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In China's Disruptors, Edward Tse takes an unprecedented inside look at rapidly emerging Chinese entrepreneurs and their game-changing impact on both China and the world. In September 2014, Chinese e-commerce giant Alibaba raised $25 billion in the world's biggest ever initial public offering. Since then, millions of investors and managers worldwide have pondered a fundamental question: what's really going on with the new wave of China's disruptors? Over the past two decades, an unprecedented burst of entrepreneurialism has transformed China's economy from a closed, impoverished, state-run system into a major power in global business. Alibaba is one of a rising tide of thriving Chinese businesses, and its success has been quickly followed by other previously little-known companies, such as Baidu, Tencent and Xiaomi. Edward Tse is a leading global strategy consultant who has spent more than twenty years working with senior Chinese executives. In China's Disruptors, he draws on exclusive interviews and case studies to reveal how China got to this point and explore what the country's rise means for the rest of the world. 'No one can explain what is happening in China better than Edward Tse' Sam Su, vice chairman of the board and chairman and CEO of China Division of YUM! Brands, Inc. 'A detailed and fascinating study of the changing landscape in China and the entrepreneurs who are driving that change forward. This is a book that will only become increasingly important in the years to come' Chen Dongsheng, chairman and CEO, Taikang Life Insurance Co. Ltd., and president, China Entrepreneurs Forum
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Edward Tse is the founder and CEO of Gao Feng Advisory Company, a global strategy consulting firm, and the former Chairman for Greater China of Booz & Company. He has helped hundreds of multinational and Chinese companies develop and apply their strategies. He has worked with the World Bank, the Asian Development Bank, and the Chinese government on issues related to state-owned enterprise reform. He has also contributed to prominent publications such as Harvard Business Review, strategy + business, Hong Kong Economic Times and China Entrepreneur.Excerpt. © Reprinted by permission. All rights reserved.:
Over the last two and a bit decades, based in Shanghai, Beijing, and Hong Kong, and working in many other cities across China, I have had the perfect seat to watch the extraordinary transformation of the world’s most populous country from economic also-ran to global superpower.
Except, of course, countries don’t transform themselves—transformations are wrought by people.
This book is about the people who are largely responsible for that transformation. Not the political leaders, who, important as they were in creating the conditions for business to take off, are not directly responsible for economic growth. Nor China’s state-owned enterprises, which—contrary to widespread popular belief—have seen their importance in the Chinese economy decline sharply. But, of course, its entrepreneurs—those people who actually set up businesses and grew them by delivering the goods and services that people were prepared to pay for, and in the process creating the jobs that would allow people to buy those goods and services.
Throughout this book, I refer to the individuals who run those businesses and the companies they have established as being part of China’s private sector. But a brief note of clarification is necessary to explain exactly who I’m talking about, as figuring out how much of China’s economy is in private hands—or even what a private business is in China—is far from straightforward. Officially, private businesses have only existed in China since 1988, when the government passed legislation allowing them to exist. That legislation defined a private company as a for-profit organization owned by one or more individuals and employing more than eight people. It is a definition that excludes all those businesses owned and run by individuals that have eight or fewer employees. These are sometimes referred to as individually owned businesses and sometimes as sole proprietorships, and China has tens of millions of them. Also excluded from this definition are the many other Chinese firms that are in effect private. The most numerous of these are “red hat” businesses—companies whose underlying ownership lies with individuals, but which for one reason or another (usually to maintain a relationship with local officials) have registered themselves as collective or state-owned businesses. These companies usually pay a “fee,” typically a few percent of revenue, in return for protection from official harassment. A variation on the red hat business is the “rented collective”—a collective business that is rented from its original owners, who more often than not are the local government.
A couple of examples show how confused company ownership can be. One of China’s most entrepreneurial companies of the last 30 years is white goods maker Haier. Technically, Haier is classified as a collective business under the city of Qingdao, which in theory means that it is owned by its employees and answerable to the Qingdao government. Occasionally, especially in its earlier days, officials would lean on the company to do their bidding; on one occasion Haier took over a money-losing pharmaceutical company in order to keep it running and preserve jobs. While the government may ultimately retain the final say—in the early 2000s, for example, it ruled out the possibility of large collective and state-owned companies being bought out by their managers—Haier’s success has left it effectively an independent entity. Over the last 30 years, there can be no doubt that the biggest force determining its destiny has been Zhang Ruimin, its chief executive and board chairman. Ever since he was installed as Haier’s head in 1984, it has been his vision and will power that has driven the company forward, not that of its ostensible owners, reflecting just how much, in China, especially in business, power and authority continues to be acquired and held through informal networks rather than legal structures.
