What are the current potential key opportunities and threats in China for MNCs?
China has been a popular destination for the growth efforts of MNCs. The country has experienced decades of unparalleled economic growth and the growth continues. The emergence of industries and rises in the disposable income of a large segment within the population highlight the economic advancement. The article ‘Designing for China’s Emerging Middle Class’ highlights that the middle class that in 2009 constituted 10% of the total population will grow to 70% of the population by 70%. This signifies that many market will continue to experience growth as more and more consumer are able and willing to pay for products other than basic necessities. Their willingness to pay for products is however not only confined to Western products as such but products that suit their individual lifestyle, meaning that an MNC should usually not adopt a ‘one-fits-all’-strategy in China. For instance, the soft drink industry grew at 11.5% in 2014 and is expected to gain further 65.1% in value until 2019 according to MarketLine. This explains why global giants such as the Coca Cola company started attempts to foster their position in the market. After the reentry to the China market in 1979, the firm sought to expand its market share by acquiring the local competitor Huiyuan. The deal was however blocked by Chinese authorities, showcasing the role of national Chinese interest in the Chinese business arena and highlighting the power of Chinese authorities, which can definitely become a threat to MNCs’ business in China if relationships are not managed well. On the other hand, more and more Chinese nationals start having access to the Internet. In 2014, the amount of Internet subscriptions rose by 17.9% to 477.1 million and is predicted to increase by a further 14.5% by 2019 as prognosticated by MarketLine. This is a huge opportunity for any e-commerce firm as the number of people that can access the Internet’s services nearly amounts to the population size of the U.S. Accordingly, multinational tech corporations such as Facebook or Google aspire to establish themselves in the Chinese market, exploiting their business models abroad. The case of Google however showed how the multinational firm even though more experienced needs to succumb to the local players with more localized offers better suited to the Chinese consumers’ needs. The examples demonstrate that the potential in the Chinese markets can be vast. Growth across industries is the usual case. However, recent years have displayed the “conversion into a competitive battlefield” according to the McKinsey paper. More and more international entrants, an increasing number of serious local rivals, knock-off products, unpredictable government decisions and unknown tastes and preferences of consumers’ can fatally scupper endeavors of MNCs. Successful companies on the contrary can build valuable competencies for long-term prosperity of the company across the worldwide markets.
Why is it important to treat China as a 2nd home?
Evonik, a German chemicals manufacturer entered China in 2005 using the joint venture mode in order to cut down on production costs. Degussa Sanzheng (Yingkou) Fine Chemicals Co., Ltd. was established. Gradually, more and more inconsistencies within the joint ventures got uncovered; the Chinese partner was holding stakes in direct competitors apart from being nearly bankrupt. Further internal audits revealed that bribes had been paid and an investigator was sent from Germany subsequently to inspect the plant in China. The sent out person however neither spoke English nor was he familiar with China at large. The situation escalated completely when he was beaten up on the plant premises. During discussions with the Chinese joint venture partner the Chinese manager allegedly even destroyed his German partners’ cell phones. The final breakup of the joint venture cost the company more than 25 million euros. While all this sounds like a story from a boulevard newspaper, it highlights a few important points. A lack of seriousness in approaching China will hardly ever be rewarded. Local knowledge of both Chinese industries, the government and Chinese culture are indispensable to build a sustainable future in China. It remains to be speculated that an erroneous notion of ‘guanxi’ and gift giving of the German side might have played a crucial part as well. As outlined in ‘How to build effective relationships in China’, Western managers still carry a simple-minded notion of business culture and the importance of trust from the heart when dealing with Chinese managers, which might explain the emotional outbreak that ended in the destruction of the mobile phones. The lack of Chinese language knowledge additionally took away a tool that would have been useful for negotiating. It can be very upsetting, frustrating and confusing, trying to deal with partners that have no understanding for local business manners. The attempt of Evonik to exploit cheap labor in China failed miraculously due to improper planning, assignment of too little resources and overall poor strategic planning. The partner chosen turned out to be highly unreliable, objectives of the partners were not aligned or an accumulation of misunderstandings poisoned the relationship. Poor decision making of the German company caused its China strategy to end uo in money destruction rather than cost savings. The Evonik case strongly resembles the combat of Danone and Wahaha that formed a joint venture but completely disregarded the incongruence in strategic objectives. All in all the key take-away from the McKinsey article is that China rising global market influence will eventually will alter the structural industry dimensions and the way business is being done on an international scale.
