Introduction

Alex Boome:

Good day to our audience from around the globe. Welcome to the Hinrich Foundation Trade Book Talk. I’m Alex Boome, Trade Education Program Director here at the Foundation. Today, we’re in discussion with Dr. Allen Morrison, co-author of Enterprise China: Adopting a Competitive Strategy for Business Success.

Our conversation will explore this extremely insightful book that examines China’s uniquely competitive and rapidly evolving business environment. In short, China Inc. Allen will look at recent success in the historic context that is driving China’s strategy.

He’ll share some faulty assumptions underlying much of Western business strategy and give key recommendations for survival and growth in this global China business environment. He’s happy to take your questions throughout the discussion. Please just type them into the chat, and I’ll raise them with Allen, or we can come back to them at the end of the conversation.

Allen brings decades of experience in global management, executive development and leadership education, really at the highest level. Having served as CEO and Director General of Thunderbird School of Global Management at ASU, as Director of IMD’s Global CEO Center, and as a professor at INSEAD here in Singapore, he’s advised and educated leaders at the highest level of business.

Today, as a professor at Thunderbird and Thinkers 50 author, Allen continues to shape conversations on leadership in a rapidly changing world. Allen, thank you for joining us.

Allen Morrison:

Thank you, Alex. Good to be here. Good to participate in this wonderful event.

Big Idea & Origin Story

Alex Boome:	Right. Let me start with the broadest question behind the book. What prompted you and Steward to write this book?
Allen Morrison	Yeah. Well, that’s a great question. You know, you have to be motivated to take on these book challenges. This was my 13th book that I wrote, and something that I had been thinking about and wanting to write for, really, for decades. The genesis of that is I’ve been a visiting professor twice in China.
Alex Boome:	Hmm.
Allen Morrison:	And also was on the board of a U.S. NASDAQ-listed Chinese company. And, and I, you know, I… not only do you learn a lot by being on… on these boards, but I learned a lot about the Western… the Western mindset, vis-a-vis China, how, how there’s so much at stake. When you compete in and with China, but there’s so many misperceptions, misunderstandings, shallow awareness of what’s going on. And as a strategy and leadership professor, I think, great opportunities for leaders to sharpen their focus on strategy… on the China and China strategy. Many strategies from too many companies are, quite frankly, incoherent and a bit of a mass. And so, with that in mind, I had… thought about and planned out this book for many, many years, and found a great partner with my colleague, Steward Black, who is professor at INSEAD, so we took on this great challenge. It’s been a lot of fun.

