Eight Key Dynamics from the Communist Party Third Plenum – And Implications for Public Affairs and Communications Burson-Marsteller Greater China December 2013
The recent Chinese Communist Party’s 18th Congress Third Plenum meeting defined the priorities and focus for the coming 10 years for the Chinese Communist Party and the Chinese Government.
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In this article we address eight key dynamics from the Plenum and some of the implications for foreign multinational companies from a public affairs and communications perspective.
Centralizing power
A new Central Party Leading Group has been established to overcome constraints posed by competing interests within the Chinese governance system and economy – both at the center and at lower levels. This group’s job is to make sure reform gets done and that it is bolder than in the past decade. Many see the past 10 years as ‘lost years’ in part because the central leadership was not able to drive through reforms that threatened the interests of powerful elites in state-owned companies and in specific ministries, as well as the interests of stakeholders at the local level.
1. Centralizing power 2. Redefining roles and relationships – markets, government and business 3. Innovation agenda 4. Increasing focus on security and stability 5. Environmental enforcement
We expect the centralization and assertion of power to involve tougher enforcement of central government policies. This will include stricter supervision of foreign companies in China. It is important to understand that many see foreign companies as having become too dominant and not adequately regulated in certain respects. The dynamics have also changed with, for example, more head-to-head competition from Chinese companies moving up the value chain and China’s relative importance to many global companies having increased in the minds of Chinese stakeholders. China’s growing assertiveness and confidence generally is also a factor – as are diminishing trust and rising expectations of multinational companies in China. Foreign companies are also safer targets politically than leading Chinese companies and government agencies. Clamping down on foreign companies in some respects also makes it easier to go after Chinese ‘obstacles to reform’. The central government’s anti-monopoly drive will potentially
6. Legitimacy test – anti-corruption and compliance 7. Political continuity 8. Listening to the people In this installment, Part 1, we address the first three.
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target both Chinese state-owned companies and foreign companies as part of the center’s agenda to drive through reform. It will be interesting to see how much of the focus is on the large stateowned-enterprises.
importance to China and are making extra efforts to meet local stakeholder expectations. Given Chinese stakeholder understanding of the increasing share of many companies’ global business that is in and with China - expectations are certainly rising in this regard.
In any case, the central government will continue to target foreign companies in part to show various stakeholders that it is enforcing its agenda (no doubt bringing to mind for some the Chinese idiom “killing the chicken to scare the monkeys”).
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Implications Foreign multinational companies need to reassess the evolving stakeholder and regulatory landscape in China and the opportunities and the risks they face in the context of a stronger center determined to enforce its agenda. Understanding of China’s agenda needs to be built and maintained at the institutional level and not just among specific individuals – recognizing that such understanding provides an important source of competitive advantage with clear implications for global success. Questions should be asked, for example, about the extent to which local partners still have the necessary power and freedom to operate as anticipated and whether greater efforts should be made to develop relationships and engage stakeholders at the central level.
Redefining roles and relationships – markets, government and business
Giving the market a ‘decisive’ role in allocating resources was one of the core themes of the Plenum. Tied to this is limiting the role of government to macroeconomic management, market regulation, public service delivery, “supervision of society” and environmental protection. This is more easily said than done in a nation where government officials are used to a much more pervasive role in the economy and society (based on a governance system that has evolved over thousands of years of Chinese history, with officials traditionally playing the role of ‘mother and father’ to the people).
A multi-level, multi-channel approach to stakeholder engagement and advocacy will be increasingly vital. Advocacy efforts should, to the extent possible, demonstrate and articulate alignment with the central government’s evolving agenda.
Businesses are expected to compete in a more transparent, rules-based marketplace – where government officials intervene less than they previously have. Theoretically this means that business and ‘the market’ will play a greater role than before in allocating resources – with a more level playing field, greater efficiencies and more realistic pricing of economic inputs such as capital, land, energy and water (overinvestment, misallocation of resources, price distortions, environmental pollution and official corruption are seen to be among the negative consequences of a more interventionist government). A government playing a narrower role can be expected to focus even more efforts in ensuring it fulfills these more limited responsibilities – with both the Party and government eager to maintain their legitimacy in guiding, supervising and regulating a more complex economy and society.
Foreign companies certainly need to consider redoubling efforts to ensure compliance and be prepared for a situation where a government determined to enforce its agenda (and to be seen doing so) targets them publicly on a specific issue. They need to be mindful of the acute sensitivities Chinese government stakeholders have to perceived “double standards” by foreign players (e.g., not recalling a product in China when you recalled the same product in the United States or Europe) and that the “attitude” of the company is seen to be very important. The handling of a crisis can become a crisis in itself – for example if expected apologies are not forthcoming or companies openly contradict government in certain situations.
