T o see how a versatile Chinese company responds to the challenges of its rapidly changing business environment, consider BYD, the battery and automobile manufacturer based in Shenzhen. Like many of China’s most successful firms, it was founded in the mid- 1990s, when Wang Chuanfu—along with hundreds of thousands of other Chinese people—abandoned his job in a state-owned enterprise to xia hai, or “jump into the sea” of business. Wang built the company, whose name stands for “build your dream,” into one of the world’s leading makers of rechargeable batteries, with an annual turnover of more than $3 billion. Its batteries turn up in around 30 percent of the world’s mobile phones, three-quarters of its cordless phones, and a huge range of other tools and battery-powered goods. From batteries BYD has moved on to making additional mobile-phone components for Nokia, Motorola, and other handset makers. And it’s started building cars, launching its first vehicle in 2005, a gasoline-powered sedan called the BYD F3.
At the time, many observers were suspicious. Why on earth was an electronics company moving into the auto business? Their concerns weren’t alleviated when Wang in 2007 announced that his target was to make his company the world’s largest carmaker, with sales of 8 or 9 million vehicles a year by 2025. That year, BYD sold 90,000 cars.
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Hubris? Possibly, especially if one judged by that first gasoline- powered sedan. But the F3 represented little more than a milestone along the way to the company’s real target: a battery-powered electric car. In 2008, BYD’s vehicle sales rose to 170,0002 At the end of that year, it started selling a plug-in hybrid gasoline-electric car in China, the first such commercial model to go on sale in the world. In 2009, it was due to start selling its first all-electric car: the E6 (“E” stands for electricity). Total sales for the year are expected to be around 350,000. And backing for its project is coming from some powerful sources. In September 2008, MidAmerican Energy Holdings Co., an Iowa-based energy producer majority owned by Warren Buffett’s Berkshire Hathaway, bought 10 percent of the company for $230 million. 2
If all of this makes BYD seem unusually flexible for an automotive company, that’s not surprising; it has long been noted for its ability to adapt. It established itself by displacing the Japanese companies that dominated the battery industry in the mid-1990s. Where these companies were focused on improving the quality and capabilities of their products, which made them expensive, BYD set out make the same kind of batteries but at a much, much cheaper price point. Using low- cost labor instead of expensive automated production lines, and looking wherever possible to find alternative cheaper materials, it ended up with batteries that cost a fraction of their Japanese-made equivalents. It used its lower unit cost to build economies of scale, which in turn allowed it to extend its market from mobile phones and other high-end products to cheap consumer goods such as toys.
The outcome is a company with a huge workforce: around 130,000 people, mostly young women who work manually on production lines, but including an army of 10,000 R&D staff continually modifying and improving BYD’s products, production techniques, and material inputs.
On the foundations he has already built, Wang, still only in his early forties, may well be able to transform the world of carmaking. If he succeeds, it will be in an industry notorious for its daunting barriers to
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entry. And yet the BYD vision stands out, even among that of most other successful entrepreneurs in China, because of the way in which it dovetails with three of official China’s aspirations: to make the automotive sector one of China’s pillar industries; to establish China as a leading source of innovation, particularly in the development of new technologies; and to move the Chinese economy from its current resource- and energy-intensive condition toward being more sustainable and environmentally friendly. This doesn’t mean BYD will necessarily benefit from direct government support (though it might), but it means that the interests of the company and the country will mesh.
Since it was founded, BYD has operated at the liberalized end of the product market freedom matrix, first in developing a core component of mobile handsets, and now with electric cars, neither of which has been subject to heavy-handed official regulation. Throughout its various incarnations—as a component manufacturer, research-based company, and full-scale automobile company—it has built its business model around serving the huge emerging market of Chinese looking to buy their first car. BYD’s product is also aligned with the needs of cities and their governments around the country that want to develop their own transport sectors but are increasingly concerned about the environmental and other costs posed by traditional cars.
No one, including Wang himself, is 100 percent sure about how sustainable BYD’s growth will be. But whether or not Wang ultimately turns out to be right or wrong in his extraordinary vision, he is positioning BYD to thrive no matter how the auto industry evolves. If he succeeds, it will be because of the company’s versatility. BYD may prosper as a battery component manufacturer, or a manufacturer of vehicles for China, or as a global electric carmaker. Because of its willingness to innovate in all these domains, the possibilities of accomplishing all three cannot be written off. And even at this early and uncertain stage, the BYD story illustrates an important quality of Chinese entrepreneurs: the versatility that carries them forward through a wide range of rapidly changing circumstances.