Success & Historic Foundations

Alex Boome:	Awesome, and it’s really, like a handbook for strategy in pretty much today’s business world, given the impact of China. You start by highlighting that China’s economy is on a roll again. And you put this success and its underlying strategy in the context of not having history repeat itself. And you’ve got some slides. If you could speak to that, that historic context, where China is now, and what’s motivating it from its history, please.
Allen Morrison:	Yeah, yeah, thanks, Alex, and I do have some slides. I, you know, as a professor, we have to have our slides, right? So, I think the slides actually help from a… from a viewer perspective, and, as Alex said, even though I’m presenting, please don’t be timid. If you have any questions, please feel very comfortable jotting those down and posting them, and Alex will help funnel them towards me. What I want to first talk about is, yes, China is on a roll. And I’ll talk a little bit about why and how, and why that’s relevant, but first, in terms of manufacturing, we know that China’s been referred to as the world’s factory, the factory of the world. It’s true. You know, in terms of the share of global manufacturing, China has added, added, added, added, added. Now, it seems to be in a modest decline over the last few years relative to its past successes. But it is still a powerhouse in terms of global manufacturing. In addition to manufacturing, of course, it is a gigantic market in many industry sectors. It’s the largest market in the world. It’s the largest market for e-commerce, luxury goods, video games, steel, on and on and on. So, if it’s not number one in the world, it’s number two in the world as a market. So, gigantic manufacturing hub, and incredibly important market. Now, what’s interesting for me is not just kind of in the abstract, the size of the market, and so on. I’m much more interested, actually, in what companies are doing, not only Western companies, but more particularly Chinese companies. And what you’ll see is that Chinese companies are getting bigger and bigger and bigger, and that’s… that’s important from a… Western perspective and understanding the power of China. It’s not just that it’s a hub for commerce or a hub for manufacturing. We’re now dealing with a huge number of very, very big and powerful Chinese companies. So, if you look at… you track, as we’ve done the composition of the Fortune Global 500 listing, you’ll see a huge growth in the number of big Chinese companies. Now, between the U.S. and China, we’re kind of vying back and forth, ping-ponging. But, basically, there’s the same number of giant American companies and the same number of giant Chinese companies in the world. And we, you know, there’s this vying back and forth and back and forth. China’s dropped off a bit in the past few years. The U.S. has surged a bit, but we’re looking at two hedgemons as we look at the major players in the world. Now… China is also not just the home of these big companies, but we’re seeing that Chinese investment overseas is also a very, very powerful thing. So, one of the concerns that you might have, or you should have, is, you know, hey, we’re not in China, what do we care about China? You care about China, because even if you’re not in China, China is… coming and knocking on your door. And we’re seeing an increasing number of what they think are just domestic firms, like, what do we care about this? Well, you should, because the companies you thought were from your home country, some of them are not. They’re actually Chinese-influenced or Chinese-owned Or if they’re not, they’re growing in their competitive position. Next door to you.
Alex Boome:	So you’re looking at.
Allen Morrison:	That really led to this book here, is this book, Enterprise China, and trying to better understand what’s going on with China and Chinese businesses. Sorry, Alex, go ahead.
Alex Boome:	Your comment about not just in China, but outside of China, you… the executives really need to take a 360 view with China in mind.
Allen Morrison:	Yeah, absolutely.
Alex Boome:	Yeah, yeah.
Allen Morrison:	And whether you’re in Vietnam, or Thailand, or Japan, or in London, or Paris, The Chinese are there, and if they’re not there, they’re influencing what’s going on wherever there is. All right, if we could, let’s, let me just talk a little bit about some of the keys to China’s success. And, you know, there’s been a lot of accusations, you know, the Chinese have cheated their way or stole their way to success, and, you know, I can’t say that China or any other people are innocent of some of the accusations, but I think we ought to be. We ought to be very clear that China has been successful because they’re smart. They’re forward-thinking, they’re very strategic, and you combine vision and smart strategy with a lot of hard work, and the failure of China’s adversaries. To respond, to do anything about it. And I think you’re gonna have the keys to how… why China has been so successful. China’s been, in terms of strategy, they’ve been very consistent with their strategy, and this is something we looked at in great depth. Is understanding their strategy for kind of vaunting from, you know, a third place, fourth, fifth place, and also ran, to now vying for number one, number two places in the world economy. We’ve identified, really, three strategic pillars for China, and if you can understand these pillars, you’ll understand a lot about where China’s come from and where they’re going as a nation, and as competitors. Basically, all of China’s industrial policy is built on, and the regulations and strategic initiatives nationally, are based on these three pillars. The first is to eliminate dependencies. The second is to dominate domestically, and the third is to go out and conquer the world. So I just want to spend a minute on each of these three. I think it’s important to understand to kind of disaggregate and take a look at these three pillars. The first pillar we’re looking at is the objective of reversing dependencies. When Deng Xianping came in. he basically said, let’s open the door, we’re a backwards, struggling economy, let’s open the door to these Western companies to come in and introduce us to their technologies. He was very good at that. But the strategy was not dependency, it was to reverse dependencies. And this goes back historically, to the era of what they call the century of humiliation, where China was subjugated to the West. It used to be the world’s dominant economy, leading in culture for centuries, 900 years. They were the largest economy in the world. And then, in the 19th century, it changed. And they don’t want to go back to that, ever. Alex, if China were to return to its rightful place at the center of the world. It cannot be dependent on outsiders. It wants outsiders to be dependent on China.
Alex Boome:	And as you’ve just outlined, with the three pillars, they’ve got a very clear plan.
Allen Morrison:	Yeah, what’s interesting is they have the plan. And that plan has held firm for over 30 years. They have not veered from the plan. Now, they’ve… they’ve got different initiatives, different regulations, different policies, but they all are aligned with that… the three pillars of that strategy. Yeah, in the West, we seem to lurch from President to Prime Minister, and back and forth, and policy change, and by the time anyone even understands what the policy is, we have a new regime in place who reverses, and we swing back and forth. The Chinese have been incredibly consistent. with their strategy. If I could, the second is… sorry, the second pillar, as we talked about, is not just to reverse dependencies. It is to dominate domestically. And dominate domestically does not mean they want to destroy all the foreign companies. They… they don’t. They just want to make sure that they’re dominant in China, and who could blame them? I don’t think any… I don’t think the French want the Germans to dominate in France, I don’t think that the Japanese want the Taiwanese to dominate in Japan, but this is also part of the strategy. And the third is to go out and actually… Try to conquer the world.

