Multinational companies and China: What future?

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This report outlines where China currently fits on the agenda of multinational companies (MNCs) and shows how global companies are recalibrating their China operations in reaction to new realities. Its findings are based on a survey of 328 senior executives conducted in June and July 2011, as well as in-depth interviews with executives of major foreign multinationals, business scholars and market analysts.

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Multinational companies and China: What future?

  1. 1. Multinational companiesand China: What future? An Economist Intelligence Unit report Sponsored by:
  2. 2. Multinational companies and China: What future? Contents Preface 2 Executive summary 3 Introduction 6 Chapter 1: The big picture 9 Hope, hype and reality 10 Justified optimism? 12 Chapter 2: The consumption story 13 Chapter 3: The perils of success 16 Is it enough 16 One strategy, or two? 19 Is it too much? 20 Lacoste: Who’s your benchmark? 22 Chapter 4: Whose hubris? 23 Suddenly uncertain 25 Chapter 5: The invisible hand 28 Aiming high 29 The real issue 30 A non-standard approach 32 At what price? 32 High-speed trains: A series of unfortunate events 33 Getting on with it 34 Chapter 6: Honour thy master 36 The renminbi 38 By other means 41 Nissan: According to plan 42 Investing in R&D 43 Chapter 7: Gearing up to play the game 44 Overcoming the fear factor 46 Appendix: Survey results 48© The Economist Intelligence Unit Limited 2011 1
  3. 3. Multinational companies and China: What future? Preface Multinational companies and China: What future? is an Economist Intelligence Unit report, sponsored by CICC. The EIU conducted the survey and interviews independently and wrote the report. Gaddi Tam was responsible for layout. The cover design is by Harry Harrison. The findings and views expressed here are those of the EIU alone and do not necessarily reflect the views of the sponsor. Many interviewees for this report have asked to remain anonymous and we have respected their wishes. We would like to thank all interviewees for their time and insights. November 20112 © The Economist Intelligence Unit Limited 2011
  4. 4. Multinational companies and China: What future?Executive summaryW ith leading economies of the world in dire shape, China now has become a crucial engine of global growth—sooner than anyone had imagined. While developed countries remain in a quagmire,China keeps roaring ahead. While consumers elsewhere worry about their jobs and financial future, manyin China are getting rich, and about to get even more so. Beyond the headlines about China’s growing weight in the world—whether in purchasing power orotherwise—what does China now mean for multinational companies (MNCs; unless otherwise noted, thisterm refers to non-Chinese multinationals)? Are they backing up their talk about the importance of Chinawith real investment? Are they being rewarded in return? Equally important, and not unrelated, what doMNCs mean for China? Will they be allowed to realise their dreams? Or will they be held in check whilelocal companies improve their capabilities? This report, Multinational companies and China: What future?, outlines where China currently fits onthe agenda of MNCs and shows how global companies are recalibrating their China operations in reaction 1 The survey covered 328 companies from a range ofto new realities. Its findings are based on a survey of 328 senior executives conducted in June and July industries. The respondents20111, as well as in-depth interviews with executives of major foreign multinational s, business scholars came equally from companies headquartered in Europe,and market analysts. North America and Asia- Pacific. In terms of size, 55% Among the key findings: had global revenues of more than US$500m, with 44% having more than US$1bn in• Multinationals, large companies in particular, are clearly counting on China to deliver more. revenues. For more details seeAlmost half (49%) of all the survey respondents said that the fallout from the global financial crisis has appendix.raised their companies’ expectations for China. Among the larger companies (global revenues of morethan US$5bn) the figure is 73%. But not all companies are planning to invest more in order to increasereturns. Among the larger companies counting on China to deliver more, half are counting on existingoperations to bring more growth.© The Economist Intelligence Unit Limited 2011 3
  5. 5. Multinational companies and China: What future? • While MNCs are bullish, there are signs they are hedging their bets. The exuberance of consumer2 Coming of age? Multinational goods firms aside, China seems to have stalled, rather than risen, on MNCs’ agendas. Among thecompanies in China, EconomistIntelligence Unit, 2004. The respondents to our survey, the share reporting that their headquarters view China as “critical to globaldemographic for the 2004survey was similar to the 2011 strategy” was 37%. This is down from 53% reported in a similar survey conducted in 2004.2 But this doessurvey, though nearly 70% of not mean that China is not an important market for many firms. A further 33% of respondents said thatthe 217 respondents in 2004were from corporations with while it is not critical, it is strategically important.global revenues of US$1bnor more; in the 2011 survey,44% of the 328 respondents • Today, China is still a relatively small market for many multinationals, but this is expected tohad US$1bn in revenuesor more. Focusing only on change quickly. Analysis of the financial results of 70 MNCs3 showed that in 2010 only ten had Chinathe responses of companies revenues that accounted for more than 20% of their global revenues. For more than half, China accountedwith more than US$1bn inglobal revenues, the figure for less than 10% of global revenues. Companies do expect this to change. Only 8% of our surveyis still down in the 2011 respondents said China is already their biggest market, but 17% expect it to become so in less than fivesurvey—48% view the countryas critical. years, while another 21% expect this to happen in 5-10 years.3 In compiling our list weexamined Interbrand, S&P • China’s consumption story is driving MNCs’ strategy. The Chinese government’s drive to raise incomes100 Global, and S&P 500companies to find those that and shift growth towards domestic consumption is likely to have a profound impact on most companies.disclosed their China revenues Among survey respondents, 58% said that this policy is the factor that will have the biggest impact on theirin their latest publishedannual reports or other China strategy, while 56% said that growth prospects for their industry was the key driver of their Chinareliable sources. strategy. • One of the greatest challenges facing multinationals is achieving “China speed”, while maintaining a low profile. Multinational companies tend to want to build more slowly and solidly than their local counterparts, but if they do so in China their competitors are likely to fill the gaps. Overall, 59% of our survey respondents remain focused on “improving penetration in wealthier coastal cities/southern region”, and only 33% of them are “currently moving into second- and third-tier cities”. At the same time, companies worry about getting too far ahead of the local competition, lest they attract unwanted attention. This could explain the seemingly low expectations of our survey respondents in terms of using acquisitions as a route to growth in China: only 20% chose acquisitions as the most important strategy for growth in China, while 63% chose organic growth and 46% said joint ventures. • There are signs that multinationals’ traditional competitive advantages are beginning to erode in China. It is often taken as fact that multinationals have superior technology and better brand management, and hold more appeal for talented workers. There are signs that all of these advantages are beginning to erode in China. Even among the large companies surveyed for this report (global revenues of more than US$5bn), only one-quarter felt they have superior technology or a stronger brand, with these figures even lower for the sample as a whole. Human-resources consultancies report that local talent is increasingly gravitating towards mainland companies. • China’s policies aimed at encouraging local innovation are causing a great deal of ill will among multinationals. Among our survey respondents, 49% were concerned or very concerned that they would4 © The Economist Intelligence Unit Limited 2011
