Emerging Markets View: What Our Analysts Are Reading

EM View

Premier Li Keqiang delivered a speech to 1,000 business leaders at the World Economic Forum last week with the message that the China market is still open to foreign investors, according to an article in Bloomberg Businessweek. However, FSG’s Senior Analyst for China says executives should stay cautious.

“Premier Li’s statement at a recent World Economic Forum meeting suggests that Chinese leaders are cognizant of how their aggressive antimonopoly campaign is impacting multinational sentiment. Even so, executives with operations in China should remain cautious about recent policy movements in Beijing and prepare an effective government engagement strategy to mitigate the associated risks,” says Shailene Zhu.

Colombia‘s economy grew 4.3% on construction spending this quarter, showing expansion at a healthy pace despite less overall growth than expected, according to the Wall Street Journal.

“Construction spending will not only drive Colombia’s economy through the medium term, but projects such as the 4G highway network will also help Colombia overcome some of its logistical bottlenecks. Multinationals set to benefit from increased connectivity, and should evaluate how improved logistics and transportation infrastructure will affect their overall cost structure in Colombia,” says Gabriela Mallory, senior analyst for Latin America.

Russia is threatening to cap western car and clothing imports following a new round of EU sanctions that seek to block the country’s largest oil companies from raising money on European capital markets, according to The Financial Times. FSG’s Head of Research for Europe, Middle East and Africa says executives should prepare for a Russian backlash.

“The likelihood of Russian trade retaliation is high and MNCs should be prepared for the repercussions this could have for their business and customers. A car import ban could be particularly damaging not only for Western, but also for Central European markets with large automotive sectors such as Hungary, Slovakia, Poland, Romania, etc.,” says Martina Bozadzhieva.

On the global frontier, Mumbai-based transnational pharmaceutical company Lupin has entered into a long-term partnership with Merck Serono with the goal of expanding in emerging markets.

FSG’s Associate Practice Leader for Global Analytics Sam Osborn says the pact is “a great example of how partnering with an emerging-market based organization can be a mutually beneficial relationship for the multinational and local company.”

FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portalNot a client? Contact us to learn more.

E-commerce Strategy Vital for B2C Companies in China by 2020

Over the last two weeks, I have been bombarded with e-commerce news from China. Amazon set up shop in China’s Shanghai free trade zone to give Chinese customers access to its products from its global supply chain and to help SMEs in China to export their products to customers in other countries.  Amazon’s biggest competitor, Alibaba, has unveiled plans for an initial public offering that values the company at $US 155 billion, one of the largest listed in the US and one of the biggest stock market debuts ever. Chinese real estate conglomerate Dalian Wanda formed an alliance with two Internet giants, Baidu and Tencent, aiming to become the largest O2O (online-to-offline) e-commerce platform in China.

Each of these movements reflects the increasingly fierce competition in China’s e-commerce market. As many multinationals initiate their 2015 planning, I believe all of them need to think deeper about their e-commerce strategy for China.

China’s e-commerce market is now bigger than America’s

China already has the world’s largest Internet user population, representing 22% of the world’s total in 2014. It has also overtaken the US as the biggest e-commerce market in the world and is set to be worth US$ 541 billion by 2015. These facts make China an ideal location for expansion, as 49% of its population made an online purchase last year. This figure is set to rise to an unprecedented 71% by 2017, so expanding into this profitable international market is becoming more and more inviting for online businesses.

Making the e-commerce decision a part of your “go deep” or “go wide” decision

This decision will be integral to your China 2020 “go wide” or “go deep” strategy, and it can’t be ignored because local companies are already making deep inroads and leveraging the current prevailing online platforms. See the chart below to get a sense of how important online sales are going to be in future. Something else worth mentioning is that online research will have a tangible impact on offline sales, as well.

China E-Commerce 1

Companies that delay the development of their online channels now will forego a significant portion of this enormous market. In the future, they will have to scramble to take market share away from their faster-moving peers.

Bypass the retail bottlenecks in China

The Internet’s extraordinary reach in China offers companies a way to bypass the fragmented retail bottlenecks and expand their customer base in lower-tier cities. Companies that aim to capitalize on the growing consumer base in China’s lower-tier cities must develop an effective e-commerce strategy; those that depend solely on brick-and-mortar retailers for their expansion will be left behind. See the chart below to understand how wallet share increases from tier 2 to tier 3 and 4 cities.

