Headless, Chicken Hearted and Running Scared

Proud roosters may be loath to admit it, but a rooster is a chicken. And those paying close attention to macroeconomics and geopolitics could surmise that regardless of radiant plumage and fancy footwork, this year’s cockerel waltz will reveal a bird that is headless, chicken hearted and running scared.

First off, let’s look at the geopolitics, the area where we are leaderless. For spring chickens in the crowd, the rhetoric of the US election must have sounded like the drumbeat of an oncoming clash in the South China Sea. For those of us older birds, scared by past cock fights, we remind ourselves that each transition of power in the US and China brings events that test the resolve and restraint of political and military leaders on both sides of the Pacific.

We remember the spy plane incident in April 2001, the seventh fleet passing through the Taiwan straits in 1996, and President Clinton, screaming to adulation in his first presidential campaign, that he would never do business with the leaders in China that have blood on their hands from the massacre in Tiananmen. We remember that regardless of the shrill rhetoric, we are witnessing a ritual dance and that in the end saner minds will prevail even if along the way we have some regrettable causalities.

Unfortunately, even if our mascot manages to find its head, we seem to be stuck with a flock of bird-brained screamers at the top and therefore must prepare for an unusually high level of harsh and bombastic crowing that will, hopefully, in the end change nothing.

The volatility of markets and downright remarkable pace at which changes can impact business models has left us with a collection of business leaders that are chicken hearted; We have a class that seems to lack the resolve to keep up the good fight. Some seem to think that the tide is shifting against multinationals and while we can list a whole host of challenges due to unfair playing fields and uneven enforcement of the rules, what is clear is that the local Chinese companies continue to move up the rankings in domestic and international markets.

Whether it is via new business models or value propositions, new entrants constantly seem to ever more frequently disrupt the status quo. Just when Apple thinks it will continue to grow rapidly in China, another competitor comes along (Oppo/Xiaomi) to show that Apple is too richly priced and not providing what consumers want, where and how they want it.

Similarly, KFC found that once the value of clean consistent food service could be found elsewhere, that Chinese preferred comfort food such as noodles and jiaozi (dumplings) versus whatever KFC could serve up. In almost every industry demand has caught up with supply and the local Chinese companies seem to be doing a better job of developing and delivering differentiated products and services with a value proposition that more appropriately meets Chinese consumer demand.

Many areas of the Chinese economy continue to struggle with and work through dynamic structural changes and fast-paced cycles that lead many to run around scared and directionless. Many companies are saddled with regional leadership that is ill-informed, incapable or not empowered or a combination of all of the above.

The pendulum has begun to swing back against localization to where it is popular to bring expatriates from HQ to run things in China. This may or may not work depending upon the level of China savvy and humility; Many international managers lack sufficient knowledge of the markets and understanding of how to lead in China to make a real difference. And perhaps more importantly they lack the will power to challenge their own assumptions, or the accepted dogma of their organization.

Moreover, China is complex, presenting multiple languages and cultures encased within regional economies at different stages of development. Each market can and often does have different drivers. Winning models do not always transfer to a national platform. For example, winning in the first-tier may actually blind one from succeeding in the second or third tier cities.

Other challenges include remarkable volatility in demand, erratic government intervention, uneven enforcement and a lack of clarity in policy, local protectionism, massive intellectual property theft, and an overall lack of enthusiasm on the part of Chinese courts to enforce the same set of rules for international and local companies. Most international companies hesitate to say it publicly, but China Inc is doing all that it can to make life difficult for the foreign guests. 

Indeed, one of the most striking developments over the past few years is that China is increasingly less interested in attracting foreign investment. Sadly, China seems to be caught up in the global trend of virulent nationalist politics. As we see elsewhere in the world, rising ethnocentrism and chauvinism is being fed by news echo chambers, all of which is compounded by a population that lacks critical thinking skills.

Casual conversations with the man on the street and more unfortunately even with those educated at elite institutions show an inability or unwillingness to engage in rigorous debate and or put in the time to question “facts” built upon shallow foundations.

In this vein the Chinese leadership has succeeded at a stated objective: keep peace at home. Like chicken breeders that use contact lenses to distort the vision so as to keep the flock from eating each other, the information infrastructure and educational systems have created Chinese citizens that hold a narrow and red-colored view of the world. We continue to drift to a position where people have an increased level of misplaced self-assuredness. Given the mind-boggling growth of the past few decades, China has much to be proud of, but pride is a deadly sin that leads to bad results.

At the end of the day however, even given these cyclical challenges and disturbing sociological trends as well as the long term structural incongruities embedded in political jargon such as “socialism with Chinese characteristics”, China over the short to medium term represents attractive opportunities for most companies.

Anyone who cares to look (closely) will find room for performance improvement that will lower costs and growth opportunities unmatched in terms of scale anywhere in the world. The Chinese consumer continues to spend and the infrastructure continues to improve so that now there are ever more channels to capture an ever larger share of the Chinese consumer segments.

Animal kingdom observers know that roosters that are not caged win their girls over by participating in a ritualized dance where no one really suffers deep bodily harm. Let’s hope that our leaders have been watching David Attenborough and National Geographic and have learned this lesson. Enough gazing at the stars. Get dancing and win your girl! Wishing you the best in the year of the bird!

Francis Bassolino is the Managing Partner of Alaris, an investment and advisory firm headquartered in Shanghai.

Francis_bassolino@alaris.com.cn

www.alaris-consulting.com