Meanwhile, foreign companies will have plenty of opportunities to benefit from a more even playing field – bearing in mind, however, that the government still sees a central role for stateowned companies and is determined to reduce some of the perceived advantages that foreign companies in China enjoy – by making the
On the flip side, companies can get credit for demonstrating that they attach a special 2
playing field “more even for Chinese companies” perhaps and by addressing perceived market dominance and manipulation in certain sectors. While some sectors will likely be more open to foreign investment as part of the next phase of opening and reform (e.g., services) and some impediments will likely be removed for foreign investors, overall the Party and government can be expected to continue with a more selective and targeted approach to utilizing foreign investment and foreign companies to achieve China’s development goals.
They also need to appreciate that government officials may be more cautious about how they engage with foreign companies – and there needs to be substantive reasons for engagement that align with the government agenda. Foreign companies should consider creating or participating in appropriate platforms where they can demonstrate positive contributions to China’s development and relevance to China’s agenda – in partnership with credible local stakeholders.
They will also expect foreign companies to continue to keep up with and align with their agenda. As the Chinese Party mouthpiece, Xinhua News Agency, has put it: “If foreign companies in China cannot break their inertia thinking and traditional model, try to pressure the Chinese government to resume their ‘super-national treatment’ while being miserly in bringing the latest technology or R&D, and simply view China as a cheap labor and production base, then it will be very difficult for these companies to adapt to China’s urgent needs to transform its economy and foster development.”
They should also be able to effectively tell their story as part of the story of China’s reform and development – with reference to specific development goals and objectives.
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Innovation agenda
The Plenum focused on innovation as a key driver of China’s economic transformation. Indeed, innovation is seen by many as the most vital dynamic in realizing “the Chinese Dream of the great rejuvenation of the Chinese nation” (Xi Jinping’s rallying cry and master narrative). Innovation will help China move up the value chain (reducing reliance on foreign intellectual property and creating greater economic value for local players), solve environmental problems, address energy, health and education challenges, build military strength and so on.
Implications Foreign multinational companies need to continually monitor and evaluate the Chinese government agenda and relevant policies and regulations – to ensure they identify the risks and opportunities for their business (e.g., the Shanghai Free Trade Zone experiment and potential opening of service sectors). This will also help them to better tell the ‘what’s in it for China story’ that is so important for success.
The Plenum “decision” evidences a sophisticated understanding of the need to develop an innovation ecosystem that is propelled by appropriate market incentives and supported by sound legal frameworks and diverse financing options. The innovation system envisaged by China’s leaders includes a complementary and interlinking role for government, large, medium and small companies, and research and educational organizations. There is more emphasis on the market and enterprises than before – but still a considerable guiding and enabling role for government (e.g., as evidenced elsewhere in the strategy to develop seven strategic industries in the 12th Five-Year Plan, which are outlined below).
There may also be opportunities to help shape government policies at a time when the role of the market and government is being redefined – and there is an even stronger emphasis on a scientific approach to development and governance. Foreign companies will increasingly need government and public affairs capabilities with the capacity to engage in policy analysis and discussions – with the old relationship-based model of government relations even less relevant and effective than in recent years. Foreign companies should obviously be careful to avoid perceptions that they are trying to use inappropriate relationships or connections with government officials to achieve their aims (by for example employing the sons and daughters of high-level officials for their connections rather than their capabilities).
The integrated innovation strategy outlined in the “decision” seems to be very much cognizant of some of the limitations of past approaches and to 3
genuinely reflect a more scientific approach to development.
to participation by foreign players – bearing in mind that countries like Japan and South Korea were in some respects much less open to foreign investment at comparable stages of development.
Foreign companies are still welcomed as participants in China’s innovation system. To an even greater degree, their technologies and expertise will be seen as the most valuable contributions they can make to China’s development – from the perspective of Chinese government and industry elites.
We expect there to be even more scrutiny on foreign companies and market / technology dominance in the years ahead – with the possibility of changes to policies and regulations around patents, technology licensing and sharing. Government decision-making and policies will continuously seek to accelerate the development and adoption of technologies that China claims as its own (to a greater or lesser degree) – with the licensing of 4G LTE a recent example (the version of the global LTE standard with the most Chinese patents has just been licensed, while the more widely adopted version of the international LTE standard, with less Chinese patents, has yet to be).
