Pankaj Ghemawat on Chinese Companies and Corporate Power

Pankaj Ghemawat, Global Professor of Management and Strategy at New York University’s Stern School of Business and Anselmo Rubiralta Chair of Strategy and Globalization at the University of Navarra’s IESE Business School, sits down with Foreign Affairs Editor Gideon Rose to discuss his and Thomas Hout's article "Can China's Companies Conquer the World" in the March/April 2016 issue of Foreign Affairs.

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A rush transcript is below.

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ROSE: Hi, there. I'm Gideon Rose, editor of Foreign Affairs, and welcome to another edition of Foreign Affairs Focus. We have a great honor and privilege today of having with us Pankaj Ghemawat who is a Professor of Global Strategy at the business school of the University of Navarra, as well as a Professor of Management and Strategy at NYU Stern, the school business at NYU, and he's the co-author with Thomas Hout of a great piece in the new issue of Foreign Affairs on Chinese companies. The article is titled, 'Can Chinese Companies Conquer the World?' And it is really interesting because it helps shed light on an under appreciated aspect of economic power, which is the nature and structure and capabilities of a country's firms. We tend to look at aggregate economic indicators or national level things, but essentially Pankaj, you argue that we have to go more granular than that and look at the actual nature makeup and power of a country's firms to really understand whether we'd be able to compete over time. Is that in fact important and why don't we hear more about this kind of analysis?

GHEMAWAT: Well, I think a lot of it is convention. We're used to using undifferentiated measures of economic power or things like GDP etcetera, which have got their own limitations. But in a situation where multinational corporations account for typically 75%, 80% of a nation's trade, foreign direct investment, and  then revenue terms a comparable share of GDP, it seems that it's a little bit hard to make aggregate conclusions without actually looking at these big players.

ROSE: So how does looking at firms shift your perspective from looking at aggregate national figures?

GHEMAWAT: Well, because I think that we have some frameworks for analyzing the strengths and weaknesses of firms that actually, at a minimum should provide some input into prognostications about how well China or the US is likely to do. So, specifically in the context of China, we did a study published in the Harvard Business Review about seven or eight years ago where we looked at, okay, within China, which sectors do Chinese companies lead in, which sectors do foreign companies lead in. We re-did the analysis for the current Foreign Affairs article and we were frankly very surprised by the results.

ROSE: Why? What was so surprising?

GHEMAWAT: Because we'd expected to see much, much more movement over a seven, eight year period.

ROSE: Movement in the sense of Chinese companies becoming more dynamic, global companies?

GHEMAWAT: Exactly. So, if one sort of assumed an equivalence or parallel movements between national economic indicators and company level indicators, you would've expected to see since 2006 or 2007 some significant improvements in the competitiveness of Chinese companies relative to foreign multinationals at home. And in fact, with the exception of one or two sectors, there were very few areas in which market share leadership shifted either from Chinese companies to multinationals, or more interestingly in the present context for multinationals to Chinese companies.

ROSE: So would it matter if you had better companies, but no particularly different measures of GDP, let's say?

GHEMAWAT: Well, over time it would contribute to improvements in GDP.

ROSE: So it's not so much that it's a better measure for assessing where you are right now, but it's a better predictor of how you're likely to do in the future?

GHEMAWAT: Exactly.

ROSE: Because a company that actually can grow and become global and dynamic and lead an industry is going to have better prospects than one that's just a follower in other people's footsteps.

GHEMAWAT: That's exactly right and I think I would be more understated in drawing that conclusion if we'd have actually seen significant movement in the relative share positions over a seven or eight period. But given the relative stasis, this starts to suggest that for purposes of medium term forecasting at least, looking at where a country's companies stand in international competition gives you a little bit more visibility into what's likely to be coming up over the next five or 10 years, because upgrading capabilities turns out to be something that you don't do in months, turns to be something that takes years or sometimes decades.

ROSE: So let's push this a little bit. Chinese companies, you're saying, tend to be essentially followers rather than leaders? Is that basically a way of putting it?

GHEMAWAT: By and large, they're followers and not just in terms of technology, which is the first thing that people think about, but we've known for a long time that multinationals tend to exist in industries where marketing and brands are important or where technology is important. In both those categories, most Chinese companies with a few salient exceptions like Lenovo, tend to lag significantly.

ROSE: And what would the characteristics of a company that you want to see? The one that has great prospects for ending up and dominating an area? What would a company like that look like instead of the kinds of companies we see a lot of in China today?

GHEMAWAT: Well, I think Lenovo is one example that people have talked about a great deal. They bought IBM's personal computer business, and that's not that unusual in the sense that lots of Chinese companies are doing foreign acquisitions. What was unusual about Lenovo is their ability to actually integrate that, and their ability to move away from this very simple "Let's centralize everything in China, have the whole thing run exclusively by Chinese managers." So if you look at, for instance, Lenovo's top management team it's about half Chinese and half non-Chinese. Which is extremely, extremely unusual. Or to take another example that I think you'll be hearing much more about in the years to come. Geely is one of China's automakers.