  6. 6. Multinational companies and China: What future?be forced to give up their IP in exchange for market access. Among big companies the figure was 52%.While some of the more objectionable measures have been softened by the central government, executivesstill worry about local protectionism. And 46% of respondents said that China’s regulatory environmentand industrial policies were likely to have a big impact on their China strategy in the next five years.• Multinationals need to reorganise to match the importance being placed on China. Among largecompanies responding to our survey, only 8% said that their China CEO sits on the company board (for 45%,the China CEO reports into regional headquarters). However, 40% of large companies said that they hadposted very senior executives to greater China, a move aimed at improving understanding of China andspeeding decision making at headquarters.• While planning how to win in China, multinationals are beginning to think how they can leveragetheir relationships there to compete elsewhere in the world. While most arrangements seem to involvecooperative agreements with Chinese partners on the use of specific products in other markets, there aresigns that this could be taken a step further to include joint ventures in third countries.© The Economist Intelligence Unit Limited 2011 5
  7. 7. Multinational companies and China: What future? Introduction M any foreign multinational companies4 (MNCs) have long viewed China, with its 1.3bn people,4 Throughout this report,unless otherwise noted,“MNCs” refers to non-Chinese as a dream market, with the emphasis on “dream”. With leading economies of the world inmultinational companies. dire shape, China now has also become a critical engine of global growth—sooner than anyone had imagined. While developed countries remain in a quagmire, China keeps roaring ahead. Consumers elsewhere worry about their jobs and financial future, but many in China are getting rich, and about to get even more so. In many sectors, China is now an emerged, rather than an emerging, market. It is the world’s largest market for cars, air conditioners and LCD-TVs, to name just a few products. No doubt, China will soon be the greatest consumer of a whole host of other goods from medicines to designer handbags. Beyond the headlines about China’s growing weight in the world—whether in purchasing power or otherwise—what does China now mean for MNCs? Are they backing up their talk about the importance of China with real investment? And are they being rewarded in return? Equally important, and not unrelated, what do MNCs mean for China? Will they be allowed to realise their dreams? Or will they be held in check while local companies improve their capabilities? This report, Multinational companies and China: What future?, assesses where China currently fits on the agenda of MNCs, and discusses how some are recalibrating their China operations in reaction to new realities. Its findings are based on a survey of 328 senior executives at non-Chinese multinationals conducted in June and July 2011, as well as in-depth interviews with executives of major foreign multinationals, business scholars and market analysts, and other published reports on specific industries. Multinationals’ future in China varies greatly depending on industry, company size and indeed on the individual company concerned. But some general observations can be made. First, companies are counting on China to deliver more. But not all are planning to plough in more investment in the name of higher returns. Almost half (49%) of all the survey respondents said that the fallout from the global6 © The Economist Intelligence Unit Limited 2011
  8. 8. Multinational companies and China: What future?financial crisis has raised their companies’ expectation for China. But while 21% are “investing morein China in the hope that it will make up for deteriorating markets elsewhere”, 28% are “counting onexisting operations in China to deliver more of [their] global revenue”. Larger companies (revenuesof more than US$5bn) are more willing—and presumably able—to spend: 73% are counting on Chinato deliver more, but they are almost evenly split between investing more and counting on existingoperations to deliver growth.Counting on ChinaHow has the fallout from the global financial crisis affected your company’s expectation for China?Choose the one answer that best applies. All respondents(% respondents) Big companiesWe are counting on our existing operations in China to deliver more of our global revenue 28 36We are investing more in China in the hope that it will make up for deteriorating markets elsewhere 21 37We are postponing further investment in China because of deterioration in our main markets 9 4We are repatriating more profits from China to shore up balance sheets at headquarters 2 1Our expectation has not changed 40 22Source: Economist Intelligence Unit survey Yet China is not as crucial to foreign companies as may be expected, given widespread hype about itsgrowth. The share of respondents reporting that their headquarters views China as “critical to globalstrategy” was 37% in our 2011 survey, down from 53% reported in a similar survey conducted in 2004.5 5 Coming of age? Multinational companies in China, EconomistAlthough the survey sample from 2004 had a higher percentage of larger companies, when we look only at Intelligence Unit, 2004. Thethe responses of companies with more than US$1bn in global revenues, the figure is still down in the 2011 demographic for the 2004 survey was similar to the 2011 survey, though nearly 70% ofCritical, or just important? the 217 respondents in 2004From the perspective of your global headquarters, which statement best describes China? were from corporations with(% respondents) 2011 total 2011 big companies 2004 total global revenues of US$1bn orIt is critical to global strategy more; in the 2011 survey, 44% 37 of the 328 respondents had 48 US$1bn in revenues or more. 52.5It is strategically important, but not critical 33 36 40.6It is on a par with other emerging markets 9 5 5.5We are still exploring the market 13 91.4It will be a niche market for us 5n.a.Don’t know 21Source: Economist Intelligence Unit survey© The Economist Intelligence Unit Limited 2011 7
  9. 9. Multinational companies and China: What future? survey—48% view the country as critical. Still, that is a fairly large percentage of companies banking on China. And even those for whom China is not critical view it as important. Indeed, based on our qualitative interviews with multinational executives and service providers working with them, it seems that foreign companies that have so far only dipped their toes in China are seriously considering taking a headlong dive. Many that had been to China and left in failure are now returning. Even those that have been aggressively expanding in the country for years are recalibrating to seize the historic opportunity that China presents—those with valuable technology are trying to figure out how to do so without losing their shirts. At the same time China is presenting new opportunities in areas such as capital raising and research and development (R&D). But China from here on is going to become more difficult (not that it was ever easy). The post-crisis self-confidence of the Chinese government, companies and people is soaring to the point where it strikes many outsiders as hubristic. Today, some foreign companies in China wonder how long they will be welcome. While smaller foreign consumer-goods makers, retailers and lower-tech companies seem largely to fly below the radar, others feel they are being watched carefully. China is making greater demands— especially on foreign companies with proprietary knowhow and cutting-edge technologies. Competition is already brutal. To build a winning business in China, foreign multinationals must now plan even more meticulously—as well as make tangible contributions to the host country’s continued economic development. The image of China that emerges from this research is a country of outsized potential, boundless ambition and increasing complexity. The relentless rise of the China market remains one of the most important global business stories today. But how this story ends will not be the same for all MNCs. That will depend on how well each company writes its own subplot.8 © The Economist Intelligence Unit Limited 2011
