Building A Second Home in China

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Multinational companies hoping to succeed in China can’t treat it as an interesting side bet any longer; they need to take China as seriously as they do their home market.

JUNE 2010 • Jeff Galvin, Jimmy Hexter, and Martin Hirt

McKinsey Quarterly 

The past two years have underscored China’s resilience and dynamism. Its economy has been booming against a backdrop of global stagnation. China’s business environment, in particular, has been changing fast, with new regulatory policies and a rising cost of doing business affecting the playing field for multinationals (see sidebar “Cautious sentiments”).

But the real story, in our view, isn’t China’s continued, rapid evolution. It’s the fact that, in far too many cases, executives still aren’t making China as central as it should be to their global strategy. In sectors ranging from auto parts to consumer electronics, semiconductors, aviation, and electricity transmission equipment, China is fast becoming the competitive battlefield on which global winners are determined. Even when companies are not competing in China, their Chinese and foreign rivals may soon be exploiting advantages earned there to compete in global markets.

 

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Cautious sentiments

An AmCham-China1 survey published in March 2010 found that 38 percent of US businesses now feel foreign companies are “unwelcome” in China, up from 26 percent just two months earlier and the highest percentage recorded since AmCham began conducting the survey four years ago. The European Chamber of Commerce is reporting similar concerns among its members. The explanation for these cautious sentiments goes beyond recent tensions between China and Google or concerns about the value of the renminbi and China’s role at the 2009 Climate Change Conference in Copenhagen.

For starters, there’s a perception that efforts are under way to limit foreign companies’ access to the Chinese market. In 2009, China announced a National Indigenous Innovation Product (NIIP) accreditation policy that would give advantage in government procurement to products certified as containing “indigenous innovation.” Fifty-seven percent of foreign technology companies surveyed recently said the policy would hurt their future business, and 37 percent said they were already feeling the impact, even though the policy was not yet officially in place. Similarly, in 2009, a new antimonopoly law was created to prevent any company from gaining a dominant position that would affect the competitive landscape in China. The first use of this law was to block Coca-Cola’s acquisition of China Huiyuan Juice.

What’s more, the cost of doing business is rising. Wage growth has averaged 15 percent annually since 2000. The renminbi has risen, and most multinationals expect this trend to continue. Tax law changes in 2008 reduced certain investment incentives and imposed a 10 percent withholding tax on repatriated dividends. All these factors reduce China’s cost advantage versus other low-cost countries, while high stock market valuations of Chinese companies make it more expensive to grow through acquisitions.

Although we don’t know how these trends will evolve, our experience—and the private reflections of executives who logged many miles in China—suggest that multinationals should take a long-term and comparative perspective on recent events. For example, some of the new tax rules represent, to a certain extent, a leveling of the playing field, which previously favored multinationals. Similarly, some new regulations, such as the antimonopoly law, have long-established analogues in the European Union and the United States and in fact represent China’s own attempt to move toward developed-market norms. A top executive at one large multinational recently mused that many of China’s policies today remind her of France’s industrial policies 30 years ago—and German and US companies did not abandon the French market.

To repeat: there is a broad consensus that the introduction or application of new regulations appears to be disadvantaging some non-Chinese companies. But what seems equally clear is that China is going through an evolution in its business environment, and the end game is far from certain. Given the importance of the market, rather than turning away, prudence suggests looking hard for ways to navigate this dynamically evolving business landscape.

1 The American Chamber of Commerce in the People’s Republic of China.
 
     
With the stakes this high, the implication is clear: it is no longer possible for most companies to succeed in China while treating it merely as an interesting side bet. Instead, they need to start building a second home in China. At the core, this means committing a company as seriously to success in China as in its home market. The starting point is to set targets for performance in China that are on par with those at home: companies need to raise their aspirations for, and rigorously measure, a variety of targets. Some of them, such as senior-executive time spent on China and knowledge of Chinese customers, are challenging to quantify but no less important than more straightforward metrics regarding market share in China or sourcing volumes. Then companies need to deliver against those targets by bringing to China their global best practices across the value chain, adapting them as needed to local conditions, and executing against them. This sounds easy but happens so rarely that it’s a powerful competitive differentiator.
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2 Responses to “Building A Second Home in China”

  1. […] View original post here: Building A Second Home in China « China Lawyer […]

  2. […] making China as central as it should be to their global strategy. In sectors ranging from auto … Read More RECOMMENDED BOOKS REVIEWS AND OPINIONS Google seeks to appease Chinese […]

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