To figure out where to start, begin with two questions aimed at delineating your company’s current position and its potential to migrate elements of its value chain to China.
In chapter 2,1 used the “product market freedom matrix” framework to depict the general differentiation of industries in China. Now, it is time to apply it to your own situation (see exhibit 6-1). If there is one thing that determines what a company may or may not be able to achieve in China, it is the position of its industry on the product market freedom matrix and the degree to which that position is changing. This indicates the degree to which a company can expect to operate without official hindrance and the type and extent of competition present. Companies
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Consumer ....■»•►- Goods*
Auto
Parts
From
early-1990s to Today From Today to 2020
Retail
Auto
Manufacturing
Tourism
Logistics
Telecom
Equipment
Chemicals
Pharmaceuticals
Banking
Life Insurance
Media
1^5 Refining
Telecom Operation
exhibit 6-1 Where do your company and its industry fit?
■RESTRICTED-
Ownership
■FREE-
then need to establish the official pressures determining the extent to which a sector is being liberalized and at what rate change is taking place.
Be aware of the limits of the table. It is not absolute, and the realities of any sector can be surprisingly complex. Very few sectors remain totally off-limits to foreign involvement. Even in those that are, many multinationals have hopes that at some point they will be liberalized and entrance allowed to overseas companies. And the trajectory of product market freedom can also change. Although liberalization of industries remains the general trend, it is not inevitable, and there can be significant variations over time.
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In the early to mid-1990s, for example, many of the world’s leading telecom operators established some kind of presence in China. They all hoped to gain entry when telecom services were liberalized. That has yet to happen: the industry remains 100 percent in the hands of state- owned companies. It will almost certainly remain that way. Consequently, almost all of the operators from around the world have packed their bags and left. But as we saw in chapter 4, the bar on operators hasn’t precluded some foreign telecom equipment makers from establishing a major and hugely profitable presence in the country. Along the way, they helped the country’s operators to build their networks and equipment makers to acquire the technology and know-how needed to establish themselves as major businesses; this created a new and longstanding set of customer relationships.
Other industries have complex rules for foreign ownership. For example, non-Chinese vehicle makers are restricted to a maximum stake of 50 percent in any single operation. In the banking sector, as we saw in chapter 4, foreign banks can operate their own 100-percent-owned operations, but can only own up to 20 percent of a Chinese bank.
Even in industries that are almost totally open to foreign involvement, appreciating when “Official China” may become involved is a vital skill. The soft drinks sector has long been open to companies from any country, with almost no oversight from the government. Flowever, as noted in chapter 5, when Coca-Cola attempted to buy China’s biggest juice maker, liuiyuan Juice, in 2008, it ran into official resistance. The Ministry of Commerce eventually rejected the bid in 2009, citing its likely effect on reducing competition.
In short, while the Chinese government has generally moved toward liberalizing its industry sectors, there is no single model of liberalization. Different sectors are moving in slightly different directions at different rates. Establishing a company’s position on the product market freedom matrix establishes a broad context, then allows you to plot the nature of the specific constraints in play in your specific sector.
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This will have a significant effect on your competitive strategy. Companies engaging in the most restricted industries may need to resort to “positioning” or building connections with well-placed officials (or guanxiy as they are known in Chinese) as their major source of competitive advantage. For example, during most of the 1990s, foreign insurance companies anticipated the opening of the Chinese market. With hopes of winning licenses from the Chinese government, they set up offices in Beijing to build and maintain guanxi with government officials. On the other hand, those in the most deregulated industries will typically find themselves competing in one of the fiercest, no-holds- barred markets anywhere, with competitors from all over the world striving to get a piece of the action. Companies in these sectors will do better relying on strong capabilities, not connections. At the same time, even in the most open industries with a large number of competing businesses, the government will continue to watch over what is going on and intervene whenever it deems necessary. And the larger your company, and the more strategic its industry, the more likely you are to encounter such official intervention. In such an environment, there are no clear rules, but there are great opportunities.
This question prompts you to stop thinking of China as a stand-alone location “out there” and instead to treat it as a place with advanced capabilities. In particular, it asks you to consider moving some key elements of your business into China now, including core practices previously maintained at headquarters or in other parts of the world.
As I noted in chapter 3, tapping into China’s research and development skills is one area of rich potential for many companies, either on their own or in partnership with Chinese firms or research institutes. Information technology companies such as IBM have been in the vanguard, but others are following, in industries including consumer products, pharmaceuticals, motor vehicles, chemicals, materials, and
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transportation. So far, many of these facilities conduct little genuine research; their main focus is product localization and testing. But establishing them allows a company to position itself to tap into the most advanced research being done in China, especially in industries the government is prioritizing, such as aerospace and communications technology. By first becoming aware of the country’s research potential firsthand, these companies can then hire talent more effectively in what is already a very competitive market.
Some companies are moving much of their operations to China. Samsung decided to invest $1 billion this way in 2009 to develop more low- to mid-tier products and give itself broader market coverage. Siemens announced in 2009 that it would add $208 million, targeted specifically at alternative energy, on top of its existing $1.4 billion of general investment. Nike is investing some $100 million to build its largest logistics center in Asia in the eastern province of Jiangsu.
Other companies are starting to explore the possibilities that developments in supply-chain services offer, particularly in the trading regions of southern and eastern China. Aside from IBM, a handful of major businesses operate major procurement operations in Shenzhen, most notably Wal-Mart, which sources around $30 billion worth of goods from China each year.
On the marketing and sales side, the great challenge will be integrating the differing needs of different parts of China into an overall whole, ensuring that the right goods are being produced for each different segment, and that as markets evolve they are supplied with the right mix of products. As you will see shortly, the complexities arising in reaching new tiers of Chinese consumers will call for bringing your best practices to China, not to assume—as you may have assumed about other emerging markets—that you can get by there with cruder approaches. And at the same time, you will have to ascertain whether goods produced in China for China are suitable for sale in other markets around the world, embracing Shane Tedjarati’s “East to West” approach.
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