Columbia Business School China Business Conference

Columbia University, New York

April 1, 2016

Remarks as prepared for delivery.

Thank you, Professor [Barry] Salzberg, for that introduction. And thank you all for welcoming me to this beautiful campus.

It is a privilege to be with so many future business leaders – including Kevin Wu and the Columbia Business School Greater China Society, who invited me here today.

I am honored to join you in discussing the next wave of surprises that China has in store.

And I am especially glad to be with you at such a pivotal moment in world history: because I believe that, far more than any political agreement or economic treaty, you – and your peers at similar schools in China – are the key to our political and economic future.

Your generation of leaders will decide whether China’s rise will lead to conflict, as some – like Henry Kissinger – conjecture may be inevitable: as an emergent power supplants an established power.

Or whether a powerful United States and a prosperous China can grow, succeed, and thrive together… peacefully sharing the world stage, avoiding the rhythms of history.

Experts like Henry Kissinger have argued for decades that competition is “embedded in human nature.” As students of competition, in a sense, I cannot imagine that you disagree!

But – with due respect to the experts – what shape that competition might take… and whether this crucial relationship between the world’s chief economic powers will be defined by dialogue, or by discord… is very much up to you.

CHINA: RISEN, AND RISING STILL

As you may know, I am Australian by birth, Greek by heritage, and I now live here in the United States.

But of all the places where I have lived and worked over the course of my career, none has commanded more of my attention, or fascination, than China.

I first traveled there 40 years ago – for one of my first jobs at The Dow Chemical Company. Since then, I have been back multiple times each year. I was in Beijing just last week, where I had the opportunity to speak with a group very much like this one at Tsinghua University. I am not exaggerating when I say that China surprises me every time I return!

I was lucky to have a front-row seat thirty years ago when Deng Xiaoping opened China to the world. And in the decades since, I have had the privilege of watching – and even better, participating – as China’s rise has transformed not only China, but the rest of the global economy.

These days, it seems China is at the center of every global conversation – from this forum… to last year’s U.N. conference on climate change… to the G20, which will convene in Hangzhou this September.

We are all China-watchers, and many of us are China students. And this has made many people quite sensitive to every fluctuation in China’s economic and policy environments: whether the latest news out of Beijing or the latest numbers out of Shanghai and Shenzhen.

DUAL HORIZONS

Many have been alarmed by the stock market turmoil we have seen in recent months. Some economists predict that China’s economy is in for a “hard landing.” They suggest a “severe adjustment period” is just around the corner.

We cannot be blithe about this volatility. But the fact is that China’s economy is in the midst of a once-in-a-generation transition: President Xi Jinping’s pivot away from the hazards of commodity exports… and toward the economic strength and stability that flow from higher levels of domestic consumption and tradable value.

This transformation began in 2012. It will continue for another five years – at least. But I believe it will prove even more critical than the Deng Xiaoping opening of thirty years ago, positioning the world’s second-largest economy for more sustainable growth and success.

That is why, despite the growing pains we will see in the short term, I disagree with the conventional wisdom.

I am not merely optimistic about China’s economy.

I am confident in China. I am bullish about China!

I am not suggesting that growth and prosperity will be automatic. That you can just throw a dart and hit a bulls-eye, so to speak, as you might have been able to do in China a decade ago.

On the contrary: we have real volatility to contend with. We will have to brave global headwinds and slowing growth… navigating short-term challenges in order to take advantage of long-term opportunities.

We will need to act like pilots do – keeping one eye on the instruments in front of us and the other on the distant horizon. I call this a “dual horizons” mindset. And it is the only way to weather this turbulence and keep moving toward our destination.

Positioning ourselves for success in China – today, tomorrow, and ten years from now – will not be easy.

But it is a matter of choice.

We can choose to participate. We can choose to be partners in this new phase of the Chinese economy.

If we do, I am confident this choice will be rewarded.

