The boom years may be in the past, but China still offers big
opportunities for multinationals that adapt to its new economic reality.
As China’s once-in-a-decade
leadership succession gets under way, another transition has been capturing
headlines: the country’s recent lackluster economic performance after years of
double-digit growth. The Chinese economy reportedly grew only 7.4 percent in
the third quarter of 2012 — its lowest growth rate since 2009 — and if the
economy finishes the year as projected, this rate will mark a 13-year low. The
decline varies by industry. Hardest hit have been businesses related to heavy
industry and to the real estate sector; new home prices in many cities continue
to drop because of government policies intended to control inflation. Growth
also varies by region; some of China’s interior and western provinces have
experienced above-average rates of growth, whereas growth in the traditionally
wealthier coastal provinces has cooled.
But other indicators tell a
different story. Beijing recently reported that industrial output grew 9.2
percent in September, and retail sales increased 14.2 percent during the same
month. Sectors such as healthcare and other services continue to grow strongly.
And even as the growth rate comes down, actual GDP continues to expand. Both
government officials and executives on the ground say that the Chinese
government still has the will and ability to ensure a soft landing through its
control over the domestic banking system, foreign exchange rates and capital
flows, infrastructure investments, and other macroeconomic policy tools.
Although any government stimulus in the coming months will not be as large as
the one Beijing launched in 2008, they say, it could effectively mitigate the
worst spillover damage from the financial crises in Europe and elsewhere.
Opinions and predictions on
China’s outlook may vary with the monthly figures, but one reality is beyond
question: The Chinese economy is maturing. China is moving away from a focus on
low-cost manufacturing toward sustainable growth and higher-value-added
business, and from infrastructure- and export-led growth to domestic
consumption. In a few years, China could look very different from how it does
today, as regional shifts in wealth, more demanding and discerning customers,
and highly motivated Chinese companies change the competitive landscape. The
country’s economy is also evolving in fundamental ways as single-digit annual growth
becomes a plausible new normal. Multinational corporations (MNCs) that have
grown accustomed to the boom years may be nervously eyeing the situation. But
they can be confident that China remains a significant source of opportunity
for those who adapt their strategies. To do so, companies first need to
understand the trends that are shaping these changes.
Short-Term Shifts
Domestic demand is growing in
China, but today and in the near future, it will come from regions that have
been largely ignored by many multinationals. These substantial shifts in demand
reflect the movement of wealth away from the coastal areas and toward some of
China’s interior and western provinces, and away from so-called top-tier cities
and toward lower-tier cities and, for some categories, rural areas. This trend
is affecting certain sectors, such as consumer goods, automotive, and
industrials, particularly strongly.
Both Chinese and multinational
companies will need to realign their footprint and operating model accordingly,
adopting a Fit for GrowthSM approach, with a
much stronger focus on both the top and bottom lines. They can expand beyond
the Tier One and Tier Two markets with which they established themselves in
China by deepening and broadening their channels to enter lower-tier markets,
implementing what is called a “go down” (xia chen) strategy. This will
often require changes to their traditional go-to-market model, as well as to core
elements of their customer value proposition. For example, they will have to
link inland and western regions to the rest of the country and build nationwide
logistic and marketing networks. Foreign companies can benefit from
partnerships with Chinese players to accelerate this strategy and fill gaps,
but they also need to develop their own capabilities to execute this shift
successfully.
In addition, companies have
increasing opportunities to leverage digital channels, including e-commerce and
social media, as part of their strategies. The Chinese e-commerce market is thriving, with well-known
and successful retail websites such as Taobao.com, a B2C site owned by
Alibaba.com, which is a popular B2B site. The number of Internet users in China
is already twice that in the U.S., and China is the largest social media market
in the world. Social media is especially important in China as a source of
credible information, because the mainstream media is still controlled by the
central government.
Execution remains a key challenge
in the short term, largely because of a widening talent gap. Such was the
finding of two recent surveys, the 2012 China Consumer Market Strategies survey,
conducted by Booz & Company and the American Chamber of Commerce in
Shanghai, and the 2012 China Innovation survey, conducted by the Benelux
Chamber of Commerce, the China Europe International Business School, the
Wenzhou Chamber of Commerce, and Booz & Company. Companies need the right
leaders in place in their China business, as well as an operating model that
balances local flexibility and agility with global control and capability
leverage. But China’s acute shortage of trained and experienced managers and
executives remains a roadblock for companies looking to grow rapidly and
profitably. Companies need to take a more holistic approach to addressing the
labor supply imbalance. The imbalance is particularly critical at the middle
management level, where talent is scarce and expats are inherently less
effective than they are at more senior levels.