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Versatility in business is the source of the ability to shift course with confidence. It reflects a broad set of skills and capabilities, and the judgment needed to apply them to a wide variety of problems and lines of business. In cultivating versatility, there are seven broad organizational attributes that company leaders can set out to develop:
This is the ability to juggle simultaneously the multiple practices required to move toward a long-term goal. For example, BYD has a clear capability in low-cost manufacturing, established through its battery business, which it is now applying to full-scale vehicle production. Many of these building blocks—distinctive marketing, manufacturing, innovation, or other capabilities—will have to be rethought and rebuilt as the company advances, and on occasion even the long-term goals will have to be rewritten. Leaders with mental resilience have the toughness necessary to cope with these changes and not abandon a company’s vision when faced with day-to-day challenges or the pressure to settle for lesser objectives.
Such flexible, resilient leadership is at a premium anywhere in the world, but in most countries the knowns are largely fixed, and the unknowns are at least guessable; in China, the knowns themselves can change, and the unknowns can remain unknown. In early 2008, for example, after several years of rising costs for labor and materials (and exacerbated by the appreciation of the yuan against the dollar), many manufacturers started to think about relocating some of their manufacturing operations to other countries.
But the onset of the global economic crisis changed their minds. By mid-2009, as exports from China fell sharply, sourcing-centric companies found themselves looking at China’s own consumer markets, where although demand had also weakened, the decline was nothing like that which had taken place in Europe and America.
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Here was a major new opportunity—or was it? New uncertainties emerged. How fast could China shift to becoming a more consumption- driven economy? How effectively would the government’s massive stimulus package be spent, especially given its weighting toward infrastructure and the potential for corruption and other bureaucratic inefficiencies? How would China’s stance on foreign ownership of companies within its borders evolve, especially given similar tensions in the United States and Europe?
In the financial sector, would the government continue deregulation, or retrench? How would the government respond to concerns that stakes in many strategic state-owned enterprises were being sold too cheaply or easily to overseas businesses? Would these sales continue, or would they be slowed down or even stopped?
In other sectors, would a greater tendency to protect Chinese industries emerge? The government had refused to allow the Carlyle Group’s bid for the Xugong Group, one of the country’s largest makers of heavy machinery, or Coca-Cola’s bid for Huiyuan Juice to go forward. Would it continue to ban similar deals?
These uncertainties left many multinational companies with a dilemma: choosing whether to raise their commitments in China or retrench their portfolios. For some, headquarter-driven business reviews led to the pruning of investments deemed noncore, but others set about expanding their business in China as they cut back elsewhere. DHL, for example, owned by Germany’s Deutsche Post, in late 2008 shut down its express delivery service within the United States. But it remained keen to expand in Asia, tapping growing intracountry demand, especially in China, which the company describes as an “an absolute must-have.” To do this, it sought to acquire local rivals or form joint ventures.
Indeed, a number of companies kept expanding in China, including the Carlyle Group, which spent $20 million on a 10 percent stake in El- lassay, a high-end Chinese women’s fashion house, in early 2009. Royal DSM, a life and material sciences company from the Netherlands, bought 10 percent of North China Pharmaceutical Group in a deal
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worth $110 million; and Yum! Brands acquired 20 percent of Little Sheep, an Inner Mongolia-based hot-pot business with a few hundred outlets around China, for $634 million. 3 Coca-Cola, for its part, announced in March 2009 that it would invest $2 billion in China in the following three years. The scale of this investment plan surpassed the total value of investment the company had made in the previous thirty years, since returning to China in 1979. Earlier the same year, PepsiCo also announced a plan to invest $1 billion over four years to expand its capacity in the country’s inland and far western provinces. Novo Nordisk announced it would spend $400 million on an insulin plant in Tianjin, which will be the company’s main Asia-Pacific manufacturing hub. Bayer Schering Parma declared its commitment to invest $139 million over five years in a Beijing R&D center.
The list could go on, including many more examples of companies committing investment to China despite the world’s economic slowdown. It is worth noting, however, that the latest round of deals have a different nature than those conducted just two years before. Many involve previously untapped geographies. The government’s emphasis on boosting their development as part of its stimulus program has led to the creation of some substantial new markets. There has also been a shift in focus to raising consumer spending, with subsidies given to a wide range of electronic and white goods. Financial services have also benefited. Previously, banks largely concentrated on urban areas in eastern coastal provinces. As a result credit availability for rural small- and medium-sized enterprises (SMEs) was highly restricted. Most of the financial services available in rural areas came from rural credit cooperatives, the Postal Savings Bank, and the Agricultural Bank of China, all of which are among the least innovative of state-owned banks. HSBC, however, has opened three rural banks and received approval for a fourth, seeking to bring its international experience to countryside markets and support the development of a sustainable rural economy.
