With this next group of five questions, corporate leaders can consider some likely scenarios for challenges and opportunities. The critical goal, during your first few years, is to build local knowledge and experience— enough to anticipate changes in the market, to resolve the various trade-offs that are the inevitable part of doing business in China, and to judge when enough data and information has been gathered to make a decision.
The markets of most companies now active in China are concentrated in the three core areas described in chapter 2: the Yangtze River Delta
region around Shanghai, the region around Beijing and its neighbor Tianjin, and the Pearl River Delta region running from Hong Kong to Guangzhou. In the next decades, companies that see themselves as wanting to reach the entire Chinese market will have to go much farther, multiplying their local knowledge base many times over.
This will take time. KFC, as we have seen, took nearly a decade establishing its first 100 restaurants, but then was able to add more than 2,000 after that using the knowledge it had gained in its early years. Coca-Cola and Pepsi are still putting together their knowledge bases on China’s millions of retail outlets.
Knowledge can be acquired in various ways. It can be bought from various of the host of sectoral consultancies, Chinese and foreign, that have established themselves. The government has a growing body of data that is rapidly improving both in scope and reliability. The National Bureau of Statistics, its main agency responsible for collecting and collating economic and other data, has a long history of collaboration with organizations from overseas aimed at strengthening its practices and methodologies. Local companies can also be a rich source of market understanding in the regions where they operate.
Most useful, however, is the knowledge acquired through experience, the kind that comes from building out an operation product by product, city by city, province by province. Procter & Gamble has excelled with this approach, taking its personal-care range item by item across China. The French supermarket chain Carrefour has concentrated on getting the nuances of each of its stores right for the region where it operates by allowing local managers considerable latitude to source their own supplies and run their stores as they see fit. Although this model of decentralization has worked well overall, it has apparently led to the company facing problems with corruption, counterfeit goods, and health and quality standards. A company with Carrefour’s strategy can succeed by learning from these experiences and codifying practices to counter them. 2
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As we have seen, many companies that have performed well in China have had their operations run by people who have worked in the country for years. They do not rotate in executives who don’t understand the local context.
This has several major implications for multinational companies. Think carefully about the role of expatriates and how long they will be required in China—and on the other side of the coin, whether localization can be usefully accelerated. Whether they are local or expat, gaining the necessary experience can take several years. The ability to read and speak Chinese is highly desirable. So is global awareness; promoting executives simply because they are Chinese is not an effective way forward.
While guanxi are becoming less important than they were, building value-adding, mutually beneficial relationships with local partners continues to be of vital importance. It allows companies to fine-tune their understanding of developments in their industry. Connections are usually personal rather than connected to someone’s position, another reason for keeping successful executives in place rather than moving them on. But note that these relationships can be subject to disruption. A central government decision can reverse years of relationship building or undertakings made by local officials.
One way of building strong ties with local businesspeople and officials is to get on the board of a Chinese company. Some of the largest domestic corporations have outsiders on their boards. For example, John Thornton, a former president of Goldman Sachs, serves on the boards of both China Netcom, one of the country’s big-four telecom operators, and ICBC, the largest of its big-four banks. I am a board member of Baosteel, China’s largest iron and steel group, and of the SAIC Group.
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Another way to foster links is to work with the Chinese government by helping it build competency. Major global accountancy firms have advised officials on ways to structure China’s tax framework; investment banks have worked with its stock exchanges, and many standards are adopted from foreign versions. Of course, there’s no guarantee that the government will follow any suggestions or advice proffered, but in general officials always want to know how things are done elsewhere to see if there are measures that can be usefully introduced in China.
Monitoring changes in the consumer markets of China is tricky enough, given China’s size and the rapidly shifting demographic makeup of its cities and regions. Making matters far more complex is the government’s impact on market discontinuities. Officials may decide to allow or ban a good or service, and can create and destroy markets all but overnight. In chapter 2 we saw how allowing companies to offer auto finance contributed to exponential growth in passenger car sales and how letting people buy their homes from their companies created a home mortgage market. Similarly, in mid-2008, the government actively discouraged outside companies from entering resourceintensive or pollution-heavy sectors and removed tax rebates for many categories of exports. Although various of these measures were reversed or relaxed as the economy slowed in late 2008 and early 2009, officials are likely to use such measures again in the future to guide companies away from sectors they disfavor.
Anticipating such changes is not easy. Acknowledging that they will happen, however, is essential, as then a company can be ready to move quickly when events move in its favor. For some industries, this means maintaining an office in Beijing that can liaise with the relevant ministry or other official body. But beyond this it requires a strong grasp of official China’s strategic agenda and the possibilities of change; and it
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means having access to the best possible sources of information on government thinking.
Executives whose experience before coming to China was focused on the cost side of their businesses, as is often the case in more mature markets, may have particular difficulties in adjusting to the country’s discontinuities. Revenues of businesses in developed markets are often flat or growing at a single digit rate, resulting in mindsets that tend to be attuned to linear and incremental change. China-based enterprises need managers who can see things in nonlinear fashion and then act boldly when required to do so.
Trade-offs are an essential part of doing business in China and must be accepted as such. The biggest trade-off that will present itself to almost any company is certainty versus opportunity. Given China’s rate of change, the undeveloped state of many aspects of business, and shortages of data, it is almost impossible to make decisions with the full range of knowledge most companies would like. Delaying too long may lead to a company missing out on a growth surge for its products, but moving too quickly may result in wasted investment.
