“History doesn’t repeat itself, but it does rhyme.”
— Mark Twain

Remembering Jack Welch’s China Strategy

Posted: March 31st, 2020 | No Comments »

Jack Welch died recently aged 84. He was chairman and chief executive of GE for twenty years from 1981, leader of one of the most successful industrial companies of the era, one of the super star CEOs of his age. The deluge of obituaries following his death have been universally fulsome in their praise. Welch could be ruthless; he wasn’t called ‘Neutron Jack’ for nought. He never allowed a business to stand still on its merits, which sometimes annoyed his executives. And he delivered for shareholders – by the time Welch retired in 2001 GE shares were worth more than thirty times their 1980 price.

China’s re-emergence as a global economic powerhouse and relatively open market occurred on Welch’s watch at GE. There was no way he was ever going to be able to avoid the country. It’s well known now that the lure and promise of China back in the 1990s was almost impossible to resist and that many a corporate China dream of untold riches died on the beachheads of commercial reality, stifling bureaucracy, and harsh competition. But Jack Welch dodged those bullets and turned China into a success for GE, despite a glitch or two. It may well be that his hard and fast China business rules back then are still worth pinning up on the office noticeboard today.

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Perhaps the decisions Jack Welch took in the early 1990s seem a little more obvious today. But back then, back when China’s reforms and ‘opening up’ were a lot more novel, when the China business was a fast moving train everyone was crawling over each other trying to jump aboard, when you felt you needed to move quick or lose that sacred ‘first mover advantage’, Welch’s considered approach was a lot less obvious. 

Of course, what dazzled people about China in the 1990s wasn’t the record-breaking skyscrapers or the high-speed trains, the vast shopping malls or gigantic Louis Vuitton flagship stores, the Ferraris on the Beijing ring roads or the new airports opening every week. None of that was there, and you had to be a true visionary to think it ever would be. Back then it was the numbers. And it had been ever thus.

Between the wars American business had fixated on the magic 400,000,000 Chinese. Four hundred million people to sip Cokes, take aspirin, drive Buicks, snap Kodak snaps. Half of them were going to buy razor blades, the other half permanent wave kits. Fortunes would be made. A few were. But mostly the numbers didn’t quite pan out. Most of those four hundred million folks were poor, miles from their nearest Coke machine or gas station, and not overly interested in perming their hair anyway. Then the Bamboo Curtain came down and everyone forgot China. Finally, Mao and Maoism died, Deng cautiously raised the drapes again, and the numbers came surging back to us through the cracks. During Mao’s reign that four hundred million had somehow become a billion and it was China Game On again. This time the numbers super-dazzled – Unilever talked of ‘two billion armpits’, Rupert Murdoch dreamt of ‘two billion eyeballs’. Nike’s Phil Knight went to China in the early 1980s, got back to Oregon and told his assembled executives, “There are two billion feet out there, Go get them!”

By the early 1990s Tiananmen was receding in the rear-view mirror, Deng Xiaoping’s 1992 ‘Southern Tour’ appeared to have cemented the economic reform process, business was slowly picking up. In the wings, about to take power were Jiang Zemin, Zhu Rongji, and the “Shanghai Gang” known for wanting to accelerate urban development, promote a consumer class, and seemingly welcoming to foreign businesses and expertise with, well if not quite open arms, then at least a cautious nod of acceptance.

Western business was only talking Asia. Eastern Europe was a mess, Russia looked seriously unstable, Jim O’Neill’s BRICS concept was still almost a decade away. The early- to mid-1990s were all about the South East Asian “Tigers”, and China. South East Asia was, of course, exciting and totally open to business, just about any business – a bit too much as it turned out. China was a hard slog, the last forty years of Maoist-inspired communism, and a rigid state economy not dissimilar to the failed Soviet Union’s, had meant those with actual on-the-ground experience of doing business in China were few and far between. Selling in Shanghai, negotiating in Nanjing, bargaining in Beijing? These were things your grandfather might have done before the Second World War. The West’s collective memory of doing business in China was gone a generation before, and anyway, the crowd in charge now were very different from the ones we’d known back in the thirties. Linguists were in short supply, all China was a hardship posting, a Kafkaesque bureaucracy of paperwork, permissions and long, long meetings that got nowhere while your bladder burst from the endless cups of weak green tea. Hong Kong was still in limbo prior to handover. But, despite all that, those numbers, that magic ‘billion’ – the constant and irresistible siren song of, as the magazine feature writers used to like say back then, the ‘Middle Kingdom’.

