Of course, not all companies need to have globally integrated, one world operations. Companies in industries such as restaurant chains, or businesses whose products and supporting services are highly tailored to particular markets, may do very well remaining local. But for those that can manage it, the benefits of being a one world company are likely to be substantial.
For companies already sourcing or manufacturing for export out of China (type B companies), the primary goal should be to gain additional scale benefits by capturing sales opportunities in the Chinese market. The key success factor is adding on-the-ground knowledge of markets to already existing relationships with local suppliers and developing the logistics and distribution skills to serve locations across the country. Wal-Mart has taken this route. Its sales from stores in China represent a total value far less than the $30 billion of goods it sources in the country. But it is expanding its footprint rapidly and using its sourcing knowledge to secure products for its stores in China.
For companies that have high volumes of sales but limited production capacity in China (type C companies), the main objective must be to take full advantage of China as a low-cost country to feed their global delivery networks. The key success factors in this case are expanding the manufacturing end of the value chain, including adding the capacity to develop products suitable for China and ensuring the right location is chosen to be able to tap into established or emerging supply networks.
Many of the global luxury vehicle manufacturers, pushed by local content rules and pulled by rapid sales growth with increasingly affluent consumers, are undergoing this process. BMW and Mercedes-Benz both have aggressive expansion plans for China, simultaneously increasing the amount of production they are conducting by localizing inputs and growing their sales networks.
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THE CHINA STRATEGY
Those that now have neither major sourcing nor sales operations in China have the advantage that they can build integrated operations from the start, but the disadvantage that they are likely to lack experience. They should not, however, feel that they have necessarily missed the boat; China, despite its achievements, remains at an early enough stage of its development.
Additionally, there are other important differences in the management approach, especially for aspiring one world companies. VW’s experience in China illustrates this point. The German car- maker was an early entrant into China in 1984, with a great deal of success in the market due in part to its advantage as one of the first movers in the industry. It succeeded in localizing production, as well as most sourcing, and brought in a dedicated management team knowledgeable about the country. However, it was slow to react to increasing global product convergence, fueled by global mergers and acquisitions in the auto sector, and the resultant opportunity to globalize its supply base. As a result, VW continued to sell aging products while competitors introduced attractive, new vehicles with more modern technology. Between 2000 and 2006, its market share fell dramatically. At the same time, due to the lack of integration among its sales, sourcing, and production operations, VW failed to take advantage of China’s low-cost sourcing base for vehicles produced in Europe.
Faced with this sharp erosion of its business, Volkswagen embarked on a five-year restructuring program. This aimed at reducing costs by increasing local sourcing and centralized purchasing for both China and global factories; better meeting customer needs with around a dozen new or upgraded models; setting up a Skoda plant (taking advantage of its lower-cost Eastern European subsidiary to make cars for the low-end of the market); and opening new dealerships, each with far more narrowly defined customer segments. By 2008, its turnaround was working, with sales increasing and its market share once again rising. 6 Though it has lost much ground to GM, Toyota, and
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various Chinese companies, Volkswagen is now on a path to becoming globally integrated.
A recent addition to the growing list of one world companies in China is Goodyear, which now produces some of its most advanced automobile and truck tires in China for the domestic and overseas markets. Goodyear has had a presence in China since 1994. But between 1995 and 2002, its global sales stagnated, with a compound annual growth rate of less than 1 percent. Then it made a massive investment in the northeastern coastal city of Dalian in 2002, setting up China both as an important growth engine for sales and a global supply base. To accelerate its growth, the company built a network of franchised after-market outlets to sell both its tires and other products and services related to auto servicing. From fewer than 100 outlets a few years ago, the total has grown to around 1,000 franchises. This large domestic network provides the local reach to exploit the full potential of the dual sourcing-sales mission Goodyear had originally envisaged.
Goodyear designed its strategy to take advantage of China’s opportunities as both a manufacturing location and market. And it grew its sales network far faster than its main international rival, France’s Michelin. Goodyear also increased its average revenue per store by 30 percent a year as it reacted to the increasingly sophisticated needs of its customers. It upgraded its outlets to offer full and tailored tire services that created additional revenue streams beyond just capturing volume growth.
Quality has been an issue for companies sourcing and exporting from China, as many domestic suppliers still do not consistently adhere to agreed standards. Goodyear’s answer to this challenge was to develop long-term partnerships with its suppliers, and sometimes suppliers of suppliers, to help them reach its standards. Thanks to these measures, Goodyear’s Dalian facility is now capable of producing high-end, high- value tires that have received the company’s top quality rating in its global audits. And it maintains high-quality manufacturing practices
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exhibit 6-3 Key Elements of a China-Based One World Business
1. CHINA GROWTH | China sourcing ^- allows regional -- competitiveness | 2. CHINA SOURCING |
China as the key growth market - across channels, customer segments, and geographies . | China as the premier low-cost country for both regional and global commodities | |
I Additional scale creates regional cost leadership 1 | 1 China sourcing creates global cost leadership t | |
3. CHINA VOLUME | Additional scale - creates global — cost leadership | 4. CHINA EXPORT |
Leverage manufacturing expertise/technology leadership and enhance capacity around additional products or third-party contracts/leasing capacity | Establish China as the key source of finished or semi-finished goods to support global network |
Table captionSource: Booz & Company
across its network of partners by strictly enforcing process controls and regular audits of both its own operations and those of its suppliers.
Finally, Goodyear has directly addressed the complexity of logistics for global supply networks in China. The company continually explores alternative ways of reducing lead times and costs, including using railways instead of roads to move goods. This approach demonstrates that strengthening logistics capabilities can be the single best way of improving companies’ performance in the country. 7
Whichever point they start from, the essence of what is needed to operate as a one world business is captured in exhibit 6-3. Growth in China—selling to its markets—will necessarily lead to increased China sourcing; increased China volumes in turn drive increased China exports. In many respects, the starting point is relatively unimportant; the most critical factor is the ability to use the first forms of success to drive expansion into others, and to coordinate all this with a company’s global operations.
Even companies that successfully integrate their sales and sourcing operations will still have challenges ahead of them. For example, one
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VISION
common challenge is building sufficient scale for effective global supply-chain integration. Thus, whenever the Wanxiang Group, a major Chinese auto parts manufacturer, enters a new market around the world, it first looks for ways in which third-party distribution can broaden its reach within the shortest possible time. External partnerships are collaborative and focused on acquiring the talent and technology conducive to scale efficiency and volume enhancement. These combined efforts have been instrumental to Wanxiang’s impressive sales growth of more than 30 percent since 1999.
In chapter 7, we look at the temperament and insights of leaders of the most effective companies operating in China, and the quality of versatility that allows them to succeed.
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CHAPTER 7