Davos leaders don't know how to deal with China's economic system

DAVOS, Switzerland — The heavyweights of Western-style capitalism in Davos don’t yet know how to deal with China's authoritarian state capitalism.

The big picture: For much of the past 70 years, the behavior of Western companies has been shaped by Western laws and regulations, and by the vagaries of Western markets.

• Now China is the first non-Western, authoritarian country with both the market size and the will to reshape the behavior of multinational companies, and even Western governments, to better fit its own interests.

Why it matters: “The fact that the Chinese are not in any way aligning with or integrating with Western-style capitalism is something that these CEOs are having a hard time coming to terms with,” said Ian Bremmer, president and founder of Eurasia Group, in an interview at Davos with Bloomberg.

Case study: China telecom giant and 5G leader Huawei has received tens of billions of dollars in various forms of government assistance, according to a Wall Street Journal report.

• This has helped it offer its products and services below market cost — and gives it an edge over competitors that top executives at Western companies are reluctant to acknowledge.
• The U.S. government has urged allies not to use Huawei 5G because of security problems and the company's close ties to the Chinese government, even threatening to withhold intelligence sharing.
• Despite the warnings, the British government looks set to allow Huawei into its telecommunications network, and Germany may follow.

What they’re saying: "[I]n some cases, the geopolitics are just slowing down 5G development as a whole, unfortunately,” Erik Ekudden, chief technology officer for Ericsson, a manufacturer of 5G equipment and Huawei competitor, said in an interview with Axios.

• "It will be a huge expense for the world if people have to choose” between China and the U.S., Neeraj Aggarwal, the Asia-Pacific chair at Boston Consulting Group, told Axios.

The bottom line: Acting against the economic interests of companies is deeply unpopular among top Davos leaders.

• Yet, with the rise of China’s authoritarian capitalism, that may be what is required to preserve the security of critical information infrastructure — and the fundamental freedoms of liberal democracy.