Insights                   China and the 8 Dragons                   A primer for multinational corporations seeking a foo...
However, over-engineered efforts to manage attrition (pay more and                                                        ...
what it wants to do, and what it stands for – instill in him the conviction                                               ...
7           Guanxi                                                                                          8           Gr...
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China and the 8 Dragons – A primer for multinational corporations seeking a foothold in China


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Despite China making gigantic strides of progress, the outsider's view of that country's business environment is still dominated by exotic descriptions. The author, an Infosys Vice President and Building Tomorrow's Enterprise Expert – who has experienced China firsthand in the last five years – dispels many of the myths around China in what could be considered 'A primer for multinational corporations seeking a foothold in China'.

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China and the 8 Dragons – A primer for multinational corporations seeking a foothold in China

  1. 1. Insights China and the 8 Dragons A primer for multinational corporations seeking a foothold in China - Anand Arkalgud Abstract Despite gigantic strides of progress, exotic descriptions of China continue to dominate the outsider’s view of its business environment and what it takes to succeed in China. My experiences over the past 5 years, in China, have dispelled many of these myths. What I have learned from conversations with business leaders, managers and friends is that business in China is influenced by a set of critical variables – similar to other markets – that must be managed in order to succeed.
  2. 2. However, over-engineered efforts to manage attrition (pay more and promote before time) is a surefire formula for failure. It’s, perhaps, 1 Talent even advisable to begin by assuming that attrition is a known challenge, and strengthened processes to deal with it effectively. Empowering employees and carving out clear roles for them in the company’s growth story will also motivate them to stick on longer.How is talent in China any different? Talent, fundamentally, is no Focusing organization efforts on “managing-to-attrition” is likely todifferent in China than anywhere else in the world. Smart engineers, be more fruitful than efforts focused on “managing attrition”. A longfrom good universities all over China, are on the market. To most of term solution is to scale the business as fast as, the word ‘talent’ conjures up an image of people with diverseeducational backgrounds, technical expertise, market knowledgeand the like. What we often overlook is that all these capabilitiescome into play only when bound by corporate culture, valuesystems and governance, typical of a multinational. It is wise not tounderestimate the effort required to nurture talent for your purposes 2 Product and Innovationto establish these “binding forces” within your organization in China.The “multinational mindset” is prevalent, for the most part, only in theyounger generations of talent, not the ones before. While Chinese While it may sound obvious, the fact is that one can only sell a goodindustries that have been around for a while, they’ve been dominated product or service to someone who can clearly see and appreciateby State Owned Enterprises. These have a broader agenda than its benefits. Companies must be willing to make enormous effortthe typical multinational corporation. Employees hired from these to educate the buyer (and the organization’s hierarchy), in China,businesses aren’t necessarily “job-ready” for an MNC environment. about a product and how it delivers on its “better than before”Assimilating them needs conscious effort and hard work, not to value proposition. I say “enormous effort” because institutions thatmention training in both hard and soft skills as well as matters related influence buying decisions in the developed world – like independentto corporate culture and governance. industry analysts who also play buyer-advisory roles - don’t have a comparable play in China. So, products brands must take on that roleGrasping the expectations of talent in a dynamic market, such too to fill in for this “institutional void”. Because, if consumers do notas China, mandates a shift in conventional Western mindset. In a buy into the “better than before” story, they won’t pay a higher pricecountry, that has sustained tremendous growth momentum for over to buy your product – even a great one that’s in demand everywhere20 years, it’s no surprise, really, that its people want to be an integral else the world over.part of that growth. They want to grow at a comparable pace. And,they evaluate their own potential for growth by looking at how their In more mature markets, the emphasis is primarily on efficiencyemployers are faring in China. Quite obviously, they don’t want to in the product value proposition. In China, growth is the primarycommit themselves to the wrong lane and risk being left behind. So, need and efficiency is a growing but distant third or fourth on thetalent in China perceives itself as competing with everyone in China list of considerations. So, when “better than before” propositionsnot just within the company or even the industry of employment. are crafted, it is also important to address how this will help buyers capitalize on the all-important growth opportunity.For an organization seeking a foothold in China, the decision of whereto locate facilities is greatly influenced by this growth expectation. In most customer-centric multinational corporations doing theThere is significant motivation for talent, from across the country, new, or at least some level of continuous innovation, is part andto shift to larger cities like Shanghai, Beijing and Shenzhen where parcel of the performance culture. And mere imitation has a clearlyopportunities are greater. But, that move comes at an increased cost negative connotation. In China, however, healthy innovation entailsof living that employees expect significantly improved remuneration assimilation of the existing before doing the new. Getting startedpackages to address. Else, employees