TWIN TRANSFORMATIONS

With the 13th Five Year Plan that President Xi unveiled last week, China’s government is accelerating its pivot to the domestic sector… transitioning from being an exporter of basic materials to a creator and consumer of high-tech goods and products.

At Dow, we have chosen to be part of this transformation. To help teach China how to build the demand side.

Even though we have been in the country for decades, we have not made the mistake of thinking we are owed anything. Because Dow does not want to be merely present for China’s transformation – or Saudi Arabia’s… or India’s… or Europe’s and America’s, for that matter.

We want to power these transformations. We want to help drive them.

This is why, ten years ago, we began a historic transformation of our own.

Ten years ago, Dow’s success depended on the commodities cycle. We rode it up and down like a roller coaster. But we had come to recognize that the path we were on was unsustainable. We saw that, at a time of increasing volatility, in a world where change moves at the “speed of live,” many industrial conglomerates were too big, complex, and unwieldy to survive.

So we chose a different path.

We transformed into an engine of innovation – a close partner to customers in solving their challenges. We adopted a philosophy I like to call “smart scale”: maintaining our industry leadership while honing our organizational agility.

As a result, our success is no longer driven by the cycle. It is driven by innovation and integration. And today’s Dow provides not just products, but solutions, to our customers. Because today’s Dow is nimble enough to go where the growth is.

SERVE THE RIGHT MARKETS

We transformed, in part, in order to serve the right markets.

In China today, that means helping the middle class grow.

By 2022, China’s middle class will grow to 630 million – twice the present U.S. population. This will create enormous demand for the high-value solutions our transformation has left us uniquely positioned to provide.

But again, this did not happen by accident. We chose this path. It has taken years to prepare ourselves for this opportunity.

Over a decade, Dow has positioned our product mix in China to be technology-driven, waiting for the country to shift its economy toward one that values high quality products… not just a large quantity of products.

Rather than selling commodities and reprocessing them for export – the China engine of yesteryear – we worked to fulfill essential needs… to build goods no one else can build… and to serve China’s consumer engine of today and tomorrow.

In 2009, we launched a world-class business and innovation center in Shanghai, our largest outside of the U.S., including state-of-the-art R&D facilities where more than 500 scientists and engineers work in 80 different labs. We have opened one new business center in China each year since 2012. And we broke ground just two weeks ago on a brand-new Dow Agricultural Sciences plant, in northeastern China, that will manufacture industry-leading products for China, and for the world.

Our transformation is allowing us to drive and capture value in new places… and even to achieve 10 percent year over year volume growth in 2015, in spite of the broader slowdown we have seen.

COLLABORATE LOCALLY, INNOVATE GLOBALLY

This is possible only because of Dow’s deep roots in East Asia.

It is because our transformation has been fueled by local collaboration… in pursuit of life-changing innovation.

I often say that Dow is a company of communities. We are where we operate. And this means we increasingly are China.

Our employees and leadership teams do not just work in the markets they serve. They are of these markets. And they can forge the strategic relationships that companies like Dow need: close, collaborative connections with NGOs and governments.

A perfect example of strategic collaboration in action is the U.S.-China Building Energy Efficiency Fund – an ambitious new partnership in which Dow plays a pivotal role.

Today, buildings are the source of roughly 40 percent of all greenhouse gas emissions. Our Energy Efficiency Fund will address this by reducing the costs of sustainable American technologies… while accelerating their development in China.

The Fund will also serve a broader, global good – helping to usher in a brighter future for people around the world.

This, too, is at the heart of China’s transformation, and at the center of the 13th Five Year Plan: an ambitious strategy that will bring the government’s focus on environmental and social well-being to the fore.

The Five Year Plan will achieve this by prioritizing emissions reduction… addressing the root causes of air pollution… and rallying stakeholders throughout the country to enhance sustainability both from the “bottom-up” and from the “top-down.”

