How Should the U.S. Compete With China?

Richard D’Aveni, the Bakala Professor of Strategy, lays out a plan.

During one of Richard D’Aveni’s recent research trips to China, a senior official of the Communist Party gave him an alarming insight into his nation’s way of thinking about business with Americans.

“He told me, ‘The idea that American companies are going to come here, take major market share, and exploit us the way the British did is ludicrous. It will never happen,’” recounts D’Aveni, the Bakala Professor of Strategy at Tuck.

The official was referring to the 19th-century Opium Wars, which were fought for the right to sell the illegal drug to the Chinese. After the Chinese were defeated, the British forced them to sign unfair trade treaties with Western nations that gutted China’s economic power. “China thinks in terms of centuries,” D’Aveni warns. “It has histories of dynasties that have come and gone for thousands of years.”

His new book, Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War (McGraw-Hill, 2012), sets out to bust the myth that the United States’ current business relationship with China is good for the U.S. economy. For example, studies done by the American and the European Chambers of Commerce show that two-thirds to three-quarters of firms that open shop in China don’t show any greater growth or profit than they make at home. “But once you’ve spent a billion dollars building your plant there, you’re in,” D’Aveni says. “What do you tell Wall Street, that you closed the factory and that your growth promises were fantasies? Your company stock would collapse.”

The book gives examples of companies lured to China by the enormous market and then ambushed by a system with legal, financial, and industrial policies weighted against them. In 2003, General Motors Corporation filed suit against Chery Automobile Company Ltd., accusing the Chinese state-owned enterprise of copying its Chevy Spark with its Chery QQ. The cars, GM claimed, “shared remarkably identical body structure, exterior design, interior design, and key components.” The suit was settled in 2005 with GM promising not to sue Chery again, and the Chery QQ continues to outsell the Spark four to one. Under Chinese law, there’s no such thing as intellectual-property theft.

For D’Aveni, such conflicts were a sign that China was following its own rule book, to the detriment of U.S. firms expecting a level playing field. This is something D’Aveni had seen before, in other contexts. As the originator of the term hypercompetition, D’Aveni first proffered the idea that today’s firms compete by intentionally disrupting their competitors’ business models. He has also written about the phenomenon of “commoditization,” in which competition among firms is so fierce that the only differentiating feature among products is price. “I started to realize two things,” he says. “Commoditization is coming largely from China, and their low prices are the core problem for many U.S. companies. Secondly, that hypercompetition between corporations has now become competition between capitalist systems.”

D’Aveni visited China several times interviewing many Tuck alumni now working in a variety of industries. They connected him with government officials, Chinese billionaires and U.S.-China joint ventures. He concludes that we’re competing in an economic Cold War, and the book lays out a shocking case: our trade deficit with China has grown 27 times since 1990; the U.S. has lost leadership in many industries; it depends on China for supplies in critical industries; and it owes China $1 trillion.

The Chinese are winning with their own system of “managed capitalism,” with such key elements as protection of home markets, government subsidies for domestic industries, theft of intellectual property, lean social programs, artificially low interest rates, an artificially undervalued currency, state-owned enterprises acting in the interests of the Chinese government, cyberwarfare, and unfair labor practices.

In sum, the system works for national growth rather than profit maximization of firms. “The Chinese have invented a new form of capitalism that is undermining the strengths of democracy and our capitalist system,” D’Aveni explains. “They’ve taken the U.S.’s strengths and size and used it against us in numerous ways.”

The first step for the U.S. to compete with the Chinese is to rebuild its own financial health: bring down the debt-to-GDP ratio and stop depending on the Chinese for money and goods. D’Aveni advocates a shift that Americans will find very difficult: stop thinking ideologically and start thinking strategically. Our laissez-faire, social-market form of capitalism is obsolete. A new strategic-capitalist system should develop specialized technocratic organizations to set industrial policy, similar to the Federal Reserve Board or the Federal Aviation Administration.

“People who are against the government ought to take a look at our successful industries: aerospace, avionics, telecommunication, satellites, computer software, operating systems, applications, pharmaceuticals, agriculture,” D’Aveni argues. “All of those industries got some substantial help in terms of R&D or protectionism from the U.S. government. We need to start turning around mature industries here rather than chasing growth that might appear to be there in China.”

In the same way that the Chinese have undermined U.S. democratic and capitalist principles, the U.S. needs to destroy China’s competitive advantage, D’Aveni suggests. One way to do that is to delegitimize the Communist Party, while another is to end their control over manufacturing and exporting.

Finally, the U.S. needs to rebuild its economic sphere of influence, and the stakes are much higher than we might imagine. Nations like Japan, Korea, Brazil, and Germany now count China as their number one trading partner, and there is doubt when it comes to whose side they might be on in the event of military conflict. They may remain neutral when the U.S. needs them the most.

“We need to understand what the Chinese are trying to do,” D’Aveni asserts. “They are essentially recreating the British Empire of the 1800s. They looked at their worst nemesis over time, and they said, ‘How do we do what the British did to us?’”