What Makes Chinese Companies So Competitive?

0:10I'm Alison Beard. And I'm Adi Ignatius, and this is the HBR IdeaCast.

0:21Adi, today's show is about China and Chinese company competitiveness, which I know is a topic of perpetual interest to you. It is. You know, I lived in China for many years. I followed its economic development closely. There's so much happening in China, and I think it's fair to say the West does not understand most of what's happening. Yes, and that's why I wanted to talk to Stanford Research Fellow Dan Wong. He spent years living in and traveling around China to better understand its economy and businesses. And his central argument is that while the U.S. is dominated by lawyers who protect rights and procedures, China is an engineering state that prioritizes building, especially manufacturing, technology, and infrastructure.

1:03Yeah, that's an interesting phrase. I think often the debate is, caricatures the U.S. as completely free market, China as completely centrally controlled. It's obviously very nuanced, and this sounds like an interesting take on it all. And I think that because Chinese companies have grown so big and so dominant in their sectors, You know, I'm talking about BYD, the world's largest EV car maker, DJI, the world's largest consumer drone maker, Huawei, the world's largest telecoms company, not to mention ByteDance, which is the owner of TikTok. Business leaders everywhere have a lot to learn from how they innovate and how they stay competitive.

1:42Wang is the author of the book Breakneck, China's Quest to Engineer the Future. And here's our conversation.

1:52let's dig into this distinction that you make between a lawyerly society and one led by engineers what does that look like in practical terms for organizations doing business in each

2:04Dan Wang:country for anyone doing business in china folks will tell you that there are all sorts of pretty remarkable efficiencies that one can see on the ground. And when I was living in China between 2017 to 2023, spending substantial amounts of time talking to businesses, not just Chinese, but also American, European coming from all over the world, they would tell you that there are all sorts of ways in which China is pretty rational to do business with. All sorts of engineering projects are very easily planned. The leadership often understands future business planning. Infrastructure is amazing. And there are all sorts of ways in which the government is super responsive to some of the needs of businesses.

2:56Dan Wang:But they might also tell you that dealing with a bunch of engineers in a highly intransparent political system also brings all sorts of headaches that they may not expect. So although the infrastructure might be planned in very nice ways, there will be some issues with, let's say, tax administration or environmental reviews in which it is terribly unclear how the government has arrived at certain decisions. And there is often no real way to appeal. And this is all operating in a background of Beijing central politics, which are purely a black box in which no one really has any keen sense of what's going on.

3:37Dan Wang:And so it is a mix of both technocratic decisions as well as incomprehensible politics. And the contrast with the U.S. is the opposite. Sort of there's a lot of transparency and legal procedure, but things don't move quickly at all. Yes. So in the U.S., let's say you are a major business leader that is going to planning to build a big factory. Let's say that you are a major financial institution that is planning to make investments. When you chat with some of these people, they might be able to say that, you know, if they try hard enough, they are going to be able to call President Trump on his personal cell phone.

4:18Dan Wang:And that is completely impossible to imagine for almost any one high level in Beijing. In China, the politics are very, very difficult to influence, but the infrastructure is amazing. In the United States, the politics are influenceable, and the infrastructure is what the infrastructure is. Okay, so let's talk about things that companies perhaps can control. You know, first, manufacturing. Chinese companies are excellent at this. I think there might be a perception, at least initially, that this was all about cheap labor, but it's much more than that now, right? Cheap labor was pretty important for China at the start of its boom throughout the 1990s and the early 2000s.

5:05Dan Wang:And I think that no longer explains very much of what makes China excellent at manufacturing. When I am speaking to political folks in the United States, I think there's a narrative among the right that China has gotten to where it has mostly through IP theft. And among the left, there is more of a narrative that China has gotten to where it has through industrial subsidies. So it's cheating on the one hand or it's stealing on the other. And I would say, you know, we have, yes, the phenomenon of cheap labor. There is definitely some degree of IP theft. Industrial subsidies are indeed pervasive throughout the Chinese system.

5:48Dan Wang:But I would also point to many other advantages that China has that has used to build up this manufacturing system that is now about one third of the world's total manufacturing capacity. So these other factors include a government that is sometimes supportive and sometimes hurts the operations of Chinese companies. It is supportive when it is building enormous amounts of infrastructure like solar as well as nuclear throughout the country. And sometimes the Chinese government has kneecapped prominent entrepreneurs, especially Jack Ma, the founder of Alibaba, who was given a disciplining when he gave an impolitic speech.