  10. 10. Multinational companies and China: What future?Chapter 1: The big pictureThe role China now plays in the world economy is pivotal. But its role in the globalrevenues of multinational companies is, for the moment, less so.T he global financial crisis has undeniably raised China’s stature in the world. Thanks to its ability to maintain near double-digit annual GDP growth through the tumult of 2008-09, China overtookJapan as the world’s second-largest economy in 2010. Before the global financial crisis erupted,Goldman Sachs had expected China to surpass the US as the world’s biggest economy around 2041.But now, the Wall Street bank projects that the Chinese economy will overtake that of the US by asearly as 2027.6 The Economist Intelligence Unit (EIU) forecasts that on a purchasing power parity 6 In terms of constant 2007 US dollars. See Goldman(PPP) basis it will do so by 2017. Sachs, “The Long-Term China’s growth prospects look good in the short to medium term as well. During 2012-15 the EIU Outlook for the BRICs and N-11 Post Crisis”, Decemberforecasts China’s GDP to expand by an annual average of 8.4%. That would be only marginally lower than 4th 2009.the 9% growth expected in 2011. This dramatic reversal of fortunes between the West and the rest has transformed the way manyMNCs look at China (as well as other large emerging markets, such as India and Brazil). Simply put, itis no longer seen as a major market for the future but a place to make big money now. While it may notbe crucial to all companies, China certainly ranks highly on the global agenda. In addition to the 37%of survey respondents who said their headquarters viewed China as critical, another 33% viewed itas “strategically important, but not critical” (though this figure was also down from the 2004 survey,where 41% of respondents said this). Only 13% said they were “still exploring the market”. The latest figures for foreign direct investment (FDI) also suggest rising interest. Though in 2009, inthe immediate aftermath of the global financial crisis, inward FDI dropped to US$114bn from US$175bnthe year before, it bounced back to an estimated US$185bn in 2010 as crisis-stricken economies beganto recover. (It is worth noting that these figures may be inflated by private Chinese companies raising© The Economist Intelligence Unit Limited 2011 9
  11. 11. Multinational companies and China: What future? money through offshore companies and then repatriating the funds back to China as FDI. It is estimated by Dealogic that such funds accounted for US$36bn in the 18 months to end-June 2011.) Surveys by foreign chambers of commerce have for several years pointed out that the bulk of investment is now focused on China’s domestic market, and our own survey underscores this. While 31% of respondents saw low-cost production as a major opportunity in China in the next five years, 76% pointed to China as a growing market for their products. This view is even more pronounced for respondents based in China—87% see the growing market as the biggest opportunity. Hope, hype and reality Just how big is that opportunity? Perhaps not as7 In compiling our list we big as the headlines insist. At least not yet. Our Tiny in the top lineexamined Interbrand, S&P Percentage of total revenue from China, analysis of 70 MNCs100 Global, and S&P 500 analysis of 70 multinational companies7 shows that (% of companies)companies to find those that in 2010 only ten had China revenues that accounted 80disclosed their China revenuesin their latest published for more than 20% of their global revenues. Onlyannual reports or otherreliable sources. 18 counted on China for more than 20% of their 60 total international revenues. Few companies, with the notable exception of some automakers such as 40 General Motors and Volkswagen, currently count China as their largest market. But it is clearly a 20 major source of growth. Although only 8% of survey respondents said China has already become their 0 0-10% 11-20% 21-50% 51%+ company’s biggest market, 17% said it will be so in % of revenue less than five years and another 21% expected this to Source: Economist Intelligence Unit happen in five-ten years. Ahead of the pack Companies generating more than 20% of total revenue in China, 2010 (%) Panalpina 23.1 Mead Johnson 23.7 Cartier (Richemont) 24.0 BHP Billiton 25.1 Rio Tinto 27.8 Qualcomm 29.1 Nvidia 34.5 Yum! Brands 36.5 Micron Technology 38.8 Advanced Micro Devices 46.3 Source: Economist Intelligence Unit10 © The Economist Intelligence Unit Limited 2011
  12. 12. Multinational companies and China: What future?It’s the growth ...China as % of total revenues 2005 and 2010(%) 2005 2010Adidas 3.0 8.3Advanced Micro Devices 14.5 46.3Astra Zeneca 0.8 3.2BHP Billiton 12.3 25.1Boeing Co 6.1 4.8Bombardier 1.3 5.9Bosch 2.4 8.8Carrefour 2.4 4.7Corning 3.1 12.5DuPont 4.5 8.4Intel 13.8 16.5LG Electronics 15.5 8.3LM Ericsson Telephone Co 7.6 12.8Micron Technology 15.9 38.8Motorola 13.6 7.0Nvidia 16.9 34.5Philips 9.9 7.8Qualcomm 7.0 29.1Siemens 4.2 7.7Xilinx 10.2 19.3Yum! Brands 13.86 36.5Source: Economist Intelligence Unit It is perhaps telling that the number of companies that make public their China results has more thantripled since 2005. Of the 70 companies for which we were able to find results, only 22 were reportingthem as far back as 2005. Of these, China’s share of their revenues has in most cases increased by asubstantial amount. For Yum! Brands, Qualcomm and several others, the share of revenue coming fromChina has doubled or even tripled. But for four companies—Boeing, Philips, Motorola and LG—China’sshare of their global revenues has actually declined. Where do they go from here? As we discuss in coming chapters, while there are tantalizing© The Economist Intelligence Unit Limited 2011 11
  13. 13. Multinational companies and China: What future? opportunities in China, the operating environment is tough and getting tougher. Nearly half of the executives surveyed said they were concerned about “being forced to give our IP (intellectual property) in exchange for market access”, with more than one-quarter “very concerned”. The shift to a higher- wage economy will put pressure on business models. Indeed, although surveys by business chambers indicate that many companies are making healthy profits in China, some observers are of the opinion that since China is no longer an “emerging” market in many sectors, the days of hefty profit margins—in the range of 15-20%—are over. On a macro level, China faces some serious risks too. An inflation rate that has been pushed to a three-year high by multiple factors (ample liquidity, booming demand, high commodity prices and upward wage pressures) has become the biggest headache for Chinese policymakers. Rising prices disproportionately affect China’s still-relatively-poor masses, and in the past have triggered social unrest. There is also the growing possibility that China’s huge investment drive—especially at the local government level—and its own exuberant housing market could end in a bust, triggering a sharp economic slowdown in the next few years. A timely policy response cannot be taken for granted, since the government is increasingly preoccupied with political manoeuvring ahead of the next leadership transition, expected at the 18th Chinese Communist Party congress in late 2012. Justified optimism? MNC executives are not overly concerned about a major crisis in the Chinese economy, but they are not ruling it out. Just under 40% said they were concerned (18% very concerned) about a crisis. More— 44%—were concerned about major social unrest. But many do expect a slowdown in growth—40% expect China’s growth rate to slow to more developed country levels, which we suggested were 3-5%, within the next five years. A measure of optimism may be justified, because China has proven sceptics wrong time and again during its three-decade-long pursuit of national economic development. It is also important to distinguish between inevitable cyclical downturns that affect all economies and the inexorable structural upgrading of the Chinese economy. To understand the full implications of the latter, one only has to look at the immense collective purchasing power of Chinese consumers today.12 © The Economist Intelligence Unit Limited 2011
