life in China. With strong personalities and the courage to experiment, these entrepreneurs successfully transitioned their enterprises into market-driven companies and became symbols of the economic transformation of the time.
This first generation began to reach maturity in the early 1990s, gradually removing the straight-jacket of the old economic system. With an extraordinary appetite for entrepreneurship, these people founded the first group of Chinese firms that were truly based on the notion of market competition. Their firms, such as Huawei, Lenovo, Haier, and TCL, not only achieved great success in China, but also began to explore international markets.
The reason for their success within China can be attributed to several factors:
- China’s vast and rapidly developing domestic market nurtured high growth opportunities for China’s competitive enterprises.
- During the 1980s and 90s, China was in a transitional mode and home to a market characterized by: (1) a lack of market regulations, (2) a lack of transparency or “hidden rules”, (3) trade barriers against imports, and (4) relatively weak foreign competitors in China. Competition was mostly among state-owned firms, private enterprises, and joint ventures representing the interests of foreign firms. Such conditions provided a favorable growth environment for the first generation of entrepreneurs.
- During this period most multinational corporations did not set up their regional headquarters in China, nor did they send their most “elite” executives to China. Joint ventures tended to suffer from the conflicting interests of partners, which undermined competitiveness. These factors mitigated the competitive pressures on the first generation of Chinese entrepreneurs.
Most first generation entrepreneurs chose to focus on the traditional manufacturing sector, which can be divided into “mainstream”, “conventional”, and “branch” types (see Table 1). The first generation took advantage of opportunities when global manufacturing shifted to China, leveraging China’s cost advantages to increase global market share.
|Typical Industry||Telecom||PC, Containers||Textile, Shoes, Lighter, Sewing machines|
|Advantages and Opportunities||
|Weaknesses||Limited ability in competing against global leaders||
The “core competence” of cost advantage enabled Chinese entrepreneurs to achieve great success and global market share in “branch” businesses as well. In the process, these firms also helped alleviate China’s unemployment problems. However, “branch” businesses relying on “cost advantage” generate low profit margins and low salaries for workers. Hence, these firms did not help create an affluent middle class in China. Since their industries are not regarded as lucrative, multinational corporations often chose not to actively compete in them. As a result, a number of Chinese firms in these industries have achieved notable success in global markets. Nevertheless, due to weaknesses such as the lack of experience in global competition, weak system integration, and unsophisticated cross-cultural management, these “branch” businesses still have a long way to go before becoming true global leaders.
To become global leaders, Chinese firms must eventually excel in mainstream industries. To carve into these areas requires advanced system integration capabilities, which prove to be more difficult than developing specific technologies. A telling example is how Huawei’s penetration of the U.S. market was countered by a lawsuit from Cisco. Although Huawei is one of China’s most successful firms in developing core technologies and competing in mainstream industries, its markets are still mainly in Asia, Africa, and South America, rather than more developed markets such as Europe and North America.
The second generation: Service sector and business model innovation
The second generation of Chinese entrepreneurs can be called “30-40,” as most of them are in their thirties. While age is not a definitive criterion, “30-40” does represent the main age range for China’s second generation of entrepreneurs, including Shen Nanpeng (Ctrip), Chen Tianqiao (Shenda), Jiang Nanchun (Focus Media), Ma Yun (Alibaba.com), and Li Hongyan (Baidu.com).