6:33Dan Wang:And the other factors that are really in China's favor are a very dense ecosystem of labor. So you have skilled engineers, you have a lot of line workers that are able to put together remarkably sophisticated electronics products like the iPhone. You have what I think is the most competitive corporate system in the world. You have dozens of electric vehicle makers in China that are competing for a share of the Chinese consumer's wallet. And you have basically thousands of companies duking it out for all sorts of products. And so in my view, China is practicing capitalism right into the claw much more effectively than the United States because there is just so much more competition.

7:23Dan Wang:And when you add up the ecosystems of labor, the ecosystems of components, the very dense infrastructure, plus this hyper-competitive system, I think it's no wonder that China has achieved quite as much as it has over the last two, three decades. Yeah, and you make the point that Chinese companies are really thriving at process innovation, doubling down on manufacturing and then making sure that their way that they're manufacturing is as innovative and efficient as possible. Yeah, and I think what is the critical insight for a lot of Chinese companies is just the importance of keeping this process knowledge alive.

8:05Dan Wang:And so if we're thinking a little bit about what exactly is technology, I would break it down into three different things. The first part of technology is tooling and equipment and components. This is everything that we're able to touch, manipulate, and use. And if we wanted to use a kitchen analogy, all of this tooling is sort of the pots, pans, and the stove that we use to cook anything. The second part of technology is essentially direct instruction. So this is everything that we can write down. These are blueprints, patents, almost anything that we are able to convey in instruction. And so in the kitchen, that is something like a recipe for how to cook something.

8:51Dan Wang:And the third and most underappreciated part of technology, I believe, is all this process knowledge, which is essentially everything that we cannot write down. So this is industrial experience. This is tacit knowledge. This is everything that lives in our hands and between our heads that we can't easily convey to someone who doesn't observe us working. And so this is something that China has possessed a lot of. So imagine giving someone who has never cooked a day in his life the most well-equipped kitchen as well as the most exquisite recipe to do something as simple as making scrambled eggs.

9:30Dan Wang:Let's say a 15-year-old who has never cooked before. And I think we cannot expect that 15-year-old to make something as simple as scrambled eggs, because that still requires some degree of training and apprenticeship. And as the United States has lost a lot of manufacturing work, especially from the industrial Midwest, and some degree of that labor moved to China, what I see is that China has been able to keep this industrial experience process knowledge alive. The United States has lost a lot of this experience. And that explains why a lot of American manufacturers, namely companies like Boeing, Intel, as well as the Detroit automakers really have fallen flat on their face and have been unable to get back up.

10:17This adaptability piece is also really interesting to me. I think one of my favorite lines in the book is Chinese companies have decided that making money is their core competence. And so they go make whatever the market needs. How can companies elsewhere adopt that sort of dynamism?

10:35Dan Wang:Yeah, and I think that is very much a decision made by a lot of companies that they really have to focus on core competences. And this really came was stark to me during the COVID pandemic when I was this line was offered by a manufacturer in China. and this Chinese manufacturer told me that when a lot of companies in the United States during the COVID pandemic were asking, should we make something like masks or cotton swabs or air filters, most of them decided this was not their core competence and so they wouldn't get into this business. Whereas in China, what I saw was that companies like BYD, an electric vehicle maker, or Foxconn, which assembles most of the world's iPhones.

11:29Dan Wang:They had their own branded masks because they were able to retool their production lines in order to meet market demands. And so this is a way in which the Chinese companies have decided we will go make whatever the market demands. And if we can retool our assembly lines productively and cost-effectively in order to do so, then that is what we shall do. There are all sorts of ways in which having a supple and robust manufacturing base creates a strategic advantage, which the United States government, as well as a lot of corporates, have not realized up until now. And so this is where having a lot of manufacturing workers may be an asset, and perhaps that constitutes a form of technological sophistication that we have not quite planned for.