4 faulty assumptions

Allen Morrison:	Now, I want to talk about some faulty assumptions that we make in the West about China. In fact, I want to… I want to identify four faulty assumptions.
Alex Boome:	Now, Allen, how did you go about identifying these, understanding them and consolidating them down to four? It must have been quite an effort.
Allen Morrison:	It was a… it was a… it was a massive two-year research effort. Involving several hundred Western companies, and surveys, and interviews, and a great deal of data analytics to identify, and also then to go verify these, test these assumptions out. And you spent a lot of time.
Alex Boome:	On the ground in China.
Allen Morrison:	Spent a lot of time on the ground in China. But again, these are assumptions Westerners make about China. There are a lot of assumptions the Chinese make about the West that are… that are faulty as well. That wasn’t the focus of the book. There’s another book there. the Chinese are absolutely horrible at understanding accurately the mindset of the Westerners. They get it wrong just as much as we get them wrong. And let’s see, the four things…
Alex Boome:	Get wrong here.
Allen Morrison:	Let’s take a look at that. Yeah. The first is that competing with China is about understanding large individual enterprises in China. The second is China is destined to be the number one economy and basically take over the world. The third is what happens in China can stay in China. And the fourth is being best in China, We’ll win the day. None of these assumptions ultimately hold water.
Alex Boome:	I know you’ve got some details on it, and that’s really getting into the meat here to set us up for the strategy.
Allen Morrison:	I think that’d be helpful to just bounce through some of these anyways.
Alex Boome:	Yeah
Allen Morrison:	Well, I want to make sure there’s time for question and answer, and the book. goes through all of this in great detail. I’m just going to touch on it here. So the first thing I want to mention is, in… we have in the West, for those who have gone to Western business schools, or there’s someone who has taught at Western Business Schools, we have a certain kind of mindset. We teach strategy using the following framework. You concentrate your analysis on, you know, many of us, when we look at these, what we call the five forces, the competitors, the suppliers, the customers, everyone is an individual, rational actor. The government is in the background, so the government might influence through policy, these stakeholders, but they are not a direct stakeholder. And that’s how we think about strategy. Competitive analysis and strategy is reverse. And it’s that way because the state and the company Are together in the foreground. Decisions are coordinated. Companies take either direct or indirect cues from the state. And I want to just touch on this, and many of the listeners or participants in the session today may understand the general theme here, but I want to be kind of more clear about what these actors look like. So, the first thing I want to say is that there are 3 types of enterprises in China. They’re what we call SOE state-owned enterprises, that are controlled by Beijing. What’s important to understand is there are not many of these. There’s only 96 of these firms. So when you look at state-owned enterprises, less than 100 are actually owned by Beijing. But they tend to be the biggest companies in China. The second thing I want to mention is that the vast majority of state-owned enterprises in China The vast majority Are actually owned by municipalities or by provincial entities? 96 are owned by Beijing, 150,000 are owned by these smaller state-owned enterprises. Now, these are gigantic, organizing units. So, big cities, you know, Chongqing in China is bigger, the city. than the entire country of Taiwan. So these are giant enterprises. And they control about a third, closing in on a third of the Chinese economy.
Alex Boome:	On that, if you could just go back on that, what’s the… from a business perspective, is there different approaches or strategies that someone would need to take between, dealing.
Allen Morrison:	Yesh
Alex Boome:	Beijing-controlled, or a provincial or a municipal-controlled SOE?
Allen Morrison:	Yeah, well, first off, the Beijing control, the… I think the strategic objective is more employment and power. On the municipal and provincial level, it’s more about money. Their ownership is less about power and influence, and more about they’re generating money. Now, I want to just get into the third type, and then we can pivot back and forth, because the third type of enterprise has a direct correlate to how we work as Western enterprises in China. The third type of organization are privately owned, or, influenced enterprises, and so these are these firms like Huawei, and Ant, and Tencent, and so on. Now, what we discovered, we did a lot of work on this, we said, well, they’re privately owned, you know, the state doesn’t control them. Well, there’s some things I want to mention about this. First off, any organization in China, any company with more than 50 employees, must have a full-time employee member, representative of the, of the Communist Party. So across the hall, down the next floor, there is a full-time employee. The second thing is, even these enterprises. We’re finding that, in our research, 100% of these privately owned enterprises had some unit of the enterprise, perhaps at the central office or their affiliates, that had ownership. A piece is percentage ownership from typically these municipal organizations or provincial organizations.