China E-Commerce 2My recommendations to all B2C companies are as follows:

  • Build a strong fan base by leveraging social media platforms and engaging with opinion leaders
  • Leverage multiple websites to capture browsing shoppers, i.e., open more than one Internet channel to capitalize on Chinese consumers’ online shopping habits. However, make sure that you are cognizant of the effect your online channel is having on your current distribution partners
  • Choose e-tailing partners beyond Tmall to target the right customer by adopting a hybrid model with complementary approaches may be worth exploring too

FSG clients can access the full report on China’s E-Commerce Market on the  client portalNot a client? Click here for more information about our China research.


If China Slows: Prepare for Disruption in EMEA Business

The dragon’s breath is losing steam – increasing wages, mounting social tensions and unprecedented political transformation are all putting strains on the Chinese economy. GDP growth figures for 2014 have fallen from 7.5% to 7.3%, with downside scenario forecasts for 2015 slipping even closer to 6.5% on an annualized basis. The risk of a sharp, sustained Chinese economic slowdown is thus already high on the agendas of Asia Pacific executives, but Frontier Strategy Group’s latest analysis shows that a China slowdown scenario poses systemic risks globally.


In Europe, the Middle East, and Africa (EMEA) in particular, there are three ways in which a China slowdown will substantially impact regional economic growth:

  • A fading export market: China’s boom has provided a growing, reliable export destination for many European companies, but a slowdown will suppress top-line growth for industrial, technology, and consumer firms alike. The commodity-led economies of the Middle East and Africa could be harder hit. Chinese demand has filled the void left by Europe’s stagnant consumption. Reduced commodity exports would cut governments’ ability to spend, weakening an important growth driver for many of the world’s most dynamic frontier markets.
  • A pullback in foreign direct investment: One-quarter of all FDI into Sub-Saharan Africa since 2006 has come from China. However, recipients of Chinese FDI are less likely to be severely affected, because Chinese companies are more likely to focus on growth internationally if their domestic market weakens.
  • A trigger of financial-market instability: Depending on whether a Chinese slowdown surprises global financial markets, financial volatility would result in a flow of capital back to developed markets, causing significant currency volatility in EMEA and impacting the prices of goods imported from developed markets, hurting consumers across the region.

Taking these impacts into account, we have constructed an index that allows multinationals corporations to gauge how a China slowdown’s impact to EMEA economic performance could in turn impact their corporate portfolio.

In this analysis, countries are ranked based on their relative susceptibility to slowing demand from China as well as the extent to which they could be affected by the repercussions of a Chinese slowdown on the global economy. The results are striking.

  • #1: South Africa’s mining sector, already struggling with strikes and falling demand from the eurozone, will be severely hurt by a slowdown in Chinese demand for its exports
  • #5: Switzerland has a free trade agreement with China that has increased exchange between the two countries. The resulting increased economic relationship helps to diversify Switzerland away from the eurozone’s low growth, but leaves it more susceptible to a softening of Chinese demand
  • #6: 80% of Qatar’s exports are to Asia, much of them liquefied natural gas destined for China. Long-term demand for Qatar’s energy is at risk, with China already diversifying its energy sources by signing a long-term gas supply deal with Russia. However, a Chinese slowdown could accelerate this waning demand for its exports, decreasing government revenue and investment

Some economies would experience mixed results, with big winners as well as losers. For example, Turkey (#40 on our list) has been successful in diversifying its export partnerships away from China. It would still experience a slowdown in demand as a result of a Chinese economic slowdown, but the impacts would be less severe. In fact, producers in Turkey could benefit from less Chinese ability to invest in higher value-added production that might otherwise have presented more rigorous competition

The most successful firms are run by executives who constantly plan for destabilizing scenarios like a China economic slowdown, and develop mitigation plans to protect their businesses when such events unfold. In the China slowdown scenario outlined above (see infographic), executives can proactively identify and benchmark disruptions against their country revenue figures, allowing them in turn to stress-test their market prioritization assumptions and identify key markets for which adjustments in strategic planning may be required. Leaders responsible for global strategy should also reassess their investment priorities to identify countries that have strong growth fundamentals and are most resilient to external shocks.

