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 / Spring 2010 / Issue 58(originally published by Booz & Company)


The China Challenge

But the challenge of doing business in China has increased during the past few years. Most businesses, even many that are currently successful, will find themselves inadequately prepared for the turmoil and dynamism to come. Not only could they miss out on the opportunities in this economy; they could be pushed aside by rivals, old and new, that use China to transform their competitive positions.

In 2005, I wrote in this magazine that in the world’s fastest-growing economy, the experience of the last 10 years will not be the best guide to the next 10 years. This statement has even more truth, and even greater urgency, in 2010. Business leaders around the world who want to be successful will need to take on a challenge with four components: the growing complexity of the Chinese market, the new sophistication of Chinese competitors, the evolving interests of the Chinese government, and their own entrenched assumptions about global business.

The Complexity of Open China

Only 30 years after it began to open and liberalize its economy, China offers its consumers an extraordinary range of brands and products that no other country, even the wealthy consumer markets of Japan, Europe, and the United States, can match. In any convenience store in Shanghai or Dalian, you can find Western beverages such as Coke, Pepsi, and Schweppes; Japanese soft drinks made by Suntory, Kirin, and Sapporo; Taiwanese flavors under the Uni-President label; Hong Kong brands such as Vitasoy; and local teas, coffees, soy milks, and fruit drinks. Chinese companies make their own versions of every international flavor, and many flavors that are not produced elsewhere.

Outside, on the newsstands, are Chinese magazines and Chinese editions of such familiar global titles as Cosmopolitan, Vogue, and Elle. Driving on the streets are locally manufactured vehicles from almost every global carmaker — General Motors and Ford, Toyota and Honda, Volkswagen and its subsidiary Audi, BMW and Mercedes, Citroën and Hyundai — plus a host of local auto brands, including Chery, Geely, Brilliance, and Great Wall Motor. Step inside a department store and you will see a similar proliferation of labels and choices. For most of the local patrons in cities such as Shenyang, Wuhan, and Changsha, this is a remarkable change from the sparsely stocked, dour shops that they patronized just a decade ago.

The shift in population from predominantly rural to predominantly urban is having an impact on almost every aspect of Chinese life. Millions of people are being lifted from poverty, probably far more in the next few years than in the past few decades. Since the start of the 1990s, annual retail sales in China have increased more than 15-fold, from around US$100 billion to more than $1.6 trillion by the end of 2008. (The 2008 figure is about one-third of the retail sales in the United States during the same year.) The Chinese middle class, although new, will not be a short-lived phenomenon; it is here to stay.

At first glance, for global consumer-oriented companies, this situation would seem to be the realization of a dream. For years, they have looked forward to the rise of the mythical “land of 1 billion–plus consumers” — eager for new products, ready to be sold to. A company with a product or service well targeted for a market category or consumer segment — perhaps a packaged good aimed at newly urbanized, frugal, demanding consumers — can expect to find hundreds of thousands of potential customers in China. This consumer market represents the largest “niche play” opportunity in the history of world commerce.

Yet this market is far more complex than many outsiders realize. The expansion of Chinese markets is accompanied by phenomenal competition, as well as abrupt rises and falls in market share for both new and established products. Most importantly, although China’s markets are open to global products, they are also extraordinarily local, rooted in traditional customs and tastes, with extreme variations from one region to the next.

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  1. American Chamber of Commerce in Shanghai and Booz & Company, “China Manufacturing Competitiveness 2008–2009,” 2009: Research on the evolving capabilities and interests of manufacturers in China.
  2. Andrew Cainey, Suvojoy Sengupta, and Steven Veldhoen, “Capturing the Asian Opportunity,” s+b, Winter 2009: Why economic recovery in China, India, and elsewhere in the region could be the strongest source of sustained global growth for years to come.
  3. Patrick Chovanec, “The Nine Nations of China,” The Atlantic, November 2009: The further differentiation of China, its culture, and its prospects for development and change.
  4. Anil K. Gupta and Haiyan Wang, Getting China and India Right: Strategies for Leveraging the World’s Fastest-Growing Economies for Global Advantage (Jossey-Bass, 2009): How to go beyond simplistic, premium-based marketing in both global economies.
  5. Warren Liu, KFC in China: Secret Recipe for Success (Wiley, 2008): The in­side story of the success in China of KFC and its subsidiary Yum Brands.
  6. Sam Palmisano, “The Globally Integrated Enterprise,” Foreign Affairs, May/June 2006: The chairman and CEO of IBM explains how the corporation is evolving from “multinational” to “global” enterprise.
  7. Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): An overall, in-depth guide to the vision, versatility, and vigilance demonstrated by successful companies in China today.
  8. Edward Tse, “China’s Five Surprises,” s+b, Winter 2005: This article explained China’s entrepreneurial intensity, fearless experimentation, “brain gain,” transition away from patronage, and overseas ambition.
  9. Edward Tse, “Context and Complexity,” s+b, Autumn 2007: More examples of the flexible approach needed for China’s increasingly diverse market.
  10. Edward Tse, Kevin Ma, and Yu Huang, “Knockoffs Come of Age,” s+b, Autumn 2009: Illuminates how China’s shan zhai companies, once associated with pirated goods, have become competitive players, even in mature industries.
  11. For more thought leadership on this topic, see the s+b website at:
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