Outside Fortress Europe Companion Volume Excerpt
This Global Business Strategy Blog post is based upon unabridged excerpts from Chapter Five, China’s Conundrum and the Clash of Freedoms, in Ten Years That Shook the (Capitalist) World: A Brexit Antidote.
Johnson, M. (2019, 22 March). Belt and Road: Italy support puts EU solidarity on China at risk. Financial Times, p4.
As this GBS Blog post is posted, British Prime Minister Theresa May is in Brussels holding yet more ‘last-ditch’ discussions with the other twenty-seven EU member states about the UK’s pending divorce from the Union: Brexit.
In Italy, meanwhile, Chinese Premier Xi Jaoping is meeting with government ministers for bilateral talks, talking football matches and, no doubt, sipping Barolo paired with a side of Grana Padano (cf. a pint of luke-warm pale ale with David Cameron), probably heralding a boost in sales of this delicate, exquisite combo in ‘pop-up’ trattorias from Bejing to Shanghai.
Thirty years ago, back in Brussels, the UK was holding nuptial meetings with the more clubby twelve European Community members as the ‘1992 process’ took shape and form. In Beijing and elsewhere in China, meanwhile, students were agitating while Deng Xiaoping, the engineer of “socialism with Chinese characteristics”, was contemplating massacre in Tianemann Square. What happened next?
Outside Fortress Europe Companion Volume Excerpt
China’s Conundrum and the Clash of Freedoms
The best time to plant a tree was 20 years ago. The second best time is now.
As we will demonstrate, while China quite liked the idea of economic reform it was less enamoured by political freedom. Fukuyama was very strong in his contention that the two must go hand-in-hand which, as we will demonstrate in this section, was extremely naïve given the two hugely different communist uber-states, the USSR and China. In the paragraphs which follow we will deviate briefly from any semblance of chronological rhythm (to reference Mark Twain’s observation that history doesn’t repeat itself, it rhymes) to understand the contemporary position of China with reference to a single point-in-time where historical outcomes could have taken on a starkly different direction.
The People’s Republic of China, the PRC, emerged as a geopolitical force in the wake of the ending of the long Chinese Civil War in 1949, a victory for Chinese Communists under Mao Zedong (aka, Emperor, Chairman, Great Helmsman) who rebelled against the ruling Nationalists Kuomintang (KMT) party amidst a protracted conflict between China and Japan. The KMT, under its long-time leader and Generalissimo Chiang Kai-shek, had already established a retreat on the island of Taiwan (Formosa) ahead of the 1949 fissure, stashing gold, national treasures and foreign currency reserves in anticipation of a temporary period of exile ahead of a triumphant return to the mainland.
Two of today’s most powerful trading nations, China (PRC) and Taiwan, the original Republic of China (ROC), were established at the end of the 1945-49 conflict. In all of today’s global institutions and forums, ranging from the UN to the International Olympics Committee, PRC is the ‘legitimate China’ while Taiwan is mostly represented under the name Chinese Taipei. The PRC vigorously maintains its ‘One China Principle’ stance within which it includes Taiwan; as does Taiwan, in its case claiming one Chinese nation (ROC) which includes the PRC or, more realistically in recent years, that it is recognised as an independent sovereign state. Regarding unification of the ‘two Chinas’ on Taiwan’s own terms, The Economist notes (Economist, 2017, October 7th): “That fantasy now exists only among a few diehards. These days governments in Taiwan, including KMT ones, claim to rule only for Taiwan, not for all of China”.
(For excellent insights into contemporary China see Jonathan Fenby, 2013, The Penguin History of Modern China: The Fall and Rise of a Great Power, 1850 to the Present. We are indebted to this authoritative account for informing and contributing to the paragraphs, sections and categorisations which follow).
Chinese history is fascinating and colourful, and it is it extremely tempting to ‘stretch’ a discussion of dynasties, warlords, silk roads, colonisation and opium wars into our focus on post-war globalization, just as it would be informative to analyse Chiang Kai-shek’s China’s Destiny alongside Quotations from Chairman Mao Tse-tung (The Little Red Book) for philosophical insights from the two civil war protagonists. But it would be an unnecessary distraction.