  14. 14. Multinational companies and China: What future?Chapter 2: The consumption storyChina’s determination to make consumption a more important driver of economic growthwill have profound implications for many companies. Wage increases are only part of thestory. Taken together with policies to provide universal healthcare, to draw more peopleinto cities and to clean up the environment, they create opportunities galore and thepotential for explosive growth.O nly a few years ago, foreign businessmen who scoffed at the notion of China’s “one billion customers” as a headline writers’ fancy were as common as those who believed that such a market has alwaysexisted and was simply waiting to be flooded with superior foreign goods. Today, the doubters are inretreat. Take Arthur Kroeber, who edits the China Economic Quarterly, a publication which he admits has“long poured sceptical cold ink on extravagant claims that the quasi-mythical beast known as the ‘Chineseconsumer’ will take over the universe”. He now declares that “as facts change, we change our minds, andthe facts now clearly say that the Chinese consumer has arrived”. What are these new facts? In his latest analysis, using 2009 data, Mr Kroeber estimates that Chinanow has about 100m households (or 300m people) with average annual household expenditure of someUS$7,500. In terms of size this army of Chinese consumers, with power to spend at their discretion,rivals that of the US. Of course, the typical American consumer spends far more than his or her Chinesecounterpart and will continue to do so for many more years to come. But at an aggregate level, Chinesehousehold consumption is already about US$800bn a year, which is more than the combined figuresin South Korea and Taiwan, where per-capita incomes are about twice as high as in China. “Chinesehousehold consumption has crossed a critical threshold,” Mr Kroeber concludes. His views are supported by the EIU’s macroeconomic forecasts. We project China’s GDP per head torise to just under US$10,000 a year by 2015, more than double the 2010 level of around US$4,500.During 2011-15, total disposable income is expected to grow by well over 10% a year. Our surveyrespondents certainly believe that consumption is set to take off: 58% said that China’s efforts to raise© The Economist Intelligence Unit Limited 2011 13
  15. 15. Multinational companies and China: What future? On the horizon Which of the following factors are likely to have the biggest impact on your China strategy in the next five years? Choose up to three. (% respondents) China’s efforts to raise incomes and boost consumption 58 The regulatory environment/industrial policies (eg, indigenous innovation) 46 Competition from Chinese companies 43 Renminbi convertibility, if it happens 32 Improved infrastructure (as a result of stimulus spending) 25 Urbanisation 21 Other, please specify 5 Source: Economist Intelligence Unit survey incomes and boost consumption is the factor that would have the biggest impact on their China strategy, and 56% said that growth prospects for their industry was the key driver of their China strategy. Efforts to raise incomes could have a very big impact indeed. The Chinese government is eager to rebalance economic growth drivers away from investment and exports towards consumption, and it is especially keen to raise incomes of the less well-off. It plans to raise minimum wages by at least 13% a year for the five years covered by the government’s 12th Five-Year Plan (FYP) for 2011-15. Market forces are already driving up wages at an even quicker pace in some areas: since 2010, 30 Chinese provinces have raised their minimum wages, by an average of 23%, and factory owners in the Pearl River Delta export belt surrounding Hong Kong are increasing pay by much more than that to keep their assembly lines running. In 2010 the minimum wage in Beijing went up by over 45%, thanks largely to the galloping economy and tightening labour supply. While companies are in the short term scrambling to find efficiencies to offset rising wages, they are keenly aware of the opportunity the creation of a new consumer class represents. This class will not be limited to the first-tier cities of Beijing and Shanghai, but will emerge all across China and deep into its poorer interior regions. By the end of the government’s 12th FYP, the EIU expects even the traditionally backwater provinces of Henan, Anhui and Sichuan to have disposable incomes per head of over US$3,660 (Rmb25,000). The Nielsen Company, a market research and consulting firm, believes the next big prize are the 161m households in the third- and fourth-tier cities at the prefectural and county levels in such central and western regions. In addition to wage rises, China’s galloping urbanisation will help pushIn the year 2025Forecasts for urbanisation up consumption and reduce the income gap. It will, in turn, further spur • Around 1bn living in China’s cities economic growth and support consumption by existing city dwellers and new • 15 cities with 25m+ population migrants, as well as making it easier to reach more consumers, creating huge • 200+ cities with 1m+ population potential opportunities for the world’s industrial firms. We forecast that by • 170 new mass transit systems built 2025 around 1bn of China’s population (or 70% of the total) will live in cities. • 40bn sq m of floor space built Between now and then 170 new mass transit systems and 40bn square metresChina urban inflows, 2010-20. of floor space will be built. China’s companies are not likely to be able toSource: China Regional Forecasting Service, Economist Intelligence Unit manage all this on their own.14 © The Economist Intelligence Unit Limited 2011
  16. 16. Multinational companies and China: What future? Healthcare reform, a key Chinese government initiative, will be vital in unleashing the full potentialof the country’s consumption power. With no social safety net, many Chinese households continue tosave an inordinate amount of their incomes against medical emergency, or to fund their retirement.Even relatively well-off city dwellers report that they save more than 30% of their annual householdincome, in part to cover medical emergencies.8 There is an urgent need to overhaul China’s patchy 8 A better life? The wants and worries of China’s consumers,healthcare system to prepare for the coming upsurge in the elderly population, and also to bring a Economist Intelligence Unit,much-needed boost to the quality of life of many of its citizens. Patients in many rural areas currently 2010.have only limited access to clinics, drugs and health insurance. And city dwellers often must cope withovercrowded hospitals and overstretched doctors. Rural and urban residents alike must pay a big portionof medical bills themselves. The Chinese government is now trying to restore the public healthcare system, after allowing it to decayfor most of the modern era of economic reform. With the goal of providing “safe, effective, convenientand affordable” healthcare to all citizens by 2020, in 2008 the government introduced national healthinsurance. (This was five years after it launched a separate rural cooperative medical insurance schemethat partially covers healthcare costs.) As Chinese people stop losing sleep over their ability to pay medicalbills, they are likely to save less and spend more in their daily life, boosting consumption. To