GHEMAWAT: It bought Volvo and when I was meeting with Li Shufu, the Chairman and his people in China in December, I was stunned to realize that they've actually started to share platforms across Volvo's and Geely's, which leads to huge cost savings. And so, I think the Chinese companies that will do well will probably have some characteristics that include an ability to really absorb rather than just acquire or purchase capabilities from overseas, because purchasing is not the same as mastering a capability. They'll typically tend to have more multi-national influence not just in terms of where the technology is sourced from, but in terms of what the top management team, what the board of directors looks like. They'll probably have to move away from this traditional China-centric model, where the traditional Chinese strategy has been "Let's construct the whole supply chain within China," and that ignores basic gains from specialization.

ROSE: In an increasingly globalized world, what is the nationality of a corporation even mean, or why is it important? If Apple is an American company but is building some stuff in China and is having them with taxes in Europe, why does it matter which nationality the company's domiciled in at all?

GHEMAWAT: Well, I think what's playing out right now between Apple and the US government, it's not clear how that's going to get resolved, but clearly the US government has way more leverage over Apple than the Chinese government does. So I think that if you go through the list of the world's largest companies, with very very few exceptions it's very easy to sort of figure out where the sort of center of gravity is. Take the example of, just to move away from the US and China for an instance, take the example of BMW. It has a very global sales footprint, and so, there's some senior managers who used to believe "Okay, you know we've sort of transcended national boundaries, we're from everywhere." If you start looking at the supply chain, 65% of their production, 70% of their labor force is still in Germany. And this is worth remembering no matter how diversified the sales footprint is because if, God forbid, the Euro were to break up, the golden mark or whatever would replace it would probably appreciate significantly, and BMW would have a massive competitive issue associated with that.

GHEMAWAT: So I can think of a few exceptions, but even some of the time tested examples like The Anglo-Dutch companies, Unilever, Shell, are actually moving more towards consolidating and concentrating in one headquarters rather than two. So I think business historians would sort of argue that in fact companies' nationality is perhaps even clearer now that it was say 100 years ago when there were an awful lot of things incorporated in London with a view to doing business overseas.

ROSE: One of the things that I was intrigued by with the article and this analysis is, that it helps reinforce how we know less than we think we do about what's going on in the economy. Our own or other's countries because we tend to ratify conventional statistics, particularly aggregate ones and say, "Well, that's the story." But if you read your piece you come away thinking, "Well, there's lots of stuff going on that we need to look at that may not be reflected in the gross aggregate statistics that we think about." Is that something that is, is it an appropriate take away? And when you're judging let's say the Chinese economy, how does the fact that we just don't know which metrics to use actually play into the game?

GHEMAWAT: Yeah, well, the Chinese economy for a variety of reasons is a particularly good illustration of the point that, if you just look at the macro numbers and don't look at what underlies them, you may draw very, very wrong conclusions about what's happening with an economy. So, I think...

ROSE: What's a good example of that?

GHEMAWAT: Well, so, lots of people look at say the Chinese stock market, specially given the huge run up and then the meltdown that's happened over the last year-and-a-half. Now, what's interesting is that between 1990 and 2013, Chinese stock prices were essentially flat while the country was growing rapidly. So this is a little bit of a reminder that we still have very different economic systems, and that stock prices are way less informative in countries like China, where pretty much all stocks tend to move up or down on a given day, than they tend to be in countries with well functioning capital markets, like the United States. So GDP, stock market levels, these are the most conventional indicators, I think between questions about how accurate the GDP statistics are, and questions and the recent experience with the stock market is a little bit of a reminder that we need to get to fundamentals, and that's what we were trying to do in this article.

ROSE: Which country's firms do the best in your kind of analyses? If you were a country and for even at the aggregate level, if you could just pick a certain country's firms, which firms would that be?

GHEMAWAT: Well, there are clearly different...

ROSE: Even if they were all valued the same way at the current time, the implication of your analysis says that some firms are actually worth more or are better prospects than others. If you could pick one country's firms or a share of one country's firms, which country would have the most dynamic interesting firms with great potential to go forward?

GHEMAWAT: Well, clearly varies by sector, but obviously the US has a huge lead in information technology related things. Which is the topic of much wailing and gnashing of teeth in Europe where I spend half the year living. But to take an example that's almost in some respects the mirror image of China, think of France. Really bad macro numbers, but if you actually look under the hood, there are an awful lot of super French multinationals, and so, at least in terms of potential, if they ever got the labor legislation cleaned up etcetera, companies like L'Oréal, Areva, Dassault Systèmes, etcetera are very very strong multinationals, despite the fact that governmental policies manage to mute the impact on the French economic growth numbers.

ROSE: Looking at the power of the firm and the importance of granular analysis for understanding the world, thank you very much, Pankaj Ghemawat.

GHEMAWAT: Pleasure to be with you.

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