Martin Posth, MSM - Mandarin Strategy Management Consulting
Release Date: 2011-01-04
Do you think it’s possible to run China with the political system that you have here in Germany?No. It is an old question whether democracy makes sense for China. For the time being, it does not. In the long run, there won’t be a democracy in the Western sense. I wouldn’t want that for China because it would be a disaster for them. I don’t even know if it would work for them 100 years from now. So the Chinese have, as they call it, a market economy with Chinese characteristics. They have to find their own way to deal with political changes. It is absolutely not in the world’s interest that every political leader pushes the Chinese government to open up and pursue democratic rights. China has to do it on its own and it takes time. So the only measure for me to say whether China has reached something is to compare the progress between 1985 and now. Then you will see tremendous development not just economically, but socially.
If you ask the youth of China what they think about democracy you will see that they are not interested in politics. To put it simply, they are interested in money and in securing a better future than their parents’ generation. It took us, western civilization, 300 years to develop democracy which produced two world wars, Guantanamo Bay, Kosovo, Iraq, and Iran. We should really refrain from teaching China and Asian countries how to organize their societies. If today you evaluate the development in China, there might be a visible tendency that other Asian countries look to China after Deng Xiaoping opened up to the world and desire to follow a similar path. They might think that the Chinese way might also be a way for their society.
So I hate all the political teachers and professors coming from the west and telling a country like China, Indonesia, or Malaysia about all the wonderful activities from the western democracies. I don’t believe in it and I don’t like it. If you put it bluntly, you have to realize that the largest democracy in the world, India, has not reached what China has reached bringing more than 400 million people out of poverty. That is an extreme performance. If you arrive in Delhi, for example, every provincial airport in China is much more modern than Delhi’s. That is one of the shortcomings of democracy in such a large country. I am not saying that democracy is butchered. But it is too early for China. If you see all these useless debates during the Olympic Games about Tibet and the Dalai Lama, we have to also ask what happened in the right direction? Of course you have to criticize and look at how you can do it better, and they are doing it better. They have opened up to journalists which they did not do in Tibet last year. They are learning and it is really difficult. So for the next 50 years there will definitely not be a democracy in the Western sense and I don’t believe and I wouldn’t vote for the Western politicians to push for it. That is absolutely out of the question.
Of course at the moment with the economic crisis many countries are reconsidering their economic models. What do you think they can learn from China to implement at home?
Of course everybody can learn from China. An advantage for China is that they can decide on policies overnight. Implementing, however, is a weak problem in China concerning all these wonderful green headlines. They can’t implement it. This has always been an interesting point. They came up with the first automotive policy that was the first central guidance in an industrial sector in 1994. They never ever implemented this policy in the provinces because the interest in the provinces is to make their own policies in order to get access to foreign car companies because the car is something which drives business and employs millions of people in China. So the provincial governors were never interested in it and Beijing has no power to implement it. They then came up with a revised version of their automotive policy in 2004. It was the same story. I read this morning that Fiat is forming a joint venture with Guangzhou automotive. The policy clearly states that no more big automotive plants should be allowed to partner with foreign companies. So implementation is a weak point for China as a whole.
The automotive industry is an interesting example because quite a few companies went in early. What happens to these companies will send a message of what other industries can expect in the future. How do you see that going forward because China clearly has ambitions to dominate its domestic industry?
It is one thing to have the idea to dominate. There is no Chinese car company for the time being which could survive in an international automotive market, not even in the local market, without the help of western companies. There is no way to really build up an internationally competitive automotive company. That takes time. Journalists always say as we witnessed when Japan developed, which took thirty years, then South Korea developed, which took twenty years, and now China, is that the Chinese can do it in ten years. They are fast learners and we have all these wonderful headlines. But if you look a little bit more in detail then you will easily find out that they way Japan and South Korea developed is totally different from the way that China developed. Japan had a long history in car making – nearly 100 years. Then of course when economies of scales for the domestic market were large enough they started exporting. South Korea developed simply. They didn’t copy. They owned 100% of the licenses from Japan – Mitsubishi or Nissan – then they got 100% access to the technology and production facilities and learned how to develop and produce cars. The government gave them billions of dollars in subsidies. The market was closed and then they started. I remember the time when 40-50% of the same model went to the domestic market because of low quality. Then they selected the good quality cars for export. So they didn’t develop fast, but in a reasonable time. Brazil never changed. They failed to develop their own car business.
