Italy’s strategy in China
Article by Paolo Borzatta, Senior Partner, The European House – Ambrosetti
from the blog “Specchio Cinese” – AgiChina24
Not all that exciting. This is Italy’s future in China, at least in my opinion, as I outlined here in a previous editorial.
In fact, we have committed many errors in the past, losing major opportunities, and it doesn’t seem to me that we have a clear idea of what to do in China in the future. But I don’t want to write an essay on Italian “strategic” errors in and regarding China — let me just mention a few I think are especially serious, as a basis for planning “a new start” (Hmm … is this even possible?):
- Never having decided what kind of relations to have — on a country-to-country level — with China: a major partner and for what purpose, a secondary partner, or just an ancillary market. As a result, not having conducted foreign policy — and related diplomatic activity — on a long-term basis that would give substance to the type of relations chosen.
- Having promised — on a governmental level — investments (including major and farsighted ones, for example, the promised contribution to the development of the Pudong area) which successive governments cancelled. In the eyes of the Chinese government, for whom it is unthinkable that a government not live up to its word, these reversals have seriously undermined our credibility.
- Lack of attention towards China from Italian leadership: few trips by heads of state, badly organized and always at the last minute.
- Lack of “cultural” investment by Italian leadership that goes beyond accepted stereotypes to have a real comprehension of that country. Very few heads of companies or major institutions have decided to dedicate enough time and energy to go beyond the stereotypes and truly understand the country’s very different and complex culture. I can attest to the fact that this has not been the case for the leadership of other major countries who are our competitors, where the importance of having an in-depth, articulated understanding of China has been fully understood.
- Having cultivated the myth that ICE (Italian Trade Promotion Agency) exists to be a “free” consulting firm for SMEs, rather than being a promoter of the country as a whole in an on-going, far-reaching manner. On the contrary, instead of an in-depth and stable approach, it has received financing for programs that are erratic, short-term and not continuous.
- Having considered China to be just one of many different countries, rather than the country ten-times more different than the others.
- Orientation, of the majority of Italian companies, that is purely trade-and essentially niche-based, with a lack of ambition (and long-term investment).
- Cost-based and not revenue-based strategies: much more than in main competitor countries, Italian companies tend to develop their strategies by minimizing costs, rather than investing what is required in their ability to win predefined shares of the market. This approach is also the result of the myth of very short-term return on investment.
- A priori and “ideologically”-based orientation in favor of joint ventures in which Chinese partners are relegated to the sole task of having familiarity with the country. At a time when other countries already had equity capital-financed companies in China, our companies were convinced that in China only joint ventures “should and could be done”. In addition, instead of choosing partners with “strategic capabilities”, partners were selected simply because “they knew” China, without realizing that knowing one’s own business very well is also needed for being successful in such a difficult and different environment.
Given this past, for “a new start”, at least to be able to maintain the current position or even slightly improve it, our country needs to finally develop a strategy for China. The hope is that we can aim for an Italian future in China that is at least somewhat exciting.
A strategy of Italy in China means deciding to make a few, clear “national” choices (of and for the entire country) about how to “position itself” in China as a country. In other words, what is it about Italy that we want to focus on, and what are the few specific actions “for the country as a whole” on which to concentrate our limited economic and psychological energy?
If you are asking why a country-wide strategy is needed, let me just mention that all the major countries with which we compete — economically and culturally — have clear strategies regarding the main countries with whom they have significant relations, and often these strategies are published and in the public domain.
Specifically, Italy needs a strategy for China because:
- China requires a broad and ambitious vision because it is an extremely large country and cannot be approached “on a small scale”.
- China is one of the world’s largest economies and is becoming one of the two geo-political super powers (unfortunately, Europe and Italy are dormant).
- China has a long-term strategic outlook, including for its relations with all the countries in the world.
- China “assigns each country a role” (i.e., what the Chinese leadership would like that country to do) and for a country to count, in China, it must develop the role “it has been assigned” or “negotiate” another one if it has the capability to change it.
- China assigned Italy the role of “partner” in developing light industry (automotive, electro-mechanical, fashion and food) and Italy has been unable to respond to this role.
- Being a “partner” for China means first “giving” (and, therefore, knowing what to “give”) and then bringing home a lot (becoming “friends”) if one is able.
Please note: this is a relationship between “systems”. There is no “boss” in these systems, but the general viewpoint within the leadership of the two systems must be, more or less, the one outlined above.
In my opinion, the cornerstones of Italy’s strategy for China should be:
- Decide on a long-term role for the Italy-China relationship (for example: focus on a number of manufacturing sectors and/or major cultural or social currents and/or creativity). This role should be seen as one to play for a number of decades and no government must change it. My personal idea: position Italy as the country in which all economic sectors (from robotics to the cognitive sciences, engineering and chemistry, as well as philosophy, literature, film, tourism, the arts, and wine and food) work together to form the embodiment of a master plan in Saper Vivere — the Italian art of living well. Saper Vivere does not only mean enjoying life (works of art, food, etc.), but also how to take on and build a philosophy of how to live (“carpe diem, quam minimum credula postero” — “seize the day, trusting as little as possible in the future”).
- Continuously and repeatedly building over time a strong country image (see the previous point). The role of government and institutions must be to assert this image and not to provide business services. Services to businesses must be provided by companies that compete on a worldwide level in order to have and maintain the highest level of competencies.
