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(originally published by Booz & Company)


The New Chinese Economy

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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