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Of course there was no way Jack Welch wasn’t going to dedicate a fair bit of headspace to China. No shareholders meeting in those days ended without a question about why a company wasn’t doing more to make everyone a fortune in China.

Welch first turned up in 1992, flying in on the GE corporate jet with a bunch of senior executives. They headed straight to Shanghai and a banquet with Communist Party officials on a boat cruising up and down the Huangpu River. Food, wine and baijou as the majestic classical old Shanghai Bund slipped past on one side, and the distinctly underdeveloped Pudong was shrouded in darkness on the other. In 1992 it wasn’t so easy to be dazzled by Pudong. The eastern bank of the Huangpu, that is now a Manhattan-esque mass of skyscrapers, was just about to be officially declared a “New Area”. Construction crews were just about to break ground on what would become the futuristic (ultimately more Jetsons than Bladerunner as it turned out) Pearl Oriental Tower. 

Still Welch liked what he saw. Lots of holes in the ground that, he rightly believed, would become office blocks, factories, shopping malls and high-rise apartment buildings. His outlook was enhanced by recession in Europe and a sluggish US economy. Welch decided to go for it in China. He instructed all his senior executives across the corporations dozen operating divisions to go to China and look for opportunities. GE was going to invest a billion dollars in China.

China’s new and seemingly pro-business leaders couldn’t have been more delighted. Where the famously cautious, stop-and-think-before-you-leap Welch decided to go gangbusters everyone else was going to follow. It’s fair to say that, though he was far from the first to go big CEO to go to China (the aforementioned Phil Knight, GM’s  Jack Smith, AT&T’s Robert Allen, and not forgetting the big French, German and Japanese auto and engineering companies too among others ), Welch’s stellar reputation and his positive comments on the China market were a big fat green light for many businesses.

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Welch decided to tip GE’s toe in the China waters with a light bulb factory. Not a massive investment for GE, but the business plan asked, how many lightbulbs does China need? The answer: ‘BILLIONS’. So GE got into a joint venture (JV) with a Chinese company, made millions of bulbs, stamped their (admittedly superior quality) brand on them and started selling thinking they’d be in competition with their usual foes in the sector – Siemens, Philips, Osram etc. Then several things happened in short order:

1) nobody in China cared what brand their light bulb was;

2) nobody in China would pay more than a few cents for a light bulb, no matter who made it;

3) the Chinese JV partner made and marketed their own (now slightly better bulbs) at less than 50% the price GE was charging.

Jack Welch got, as they say, his head served to him on a platter. He took note of that. Don’t go up against the Chinese selling cheap, easy-to-reproduce products – elastic bands, paper clips, t-shirts, small cartons of milk….light bulbs. You couldn’t win and the fight would be bloody.

So Welch imposed his long standing US Golden Rule globally – any business plan had to give a minimum 20% return on investment. None of the China business plans on Welch’s desk hit that threshold – none even came close, despite the magic billion customers. Other western firms, GE competitors, made similar mistakes. Maytag, Bosch, Siemens and Whirlpool appliances couldn’t beat the local dishwashers and refrigerators from the likes of Haier and Hisense.

The un-circumventable rule of Welch’s, and the debacle of the light bulb factory, meant his executives had to rethink China. And they did.

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Eventually, GE began making investments, approved by Welch, that worked. A hi-tech plastic components factory in Guangdong that could not be easily replicated and serviced GE’s export clients only. A medical equipment and devices company that built scanners that were not only hard to reverse engineer, but also, being GE-branded, were considered far superior to local equipment by China’s new legion of healthcare consumers who didn’t care much who made their lightbulbs, but their MRI scanner or replacement hip joint? That was a different question. Another highly successful venture was GE Capital Aviation Services – arranging leasing of planes to China’s nascent and rapidly expanding civil aircraft sector.

Perhaps now the notions of not competing in China at the low end, looking to use China’s lower production costs to service existing global clients at advantageous prices, using brand reputation to win the new middle class consumer, and using foreign capital to support newly emerging sectors, all seem obvious. They’re all part of the business school emerging market MBA syllabus. But back in the early-90s these China business truths were not held to be self-evident and plenty of big names got burned. Welch included with those cheap light bulbs. But he learnt the lesson and eventually succeeded in China. Jack Welch’s China journey is one still worth remembering.

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