strategy+businessONLINE NOVEMBER 12, 2012BY SARAH BUTLER, EDWARD TSE,AND JOHN JULLENSThe New ChineseEconomyThe boom years may be in the past, but China still offersbig opportunities for multinationals that adapt to its neweconomic reality.
A The New Chinese Economy The boom years may be in the past, but China still offers big opportunities for multinationals that adapt to its new economic reality. by Sarah Butler, Edward Tse, and John Jullens1www.strategy-business.com s China’s once-in-a-decade leadership succes- exchange rates and capital flows, infrastructure invest- sion gets under way, another transition has ments, and other macroeconomic policy tools. been capturing headlines: the country’s recent Although any government stimulus in the coming lackluster economic performance after years of double- months will not be as large as the one Beijing launched digit growth. The Chinese economy reportedly grew in 2008, they say, it could effectively mitigate the worst only 7.4 percent in the third quarter of 2012 — its spillover damage from the financial crises in Europe and lowest growth rate since 2009 — and if the economy elsewhere. finishes the year as projected, this rate will mark a 13- Opinions and predictions on China’s outlook may year low. The decline varies by industry. Hardest hit vary with the monthly figures, but one reality is beyond have been businesses related to heavy industry and to question: The Chinese economy is maturing. China is the real estate sector; new home prices in many cities moving away from a focus on low-cost manufacturing continue to drop because of government policies toward sustainable growth and higher-value-added busi- intended to control inflation. Growth also varies by ness, and from infrastructure- and export-led growth to region; some of China’s interior and western provinces domestic consumption. In a few years, China could have experienced above-average rates of growth, where- look very different from how it does today, as regional as growth in the traditionally wealthier coastal provinces shifts in wealth, more demanding and discerning cus- has cooled. tomers, and highly motivated Chinese companies But other indicators tell a different story. Beijing change the competitive landscape. The country’s econo- recently reported that industrial output grew 9.2 per- my is also evolving in fundamental ways as single-digit cent in September, and retail sales increased 14.2 per- annual growth becomes a plausible new normal. cent during the same month. Sectors such as healthcare Multinational corporations (MNCs) that have grown and other services continue to grow strongly. And even accustomed to the boom years may be nervously eyeing as the growth rate comes down, actual GDP continues the situation. But they can be confident that China to expand. Both government officials and executives on remains a significant source of opportunity for those the ground say that the Chinese government still has who adapt their strategies. To do so, companies first the will and ability to ensure a soft landing through its need to understand the trends that are shaping these control over the domestic banking system, foreign changes.
Sarah Butler Edward Tse John Jullensis a partner with Booz & is a senior partner with Booz & is a partner with Booz &Company, a director on the Company and the firm’s chair- Company based in Shanghai.firm’s global board, and the man for Greater China. He He currently co-leads themanaging director of the advises companies, headquar- firm’s engineered products andGreater China offices. She tered both in and outside services practice in Greaterleads the firm’s health and China, on their strategies, China.financial-services practices in organizations, and operations.the region.Short-Term Shifts 2 firstname.lastname@example.org email@example.com firstname.lastname@example.org owned by Alibaba.com, which is a popular B2B site.Domestic demand is growing in China, but today and The number of Internet users in China is already twicein the near future, it will come from regions that have that in the U.S., and China is the largest social mediabeen largely ignored by many multinationals. These market in the world. Social media is especially impor-substantial shifts in demand reflect the movement of tant in China as a source of credible information,wealth away from the coastal areas and toward some of because the mainstream media is still controlled by theChina’s interior and western provinces, and away from central government.so-called top-tier cities and toward lower-tier cities and, Execution remains a key challenge in the shortfor some categories, rural areas. This trend is affecting term, largely because of a widening talent gap. Such wascertain sectors, such as consumer goods, automotive, the finding of two recent surveys, the 2012 Chinaand industrials, particularly strongly. Consumer Market Strategies survey, conducted by Booz Both Chinese and multinational companies will & Company and the American Chamber of Commerceneed to realign their footprint and operating model in Shanghai, and the 2012 China Innovation survey,accordingly, adopting a Fit for GrowthSM approach, with conducted by the Benelux Chamber of Commerce, thea much stronger focus on both the top and bottom China Europe International Business School, thelines. They can expand beyond the Tier One and Tier Wenzhou Chamber of Commerce, and Booz &Two markets with which they established themselves in Company. Companies need the right leaders in place inChina by deepening and broadening their channels to their China business, as well as an operating model thatenter lower-tier markets, implementing what is called a balances local flexibility and agility with global control“go down” (xia chen) strategy. This will often require and capability leverage. But China’s acute shortage ofchanges to their traditional go-to-market model, as well trained and experienced managers and executivesas to core elements of their customer value proposition. remains a roadblock for companies looking to grow rap-For example, they will have to link inland and western idly and profitably. Companies need to take a moreregions to the rest of the country and build nationwide holistic approach to addressing the labor supply imbal-logistic and marketing networks. Foreign companies can ance. The imbalance is particularly critical at the middlebenefit from partnerships with Chinese players to accel- management level, where talent is scarce and expats areerate this strategy and fill gaps, but they also need to inherently less effective than they are at more senior lev-develop their own capabilities to execute this shift suc- els. In general, companies need to focus less on recruit-cessfully. ing the right people and more on developing and In addition, companies have increasing opportuni- retaining high-potential people through structured tal-ties to leverage digital channels, including e-commerce ent management programs and a long-term commit-and social media, as part of their strategies. The Chinese ment to their China strategy. Companies can also seeke-commerce market is thriving, with well-known and out partnerships with universities, where they can estab-successful retail websites such as Taobao.com, a B2C site lish scholarships, internships, and relevant courses.
