My wife and I just returned from a 3 week vacation in China (my 60th Birthday present), and we took in China’s ancient cities, “just old” vistas and its modern manifestations. It is a remarkable nation struggling with scale, quality of life and expectations for the future.
China is big — correct that, it is huge — correct that, it’s scale is off the charts. It’s not that the cities are enormous and teeming with people (a city is crowded only above, it seems 5 million people, and there are a bunch of those) — everything China builds is of such scale that it really took my breath away. Whether it’s ancient, such as the Forbidden City or the Great Wall (funny they are not condemned for building an “apartheid wall”) over 8,000 km long — over 15 times the length of Israel — and a feat of extraordinary engineering and achievement (though it did fail to stop invasions) — or the modern skyline of Shanghai. China’s growth has only occurred during the past 25 years and it is remarkable how far the country has come, the level of industriousness and energy bottled up in her and how much catch-up is still necessary with the associated risks. I hope to offer some insights into what we learned as well as observations as it relates to Israel.
1. China as a Nation, not Country
It is clear that, like the U.S., China could exist just on domestic production and consumption alone (for sure it’s growth would be slower, but it would work). That is how I would define a “Nation” — a potentially completely self contained social and economic entity — and for this to work you need enormous scale in people and resources. China has this in spades. In China, like the U.S. with English, you could survive just speaking Mandarin. A Country, on the other hand, such as France, Singapore or Israel requires economic and social connectedness to survive. It’s why Israel worries about BDS and “what the world thinks” while China, frankly, couldn’t care less though they may act on this for political reasons.
Think about this: their domestic tourism is so massive, outside tourism is nice but not necessary to fuel their tourism business. Can Israel survive without foreign tourists? Countries depend on interconnections with other Countries and Nations to maintain it’s economic and social viability. Hence the pressure to speak English and the need for cooperation. Some Countries created Nation-like entities by subjugating territories — such as England or what the Soviets tried to accomplish — but in the end, there was an essential lack of cultural and linguistical cohesiveness to sustain this model for long. They are just countries with territorial extensions. Russia is clearly a country since the Soviet Union was not sustainable for the reasons above. It is not clear that there are any other Nations out there aside from these two — maybe, India, but that is not clear to me.
There is one other entity aside from Nation and Country and that is People-hood. This stands apart as well as meshes with a Nnation or Country. People-hood unifies a constituency by a sustainable ideology that provides citizens a unique connection that is distinct from their citizenship — an example are the Jews in Israel (I believe the Japanese also have People-hood) where they are both a People and a Country. The U.S. and China do not have People-hood at a national level though their populations share many cultural mimes. I believe Israel’s People-hood is quite unique in the world and a cause of much friction with European countries who do not understand this.
Now Nations can do things that Countries are just not able to pull-off though Countries like to complain that it’s unfair. Nations operate with their own rules — things that a Country would be condemned and blocked for trying to do. Nations can treat minorities or dissent in any way they desire and other Countries need to just deal with it. Their foreign policy tends to be overbearing and others find it difficult to reign this in. It’s just the nature of being a Nation. Nations have such a larger reserve of human, financial and intellectual capital that they are able to dictate many terms of commerce and trade.
Israel, for example, cannot expect to the same type of leeway on rules that a Nation exhibits. Nations are very important for alliances but they can change the rules any time they want. Hey, they are a Nation! So, if Ariel Sharon does political deal with Pres. Clinton, like during Gaza withdrawal, don’t be surprised when Pres. Obama says that’s all well and good but he doesn’t need to adhere to whatever commitments made in the past. Letter or no letter. Don’t complain, that’s what Nations do. I hope Bibi realizes this in terms of commitments from the U.S. for any deals with the Palestinians. So it’s great to have Nations as your allies, but it should also be clear who’s on top and they may not even notice when they roll over with a yawn and crush you.
2. Addressable markets
It just blew me away to realize just how big their domestic addressable market is. I always thought about China as an “export” nation but the reality is that they are a massive domestic market opportunity. Certainly, cultural and regulatory barriers to entry are complex and there is an inherent fear of the Chinese stealing intellectual property (this is related to their “contextual” adherence to laws as I describe below), however, the risk/benefits seem to point to considering their domestic demand. Let me share just one statistic: one study analyzes the “productive workforce” representing ages 20-35 and in China this population is over 330 million! That one cohort is larger than the entire population of the U.S.! Wow is all I can say. (The productive workforce in the U.S. is about 50 million — China has a 6x advantage in human productive capacity). And this is a group with a rapidly ascending middle class, purchasing power and needs. They care a lot about brand reputation and are cost sensitive. They do spend (carefully) and there are a lot of them. So the take away for Israel is to consider China not as a low-cost manufacturer but as a vast consumer marketplace. Israeli entrepreneurs should analyze market needs and product gaps and consider China as complement to their U.S. marketing efforts. One needs to consider my next point if you take what I am suggesting seriously.