be sure, this may still be a distant prospect. Many parts of the healthcare reform plan, such as therole of the private sector and drug pricing, have yet to be decided or put into place. Moreover, currenthealthcare insurance rarely covers the cost of the level of care demanded by middle-class consumers. Itis estimated that about 200m people still have no health insurance at all. Nonetheless, the healthcare market is already huge and can only get bigger. Health insurance and theprovision of more healthcare facilities across the country will bring more consumers into the system. Thereare an estimated 13,000 hospitals in China, many of which are likely to need new equipment. Beijing hasalso announced plans to encourage more foreign investment in this sector, though guidelines have yet tobe issued (there are already about 100 foreign-invested clinics and hospitals in China). China is a top-tenmarket for pharmaceuticals in the world, with US$42bn-worth of drugs sold in 2010 according to IMS, ahealthcare consultancy. Though much of the spending was on cheap, domestically made generic drugs, themarket grew at an annual average of around 6% during 2006-10. This pace is expected to continue through2015, as incomes rise, the government spends more and the ranks of the elderly swell. By then, someforecasters project China to be the world’s second-largest pharmaceutical market, after the US. Another area with seemingly huge implications for consumption is China’s determination to cleanup its environment. In a country where studies estimate air pollution kills up to 1.3m people a year9, a 9 “The China Greentech Report 2011”, The China Greentechpotential bonanza awaits, for example, global carmakers that develop greener vehicles for the masses. Initiative, 2011.Having pledged to reduce the country’s carbon intensity (carbon emitted per unit of GDP) by 40-45% by2020 compared with the 2005 level, the government plans to invest more than Rmb100bn (US$15.7bn)in the green-vehicle sector in the coming decade to curb the explosive upsurge in vehicle emissions. Itsgoal is to turn China into the world’s largest producer of clean-energy cars, with emphasis on electricvehicles (EVs), a category that includes hybrid-electric and battery-powered vehicles. How do MNCs plan to capitalise on this consumption story, and what obstacles do they face? Perhapsmore importantly, how does China view their success?© The Economist Intelligence Unit Limited 2011 15
  17. 17. Multinational companies and China: What future? Chapter 3: The perils of success Now that the mythical China consumer has materialised, companies could struggle to keep pace with rising demand. They also worry that too much success will attract unwanted attention. M any multinationals are now turbo-charging their China plans to keep pace with demand. The words “doubling in size” are commonly heard, whether referring to the overall size of a market, or to an individual company’s revenue expectations. For example, AkzoNobel, a chemical company, plans to double its revenue to US$3bn in the next five years. It has ploughed €275m (US$383m) into a complex in Ningbo to make numerous products that will be sold to the building and construction, cleaning and detergents, food preservation, oil, personal care and pulp industries. The company also recently bought a local automotive paint maker. Some companies are even more ambitious. Coach, a premium US accessory maker that saw its sales in China double in 2010 to US$100m, says it aims to raise its revenue in the country to US$500m by 2014 and secure a 10% market share in its sector. Unilever is aiming to boost sales five-fold to US$10bn by 2020. Volkswagen will open two new plants by 2013 (both to be financed by revenues from its China ventures) and Ford will open three by 2014. Coca-Cola is just finishing up a US$3bn investment programme and is planning to spend US$4bn more over the next three years. The list goes on. Is it enough? Ironically, amid all the fantastic expansion plans, one of the biggest questions facing multinationals is, is it enough? While companies are putting increasing amounts into market-sizing research and squeezing as much investment out of headquarters as they can, in interviews for this report some admit that they really are not very confident in the results—if anything, they worry they are being too cautious. Nissan, which has just unveiled a major expansion plan (see Nissan: According to plan, p42), has16 © The Economist Intelligence Unit Limited 2011
  18. 18. Multinational companies and China: What future? Bricks and mortar aplenty Retail expansion plans* Retailer Current (2010) number of stores Planned expansion Apple 6 25 by end of 2012 Burberry 53 100 over 5 years Carrefour 180 20-25 per year (no timeframe) Coach 44 11 (timeframe unclear) Gap 4 10-15 (fiscal 2011) Gieves & Hawkes 90 10 (in 2011) Guess 113 500 (by 2016) H&M 50 250 (fiscal 2010/11) Zara (Inditex) N/A 42 (by 2012) Ikea 8 17 (by 2015) Marks & Spencer 16 (12 in HK) 2 McDonald’s 1,300 700 (by 2013) Prada 18 10-12 per year Starbucks 459 1,500 (by 2015) Tesco 88 80 (by 2016) Uniqlo 77 923 (by 2020) Yum! 3,720 (3,200 KFC; 520 Pizza Hut) 500 annually between 2011 and 2014 Wal-mart 338 Not disclosed. Subway 233 600+ (by 2015) * Excludes investments in or other arrangements for online retailing. Source: Company reports, press reports A sampling Fast-moving consumer goods companies’ expansion plans Company Planned investment Purpose Add bottling plants, expand existing facilities, initiatives in Coca-Cola Company US$4bn, 2012-14 distribution, marketing and development of new cold drinks PepsiCo US$2.5bn by 2012 New plants (10-12), five new farms, branding Proctor & Gamble US$1bn by end 2015 Unilever US$100m New production facility Nestle US$1.7bn 60% stake in Hsu Fu Chi (awaiting approval) Nestle US$600m-1bn* 60% stake in YinLu Foods *Market estimates. Not disclosed Source: Company announcements, press reportsconsistently under-estimated demand for the past seven years, and the company’s CEO, Carlos Ghosn,sees this as the biggest risk for automakers in the country. “We are very humble in terms of forecast, wetake it year by year, but I would bet this market will be more than 20m by 2015,” he says (passenger carregistrations are forecast by the EIU to hit 15m this year).© The Economist Intelligence Unit Limited 2011 17
  19. 19. Multinational companies and China: What future? Foreign companies with strong brands will want to employ their traditional, slower and more meticulous routes to building a sustainable business. But in doing so, they run the risk that their domestic competitors will fill the gaps—sometimes with the foreign company’s own products. This is already happening to some of the world’s more iconic brands such as Apple, Nike, Disney and Ikea, with local entrepreneurs opening unauthorised retail outlets bearing the brand or outlets which closely resemble the original. This seems to be happening largely in the hinterland, where foreign retailers have yet to invest with any great conviction. Indeed, while there has been much media hype about companies moving to third-tier cities and beyond, and FMCG (fast-moving consumer goods) companies certainly are, overall 59% of our survey respondents remain focused on “improving penetration in wealthier coastal cities/southern region”, and only 33% of them are “currently moving into second- and third- tier cities”. The picture is slightly different among bigger companies—45% report they are moving into second- and third-tier cities, but only 12% say they are moving beyond, and 44% say they are concentrating on further penetration of wealthier areas. Going west? How will your company expand geographically in China? Choose the one answer that best describes your situation. (% respondents) All respondents Big companies We will focus on improving penetration in wealthier coastal cities/southern region 59 44 We are currently moving into second- and third-tier cities 33 45 We already have a substantial market in second- and third-tier cities and are moving on to fourth tier and beyond 8 12 Source: Economist Intelligence Unit survey But companies trying to expand rapidly