Closer to our focus, the Long March of the Chinese Communist rebellion, the Great Leap Forward of dismal economic and social reform, the Cultural Revolution, the Gang of Four and the Red Guards had little impact on the pace of post-Bretton Woods globalization other than delaying China’s contribution to its development and acceleration. Strong evidence for this is provided by the extraordinary technology-focused, export-driven industrial economic development of Taiwan under the equally authoritarian one-party (KMT) government during the period of Maoist mayhem and shenanigans alluded to in the previous sentences.
Five significant periods and/or events relate directly to China’s current – 2018 – position in the history of globalization and, following a brief discussion, we will return to the decade under review in this Chapter.
- The Finalé: China’s long civil war ends (1949)
Interrupted by the Sino-Japanese War and Japan’s occupation of the Chinese mainland and surrounding islands during the Second World War, the Chinese Civil War began in 1927 between the Kuomintang-led (Nationalist) government of the Republic of China (ROC) and the Communist Party of China (CPC) and settled into a protracted clash of fiefdoms led by the KMT’s Chiang Kai-shek and the CPC’s Mao Zedong. As discussed in the introduction to this section, the conclusion to this civil war came in 1949 and laid the foundations for two global economic superpowers, the ROC and PRC, separated by just over a hundred miles of water and a lengthy but always uneasy truce.
- Panda Diplomacy: President Nixon visits Chairman Mao (1972)
Although the US had remained ice-cold towards the PRC and its ideology since the civil war had ended, following the latter’s ascendancy to legitimate status as the ‘one China’ in the UN in 1971 relations did begin to thaw. President Richard Nixon saw both opportunity and threat in the vast country and persuaded his National Security Advisor, Henry Kissinger, to his line of thinking. He was also vivid in his rhetoric. 1bn sounds inconsequential, the ‘1’ guiding our misperception of magnitude according to behavioural science. But, as Nixon observed in a hand-written note to make his point (cited in Fenby): “Chinese Communists … we do not want 800,000,000 living in angry isolation”. That looks like a big number and, of course, it is. (China has 1,415,000,000 souls in 2018; or a measly 1.4bn, rounded down). Typical of Nixon, famed for opportunism and grandstanding amongst other political traits, a meeting with the Chairman was arranged by Kissinger in negotiations shrouded in secrecy and subterfuge. When the get-together was subsequently publicised and spun as a great success by both the US and China, the Chinese door was opened to America’s allies, including a hugely symbolic meeting with old-enemy Japan shortly afterwards. More generally, the meeting is widely acknowledged as the first move by China to engage with the West and as such is a significant milestone in the long march of globalization. Having made this observation, it should be noted that the primary motivation behind Nixon’s visit was to shift the delicate Cold War balance between the USA and the USSR, which at the time resembled a teetering faux-engagement complicated by the Vietnam War. In this, it failed; as Fenby notes: “The Sino-US relationship would become enormously important, but the immediate fall-out from the trip was unimpressive, and the real change would have to wait for a decade, under another Chinese leader, who was repairing tractors in Jiangxi when Nixon met Mao”. That amateur mechanic was Deng Xiaoping, the engineer of “socialism with Chinese characteristics” which defines the contemporary era of Chinese engagement with global capitalism, as we shall see.
As a parting gift following the meeting with Mao, Nixon was presented with two giant pandas, Ling-Ling and Hsing-Hsing, who subsequently proved to be a major attraction at the National Zoo in Washington D.C. In return, Nixon gave two muskoxen: hairy, horny (in the antler-sense), smelly (during mating) mammals.
(China has a long history of Panda Diplomacy, dating back to the Tang Dynasty. In recent years it has developed a business in leasing pandas to zoos worldwide, typically for ten years at around $1m a year with any cubs born reverting to Chinese ownership. Edinburgh Zoo in Scotland currently has two Giant Pandas on a ten-year loan, arranged as part of a £2.6bn UK-China trade deal. The female is called Tian Tian – Sweetie) – and the male is Yang Guang – Sunshine. At the time of writing, the pandas remain unproductive on the cub-creating front but are hugely popular on social media and at Edinburgh Zoo’s PandaCam, although the SquirrelMonkeyCam is more animated!).