12:16You talked about some of the difficulties of being an entrepreneur in China and particularly a technology entrepreneur sort of in areas that the government might not feel are as advantageous to society as energy infrastructure or manufacturing, for example. So how difficult is it to be a tech entrepreneur in China right now? You know, when you've seen Jack Ma of Alibaba and ByteDance, the company behind TikTok, really have to cede some control over what they're doing to the government. I imagine that's playing out in AI now. It's a more regulated state that hinders entrepreneurialism, right?

13:00Dan Wang:It is really difficult being a Chinese entrepreneur. So difficult that plenty of people have departed China because it is very challenging to do business in China. For a period of time, Jack Ma left China and stationed himself in Japan and was basically essentially pretty hands-off from running Alibaba because other people was doing it in his stead. The founder of ByteDance, Zhang Yiming, has substantially relocated himself to Singapore. I think China is a giant market. It has a lot of technical talent. It has a really robust business culture of people that are really aggressive in creating software businesses.

13:51Dan Wang:And I think it is pretty clear that China is the only space in which Silicon Valley entrepreneurs could regard as their peers. But China is also ruled by a very jealous central government that is trying to make sure that it has control. I think that the overriding concern for the Communist Party is control over the country. And you have all of these red lines, which are really difficult for anyone to read, including many Chinese insiders to read, that might be shifting against some of these entrepreneurs. And you have a lot of these entrepreneurs who have employed some very well-paid and sophisticated government relations people who were consistently wrong-footed by their inability to read the mind of top leader Xi Jinping.

14:45Dan Wang:And that is part of why there was a pretty severe crackdown about five years ago that Beijing initiated against essentially every major tech company working in software as well as the internet. And so that is just a challenge of doing business in China. And what about the branding piece? You know, the idea that China has the world's largest EV maker, the world's largest drone maker, the world's largest telecoms equipment manufacturer. But if you had to name sort of a globally resonant brand, I feel like TikTok, ByteDance would obviously be there. But it struggled to sort of export any others. Why is that?

15:29Dan Wang:I think that the Chinese system is pretty good at making the products. And I think you are totally right, Alison, that Chinese brands have not caught up. But this is mostly a matter of time, because I suspect that what we see in the history of East Asia is that branding tends to follow quality. For a long while, the Japanese products were derided as being not very good. And once they were able to figure out the manufacturing quality kinks, pretty quickly the branding caught up. And we can tell the same story about South Korea as well. And I think that Chinese firms do somewhat struggle with branding, but I think this is something that they are going to be able to fix.

16:20Dan Wang:We see better Chinese consumer brands. I think that more people will, in the next couple of years, know the names of these companies that you've described, BYD, in terms of autos, DJI, in terms of drones, Huawei, in terms of its telecommunications equipment, but also, more substantially, its consumer-facing products, like its smartphones, that more people, especially around the developing world, are going to be able to be enthusiastic about these products. One challenge for an America-centric perspective is that the United States government has banned most of these products from American shores, namely BYD EVs as well as Huawei phones.

17:00Dan Wang:So no wonder very few American consumers know what these companies are. And we see more Chinese companies like a fashion brand called Songmont that is capturing a lot of hearts and minds. Young people may know La Bubu, which is this kind of a scary looking ugly doll that is nonetheless much beloved by some sports stars. And so I think that once the Chinese companies are able to hire better creative marketing consultants, especially those in Europe as well as the United States, they will be able to appeal more to American and European customers. They say that every day your business is late to AI, you fall two days behind.

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18:17Where do workers and consumers fall in all of this? You know, how is the average American or European faring versus the average Chinese person?

18:27Dan Wang:I think that it is pretty miserable being a Chinese worker. And one of the big books that came out from China last year is called I Make Deliveries in Beijing. And this was translated into English, and I encourage anyone listening to pick it up. But this is basically kind of a tale of how miserable it is for a lot of workers in China to just constantly be on the road making deliveries. And a lot more of the Chinese workforce is making deliveries these days. They're essentially the equivalent of DoorDash deliverers as well as Uber drivers. There are substantial numbers of college graduates who are working these sort of jobs because the labor market in China is so soft.

19:15Dan Wang:The figure is that Chinese youth unemployment is now north of 15%. The unemployment rate in China is pretty high. And that's obvious if we look at some of the broader economic weakness in China. So China's property sector has declined by about 30 % over the last five years as the government tried to prick a property bubble. Unemployment is pretty high. Consumer spending is soft. And sort of the only thing that's been going really well has been exports. And that's despite these massive infrastructure projects, despite the huge growth in manufacturing and Chinese business, it's not creating better quality of life for workers?

