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Published: February 23, 2010
 / Spring 2010 / Issue 58

 
 

The China Challenge

This could involve moving some key elements of their global business into China, including core practices previously maintained at headquarters — just as IBM did with procurement. Nokia, Samsung, and Nike have also started down this path. China is Nokia’s leading production center, a major market for its phones, and a primary source of new technological developments. Samsung set aside $1 billion in Chinese investments in 2009 to develop more low- to mid-tier products and to give itself broader market coverage, and Nike built its biggest Asian logistics center in the eastern Chinese province of Jiangsu.

A fully integrated enterprise might also tap into China’s research and development skills by establishing new innovation centers, or forming partnerships with Chinese firms or research institutes. So far, many of the new R&D facilities in China conduct little genuine research; their main focus is product localization and testing. But they help companies draw on the most advanced research being done in China, especially in industries the government is prioritizing, such as aerospace, agriculture, and communications technology.

Multinational companies that want to succeed in China will also need to develop better knowledge of Chinese local markets and government priorities. Some of this knowledge can be bought directly from sector consultancies, or, better yet, developed through relationships with government officials. The National Bureau of Statistics of China, the government’s main agency responsible for collecting and collating economic and other data, has a long history of collaboration with organizations from overseas. Local Chinese companies can also be a rich source of market understanding in the regions where they operate. Most useful, however, is the knowledge acquired through experience, the kind that comes from building out an operation product by product, city by city, province by province.

In many companies, these sorts of choices will be the subject of continued discussion between the company’s world headquarters and China operations. Indeed, a key element in executing global strategy will be the maintenance and management of communication between the two. Keeping headquarters informed of what’s happening in China can be a challenge, but when it is overlooked, headquarters executives often fail to understand developments in the country, and may find it difficult to react to possibilities and opportunities rapidly enough.

A related error is to maintain Chinese operations without benefit of the corporation’s overall knowledge base; too few multinationals have brought the best practices of their global operations into the country. Without good communication, some companies may find their burgeoning business in China causing disruptions in parts of the enterprise that are thousands of miles away.

Finally, the development of a China-conscious talent strategy, particularly for executives, is crucial. Some multinational companies have a relatively high turnover rate for executives in their Chinese operations. They bring in senior people from elsewhere, people who don’t understand the local context, on short-term, rotation-style assignments to “bring them up to speed” in China. This has left these companies with little institutional memory of their hard-learned experiences. Conversely, the multinationals that have performed well in China have tended to leave people in place in the country for years. They look for executives who combine facility in the Chinese language with a global perspective, who make a relatively long-term commitment to their position, and who develop an extremely valuable base of experience over time.

The Chinese themselves have only just started digesting the implications of the changes they are going through. And most multinational companies still have a lot to learn about doing business in China. The transition to being a one-world company will feel unfamiliar and challenging for them, because this type of company is new on the world scene.

 
 
 
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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.
 
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