There was never a chance for China. When Deng Xiaoping gave the green light for Western joint ventures and investment the government discussed beforehand if they should go the way of Korea. Should they buy licenses to go the way that South Korea developed? Then they said to the central government that they cannot do it because they don’t have enough money. They had no capital, no management knowledge, or no technology. So the only way for them was to invite foreign car companies. You can see how wrong some of the ideas were of the Chinese leaders. They thought that through the joint venture construction they could easily get access to foreign technology to build up their own branch. I witnessed from the beginning of my involvement in China that there is nothing you can do overnight. In the first twenty years, the Chinese learned to build a car and to produce nothing more. I remember when we made the first facelift on the Jetta. Our Chinese friends told us that they had an idea to show us. It had nothing to do with a facelift. A car is a complicated product. Everything is involved from electronics to plastics to textiles and engines. What they came up with looked nice, but the quality was unbelievably lousy. So we told them that we couldn’t accept it. So if nobody in the top management level is involved in just pushing through it to the lower ranks you can’t reach anything.
At that time the only idea they had to make money was to put subsidies in the supply industry and so on. There was no idea how to design a developing center. Even in the mid 1990s, if you talked to the top people, they blamed us for coming up with such complicated test procedures for the Chinese to not localize our parts. For example, if you have a shock absorber you have to test it at the automotive center one year in advance before you have a good feeling whether the quality is acceptable or not. That is the reality. And the Chinese blamed us for that. Wherever Volkswagen is doing business around the world – and the same is valid for General Motors and so on – you have to guarantee the same quality. That takes time and it is not easy. So they learned to produce the car that can do it better today than in Germany probably. Their labor productivity is absolutely high. The labor regulations are not as restricted as here in Germany, but the individual productivity is good and on the production side you can organize without unions more or less what you want. So this part is OK. But development comes from technological knowledge. It also has something to do with democracy, so to speak. There is creativity involved. The central government knows that their technical or business universities are not in a situation where the students can disagree with professors. There are no open discussions. They are fixed on learning - repetitive learning. But creativity and innovation comes if you have the freedom to say, “No, I do not agree. I am doing something different.”
Of course China has the ambition to become a world leader in electric cars – a field in which it is not so far behind because it does not really exist. It will require a lot of creativity and innovation. Do you think they will be able to turn this ambition into reality?
Not overnight. So far as electrical cars are concerned or other alternative ways, China has a really good chance because they have large production outcome every year. So the central government has to do something to change the whole environmental issue in the right direction. So the fundamentals, in principle, are not bad for China. But you need technology and they don’t have it. BYD for example, if you look at all the details, has not developed from its own capacity. They bought from various places. In the long run China can have everything. But in the short run it takes time. And we are not standing still. We are also improving. If you talk to a Chinese business leader about the whole consulting business, they will say that it’s too expensive and they don’t need it. My question is how they can compete in the automotive industry, for example, with Volkswagen, GM, and Toyota which have the world’s best consultants for technical questions, details, materials, and management? How can you compete if you don’t get the same permanent access? That means that you need the people. If you read the newspapers and see all these Sunday morning speeches from our politicians, they say that “we have to keep in mind that China is producing 350,000 engineers every year.” That is wonderful. But engineers are engineers. You need as much creativity and innovation to complement the engineering. The Minister of Science worked for ten years at Audi. If you talk to him he will tell you you’re right. Hu Jintao also knows. We bloody Westerners are pushing so many fears among ourselves about China’s 350,000 annual engineers. It is early but you have to see what China has done so far with unbelievable success. But keep in mind that in Germany alone we have more than 1,000 tier-1 world market leaders and another 500 in tier-2. You will not get to be a world market leader overnight. The same is true in China.
One of the reasons the Chinese are investing in green technology and renewable energy is because they believe they can become the world leader in some of these fields. Of course it’s not just to stop climate change. There are clear economic reasons. Danish, German, and American companies are the world leaders at the moment in the wind industry, but Chinese companies are rising really fast. How will this play out in the longer term. Is this a game about innovation and technology or access to market?