Alex Boome:	Hmm.
Allen Morrison:	18%, 23%, 12%, 100% of them.
Alex Boome:	Hmm.
Allen Morrison:	100%, from our research. Now, I can’t… can’t… we didn’t look at 150,000 of them, but every single one of them. So how is the state influencing, by the state, I mean municipal or provincial, they’re influencing them either directly or indirectly. Because all of the strategic decisions are vetted by… State entities. Any of these strategic decisions. So, they will tell them who to partner with, who to ally with, how to supply, and these organizations will go, we want to build a plant, and the city will say, well, here’s the deal. You build a plant, we’ll give you the land, we want 6% ownership, and we want you to partner with this supplier.
Alex Boome:	And if you.
Allen Morrison:	If you don’t do that, then you don’t have a permit to operate the facility. So when you’re a Western company dealing with China, and thinking of investing in China, don’t expect to get a different deal than the privately owned enterprises will have. They will tell you where, how, and so on. And so, the Western companies that are doing business in China, even if legally they don’t have to have ownership, and in some industries they can do this 100% foreign-owned.They invariably do, because they recognize the value of these partnerships. So why would you say, how does it… how do you deal with the state? Well, the state invariably is not SASIC in Beijing, it is invariably these 150,000 enterprises in which you’re going to be partnering. Okay? So, so, so what we…
Alex Boome:	If we could go on this slide, if… there was a case, I don’t want to put you on the spot in the book, though, but about, the, public listing. Was it the Ant Group?
Allen Morrison:	Yup. Yeah.
Alex Boome:	Could you just touch on that a little bit? I think it’s, it’s, it’s quite, quite a compelling argument about backing up what you’ve got here.
Allen Morrison:	Well, so, there’s a broader discussion here about these privately owned enterprises, and their growing influence. So I said most of them, their interface is with with municipal and state, partners. That kind of what we call the… this is what we call it the enterprise China. It’s because it’s the enterprise network effect. what happens when you get these companies like Ant and Alibaba that are now, you know, their CEOs, their founders are worth $20 billion, $50 billion, and when they’re getting big and powerful, is it becomes threatening to the CCP. So the CTP, and, and… And by the way, they’re threatening because of their size, but also, many of these founders are now incredibly wealthy, and they’re kind of giving speeches, and they’re criticizing different power brokers, and so… and so this has become very, very central to Xi Jinping and his approach to policy. It’s either… the CCP is either gonna be relevant or not relevant. And if we let this go too far, they’ll become less relevant, and Xi Jinping’s view was, no, we’re not going to allow that to happen, so we’re going to control the messaging and control the strategies of these Privately owned or privately influenced enterprises. So when it comes to publicly listing. They’re gonna wanna make sure that the communication is all consistent, and they’re going to want to make sure that the public knows who’s really in charge.
Alex Boome:	And, and so…
Allen Morrison:	So, we’ve had a number of these situations, including, you know, Ant, but including, you know, Alibaba and Jack Ma, where they’ve basically ensured that they’re put in their place. The problem with that, from… I mean, I understand the political objectives. The problem with that is what that does to the aspiring graduates, the 30-year-old graduates of, you know, leading business schools or technology schools, engineering schools in China.
Alex Boome:	Hmm.
Allen Morrison:	Who are now saying, well, I thought I could become a successful entrepreneur. Are you saying that I can’t? I don’t have those opportunities? And read the tea leaves, it’s like, you know, we’re not sure you do have those opportunities. You don’t have as much freedom as you thought you had.
Alex Boome:	Yeah, right.
Allen Morrison:	Thank you. Yeah. Thank you. Alright, so that’s the background, I think.
Alex Boome:	Thank you, yep.
Allen Morrison	All right, so let’s, let’s talk about faulty assumption number two. China’s destined to become the world’s number one economy. I wouldn’t rule it out, but I certainly wouldn’t rule it in. As we’ve seen in the last 5 or so years, their kind of ranking is dropping down a little bit. What could derail China? A lot of things can derail China. Internal political conflicts. Interestingly, we’ve seen a number of people in the, military leaders have been replaced over the last… I think there’s been 7 very senior leaders and Politburo members who have been replaced. The rise of horizontal China. Horizontal China is the consumer, basically, who’s now becoming more empowered. Better data, better information. China’s continued dependency on Western technology. They are far behind in a number of sectors, including semiconductors. They’re far ahead in some sectors, I will add. This Bailan, let it rot kind of mentality of young, educated Chinese, which I alluded to when we talk about entrepreneurs. Demographics is a huge issue I can talk about. Debt is a gigantic influence, and lagging financial performance. Just on the issue of demographics. Like it or not, and we’ve seen this, I’ve written a number of Harvard Business Review articles on this, you look at China, and you look at Japan, and it’s the same demographic curve, just pivoted 20 years. Same curve. And Japan has never fully recovered from that. Like it or not, China is going to lose about 230 million people from its population ranks over the next, 20, 20, 25 years.
