I n 2004 , Shane Tedjarati joined Honeywell as its China president.
Honeywell’s lines of business—in aerospace, industrial and consumer control devices, specialty materials, and transportation systems— were expanding in China. But revenues were growing by just a few percent annually. He set about changing that.
Tedjarati describes his approach as swapping a “West to East” approach for an “East to West” one. Before, Honeywell had had a defensive attitude to the Chinese market. It saw the country as a place where it had to have a presence, but where growth would come in the future, once the country had developed a little further. Honeywell hadn’t introduced its more advanced products for fear they would be counterfeited. Many foreign companies operate like this—seeing what products they have that might be appropriate for China, then selling a small volume, usually into China’s top-tier markets. They postpone any further expansion, waiting for domestic markets to reach the size and sophistication where they will need the kinds of products they already sell in the West.
Instead, Tedjarati set up Honeywell to develop products in China for China, and particularly its mid- and lower-tier markets. Essentially, the company “rethought” China. Instead of viewing China as a distant outpost of its U.S.-centric operations, Honeywell looked for ways of
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making China a core part of its global operations, where value could be originated. The company started taking China’s markets seriously on their own terms, rather than waiting for growth to come and make the Chinese economy look like that of other places.
To accomplish this, Honeywell had to follow IBM’s example and move key parts of its operations to China. The Asia-Pacific headquarters for all four of its strategic business groups were relocated to Shanghai. The company opened a global engineering center in the western city of Chongqing and relocated the global headquarters of its electronic materials division from the United States to Shanghai.
Tedjarati knew what he wanted to do couldn’t be done with its existing Chinese staff. It needed more local expertise—a lot more. The company more than doubled its China staff to more than 8,000 people, with a huge proportion of these new hires going to work in an entirely new 1,000-person research and development center in Shanghai.
With the right people in place, Honeywell then began developing new versions of its industrial controls and other products. Some had fewer functions. Others were simply cheaper. Others were essentially new products. The outcome: a range of Honeywell products tailored for the Chinese market, many of which could be exported for sale in other parts of the world. Though they often sold for less than Honeywell’s other products, the margins on these goods weren’t necessarily lower. In many cases, thanks to lower development and production costs combined with higher sales volumes, they were higher. Within four years, Honeywell’s China revenues were up threefold.
As for counterfeiting, Tedjarati points out that if a company is not present in a market, other companies may copy its product to fill the gap. But while the copier’s offerings may be cheaper, they are almost certainly inferior and probably cannot be properly supported. If a business enters China with a sophisticated product that requires support and services, it may be too much trouble for other companies to compete.
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To make his strategy work, Shane Tedjarati drew on three major strengths. First, his deep China experience. He speaks Mandarin (and five other languages). Since arriving in China in 1992, he’s traveled widely across the country, talking to people wherever he’s been. He joined Honeywell after first building a business selling information technology to Chinese banks and then serving as the China head for Deloitte Consulting.
Second, he approached the country as a place of strategic value. He looked for opportunities to migrate a far greater part of Honeywell’s global value chain to the country; he tapped into China’s pools of research talent to develop new products; and he reevaluated the stage of development of its markets.
Third, he didn’t isolate China from the rest of the world. Under Tedjarati, Honeywell developed a China vision that allowed it to rework its global outlook, leading to a new strategic outlook for the company. Indeed, since 2008, Tedjarati’s responsibilities have been expanded to include India, with the goal of identifying the same kind of possibilities that Honeywell has found in China.
Many companies remain in Honeywell’s former position. They have poured billions of dollars, yen, and euros into China, but set limited objectives. Either they seek to create a low-cost manufacturing platform to make and export products to other markets, or they want to create sales and distribution networks to reach China’s consumers, sometimes with products made in China, but also with goods imported into the country. These goals may seem admirable, but they exhibit tunnel vision. They represent a narrow view of China: perhaps as purely a venue for low-cost sourcing, or as a rapidly expanding pool of customers who are attracted to imported goods, or as a country of potential, but not yet a place where real gains can be realized now.
By contrast, one world companies recognize what it means to operate on a global stage. China isn’t the only country playing a role in their plans, but with its established manufacturing base and huge population
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rapidly growing more affluent, it is a predominant base—and a platform for developing the kinds of products and services that will sell around the world, especially to the millions of newly urbanized people joining the middle class in emerging economies. Companies like Honeywell, that take advantage of the game-changing nature of China in the global economy, are already reaping the benefits. Their examples can offer key lessons to companies that decide to follow in their footsteps.
This chapter describes the mindset of the Chinese strategist; or rather, the business strategist who recognizes that China is a key part of the global business environment. It shows how to develop a strategic vision building upon the knowledge of China (and related global trends) that was laid out in the previous chapters.
According to the classic approach to business strategy, executives are advised that they need to consider the “three Cs”—customers, competitors, and their own company. For China, another “C” needs to be added: context. Understanding China’s context, how it is evolving, and how this evolution will affect the structure, conduct, and performance of a company’s industry is vital.
I have built this chapter around three stages of diagnosis and decision making, each with questions for the individual reader. In the first stage, establish where your company is in relation to China’s development. In the second, figure out where your company wants to go. In the third, anticipate what might happen along the way, and put yourself in a position to be ready for possible threats and opportunities. To further help companies with this process, the chapter closes with a list of the key steps necessary to become a one world company.
But let’s start with a word of warning. Be careful about applying a traditional, static long-term planning approach. Things can change very rapidly in China. Straightforward extrapolations of any state of affairs are highly reliable guides. The solution to this dilemma is to build your own capabilities and understanding: to think in terms of understanding China’s business context and the forces that drive change in the country rather than moving toward a fixed set of targets. That is why I have
spent so much time in the previous chapters exploring the motivations of China’s companies, leaders, and consumers.
The best companies operating in China have built up this knowledge in-house by taking on executives who have a deep experience and understanding of the country. These include people such as KFC’s Sam Su, Honeywell’s Shane Tedjarati, and Tetra Pak’s Hudson Lee. Bringing such expertise on board, as KFC, Honeywell, and Tetra Pak did, is the single most important step any company can make.
These companies also balance their in-county expertise with a grasp of the wider picture. They have experienced global executives on hand who are neither dismissive of China nor China-centric. They possess in-depth knowledge of the country, and knowledge of global business. Ingrained, experience-based judgment about both domains is a prerequisite to integrating a successful China operation into a company’s worldwide structure. And that, in turn, can transform a global company’s performance.