- Deng Xiaoping, Modernisation and Special Economic Zones (1980s)
Over many years China has been accused of ‘stealing’ ideas by fair means or foul, an assertion repeatedly featuring in President Trump’s current trade war tweets (also, see the discussion later in this Chapter on the transition from GATT to the WTO). But while the focus in recent years has related to technology and intellectual property theft it is important to note that the Communist Party of China has not been shy of ‘borrowing’ ideas from political science and political economy. Deng had been side-lined on numerous occasions under Mao’s chaotic leadership and had witnessed the disastrous consequences of the Great Leap Forward in both the agricultural and industrial sectors. Moreover, he was no doubt very much aware of the impact of Stalin’s purges of the ‘capitalist’ Kulaks and the subsequent failures of various attempts at collectivisation of agriculture in the USSR. Multiple ‘private land-plots’, in contrast, were in large measure the most productive component of Soviet agrarian output and it was this model of agricultural reform that began Deng’s transformative approach to Chinese economics. As Fenby comments:
In the past, a peasant had been part of a huge, amorphous commune or collective run by cadres, who might know nothing of farming, and subject to orders from political bosses. Now, individuals could better themselves by their own effort and skills. It was the greatest change seen since the early Communist land reforms, and a frontal attack on everything done since the early 1950s. It was also stunningly successful.
From this foundation, Deng’s focus switched to an old idea which had been around in China for many years but never implemented in any systematic manner: special development areas. Looking at economic development initiatives from as far afield as Ireland (the southern Shannon project), post-war South Korea, closer to home in Guangdong province and across the water to the extraordinarily successful Taiwan, Deng made the following oft-cited (and adapted) observation: “We must integrate the universal truth of Marxism with the concrete realities of China, blaze a path of our own and build socialism with Chinese characteristics.” The means of achieving this evolved into the creation of Special Economic Zones (SEZs) and we are again grateful for the concise and informative commentary of Fenby:
In May 1980, [the] fishing village of Shenzhen was declared the first SEZ, chosen for its position just across the border from Hong Kong. It was followed by zones at Zhuhai, near Macau, and the old treaty city of Shantou, in east Guangdong. A fourth SEZ was opened in the one-time tea port of Xiamen in Fujian, on the Strait opposite Taiwan, which, political differences notwithstanding, was to be a big source of investment and trade.
The reference here to Taiwanese investment is of huge contemporary significance, but as the SEZ’s success was replicated and expanded, primarily around eastern coastal areas, south towards Hong Kong and with special attention to cities such as Shanghai, the city being allowed to attract foreign inward investment and expertise, for example, by establishing international joint ventures (IJVs). The SEZs were focused almost exclusively on exports which earned foreign currency reserves and effectively financed domestic economic growth and development, a process accelerated by restrictions on capital outflows and a steadily declining yuen over a period of years. China under Deng was characterised by market liberalization and FDI, concisely paraphrased as ‘one country, two systems’, later to become the philosophy underpinning the Special Administrative Region (SAR) status of Hong Kong and Macao. For the first time in its modern history, China had successfully synchronised agricultural and industrial economic reform, although it should be noted that the benefits accrued went largely to eastern-coastal and southern regions at the expense of the west and the vast hinterland in between the two extremes.