face some very real constraints. “We’re asking ourselves: do we have the resources?” says Frank Cancelloni, CEO Asia-Pacific of Devanlay Asia Distribution, which manages Lacoste’s supply chain in the region (see Lacoste: Who’s your benchmark? p22). He is more concerned about people than cash. “It took us more than six months to find our regional HR director,” he says. “We’ve got 500 sales clerks, and they are the most important people in the company. How do we keep them if the other major apparel retailers or new brands entering the market try to hire them?” Another obvious challenge is maintaining brand consistency while expanding at a dizzying pace. While prominent retailers such as Starbucks and Burberry have bought out their franchisees in order to gain more control over their brands, it is questionable how far those aiming at the mass market can expand without resorting to some form of franchising, given the resources—both human and otherwise—required to expand at the pace that market growth would dictate. Local companies certainly will not hesitate to go big. For example, since 2004 Li Ning, a Chinese sportswear company, has opened more than 5,000 own-branded retail outlets, bringing its total to 7,915. It is aiming for 9,400 by 2013. Adidas, by contrast, plans to open 500 this year, bringing its total to 6,100, and to add 2,500 more by 2015. That is daunting enough. But then consider that Adidas is also expanding its footprint from 550 cities to 1,400. To be sure, companies that excel in small-lot production of a variety of goods, such as many Japanese consumer-goods firms, are going to struggle in China. The issue of scale is not just for retailers. Caterpillar, a US-based provider of construction equipment,18 © The Economist Intelligence Unit Limited 2011
  20. 20. Multinational companies and China: What future?has been making headlines recently over the new priority it places on China—even factoring in theconsiderable (and early) investments it has already made in the country. According to analysis fromOff-Highway Research, a consultancy, Caterpillar’s market share in China has fallen from 11% in 2005 to7% in 2010, despite the fact that its sales have quadrupled in that time. The market share is not going toarch-rival Komatsu of Japan, but to local players.One strategy, or two?Those on the front-lines of the consumption story are also grappling with how to keep up with consumerneeds that at one end of the spectrum are becoming very sophisticated, while at the other remain verybasic. As an analyst once quipped, “In China you have both Africa and the EU.” Today, people living incoastal provinces of the eastern and southern seaboards, as well as in some large cities in the interior, aremuch richer and more discerning than the national average. Rollouts of nationwide distribution networksremain works in progress. But what is more, regional disparities in tastes, preferences and shoppinghabits, apart from incomes, are simply too great. “If you compare Guangdong in the south and Shandongin the east, less than half of the leading brands are common between the two provinces,” says KarthikRao, managing director for Greater China at Nielsen. While most foreign companies have in the past chosen to play in the higher end of the market, leavingthe lower-end to local players, there are signs that they are now reassessing that strategy, with someaiming to play in the middle, if not the low-end, of the pyramid. “As incomes rise, people become hungry for choice,” notes Mr Rao. “Tastes are constantly changingand companies have to stay on top of that. They even have to segment their product line to cater fordifferent tastes as they evolve. That’s what a lot of companies have now realised.” This applies to everything from denim jeans to cars. Levi Strauss, for example, has developed a newrange of jeans called dENiZEN, which retail for about US$40-60 compared with the US$100 for a regularpair of Levi’s. GM is developing a marque specifically for China to target the aspiring car-owner whocannot afford a Chevrolet but wants a lot of the features the brand would offer. The company estimatesthat there are 4m such consumers. Why leave that market to local makers like Chery or BYD? The issue will also confront the pharmaceutical industry. China’s growing middle class is willing topay out of its own pocket for branded Western drugs that they are sure will not harm them. This seemsunlikely to change any time soon, given numerous scandals over product quality in China. But at thesame time foreign companies will need to align themselves with the Chinese government’s goal ofimproving access to healthcare for all, including the lowest-income groups. While the government’sultimate policy on drug pricing remains to be set, it seems a fair bet that price caps will drive the markettowards generics. In the view of George Baeder, who leads the Asia life science practice of Monitor Group, a consultancy,“The government must meet the needs of 1.3bn people. It can’t just follow the broken models in theWest, where drugs are too expensive. They need to drive costs down to the lowest level. Most MNCs arenot particularly strong at playing here.” Most big pharma companies face declining prospects as their major drugs come off patent. Unlikeother types of consumer goods, pharma companies cannot tailor products to the low end of the market:© The Economist Intelligence Unit Limited 2011 19
  21. 21. Multinational companies and China: What future? they may need to offer the same products at lower cost to poorer segments of society. Can or should they do this? There is no clear answer and only one precedent, which does not really apply: the moves by five big companies to offer AIDS drugs at low cost in Africa. While this had no ramifications for global pricing of AIDS drugs, the same cannot be expected for drugs that have a wider application and are produced in China, which has problems with cross-border leakages of both real and counterfeit goods. Is it too much? What does the Chinese government make of this mad scramble? Most smaller and lower-profile firms feel they are too unimportant in China’s overall priorities to warrant much attention. They are probably right. But the larger players are mindful of their steps. “I often joke with government officials—how many stores are too many?” says a senior executive at one foreign retailer. “I mean, is US$50bn in sales too much? There could be a tipping point when they say ‘too much’. But the market is growing so fast that it is not inconceivable that our market share could even decline while our business continues to grow enormously.” This nagging worry about somehow being punished for treading on the local competition could explain the seemingly low expectations of our survey respondents in terms of using acquisitions as a route to growth in China: only 20% chose acquisitions as the most important strategy for growth in China, while 63% chose organic growth and 46% said joint ventures. There has been an air of uncertainty hanging over China’s M&A market since regulators rejected Coca- Putting on weight Which of the following growth strategies will be most important to your company’s expansion plans in China? Choose up to two. (% respondents) All respondents Big companies Organic growth 63 80 Joint ventures 46 43 Acquisitions of Chinese companies 20 23 Acquisitions of foreign competitors’ operations 6 7 We are not planning to expand 9 3 Don’t know 1 1 Source: Economist Intelligence Unit survey Cola’s planned purchase of China Huiyuan Juice for US$2.3bn in 2009 over competition concerns that were viewed as questionable. The deal would have boosted Coca-Cola’s share of the fruit and vegetable juice market to around 20%. The American giant has since given up on buying anything in China. Muhtar Kent, chairman and CEO of Coca-Cola, told reporters in August, “It’s [acquisitions] no longer on our10 “Coca-Cola Plans $4bn radar screen because we’re seeing so much potential for organic growth. 10“China Investment”, wsj.com,August 19th 2011 The Ministry of Commerce has since shown a keenness to improve the transparency of its decisions20 © The Economist Intelligence Unit Limited 2011
