A Business Lesson Every Entrepreneur Should Learn

“Competition is easier to accept if you realize it is not an act of oppression or abrasion – I’ve worked with my best friends in direct competition.” – Diane Sawyer

A recent Wall Street Journal article about a joint venture in China highlights a couple of ideas that we have been talking about in Early to Rise for many years:

1. Many businesspeople (and apparently some business writers) think competition is bad and that reducing or eliminating competition is good. This is an enormously stupid and dangerous idea. Competition is good because it expedites natural economic selection, weeding out bad companies and bad products and promoting good ones.
2. When some people say they favor “win-win” deals, what they really mean is they like 90/10 deals – i.e., we both win, but I win much more than you do. This, too, is stupid thinking.

The best and smartest businesspeople welcome competition because they know it will make them perform better. They bend over backward to make every deal they do good for their partners because they understand that, over the long run, it is much easier and more profitable to grow a business when everybody wants to work with you.

To build better cars, Shanghai Automotive Industry Corp. teamed up with General Motors Corp. in 1997 to produce Buicks, Cadillacs, and Chevrolets for China’s booming middle class. During that time, GM became the biggest car maker in China and SAI learned a lot about the manufacturing and marketing of American-quality cars.

Now SAI, using the knowledge it gained and the money it earned by working with GM, is producing its own line of mid-priced luxury cars… and they are selling well.

Does this bother GM?

Not at all. GM Chief Executive Rick Wagoner told The Wall Street Journal, “We made a big bet back in 1997, and it’s paid off for us very well.”

The Journal wonders if GM gave away too much. “Its Chinese partner could end up competing against GM both in China and, someday, abroad. SAI, owned by the Shanghai city government, already makes cars that rival GM’s in a joint venture with Volkswagen AG.”

And SAI probably will end up competing against GM. Hu Maoyuan, Chairman of SAI, is clear on his ambitions. “We want to build a global Chinese brand,” he says. His company intends to “take full advantage of the technical and management experience that [they’ve] accumulated” in the GM and Volkswagen joint ventures.

Does that mean GM shouldn’t have gotten involved with SAI?

Of course not. During the last 10 years, GM made hundreds of millions of dollars a year in profits. Plus, it took a first position among Western car manufacturers in the world’s biggest market. Finally, it learned a great deal about selling to the Chinese people. Yes, it will have to compete with its ex-partner in the future, but it will do so from a much stronger position than it would have ever gained had it not made the deal.

The Journal’s question – Did GM give away too much? – reflects the kind of thinking that is very common in the business community. I call it “I win a lot. You win a little.”

Here is a situation where GM learned lots, made tons of money, and is now in a great position to do well in the future … and the Journal is wondering if it “gave away too much.” A better deal, that kind of thinking implies, would have been one where GM’s partner was never allowed to learn anything – just take its profit share and be happy.

I don’t look at business that way. What’s the fun in running a monopoly? Sure, you can make a lot of money. But you can make a lot of money competing for it too. And the difference between competing for money in a free market and taxing consumers in a controlled market is that you are much more likely to produce good products if you have competition.

Now that its partner is competing against it, GM will have to start making better cars and pricing them more competitively to maintain its dominant market position. That will be good for GM because it will have better cars to sell all over the world. GM shouldn’t – and didn’t – shy away from this competition.

I’m surprised that the writer who covered this story didn’t see that.

In making this case, I am assuming the Chinese government will not subsidize SAI and will maintain a free market. Interfering to artificially make SAI cars more financially attractive would be bad for GM in the short run but disastrous for SAI over time. Its products would degenerate from Cadillac to Lada quality.

Competition is good. Good for the consumer. Good for the economy. And good for business.

When I think about some of the businesses I’ve been involved in, this lesson is easy to understand. The nutraceuticals business, for example, was an easy business to make money in 12 years ago, when I got into it. There were only two or three players to compete with and a big and growing community of people who were willing to buy natural supplements. You could sell pretty much anything and make good money. And to cut costs and boost profits, many of the businesses operating at the time sold inferior products.

But you can only fool people – even eager, enthusiastic people – for so long. Eventually, the nutraceuticals market became sophisticated and much less responsive to hyped offers for products that didn’t have quality ingredients in optimum dosages.

As the market became more crowded with producers, consumers had more choices and so it became a lot tougher to sell cheap products at high prices. In fact, it became tougher to sell cheap products at low prices, too.

All the second-rate companies were complaining about the fall-off in the market and predicting a gloomy end to the industry. Meanwhile, some businesses were making money and growing fast. Who were they? What were they doing? They were quality-oriented businesses that were spending more money on their products and delivering nutraceuticals that really worked!

Competition weeded out the charlatans and the cheapskates but gave fertile ground to the companies that were brave enough to invest in better products.

I had two separate conversations this past week with owners of supplement companies who complained about the “decline of the market.” I nodded sympathetically. Then, this morning, I met with Dr. Sears, who is committed to quality products, and was not surprised to hear how fast his supplement business is growing.

To stay on top of the Chinese market, GM will have to be very good. But that’s a good thing, being very good, not a bad thing.

Could GM have squeezed a better deal out of SAI than the one they got? Could they have persuaded SAI to sign a non-compete clause, for example? Not hardly. The Chinese government is very aware of how attractive its market is and very sensitive, because of its history, to being exploited by the West. If GM hadn’t agreed to the deal they were offered in 1997, some other large car company would have been happy to stand in their place.

But even if SAI were willing to give GM a “better” deal, it wouldn’t have been good for GM. Sooner or later, SAI executives would have learned every detail of the GM process – and when they did, they would have been ready to compete. Having some legal document in their way at that time would have been merely a legal impediment – an impediment that they would have sorely resented and perhaps used as justification for canceling the joint venture and sending GM back to America.

A deal is only good if it is good for both parties all the time, not just for a little while. When I make a deal, I ask myself, “How could this relationship become unfair to my partner in five or 10 years?” And if I can foresee a potential problem, I fix it then, at the beginning of the relationship. If I were to wait to see if the problem actually developed, it could only result in animosity toward me later on.

Just yesterday afternoon, I helped negotiate a deal between two businesses that I mentor. The deal that had been proposed was going nowhere. One party felt it was unfair to him, and the other party felt it was unfair to him. It was partly because certain assumptions hadn’t been spelled out – but it was also because neither was trying to take care of his partner.

I did my best to show them that the last thing they wanted was a deal that would be unfavorable to the other guy down the road. “Relationships that are forced are not good for either party,” I told them. “Make sure your partner is happy and – if he is the kind of person you should work with – he will make sure you are happy too.”

Weak people like controlled situations that protect weaknesses. Strong people are happy to subject themselves to competition. Smart people want their partners to share fairly in their profits.

Be your best self in business. Welcome competition. Make your partners happy.

[Ed. Note: Get Michael Masterson’s in-depth insights and practical advice for how to earn more, save more, and get rich faster than you imagined by picking up a copy of Automatic Wealth for Grads… and Anyone Else Just Starting Out, one of Amazon.com’s Top 10 Finance and Investing Books of 2006.] [Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]