- Students protest; Gorbachev visits Deng; the tanks roll (1989)
As the end of the 1980s approached ‘Western’ firms (including companies from Japan, Taiwan, South Korea) saw political stability, low-cost manufacturing potential and, further down the line, a huge consumer market in the making in China. Sitting in his small office in Washington D.C. Francis Fukuyama became excited about the end of history as he saw it (the triumph of liberal democracy), particularly given the twin freedoms of perestroika and glasnost emanating from speeches being given by Mikhail Gorbachev, the thawing of the Cold War and the subsequent collapse of Comecon and the Soviet Union. It sounds harsh, but Fukuyama’s analysis was shallow, particularly regarding European social and economic history. A simple comparative analysis of the two communist superpowers (USSR and China) and their development throughout the 1980s would have revealed sharp contrasts. As the 1980s progressed China grew ever stronger while the USSR became bogged down in an extremely messy military engagement in Afghanistan, a conflict it was losing, badly. China was one country with a long history, run under an extremely strong, highly centralised controlling party, the Communist Party of China (CPC), and a fiercely loyal one-nation military, the People’s Liberation Army (PLA). In contrast, the Union of Soviet Socialist Republics (USSR) was a fragile union, a federal hydra of unsettled nation-states with hugely disparate historical contexts, whose biggest misfortune was being geographically proximate to Stalin’s Russia at the end of the Second World War (see the earlier section on the fall of the Berlin Wall and the 1989 revolutions). While the Soviet Armed Forces may have been loyal to their Moscow masters, they were also used violently against Soviet satellite states on occasion, for example, in suppressing the 1956 Hungarian Revolution and for the invasion of Czechoslovakia during the Prague Spring of 1968. In the latter case, the Soviet Army was joined by Warsaw Pact members, an engagement which was essentially the equivalent of one NATO country invading another.
With these observations made we can see through the naivety of Fukuyama’s thesis but, as this section’s heading suggests, Deng was facing a conundrum: students in China were agitating in campuses across the country, especially in the more prosperous areas. Given the spectacular success of his economic reforms, Deng pondered how he should respond to the university student’s demands which were broad-ranging in scope (Fenby):
At dawn on 18 April , several hundred undergraduates mounted a sit-in in front of the Great Hall of the People. They demanded that the leadership back Hu’s views on freedom and democracy, admit that the campaigns against spiritual pollution and bourgeois liberalization had been wrong, publish information on the incomes of state leaders and their families, allow private newspapers and freedom of speech, raise funding for education and the pay of intellectuals, lift restrictions on demonstrations in Beijing and hold democratic elections to replace those who made bad decisions.
It was quite a laundry list and the Politburo was divided on the degree of liberation which could be conceded without disturbing the delicate balance of powers between the state, the party and the PLA. In the Chinese constitution of the day the Politburo of the Party had the greater authority, and ultimate decision making was in the hands of the Politburo Standing Committee (PSC). Deng was one of the ‘Elders’, a veteran of the Long March; he had been on the receiving end of the infamous leadership purges, had witnessed the disastrous Great Leap Forward and, perhaps most important of all, had observed the role of students in the philistine-like destruction embodied in The Cultural Revolution under the guise of the (student) Red Guards. At that time the students had lobbied for influence and, with Mao’s approval, went on an orgy of destruction: once the student genie was released from the bottle it had proved almost impossible to restrain.
It should also be noted that the student movement in Tiananmen and elsewhere was not a simple copycat of what was happening in Central and Eastern Europe. There was a long tradition of student agitation in pre-communist Chinese history and there were many factions in the student body who pitched their tents in Tiananmen Square and marched daily in huge numbers, their ranks swelled by artists, teachers, historians and journalists.
Regarding Deng, as early as 1988 he had observed and greatly disliked the emerging impact on the USSR of Gorbachev’s glasnost and perestroika freedoms and reforms. By coincidence, Gorbachev made an official visit to meet Deng for a summit in Beijing on May 15th, 1989 and had to enter the Great Hall by a side entrance as more than 300,000 protestors marched on Tiananmen. International reporters covering the summit, meanwhile, turned their attention to the protestors and their wish lists. China in general and Deng, in particular, had lost face, both directly with their great communist rival the Soviet Union and, more broadly, with the world at large. There was extreme tension in the CPC leadership with the most powerful group then (and now), the PSC, urging restraint. As a veteran of the Long March and representing the ‘Elders’, and with no formal constitutional power base, Deng sent in the tanks. As Fenby observes:
The Standing Committee of the Politburo had relinquished its constitutional authority to the Elders. If there had been any hope of political modernization accompanying the economic reform, it was killed by the decisions taken.
