China and reversing roles from guest to host

Sometimes thinking in reverse moves you forward more efficiently.

One of the 36 Chinese Strategies recorded about 3,000 years ago that have endured to this day is called “Reverse Roles from Guest to Host.”  Reversing roles from guest to host means to step by step gain authority in an organization that has requested your assistance until you become the host and your host becomes your guest.  The process that can lead to reversing roles from guest to host is underway on a grand scale in the many business relationships that Chinese manufacturing companies have set up with R&D based companies from longer established industrial countries.  Step by step, Chinese manufacturing companies have gained IP licenses and know-how necessary to perform their own R&D, and have further leveraged Chinese IP laws that often have less rigid or consequential enforcement standards than established counterparts to gain access to important inventions.

It is in the Chinese national interest for reversals from guests to host to happen.  From the Chinese point of view, it makes sense to have laws and enforcement standards favorable to the global national strategic interest.  A precedent also exists with Japan where companies used aggressive cross-licensing as a part of their effort to become the host instead of the guest in such industries as consumer electronics.  Chinese companies that started out as low-cost manufacturers will likewise have their own brands and R&D, and find industries in which to attain dominant positions.  Lenovo is an early example of a respected Chinese brand within personal computing born from a pioneer of personal computing, IBM.

Competitive pressure to keep costs low have pushed companies from countries with comparatively expensive labor pools toward manufacturing in countries like China in order to produce goods cheaply enough to meet the demands of distributers that often compete on price to sell similar goods.  Think Best Buy, Walmart, and Target with many consumer electronics and personal computing products.  These consumer chains have a lot of market power to push R&D based companies to lower their prices on the products they would like to have distributed to consumers.  So even if an R&D company fears a reversal in roles from host to guest, non-engagement with low-cost manufacturers in China or other low-cost manufacturing countries may not be an option.  In fact, quite a few companies that only manufactured in countries with low-cost labor pools have also started to conduct R&D with low-cost R&D talent pools, further contributing to reversing roles from guest to host given the cost advantage of overseas R&D pools.

Companies need to engage low-cost manufacturers with eyes wide open in order to manage the need to use the short-term advantages of cheap labor to compete and survive today with the inevitable reality that they may be accelerating the creation of perhaps more formidable competitors tomorrow.  In China, the idea that a company can be a customer, a partner, and a competitor at the same time is an entirely normal way of thinking.  The goal of the pupil is to become the master.  Design your global IP strategies with this orientation in mind.  And if you are reading this from a country with an advantageous labor and R&D pool base, there is not time better than the present for you to move ahead given that the delta in the cost of labor and R&D talent is likely to shrink as your economy develops and wages rise.

Robert is also the author of Understanding Sun Tzu on the Art of War.

[Image credit (gate): Lanfranch]