  22. 22. Multinational companies and China: What future?and to be a more sophisticated regulator. But the fact remains that China’s law does allow it to considernon-competition issues, such as security of supply and its own industrial policies, in making its rulings. China has recently shown signs that it will allow purchases in relatively high-profile local companies—albeit with conditions. For example, Diageo, a UK drinks giant, received approval this year to take acontrolling stake in its existing Chinese joint venture, Sichuan Chengdu Quangxing Group, therebygaining indirect control of Shuijingfang, owner of the famous Quanxing brand of the local spiritbaijiu that accounts for more than 30% of China’s alcoholic drinks market. Approval of the acquisitionreportedly took 16 months and, as a condition, Shuijingfang had to divest the Quanxing brand. Nestléthis year announced deals to take 60% stakes in two local companies, YinLu Foods, a maker of peanutmilk, and Hsu Fu Chi International, a confectioner. The former has been approved, but the latter is stillawaiting the green light. It is notable that all of these deals have involved keeping a substantial stake with local shareholders.Indeed, the byword remains caution. “MNCs need to choose targets carefully and manage growth,”says Ninette Dodoo, a lawyer with Clifford Chance in Beijing. “By that we mean, do not overshadow theChinese business target.”© The Economist Intelligence Unit Limited 2011 21
  23. 23. Multinational companies and China: What future? Lacoste: Who’s your benchmark? While others in the apparel retail industry are moving towards directly owned stores, Devanlay is likely to continue to use dealers in second and third-tier cities as a means to achieve scale. It Devanlay, which is responsible for the production and distribution currently operates 100 points of sale directly in Shanghai, Beijing, of Lacoste brand apparel globally, is illustrative of what is no doubt Shenzhen and Guangzhou, a mixture of boutiques and corners within happening in many companies around the world. Until around 2008 department stores, and 250 franchised points of sale. “Franchising the company paid no special attention to China. Revenues from the is more profitable, there is no doubt about it,” says Mr Cancelloni. “If country were growing at 10-15% a year and it was opening 20-30 new you open in a certain city then you have to set up an office and hire points of sale (boutique, a corner within a department store, or a managers, etcetera. Again, it’s people. So I think we would rather franchise operation) annually. This was fabulous when benchmarked make sure the people at headquarters are very good at training and against France or the US. But the company never benchmarked working with franchisees.” against other brands in China. Had it done so, it would have realized that even 20% growth was nothing to get excited about. Crocodile-infested waters Enter a new CEO, Jose Luis Duran, formerly the global head of Lacoste, like many companies operating in China, has its share of French hypermarket chain Carrefour. Mr Duran knew China. Suddenly problems with counterfeiting. Lacoste’s problems in Asia actually go the possibilities became clear. Mr Duran understood the need for back to the 1950s when two brothers set up companies in Hong Kong higher investment in a market featuring intense competition in the and Singapore making polo shirts and using a crocodile logo. Lacoste so-called “accessible luxury” space as well as the need to march assumes that they were exposed to the brand after they fled China forward into second and third-tier cities where no one had ever seen following the communist revolution and went to Vietnam, which was the iconic Lacoste crocodile logo (or at least the real thing). still a French colony and where French expatriates would be wearing Since Mr Duran took over Devanlay has beefed up its management Lacoste shirts. in China, including sending a new CFO from Europe. It has been Over the years there have been numerous legal disputes with the increasing investments in new store openings and renovations and companies spawned by the brothers, including in China. The battle essential infrastructure such as information systems. with Singapore-based Crocodile International, known as Cartelo in Devanlay does not reveal investment figures but Frank Cancelloni, China, continues. There are also numerous small groups who make the company’s Asia-Pacific CEO, says that capital expenditure for exact copies of Lacoste products, or products clearly inspired by the region (Japan, China and South Korea) will double in 2011, with Lacoste. China accounting for more than half the total. “We are now growing Counterfeiting has not prevented Lacoste from growing rapidly in at about 30% a year, and I think compound annual growth of 30-35% China. According to Jerome Bachasson, regional director for Asia- is achievable,” he says. Today China accounts for less than 5% of Pacific at Lacoste, who oversees trademark protection, branding and Lacoste’s total apparel sales worldwide, a figure which Mr Cancelloni sponsorship, it is unrealistic to expect the counterfeiting industry to says could rise to 10% in the future on current growth projections. go away soon given that so many livelihoods in China still depend on it. While it is important to take legal action against the factories or Keeping up wholesalers involved in counterfeiting, the only real solution is to stay Devanlay’s current challenge is deciding what it can reasonably do in one step ahead of them. terms of the pace of expansion. “Two years ago we opened 20 doors “We will fight counterfeiting by having fantastic stores, creating [points of sale] a year and now we’re talking about 100-150,” says Mr that gap between us and the locals,” he says. “Consumers want to Cancelloni. “But now we’re asking, ‘do we have the resources?’” He is know how to tell the difference between originals and fakes. In fact most concerned about staff retention and has hired an HR consultancy I’d say consumers are going faster than the Chinese authorities in to survey retail staff on what motivates them to stay with a company. dismissing fakes.” The company also spent six months finding the right HR director.22 © The Economist Intelligence Unit Limited 2011
  24. 24. Multinational companies and China: What future?Chapter 4: Whose hubris?It is often taken for granted that multinationals possess superior technology, betterbrand management and a stronger appeal for talented workers. There are signs that all ofthese advantages are beginning to erode in China.A chieving ‘China speed’, as it has come to be known, is but one factor in staying ahead of the competition. “It is a global playing field almost unlike any other,” notes Torsten Stocker, aconsultant with Monitor Group. He points to the example of plastic containers, which in manycountries around the world are synonymous with Tupperware or Rubbermaid. In China, the marketleader is Lock & Lock, a South Korean company that is almost unknown outside Asia. Competition in China comes in many forms. There are foreign companies that have been in the marketfor years and are now upping their game, as well as new entrants and companies returning to China for asecond time. Then there are the locals, who by all accounts are rapidly improving in many segments. Our survey suggests that competition from local companies is perhaps being underestimated by MNCheadquarters. Respondents based in China rank competition from local firms at the top of their listof obstacles, while the sample as a whole ranked it second, behind IPR (intellectual-property rights)protection. Studies suggest that foreign companies ignore the threat of local competition at theirperil. A former executive at one multinational disparagingly notes that management at his formeremployer would track the market share of the usual global competitors on a weekly basis, ignoring thelocal competition, until one day the “other” category exceeded 50%. Who is this ‘other’? they suddenlywanted to know. By then it was too late. Nimble local competitors are challenging the likes of P&G and Unilever. In a recent report, Booz& Co, a consultancy, highlighted the rise of four such companies: Wanglaoji (herbal tea); FoshanJingxing Health (sanitary napkins); Bawang International (shampoo) and Hangzhou Hancao 11 “China’s Local Champions”,Biotechnology (non-tobacco cigarettes) 11. The authors wrote that for foreign multinationals, “the Booz & Co, 2011warning signs should be apparent”. They went on to conclude: “China is generating a host of powerful© The Economist Intelligence Unit Limited 2011 23