The Plan will also strengthen the government’s enforcement of environmental regulations. It will bolster China’s environmental justice system. It will encourage investment in sustainable technologies and incentivize “green” business practices. Most importantly, it will mobilize both the Chinese public and partners in private enterprise to meet the considerable challenges ahead.

SUSTAINABILITY

After all, this work cannot be completed by government alone!

Overcoming today’s sustainability challenges will require solutions that can only be delivered by government, business, and civil society in close collaboration.

Consider that air pollution contributes to the deaths of a staggering 1.6 million Chinese citizens each year. That is 4,400 lives every day. And the problem is only getting worse.

Consider that, by 2025, 1.8 billion people – in China and around the world – will live in regions where clean water is scarce.

Consider that, by 2050 – as the global population tops nine billion – worldwide demand for food will increase by 60 percent. And all of humanity will be counting on sustainable solutions to address these urgent needs.

Fortunately, sustainability is also a pillar of Dow’s transformation. We share with China a steadfast belief that doing well by doing good is not only possible, but essential – even in today’s volatile environment.

With our 2025 Sustainability Goals, Dow is integrating the value of nature into everything we do. And our scientists in Shanghai are leading the way when it comes to inventing and manufacturing sustainable solutions – solutions that directly address priorities laid out in the new Five Year Plan:

  • To keep the air clear, our scientists have pioneered a first-of-its-kind formaldehyde abatement technology that gives paint incredible air-cleaning functionality, converting formaldehyde in the air into harmless water vapor.
  • To address the water challenge, Dow has worked with the Haier Group to commercialize the world’s first eco-friendly washing machine, which reduces water consumption more than 30 percent… while removing as much as 99 percent of bacteria during washing.
  • And to provide better food safety and extended shelf life, we have developed technologies like PackXpertTM, which has won the China Sustainable Package Technology Award and the “R&D 100” Award for its reduction in raw materials use – and its ability to protect more product in a lighter package.

CONCLUSION

Of course, innovation does not happen in a vacuum. Our ability to continue developing differentiated, sustainable solutions will depend on the government’s willingness to create an atmosphere conducive to innovation… friendly to entrepreneurial spirit… and founded on mutual trust.

I have conveyed directly to President Xi that he can count on Dow’s partnership as China embraces regulatory reform… and develops clear, rational rules of the road. Because Dow, like China, is focused on the future we can build together.

The theme of this conference, “Unveiling China’s Next Wave of Surprises,” stimulated me to think about China’s last wave of surprises, from the great opening of Deng Xiaoping’s China, circa 1983-2013. How, toward the end of these 30 years, China had become an export engine par excellence… but had left many of its citizens behind.

I remembered a session with Premier Wen Jiabao where he teared up when he spoke about the great achievement of bringing 300 million people out of poverty… but how many had been left behind. How the issues of corruption, income inequality, and real estate bubbles were endemic to the new China – and the new China was not inclusive.

President Xi Jinping is sweeping in an era of fundamental new reforms to solve these issues and many more. So I thought, as an avid China-watcher and Sinophile, that I could conclude my remarks to you today by having a list of China’s next wave of surprises over the next decade.

Here you go. Some are already obvious:

  1. China will move to a phase of SOe’s… with a little “e.” China’s entrepreneurial ecosystem will be unique to China.
  2. China’s consumers will outspend their U.S. counterparts, on a run-rate basis, by 2025.
  3. China will keep a large agrarian economy, but will be a fast adopter of new technologies.
  4. “Made in China” will be matched by “Invented in China.” And IP enforcement will become stronger and stronger.
  5. China’s geopolitics will be led by their geo-economics – which will define their relationships with other countries.
  6. And last but not least: China’s environmental stewardship will become exponentially better, and will be an exemplar in enforceable regulatory standards. We will all be able to breathe in Beijing again!

My final thought for you: do not let the 6.5 percent GDP growth number fool you. At a $10 trillion GDP, every year China adds a G20 economy.

Go East! There is opportunity and unique experience in every sector and on every street corner.

Thank you.