EMEA’s corporate leaders will be increasingly challenged to craft business plans that protect their performance in a highly interlinked global economy that is susceptible to cross-regional contagion. If China slows abruptly, unprepared corporate executives will lose their footing, even outside the Middle Kingdom. Multinationals should plan for that contingency today.

Follow me on Twitter @FrontierStrtGrp

If you wish to learn more about how a China slowdown will impact your business you can access our full analysis here.  Not a client? Contact us for more information.

Trace the Lights II: China’s 19 City Clusters by 2020

China Clusters Map by 2020

As outlined in China’s 11th five-year plan, the Chinese government has pushed for the development of regional city clusters, aiming to drive economic growth, strengthen transportation, and influence the pattern of migrants. For those less familiar, city clusters are comprised of one or two cities, considered the nucleus, and several neighboring cities with well-connected transportation facilities.  China already has several mature mega clusters such as the Yangtze River Delta centered in Shanghai and the Pearl River Delta anchored by Guangzhou, but new initiatives to continue city cluster development are underway.

Earlier this year, The Central Committee of the Communist Party of China together with the State Council released the New National Urbanization plan, a series of integrated, cooperative government initiatives to establish a more coherent city cluster plan.  According to the document, China will have 19 clusters by 2020 as illustrated in the map above. The government intends to break the constraints of administrative divisions of these city clusters, realize the integration and consolidation of social and economic activities within vast areas, greatly reduce the distance and space between people, and promote human movement and economic activities at regional and national levels.

The formations of these metropolitan areas and urban clusters are changing and will continue to fundamentally change the way we look at China’s cities. In my previous post, I discussed China’s urbanization as a major driver for the future consumption-led economy.  As China continues to urbanize, the inter- and intra-cluster’s connectivity and motilities, driven by the development of public transport infrastructure, city boundaries are increasingly blurring.

FSG has aligned the clusters’ definitions with the government’s plans. Of the 19 clusters, 3 super clusters have been targeted to become world-class economic zones. An additional 8 clusters are called emerging clusters, each composing as much as 3–9% of total GDP in 2013. The government aims to turn these clusters into national zones as key pillars of the Chinese economy. The remaining 8 frontier clusters are included in government’s 2020 cluster master plan but haven’t yet taken shape, each with equal to or less than 2% of total GDP. Apart from the well-known super clusters, 8 emerging clusters have already or will feature prominently in the national urbanization process. Among them, FSG has highlighted the Yangtze Mid-River cluster and the Chengdu-Chongqing cluster because we believe they are poised to be the upcoming super clusters.

This article is part two of a three-part blog series on China Urbanization called Trace the Lights. Check back next week  for part three.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Trace the Lights: 5 Key China Urbanization Stories for MNCs

nasa earth at night
Source: NASA Image

Take a look at this famous NASA image, a satellite photo of the Earth at night. This map shows the geographic pattern of night time electricity consumption, but it also clearly shows the geographic distribution of cities and population. Lights are bright in South Korea, but most places are in dark in North Korea; within the US, the east coast is brighter than the rest. Likewise, the lights are brightest around Paris and London in Europe. While there are still lots of dark places in China, we must ask ourselves, as urbanization continues in the country, what will this map look like for China in 2020, and where will the brightest lights be?

1. Strategic plan for China 2020 should incorporate future urbanization landscape—“go deep” vs. “go wide”

Every Western multinational needs to ensure they look at China’s urbanization as a major driver for the future consumption-led economy. FSG’s analysis is a starting point to assess the clusters in which multinationals already operate, and more importantly, what the best plan for the future should be—“going deep” vs. “going wide.” A clustering approach uncovers synergies, which are necessary given the scale in China and therefore an important input into the game plan for China 2020. My next blog will provide more details on which clusters I’m referring to.

2. Managing profitable growth in China

Concentrating resources on certain clusters brings the opportunity to exploit scale more quickly, because companies can leverage the synergies in sales force, distribution partners, supply chain, and marketing efforts across a wider geographical scope than by managing on a single city basis without sufficient regional scale.

