China: The World’s New Laboratory

Tom Manning, affiliate partner at Waterstone Management, has been advising global companies on China, and vice-versa, for years. The onetime CEO of Ernst & Young Consulting Asia, Capgemini Asia, Cerberus Asia and Indachin, and former senior partner at Bain, sat down with Global Finance to discuss the nation’s quiet innovation revolution.

Global Finance: What are the key trends in China’s long-term economic development?

Tom Manning: Most companies still consider China to be the manufacturer of the world and don’t see it as the world’s laboratory. Yet this is the role that China will play over the next 20 years. There is evidence of a trend in credible, original ideas in China, where companies now routinely make products invented in China by Chinese engineers. This trend will grow. Telecommunications equipment maker Huawei, for instance, spent over $6.6 billion in R&D in 2014, equivalent to 14% of its annual revenue.

In finance, there is no other trend as powerful as that of Chinese money going abroad. We have already seen China invest in at least 70 countries, and this will multiply over the next decade or two. China will play an ever-larger role in financing, building and operating infrastructures. This will happen not only in the developing world but also in the developed world, where infrastructures are crumbling. We are likely to see more Chinese construction companies playing a role in the US, and they already are [doing so] in Europe.

GF: Will China Inc.’s expansion resemble Japan’s trophy-buying in the 1980s?

Manning: Not really. Because the Chinese government is involved in approving Chinese direct investments, we will see less of that prideful buying and more purposeful buying. The Chinese government in many ways operates as a global private equity firm. It is probably the world’s largest private equity firm. They invest with the idea of creating national global champions on the model of Huawei. This will bring the country economic benefits and an important role in shaping market size and pricing. There are 10 to 12 industries where that is a realistic outcome. Construction could be one.

GF: Are there industries they’d rather avoid?

Manning: There’s probably no industry they are not interested in—but there are some in which they are more keenly interested. That includes platform industries, like semiconductors. What’s happening is that they want to be in business not just in semiconductor production but also in R&D. They have a list of strategic industries in which they want to play a role. Telecommunications and banking are at the top of the list—aerospace also, although they are late to the game. A relevant role in these industries offers the possibility of setting conditions on important issues such as pricing, structuring and the pace of invention.

GF: Are Chinese banks strong enough to fund this expansion?

Manning: The Chinese banking system is actually stronger than it appears. It is driven in large part by central planning but is also responsive to market forces. Individual banks do have an ability to set their strategies, respond to demands, to local challenges and opportunities, but they are always doing that within the framework of the government’s programs. Government appointees play a major role in the boards. Programs that go against the government’s plans have a hard time passing.