The Plenum noted the importance of importing technology, technology “absorption and reinnovation” – and the need to “complete technology transfer mechanisms” – as part of the integrated approach to building China’s scientific and technological capacities. With the perceived failure of the previous “market for technology” strategy, China’s leaders can be expected to continue exploring a range of ways to hasten this process of technology and knowledge transfer – while at the same time building China’s capacity for original or novel technology innovation so China can eventually be a net exporter of technology rather than being continually reliant on expensive imported technologies and IP.
The seven strategic industries defined in the 12th Five-Year Plan are: I. Energy-saving and environmental protection: Advanced and eco-friendly products, cyclic utilization, industrial equipment and services
The incentive to protect and enforce intellectual property rights in the next 10 years should be much stronger as China seeks to protect innovations generated in China and by Chinese companies. However, given the slow pace and limited progress of original technology innovation in China (with some exceptions) – a certain chicken-and-egg dynamic is at play (without IP protection Chinese innovation is stifled, but without Chinese innovation there is limited incentive to protect IP) and much remains to be seen. The Plenum did make note of the importance of strengthening “intellectual property rights use and protection” and of related reforms. The question is how fast and comprehensive progress will be.
II. Next generation information technology (IT): Next generation communications network, cloud computing, three network convergence, high-performance integrated circuits, highend software, Internet security, artificial intelligence III. Biotechnology: Bio-medicine, bio-agriculture, bio-energy, biomanufacturing, drugs/vaccines IV. High-end equipment manufacturing: Carbon fibre, battery industries, high-speed railway, aerospace, marine engineering and high-end smart equipment V. New energy: Nuclear, solar, wind, biomass, geothermal and ocean energy
Global companies understandably have mixed views about such ‘national innovation strategies’ – with the prospect of improving intellectual property rights protection good on the one hand – and pressure or compulsion to transfer technologies and lower prices not so good on the other.
VI. New materials: High-performance composite materials, materials with special features, nano materials, rare earth, alloys, membranes, high-end semiconductors VII. New energy vehicles: Plugin hybrid vehicles and pure electric vehicles, fuel cells, hydrogen cars, solar cars
Meanwhile, Chinese stakeholders will be continually assessing how open China should be
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Implications
effects’ (e.g., through open collaboration with Chinese partners). They also like to know that China has an important role in the company’s global innovation strategy (foreign companies now increasingly encapsulate this with taglines like, “in China for China, in China for the world”).
Foreign companies need to develop sophisticated, carefully balanced and integrated strategies to address expectations for technology transfers while ensuring their intellectual property is protected during China’s innovation drive. They need to manage the business and reputation risks associated with being seen as too aggressive in pursuing intellectual property claims or as too dominant in a particular technology area – while helping create a more favorable environment for enforcement of China’s intellectual property laws and helping ensure government policies and regulations keep up with the pace and evolution of technology.
On the other hand, they are also mindful that foreign companies can sustain their market dominance by taking advantage of China’s talents and access to China’s market – and that many foreign companies are generating a large share of their global profits because of China’s reliance on foreign innovations and technologies. Some are also skeptical of what they perceive to be exaggerated claims made by foreign companies – so any positioning needs to be well supported by the facts and carefully measured. For example many Chinese are skeptical regarding claims about “R&D” in China – which is more often than not perceived to be tweaking or adapting products locally (skeptics refer to such alleged exaggerations as “PR&D”).
Foreign companies should look at how they can tell their story and deliver their messages in China in terms of support for China’s innovation agenda (while being mindful, of course, how such messages will resonate in other markets and at a global level). By understanding the specifics of China’s innovation strategy they can connect the dots to what they are doing or want to achieve. From a corporate positioning perspective, this can cover many aspects of their presence in China including products and services, R&D, procurement, training and talent development, technology sharing, collaboration with local partners, investments and CSR. Chinese stakeholders generally like to hear a global company is doing globally significant innovation in China that it is helping address local development challenges and raising the overall innovation capacity in China through ‘spill-over About Burson-Marsteller
Burson-Marsteller (www.burson-marsteller.com), established in 1953, is a leading global public relations and communications firm. It provides clients with strategic thinking and program execution across a full range of public relations, public affairs, reputation and crisis management, advertising and web-related strategies. The firm’s seamless worldwide network consists of 72 offices and 86 affiliate offices, together operating in 108 countries across six continents. Burson-Marsteller is a part of Young & Rubicam Brands, a subsidiary of WPP (NASDAQ: WPPGY), one of the world’s leading communications services networks and includes direct lobbying and grass roots capabilities through subsidiary companies that are the leaders in their area of expertise. Contact: Douglas Dew, Managing Director, Corporate and Public Affairs, douglas.dew@bm.com
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