The Economy

3 Things to Understand About US-China Dynamics

CFOs who don't understand the new superpower competition between the two nations are betting on a bygone era.
Jonathan D. T. Ward and Atlas OrganizationDecember 5, 2018

As globalization turns to superpower competition, how should companies prepare for a high-stakes economic rivalry between China and the United States?

For the last 25 years or more, U.S. business leaders have formulated strategy, opened markets, and expanded their operations across the globe with an invisible hand behind them — not the invisible hand of the market, but that of American military and economic supremacy.

Pax Americana ushered in an unprecedented era for global business. Supply chains wound their way to the once-far corners of the globe, new cost advantages sprang up, and new markets that were once unimaginable because of their distance or political complexity began to open up with the right know-how and strategic planning.

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The “globally integrated enterprise” took shape — made in the image of the liberal, democratic superpower that guaranteed international security and the free flow of commerce, and enabled by a series of victories for global democracies in two world wars and then the Cold War.

All of this was more or less taken for granted — and all of it is now changing.

The most significant change is the failure of American long-term strategy toward China. Rather than producing a “responsible stakeholder” in an American-led system, the U.S. strategy of engagement with China has produced a military and economic rival with ambitions to dominate multiple strategic industries and emerging technologies and to spread its power and influence throughout the globe.

While many observers focus on the short-term questions of tariffs and trade, they overlook a sea change in U.S.-China relations, driven by an underlying contest that will shape global politics for a generation. It will be the most significant international contest since the Cold War. The difference is that unlike the Cold War, this new contest will be all about economics — and companies will be on the front lines.

The new CFO is a strategist, working at the highest levels of global business. The best strategists have exceptional understanding of the terrain they are dealing with. In their role as strategic advisers, responsible for the future of their enterprises, CFOs must think globally, understanding the interplay between countries and regions and acting with foresight when it comes to historic international changes.

Without an understanding of new terrain, strategic advisers and the enterprises they are responsible for can be subject to unforeseen, damaging effects. By contrast, understanding this new playing field can move an enterprise ahead of competition and bring great rewards.

Key Understandings

There are three things CFOs must know about this new era of superpower competition.

First, China is not simply a market; it is a strategic competitor.

Here’s what we’ve seen from China over the past 20 years: forced technology transfer, intellectual property theft, government-assisted acquisitions, and even the transfer of human capital from multinationals to Chinese firms.

These changes have created a raft of Chinese corporations that have grown up in China’s domestic market and are now pushing out into every sector, competing for market share around the world against incumbent firms. In other words, think of China as a giant incubator.

Executives must be prepared to outcompete Chinese companies that will be coming to their sector with support from the Chinese government, employing strategies and tactics unfamiliar to most people outside of China. Business leaders must have a strategy for Chinese competitors that will punch above their weight with the backing of a global superpower with deep financial and human capital resources.

Second, C-suite leaders must understand the role they play in U.S. national security, particularly in a superpower economic contest.

Unlike state-on-state competition in the past, the U.S.-China contest is chiefly an economic one.

Which country’s companies are most successful, best able to master innovative business strategies, and best positioned to expand into new markets around the world will be a decisive factor in this century’s history.

If China’s authoritarian model and the support the Chinese state gives to its corporations enables China to build superior economic power vis-à-vis the United States, it will be extremely dangerous to American national security in the long term.

Leaders of Fortune 1000 companies should work to understand an emerging U.S. grand strategy designed for long-term competition with China. They should also realize, as officers in the companies that are the primary economic engines of the democratic world, they should be open to working with the U.S. government to safeguard U.S. economic and military power in relation to China and other authoritarian nations.

Third, strategy at the C-suite level has more to do with geopolitics than ever, and long-term thinking will be essential.

Making strategy at the executive management and boardroom levels requires understanding U.S.-China competition across multiple regions, emerging technologies, and contested markets.

A serious, sober understanding of major Chinese strategic initiatives, including “Made in China 2025” and the “Belt and Road Initiative,” is important for understanding what’s happening in China. But it’s equally important for understanding how competition will change throughout multiple regions of the world, especially in emerging markets, which many companies see as key drivers for growth.

Additionally, understanding the interplay between Chinese state-level strategy and Chinese corporate strategy will be vital to success in the coming years. And understanding the contours of the next decade of U.S.-China competition will provide a backdrop for successful strategy making at the C-suite level.

When the Chinese government begins to make plans for a particular business sector, changes are likely to take place faster than most executives and business leaders anticipate. And China makes a point of targeting market-leading companies to grow its global firms.

From steel and concrete and paper/pulp to artificial intelligence, electric vehicles, and satellites, the Chinese state takes a comprehensive approach to economic growth and competition. That means today’s global leaders may be tomorrow’s targets in the broader game of building China’s comprehensive national power in a contest with the United States.

The defense of free markets and a rules-based international order rests on American leadership, which is based in turn on U.S. economic and technological power. Business leaders’ understanding of this competition is vital to long-term U.S. national security, as the success of the Fortune 1000 and the success of America are always intertwined.

Dr. Jonathan D. T. Ward is the founder of Atlas Organization, a strategy consultancy focused on U.S.-China competition, Chinese global strategy, and the geopolitics of the Indo-Pacific. He is currently at work on a book about Chinese global strategy, “China’s Vision of Victory,” forthcoming in 2019.