China Law Blog

I apologize for the recent onslaught of posts on China's consumer market, but I cannot help it. There has just been a plethora (I know that's a pompous word, but I've always loved it anyway) of great stuff out there of late.

The latest is from Jack Perkowski over at Managing the Dragon (h/t to Adam Daniel Mezei) in which he does a great job discussing how Geely's purchase of Volvo and its relationship to China's "two markets":

Geely’s purchase of Volvo underscores the powerful forces that are being unleashed by China’s two markets. MTD readers are well aware of the fact that for any product, there are two markets in China—a high priced, high technology market where the 400 million people who have benefited most from China’s economic development shop, and the low priced, low technology, purely local, market where the other 900 million people buy the goods needed in their daily lives. I devote an entire chapter to this subject in my book, Managing the Dragon, and have referred to it on numerous occasions in this blog.

In autos, the headline number is that China will produce 12 million vehicles in 2009, itself an impressive accomplishment. However, that is just the tip of the iceberg. Every year, China produces at least 50 million vehicles for transportation. Twelve million are the BMWs, Buicks, and Audis that China’s wealthier citizens can afford, while the remaining 38 million are used in vehicles that the country’s less advantaged citizens must buy to meet their transportation needs–motorcycles, agricultural vehicles and the so-called “inkfish” that combine a chassis with a one cylinder diesel engine and receive their name because they spew so much black smoke.

The existence of this vast local market, where price is paramount, gives companies like Geely a chance to develop. The continued growth of the local market gives the Geelys of the world a chance to grow and prosper. If a company’s leaders are sufficiently visionary, and they succeed in raising the quality and technology levels of their products, they soon begin to compete in the higher price, higher technology market in China. Once success is achieved in this market, it is but a short step to the global markets.

For more on Perkowski's "two market" paradigm, check out "China Business. Which Comes First The Wealth Or The Low End?" in which I talk about a meeting I had with Jack where we discussed this very thing.

What I also liked about Jack's post was his discussion of how the West tends to doubt and minimize the ability of China's companies to go global. Though on the one hand, I would be the first to tell you that the overwhelming majority of China's companies have a long long way to go before they will be anything close to a global fighting machine like Sony, or Coca Cola, or Procter & Gamble, I will also be the first to assure you that it will happen and it will happen faster than people expect.

I say this because I have been practicing international law for a long time and I can remember very clearly when everyone (including me) had little to no respect for Korean or Russian companies and everyone (including me) thought they would never be able to compete on a high level internationally. Yet they have. And I am not just talking about the very well known companies like Samsung. I am talking strictly from my own experiences as a lawyer to Korean and Russian companies. Fifteen years ago, I did not particularly want Korean or Russian companies as clients. They would come to us because we represented American companies in Korea and in Russia, but they were difficult. Almost without exception, they did not understand business or law outside their respective countries and they would bullheadedly insist that the way they had done things in their country would be the way they would do things everywhere.

Then things started to change. The "do it my way or the highway" company leader would turn over the reins of the company (or even just its international components) over to a son or daughter (or someone else) with a college degree and real international experience and things would start to shift. Or even occasionally, the company would get badly burned overseas, yet survive and learn from their mistakes and properly retool.

Right now, most Chinese companies are in the "getting badly burned stage" but some are already past that and more soon will be. There is a lot holding Chinese companies back right now, but all those things were true of Korean and Russian companies fifteen years ago and I am not aware of a single thing that would lead me to believe Chinese companies are not comparably equipped to make the same sorts of strides towards internationalization I have seen with my own eyes with mid-sized Korean and Russian companies. For more on this wave of Chinese companies doing things right overseas, I urge you to check out, "China Business. I FEEL "The Second Wave.