Other possibilities come from Chinese companies now looking to invest in business around the world, especially in Asia and other emerg-
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ing markets. Although they know the economic crisis has created many excellent buying opportunities, the leaders of these businesses are aware of the challenges they face to make acquisitions work. This creates opportunities for international firms to help them with everything from partner search and due diligence to postmerger integration.
Global companies with the right range of abilities and capabilities— those that can devote time and resources to China despite the demands being placed on them elsewhere, that have a product or service that attracts Chinese consumers, or that have something to offer Chinese corporate partners—could find themselves in a strong position to reap the benefits of their prior investments there. But they would almost certainly have to rework their previous plans—swapping an emphasis on markets in one set of regions for another, say, or looking to change large parts of their product range. In such circumstances, companies need to demonstrate fluidity of mind: the ability to change and amend their thinking and projects on the fly.
A fluid mind is not reactive, in the sense of thoughtlessly bending to events in panic or greed, but is capable of changing easily and tends to change when needed. The reactive response to rapidly changing circumstances was summed up for me by the former China head of an American consumer goods company: “For most companies, this instability and dynamism will call for trial-and-error responses to problems. A lot of time will inevitably be spent firefighting: managing on the run in order to keep up with the exigencies of the business.” And undoubtedly, many corporate leaders and managers will take this approach.
But “firefighting” is not fluidity of mind. Executives who try to stay on top of changes at the ground level, tackling one opportunity or problem at a time, will find themselves sucked into the minutiae of their businesses and will lose sight of their overall strategy and context.
Another approach is to focus on one core task, ignoring other opportunities. But the Chinese environment may not permit this. The country and its markets are so diverse that most companies will need to work on multiple fronts simultaneously.
There is another way, one adopted by many Chinese companies, that emphasizes standing back and look for ways of viewing relevant trends and events in a holistic fashion. Exactly how to apply such a technique will have to be figured out by every individual company depending on its own circumstances and needs. But the general methodology should stand most companies in good stead. Step back and map out the array of forces at play and the relations among them: the major trends shaping the country, as described in chapters 2-5 of this book, and their particular relationship to your own industry and markets. Then use this map to make sense of the complex array of changing situations that you face. Consider in particular the possible influences at play and how likely—or unlikely—changes could impact your business.
This has little to do with making predictions, most of which, as was noted in the last chapter, are likely to be proved wrong. Rather, it is about looking at the kind of scenarios that might arise and then how best to prepare for meeting their multiple possibilities. Keep your overall goals and objectives clear and constant; like BYD, hold an aspiration that can easily be stated and defended, and that doesn’t easily change. But allow your strategies to be flexible: reacting to changing circumstances, accommodating new information and data as they become available, and remaining aware of the impact of shifts in the supply chain, the markets, the government, or the world at large.
Mental fluidity is not enough by itself. Companies need to be able to act and react quickly and nimbly when things turn out differently from what was expected. This is particularly important in China, where business takes place on a greater scale than almost anywhere else in the world. When an opportunity arises, it can be of a magnitude that will test the abilities of most businesses to cope.
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For example, when the number of mobile-phone users surged in the early 2000s, the market share of foreign companies dropped from 95 percent to less than half. Nokia, Motorola, Ericsson, Alcatel, and Siemens simply weren’t prepared for the growth in demand that came as the operators rolled out networks and slashed tariffs. Into their place stepped Chinese companies able to make low-cost phones using off-the-shelf components. A large part of Nokia’s current dominance of the Chinese market can be traced to its reaction to those events. It centralized production at one location in Beijing, invested heavily in development capacity there so that now it can produce several new phones each month, added a wide range of low-cost models, and reworked its retail model, building out links to a network of outlets across the entire country.
Other bursts of market dynamism continue to occur. Over the next decade, industry after industry, and not just those that have been opened to competition, face futures of multiple shakeouts through mergers, acquisitions, consolidations, and closures. Markets will continue to grow as more people move into cities and into the income bracket that allows them to become consumers.