Long-Term Competition3www.strategy-business.com Finding Opportunity Group), and household appliances (Haier and Galanz). True, Chinese customers are now prepared to pay more Now able to sell into China’s immense market, these for higher quality, and they may have more brand loyal- companies have taken advantage of the explosive ty than in the past. But the value of these developments growth in infrastructure investment and the huge sup- 1. Double down. Some companies anticipated the for MNCs will be limited by ambitious local competi- ply of cheap labor at all levels to produce high technol- tors that are fast acquiring the technology and know- ogy and variety at low cost, with a strong home base to how to produce high-quality goods on par with build from globally. (See “China’s Mid-Market multinationals’ offerings. The days of winning purely by Innovators,” by Edward Tse, John Jullens, and Bill having the allure of a foreign brand are largely over, thus Russo, s+b, Summer 2012.) more clearly differentiated customer value propositions Not all of these companies will succeed. Indeed, the are needed. recent global economic crisis has provided a reality Although Chinese companies still have capabilities check for many Chinese companies. Sany Heavy 2. Reposition. Companies that are facing a funda- gaps, especially in branding and marketing, many are Industry, for example, viewed until recently as a poten- moving beyond their copycat reputations to become tially major threat to companies such as Caterpillar and serious innovative competitors. Indeed, the 2012 China Komatsu, has started to lay off staff after seeing its Innovation survey found that many Chinese companies China sales fall. And the financial performance of many have already replaced their shanzhai reputations (in industrial state-owned enterprises has sharply declined. which they rapidly put out low-cost, knockoff-style Still, enough will rise in prominence that MNCs need products) with an entrepreneurial Need Seeker model to take notice. (in which they pay closer attention to the market and release products that fit consumer demand as they see it). Among the MNCs interviewed as part of the study, To cope with these shifts in both the short and long 45 percent said they have Chinese competitors that are runs, multinationals should follow one of these courses at least as innovative as they are. of action. The survey’s findings are further supported by Booz & Company’s analysis of a new category of Chinese growth of China’s inland regions and are using the competitor: mid-market innovators. In some sectors, opportunity to aggressively compete — with pricing, MNCs increasingly find themselves competing with this for example — to put pressure on the competition. This new category of local companies that have strong brands strategy is paying off, at least so far. For instance, and fast-improving (or equivalent) technologies and General Motors has introduced a budget brand called quality standards. Sectors with a large and vibrant the Baojun (“treasured horse”) specifically for emerging Chinese mid-market include construction equipment customer segments in China’s interior markets. (Sany Heavy Industry), logistics (China International Marine Containers Group), motorcycles (Lifeng mental shift in demand — in the logistics sector, for
4 www.strategy-business.com 3. Wait and see. Companies that can afford this 4. Pull back. Companies with weak positions and a competitiveness. +example — need to adapt proactively. This could mean while maintaining global scale and leveraging theiraltering their business model. It could also mean seeking global capabilities. They will also need an in-depthout a new way to play in the market. For instance, understanding of the local context — in particular, aDamco, the logistics arm of the A.P. Moller-Maersk stronger grasp of their local competitors. They willGroup, has recently opened new offices in western then need to invest in two types of capabilities: the com-China and made several acquisitions in response to the petitive necessities that are required to win in this newchanging nature of demand in China. market, and a few distinctive capabilities that can set them apart from every other company in their industryoption, for example, high-end brands such as Gucci and in China.Cartier or companies that control irreplaceable resources Should MNCs stay in China? Yes, but theiras De Beers does, are considering a more careful approach will likely change as the Chinese economyapproach. These are companies that can gain market continues to mature. It remains to be seen how China’sshare in any environment through innovation or brand new leaders will affect the country’s economic andstrength. However, they tend to be spurred to act either fiscal policies, but under every plausible scenario, Chinaby a desire to expand faster when they can or by pressure will grow in importance during the next decade asfrom headquarters. a key strategic market and a source of globallack of ability to gain market share need to broadlyrethink their strategy. They may need to make more rad-ical choices about their portfolio strategy and where andhow they play, for example, by leveraging the strengthsof a Chinese partner or refocusing on parts of the busi-ness that make the best use of their current, most dis-tinctive capabilities. There have been a few well-knownexamples recently of companies that have failed inChina and needed to pull back and regroup, includingGoogle and Best Buy. Most companies should regard these options as partof their effort to develop an overall global strategy withChina at its core, incorporating China’s many competi-tive advantages into their global operations. To pursuethis type of strategy, companies will need to migratemore and more of their major value-chain activities,such as R&D and product development, to China —