Chinese companies are particularly proficient at handling such tradeoffs. They pursue opportunities wherever they see them and are accustomed to rapid entry into hot new business sectors. Those that are successful with this approach can grow very fast, but they can also crash. Despite China’s brief corporate history, hosts of companies have already had time to rise fast and then fall to a fraction of their former size, or even to vanish without a trace. One example is D’Long, a conglomerate that in the mid-2000s had revenues of close to $4 billion but collapsed into bankruptcy after its founder, Tang Wanxin, was found to have illegally raised capital and manipulated the share prices of various D’Long subsidiaries. He was sentenced to eight years’ imprisonment. Another example is Guangdong Kelon, once one of China’s leading refrigerator
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makers, whose chairman, Gu Chujun, was tried for embezzlement and fraud after the company overstated its revenues by $150 million and its profits by around $50 million between 2002 and 2004. Then there is Ningbo Bird, a maker of mobile phones that briefly in the early 2000s soared to become China’s largest domestic mobile-phone brand, third in sales only behind Nokia and Samsung. Now it is just another of the many tens of local handset makers struggling to cope with competition from Nokia, Motorola, and Samsung. 3
For multinationals, the trade-offs can be more nuanced. Especially in their early ventures, it is often worth trading investment for experience. Many multinationals, particularly Japanese ones, treated the 1990s and early 2000s as learning years, positioning themselves to be ready for when the economy had reached a size where they could start making serious returns. Toyota epitomized such an approach: for a long time it was widely regarded as moving too slowly, as first VW and then GM established joint ventures with the heavyweights of China’s auto industry, Shanghai Automotive Industry Corporation and First Auto Works (FAW). Toyota also has a joint venture with FAW, but what could prove the jewel in its China crown is its south China operation with Guangzhou Auto, a relatively lightweight company. Based in a zone that includes a purpose-built shipping port for transporting cars to other cities along the Chinese coats, Toyota has emerged with far greater control and with a far less ambitious partner than GM and Volkswagen have. This will probably give Toyota greater control over the direction of its development, providing it can navigate the downturn in its China market share that accompanied the global economic crisis.
Many overseas businesses have been as opportunistic as their Chinese counterparts. The foreign financial institutions that took stakes in Bank of China, China Construction Bank, and Industrial and Commercial Bank of China ahead of their international listings in 2005 and 2006 accepted that although their investments weren’t bringing them a say in how these banks were run, being involved early in their development appeared to be a trade-off worth making.
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In many other industries, most companies wanting access to China’s markets have had to trade some of their know-how and expertise in return. Siemens and Alcatel gained their footholds in the country’s telecom equipment sector this way in the 1980s and 1990s. The practice also lies behind most of the large automotive joint ventures. In all such negotiations, China’s greatest strength is its awareness of where it is headed: reestablishing itself as a major economic force. For this it is prepared to trade off short-term gains, particularly in market share, for longer-term access to technology and know-how.
Companies must also bear this in mind when it comes to their intellectual property. Given China’s reputation for piracy and counterfeiting, there is every reason to take threats to a company’s proprietary knowledge seriously. Protection measures can include keeping a key process offshore or simply ensuring that security within plants is a priority, with strict control over who is allowed to have access to which part of a factory. The trade-offs in deciding whether to transfer technologies often involve more than a simple fear of whether they will be stolen or copied. In some instances, for example, not transferring a product or a technology can be an invitation for a domestic company to try to reverse-engineer and produce their own version. Whatever the quality of their offerings may be, they know they will gain expertise in manufacturing and selling this good. Importing the good or technology, however, will make copycats vulnerable to competition from the real thing, which is usually superior and can be offered with better support. Moreover, once in the market, a company can start looking at how best to both shape it for Chinese needs and take advantage of China’s lower-cost manufacturing to make its offerings more competitive.
China will remain a not entirely transparent place to operate in for many years to come. Companies looking for certainty in this environment
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will find themselves foregoing action until it is too late. The country has produced a generation of executives who thrive under these conditions: figures such as Zhang Ruimin, head of Haier, or Ren Zhengfei, the founder of Huawei, know that they won’t succeed by getting things right all the time. Instead, to maximize their chances of success, they are ready to take advantage of sudden openings. They act fast and decisively, anticipating possible opportunities for success rather than looking to consolidate or protect market gains already made.
A long list of multinational companies have failed because they haven’t been able (or willing) to move opportunistically. Peugeot’s initial venture in Guangzhou was a disaster. But many companies have learned from these experiences. Peugeot Citroen has since developed a strong joint venture in the central city of Wuhan with Dongfeng Auto, with a factory capable of producing nearly half a million cars annually.
Overall, according to the various surveys undertaken each year, profitability is rising for global companies in China. For example, the American chambers of commerce in Beijing and Shanghai found in 2008 that around three-quarters of the companies surveyed report themselves to be making money in China, a percentage that has steadily risen over the years. 4 Even more noteworthy is the fact that a decade ago, only 13 percent of companies reported margins in China higher than their worldwide averages; in mid-2008 (admittedly before the onset of the global financial crisis) this figure was approaching half. 5
Five years ago, it was possible to make a strong case that the unknowns about China made delaying a decision to invest worthwhile. But the country is more accessible and transparent now; it is no longer excusable to claim to be operating in the dark. There are also a lot more people with experience of operating in China, Chinese as well as foreigners, and the quality of decisions is improving. The decision about how to be involved can be right or wrong; the decision not to be involved is almost certainly wrong.
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