The tire industry provides a good example of how companies missed a huge opportunity because of their inability to react quickly enough. Earlier this decade, most industry experts believed automobile purchases would grow at around 15-20 percent annually. But this figure was just an educated guess. Much to everyone’s surprise, up until the global economic crisis, annual growth was around twice this on average, and as high as 75 percent in one year. None of the world’s leading tire-making companies present in China were prepared for this. Suddenly they were all caught by surprise, missing a huge opportunity for growth and market share gains. They responded by overcompensating, creating massive new facilities. Toward the end of 2008, however, sales growth plunged, leaving many of these companies facing significant short-term overcapacity and perhaps long-term structural overcapacity should demand growth continue to be slow. Then, in 2009, the auto market started to surge again, turning China, as we’ve seen, into the world’s largest vehicle market. 4 Auto
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makers and suppliers, including tire manufacturers, have rushed to meet this surging demand. Finally, there is still a risk, however, that their new production lines could lead to overcapacity. Exacerbating the risk is the fact that much of this jump in demand can be attributed to government stimulus measures, which in turn have led some industry observers to ask how sustainable the increase in market size is likely to be.
Boom. Bust. Rise. Fall. The kind of fluidity that can respond to a massive upshift (to 75 percent growth) and then a rapid downshift is tough to achieve. But there are a growing number of success stories from companies that have managed to accomplish this. KFC was careful to get its business formula right before rolling out across China with major investments. Starbucks built fluidity into its entry-and- growth model in China; it chose to conduct joint ventures in a couple of key entry cities as a way to hedge against potential losses, while buying an option on the upside through an agreement that allowed it to buy out its partners. GM’s success in China can be attributed in large part to its noted fluid mindset in this country. Among Chinese auto companies, Chery and Geely have been noted for their fluidity—for example, in the ways they have revitalized their brands when facing low-cost competition.
Another reason for fluidity is the rapid changes that can occur at a very large scale, such as in consumer tastes, as people get used to goods and foods that they were unfamiliar with before. One example is milk. A decade ago, milk was sold in powder form; there was no suitable packaging to allow for long-distance transportation. As new processes such as UHT and pasteurization were introduced, the liquid milk market took off exponentially. Despite the 2008 scandal over the widespread lacing of milk with the industrial chemical melamine in order to falsify protein levels, milk is now a regular part of the diet for many Chinese, especially children. The country’s best dairy companies, such as Mengniu and Yili, remain both profitable and fast growing. In 2008, for instance, Mengniu became the largest customer in the world for Tetra Pak, the liquid-packaging supplier.
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Regulatory change will further shake up the way companies distribute and sell their goods. In some areas, older, local government- run systems still dominate distribution; in others newer private companies are filling gaps in the market. In city after city across the country, the socialist-era retail system based around small stores and state-run department stores is giving way to another one, with Chinese and foreign supermarket chains snaking out across the country, twenty-four-hour convenience stores springing up on every urban corner, and malls being built way in advance of demand in many districts.
Fragmentation is common in distribution systems. Few transport companies have anything more than a local reach. The only national ones are hugely inefficient state-owned giants. Companies that want to reach second-, third-, and fourth-tier cities must either manage a myriad of local distributors or build a distribution system themselves. There is no single answer to this. Coca-Cola set about moving its drinks to retailers by signing bottling agreements with different companies in different parts of the country. Procter & Gamble, the most successful fast-moving consumer goods company in China, does its distribution itself, as does KFC. But few companies have the same volume of goods to move as Procter 8c Gamble or 2,600-plus outlets to move them to, as KFC has. Even fewer would want to devote valuable management time to building up a series of skills in functions they typically outsource to third-party contractors in other markets. But China often calls for companies having to question the practices they hold dear in other parts of the world, and coming up with a different answer.
Putting an even greater premium on mental fluidity over the next decade will be the changes in Chinese society and official China’s approach to governance. Urbanization and the embrace of sustainable growth (with far fewer carbon emissions) will lead to some major changes in the business environment. There will be a reworking of many of the regulatory frameworks in which companies operate, most likely including a tightening of environmental controls, a greater emphasis on social equity, and greater government involvement in certain
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industries and sectors, such as those to do with energy. Certainly, China will see far less of the freewheeling “anything goes” attitude of the last two decades, and the gradual adoption of economically and environmentally sustainable practices across an ever wider range of activities.
Economic liberalization itself may shift in unprecedented ways. In the 1990s, Zhu Rongji drove the country toward liberalization because of his belief in the hazards of trying to protect industries from competition, be it domestic or foreign. The restructuring of the state sector that followed proved him right, but the benefits Zhu was aiming for have by and large been realized. Now, as the government searches for a more sustainable growth model, it wants to be more selective about which sectors it opens and to what extent, particularly in key sectors such as banking. China will continue to open businesses, but it will do so more on its own terms, where it sees clear benefits for itself or its companies.
