Saturday, September 10, 2005

The Chinese, Too, May Be Worth Copying

By WILLIAM J. HOLSTEIN; Published: September 11, 2005

THE American economy is more open than Western Europe's, and may be better able to respond to challenges from China and elsewhere, says Gerard Kleisterlee, chief executive of Royal Philips Electronics, the multinational company based in Amsterdam. Here are excerpts from a conversation:

Q. Many Americans think that Western Europe is growing very slowly and faces stagnation. Is that right?

A. That's also the popular image among European executives and policy makers. In a number of countries, initiatives are being taken to reform the economy and reform labor policies, and to deregulate, because we have excessive regulation. But the pace of change is simply too slow.

Q. Is the economic emergence of China and other countries going to change the world order as we know it?

A. It is going to have an impact on the world order. But I don't see it as a one-sided debate where the Europeans or Americans see the emergence of China and India just as a competitive threat. It's also an opportunity, because every day more people are joining the economy and becoming consumers. They need products. China has a balanced import-export situation with the rest of the world. A lot of textile and consumer electronics are being exported out of China. But on the other hand, things like airplanes and sophisticated equipment and tools are being imported into China. As long as the Western world continues to invest in the education of our children and in the quality of universities and research institutes, they can stay ahead of the game in terms of technological development.

Q. But we're seeing entire industries moving offshore. Is that cause for alarm?

A. Yes, we will see some industries migrate, but we will also see new opportunities on the high-tech side and the services side. When Europeans ask me, "What is the future of European manufacturing?" I say, "Apparently we are good in complex systems, whether it is Airbus or high-end cars." Both the Americans and Europeans are good at this. We have the infrastructures, we have the know-how, we have the technology. We can put it together. China is focused on mass manufacturing.

Q. One of the debates Americans have is about whether the Chinese can innovate. They can copy, but can they develop new products that reach the market?

A. I see no reason why they couldn't. I would not stereotype them as copiers. They're working hard to develop their own indigenous technologies and their own standards.

Q. What do you make in China?

A. We manufacture some percentage of all the things we sell in China. We have a fully integrated medical systems business, but we also import high-end equipment from the United States and Europe into China. We have our semiconductor operations, but no wafer fabrication plants there. Those are in the United States, Europe and Singapore.

We are the largest multinational in China measured by total activity level, which was $9 billion last year, and measured by exports volume. Of that $9 billion, $3 billion was sold in China and $6 billion was exported. We are not the largest by total dollars invested or total employment, but on the basis of these other two measures, we are.

Q. How do you think American companies are faring in the new world order?

A. I think they are responding fairly well. Take the top 100 companies in market capitalization and you see that American companies are well represented in that league. Neither the emergence of the Japanese, nor the Koreans, nor the Chinese and after them the Indians, fundamentally changes the picture. Yes, it brings new companies into the game. You will have some shakeout, but, by and large, this is the strongest economy in the world.

The American economy works because of its openness and its market-focused competitiveness. There is a high degree of adaptability. You may have U.S. companies that go under, but you will have more that survive and prosper.

Q. Which American companies do you respect the most?

A. General Electric is a formidable competitor. It commands a lot of respect because of its processes. On a different front, in I.B.M., people are pioneers in new breakthroughs. We also learn from them and adapt. If I see something good, I take it.

Q. So you're learning from American multinationals?

A. Of course, but I'm also learning from Chinese start-ups. To me, the whole essence of prospering as a business is to know that every day, everywhere, there is something you can learn. You learn from successes, but you also learn from failures. You need to have that mind-set.

Q. What have you learned from Chinese start-ups?

A. How to be extremely pragmatic in getting yourself into the market. I have taken my board to China a few times, not only to have internal discussions, but also to go out into the marketplace.

We talk with Lenovo and TCL and you see how their young management teams have built their businesses with very low overhead and are very focused. Sometimes we make things too complex. We can be overly focused on process, but the Chinese are very focused on results. They are learning faster than you can imagine.

William J. Holstein is editor in chief of Chief Executive magazine.

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