may not be able to withstand by “copying’ might indeed be the best solution to many problems.the impact of the shift for long. With this as background, where to I would go so far as to argue that it is the best way to rev up thelocate your office, is a tricky decision to make. While, getting started growth machine. Ask anyone who has spent some time in China,in a tier 2 city, in China, may prove to be a good first move, if your and they will tell you with a sigh of relief that once you set a direction,organization has long-term ambitions in China, dropping anchor in things get done, and this is very favorable for business. But thena tier 1 city, as soon as feasible, is unavoidable. As talent gravitates again, there’s the question of balancing copying with creatingtowards the big cities in search of growth and opportunities, today need for the new and “better than before”, which then meansyou can perhaps manage with local workers, in your tier 2 city nurturing creativity, initiative and other attributes of healthyoperations, driven by managerial talent imported from tier 1 cities. innovation.But, it won’t be long before the lure of faster growth in a bigger city Innovation is as important to the Chinese as anyone else, butdraws them all away. innovations that succeed are ones that not only reflect the best in theThis brings us to the subject of a highly mobile talent pool and the world, but ones that are likely to create opportunities by questioningensuing attrition. It may be caused by a variety of reasons that range traditional business trajectories rather than ones that emulate globalfrom bachelors looking for higher paying jobs, so they can buy a knowledge. To sum it up” it is not about gaining market share inhome to secure a bride, to more prosaic causes like peer pressure. China, it is about growing the market by creating new experiencesCompanies must be prepared to train more people than they need. that consumers will want in the future”2 | Infosys
  3. 3. what it wants to do, and what it stands for – instill in him the conviction and the integrity of purpose of this organization and empower him so 3 Markets he does not ever feel the need to apologize for it!” An organization with a global talent pool will probably have the right Chinese leaders in its midst, to do the job. Failing that, it can bring in anWhat struck me, when I moved to China, is that the business environment expatriate to drive the business forward. It’s important to hire someonehas not matured to a point where companies are categorized into who will not shy away from saying NO, nor hesitate to say why businesslogical segments. It falls upon the buyer to determine these details, in must not be pursued under given circumstances. Because, in China,the absence of coverage by analysts or trade press. Then, to separate one has to say NO, perhaps, more often than in other parts of the world.the wheat from the chaff, the buyer must be guided by criteria shapedby his own experience over the years.First off, there is a general wariness of being cheated or overcharged.In the absence of clear ways to discern a good product or service froma bad one, buyers tend to behave in a manner that seems to suggest 5 Scalethat; “I am very likely to be disappointed with the purchase, I’d ratherbe disappointed by paying less”! This wariness is often addressed by Size matters in China, to the extent that “great” and “big” arenegotiating hard on price, inserting substantial penalty clauses in synonymous. The appeal of big companies lies more in their jobcontracts, buying from people who can be influenced in case something creation and career growth potential than in revenue and profitability.goes wrong and so on. This is often referred to as local business culture In the absence of vocal trade media, energies expended to create theand many companies feel obligated to try and cater to these asks. The perception of a “big and influential brand takes on an exaggeratedchallenge is that we (people working for Multi-National Corporations) are importance. Size and brand decibel levels count during hiring, inrequired to adhere to corporate governance norms, ensure our contracts government relations and in business deals. Whether a companydon’t carry unreasonably liability, profit from our business deals, and succeeds or not depends on the scale of its ambition and the decisionsso on. These two don’t mix very well, and companies have to decide it takes to achieve it. That being said, being conservative or small inwhether they have what it takes to persist and win in such markets. China is not a good strategy as the cost of doing business is high (unlikeThis brings us to the subject of business relations and alliances - which developed countries where SMEs have a favorable ecosystem givingones to pursue and which to avoid. The topic of institutional voids is very them a fair chance). In China, the following go in a company’s favor:relevant to China, understanding the explicit and implicit capabilities FDI (Foreign Direct Investment), large scale or high wage employment,and dependencies that your company relies on to deliver success (in or operations in certain industries/ fields which are of interest to thehome markets), and using that knowledge to understand the changes government. Being a small company in China does not exactly feedrequired in your business and mental model for creating success in China, this critical. Other times, there’ll be inescapable reasons for partnering –such as the need to comply with regulations that prohibit expansionin the absence of a local partner – but opportunism is not one of them.And finally, don’t put too much energy to “figure out the market”. In adynamic market, like China, this can prove futile. Growing affluence and 6 Governmentchanging aspirations will keep the goal post moving. Business must bein a position to adapt to these changes. What role does China’s government play in business success? That question is best answered by remembering that the government owns a large percentage of companies (in Shanghai, State-owned enterprises account for around 50% of GDP); judiciary is a branch of the 4 Leadership government, as is law enforcement (or the public protection bureau); and the public does not vote on policies – it is the government which debates and decides based on the inputs received.Success is