Official moves toward the establishment of a “harmonious society” will lead to companies having to change their practices, from growth at all costs to also balancing their own needs with those of society. As development priorities change, officials are likely to look for ways in which they can exert greater influence. This won’t lead to a return to central planning, but it will lead to stricter forms of regulation or other changes. The government’s growing interest in restricting transfer pricing has already been noted; individual taxation is another area of change. Since 2007, everyone with an income of Rmb 120,000 (around $17,600) or more has had to file an annual tax return. 5
Business competition can lead to equally sharp surprises. Many multinational corporations have entered China unprepared for the fierce competitors they find there, and all too capable of underestimating them. Whirlpool lost against Haier and other Chinese competitors; eBay was deflected by Taobao; and even Coca-Cola and Pepsi have been challenged by such local companies as Wanglaoji and Kangshifu.
The most mentally fluid corporate leaders will keep multiple scenarios in mind, ready to react rapidly as they come to fruition. Sometimes entering a market via an acquisition will be the way to respond
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to a new opportunity; sometimes building through organic growth will be the right answer; sometimes the best option will be teaming up with another company. Having the scenarios in place will encourage companies to build the necessary capabilities before they are needed.
ICI Paints, a part of Akzo Nobel, has high aspirations for the China market: it wants growth of three times the average market growth rate. To meet this target, it must enhance its core position in the country’s more mature markets, and it must expand into less-developed regions where growth will be faster. This calls for entering new product categories tailored for the lower end of the market while continuing to build its premium products. As a result, it has found itself no longer managing a single paint business but instead running a portfolio of businesses at different stages of maturity. To handle this situation, the company has realigned its entire organization. Its more mature businesses have been granted greater independence, and a new corporate development group was set up to oversee the higher-growth regions, lending support for everything from business-model development and strategic planning to project management. Substantial senior management time and resources are being invested to grow these emerging businesses and develop the specific capabilities they need. Once a business reaches maturity, it will be spun off and integrated alongside the company’s other mature businesses.
Fluidity can also be highly practical. For example, rapidly improving the functioning of a supply chain—for example, with better logistics or network design—can bring sizable returns, especially if this allows companies overnight expansion or change of what they make. Many companies recognize the opportunities inherent in having a dual-mode sales-sourcing business in China, fully integrated into their global operations, but they have yet to develop the lean, flexible, integrated supply chains necessary to deliver on that potential. A study conducted by Booz & Company found that only one in six multinational manufacturers operating in China had applied postponement and segmentation methodologies to their logistics systems; most companies can
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realize major gains in efficiency. Building more flexibility into operations can also help overcome the problems faced by all companies in China, such as staff issues, product safety and quality, counterfeiting, and intellectual property theft.
The fluidity needed to meet the Chinese business environment can sometimes contradict well-established, ingrained, and previously successful ways of thinking. Chen Hong, the CEO of SAIC Motor, once remarked that while Japanese and Korean automotive makers took twenty to thirty years to develop their products, technologies, and quality standards, building scale and incorporating the skills necessary for their industry gradually, Chinese auto makers such as SAIC need to tackle all these challenges at the same time. In a similar vein, the strategy director of a major foreign automotive maker has commented that although his company is currently selling around one million cars a year annually in China, he expected this number to double within a few years; to support this extra volume would require his company to establish an entirely new operational structure.
The practices of the best Chinese companies offer some lessons in how to combine mental fluidity and operational flexibility. Haier’s move into international markets was made by using the same advantages it had used to grow domestically—niche products produced in volume and then sold at a low price—but recast for the differing needs of its new target consumers. In one celebrated example, it captured two-thirds of the American wine refrigerator market by targeting a business that most appliance companies had seen as too niche-scale to bother with. By lowering prices to a fraction of competitors’ prices, it created a volume business.
Geographical opportunities can vary dramatically in China, and they can also change rapidly. For some companies, one year Shanghai will be hot, the next it will be Chengdu. As we saw in chapter 2, companies that have
focused principally on the three current centers of wealth—the Bohai rim region centered on Beijing and Tianjin in the north, the Yangtze Delta in the east, and the Pearl River Delta in the south—will have to extend their reach inland. This will mean managing and coordinating operations at very different stages of development, in different circumstances, and in different parts of the country—but all at the same time.