3. Future organizational design is tilting toward decentralization

Multinationals will have to assess the possibility of decentralizing their Chinese sales headquarters by branching out sales centers to other hub cities to get closer to local business—for instance, using Beijing as the northern China headquarters, Guangzhou as the southern China headquarters, and Chongqing as the western China headquarters. MNCs can also consider breaking down functional responsibilities into different clusters by leveraging the clusters’ specializations—for instance, building a logistics center in Wuhan because of its favorable geographic location, establishing an e-commerce hub in Chengdu, and incubating R&D innovation in Suzhou.

4. Western multinationals need to monitor the industry clusters very closely

The government is and will continue building numerous industry clusters across the country that will help build the ecosystem around them. High-skilled and high-tech industry value chains are gradually taking shape. For example, a few biotechnology companies set up their administrative operations and R&D centers in Shanghai, while locating manufacturing in neighboring cities such as Suzhou or economic zones such as Kunshan or Zhanjiang Industrial Park. MNCs can leverage the formation of mature industry clusters to screen out horizontal suppliers and customers, as well as monitor the vertical competitive environment.

5. Multinationals need to keep an eye out for key signposts that will evolve over time; everything may not be rosy

China’s urbanization program will cost approximately US$ 6.8 trillion. From 2015 to 2020, more than US$ 100 billion of new, related professional services and biddable infrastructure contracts are estimated to be available every year. However, local governments are already deeply debt-ridden, given that China’s total local government debt in mid-2013 ballooned to 17.9 trillion RMB. The gap between the urbanization rate and urban “hukou” rate has widened over time. The high levels of local government debt will make it difficult to provide provisions for adequate public services, including healthcare and education, to new migrants.

This article is part one of a three-part blog series on China Urbanization called Trace the Lights. Check back next week for part two.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Rising Competition from ASEAN-based Corporations

As the ASEAN region begins to mature, the power, reach and influence of its indigenous companies have begun to increase dramatically.  We’ve witnessed similar rises of local and regional companies in other parts of the world — East Asian companies in the 1980s-1990s, Multi-Latinas over the last decade and mostly recently we are seeing increasing competition from Chinese firms.

ASEAN’s resilient performance over the past decade has allowed many of its local companies to rapidly expand across the region and beyond, giving birth to numerous ASEAN-based corporations.

Asean Local Competition

Under the Radar

Companies from ASEAN often do not receive much attention from Western analysts who instead focus on China and India. However, ASEAN firms are a force to be reckoned with; keeping pace with the region’s growth, the number of ASEAN companies on Forbes’ list of Global 2000 companies has more than doubled in the past seven years. Moreover, ASEAN has more companies on the Forbes’ Global 2000 list than India, Brazil, or Russia. The region is also home to 227 companies with more than $1 billion in revenues, making it the seventh-largest host for such companies, or 3% of the global total.

ASEAN countries and companies have continued to invest within the region at a steadily growing pace, with 2012 seeing twice the amount of intra-ASEAN FDI, in dollar terms, compared to 2008 (pre-crisis). The strengthening of intra-ASEAN investment can be attributed to a number of factors, including (a) the maturity of a growing number of companies in ASEAN who are venturing abroad, (b) regional integration, which provides future opportunities to scale, (c) improved financial capacities of ASEAN companies, and (d) home-country measures that encourage overseas FDI through institutional and informational support.

Western MNCs Should Monitor the Business Climate

Hailing from a new group of countries and leveraging competitive advantages that Western firms have not seen before, emerging-market multinationals have shaken up many stagnant, mature industries in developed countries. While not mature enough to rock Western markets, the rise of ASEAN corporations is going to lead to an increased fight for resources (both natural and human), heightened competition for several fast-growing segments, and the reduction of prices alongside faster innovation in ASEAN. 

MNCs should explore all potential partnerships with regional firms; ASEAN-based companies understand the market better, tend to have deeper distribution networks, and lower-cost operations. Emerging-market multinationals are born in a new world, one that is highly globalized and integrated, where internationalization will happen much faster than experienced by MNCs, making them much more of a threat to long-established businesses.

For more information on the rising competition of ASEAN-based corporations, FSG clients can access the full report on the client portal.