In general, companies need to
focus less on recruiting the right people and more on developing and retaining
high-potential people through structured talent management programs and a
long-term commitment to their China strategy. Companies can also seek out
partnerships with universities, where they can establish scholarships,
internships, and relevant courses.
Long-Term Competition
True, Chinese customers are now
prepared to pay more for higher quality, and they may have more brand loyalty
than in the past. But the value of these developments for MNCs will be limited
by ambitious local competitors that are fast acquiring the technology and
know-how to produce high-quality goods on par with multinationals’ offerings.
The days of winning purely by having the allure of a foreign brand are largely
over, thus more clearly differentiated customer value propositions are needed.
Although Chinese companies still
have capabilities gaps, especially in branding and marketing, many are moving
beyond their copycat reputations to become serious innovative competitors.
Indeed, the 2012 China Innovation survey found that many Chinese companies have
already replaced their shanzhai reputations (in which they
rapidly put out low-cost, knockoff-style products) with an entrepreneurial Need
Seeker model (in which they pay closer attention to the market and release
products that fit consumer demand as they see it). Among the MNCs interviewed
as part of the study, 45 percent said they have Chinese competitors that are at
least as innovative as they are.
The survey’s findings are further
supported by Booz & Company’s analysis of a new category of Chinese
competitor: mid-market innovators. In some sectors, MNCs increasingly find
themselves competing with this new category of local companies that have strong
brands and fast-improving (or equivalent) technologies and quality standards.
Sectors with a large and vibrant Chinese mid-market include construction
equipment (Sany Heavy Industry), logistics (China International Marine
Containers Group), motorcycles (Lifeng Group), and household appliances (Haier
and Galanz). Now able to sell into China’s immense market, these companies have
taken advantage of the explosive growth in infrastructure investment and the
huge supply of cheap labor at all levels to produce high technology and variety
at low cost, with a strong home base to build from globally. (See “China’s Mid-Market
Innovators,” by Edward Tse, John Jullens, and Bill Russo, s+b,
Summer 2012.)
Not all of these companies will
succeed. Indeed, the recent global economic crisis has provided a reality check
for many Chinese companies. Sany Heavy Industry, for example, viewed until
recently as a potentially major threat to companies such as Caterpillar and
Komatsu, has started to lay off staff after seeing its China sales fall. And
the financial performance of many industrial state-owned enterprises has
sharply declined. Still, enough will rise in prominence that MNCs need to take
notice.
Finding Opportunity
To cope with these shifts in both
the short and long runs, multinationals should follow one of these courses of
action.
1. Double down. Some companies anticipated the growth of China’s
inland regions and are using the opportunity to aggressively compete — with
pricing, for example — to put pressure on the competition. This strategy is
paying off, at least so far. For instance, General Motors has introduced a
budget brand called the Baojun (“treasured horse”) specifically for emerging
customer segments in China’s interior markets.
2. Reposition. Companies that are facing a fundamental shift in
demand — in the logistics sector, for example — need to adapt proactively. This
could mean altering their business model. It could also mean seeking out a new
way to play in the market. For instance, Damco, the logistics arm of the A.P.
Moller-Maersk Group, has recently opened new offices in western China and made
several acquisitions in response to the changing nature of demand in China.
3. Wait and see. Companies that can afford this option, for
example, high-end brands such as Gucci and Cartier or companies that control irreplaceable
resources as De Beers does, are considering a more careful approach. These are
companies that can gain market share in any environment through innovation or
brand strength. However, they tend to be spurred to act either by a desire to
expand faster when they can or by pressure from headquarters.
4. Pull back. Companies with weak positions and a lack of
ability to gain market share need to broadly rethink their strategy. They may
need to make more radical choices about their portfolio strategy and where and
how they play, for example, by leveraging the strengths of a Chinese partner or
refocusing on parts of the business that make the best use of their current,
most distinctive capabilities. There have been a few well-known examples
recently of companies that have failed in China and needed to pull back and
regroup, including Google and Best Buy.
Most companies should regard
these options as part of their effort to develop an overall global strategy
with China at its core, incorporating China’s many competitive advantages into
their global operations. To pursue this type of strategy, companies will need
to migrate more and more of their major value-chain activities, such as R&D
and product development, to China — while maintaining global scale and
leveraging their global capabilities. They will also need an in-depth
understanding of the local context — in particular, a stronger grasp of their
local competitors. They will then need to invest in two types of capabilities:
the competitive necessities that are required to win in this new market, and a
few distinctive capabilities that can set them apart from every other company
in their industry in China.
Should MNCs stay in China? Yes,
but their approach will likely change as the Chinese economy continues to
mature. It remains to be seen how China’s new leaders will affect the country’s
economic and fiscal policies, but under every plausible scenario, China will
grow in importance during the next decade as a key strategic market and a
source of global competitiveness.
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