Many businesspeople are already aware of the differences among Chinese regions; for example, the far west, the coastal east, the subtropical south, and the dry north. But there is also tremendous diversity within regions. Even in the wealthiest of coastal provinces, larger cities are very different from smaller towns. A half-hour drive outside a large city can take you to a far more modest local economy and less sophisticated commercial environment. China’s breathtaking economic growth, which has transformed the major cities at a breakneck pace, has exacerbated many of these differences and made it harder to plan for growth.
Many companies will move into lower- and midtier markets earlier than they would in other countries. There are two reason for this: first, because of their scale and growth potential, and second, because of the threat posed by domestic companies establishing themselves in these markets and then using them as their foundations for moving up into higher-tier markets. This can be a successful strategy, but so can the move from high- to low-tier markets, depending on the industry and competitive dynamics.
ICI Paints built a strong position in high-end emulsion products in the early 2000s, investing heavily in tier-one cities. By 2005, more than 40 percent of its China sales came from these well-developed cities. Then, to maintain its high growth rate, ICI started selling lower-end products to lower-tier cities, reaching its customers through traditional outlets such as Mom-and-Pop shops. Its goal for 2010 is to have tier- three cities accounting for 30 percent of sales, with tier-one cities accounting for just around 20 percent.
Nippon Paint, in contrast, invested heavily in lower-tier markets early on, to the extent that more than 30 percent of its sales were coming
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from tier-three cities by 2005. Since then, it has been looking to increase its share in the higher-end market. In 2006, it invested heavily in the launch of its odorless products aimed at wealthier consumers in tier-one regions. Despite their different approaches, both ICI Paints and Nippon Paint have emerged as the top players in the China paint market, with neither yet to emerge as the clear leader.
Developing goods for this wide range of markets is often best accomplished by establishing in-country research and development teams. These, however, will have to be given mandates different from those of their home-country R&D staff. Most research in developed countries is focused on producing new or high-end goods; in China, the emphasis is more on producing goods for other tiers, ones that its consumers can afford.
In some ways, thinking of China’s regions as separate countries helps; they are each as large as many other countries. But this view is also partly misleading; markets overlap among many of them, as can distribution networks. And underneath it all they are part of a single nation, with one currency and one government. The longer-term trend will be for greater unity as communications and transport networks develop.
Distinguishing the factors that link and separate adjoining regions is already an important part of any marketing strategy. Toyota has realized this: its two major carmaking plants in China lie around 1,200 miles apart; one is in the northern city of Tianjin and the other in the southern city of Guangzhou. When it set up in Guangzhou, it arranged for a special port to be built to move cars between the two locations and make it easier to serve each end of the country.
Some companies in China have built success on S curves. Through foresight and good fortune, they were present at the start of a surge of hypergrowth in their product lines, then rode an immense wave of de-
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mand to market dominance. Examples already discussed in this book include mobile communications, mortgages, and passenger cars. The Chinese economy is so complex that reliably forecasting such S curves is all but impossible. Nonetheless, this does not mean that a company cannot put itself in a better position to anticipate the possibilities of such sudden surges occurring. Spotting and managing discontinuities within market segments through the triangulation of available data is paramount, while regulatory changes affecting an industry have proved to be one of the main triggers of growth, underlining how important it is for companies to monitor what is happening at a policy level in their industry.
Similarly, understanding social and cultural shifts is important because it can help you identify when attitudes are shifting dramatically toward a particular product. (Consider the rapid cultural changes that had to occur for milk to suddenly be popular.) Metrics and context form the core of market knowledge, and a company’s ongoing ability to capture market knowledge, and act on it, will be one of the keys to success. Developing and institutionalizing this capability requires a systematic yet entrepreneurial approach, usually calling for the building of a market research team on the ground.
Even companies with well-established practices still need to adjust their research methodologies frequently. There are several reasons for this: demand is often latent, the supply side remains highly unpredictable, and proper metrics and market segmentation often remain undefined. Given all this, companies often need to make a trade-off between making a prompt decision and collecting enough data to confirm or negate hunches. The most effective companies have executives who spend much of their time on the ground—going to trade shows, talking to customers, visiting different markets, and finding out what their competitors are doing.
