Taking the Pulse of China Strategy

I’m writing en route to Washington DC from Shanghai, where I moderated a fascinating breakfast roundtable of FSG clients, all MNC general managers or heads of strategy for Asia-Pacific and China. We brought together diverse perspectives, representing companies with a mix of consumer, industrial, and government customers, some with products aimed at the mass market and some in a premium position. Everyone had something to teach and something to learn from others.

Here’s what I heard from top executives trying to make the most of today’s China opportunity for their parent multinationals:

  • We’ve all seen the headlines projecting the demise of labor arbitrage in China, starting with top managers and technical workers. The executives at our event deal with spiraling wages every time there’s a job opening, but they are much more focused on improving productivity than on containing costs. For example, revenue per sales rep tends to be low given frequent travel to maintain customer relationships, which flags China as red on the corporate dashboard. But overall cost of sales as a percentage of revenue tells a more favorable story. Sometimes the metrics that HQ expects to see are a poor guide for managing operations inside China.
  • Companies with relatively mature penetration of China’s markets are seeing pressure from corporate to deliver profits as revenue growth slows. It’s a different type of challenge that that of relatively new entrants who, if their product brings something unique to the Chinese consumer, can still pursue high double-digit growth targets without tight margin constraints. The more mature players are finding some leverage in revisiting their distribution strategy, consolidating channel partners or going direct in tier-two and tier-three cities.
  • China gets no shortage of attention and investment from headquarters in the US or Europe. It is, after all, the biggest long-term opportunity regardless of ballyhooed concerns about its aging workforce.  That said, local leaders still struggle with HQ’s tendency to look at China as a monolith. Again and again, people noted that many Chinese provinces are larger than entire nations in Southeast Asia. Despite that recognition, not one of the companies represented directly compares Chinese provinces to similarly sized Asian countries when making investment decisions. Country boundaries still drive corporate strategy.
  • Organizational design and leadership talent remain considerable hurdles to executing growth plans. One China GM flatly stated that there is no way for him to understand what’s happening on the ground across the vast country, so he has decentralized authority to five regional CEOs – each of which, he added, run larger operations than many of his country peers around the world. But how to fill such roles with ready leaders? The scarcity of seasoned local talent (especially with MNC experience) was cited, as usual, as no less a limit to growth as any inflection in the economy.
  • Time and again, I heard similarities between our Shanghai discussion and my recent meetings in São Paulo. Geographic complexity, an outsized role in the regional portfolio, talent challenges — the parallels are striking. Any company that isn’t “buddying up” its China GM with its Brazil GM is missing an opportunity to cross-pollinate internal best practices and innovations between two big-bet markets.

 

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