China’s leaders are instituting a new industrial revolution with robotics at the centre, and are inviting investors from outside countries. But what’s it like to enter the dragon with your money? In this article, China-based investment expert Edward Tse, CEO of Gao Feng, outlines some things to consider
Broadly speaking, there are now three distinct groups of multinational companies (MNCs) in China we can classify according to their market views.
The first group includes MNCs who have come to China, made investments and being unsuccessful, decided that China is not their cup of tea. They generally found it difficult to be profitable and some have withdrawn from China.
The second group of companies are those operating in sectors with overcapacity – often quite significant ones – in China. These companies are typically in a wait-and-see mode, waiting to see if and when the overcapacity may be managed away.
The final group of companies are those who have found China to be a major, and often highly profitable, market. For them, China is one of their largest, if not the largest market in the world.
In the open sectors in China, competition is extremely intensive, often the most intensive in the world. In addition to their usual MNC competitors, MNCs will also have to deal with local Chinese competitors, some state-owned and some privately-owned.
While MNCs are somewhat used to how other MNCs compete, the ways that the Chinese companies compete are often quite different and hence surprising. The leading Chinese private companies have become increasingly more competitive and in many cases innovative across a wide range of industries.
The leading private companies are disrupting traditional businesses with incredible speed and intensity. The rapidly changing, complicated and ambiguous operating environment in China is catching MNCs off guard.
Increasingly, MNCs now realize they cannot just apply their cookie cutter ways from the rest of the world to China and that they need to adapt. The question is how and when and all this will need to be aligned and accepted at headquarters.
While there are some structural problems in China’s economy, the growth that is cast within the context of a complicated and fast changing environment will bring a variety of leapfrogging phenomena and is filled with both tremendous opportunities as well as challenges for everyone, MNCs included.
The key for MNCs is to know how to strategically anticipate and capture these opportunities and handle the challenges properly.
Those MNCs who see the opportunities coming from China, will stay and continue to invest, and if they manage to build the right capabilities on the ground – both tangible and intangible – they will be able to compete effectively.
In the wake of their operations in China, foreign MNCs find their standing with China’s youth in a constant state of flux. For the past couple of decades, many MNCs would often claim that China is their (most) important and strategic market, and that in China they need to “localize”.
However, for many, “localization” simply means hiring some token Chinese managers or in some cases, expatriates who have lived in China for a long time.
These roles would have nice sounding titles like “China Chairman” or “China CEO” but they often lack full business authority or decision making capabilities.
In almost all cases, these local executives are not placed at the core of thought leadership generation at the largest levels of the company for driving China’s strategy, organizations or business models, and for that matter, those for defining China’s role in the company’s global strategy.
These considerations and decisions are, typically, in the realm of the global or regional headquarters. In most cases, the so-called “local management” is only for execution and has little real authority.
As innovation and entrepreneurship are becoming the mainstream in China, career opportunities with significant upside potential are being made available to many young people.
MNCs are no longer the best employment option. Creating new ways to win the human capital battle in China will be key for MNCs.
As China continues to evolve, opportunities and risks will inevitably surface and so the context for developing China’s strategy will also evolve. MNCs must understand the context better and leverage that into their strategies, organizations and capabilities.
Edward Tse is founder and CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in China. A pioneer in China’s management consulting profession, he led the Greater China operations for two major international management consulting firms for 20 years and is widely known as China’s leading global business strategist. He is author of The China Strategy (2010) and China’s Disruptors (2015).
Read Edward Tse’s article on Forbes.com