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OCTOBER 11, 2000

MANAGEMENT

China's Young Visionaries
U.S. businessman Lu Hua Si talks about how the next generation of Chinese are preparing for the New Economy


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Lu Hua Si is an American businessman working in Beijing. He has 39 years of experience working with startups in emerging economies in Europe, Central America, South America, and now China. Last year, he co-founded eGistics Corp., which provides secure communications services for supply-chain management, and this fall he and two Chinese partners founded Ascend Inc. to provide Internet application services to small and midsize companies. Dr. Lu, who has a PhD in economics, teaches the first-ever courses in entrepreneurship and e-business at Guanghua School of Management at Beijing University. Business Week Online reporter Theresa Forsman in New York recently interviewed him about the business landscape in China as the country prepares to join the World Trade Organization.

Q: When did you go to China and why?

A: I arrived in 1993 to save a failing company that my brother and some friends had invested in. I decided to stay to conduct a study of how the emerging information and communications technologies would create opportunities during China's transition from a controlled to a market economy. Some students who attended seminars I gave on entrepreneurship and e-business drafted me to teach at the Guanghua School of Management. Surprisingly, the dean agreed.

Q: What is the short-term outlook for small businesses in China?

A: The changes in the economy indicate that by the year 2004, less than one-third of China's GDP will be produced by the medium- and large-size enterprises that exist today and that two-thirds will be produced by newly formed, privately owned, smaller enterprises. They will be managed by China's younger, more visionary entrepreneurs who, like Italian race-car drivers, have thrown away their rear-view mirrors. They will be the founders of the companies that will be China's Intels, Microsofts, Ciscos, and General Electrics. When these young people learn how to abandon business models in favor of business dynamics, then the Western companies will need to watch out how they are doing business in Memphis and Santa Rosa because the Chinese competition will be there.

Q: What do the young, bright entrepreneurs of tomorrow think about the prospect of competing with the Intels and Ciscos?

A: At first, they will be the Western companies' suppliers. That is why it is important for them to form collaborative groups of small companies that can bid as a group (globally) for the big companies' requirements. As they do, they will develop their own ideas and become the companies the Intels and such will have to compete with. For now, WTO doesn't challenge the small company in China -- it gives the small Chinese company access to the U.S. and European markets.

Q: Describe the transition you've seen in your seven years there?

A: These three sentences -- it will take time, this is China, and that will be difficult -- perfectly describe what all foreigners trying to do business in China were facing in 1993 and 1994. It will take time meant that even if your project was desirable for China, you still had to struggle with the mechanisms set up by a bureaucracy that had survived Genghis Khan and the Cultural Revolution. "This is China" meant don't tell us about how it is done in Chicago, but instead learn about how it has always been done here. "It will be difficult" meant that in order for your licenses to be approved, you would have to have relationships with the right people. But I could see the beginning of a trend: Value innovation would eventually become as important to China's development as product innovation. Today, Chinese companies who are trying to compete with products are caught in the trap of declining revenues and nonexistent profit margins. The few that understand the meaning of adding value through innovation are flourishing.

At the same time, I could see other trends. China needed foreign investment, and some communities were becoming more aggressive in their means to attract it than others. What would have taken a year in 1993 now takes a few days to a few weeks.

Probably the most evident driver in the evolution of "but this is China" has been the influence of Western television on China's young people. Keep in mind that to someone who has lived all his young life in a small one- or two-bedroom apartment with parents, grandparents, and an unemployed cousin or two, having his own bedroom means being rich. The story line of the TV show or movie wasn't very important. What was important was seeing people who had their own bedroom, living in a house with a yard, lipstick, MTV, and mini-skirts. The idea that everything American was desirable can be verified at any Kentucky Fried Chicken, Pizza Hut, or McDonald's here.

Q: Will Chinese youth abandon their culture to embrace Western capitalism?

A: It is not an abandonment of culture. The Chinese culture is one of the richest and most informative in the world. It is a realization that the circumstances of the China of today have little relationship to the circumstances of the China of 1960 or 1970 or even of 1990. The question I ask my students is: "Should we base today's decisions on the 'facts' of the past, the circumstances of today, or our informed assumptions about what business in China will look like five years from now?" Seven years ago, the answer would have been the "facts." Three years ago it was the present. Today, the answer is a question: "How do we go about forming a string of assumptions about the future?" The current MBA students buy into the future because they know that is where their own bedroom and the house with the yard exist.

Q: What happened to the "that will be difficult" aspect of business/political bureaucracy?

A: You find more and more young people in important management positions precisely because they are not trained in the old way of doing things. They have to innovate to survive. It is in them that I see the real entrepreneurial mindset.

Q: Are most of your students planning to work in startups?

A: All hope to have their own companies. Some are looking at Internet and telecom opportunities, but most are planning to use the new technologies to satisfy other real needs in the Chinese marketplace as a means to get under way.

Q: How will they be able to compete against the much more market-savvy and entrenched Western businesses and products?

A: Equal or better quality at a lower price, domain knowledge, value innovation. Domain knowledge is the really important one. I am talking about being able to develop a domain knowledge upon which business decisions can be made with incomplete information. Using an extension into the future of known facts about either how it is done in the U.S. or how it has been done in China will always lead to the wrong path. It is being able to make decisions under conditions of great uncertainty, knowing that your decision is based on assumptions about the future rather than facts, that gives the best chance of success. Of course, the assumptions must take into consideration how the Chinese will make their decisions. This is where knowledge of the culture is immensely important.

The real competition for Western companies coming here will be from China's New Economy, which will be made up of new, privately owned small- and medium-sized companies who will use new technologies to become global even when the company is one person with a laptop and a cell phone. Most will be a lot larger than that, and they will produce two-thirds of China's GDP within five years. It isn't these companies that need to learn to compete against the Western companies -- it will be the Western companies who will need to learn how to compete against these small, flexible Chinese companies.

Q: What are the most urgent needs in China?

A: Figuring how to bring the benefits of China's New Economy to the majority of the population. The answer lies in education. In the U.S. we have all grown up in a market economy, both for products and capital. Here, at this time, we have to start with some very fundamental concepts and build on that. For that purpose the B-schools here are doing an adequate job, and some are doing a great job. Once the young people here get the fundamentals, then who will have the advantage? Deep in the Chinese psyche is the natural innovator. In general, I think the women will touch that place sooner than the men. Women everywhere have more of a trust in their intuition than men do. But when that happens, whether it is the men or the women or both, then the Intels and the Ciscos of the world will need to pay attention. This will happen like the mini-skirts: One day they were nowhere to be seen, and the next, they were everywhere.

Q: What have your students taught you?

A: That from a business point of view, I wish I was 22 years old and knew about business only what I have learned in the past few years. The rest is static. In China today, there are hundreds of once-in-a-lifetime opportunities that do not exist in more mature economies. It is truly an economic frontier. As Mrs. Loman said to Willy, things are changing.



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