What should multinational corporations do to make China as a second home?
Among many MNCs that did not get their strategy right, the German aircraft engine manufacturer MTU is flourishing in China. In 2001, the joint venture of the German company and the China Southern Air Holding Company was founded with 50/50 stakes. MTU Maintenance Zhuhai is based in the Zhuhai free trade zone. China Southern Air can be considered a strategically excellent choice as MTU is carrying out maintenance works for the airline and thereby securing large amounts of orders. Furthermore, the partnership aided the necessary approval by Chinese authorities a great deal. Only one year after the creation of the joint venture, the workshop could start operations. As a matter of fact, MTU embraced a complete technology transfer in order to assure consistent global quality. This step was logically welcomed warmly by the Chinese partners. MTU imported its best technologies and equipment to the workshop in Zhuhai. On top of that Chinese subsidiaries of the venture have received national Chinese excellence awards, including the ‘Excellence Enterprise with Foreign Investment’ award, which highlights the appreciation of the company within the country. Effectively, the numbers add up, too. Orders are increasing steadily, so that a representative office was set up in Shanghai in 2010 to respond to local customer queries quickly and collect valuable customer knowledge in and work capacities in Zhuhai were extended by expanding the facilities in 2012. Moreover, MTU provides extensive training opportunities to its staff. These efforts include apprenticeships, cooperation with universities in China for future talents as well as teamwork, management and further practical training for existing staff to create a healthy corporate culture and ensure knowledge and information sharing. MTU’s proclaimed goal is to become Asia’s market leader. Current negotiations with Chinese partners include the future co-production of aircraft engines for the Chinese market, all of which lead and coordinated by the Shanghai office under supervision of the global board of directors. The MTU case effectively showcases important success factors mentioned in the McKinsey article. From the outset the company took a long term perspective for its China strategy accompanied by sincere resource commitment and management attention. Best practices were exercised from the beginning, too. The company was not afraid of technology transfer, on the contrary, well aware that business in China is a give and take and needs to be mutually beneficial, MTU openly shared its know-how and maintained fond relationships with its partners. This fact is particularly striking as it is completely opposed to what the article ‘Preventing know-how from walking out of the door in China’ suggests. The company did not even intend to protect its know-how using the existing law and intra-corporate measures such as keeping proprietary information locked and inaccessible. Instead knowledge and technology sharing is one of its core values success factors. When MTU first entered the Chinese market it had already very clear aspirations, namely becoming market leader in Asia. Rather than a short-term exploitation of the opportunities in the market, MTU recognized China as a viable strategic option given the potential and trends in the Chinese economy.
Do you have any different views on Chinese market or on doing business in China?
During the course of the ‘Strategic Management in China’ class I came to realize how even nowadays in such a globalized worlds human still tend to underestimate the unknown and overrate their own competencies. As a matter of fact, even though taken advantage of for the sake of propaganda, cases like Apple’s ‘Unparalleled arrogance, undisclosed agenda’ and other cases of multinationals showcase poor business conduct in China and do not come as a surprise. A company can analyze the numbers over and over again but without understanding the real forces in the market, i.e. the impact of consumer voices, the power of the government and the management of business relationships and interests of various parties it is impossible to carry out a sustainable business in any country. It was particularly striking to read about the significance of sentiment when judging moral and professional dilemmas in the article ‘Managing Corporate Crisis in China’. To me, the most important lesson both from the course overall is that no matter the numbers, be it growth rates or market shares, real success is built upon real understanding of the context and the design of suitable solutions given the ecosystem that is being operated in. This particularly applies to the management of people. You can get the numbers right but if you do not win the hearts of all your stakeholders, i.e. customers, employees, suppliers, the government or investors, you will meet up with serious problems sooner than later. This is not only the case in China, this is the case everywhere that human being engage in trade with one another. What is staggering though is that despite the experience, MNCs had to learn this lesson once anew when entering China. The McKinsey article effectively reminds one that any country included China deserves the same level of seriousness.