Alex Boome:	Well…
Allen Morrison:	That’s equivalent to much of Western Europe. They’re gone.
Alex Boome:	Yeah.
Allen Morrison:	So that can be impacted. It’s going to impact the size of the economy. It’s going to impact the shape of competition. The only solution for China… there are two solutions. One is, let’s bring in 200 million foreigners. I don’t think they’re going to do that. Number two is, they can beat that rap with rising productivity. But I don’t think they’re going to be able to do that for a number of reasons. Productivity didn’t happen in Japan. And China’s fighting what we call the, the law of large numbers. When you look at the GDP per worker, the growth. We are seeing the huge rises in productivity, but they flatten out as technology is brought into the forefront in how China’s competing. China can no longer just Add capital and technology to a fairly uneducated workforce and see big productivity gains. They’re not gonna be able to overcome this gigantic problem with demographics. There’s other barriers, corporate governance remains a problem. Corporate culture? Remains a problem. So you go to a company and say, help us figure this out, they’re like, well, why is that my problem, Chinese company? Not my problem to figure out the national, the solution to national demographic issues. Lack of leadership is a… is a big issue, and and so you could say, you know, maybe China’s even past its peak, and there’s been a number of of, people who’ve been writing about this. This is just looking at this Fortune Global 500 list. Is China actually past its peak? When you look at between 2024, growth in sales Chinese MNCs have grown 21%, American MNCs have grown their sales by 52%. This is amongst the biggest firms in the world.
Alex Boome:	Yep, yep.
Allen Morrison:	When you look at, sorry, when you look at, growth and profits, How’s China doing compared to the U.S?
Alex Boome:	No.
Allen Morrison:	Well, there’s a price to be paid, is all I’m saying, for all of this governance and over… oversight from the state in China. Is China destined to be number one? The trajectory in the last 5 years or so is not so good. So, go ahead, Alex.
Alex Boome:	Well, I just, you know, we’ve got here on the slide the, you know, that sinking housing market, and I think your, you know, the chart of, you know, losing 230 million people really puts that in.
Allen Morrison:	It doesn’t help. Doesn’t help, does it? Yeah.
Alex Boome:	Yeah, yeah, yeah.
Allen Morrison:	I think they should go to, you know, some of the emerging markets and open their doors and say, bring them in! We’ll bring in 200 million. India or Africa, you know? It’s not gonna happen.
Alex Boome:	On the education front, though, they are looking to bring in more foreign students, which is… which is a plus, a step in the road.
Allen Morrison:	I think it’s a plus for the students, and I think it’s a plus for China. I would be, if I was, you know, 18 again, I would think very seriously of going to China, and a fascinating place, and brilliant people there. There’s a lot we can learn from China.
Alex Boome:	Absolutely. Misreading China, I was just, you know, coming to that. This is sort of getting closer to the meat of what are we getting wrong?
Allen Morrison:	Yeah, yeah, a lot, a lot. So, the first is we misunderstand, we underestimate their… Their strengths and weaknesses. They, they, we just… we get it wrong, constantly. And, to me, that suggests, some great opportunities for smarter strategy. One of the strategic mistakes we make in China is… is we believe that what happens in China can stay in China. And there’s companies that are really doing their best to say, look at, you know, China’s different than the rest of the world, I’ll just have a made-in-China strategy. And that may seem very appealing, and there’s some merit to that, but I would say that It’s very difficult. There’s essentially only a, you know, a select number of companies that have been able to pull this off. One of them is, like, Honeywell, Yum! China, they’ve spun off, you know, Yum, I’ve done a lot of work with them, and historically…
Alex Boome:	Chucky Fried Chicken, or is it?
Allen Morrison:	Yeah, yeah, Kentucky Fried Chicken, and they split that off. It’s a completely separate company from KFC, the rest of the world. And they’ve done that. They’re now listed, Yum! China’s listed as a company. They just, by the way, bought Yum! China’s Pizza Hut business, and they’re rolling that into this separate company. And the reason is, is that then they can act independent of the rest of the world. Volkswagen’s doing that, putting $4 billion into creating a standalone, basically a standalone operation, to be determined whether that’s successful or not. But one problem is, your reputation. and governance issues. And we see huge problems, you know, with Western companies in China. Some of them are just natural and normal, I mean, stupid, cross-cultural mistakes that are… I think the intention is fine. But we have, you