Can China Lead? A Nation at an Inflection Point
Interview

Can China Lead? A Nation at an Inflection Point

Ryo Takahashi, CEO

Ryo Takahashi (MBA ’20) speaks with Harvard Professor William Kirby.

As U.S.-China trade tensions rise and the world watches the demonstrations in Hong Kong unfold, the question of China’s role in the world has once again come to the forefront of public debate.

Harvard Business School Professor William Kirby, who is the former Dean of Harvard’s Faculty of Arts and Sciences and an expert on modern China, discusses the promises and perils that China faces in his co-authored book, Can China Lead?. The book draws upon the authors’ decades of research on China.

“As a graduate student, I became a student of John Fairbank, who was a leading figure at the time in modern Chinese history and who was educated in China in the 1930s,” says Kirby.

“Much of what we thought we knew about China turned out to be wrong. We had read about why capitalism couldn’t develop in China; the Chinese Communist Party had systematically obliterated every vestige of private enterprise in China.

“But now we are witnessing a rebirth of Chinese capitalism and the internationalization of Chinese enterprises. In the book, together with my co-authors, I explore the qualities that are unique to Chinese enterprises and how Chinese businesses have either thrived or suffered amid shifting political winds,” says Kirby.

Relationship between private enterprise and the state

“Historically, the relationship between businesses and the Chinese Communist Party has been one of mutual suspicion,” says Kirby.

“Private business people today know the history of the CCP. They know how businesses were expropriated and that at some fundamental level they exist at the tolerance of the CCP.

“In the past, the CCP has been anti-capitalist. The Party remains more suspicious of Chinese enterprises than of foreign enterprises, which are more easily controlled.”

Yet the Party, Kirby points out, faces a dilemma.

“The Party knows that private enterprises have been the engine of China’s growth, and they have to be unleashed in order to have some material basis, even for socialism.”

The case of Wanxiang

In addition to authoring books on China, Professor Kirby also teaches a course at HBS called “Doing Business in China.” Through the course, students learn about the role of politics in business in China, the rise of China’s middle class, the evolution of Chinese SOEs, and the rise of the private enterprise.

“One of our HBS cases is about the auto components maker Wanxiang, which has become enormous,” says Kirby.

Founded in 1969 at the height of the Cultural Revolution, Wanxiang has grown to become one of China’s largest manufacturers of automobile parts. The company is notable for becoming the first Chinese supplier to an American auto parts manufacturer, Zeller Corporation, in 1984, and more recently has acquired Fisker Automotive, a maker of electric luxury sports vehicles, in 2014.

“Wanxiang was founded by Lu Quanqiu, who was born in Zhejiang Province, a province that has historically been one of China’s great entrepreneurial provinces as well as the birthplace of Chiang Kai-shek.

“Lu’s first ‘business’ had to start as a people’s commune, even though it was really a family business. His family saved his village from starvation and deprivation as he built up this company, and the Commune leaders turned a blind eye to Lu’s entrepreneurial activities.”

How Lu navigated his entrepreneurial venture—from the Cultural Revolution to the present daynot only tells the story of a resourceful entrepreneur but also reflects China’s shifting attitudes towards private enterprise.

“Wanxiang is the very model of the aspirations of many Chinese businesses,” says Kirby.

“It was originally socialist in name and form, it became a village enterprise in the 1980s, a private and family enterprise in the 1990s, and an international business in the 2000s.”

Many notable business leaders, including Jack Ma, founding Chairman of Alibaba Group, have praised Lu’s entrepreneurial spirit.

“When I went to Hanzhou and visited him, I asked Lu Guanqiu the story of his success,” says Kirby.

“At first, he thanked the government for all of his successes, but when I prodded him further for the real story, he said: ‘As long as there is a human race, there will be Chinese, and as long as there is a market, you will have people from Zhejiang.’

“Zhejiang’s history tells a remarkable story of a region that has been a market-oriented economy. It had benefited with foreign trade as one of the centers of China’s tea and silk exports in the 18th and 19th centuries. It is still very much an entrepreneurial area today,” says Kirby.

Rising tensions with the U.S.-China Trade War

Yet despite Wanxiang’s rise as a multinational company with investments abroad, including in the United States, tensions have risen recently between China and the United States. This has led to a frosting of trade flows such as bilateral FDI flows.

Since reaching its peak of $46.5 billion in 2016, Chinese direct investment into the U.S. has plummeted sharply to $6.8 billion in 2019, and U.S. direct investment in China has nearly halved in the past year.