The capitalist community and Fukuyama-followers watched intently: in the absence of political freedom, what next for Chinese economic reform?
- Deng’s Southern Tour and reaffirmation of China’s economic reform (1992)
Thus far we have aimed to contrast a complex series of events (in Eastern Europe) with a parallel series of events (in China) to address a common theme: the nature of change and ultimately the discussion leads to the appropriate strategic response by companies to it. The atrocities committed in Tiananmen Square and the broader discussion of human rights, democracy and dissent, liberal versus conservative, old versus young and related controversies are beyond the scope of this book but are central to its context. Capital had flowed to China from Western firms in anticipation of bumper rewards, which is what capital does. Billions had been invested but asset repatriation, expropriation and nationalisation have plagued FDI in the past, especially in countries rich in resources but opaque in political governance. After Tiananmen, there was a deep breath taken and held by companies who waited to see how the dice would roll: what had widely been seen as a safe bet now had the nasty taste of a highly speculative punt (see the discussion relating to emerging markets in Chapter Five, Analysing Global Markets and the Intelligent Company). The voice of reason and the group with the formal power base, the PSC, had been overruled by the man who’d seen it all and was wholly associated with the successful economic reforms. And Deng was old and looked as though he might die. Your author was involved on the fringes of an extraordinary conference held in Bangkok in 1991, hosted by a manufacturers’ association whose members had made huge investments in the southern SEZ Guangdong Province and who had also transferred proprietorial technologies to their Chinese joint venture partners. The three-day event had a simple theme: The Impact on Chinese Economic Reform if Deng Dies. Uncertainty was huge and historical precedent didn’t exist. A methodology known as Delphi was used, a process which relies on ‘expert opinion’, not dissimilar to the ‘talking heads’ invited to speak on cable news channels in a ‘breaking news’ scenario. The experts here were professors of Sinology, experienced journalists, military generals, former ambassadors and so on. Three scenarios were brainstormed then evaluated on their likely outcomes: (i) economic reform retardation, based upon the primary assumption that the ‘old guard’, the Elders who wielded great informal power, would put the brakes on reform, reflecting China’s past and observations of the 1989 anti-communist revolutions in Central and Eastern Europe; (ii) economic reform acceleration, based upon the primary assumption that Deng, already worried about political freedom and widely acknowledged as the individual behind the Tiananmen massacre, had applied the brakes and, upon his death, the younger generation would release the growth agenda; (iii) steady progression, no significant change, based upon the primary assumption that the political climate was calm, there was no significant backlash and that ‘socialism with Chinese characteristics’ was indeed highly viable. The experts were then requested to assign a probability to each scenario. For information, the following were the estimates: (i) 15%; (ii) 20%; (iii) 65%. The companies then had to create their own Plans A, B and C, assuming they trusted the experts. There was one small problem: Deng was very much alive and, if Mao was anything to go by, could well be that way for a decade or so. At least a benchmark had been set for the investors which could be used as a baseline for continuous monitoring and flexible strategic response but for three years there remained extreme uncertainty and please note that this was not a risk assessment for market entry where the luxury of a go/no go decision was under consideration (see Chapter Seven, A Practical Framework for Global Business Strategy Success). Billions of dollars of capital had already been committed. And for more context, in the late 1980s China was in negotiations with the UK regarding the handing over of Hong Kong when its lease expired in 1997. As Chris Patten, the ‘Last Governor of Hong Kong’, observed, an impatient Deng, no doubt with a view to his declining health, told Margaret Thatcher that the PLA could simply ‘march south and take it now’ (Patten, 1998). They could, but they didn’t, apparently fearing ‘bad publicity’. Beyond irony.
So, the world watched and waited, totally impotent, dealing with an autocratic, ageing, senile dictator who had over-ridden the most powerful group within the CPC when he sent the tanks into Tiananmen. And then, as Fenby chronicles:
On 15 January 1992, though in weak health, Deng launched his counter-offensive [against internal opponents], the last major action of his life and one which would set his decisive stamp on the evolution of China into the twenty-first century.