know, companies, you know, that are making those Dolce & Cabana, you know, just dumb things that they’re doing, you know. They’re having advertising, promotional videos. You know, eating with chopsticks, you know, and sticking the chopsticks in bowls of noodles and stuff. Just really dumb things, or… or like McDonald’s. I mean, just this horrible… Guangdong Province, they had a big sign in the window. Saying Black people are not allowed to enter the restaurant. Well. Yeah, I don’t know, the Chinese go, okay, well, whatever, but the rest of the world goes crazy with this stuff. very offensive, but these are what I would say… these are what I would say just normal cross-cultural mistakes, that if you do business in China, be prepared, somebody’s got a video camera, and this stuff gets picked up. But there’s also, I think, more… I think more… even more damaging, or more worrisome problems. That is filtering free speech to appease the Chinese. So, you see a big number of Western companies, you know, Marriott, Swarovski, Medtronic, Mercedes, and so on. Basically saying, you know, we’re so sorry, genuflexing, we’re sorry, we’re sorry, you know, we’ve got, you know, pictures of Taiwan, and the Dalai Lama, and so on, and the government’s pounding them, and we’re, oh, we’d never do this, never do this. Which is great in-China-for-China strategy, but the rest of the world says. Wait a minute!
Alex Boome:	Hmm.
Allen Morrison:	You’d say that to the Chinese, why wouldn’t you say that to your home country?
Alex Boome:	Yeah, no.
Allen Morrison:	So, so this is causing problems.
Alex Boome:	Hmm.
Allen Morrison:	The final one, which is also causing problems, is actually compromising core values to secure business. So, you know, do you contribute to China’s social credit network, a system you would never support in the United States or London? Or if you’re Apple, which has an incredibly strong policy about sharing information, would you do that? We would never do that except in China. What they do there is have a partner, turn the encryption keys over to the partner, and the partner is controlled by the state. So, that’s an in-China-for-China strategy, but the world is not dumb, and the world catches on. So, can you do this? What stays in China doesn’t stay in China.
Alex Boome:	Hmm, yeah.
Allen Morrison:	The final one is, you know, being the best in China is going to rule the day, win you over. It’s not… it’s not so much the case. China and many know that China has this Made in China 2025 policy. They’ve targeted certain industries, 10, And they’ve said, look it, in these industries, we… we… China, Chinese firms are going to absolutely dominate. Doesn’t matter who you are, doesn’t matter how good you perform, we’re going to be at least 80% market share, 90%, So, if you’re Tesla, if you’re Boeing, If your advanced rail company, doesn’t matter how good you are. you will be relegated to second, third tier. So being the best is… isn’t enough, which then raises the question. You know, where do we go from here? Some clarifications. China does not want to drive foreign companies out. China does not want to decouple. If… it cannot decouple if it wants to lead the world. China does want to tilt the playing field. Right? If your firm is in a dominant position in China, or if Chinese firms are dependent on it, expect a rough ride. foreign firms in China prepare to assume subordinate roles, particularly in targeted industries. So what should we… what should we do? Would you go back a second?
Alex Boome:	Just go back one, Allen. The… in the book, the example of the high-speed rail, I thought was compelling. And kind of speaks to this. Could you give us a quick synopsis of that, and how that worked out for some of the foreign companies that were leaders, bringing that into China?
Allen Morrison:	They invite them in, and they set up partnerships. The partners, basically, as one condition for working in China, are asked to give the Chinese access to their technology. It seems to make sense. By the way, the Chinese, we don’t need to worry about them, they’re basically dumb and lazy, so they’ll be dependent on us forever. Well, the Chinese weren’t dumb, they weren’t lazy, and they worked very hard. Over time, the policies change. And over time, the Chinese competitor grows in power, and then they subjugate the Western firms. The Western firms are relegated to also-ran positions in China. The government then pours money into advancing the technology in China. They poured tens of billions of dollars more than the Western firms could ever afford into the technology, so certainly for high-speed rail, the Western companies are now wholly dependent on China for the technology. So it was not just in China. It’s a multi-stage approach, not just in China.
Alex Boome:	Right, yeah, and they’ve taken that now, that technology, as a global competitive advantage.
Allen Morrison:	They’ve taken that technology, and through their piggybacking on Belt and Road, they’re now, you know, saying, well, you know, Pakistan, if you want rail, don’t you want rail? Oh, we want rail, all right, well… you’re gonna… we’re gonna give you a bunch of money, which you’ll borrow for us at favor… at rates that are favorable to us, and here’s the firms we want you to use. And so it’s that… it’s that… what we call the enterprise China. It’s the ability of the state and and industry to work hand in glove. And it’s a brilliant model, however, it has some significant weaknesses.