Emerging Market View: What Our Analysts Are Reading

EM View

On Thursday, EU diplomats will consider increased Russian sanctions. The sanctions include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to the Financial Times, and FSG’s Head of Research for EMEA says it’s time for multinationals to make contingency plans.

“If some or all of the proposed measures are approved by the EU, MNCs operating in Russia will be significantly affected. Executives should build a targeted contingency plan for their Russia operations to prepare. Read FSG’s report Protecting Your Russia Business for analysis and suggested actions for building a contingency plan in the case of further sanctions against Russia.” – Martina Bozadzhieva

In Southeast Asia, a rising middle class and strong demand for more expensive foods has led to increased investment by Japanese food companies, mirroring FSG predictions on the rising competition from multi-ASEAN corporations.

“The increasing sophistication of regional firms and growing demand is attracting several global players to partner/acquire ASEAN firms. MNCs should explore all types of partnerships with such regional firms; they understand the market better, tend to have deeper distribution networks, and lower-cost operations.” – Shishir Sinha, FSG’s Senior Analyst for Asia Pacific after reading this WSJ article.

Good news for Argentina this week. Last Friday, the Latin American country struck a deal to borrow $7.5 billion from China for power and rail projects, according to Reuters.

“Argentina has reached a deal with China to borrow US$ 7.5 billion to finance energy and railway projects, and the two countries have also signed a three year, US$ 11 billion currency swap, in which Argentina will receive Chinese yuan that it can then use to finance Chinese imports or exchange to USD to bolster reserves. This news is welcome given Argentina’s balance of payment concerns.” – Christine Herlihy, FSG’s Senior Analyst for Latin America.

FSG clients can keep up to date with the latest emerging markets headlines and exclusive analyst commentary on the client portal.

China’s Rapid Pulse: Thoughts from the Road

I am standing amid the hustle and bustle of the main street of Shanghai, unable to hail a taxi and scrambling to open Google on my phone. I’ve forgotten it’s recently been banned in mainland China and that drivers now prefer passengers who book through WeChat, a mobile app that awards taxis an additional service fee. I’ve lived in this country for most of my life, but I still have trouble keeping up with the pace of China’s evolution.

During the 12 days I spent in Shanghai, I spoke at length with clients, experts, local think tanks, and consulting analysts all focusing on one thing: how businesses can adjust to a developing China. A few of the on-the-ground insights I picked up are highlighted below.

Buildings in Shanghai
Older Shanghai-style “Shikumen” architecture is found adjacent to newer modern facilities.

From the business operations standpoint, local competition is happening at the provincial level rather than the national level. Many strong, regional-based Chinese brands are emerging and ramping up their capabilities in order to become “national” brands. Echoing the findings detailed in my past report on Managing Local Competition in China, the biggest challenge multinationals are facing is how to localize their strategy in an increasingly sophisticated China. Opening up a developed-market “toolbox” is not sufficient enough to solve China-specific issues.

The crux of this problem is that, in a sense, China is not really a single country—it is a series of distinct regions. A standardized strategy cannot work well in China because of the cultural diversities, wide range of local dialects, and large wealth gap. Some clients are beginning to reconsider their city tier-based model, questioning whether it is an effective way to segment customer needs. Even within one tier, the divergence will be daunting. However, you cannot create 200 business models for one country because it will not be profitable. In my upcoming report on Evolving Consumer Base and Urbanization, which will be released in a few weeks, I will provide detailed analysis of FSG’s cluster model and its implications for MNCs’ go-to-market strategies.

The idea to develop city clusters is central to the government’s plans to smartly urbanize people and cities in order to better allocate resources and boost small and mid-sized cities by leveraging the agglomeration effect from big cities. In the future, China will have three world-class super clusters that will radiate around 16 regional clusters. Logistical corridors will be built to strengthen the linkages between the northwest Chinese city of Urumqi and Russia, as well as the southwest city of Chengdu and European countries through the Pan Europe-Asia Bridge.

One pitfall that MNCs run into easily is making overambitious investments in backend facilities before the business strategy has been proven successful and the front end starts to generate revenue. Another pitfall is applying a swing strategy between the premier and middle markets. As the middle class booms, successful MNCs will create high-margin products to serve the massive middle market instead of the super premier market, which has very limited scale. (One client used the metaphor, “We don’t want only to skim a slide of fat from a big soup.”)

