Some discussion points:
”Foreign multinationals in China: learning to adapt to new realities”
China CEOs of foreign companies are under severe time constraints. According to a recent research*, forty percent said they don’t have time to respond quickly enough to the rapid changes in the China market, and another 40 percent admit that they are hard pressed to do so.
Two challenges that China CEOs say demand large amounts of their time are hitting the numbers while they cope with the downturn in demand, as well as building their local teams. Another major issue is managing headquarters, including explaining the unique Chinese context to senior management there. About 40 percent of their time, they are dealing with headquarters. Even locally focused China CEOs spend about 20 percent of their time at or speaking with the global HQ.
Most China CEOs have direct line control over go-to-market and support functions, such as branding and corporate affairs, but limited direct line reporting in upstream areas like product development, operations, and supply-chain management. Less than 50 percent can make decisions about pricing and product strategy independently of headquarters. Among those with integrated control over country operations and commercial results, most must still involve HQ in overall China strategy, long-term multiyear plans, and annual budgeting (source: W. Baan and Ch. Thomas, How China country heads are coping, in: McKinsey Quarterly, October 2015).
The above analysis shows important challenges, but we think, out of our broad experiences in China, that the smart companies actually reverse the dynamics by giving more authority to local product development and marketing, while keeping their global CEO directly involved with government relations and other relationship issues.
During the discussion in our Horasis dialogue session on October 23, 2015, we discussed the following.
A. Experiences of corporate executives
- Many foreign investors – including US investors – continue to view China as an attractive market. However, they are looking for more and better guidance on how best to access the market and better manage risk as China’s economy continues to grow and mature, now frequently referred to as the “new normal”.
- Some “friends of China with over twenty five years experiences working on investment and other bilateral issues impacting US-China”, they continue to see opportunities for Chinese investment in the US and Latin American markets. But some China experts also feel we could be at the beginning of greater challenges and risk for Chinese investment driven primarily by changing political attitudes in these markets.
- One obvious thing to follow is the US Presidential election campaign. US foreign policy will be debated, which will likely include discussion on appropriate responses to what will likely be described as the “China Challenge.” While it is not clear at this time, we should assume that unlike the past elections in recent years, there could be a a residual impact from these public discussions, where the US public and their political representatives begin to see China as a competitor rather than a partner. Similar to US companies needing to make further adjustments to their strategies to succeed in the “new” China, Chinese companies may have to adjust their strategic approach to the US and the European market.
- China should also consider a renewed effort to build new networks of relationships in the US and Europe to create better understanding and more support for productive bilateral relations. Similar to China, but not often fully appreciated, the US market places great value on relationship building, as well.
- Anti-corruption governance rules encourage Chinese parent companies to look for more suppliers. An opportunity for foreign companies has arisen. The fact that Chinese companies should look for alternative suppliers, because they are under pressure of new corporate governance regulations, provides a market chance. The more alternative qualified suppliers Chinese parent companies can have, the better. This opens markets for foreign US and European companies.
B. How can foreign investment tap into China’s economic potential?
- Nothing symbolizes China’s drive to be a dominant player in innovation and technology more than its huge investments in science and technology parks and the search of Chinese companies for new technologies. Technology transfer between Chinese and European organizations has become more important.
- In order to get most benefits from the intensified cooperation with China, it is key to aim high by not focus on small projects but instead, to aim for larger, value adding, and contributing projects.
- For foreign small and medium size companies it is important to make use of the fact that China has become the world’s largest and most dynamic e-commerce market. This phenomenon has become an opportunity for foreign companies to expand faster in the Chinese market.
- Foreign companies are now able to sell their European brand products in a more efficient way than before. Of course, being successful requires understanding and embracing its unique digital landscape and consumers. Need to know more about your potential customers? Brand owners and retailers can uncover consumer insights by collaborating with digital-platform businesses in China.
- Working with China’s e-commerce providers to co-develop consumer insights can benefit brand owners, retailers, and platform companies—and help strengthen a company’s relationship with China’s e-commerce players beyond being purely transactional.
C. How is doing business in China different in terms of risks?
- Labour issues: rising labour costs, increasing labour activism, shrinking labour force and aging society, skills mismatch between education/training and market demand;
- Corruption: risk of firms losing out on account of corruption, or becoming embroiled in anti-corruption efforts?
- Regulators: populist backlash against foreign firms; discriminatory treatment? The importance of a removal of limitations to foreign investors – including joint-venture requirements;
- Transparency of corporate governance, financial sources and transactions of foreign investors – a key issue, especially in light of increasing public attention given to large scale investments.
- Economic trajectory: can growth be sustained now that the current growth model, led by investment and exports, has reached its limit? Is the political system capable of executing the reforms now necessary?