Unfortunately, many foreign executives, instead of spending time out scouting the marketplace, spend far too many hours in their offices, demanding that reams of data be delivered to their desks so
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that they can make decisions, but ignorant of just how much of this data is incomplete or outdated by the time it is presented to them. By eschewing in-person fieldwork, these executives generally lack the judgment to make the right decisions when the market information is incomplete or ambiguous. Doug Jackson, head of China for Coca-Cola, is an excellent example of someone who has their nose on the ground. Since his arrival in China, he has traveled extensively across the country visiting both larger and smaller cities with the aim of trying to understand the market, his customers, and the channels to market.
Even the shortest of journeys can generate valuable and surprising insights that published data cannot provide. The China head of one of the world’s largest consumer goods companies talks of the disparity he found on driving half an hour from the center of a major city where his company had just opened a key production center. Despite his company having had a China presence for more than two decades, including spending tens of millions of dollars on advertising, he found that retailers on the outskirts of this city had negligible awareness of his company’s brands.
Because it is so important to capture evolving market information, the best companies in China make a point of encouraging formal and informal exchanges of market and regulatory information within their organizations, often among people in the field and across different organizational units, so the most can be made of what information they do gather. They know that building up market knowledge over time eventually puts a company in a position to make a big bet.
While many companies are quick to praise the talent and industriousness of their staff in public, in private executives often admit to a list of grievances about human capital. Managing people is and will
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continue to be one of the hardest challenges confronting most companies in China.
The most immediate issue is the short supply of skilled and experienced staff, especially managers and professionals, a problem that will be further exacerbated as the economy continues to grow. While companies such as IBM have tapped into China’s growing number of educated, skilled engineers and technical people for its R&D and procurement teams, the competition for these individuals is intense and will become more so.
But in the longer term, an even harder challenge will be that of reworking attitudes. Chinese society has been through many wrenching changes during the last several decades. This is continuing as urbanization of a previously rural population. The instability and change that creates opportunities also leads individuals to question their loyalty to the institutions around them. As many people have pointed out, this has left many individuals in a spiritual vacuum, uncertain of both their personal aspirations and of the social mores around them.
Particularly problematic are the outlooks of many people in their twenties, thirties, and forties. A combination of the destruction of much of China’s social fabric during the cultural revolution of the 1960s and early 1970s and the “get rich fast” mentality of the 1980s and 1990s has produced a generation with little respect for traditional community-oriented values. Its cynicism is manifest in everything from job hopping and misplaced salary expectations to staff who, when offered an evening meal allowance if they work past 8:00 p.m., systematically clock off at 8.01 p.m.
Multinational companies must be aware of the larger context and be creative in thinking of ways of solving these problems. Under China’s current conditions, building teams and team spirit is unlikely to be straightforward. A lot of time and effort will be necessary, often spent one-on-one with talented staff.
Employee rights have also been enhanced with a new labor law that came into effect in 2008. Dismissing staff is far harder than it was
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previously, as is hiring people on a temporary basis. While there have been widespread complaints that the law pushes up staff costs, it should also contribute to creating more stable workforces, and ultimately act as a stimulus encouraging companies to move up the value chain. This gives companies more reason to focus more attention on hiring the right people and to invest in corporate learning and other ways to improve the quality of their staff.
Multinationals may benefit from understanding the mores of Chinese businesses. From the outside, many domestic companies appear to be operating in a transitional manner: modernizing, but still subject to many traditional constraints. Consider the differences between the prevailing culture in Chinese companies and that of businesses in developed economies (see exhibit 7-1).
These cultural differences help explain why some mergers and acquisitions go well and others go poorly. Deliberate attention to bridging the divide can make all the difference in postmerger integration or the management of joint ventures. In the short term, companies may benefit from adopting a more Chinese approach. Most Chinese employees are used to being told what to do. Asking them to be creative and come up with their own answers to problems may result in bemusement and confusion. However, companies should be wary of adopting such practices as a long-term model. In the long run, China will move away from its traditional corporate structures; to move up the value chain, companies will have to develop a broader range of innovation and creativity, which will require empowering staff.
These changes will take time. While many multinationals talk about their commitment to China as being for the long term, when it comes to human resources, it absolutely has to be. As a consequence, multinational companies must make training a huge part of their China commitment, even if they find that the price of producing the next generation of Chinese managers and executives is that many of these
exhibit 7-1 The gap in business culture
Chinese Business Culture Multinational Business Culture
Fast decision making in response to dynamic market
Large use of rules of thumb such as “80/20”
Widespread use of imitation, sometimes as a starting point for innovation
Top-down hierarchies, with an emphasis on direction
Leader is often “supreme leader”
“Rule by man,” with decisions often taken arbitrarily
Values based on traditional hierarchical relationships; individual rights secondary to those of the organization
Source: Booz & Company
Greater emphasis on planning and analysis
More precision in planning and decision making
Compliance with intellectual property; innovation centric
Flatter reporting, with an emphasis on teamwork
Leader is often a coach
Clearer systems and policies
Values based on integrity, trust, value to clients, and return to shareholders
people leave to work for other companies or establish their own competing businesses.