China’s second-generation entrepreneurs became active in the late 1990s. Most were well educated and went overseas for advanced education. Unlike the first generation, many of China’s second generation did not start from the bottom and did not experience the constraints of the planned economy. They started their businesses in a more transparent business environment and enjoyed more clarity on legal issues than their predecessors. China’s second generation also tends to be more active in social activities such as philanthropy.
|First Generation||Second Generation|
|Age||Above 45||30 to 40|
|Type of Firm||State or collectively owned||Private|
|Business Model||Cost leadership||Adapting successful models from developed countries|
|Mode of Expansion||Enhancing productivity through economies of scale||Private equity and listing overseas|
|Typical Examples||Liu Chuanzhi, Zhang Ruimin, Ren Zhengfei||Shen Nanpeng, Jiang Nanchun, Ma Yun|
China’s second generation of entrepreneurs is open to learning new business models from developed countries and is skillful in dealing with the financial markets such as international private equity. Hence, their personal wealth has reached levels unmatched by the first generation. While the first generation served as role models for society, the second generation is closer to “youth idols.”
Characteristics shared in common by the second generation:
- These entrepreneurs often brought successful business models from developed countries, particularly in growth areas related to high technologies such as the internet. Examples include Shen Nanpeng, who co-founded Ctrip and Home Inns.
- Most focus on the service sector, rather than low-cost manufacturing. These entrepreneurs localize advanced business models and adapt successful models to local market conditions.
- Since these entrepreneurs lacked personal wealth at the outset, private equity and overseas public offerings were widely used to finance their businesses. Rapid growth caused rapid escalation in their firms’ market value, enabling them to consolidate industries by acquiring competitors. Such virtuous circles have given these players strong leadership positions domestically. For instance, after going public on NASDAQ, Focus Media acquired leading competitors such as Target Media and Framedia, and became one of the largest and most competitive advertising firms in China.
The emergence of a service sector
China’s two generations of entrepreneurs can be easily contrasted by industry sector: manufacturing vs. service. The emergence of the second generation is of particular importance for the development of the Chinese economy and society. The service sector is an indispensable part of any advanced economy. The service sector constitutes 80 per cent of US GDP, over 60 per cent in Europe, 51 per cent in India, and about 40 per cent in China. The service sector is critical in solving unemployment and stimulating consumption. In the U.S. in the 1950s the service sector employed 50 per cent of the total labor force, climbing to 80 per cent in the mid 1990s. High employment led to sustained consumption, which supported the long-term growth of the U.S. economy.
The emergence of the service sector challenges traditional views of social and economic development, which put a priority on manufacturing and technology development. In the U.S., the star companies are no longer manufacturing giants such as General Motors, but service providers such as Wal-Mart, Citibank, Goldman Sachs, and Starbucks. While the latter are not best known for core technologies, they have become the pillars of the U.S. economy due to their innovation, market value, and wealth creation. The market value of Google, for example, has surpassed traditional IT giants IBM and Hewlett Packard, while Wal-Mart has led the Fortune-500 list for many years.
Similarly, many Chinese firms founded by second-generation entrepreneurs are eclipsing firms founded by China’s first generation. Focus Media, founded by Jiang Nanchun just 5 years ago and listed on NASDAQ, has a market value of US$4.4 billion. Using Warren Buffet’s method of value estimation, some Wall Street analysts put the real value of Focus at US$27.8 billion. By comparison, PC maker Lenovo, with over 20 years of history, has a market value of only US$12 billion.
Although second-generation entrepreneurs are more active than their predecessors in global financing, their firms significantly lag behind global leaders in management capability, business model innovation, and human capital. These firms have not yet made great strides towards globalization, evidenced by their lack of cross-border acquisitions. While second generation mindsets are generally more open, their business success is still mostly within China. As such, the second generation could be viewed as a transitional generation not yet prepared to break significant ground in China’s globalization efforts. Nevertheless, second-generation entrepreneurs should be commended in light of the following aspects.
- With the development of the Chinese economy and increases in personal income, the service sector will grow at a rapid pace. Since the service sector is closely related to national culture, local companies will tend to dominate.
- Service-based firms increase employment and consumption, which are essential in China’s drive to create an “internal-consumption-driven” economy. Service companies also: (1) improve China’s industrial structure, (2) reduce the pressure to import, (3) help balance international trade, (4) alleviate concern over China threats, and (5) create a broad middle class in China.
