How To Succeed In China: Why Some Foreign Firms Boom, And Others Go Home

For those firms looking to cash in on the booming Chinese economy, there are as many recent tales of failure and retreat, as those of runaway success. Certain patterns have begun to emerge, both universal and China-specific lessons to be learned.

The Colonel has hit it big in China (Albert Law)
Xie Zuxi

BEIJING - Two very different trends concerning multinational firms in China have attracted wide attention recently. One is the "strategic retreat" from China of Best Buy, Pepsi, Danone and Nestle; at the same time, General Electric, Philips and Intel have come to regard China as their "second home."

Though these two storylines may seem contradictory, they in fact reflect the current condition of multinationals operating in the highly competitive Chinese market. Those firms that have been successful in China will continue to invest here, while those whose development has been less than ideal will either get out of this market, or radically adjust their strategy.

What should be emphasized is that in a vast and rapidly developing market such as China, both foreign and Chinese companies will always face pressure in developing -- or just surviving.

China is a new economy. Strictly speaking, the opening up of China started from Deng Xiaoping's "Southern Tour" in 1992. The country's vast economic development is thus only 20 years old, a relatively short period. The Chinese government, as well as businesses and customers, are still in the process of learning and exploring what exactly is this "social market economy with Chinese characteristics."

The common errors that foreign firms commonly commit are the following:

First, China's market development is particularly fast and the competition fierce. Numerous foreign firms can't keep up with the pace of an ever-evolving market. A lot of them simply transplanted their products, services and business models from other parts of the world to China without any deeper understanding of their Chinese customers. Meanwhile China is producing a local business force of tens of thousands of businessmen who are very strong competitors. They know and live closer to the local customers, and they focus on producing cheaper alternative products. They also emphasize marketing and distribution, and they develop new products and innovative sales models that cater much more to the needs of the Chinese.

Second, many foreign firms neglect the huge potential for development in the third and fourth-tier cities. Even though most of them are aware of these markets, they somehow fail to operate effectively in these places. These smaller cities give Chinese enterprises an excellent chance for development and in turn they work upwards to the third and second-tier cities.

Third, the headquarters of these multinationals back in their home country often suffer from unrealistic expectations of their business in China, while their top managers in China often fail to clearly report the real situation back to headquarters. In addition, the frequent replacement of their expatriated managers does not help, while some of their CEOs come to the Chinese market once or twice each year and imagine they know China thoroughly.

Learning from the top performers in China

Mark Norbom, the President and CEO for General Electric, China, likes to say that "China is our second home," an expression of how important the multinational's pursuit of the Chinese market is to the company's overall strategy.

Danfoss, the Danish global producer of components and solutions for refrigeration and air conditioning, was one of the first foreign firms to designate China as their second base. Since entering the country in 1996, China has become the company's third-biggest market worldwide, with its second largest employee workforce here and its top overall procurement market.

There are two key strategic considerations these companies make: the integration of the value chain and the transfer of their operations center. The integration of their global and Chinese businesses thus becomes more organic. Meanwhile, the integration of the value chain is reversed. After baptism in such emerging markets as China or India, the products and services are exported to other parts of the world.

And beyond gradually moving their value chain to China, numerous multinationals have also transferred their regional headquarters and some major company departments to China.

The most successful example is IBM. As early as 2006, IBM moved its global procurement division from upstate New York to Shenzhen, China. This helped IBM in strengthening its own supply base as well as its clients supply chain.

IBM subsequently set up its second headquarters in Shanghai to take charge of all the emerging markets: Asia, Latin America, Russia, Eastern Europe, the Middle East and Africa.

IBM rethought its China strategy fundamentally. It no longer considers China as a remote corner of its operations centered on America. Instead, it finds ways to integrate China as a core part of its global operation in a way that can create value.

While foreign companies that encounter bottlenecks in China share common errors, the successful ones often abide by certain common rules.

First, the leader of the Chinese team is critical. The success of many enterprises is due to the fact that the person at the helm was given enough time to develop the business in China. Some have even become legendary figures. Su Jingshi, the Taiwanese director that expanded Kentucky Fried Chicken's rapid occupation of the vast Chinese market; Li Hexun, the Hongkongese President of Tetra Pak, the Swedish firm that is the world's largest food packaging company; and Zhu Xi, the Chinese president for the greater China Region of General Mills.

All these top executives had been rooted in the Chinese market for many years, and understand it profoundly. Hence they were able to set up teams to grasp opportunities in a timely manner to promote their expansion. Top-level and stable leadership enables the accumulation and passing on of business knowledge, which can become the decisive edge in the Chinese market. Meanwhile, they must also be able to communicated successfully with their colleagues back at headquarters to gain support for their strategies.