3. Culture counts
For all the liberal leftists who think that all people are basically the same, as I discredited in a prior blog, the impact of differentiated culture is clearly evident in China. It’s culture of honor/dishonor, Emperor/centralized leadership, superstitious yet a-religious (in a Western sense) resulting in a lack of guilt, a focus on monetary success to a near obsession — these are just some of the cultural drivers in China. I have just finished a short book that I highly recommend on Chinese culture – “The Chinese Mind” by Boye Lafayette De Mente published by Tuttle (they have many books on topics related to Asia). Just to give you an additional taste of the cultural differences (you can read the reasons in his book), here are a few:
- Trading Social Credits
- Preference for Fuzzy Logic
- Avoiding responsibility
- The Importance of an Apology
- The Importance of Third Parties and the Role of Personal Connections
- Laws and Behavior are Contextual
- Staying out of Trouble
Let me just leave you with the thought that for over 2,000 years, China has been essentially ruled by a centralized power (until 1911 they still had Emperors) who make laws, rewards and punishments on a whim so you need to have connections, understand that laws are whimsical (contextual) while keeping your head down to stay alive.
This is so different from Western and Israeli culture one needs to really step back and spend the time to incorporate this into ones plans. I must tell you that the cultural difference with Jews and Israel is immense and one needs to have good guidance to do business in China. In spite of what I just said, we do share many important cultural mimes with China.
4. Shared values with Israel
We share many interesting and unique values with China — different, for the most part, from what we share with America. And there are areas of enormous difference. Let me share just a few. Foremost is our respect and near obsession with our histories and ancient narratives. We are both very old civilizations with many ups and downs. We have both been victims of fascism — for the Chinese, it was Japan’s major massacres of populations during WW II — as well as designs by world powers to control and manipulate them. Due to these pressures, both cultures became quite insular though Jewish culture needed to interact with the dominant culture since we have been a minority for so long (until Israel’s re-emergence.)
Our language cultures do similar things — the relationship between the sounds of words and alternative meanings — similar to the what we do with Hebrew and the importance of numbers and their connected meaning to the language. This has enormous influence on how they think and project their uniqueness in the world. Their respect for older people due to their wisdom of years is also similar to the Zaken (elder) philosophy of Judaism. The one area where we greatly differ is in tolerance for alternative religions. Monotheism, in general, is intolerant of other forms of worship and China, for reasons too long to explain in this blog, does not suffer from this affliction. Where do share an affinity is mutual respect of education and books. This is quite an involved topic and I am just trying to give you a taste here.
Let me leave you with one other key difference. For Jews, we are connected to other Jews all over the world — Kol Yisrael Arevim. Chinese do not have this concept. They open to close friends and family, however, everyone else is a stranger you owe no connection or allegiance.
5. Political system
China is a single-party political system. And it’s in their interest to keep the pot from boiling over with descent. Hence, they have major controls in place on all forms of media and internet access (Google, Facebook and Twitter are not accessible in Mainland China because they will not implement the required filters — though people have work-arounds via proxy servers). These restrictions have, as a by-product, led to a very vigorous domestic internet software business to replace these technologies and given the size of their domestic market I mentioned earlier, these company have become mammoth — note Alibaba, the largest IPO ever for a software company.
You do not hear the type of intense partisan political debates like you have in Israel. Actually, I was relieved by this. This lack of debate is the result of thousands of years of Emperor-led governance. Jews lost this associations to centralized power 2,000 years ago and, given Israeli politics, it seems it is lost forever! Bottom line, Israeli’s needs to be respectful of this difference and plan accordingly. Their system works OK and they are acutely aware of the excesses of the Mao, the Cultural Revolution and Great Leap. They acknowledge the pendulum went too far.
6. China’s economic & social weakness – the potential flip-side
People tend to point to the political system as the source of concern regarding China but I think that is misplaced. The real concern is actually economic instability. To gain a better insight into this structural issue, I suggest reading “The Next 100 Years” by George Friedman, CEO of Stratfor. The upshot of his analysis is that the economic boom is being distributed to a very thin slice of the country along the coast while the vast majority of Chinese in the interior are desperately poor today. This has always been a fault line in China (between China of the coast and the interior) and erupts during tough times which Friedman sees coming soon. The source of the economic problems is the sheer level of bad-debt to GDP similar to what lead to Japan’s nearly 2 dark decades. He believes the number is approaching 40% of GDP (though these figures are manipulated by the Government) which is twice the tripwire in Japan. When this occurs the social and economic upheaval will be devastating. Since they have built their growth on debt and low profitability, it will be nearly impossible for China to repair the damage. I point this out as a significant cautionary insight to incorporate into any plans regarding doing business or strategic collaboration.
China offers many unique opportunities for Israel to explore a more balanced approach in terms of alliances and economics keeping in mind the cultural, political and economic realities. I know that many in Israel see this as well and is another reason there has been pressure on Israel to tread lightly with China via American pressure. I came back from China energized and also appreciative of the miracle we have in Israel.