impossible without the right leadership. A truism the China’s corporate law is going through rapid evolution, leaving anworld over, this takes on added significance in China - where lack of impact on business operations and bottom-line. While paid advisorsleadership can bring disappointment and delay the realization of the offering “interpretation” of these laws abound, companies need tomarket’s true potential. The China business leader is ever so critical to beware of those with poor credentials. The challenge, however, liesbuilding the DNA of local operations. in telling the good from the not-so-good. “So, are there no leaders in China?” One look at cities like Shanghai Employees care about whether or not their company is recognizedwill show how incredulous that question is! My view is that this is less by the government. This is understandable considering the latter’sabout the availability of leadership and more about grooming local ownership of industry and land assets.leadership to match the organizations purposes. Early and sustainedexposure to global practices clearly pays off rich dividends. Having It’s logical to view the government and State Owned Enterprises asconsulted many seasoned heads of multinational companies in China, growth-enablers, and it’s judicious to nurture relationships that qualifyI found the following piece of advice most convincing: “Find the best your enterprise to be considered for business by the largest employerman for the job; someone who understands what your company does, in the land. Infosys | 3
  4. 4. 7 Guanxi 8 GrowthGuanxi stands for networks or relationships. The truth is that the old I recently ran into the head of business for a multinational in China.boys club exists everywhere. What’s so different about China’s Guanxi As we got talking, I commented on how exciting it must be to bethat it merits so much discussion? A conversation I had with a Chinese growing so fast, and that I thought China was a good region to be incolleague will explain the reasons why I drew the conclusions I finally did. at this time. He followed up a very long pause with a longer question; “Who told you that we are doing so well? It is true, of course that ourHe asked me, respectfully enough, why I thought I was picked to head revenue is growing by 20-30% a year over the past few years. This isbusiness development in China when I don’t have the benefit of Guanxi certainly positive, but both the market and our competitors seem to(as a newcomer to China almost 6 years ago). In turn, I asked him if be growing faster – we are obviously losing market share?he had Guanxi, and he confidently replied in the affirmative. I thenasked him if he could leverage Guanxi to get prospect X to consider “We seem to be getting a good part of this growth from sales of ourus for a technology transformation program they had on the cards. He high-end products where we have a significant technology advantage,replied in the affirmative again. I pressed on asking if we could leverage and few or no real local competitors. However, with our commercialGuanxi to enable us to apply for this project quoting double our rate- products which make up a large percentage of our portfolio globally,card prices. He was aghast and exclaimed that would be impossible. we don’t seem to be making much progress. We haven’t figured outIn fact, a distinct price benefit would certainly be part of the selection how to design, position, price and sell our products in the broaderprocess, he said. I then asked if his Guanxi would get the same prospect segment effectively. This is cause for concern, as the volumes in theX to consider us for a building construction project they were inviting high-end market are not very big.”proposals from vendors for. His refusal was equally emphatic this time. We tend to celebrate double digit growth rates. I don’t want to beWe had no track record in the business, he said. So, Guanxi couldn’t a Grinch, but growing double digit while losing market share is notget us to run a race we weren’t anyway qualified to run, nor could it what we had in mind! Managing expectations and performanceassure us of victory. Then exactly, what does Guanxi do? management in our China operations is a big challenge – it is hardIn the absence of the ability to make a comprehensive assessment of to explain to employees why double digit growth rates in this marketthe quality of the suppliers’ proposals or their track record, one tends means that we are doing pretty badly!to lean on relationships to provide favors and in return get someassurance that you have a party that will be willing to work with youif the going gets tough.It is abundantly clear to me that the way to building a sustainablebusiness is founded on best practices and good governance. Guanxican perhaps help, but must not be overestimated. About the Author Anand Arkalgud Vice President & Building Tomorrow’s Enterprise (BTE) Expert, Infosys Limited Anand’s professional journey started in India just under two decades ago, and then traversed Australia, the United States and China, where he has lived and worked in a career spanning different industry segments, and service lines. Anand now leads a group of Infosys experts who endeavor to partner with key clients to future proof their enterprise. He is also passionate about and leads efforts to identify opportunities and challenges for companies in emerging markets. Until early 2011, Anand was responsible for establishing and growing Infosys business in the Greater China region. He has played a key role in Infosys’ emergence as one of the fastest growing multinational business and IT consulting company in China. Before moving to China, Anand was a senior member of the Hi-tech and Manufacturing practice with Infosys in the US. Anand holds a degree in Instrumentation technology from the University of Mysore, and an MBA from the University of Queensland, Australia.About InfosysMany of the worlds most successful organizations rely on Infosys todeliver measurable business value. Infosys provides business consulting,technology, engineering and outsourcing services to help clients in over30 countries build tomorrows enterprise.For more information, contact© 2012 Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledgesthe proprietary rights of the trademarks and product names of other companies mentioned in this document.