20:07Dan Wang:That's right. You can't eat an electric vehicle. You also can't eat one of these big bridges that the government has been putting up. And I think that doubling down on infrastructure is a sign that the Chinese state has lost its creativity about how to really stimulate the economy. Because they are still building these big infrastructure projects, namely very tall bridges, high-speed rail, subways in cities. cities and the countryside that are almost saturated with a lot of these different projects. That what a lot of Chinese consumers want is not a better bridge, but a more functional healthcare system, because healthcare in China is still pretty weak and does not meet the needs of a lot of people.

20:56Dan Wang:That people have a pretty high savings rate in the expectation that they may not have a lot of help in the future, and that the country is, I think, pretty obviously hardening itself for geopolitical competition with the United States. And so Xi Jinping wants to plow a lot more money into manufacturing as well as infrastructure because he thinks that this is the way to gain a geopolitical advantage over the United States rather than trying to deliver a vision of human flourishing that has broader appeal to its people. What's your advice to U.S. or European or companies from anywhere looking to do business in China right now?

21:42Dan Wang:I think that it is still the case that multinationals have made considerable money in China relative to other countries over the past 20 years. So have American, European, or other multinationals made more money in China than in, let's say, Japan or India, to name two other big markets? I think China has, over the last 20 years, delivered a lot of profits to multinationals. But past performance is no guarantee of future guidance. So Chinese companies now are much more sophisticated than in the past. They have muscled away a lot of their American, Japanese, European competition in industrial components as well as increasingly consumer-facing goods.

22:33Dan Wang:And they are becoming formidable competitors in the export markets as well as sometimes in the home markets as well. China's economy has been softening over the last couple of years, and the geopolitics are also much more uncertain. And so I think that that is no reason to say that foreign companies need to pull out of their existing investments. Maybe they should continue to maintain the Chinese market because it is still very large and still has some growth left in it. But I think that they should be a little bit more wary of Chinese competitors now encroaching on their home turfs. Do you see sort of a long-term advantage that Chinese companies are gaining, even being prevented from going to the U.S., but just, you know, making so many inroads elsewhere?

23:28Dan Wang:I think that Chinese companies have very formidable advantages, but also so do the American companies. Now, on the Chinese side, what the Chinese companies have are just this fierce entrepreneurialism to try to make money however they can. They are super competitive. They are very eager to move into new markets. And the Chinese economy, which is still the world's second largest economy, is going to be able to generate some really formidable companies. On the other hand, they face protectionism from abroad, uncertain government policies at home. You never really know when the Communist Party might once again turn Marxist, which is their espoused, well-stated, very explicit political system, and perhaps deliver a few crippling blows to some of these companies, as it has done in the past.

24:28Dan Wang:These companies are also facing sluggish demand at home, fairly uncertain funding environments. The Chinese capital market ecosystem is just not that well developed. And so they certainly face a lot of challenges. American companies also face considerable challenges, but they also have a lot of other benefits. I think that they are on average much better run than Chinese companies. the United States is able to attract a lot of the world's most ambitious people to its shores, including from China, to build companies in a better protected legal system. And the American financial system functions a lot better than the Chinese system.

25:13Dan Wang:So my view is that we should take nothing for granted. China has a lot of problems. The United States also has a lot of problems. implosion is always an option for both states. We shouldn't base our analysis on any sort of static conditions. We should always be aware that the future is something that we can change and something that we have agency over. Thank you so much. I learned a lot. Thank you, Alison.

25:43That's Dan Wong, a Stanford research fellow and author of the book Breakneck, China's Quest to Engineer the Future. If you found this episode helpful, please share it with a colleague and be sure to subscribe and rate IdeaCast in Apple Podcasts, Spotify, or wherever you listen. If you want to help leaders move the world forward, consider subscribing to Harvard Business Review. You'll get access to the HBR mobile app, the weekly exclusive Insider newsletter, and unlimited access to HBR online. Just head to hbr.org slash subscribe. Thanks to our team, senior producer Mary Du and senior production editor Kristen Murphy Romano.

26:16And thanks to you for listening to the HBR IdeaCast. We'll be back with a new episode on Tuesday. I'm Alison Beard.