- The emergence of successful second-generation entrepreneurs will bring new perspectives to China’s current technology-driven development model.
Service firms usually do not have significant fixed assets. Since their value primarily comes from growth potential, their market value is usually much greater than their asset value. Service-oriented firms tend to take advantage of their high stock prices, and use the stock markets to buy into new areas. For instance, Google has grown from a search engine company to a leading online advertising company with a 75 per cent market share, mainly through a number of stock-based acquisitions.
In China, many service industries (e.g., finance, media, education, and healthcare) have not yet been truly deregulated. As a result, these industries are expected to experience exponential growth in the next few years. For many Chinese firms operating in these sectors, the large domestic market underpins high market value, which is critical for possible stock-swaps with global leaders. For instance, China Mobile has become the largest telecom operator in the world in terms of market value, while the Industrial and Commercial Bank of China (ICBC) is among the top three globally. ICBC could consider cross-equity holding relationships with top commercial banks such as Deutsche Bank, and form a global strategy through such integrative alliances. Other firms such as Focus Media and Gome Appliances could adopt similar equity-exchange programs with leading multinational firms. Such a “leverage to integrate” strategy would help Chinese firms deal with weaknesses in management capability, and alleviate international concerns over China’s economic emergence.
The third generation: Consolidating global resources
Globalization presents a major challenge to national economies, societies, businesses, and human resources. Chinese firms have experienced many setbacks in their globalization efforts. Despite considerable investments, Haier’s ten-year globalization effort has been rather disappointing, and Huawei has not made major progress in penetrating the U.S. and European markets.
As a result, there are discussions about whether Chinese firms can become world-class enterprises. Indeed, Chinese firms have limited resources and capabilities, and lack the experience to compete in developed markets. Meanwhile, the rapid speed of globalization means that there is not much time left for local firms trying to go global. The perceived “Chinese threat” further constrains the development of Chinese firms overseas. Given this backdrop, Chinese firms pursuing traditional approaches have little hope for success.
Chinese entrepreneurs are searching for improved global strategies to enhance the global competitiveness of their firms. In recent years, a new approach toward global competition has emerged, exemplified by Indian entrepreneur Lakshmi Mittal. Under his leadership and through relentless acquisitions around the globe, Mittal Steel quickly consolidated the global steel industry.
Mittal’s strategy of utilizing global resources to counter global competition represents an enlightening new strategy. Firms in developing countries such as Mittal do not have to defend their domestic markets first and then gradually expand into global markets. Instead, they can leap forward from a relatively weak position and quickly take control of global assets and assert leadership positions.
Given the Mittal case, the global ambitions of Chinese entrepreneurs may only materialize once these Chinese entrepreneurs learn to effectively integrate global resources. Hence, a “new globalization strategy” for Chinese firms could emerge, which actively utilizes foreign resources to achieve the best solutions around the globe, rather than focusing on local resources in any one local region. While cross-border acquisitions can be considered part of the strategy, this new strategy goes far beyond acquisitions.
The essence of this strategy is to counter global competition with global resources. Instead of merely defending the Chinese local market by mobilizing local resources (such as low cost labor), firms must mobilize global resources (such as advanced technologies). In today’s world, no nation can possibly possess the best resources in all areas. Thus, the strategy of using Chinese resources to compete against the whole world will be increasingly ineffective.
Following Mittal’s strategy, Chinese entrepreneurs may also develop a group of world-class firms in mainstream industries. Only then will the third generation of Chinese entrepreneurs emerge onto the stage. In our view, the first and second generations of Chinese entrepreneurs could successfully “upgrade” themselves to the third generation. Particularly, the second generation has much potential to become “third generation” entrepreneurs, who surpass the previous generations in terms of their management, structural, and business model innovation. Since mainstream industries can only be won by utilizing global resources, entrepreneurs such as Mittal are much needed in the effort to achieve true global integration.
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