So What Should Companies do? / Recommendations

Alex Boome:	Looking at those, I guess, those weaknesses, there might be opportunities. What can Western companies do?
Allen Morrison:	Well, the answer isn’t simple. Should you… just some questions. Should you stay in China? Should you leave China? Should you localize everything? Should you decouple as fast as possible? And I would just start with a very basic question for… for… Those in the audience who are looking at this from a company strategy perspective. And that is, you know, what is China to your company? And this is a very basic question, very… relatively few have tried to answer. Is… are you there? Is it a market? Is it a supply base? Is it technology? Is it a competitor? Is it a source of risk? Is it all of the above? What is China? And, and, you know, I think boards need to get, because CEOs are… they’re… you know, they’re distracted by a gazillion other things, and unfortunately, it’s the boards who are putting a lot of pressure on CEOs, unfortunately, because it should be the… probably the opposite. But, hey, what are we doing with and for China? And, and that requires some strategic rethinking. Until leaders answer that question, they can’t know. really what to do about China. So let me talk about this. I’m going to just put this framework up, and we could spend hours on each of these cells. And what I want to do is to just get people to think about these two dimensions. The dimensions are, I’m in China, Basically, for upstream. So I’m in China because I want to source raw materials from China, right? or I’m in China, For downstream, which is for the market, giant market. So we have those two dimensions. Now, there are companies that are what we call below-the-radar players. There’s actually over a million of these companies, Western companies, in China. They’re just kind of there. They’re not… they’re there, and by there, I mean they’ve got 48 employees and an office. So they’re really not doing much. There are those who are upstream who are there sourcing, you know, the factory of the world, you know, and they’re there because they’re getting 80% of their supply chain is channeling out of China. There are companies like market players, like, think about Rolex, for example. They’re not making, you know, assembling watches in China, but they’re there for the giant market. And then there’s dual players. Which we can talk about. These are companies like General Electric, like Boeing, that are supply-chaining through there, but they’re also using China as a big market. So these are the four, kind of, strategic postures, and all of these have great opportunities But, you know, there’s some big risks as well. Below the radar companies, they’re at risk of being just overwhelmed by a highly competitive enterprise China. You’re not gonna beat the Chinese for long if you’re a below-the-radar player.
Alex Boome:	Allen, just in the interest of time, we’ve… this is in-depth in the book. If you could kind of go through this, because I really would like to get on to. recommendations.
Allen Morrison:	Let’s do this here, and I want to just say, market players.
Alex Boome:	Yep.
Allen Morrison:	Take a long-term perspective on China. Building options requires time, effort and energy. Strengthen your China-centric leadership capabilities. I continue to be shocked at giant Western companies that have, at their senior SDP ranks, two people who are fluent Mandarin speakers. Traditional fly-in, fly-out appointments of the past are bound to fail. We need longer-term commitments from Western folks, or in China, three years isn’t going to be enough. We also need to be much smarter in utilizing local Chinese talent than we have been. We need to make sure.
Alex Boome:	Thank you, Allen. Allen, maybe if you could turn off the, There’s a couple of questions that have come in. We’ve got ample time, so I think I’ll start with the first one. We have a Thunderbird grad, so it’s a pleasure to hear from you. The question is, your strategies largely address competing in China against Chinese importers at home. This came in a bit earlier. But the fastest-growing front now seems to be third markets, like Southeast Asia, Latin America, and Africa. Where enterprise China shows up with estate financing and Western firms have no tariff wall to hide behind. How should Western companies compete against the monolith on that kind of neutral ground? So, in… I guess, in these… these third parties of Southeast Asia or Latin America. So, Western…
Allen Morrison	Yeah, that...
Alex Boome:	That’s a great question.
Allen Morrison:	Question, and it’s good to hear questions from Thunderbird alums. So, first thing that I would like to say is, you know, it’s… it’s interesting that China is, as I said, they don’t want to decouple, but China is also, I think, putting a circle around Southeast Asia, and they’re trying to engage Southeast Asia, and just, like. the U.S. has, you know, this mentality of, you know, we’re going to own the Americas, China wants to own Southeast Asia. Now, I will… I will add that, it becomes complicated. Number one is China’s Belt and Road Initiative has had some successes, but they are stepping away quite, with quite a degree of alacrity from their Belt and Road initiative. It has not worked particularly well. It’s worked well in terms of spending money, but they haven’t got great value out of that. Number two is, in terms of Africa, they… they are not viewed as, a welcome partner in, in, particularly the extractive industries, they’re viewed with great suspicion. yes, we’ll take your money, and then the Chinese say, yeah, but we want to impose conditions, and the Africans are increasingly saying, we’ll take your money, but we don’t want the conditions, and so this is not…
Alex Boome:	In the book, Allen, you mentioned that a lot of the laborers on some of the initiatives are Chinese.
Allen Morrison:	Are Chinese, yeah. One of the conditions is, yeah, we’re going to employ 40,000 workers to build this dam, and 39,000 will be Chinese. So, hmm, how is this a good deal? So, I’m just saying, I’m not saying Belt and Road is dead, it’s not dead, but it’s certainly viewed with more suspicion, and the Chinese government is more reticent than it had been in the past, because it’s not getting its loans repaid. Now, regarding Southeast Asia, it’s a tricky thing here. What I will add is that, as I mentioned, the China plus one strategy, you’re seeing countries like Vietnam, Indonesia, Malaysia. Thailand with near-explosive growth in manufacturing. And the Western firms are saying, well, you know, we’re at risk in China, let’s go to Vietnam. And and the challenge, I would say, with that approach is that many of the… much of the ecosystem in China, or in Vietnam, is actually, heavily influenced by Chinese. So, you’ll say, look, I’m gonna partner with this Vietnamese manufacturer. And then you do the digging, and it’s like, yeah, but actually the Vietnamese manufacturer is 42% owned by a Chinese manufacturer we were already doing business with in China. So, there’s a lack of transparency in the ecosystems in Southeast Asia that should be worrisome. Because you end up doing business with the same firms that you were doing business with in China. Now, there may still be good reasons to do that. But just a caution there. China is, China cannot… it is not in their short… it’s not in their… we’ll put it this way, their commercial interests to manufacture in Southeast Asia, except to the degree that it meets geopolitical objectives.
Alex Boome:	And what a… part of the question was in Latin America, so you talked about the spheres of influence, but, what… what’s… what’s happening in Latin America vis-a-vis China firms, China Inc. And how can the Western firms, compete in that third-party market?