In normal terms they will really be competitors in every industrial sector. The question is how long it will take and what will be the effect on political stability? That’s the reason they say they will have 8% growth, because they will keep down dissent. So stability is a key word. So far as a green focus on technology is concerned, that is often driven by business ideas. Take the issue of water implementation for example. Statistics tell us that around 700 million people in China are drinking water that they should not drink. But how do you implement the issue of pure, drinkable water? The government likes to keep down tariffs for consumers. The private investors say that they will only invest if they have the market. So the politicians have to find a balance between politics and consumer and investor interests. You see it in the automotive industry. It is absolutely crazy today to see that there are more than 140 automotive companies in China. When we came to Shanghai in 1985 there were 120 pure car companies. The Chinese government said that they had to consolidate and restructure. The implementation also has to do with how the Chinese are thinking. They are thinking in business terms, not necessarily in terms of being responsible for the world’s environmental problems. So it’s good that the government is going in this direction. But putting it in practice is a long way away because you need capital and technology. Where can you get it? Okay, from the west. Getting it by yourself is not so easy. Don’t forget the issue of intellectual property rights. So western companies are really reluctant to give away their resources in order to make China the world market leaders.
If you think in longer terms, if we don’t help China to get the environmental issue under control, the whole world will suffer. If every other person has a car in China, like in Europe today, then you would have 600 million passenger cars on the road in China alone. There are only 350-400 million passenger cars in the whole world right now. So something has to happen in this respect. But for the government in a local province they think totally different. They don’t care about the environmental issue. They want to see to it that they employ their workers who are affected by the financial crisis. The interests are totally different between the central and local governments. So it’s good if you have a government who picks their focus and would like to cooperate with the countries that have the latest technology in their hands. But the question is how to bring this in clear investment and implementation decisions.
I remember waste water treatment was part of our joint venture contract. If you ran a paint shop you could not put all these pollutants in the river. So we said in our joint negotiations that we insist that you, the Chinese local government, must invest in a waste water treatment if you want to avoid poisoning the water. Jiang Zemin was the mayor of Shanghai and couldn’t do anything. I remember his first visit to the plant on his third day in office as Shanghai mayor. We discussed everything and he complained about waste water treatment. He then approached twenty people from various departments and asked “Is what Mr. Posth said correct that it’s part of the contract?” Everyone said “yes.” He looked around and asked who was responsible. Then he said “start building the plant tomorrow and it should be finished in six months.” What I want to say is that you need to have leaders who are tough enough not only to announce ambitions but to implement them. So I appreciate that a lot of activities are going on in China as the central government has grasped that they have to do something. But it’s a huge country. Shanghai is Shanghai and Beijing is Beijing. Take a bicycle and drive two hours west of Shanghai and you’ll know that China is in need of reform. Implementation takes time. You also need overhaul in Germany which you’ll notice if you see the everyday discussion between the Green Party and SPD and the decision makers in charge.
Technology transfer is a major issue in the discussion on climate change. It would probably be even harder to agree on than the targets for CO2 emission reductions. What would be your suggestion on how business leaders and politicians should work together and what are the main points they should focus on to make technology transfer work both for German companies that possess the technology and for Chinese companies that want to implement this?
First of all I said fifty years ago when we witnessed what happened to China that western companies should give their technologies free of charge to China. I would not say this today because it is too simple an idea. On the other hand we, as business leaders, should think about how to cooperate with the Chinese in a way that we reach improvements without giving up our technologies free of charge. I see how the whole western world has money overnight for the banks. Everyone should really think about how to fund governments to subsidize such technology transfers. The G-8 or G-20 should make a packaged deal between politicians and business leaders knowing that there is no implementation overnight. If you waste year after year not doing anything clear, business leaders can step in and say that they can do something about it. Then politicians will see progress. Everything is so complicated. Take Nordex. Nordex went to China and invested there. So today there are Chinese companies claiming to have the same technology and for half the price. What can you do? I know it also has to do with safety and environmental issues. I am serving as a member of the board of directors of Demag Cranes, one of the world market leaders in crane technology. They sell cranes produced in factories in Shanghai. The prices of the cranes are really high. But at the same time you reduce the building costs because the crane skill and technology is totally different from the old cranes from China. The old cranes from China cost 50% more. Now we have a wonderful slogan to buy Chinese products.
How should that work then in terms of technology transfer for these kinds of companies? It’s not going to be enough if you just give them a whole lot of money because it does not solve any problems. So how should the discussion work between business and politics then because the solution has to involve the legal framework and market access?