Huawei, the Shenzhen-based telecom equipment maker, is another company with somewhat confusing ownership. Company spokespeople repeatedly describe their firm as being an employee-owned private business. As with Haier, however, that description makes little sense: for its entire existence, the company has, for all intents and purposes, been answerable to its founder, Ren Zhengfei, despite his officially holding just 1.4 percent of the company’s shares.
Complicating matters further, some entrepreneur-run companies are private but not Chinese-owned. Alibaba, for example, has been majority-owned by foreign companies for many years, thanks to Softbank’s 34 percent stake in the company, Yahoo’s 22 percent stake (which as of February 2015 was about to be spun off into an independent company), and smaller stakes held by other foreign entities. Moreover, what these businesses own is not a Chinese company itself but stakes in a Cayman Islands company that collects royalties and fees from Alibaba’s China-based operations via a string of subsidiaries and “variable-interest entities”—legal structures that in theory offer foreign companies contractual control over Chinese businesses without actually owning them, and so allow them to get around Chinese laws and regulations that bar non-Chinese companies from holding stakes in Internet and other media-related businesses. All of China’s other leading Internet companies use similar vehicles. It’s a complicated setup, and clearly one with risks: if the government were to change the rules, then such businesses could find themselves operating illegally.
This ambiguity about corporate governance structures, combined with questions concerning the quality of Chinese economic data, make it hard to estimate the size of China’s private sector with precision. What we can be sure of, however, is that privately run businesses account for by far the biggest share of the Chinese economy—probably around three-quarters of GDP, and possibly more than 80 percent if we include the country’s 100 million or so farming households, each of which is in effect a small business, and its foreign-invested businesses, almost all of which are owned by private companies.
For this book, it’s not important whether a business falls into one ownership category or another, but what it is doing and how it is doing it—how businesses such as Huawei, Alibaba, Haier, and Tencent are rewriting the rules in China, changing the country in the process, and creating a market that will, over time, have an enormous impact in the rest of the world.
Quibbling over whether such companies are private or not misses the far more important point—that these are hugely entrepreneurial businesses, run in risk-taking manner, embracing innovation and change, and that running them is a group of extraordinary individuals.
In this book I want to show who these people are, what motivates them, and how they think and act. China’s political leaders may have created the conditions under which they operate. But they are the people whose decisions are carrying the country forward. They are creating businesses not just to make money but, as I explore in detail in Chapter 1, as an expression of a far broader and greater mission that includes reestablishing China as one of the world’s leading sources of new ideas, technologies, and ways of doing things. Moreover, I believe that these figures have the potential to help not just China but also the world tackle some of the most troubling issues of the 21st century, among them global energy, food security, and climate change.
Things move fast in China. Almost every day brings new developments that could be featured in this book, be they a multibillion-dollar acquisition, a sudden loss in market share, or a new set of government regulations. At the time of this writing, for example, Xiaomi, one of the stars of this book, was having to simultaneously cope with finding itself China’s biggest smartphone seller, an attempt by Sweden’s Ericsson to halt its sales in India on legal grounds, and government efforts to rein in the power of the United States’s Qualcomm, a leading supplier of the technologies used in the components in Xiaomi’s handsets. From such a position it could plausibly soar further, taking its China strengths to international markets, or find itself pinned back, losing ground as quickly as it has gained it.
Which trajectory it will follow I have no idea. But what I am confident about is that even if Xiaomi were to crash, another Chinese entrepreneurial company—either one of its existing competitors, such as Lenovo, Huawei, Coolpad, ZTE, Oppo, or a new company that no one has yet heard of—would quickly replace it. In short, I am confident that even if we were to witness the most unlikely reversal in fortune for any of the companies discussed in this book, my fundamental message would remain unchanged: China’s future, economically, socially, and—eventually—politically, rests in the hands of its entrepreneurs.
A note on style: throughout this book, I write the names of these people in the standard Chinese way, with the family name first, followed by the person’s given name. Yu Gang, for example, is Mr. Yu. If the person has adopted an English name, as with Alibaba’s Jack Ma (known as Ma Yun in Chinese) or Tencent’s Pony Ma (Ma Huateng), I use standard English usage.