Allen Morrison:	Yeah, there’s a couple of issues here. First off, you are seeing pushback, so we’ve seen this in Panama Canal with Hutchison Ports, and, you know, the U.S. is kind of saying, you know, we don’t want the Chinese, you know, running that, which… You know, I understand the argument, I’m not sure I follow all the premises upon which it’s built. There’s two issues with Latin America. One is the market. The market is significant for Western firms. The second is Latin America’s a manufacturing base. The problem with Latin America, and I’ll just give you one example. With one very ma… probably the largest, manufacturer of home appliances in the world. They’ve been sourcing from China for 30 years, and they’re like, geez, we gotta diversify. So they’re looking at where can we, you know, source microwaves and toaster ovens and hair dryers and so on. The problem they’ve been having is they’re… with the exception of parts of the Mexican, you know, ecosystem. There’s no one in Latin America who has the capacity to take these things on. They don’t have… you go to the Brazilians, and they’re like, well, yeah, we were looking after Brazil. You want to invest tons of money, we will partner with you. But they don’t have the capacity right now. And so the Chinese are saying, well, maybe we should manufacture there, but it only makes sense for them to do that if they’re then going to export into the U.S. And it’s just not a smart move. I mean, if you want to… if your objective is the U.S, then just invest in the U.S. So it… it… it’s… It’s not so compelling, the Latin America.
Alex Boome:	We’ve got another question here from Michael. Does China provide a model other countries should, and I put in here, can follow? If so, which countries would you estimate are mirroring China? How? can… should the U.S. and other countries in the West become more like China to better… to better compete with it? That’s a lot in that question.
Allen Morrison:	Well, just given the sake of time, I’ll just talk about India for a minute, because that’s typically used as the foil for China. I was in Delhi about 3 weeks ago, talking to a whole bunch of CEOs on this very topic.
Alex Boome:	Hmm. Hmm.
Allen Morrison:	Should, can, should, will India, you know, mirror the China strategy? And the answer is, there’s some things to learn, but no. India is… is a league different. They do have the supply of labor. The advantage to India is they do have some very smart, highly, highly educated people. They do have some technology skills. Culture is totally different.
Alex Boome:	The…
Allen Morrison:	Ecosystem, relationship with the state, language, the overhang of the caste system, and on and on and on. It’s just a very, very different world. Can they, copy China in some sectors Maybe. Maybe, and that would… that would be technology. But the relationship with the state is fundamentally different than… than it is with China.
Alex Boome:	And that would, then beyond India, no real contenders that would be able to, look at mirroring China.
Allen Morrison:	Well, I think, you know, the Gulf states have certainly been looking at China. They go to China all the time. What can we learn? How can we partner? Saudi Arabia has been knocking on China’s door, trying to understand how do we create this ecosystem? And there is… there… there is certainly some lessons in terms of Of, of how you, You know, how you can partner. The advantage China has is just one of scale.
Alex Boome:	Yeah.
Allen Morrison:	So, they can create an ecosystem where the partners in the ecosystem have global scale.
Alex Boome:	Yeah.
Allen Morrison:	The Saudis cannot do that.
Alex Boome:	Yep, yep.
Allen Morrison:	And… and so that… it’s a scale issue. The model has got certain merits, But also some significant limitations, particularly around the issue of entrepreneurship.
Alex Boome:	Allen, the elephant in the room, we’re in a time of geopolitical upheaval, I would suggest.
Allen Morrison:	God.
Alex Boome:	I’d like to have you share with the audience, what are your views on where we are now, and more importantly, you know, the way forward?
Allen Morrison:	Well, you know, I have strong opinions on the way forward. I’m not sure the politicians right now care about my views, about the way forward. I think where we’re at today, there is a certain logic behind that. There’s always a logic behind what happens amongst politicians. I think is what the U.S. is doing in terms of trade policy. I understand the logic behind that. I think it’s highly short-sighted, and I think we will… We’ll reverse course maybe 80% after the next election, not 100%. You know, ultimately, I’m a globalist. I think invariably, you know, with fits and starts, we will become increasingly global as a world, and I think this is a setback. As I said, I understand the logic, but, and I also understand, the logic behind what the Chinese are doing. And rather than trying to convince the other side they’re wrong, I think we need to find better ways to work together, and certainly shape the playing field. Everyone has a right to do that. But in a way that respects the principles of free trade and respect. We are going to be more global, and we are going to be more technology-centered over the coming century, whether… and the alternative is we move backwards, and I don’t think the public wants that to happen.
Alex Boome:	Well, you’re speaking the spirit of the Hinrich Foundation and advancing mutually beneficial and sustainable…
Allen Morrison:	Completely. I love what the Hinrich Foundation is doing.
Alex Boome:	Yeah, I’m…
Allen Morrison:	I’m a huge fan. I applaud your… your… what you’re doing. That’s why I’m participating today, because we are.
Alex Boome:	Thank you so much. Allen, we’ve got just a couple of minutes. In closing, what’s the big key? I mean, I think we’re kind of there with your last comments, but some of the key, takeaways? what are, what would you like the audience to think about strategically? And my question is, when can we expect the next book?
Allen Morrison:	So, so listen, the, the, Some, some, some takeaways. Number one is clarity around strategy. Now is the time to make sure we don’t have a sloppy thinking, be smart about strategy. Number two, no matter what you do, you’re going to need to invest more in China, or to protect yourself from China if you’re a wholly domestic firm. Take it seriously. And by investing more, I don’t mean you’re pouring money in, I mean investing time, effort, energy, management, attention. Don’t short, change this. Number three, I would say is one of respect. We need more respect for the Chinese. Chinese need more respect for the Western perspective. Both sides need respect. and greater empathy. I have no problem at all with people promoting self-interest. But let’s do that from a respectful environment, Next book, I have a book coming out, just before Christmas, called Stalled. The publisher is Simon & Schuster, be a big global book. I’ve been working on that for the past 2 years. It’s, it’s drafted and going through the editing process right now. It’s really about the politics of innovation, basically saying, look, the enemy of innovation is not bright ideas. It’s not someone in a lab coming up with a great technology. The enemy of innovation are the people who work at the company, who destroy or who make sure that innovations stall out Before they actually reach the market. And so it’s about the internal politics that stall organizations from innovating effectively.
Alex Boome:	Wow.
Allen Morrison:	So that’s my, that’s my next project.
Alex Boome:	Fantastic. So, I thank you. I trust, the Hinrich Foundation Book Talk has been, with, with, Dr. Allen Morrison has been fascinating for you, as it has been for me, and I thank the guest, and, Allen, thank you so much for your rich insights.
Allen Morrison:	You’ve been wonderful. Wonderful to connect with people again, and Look forward to the next one of these.
Alex Boome:	Thank you.