“There have historically been tensions in the bilateral relations between our countries, but today the consequences are enormous,” says Kirby.

“Trade is one of the most easily addressable issues that we have before us. There are roughly 300–400 million Chinese poor people who will be joining China’s middle class, which is roughly as big as the population of the United States. This will play a decisive role in rebalancing China from a largely export-driven economy to one that is driven more by domestic consumption.

“The real question then is not how to stop China from doing X or Y, but rather how to get the United States to continue to make long-term investments and compete where it needs to be,” says Kirby.

“There is something to learn from why the United States is behind China in 5G technology, as we can see from Huawei’s R&D capabilities. America’s challenges are just as much domestic as they are international.”

Towards this end, a de-escalation of trade tensions can help to spur innovation, encourage competition, and make both countries better off.

“We could be more welcoming of Chinese investments in the United States. The United States has allowed Japanese investments in the U.S. auto industry, which has not only made Japan better off but also forced American automakers to become more competitive both domestically and abroad.

“In China, 95% of American businesses in China are making money. They wouldn’t be there if they weren’t profitable.”

Can China Lead?

As China begins to lead in more sectors such as infrastructure and technology, the big question is to what extent and in what areas China can lead.

“In some sense, China’s rise is a question that Americans have been asking for over a hundred years,” says Kirby.

“Since over a century ago, there were books being published with titles like The Dragon Awakes, Sun Yat Sen and the Awakening of China, and When China Rules the World.

“In fact, there have been three or four ‘rises’ of China over the past century. When China emerged from a republic in 1912, poised to be the strong and great power of Asia, that did not happen. In 1926–1927, China was reunified under the Nationalist government and had aspirations to become a great power. Post-World War II, Nationalist China did indeed become a founding member of the international system we know today.

“Subsequently, Communist China would fight the Americans to a standstill in Korea, and China was perceived as such a threat that both the Soviet Union and the United States contemplated attacking it. In a way, China is restoring its position in the world of where it was 200 years ago as the largest economy with some of the world’s richest people.

“Given its R&D spending, innovation in technology, rising competitiveness of its universities, and increasingly world-class human capital, China certainly is building the capacity to lead,” says Kirby.

Beware fault lines

Yet Kirby also warns of potential “fault lines” that may limit China’s ability to take on leadership both at home and abroad. While China has undergone remarkable economic transformation, institutional change has been largely lacking.

“If you look over the long history of China, every dynasty conquers militarily. So far, no one has been elected Emperor or Party Secretary by the people. Since the 20th century, the most powerful political figure in China has been the Chairman of the Military Commission, first Chiang Kai-shek and now Xi Jinping.

“The People’s Republic of China is still, in many ways, a conquest dynasty. It is still ruled by the second and third generation, mostly the second generation of people who conquered the nation in 1949. The challenge is, how do you translate this into systems of laws and procedures, a rule of law as distinct from the rule of man?

“There has only been one succession without violence or a political purge, and that was in 2002. Mr. Xi has now taken away the sense of expected and routinized change that was beginning to take hold at the beginning of the century by removing term limits in the constitution.”

To what extent institutional change will be seen, and how the changes will occur, remains a question to be seen. Until then, like Mr. Lu, there will undoubtedly be entrepreneurs who will either play by the rules or innovate their way around them.

 

The author would like to thank Professor William Kirby for his input and comments on this article. William C. Kirby is Spangler Family Professor of Business Administration at Harvard Business School and T. M. Chang Professor of China Studies at Harvard University. A historian by training, Professor Kirby examines contemporary China’s business, economic, and political development in an international context. He has been named Honorary Professor at Tsinghua University, Peking University, Nanjing University, Fudan University, Zhejiang University, Chongqing University, East China Normal University, the Shanghai Academy of Social Sciences, and National Chengchi University.


Ryo Takahashi (MBA ’20), originally from Japan, is a management consultant and writer. Prior to Harvard Business School, he worked as a Project Manager at the World Economic Forum (WEF) and was a Senior Associate at McKinsey & Company. Prior to these roles he worked at the Economist and the Japan Times. His writing has appeared in Time magazine, the Economist, the Japan Times, and the World Economic Forum, among other outlets. He received his B.A. in Economics (with Distinction) from The University of Tokyo and was also a Rotary Scholar to the London School of Economics.

December 4, 2019
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