This manifested itself in a train journey in 1992 which became known as ‘Deng’s Southern Tour’ during which he made the following statement (cited in Fenby):
‘We should be bolder in carrying out reforms and opening up to the outside world and in making experimentation; we should not act like a woman with bound feet,’
And for the aftermath, we turn to Fenby once more:
The SEZs boomed. Foreign money poured in. Western firms saw the cost benefits of using Chinese labour. Modern machinery was imported. Tens of millions of migrant workers crowded into the development zones. Annual growth soared. The seeds of a middle class began to emerge, made up of entrepreneurs and well-connected businessmen who could use their political contacts to move ahead. The generally peaceful international climate provided the essential context for rising exports and inward investment. China’s role as assembly shop for the world became irreversible.
In 2018 we know that China has far greater ambitions than being a simple ‘assembly shop’, i.e. providing low-cost OEM supplies to global brands. But by the mid-1990s the creation of the SEZs had transformed China’s economy. Four key factors explain this:
- An autocratic political system under the CPC enabled the rapid mass movement of people into newly created supercities either built upon established conurbations such as Shanghai (which saw its historic architecture violently bulldozed) or created from scratch.
- The same political system provided the surety and stability so sought after by executives making FDI decisions.
- Whereas initially FDI was only allowed for the creation of partnerships with local firms, over time investment in wholly-owned subsidiaries became possible alongside international joint ventures (IJVs) and $bns of inward investment was attracted, the textbook example of a hugely successful IJV being Shanghai Volkswagen (Frynas and Mellahi, 2014).
- Strict rules of engagement ensured that the vast majority of manufactured goods had to be exported which, in turn, had three favourable outcomes: (a) companies had to produce to international quality standards, thus de-emphasising any negative connotations associated with ‘Made in China’ (see Chapter Six, Strategic Marketing and Global Brand Management); (b) related to this, Japanese, German, Taiwanese and South Korean companies transferred their highest tech manufacturing equipment into China; (c) huge foreign reserves were quickly accumulated, allowing China to invest heavily in mega-infrastructure projects, including hi-speed railways, super-highways (e.g., between Guangzhou and Hong Kong), airports etc. Rural areas also benefited, although the wealth gap between poor and rich grew rapidly.
We conclude this section on China and its contribution to globalization with a lengthy quotation from ‘noted academic’ Zhang Weiwei:
The hallowed dichotomy of democracy versus autocracy is a vacuous one in today’s complex world, given the large numbers of poorly governed democracies across the globe. China’s experience may eventually create a paradigmatic shift in international political discourse away from this old dichotomy of good versus bad governance, in which good governance may look like either a Western political system or a non-Western one. Similarly, bad governance may or may not take the form of a Western political system. In response to Francis Fukuyama, author of The End of History and the Last Man, now is not the end of history, but the end of the end of history. This is not only good for China, but for the West and the whole world, as we can now jointly explore new ways and means for better governance and development in the interest of our common humanity.
Please note that there is no reference cited relating to this quotation at the end of the Chapter because: (i) Mr Zhang, as far as we can tell, is not a noted academic, not that this matters for citation; (ii) it is not taken from an article or conference paper with any editorial credence, which is important. We can let you know the title of the ‘piece’: How China Made It: The political philosophy behind the world’s most remarkable success story. And the source? A propagandic advertisement placed by ‘China Focus’ in The Economist, March 10th, 2018, pp 34,36.
Your right of reply, Dr Fukuyama.
Outside Fortress Europe Companion Volume Excerpt References
Economist. (2017, October 7th). Homage to Formosa: Despite its admirable democratic evolution, Taiwan receives precious little recognition. The Economist, 53.
Fenby, J. (2013). The Penguin History of Modern China: The Fall and Rise of a Great Power, 1850 to the Present (2 ed.). London: Penguin.
Frynas, J. G., & Mellahi, K. (2014). Global Strategic Management (3 ed.). Oxford: Oxford University Press.
Fukuyama, F. (1992). The End of History and the Last Man. New York: Free Press.
Patten, C. (1998). East and West: The Last Governor of Hong Kong on Power, Freedom and the Future. London: MacMillan.
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