Many companies have already taken such a position. Motorola did so as far back as 1993, when it set up Motorola University China; others have followed. Delivery company TNT has its TNT China University; Microsoft has spent tens of millions of dollars offering training to tens of thousands of Chinese software engineers; and the Nokia Research Center has set up its first long-term research facility in Asia at Beijing’s Tsinghua University, bringing together some
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twenty of its researchers with thirty of the university’s professors and fifty of its students. 6
In America and Europe, contracts form the heart of any business arrangement; in China, relationships are still the most important factor. Tru e,guanxi (personal connections) don’t have the same importance as they did twenty years ago, when getting almost anything done seemed to need a “fixer” of one kind or another. But because of the way Chinese business culture operates, turning on the intricate play of the ties among a host of people and organizations, the cultivation of connections and relationships will remain an important factor for decades to come.
Superficially, this isn’t so different from elsewhere. Worldwide, large companies in sensitive industries have to pay attention to keeping on good terms with officials. But in China, both the reasons for developing relationships with officials and the ways in which they are managed are very different. The most important thing to bear in mind when handling official relations stems from the relationship between the business community and the government. Official China, for both traditional cultural reasons and ideological ones, sees itself as standing at the core of all important decisions to do with the running of the country in general and the economy in particular. Government officials, central and local, therefore have to be involved; they cannot be ignored or circumvented. Even in the most liberalized of industries, they see themselves as having a duty to oversee and, where necessary, shape events, as seen in the Ministry of Commerce’s decision to veto Coca- Cola’s takeover of Huiyuan Juice.
In regulated sectors in particular, establishing long-term relationships with official China is important. Even more important is staying attuned to the changing structures of the industry, which determine
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how the relationships evolve. In energy and finance, for example, official involvement is overt, and will remain so. The global financial crisis has reinforced beliefs that companies, especially banks, should not be left to their own devices, but must be monitored. Companies that had therefore assumed that their sector was likely to become more liberalized must take another look at their plans and see if they need rethinking. Consequently, for many companies, finding the right corporate partner (or partners) is likely to become more important, not less so. Establishing relationships involves finding partners who share a company’s vision. Doing this can take several years, but spending time like this is the only way a company can be confident it is on the right path for a long-term commitment to China.
Whenever a company looks at a project, it has to consider the benefits the project will have for various partners and stakeholders. Given the length of time it takes for many projects to reach the point where returns are satisfactory, long-term win-win deals are the only kind that will ultimately work. This is particularly the case in China’s most tightly regulated sectors, but lining up support from officials is also critical in more liberalized industries. Most of this lobbying has to be done behind the scenes, getting to know possible partners and projects, and the officials involved. This can pay off in multiple ways, among them being able to spot potential changes in rules or regulations earlier than other companies. As noted in chapter 4, the goal of official China isn’t a laissez- faire economy per se, but a successful, powerful, and modern economy. Companies can develop relationships with officials and Chinese companies by projecting and substantiating the message that their success in China is good for the country as a whole. Those that do this will always do better than those that focus solely on their own bottom lines.
And as noted before, a heavily regulated economy does not necessarily mean it is static. Changes in regulated sectors can happen fast and be even more sweeping than in liberalized industries. In the oil and petrochemicals sector, for instance, until just over a decade ago the industry was divided between CNPC, the country’s principal oil and gas producer,
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which operated upstream, finding and developing oil and gas fields, and Sinopec, which operated downstream, running refining and petrochemical facilities. A third company, CNOOC was responsible, as its name suggested, for offshore oil and gas production. The government ended this demarcation, reshuffling assets among Sinopec and CNPC, allowing all three to operate up- and downstream and subsequently allowing them each to list subsidiaries on international stock markets. The industry became highly competitive as a result. All three companies, plus ChemChina (formerly the country’s main chemicals trader), started to establish refineries and other petrochemical operations.
This placed foreign energy companies in a difficult position. It was no longer clear what they would be able to do, when they might be able to do it, and how they should position themselves. In such circumstances, a multinational company is unlikely to pull off a business coup singlehanded: if it enjoys success, then it will likely have to share it with a Chinese partner.