strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: February 23, 2010
 / Spring 2010 / Issue 58

 
 

The China Challenge

Between those extremes, some industries have relatively liberal ownership regulations, but strict controls over what kinds of products and services can be offered. For example, since late 2006, a foreign institution in the banking sector has been able to own up to 20 percent of any Chinese bank, as long as the total stake held by foreign institutions in a Chinese bank does not exceed 25 percent. But credit cards can be offered only via a joint venture with a Chinese bank. And new products are often subject to long delays before approval; it would be very unlikely for a foreign bank to be permitted to introduce an investment innovation before its Chinese counterparts could.

In other sectors, ownership freedom is relatively limited, but product freedom is high. No foreign company can own more than 50 percent of a Chinese motor vehicle maker, for example, but there are few constraints on what kinds of cars the foreign companies make or how they sell them.

In the more-restricted industries — those that the government has deemed strategic — foreign companies have to deal with numerous regulations whose interpretation can vary according to official whim or sentiment. As a result, most or all companies operating within these spheres are state owned or controlled. In the less-restricted industries, multinational companies find themselves facing a proliferation of competitors, often from all corners of the world, quite likely with a surfeit of productive capacity and downward pressure on pricing.

The dynamics of government restriction can be surprisingly complex. For example, since the early 1990s, the soft drinks sector has been open to companies from any country, with almost no oversight from the government. However, when Coca-Cola attempted to buy China’s biggest juice maker, Huiyuan Juice, in 2008, it ran into official resistance. The Ministry of Commerce rejected the bid in 2009, citing China’s new anti-monopoly law. (Public opinion, which mounted against the deal on blogs and in online forums, did not help Coca-Cola’s cause.)

Anticipating the impact of potential changes is not easy. Some sectors, possibly including telecommunications and media, may even become more restricted for some periods. Acknowledging that such changes may happen is essential for a company if it is to be ready to move quickly when events shift in its favor. For some industries, this means maintaining an office in Beijing that can interact with the relevant ministry or other official body. This degree of readiness requires a strong grasp of official China’s strategic agenda, and it means having access to the best possible sources of information on government thinking.

The Mind-set of “One World” Companies

To meet the Chinese challenge, some multinational companies are rethinking the way they do business. The only companies that can take advantage of the massive opportunities are those that place their China activities in a global context as part of an integrated web of capabilities, including manufacturing, marketing and sales, innovation, new business model incubation, and talent development. And that is the fourth component of the challenge: Their own assumptions must change.

For example, global companies will need to become more adept at integrating their Chinese operations into their global value chains. They will need to use their Chinese expansion to significantly improve their global scale and their leverage in sourcing, and to apply superior product designs and standards from elsewhere to the Chinese market. As IBM and Coca-Cola have done, they will need to integrate their upstream activities, such as R&D and product development, into their Chinese operations. And they will need to build marketing platforms that combine local consumer insights with global brands and platforms.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

Resources

  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:
    www.strategy-business.com/global_perspective.
 
Close