The second common factor among the successful foreign firms in China is the steadiness and coherence in both projections and operations. The firms that failed tend to be either too optimistic and overly invested, and wind up taking too long to achieve profits. Others were too conservative, entering China with a "testing" state of mind.

Success requires thorough knowledge of the needs and size of the Chinese market, the level of resources required, and a willingness to explore relevant aspects of their services. Multinational giants in China must find the right way to continuously adjust their business models.

In short, multinationals can face risks in China just like they would in other markets. But if foreign companies are capable of developing an in-depth understanding of China's commercial background, and adopt appropriate strategies, the payoff can be much bigger indeed.

Read the original article in Chinese

photo - Albert Law

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Why Chinese Cities Waste Millions On Vanity Building Projects

The so-called "White Elephants," or massive building projects that go unused, keep going up across China as local officials mix vanity and a misdirected attempt to attract business and tourists. A perfect example the 58-meter, $230 million statue of Guan Yu, a beloved military figure from the Third Century, that nobody seems interested in visiting.

Statue of Guan Yu in Jingzhou Park, China

Chen Zhe

BEIJING — The Chinese Ministry of Housing and Urban-Rural Development recently ordered the relocation of a giant statue in Jingzhou, in the central province of Hubei. The 58-meter, 1,200-ton statue depicts Guan Yu, a widely worshipped military figure from the Eastern Han Dynasty in the Third century A.D.

The government said it ordered the removal because the towering presence "ruins the character and culture of Jingzhou as a historic city," and is "vain and wasteful." The relocation project wound up costing the taxpayers approximately ¥300 million ($46 million).

Huge monuments as "intellectual property" for a city

In recent years local authorities in China have often raced to create what is euphemistically dubbed IP (intellectual property), in the form of a signature building in their city. But by now, we have often seen negative consequences of such projects, which evolved from luxurious government offices to skyscrapers for businesses and residences. And now, it is the construction of cultural landmarks. Some of these "white elephant" projects, even if they reach the scale of the Guan Yu statue, or do not necessarily violate any regulations, are a real problem for society.

It doesn't take much to be able to differentiate between a project constructed to score political points and a project destined for the people's benefit. You can see right away when construction projects neglect the physical conditions of their location. The over the top government buildings, which for numerous years mushroomed in many corners of China, even in the poorest regional cities, are the most obvious examples.

Homebuyers looking at models of apartment buildings in Shanghai, China — Photo: Imaginechina/ZUMA

Guan Yu transformed into White Elephant

A project truly catering to people's benefit would address their most urgent needs and would be systematically conceived of and designed to play a practical role. Unfortunately, due to a dearth of true creativity, too many cities' expression of their rich cultural heritage is reduced to just building peculiar cultural landmarks. The statue of Guan Yu in Jingzhou is a perfect example.

Long ago Jinzhou was a strategic hub linking the North and the South of China. But its development has lagged behind coastal cities since the launch of economic reform a generation ago.

This is why the city's policymakers came up with the idea of using the place's most popular and glorified personality, Guan Yu (who some refer to as Guan Gong). He is portrayed in the 14th-century Chinese classic "The Romance of the Three Kingdoms" as a righteous and loyal warrior. With the aim of luring tourists, the city leaders decided to use him to create the city's core attraction, their own IP.

Opened in June 2016, the park hosting the statue comprises a surface of 228 acres. In total it cost ¥1.5 billion ($232 million) to build; the statue alone was ¥173 million ($27 million). Alas, since the park opened its doors more than four years ago, the revenue to date is a mere ¥13 million ($2 million). This was definitely not a cost-effective investment and obviously functions neither as a city icon nor a cultural tourism brand as the city authorities had hoped.

China's blind pursuit of skyscrapers

Some may point out the many landmarks hyped on social media precisely because they are peculiar, big or even ugly. However, this kind of attention will not last and is definitely not a responsible or sustainable concept. There is surely no lack of local politicians who will contend for attention by coming up with huge, strange constructions. For those who can't find a representative figure, why not build a 40-meter tall potato in Dingxi, Gansu Province, a 50-meter peony in Luoyang, Shanxi Province, and maybe a 60-meter green onion in Zhangqiu, Shandong Province?

It is to stop this blind pursuit of skyscrapers and useless buildings that, early this month, the Ministry of Housing and Urban-Rural Development issued a new regulation to avoid local authorities' deviation from people's real necessities, ridiculous wasted costs and over-consumption of energy.

I hope those responsible for the creation of a city's attractiveness will not simply go for visual impact, but instead create something that inspires people's intelligence, sustains admiration and keeps them coming back for more.

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