The O2O (Online-to-offline) model is poised to be the future of e-commerce in China. An e-commerce solution provider I talked to has already seen its O2O revenue contributions to their overall portfolio increase from 0% to 30% within one year. Target clients include lots of big-name retailer/FMCG/luxury products. Many MNC clients will be looking into this option in the coming years.

From the macroeconomic perspective, the recent shift in manufacturing is a result of the Chinese government’s policies. Although the current manufacturing outflow is an irreversible trend for China, the question here is about its timing. On one hand, this change is happening before the economy is fully ready. That’s why this transition is creating some problems. Some enterprises in the coastal region cannot afford the increasing labor/land cost because the government has implemented a land quota, and they will eventually move to ASEAN. On the other hand, the government is encouraging investment in west/central China by increasing the land supply and subsidiaries. However, the infrastructure-driven model makes inland China more prone to debt issues, the “ghost city” phenomenon, and heavy pollution.

Government always follows the path of creating supply first and then waiting for demand to materialize the supply. When the pace of “city-urbanization” outpaces “people-urbanization,” ghost cities are created. When highly polluting manufacturers move to inland cities, polluted water then flows along the Yangtze River from inland to east regions. Two types of manufacturing shifts are taking place. First, higher labor-intensive manufacturing is moving to ASEAN (as we mentioned in our latest ASEAN manufacturing piece), and possibly to Africa in the next 20 years. Second, lower labor-intensive manufacturing is moving to Shanghai’s satellite cities, such as Hefei or inland/west cities, based on the analysis of overall transportation costs and whether the business nature is more export-driven or more domestic market-driven.

Last but not least, China’s growth model dictates that it MUST grow. If growth is under 5%, all of the problems—shadow banking, local debt, and the real estate bubble—will explode. The internationalization of RMB and the financial market will feel consequences overnight and then will impact global markets too. If the country manages to maintain current levels of growth, all of the issues can be resolved by themselves. China’s current challenge is similar to the European debt crisis—one country, one currency. In addition, people cannot move freely because of the “hukou” restriction (the local registration system in China), and governance administrations are managed separately (different provincial governments work differently and lack integration). However, the future of China’s growth is promising. China is different from Japan. The advantage of having a centrally manipulated economy is also having well-planned fiscal/monetary policy from a government that can achieve highly effective results.

Finally in a taxi on my way to the airport, I noticed something interesting. Old Shanghai-style architecture is being replaced by modern facilities. It’s a result of the rapid pace of China’s urbanization, and the sharp contrast is visible on every corner. Differing styles must coexist as the society transitions, proof that everything moves at an astonishing pace in this market.

Beijing Travel Notes: 4 Perspectives on Chinese Outbound Investment

China Goes West Banner

I am currently in Asia promoting my new book, China Goes West: Everything You Need to Know about Chinese Companies Going Global. It was certainly an interesting week to be on the ground given Putin’s visit and the United States’ charging five Chinese officials with cyber espionage on Monday. I kicked off my tour in Beijing – and it was a busy week. In addition to several client visits across the city, I spoke in front of more than 200 people in my first week at organizations such as the American Chamber of Commerce, the European Union Chamber of Commerce and the Carnegie Endowment’s center at Tsinghua University. One of the greatest parts of the trip so far has been interacting with attendees at each of these events to hear their perspectives on Chinese outbound investment. Not surprisingly, much of what I’m hearing echoes the sentiment of individuals I interviewed over the course of conducting research for my book.

JB China picture

The following are four perspectives on Chinese outbound investment from week one:

1. Chinese Competition: The Western Multinational Executive

In addition to events, I met with many senior executive clients at their Beijing offices to discuss the topic of intensifying Chinese competition. At a workshop FSG organized in Shanghai last month 41% of the 40 executives in attendance attributed Chinese competition as having the greatest impact on their ability to hit 2014 targets. Increasingly though, this competition is occurring not just within China, but in other emerging markets and in developed markets like the United States and European Union. Based on the level of interest during these client conversation in Beijing, it’s clear to me that theme of “Chinese firms as both local and global competitors” will be top of mind for Western multinational executive for the foreseeable future.