Regardless of whether they have adopted an English name, I am certain of one thing: many more of these figures will over the next few years follow in the footsteps of Jack Ma and Alibaba to become familiar names to Western audiences—because of their astute entrepreneurial skills, and because of the products and services they will bring out of China to the rest of the world.
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ENTERPRISES OF OUR TIME
Zhang Ruimin is a household name in China. Thirty years ago, officials sent him to run a failing maker of poor-quality refrigerators in the coastal city of Qingdao. Today, that company—which he still heads—is better known as Haier, the world’s biggest seller of washing machines, air conditioners, and other major appliances. The company’s revenues—$29.5 billion—and profits—$1.8 billion—easily exceed those of its two largest global rivals, America’s Whirlpool and Europe’s Electrolux.
Zhang’s achievement in taking an ailing collectively owned factory and building it into a world-beating firm is one of the stunning business success stories of China’s reform era. Zhang was born in early 1949, just months before the founding of the People’s Republic of China, to parents who worked in a garment factory in north China’s Shandong Province. After the disastrous Great Leap Forward economic campaign of 1958 to 1961 and the subsequent famine of the early 1960s, Mao Zedong sought to reclaim his power and prestige by instigating the Cultural Revolution, a nationwide political campaign aimed at purging the Communist Party of his rivals and reestablishing the revolutionary spirit that had brought him to power. Across China, countless young people joined this political movement, launching a long period of chaos and upheaval that left a deep scar on the country.
After the initial fervor of the Cultural Revolution died down, Zhang took his first job, in a construction-materials factory. Through the 1970s and early 1980s, he rose through the ranks to become to a member of the factory’s management committee. Along the way, he established a reputation as an autodidact who, despite having ended his formal education at the age of 17, read every business and management book he could lay his hands on. In 1984, Zhang experienced the most pivotal moment of opportunity in his career, though it probably didn’t look like one at the time. He was dispatched to run the Qingdao Refrigerator Factory, the fourth director to walk through its doors within the space of a year. When he arrived, he found he was to lead an insolvent, debt-laden plant. “The workshop didn’t even have any windows then,” he later recalled. “The winter was very cold and the workers had no coal to keep themselves warm, so they removed the window frames and burned them as fuel.”
The one thing in the factory’s favor was that people wanted what it made. Its refrigerators may have been poorly designed and frequently defective, but China’s shortage of consumer goods was so acute that the few people who could afford home appliances would take anything they could get their hands on, regardless of their shortcomings. Of course, this didn’t mean customers were happy if their new refrigerators didn’t work properly. But for many companies, such matters were of secondary importance. With demand rising fast, especially in the countryside where farmers were taking advantage of reforms that allowed them to sell surplus produce at whatever price they could find, manufacturers of home appliances and other household goods rushed to add capacity, certain they could sell everything they produced.
Zhang, however, was convinced that such circumstances would not continue for long, and that inevitably, as supply rose to meet demand, consumers would become more picky. For a business to thrive in the longer term, he believed, it would need a reputation for reliability and quality.
The following year, in an act that is now legendary in Chinese business history, Zhang addressed this issue head-on. In one of the company’s warehouses, he lined up 76 refrigerators that had come off its production line with one problem or another. He asked his staff what they thought they should do with these faulty refrigerators. Sell them at a discount, suggested one person. Offer them to employees, said another. No, said Zhang, we shouldn’t be making such refrigerators in the first place. Taking up a sledgehammer—now carefully preserved in a Beijing museum—he destroyed the first of those 76 refrigerators, then forced his staff to follow suit with the other 75.
His statement could not have been more emphatic. From that point on, the Qingdao Refrigerator Factory (shortly afterward renamed Haier) set about establishing a reputation for quality. Zhang instituted rigorous production standards at his factories. To gain access to better technology, he set up a joint venture with Liebherr, a German maker of high-end refrigeration equipment. Inspired by his reading of Japanese management books, he focused on instilling discipline into his workforce. Work processes were improved, and every employee’s performance was evaluated on a daily basis. At a time when most companies in China were more interested in simply selling whatever came off their production lines, Haier’s focus on establishing itself as the country’s first major appliance brand by producing quality products soon started producing results.
In the late 1980s, confident that he could instill similar standards at other factories, Zhang launched Haier on a second stage of development: to acquire the scale that could make it a major player across China. The company expanded its product range to include water heaters, air conditioners, washing machines, and other home appliances. Despite annual profits of less than $10 million, it listed its refrigerator arm on the Shanghai Stock Exchange, raising $400 million. Zhang used this money to build new factories in Q...
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