Take technology for example. There is a core technology in this business. And of course Nordex is already prepared to come to China whether as a holding company or joint venture or in another form if their core technology will be protected. That is, they say to the government that intellectual property rights have to be protected. There is a huge legal framework to deal with intellectual property. The intellectual property rights issue in China, to my understanding, is a cultural problem. Confucius said to the people “You should work like me.” Throughout the whole of Chinese history, copying has been something wonderful. The Chinese understand very well the concept of doing it like the master. So a legal framework by the central government is limited in its efficacy. Ask someone in the street what they think of intellectual property rights. They will think that you came up with a new product. They don’t have any idea of intellectual property. So it takes some time. They have to organize and insist that it will be improved. If I’m going to court for example and get a decision from the court, will the decision be implemented? There is a clear tendency now in China that if you get a decision, it will be implemented.
But that is only one side of the coin. You have to organize in a very intelligent way that your core business will be protected. The Japanese never gave their secret away. By the way, Germany is the largest country in the world with regards to technology transfer. There is no country in the world which has given as much technology to China as Germany. On the other hand, if you are a small or medium sized company you can say that those bloody Chinese copied my product. Only in this combination – clear laws of enforcement in China and organization of your business so that your product can’t be copied – can there be full protection. That’s the reason why sometimes companies never give their latest technology, but just one step before. But how long can you play this game? Probably 20 years. I would say it’s better to really find a serious partner in the business community in China and share your technology. It has something to do with trust and respect and is very difficult to do. I say this because, the other way around, China is going global. We in the rest of the world have to learn how to deal with the Chinese. Now we like them to be open. They are getting involved to get information to train. It was never their intention to take over. They can’t. They have no idea how to run a western car company. But anyway, if more and more Chinese companies investing abroad remember that one year ago we said “we need a great wall around Germany,” the state government should decide yes or no to protectionism. We teach these guys in Asia to be against protectionism, now everybody needs money and they say “ah, welcome.” Are we really able to work with Chinese managers in Germany? Can we understand how the Chinese operate? So both sides have to do something.
I gave a speech in Beijing recently about China going global and its advantages and opportunities. Among the business leaders were CEOs of chemical and automotive companies. I told them the story that when Volkswagen came to China in 1985 we were told by the Chinese that we have to learn about China because we didn’t know anything about their market. There is no uniform Chinese market. There are thousands of markets. “You don’t know anything about our culture. You have to learn, you have to adapt,” is what they told us. I told these gentlemen that if they are coming to Europe there is no uniform market. There is a market in France, Germany, Poland, and elsewhere. There are cultural barriers. Intercultural training isn’t a one way story. It is something that has to go in both directions.
The central government in the meantime should set up a kind of seminar in order to train all those managers before going abroad. So what I would like to say is that the same is valid with all these technology questions. There is no other way other than to cooperate. Otherwise we can’t solve our problems in the world, not only in the green technology field but also politically as well. We have to work together. The G-8 and G-20 say that we need China today because China is as much a part of the solution as it is the problem. Then we have to learn how to deal with China. A typical mistake we are made is Frauline Merkel giving a wonderful reception to the Dalai Lama in the Chancellor’s Office. That is absolutely a political disaster especially for Merkel who doesn’t know anything about China. For Merkel, whether or not she is in office for the next five years, she will never get a clear face-to-face accepted or respected relationship with the Chinese.
After the election there will probably be a different minister of foreign affairs. Who do you believe can play a key role in improving the Sino-German relationship in the coming five years?
From the political side, I would say even though he probably won’t end up in office Schteinmeir, has a reasonable approach. Also Guttenberg. But the foreign minister will most likely be 16:00 tape 3 from the FDP. The most likely scenario will be that the CDU and FDP will form a coalition. But Guttenberg might be a good choice. The business community asked Merkel what was she thinking when it came to the Dalai Lama? But Merkel is unable to learn. I don’t see so many good candidates but at the state secretary level there are some good competent partners.