  25. 25. Multinational companies and China: What future? Getting in the way What do you see as the biggest operational obstacles standing in the way of seizing opportunities in China? Choose up to three. (% respondents) Respondents based in China Lack of intellectual property (IP) protection 41 35 Competition from domestic companies 35 48 Unpredictable nature of Chinese government 32 21 Discrimination against foreign companies 31 29 Corruption 28 27 Competition from other foreign companies 27 15 Lack of legal protection in general 23 13 Lack of available local talent 14 33 Risk of trade and economic disputes between China and other countries 11 13 Lack of autonomy to make the right decisions for the China market 8 13 Source: Economist Intelligence Unit survey Cleaning up Market share by retail value for selected consumer goods Domestic (%) MNC Other 50 Laundry Surface Care 47 40 40 30 20 18 14 12 12 10 10 9 7 6 6 6 5 4 2 2 0 Nice Liby P&G Unilever Nafine Blue White Others SC Blue Lohmann White Kaimi Reckitt Amway Others Moon Cat Johnson Moon Haas Cat Benckiser 50 Dishwashing Toilet Care 40 30 31 24 20 19 18 17 17 14 10 10 10 9 5 6 6 6 4 4 0 Liby Nice White Amway Nafine Lonkey Reckitt Others SC Blue White Lonkey Saa Lee Reckitt Kaimi Others Cat Benckiser Johnson Moon Cat Benckiser Source: Euromonitor 2009 report; Booz & Company24 © The Economist Intelligence Unit Limited 2011
  26. 26. Multinational companies and China: What future?local champions—and competing against them is the new reality. Close to their customers, focusedon developing lower-cost alternatives, marketing and distribution strategies, these businesses aredeveloping new goods and innovative ways of selling them that are well attuned to the needs of Chineseconsumers.” The rising competitive strength of local companies is also reflected in the talent market. Although oursurvey respondents as a whole ranked “lack of available local talent” pretty far down the list of obstaclesstanding in the way of market success, a mounting array of evidence suggests they should be concerned.Those on the ground already are—respondents from China ranked the lack of talent third on their list ofobstacles (respondents as a whole ranked it eighth). With many Chinese companies flourishing and expanding at a faster pace than MNCs, the same pool ofbilingual and bicultural local talent who can straddle the Chinese and international business worlds arebeing chased by both. For example, in 2010 Deutsche Bank lost its China head to Industrial and CommercialBank of China. A few years earlier B&Q and Microsoft saw high-profile executives jump to Chinesecompetitors (to Alibaba and Shanda Interactive Entertainment respectively). Ante and Li Ning, the twoleading sportswear makers, also have managed to attract talent away from Nike, Adidas and Puma. HR and executive-search firms say this reverse flow of local talent from MNCs to Chinese companieswill increase in the future. According to Manpower Inc, a comparison of its surveys done in 2006 and2010 shows that job seekers who preferred to work for a private Chinese company jumped by fivepercentage points during the period, while the figure for those who preferred a foreign companydropped by ten percentage points. The rising attraction of local companies is manifold. Thanks to rapid growth, more of them can matchor exceed salaries at MNCs. Many companies are expanding overseas, providing attractive postings. Andemployees can expect quicker promotion at many successful Chinese companies, which are less rigidand formal, allowing managerial employees more flexibility to define their responsibilities and workingconditions.Suddenly uncertainEven though headquarters may be underestimating the power of local brands and Chinese companies’growing attractiveness to the country’s shallow pool of talent, multinationals do not seem overlyconfident. Asked to identify their company’s competitive advantage in China, just under 20% of surveyrespondents reported that they don’t have an advantage but feel they need to be in the market. Amonglarge companies, only one-quarter felt they have superior technology or a stronger brand, with thesefigures even lower for the sample as a whole. Indeed, the competitive prowess of Chinese companies has surged since our last report in 2004.Then, 68% of survey respondents saw foreign-invested companies as the biggest competitive threat totheir business in China, while 44% saw a threat from private Chinese companies and 27% from state-owned enterprises. In 2011 foreigners do not seem to worry much about each other—only 27% pointedto competition from other foreigners as a threat, ranking sixth on the list of obstacles in the way ofopportunity. Competition from domestic companies, by contrast, ranks second behind IP protection asthe biggest threat, and it ranks first among respondents based in China.© The Economist Intelligence Unit Limited 2011 25
  27. 27. Multinational companies and China: What future? Sizing up the competition What is your company’s competitive advantage in China? (% respondents) All responents Big companies Long experience in emerging markets/Strong management 24 24 Superior/unique technology 23 25 Strong brand 16 25 Large resources 10 13 We don’t have an advantage but feel we need to be in China 19 9 Other, please specify 6 2 Don’t know 2 1 Source: Economist Intelligence Unit survey The view in 2004 ... Are domestic (as opposed to foreign-invested) companies a competitive threat to your business globally? (% respondents) A serious competitive threat 5.6 Somewhat of a competitive threat 28.2 Not a threat 65.7 Other 0.5 Source: Economist Intelligence Unit survey, 2004 ... in 2011 How would you describe the competitive strengths of domestic Chinese companies in your sector? Choose the one that best applies. (% respondents) All respondents Big companies Chinese competitors in our industry are already a serious threat to our business in China 26 31 Chinese competitors in our industry are already a serious threat to our business globally 15 5 Chinese competitors in our industry will be a threat to us globally in five years time 20 22 Chinese competitors in our industry are not a threat 22 21 Chinese competitors in our industry are the same as other competitors 17 21 Source: Economist Intelligence Unit survey, 2011 Chinese companies are also increasingly viewed as a threat on the global stage. In 2004, 66% of survey respondents said their Chinese counterparts were not a threat to their business globally. Today, only 22% say the same. Over one-quarter of respondents expect Chinese companies will be their major26 © The Economist Intelligence Unit Limited 2011
  28. 28. Multinational companies and China: What future?global competitors in five years’ time (9% say they already are), while 47% say they will be seriouscompetitors within ten years. Big companies are somewhat more confident—only 16% expect theirChinese counterparts to challenge them globally within five years (only 5% do so now), with the figurerising to 38% within ten years. But larger companies are more concerned about the impact events inChina will have on their industry—38% said that developments will have a disruptive impact on theirindustry within five years, and more than half expect this to happen within ten years. This threat is mostlikely to come from lower-cost competition on the global stage. Still, executives think that China’s efforts to boost consumption, and the uncertain regulatoryenvironment (discussed in the next chapter), will have a bigger impact than local competition on theirChina strategy in the next five years.© The Economist Intelligence Unit Limited 2011 27

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