2. Investment Recruitment: The European Ambassador

After my speech at the Carnegie Tsinghua Center, Ireland’s ambassador to China came up to me to discuss the topic of investment recruitment. While American and European executives are building plans to fend off Chinese competition, government officials are in the process of opening the doors for more and more investment from Chinese firms to add jobs, increase tax revenues and improve infrastructure. These are all very tangible economic benefits for the recipient nations of Chinese outbound investment; however, in my book I remind readers of a famous quote by Chinese economic reformer, Deng Xiaoping: “when you open the window, fresh air will come in, but so will some flies” – i.e. increased foreign direct investment will certainly lead to benefits, but negative “flies” can come in as well. Top concerns related to Chinese outbound investment include national security, cyber-security, anti-competitiveness, among others.

3. Global Brand Building: The American Public Relations Director

One of the attendees of my talk at the American Chamber of Commerce works as a director at a large multinational public relations firm. His firm just started a “China Global” practice focused on securing Chinese clients to help with the international expansion efforts. He asked how his and other professional services firms in the marketing and branding space could win business as a result of Chinese companies going overseas.  I told him about a joke a China PR expert told me during my research, “for many Chinese companies ‘branding’ means getting a new logo, ‘advertising’ means buying ads on China Central Television, and ‘P.R.’ stands for…pay the reporter.” While the joke is obviously a generalization it does illustrate the general lack of emphasis most Chinese firms place on investing in brands as a long-term strategic asset – this is why his firm is having a difficult time winning business.

4. Post-Merger Integration: The Chinese Global Executive

My last speech in Beijing was at the Cheung Kong eMBA program which highlighted the Chinese side of outbound investment. The vast majority of the 80 attendees were C-level executives from top Chinese firms pursuing their MBA primarily to learn how to globalize their businesses. After a keynote speech to open up the session, I was joined on stage by a senior vice president from the Chinese firm TCL, a consumer electronics firm. We discussed the topic of outbound M&A and the many challenges that Chinese companies tend to face in the process. My counterpart from TCL described many of the challenges I wrote about in my book based on his own experience buying firms in the US and France. He expressed concerns about over-paying for acquisition targets, challenges along the management visit stage and difficulties incorporating global executives into his Chinese organization.

I look forward to sharing more perspectives with you next week after I conclude my trip – a busy six days across Shanghai, Shenzhen and Hong Kong. Find out more about China Goes West.

How Can MNCs ‘Partner’ with Governments in China?

It only has been one month since my last blog titled, “Why MNCs Need a Better Government Engagement Strategy for China.” However, since then, the dynamics have changed drastically. Foreign multinationals have been publicly investigated for illegal business practices and have been exposed to cyber security risks and intellectual property infringement. The paradox of an uncertain regulatory environment existing alongside a relatively attractive market suggests MNCs must have found an effective way to manage relationships with Chinese governments.

After extensive conversations with our clients, industrial experts, and business associations, I realized that the biggest challenge MNCs face is how to build a strong advocacy message to governments.

Naturally, the rapidly evolving government structure makes it difficult for multinationals to identify the right stakeholders. To make matters worse, the opaque environment hinders companies from having a proactive reaction before a negative policy rollout. The crux of problem is that most foreign companies lack a deep understanding of Chinese government agendas and are unable to deliver their values to governments by facilitating their political objectives.

Below is a snapshot of the most pressing challenges for the Chinese government. To better work with the Chinese government, multinationals should change from being regulation “destructors” to “instructors,” who can demonstrate knowledge about policy and provide valuable industry input—areas in which the central government is most interested. For example, multinationals can match their companies’ capabilities with the Chinese government’s publicly stated objectives to develop cutting-edge technology in strategic industries or promote innovation among China’s youth.

5 most pressing challenges for the Chinese Government

Nowadays, think tanks are playing an increasingly important role, and the policymaking process is no longer a “black box” in China. Companies can work on participating in the decision-making process to lobby think tanks and shape policy, thereby preparing for any policy “surprise” before it is too late to make changes. In some cases, a company’s government affairs team can engage the right opinion leaders and then recommend them for the policy development process. By doing so, they help the government select true experts, who can provide professional suggestions, and also help themselves influence policy making.

Policy Development Process