- Identify national great projects to involve Italy and its economy as a whole. The role of the country is to create opportunities for Italian companies and institutions (“create the project”, i.e., “create the market”!)
- Differentiate and keep separate the roles of:
- economic penetration
- attracting investment
- attracting tourism.
We need to understand that a strategy such as this one does not close the door on Italian interests that are not mentioned (or for whom incentives are not provided) in the policy agreed upon. Everyone is free to do as they please, but the government (aside from negotiating agreements to facilitate the activity of all Italian companies and institutions) would focus on promoting its strong points knowing that asserting this strategy (and strong points) would lead to a growth in opportunities for all Italian companies.
As part of a strategy of this type, I would also propose a “catalyst” project for Italian development in China.
The goal of the project I propose is to: “Acquire preferential channels for Italian companies (for orders and investment opportunities) through initiatives that:
- Concentrate Italian efforts on building a special, long-term relationship in an area of China experiencing major development.
- Take advantage of the competencies found in Italy to assist local government in China to develop major projects (for example) infrastructure, manufacturing, services, healthcare, the environment, the arts, higher education, public services (municipal corporations), etc.
The motivation behind a project such as this is that, more than once, the Italian national economic system has attempted to create (or has supported the development of) an area in which Italian companies could invest in a preferential way or find a base for initial moves (Palazzo Lombardia, Tianjin, Qipu, etc.). The hope was, perhaps, to also “replicate” in China the experience of Italian districts. However, in the best of cases, these experiences have had only very modest success. In any case, the fundamental error behind these experiences was the belief that a company (often a small one) would invest in a given place only because it would receive economic assistance and perhaps find “fellow countrymen”. Obviously, a company invests, first and foremost, if optimal conditions of supply (production factors and/or outside contractors) and sales (proximity to target market) exist.
In contrast, the project I am proposing is aimed at creating — in a proactive way — markets (orders and final market) that are potentially very interesting and also concentrated geographically.
The broad outlines of this project
- Launch an initiative that brings together those companies, banks and institutions most interested in this project. Create a clearly-coordinated task force to work in the field.
- Very carefully identify a Chinese province with high potential that could be interested in this project.
- Identify the problems of the province and develop a program of projects that Italian companies and institutions could help to create and implement.
- Negotiate an agreement framework with the government of the province selected.
- Provide support to the Chinese province by attracting capital and expertise to implement the program.
- Carefully monitor the development of the various projects and quickly resolve any “stumbling blocks”.
- Assign a ten-year time frame to the project to “cultivate” investment in the local area to the maximum.
Finally, I propose that (at least) three major roles for Italian institutions in China be differentiated: economic penetration, attracting investment and attracting tourism. The characteristics of these roles, the competencies they require and the players involved are so varied that there is no sense in keeping them united. And yet, they have often been combined or, at least, not clearly differentiated.
- Select a (small or very small) number of lead sectors in Italy that are not only important in themselves, but also feed other sectors;
- For these, have a single point-of-reference for China that is the “Dominus” (master or leader) of these sectors, whose goal is to:coordinate penetration initiatives for no less than five years (but even up to 10);
- build a network in China (therefore, be acquainted with the key players in the selected sectors);
- monitor the evolution of the sectors and main projects launched (by both the government and private sector);
- suggest new projects to the government and private sector;
- act as the midwife and coordinator of potential consortia (groups of Italian companies and institutions) for major initiatives within the sectors;
- where necessary through moral suasion, coordinate all of Italy’s positioning efforts within the sectors.
Have a (separate) Dominus for attracting investment, whose goal would be to:
- continuously monitor and observe China to understand the “needs” of Chinese companies, with special focus on those which can be met by Italy;
- make these needs known in Italy and communicate them to all interested contexts to generate reactions;
- in a more or less informal way, identify the priority Italian areas of greatest interest to China and which, therefore, have competitive advantages to offer China;
- coordinate promotional efforts for Italian regions in China to avoid discrepancies in the image communicated, and to promote a well-functioning back office;
- prepare an annual report to the government on investment progress, providing an evaluation of the investments in terms of: value; capital expenditure cash flow; loan capital cash flow; short- and long-term job generation; strategic value for Italy. An example is the Invest in Sweden Agency.
Have a (separate) Dominus for attracting tourism, whose goal would be to:
- monitor the needs of Chinese tourists;
- monitor Italy’s image with decision makers and opinion leaders in China.
- coordinate efforts to promote the image of Italy which must be one only (e.g., Saper Vivere master plan).
- continuously update the list of primary key players and decision makers in China regarding tourism, and maintain relations with this network;
- act as the midwife and coordinator for great projects involving tourism to present to Chinese decision makers;
- prepare an annual report to the government on: tourist flows; economic benefits; tourist satisfaction levels; comparison with our competitors.
So, this is the strategy I dare to propose for Italy in China. I don’t know if it is the fruit of rational thinking, or just a pipe dream, in hopes that the “the wind has already changed”. But it is all aimed at creating — over the next ten years — a bit of enthusiasm and excitement about our presence in China.
POST SCRIPTUM: These ideas, which I have been thinking about for some time, I have also discussed on more than one occasion with my colleague, Mattia Marino, whom I thank for his stimulating thoughts and contributions.