What we need on the business and political side all over the world, not just between Germany and China, are people who understand how to deal with China. It is very easy to criticize China on its human rights record. On one hand you to be very tough with the Chinese but you need to know when to be tough. Then you also have to be soft, but not necessarily soft in a bad sense. Taking again the example of Merkel and the Dalai Lama, this came two weeks after Merkel came back from China where Wen Jiabao gave her a very warm reception and accompanied her to a public park. If only Merkel had called him at the time and told him “Mr. Jiabao, we are a free democracy and I would like to meet with the Dalai Lama. But I know, I feel, I learned what Tibet, Taiwan, and Hong Kong mean to you. I tell you that I will not meet him in the Chancellor’s suite but instead I will have a private meeting with him.” Then Jiabao would think that Merkel is becoming understanding. You have to initiate this kind of relationship building process from both sides in order to be successful. If you look at successful joint ventures vs. unsuccessful ones or successful business cases you will easily find out that the most important factor is the intercultural initiatives. If you take ten business investments in an industrial area, 80% failed not because of the wrong product or insufficient capital, but simply because the people don’t understand each other. It’s like a marriage. You have to treat your wife on a clear and equal basis. China is the same story.
We know the key players of the business community today. Who is the next generation of business people who will be important in this relationship, the ones that you see coming today?
There are people who are now gaining experience living in China, running joint ventures, running foreign owned enterprises, doing banking businesses. Go to Siemens and there are thousands of people running a business in China. But that doesn’t mean that all of them understand how to deal with the Chinese. It’s difficult to say. It’s also a new generation of people today. At an auto show in Shanghai I met many old German friends and experts who were part of the original thirty-five person team when we started in China; people who are today 68-70 years old. That is not a good sign. It is a sign that so many big countries are working hard to develop such leaders. That also has to do with personnel policy of such groups because they don’t use China as an essential part of their company career building. From my point of view when I was director of the Volkswagen group worldwide I told my colleagues, “look, I am coming from China. For three years I’ve seen what you are doing here. We have to change our philosophy totally to implement a system that establishes a certain hierarchy where you can’t be promoted to a higher level if you have not done several years in a foreign country.” The board members agreed in principle but said that they needed the best people in China because if you don’t have the best people in China, Chinese business won’t develop. So the personnel policies of so many companies including and especially the small and medium sized companies will think that if they send their best technical person to China, they will go out of business domestically. So it’s a question of your mindset regarding this problem. Most companies today are not rewarding the man who was prepared to go with his family to China often keeping him at the same professional rank as when he went out. Instead of talking about your promotion policy in your wonderful business reports, demonstrate it. If a person goes to China and does a good job, it should be seen that he is promoted for his efforts.
You need someone on top who sees this problem and convinces his colleagues and is implementing such a policy. At the end of the day most of the people going to China are probably not from the intercultural side.
As a last question, what would you like to be the main developments in the relationship between China and Germany over the next ten years?
I hope that the German community, not only the business community, but the social community understands that we need China as a partner; that we grasp that China is not threatening the world or our country with taking away our jobs. Sometimes not even business people or union leaders see this. Volkswagen is producing one million cars in China. On average 65% is produced locally in China and 35% comes from Germany. In other words, with China’s business– talking in people and product terms – 350,000 cars are coming from outside, made in Germany. The car company today in Germany is producing 220,000. So one full plant in Germany is secured because we are in China and therefore China is not taking away our jobs. So we have to this tell our young people who don’t know about business. 65% of Germans in schools can’t explain what inflation is all about. 55% don’t know about the most simple and basic economic concepts. I hope that we get a better understanding of global business; overall, a better understanding of what a global business is all about – both strengths and weaknesses. And that we get convinced that the future problems in the world economy, whether we are talking about business, the environment, energy, or politics, can only be solved in a multi-lateral dialogue. If we can’t grasp that then goodbye Germany. But if we can grasp it, then we have something to organize around. Dialogue means from different countries. It starts even in kindergarten. We have to work together in a trustful manner with respect for each other. Then we can use the strengths of China and combine them with our strengths. This is not a one way issue. The Chinese also have to learn and keep in mind what it means to come to Germany and Europe to invest. So I hope this process can be implemented and enforced especially in the younger generations. We have to realize that nationalism is growing within the Chinese community. The more China is successful on a business side the more their egos go up. So politicians have to evaluate the speeches they give on Sunday mornings very carefully and ask people, “Can I go with such a speech to China?” Merkel is the best example. The world of tomorrow is a world of cooperation, understanding, and dialogue. If this works then you can find the solution to technology transfer and many other things.
| Company: | MSM - Mandarin Strategy Management Consulting |
| Position: | Chairman of Global Advisory Board |
| Country: | Germany |