Source: Gao Feng Advisory Company 2015-6-30
Authored by : Edward Tse, Paul Pan
By now everyone has heard of China’s “New Normal”. It refers to a slowdown of China’s economic growth rate from double digits, which had lasted for over two decades, to somewhere around 7% as demonstrated in the past couple of years. The media has been talking about this phenomenon, stating that the “golden age” for multinational companies (MNCs) in China is over. Moreover, business intelligence surveys by foreign chambers of commerce in China, including both the American and the European Union, continue to report discomfort of MNCs in China in their perception of “China problems” such as lack of access, unfair competition, lack of intellectual property rights protection, corruption, and others.
Over the past decade, MNCs have had different experiences in doing business in China. Some have tipped their toes into the water but have struggled to gain traction, and some ultimately left the market. Notable examples include retailers Home Depot, Best Buy, Media Market and U.S. toy maker Mattel. Others noting chronic overcapacity in their industries, are taking a “wait-and-see” stance. Steel, cement and solar panel manufacturers, all fall under this category. On the other hand, some MNCs have found unparalleled success in China, where China has become one of their largest – if not the largest – markets in the world. For Apple, China is now their largest market for its iPhones. For some major German and US automotive OEMs, their China business is globally significant. And despite the initial perceived cultural difference of preferring tea over coffee, Starbucks has been doing very well in China.
A New Era
Under the leadership of Xi Jinping and Li Keqiang, China is entering a new era in two key aspects: geo-politically and economically. On geo-politics, China aims to play a more critical and visible role both within the Asia Pacific region, and also globally. The recent unveiling of the “One Belt, One Road” strategic roadmap and establishment of the Asian Infrastructure Investment Bank are important steps as the Chinese Government strives to become more influential, while helping to bring greater export opportunities for Chinese technology, products and services. In terms of economics, the Chinese government is providing more credence and support to the private sector and its development. To this end, it is encouraging enterprises and individuals to embrace entrepreneurship and innovation. A new national strategy, “Internet +”, aims at leveraging the internet to improve productivity and thereby transform traditional businesses across the board. In parallel, the Chinese government has also committed to reform its state-owned enterprises (SOEs) to ensure sound governance and also increase efficiency.
Putting all of this into perspective, China is transitioning from a “rising tide” to “pockets of opportunities”. When China’s GDP was growing at about 9 to 10% per annum for most of 1990s up until the 2000s, MNCs saw a huge wave of opportunities, at least in sectors that were open or partially open for foreign participation. That was the time when the tide was rising, and all boats in the water will also rise with the tide. For many MNCs, that was a pretty good time. With the “New Normal”, however, many believe that this tide will slow down, and less opportunities will present themselves.
We disagree. We think new opportunities are in fact emerging or will soon emerge in “pockets”, and these are already evident in multiple aspects of the Chinese economy, marked by a focus on more quality growth and innovation as the new underlying growth engine.
First is the expanding middle class, currently at over 300 million and growing1. Second is China’s unabated push for infrastructure development, recently approving a 10 trillion RMB ($1.6 trillion US) budget on some 420 projects for 20152. The “One Belt, One Road” initiative, as mentioned, aims to connect China with strategic neighbors. This is a bold and somewhat complicated plan but nonetheless would create new opportunities for businesses. Third is China’s shift into “Industry 4.0”, the application of the digital technology in manufacturing and other industrial applications. This is further reinforced by the Internet+ strategy as internet and mobile technologies are applied to transform “traditional” industries. China needs to transform its manufacturing from large scale, low labor cost to higher technology, with increasing proportion of high-value products made with advanced manufacturing techniques. In terms of healthcare, China is the world’s third largest market3, thriving especially in “Greater Health”, which encompasses not only pharmaceuticals and medical devices but also health care services and other related areas, to address fundamental needs of the Chinese population; some of them requiring only basic health care coverage, while others would need more premium services. M&A activities in private healthcare have grown rapidly as investors acquired pharmaceutical companies, hospitals, medical device manufacturers, and others. Green industries are quickly developing with China’s imminent need to tackle its environmental crisis. In 2013, China became the biggest renewable energy producer globally, mainly in wind and hydroelectric power production4.
The above list is clearly not exhaustive. The size of the emerging pockets, by definition, will vary. Some will be smaller but some can be significant. For example, with the world’s biggest smartphone market5, and one of the biggest e-commerce markets6, fueled by the largest internet user base7, China’s digital economy has been growing fast and looks to continue to do so in the next few years at least. The implications are not isolated within tech industries, as new technologies also affect the development of other sectors. As the geographical spread of growth and urbanization continue, businesses will penetrate channels into the lower tier cities, and even the rural areas.
Take China’s middle class as an example. A study by Cornell University estimated that by 2025 the population of China’s middle class will reach 650 million8, accounting for about 78% of urban households; and a Deutsche Bank report suggested that their expenditure will constitute over 60% of China’s total consumption9. More significant is the shift of consumption nature from basic goods to discretionary items, including cars, luxury goods, cosmetics and high-end household appliances. A majority of China’s middle class is concentrated in the top 15 metropolis and they are not afraid to become trendsetters10. Fashion retailers such as Zara and Uniglo and decorative paint companies such as Dulux and Nippon Paint are among the MNCs which have already successfully tapped into this fast-expanding consumer segment. This consumption upgrade cycle has barely begun, and could last years or decades.
Successful MNCs have capitalized on specific sectors that are thriving in the promising Chinese market. China is already the world’s largest robotics market, buying 25% of total global industrial robots in 2014, with some 200,000 robots operating at the end of that year11. Companies like Kuka, ABB and Fanuc are doing well in China. Outbound tourism is in high demand, as living standards and incomes rise. 109 million Chinese have traveled overseas in 2014, an increase of 19.5% YoY12. Fosun, a large Shanghai-based private-owned conglomerate, has recently bought Club Med, which is building new resorts with luxury brand shops like Chanel, catering to Chinese tourists. With the budding healthcare sector, global private equity firms like TPG, Australia’s Lend Lease and China’s Taikang Insurance are actively investing in elderly homes13. Interestingly, pollution has spurred some new products and services which profit from mitigating its damage. 3M is well known for developing a new generation of face masks, including ones filtering PM2.5, becoming an instant bestseller. It also sells customized water filtration and treatment systems for both residential and commercial use14. Similar to other countries, social media platforms are powerful tools for companies in China, cost-effectively leveraging the power of social networks. Durex adopted a comprehensive digital marketing strategy in 2010 to position its brand and compete with cheaper counterparts, launching campaigns on Sina Weibo, hosting online forums with industry experts and partnering with e-commerce platforms. In three years, they gained 45% market share while sales tripled14. Nike also launched a series of campaigns to inspire a growing class of marathon enthusiasts throughout China.
While China’s auto industry is experiencing some slowdown and in some segments overcapacity, “smart mobility” – the application of internet technology in providing mobility – is creating new, major opportunity to many players; some of them are recent entrants into the space. Didi Kuaidi, China’s largest taxi-hailing app is only two years old, and expects to grow from its current daily customers of 6 million to 30 million people in three years’ time.
Tapping into the pockets
Viewing China simply as an average of the so-called “new normal” would not provide a precise picture of reality. Of course, China is not ideal for everyone – for some sectors, overcapacity may continue to pose as an issue, and this will take some time to correct itself. For some MNCs, their fundamental value proposition may be downright unsuitable for Chinese customers who may reject them. Others who have entered joint ventures or partnerships with Chinese state-owned enterprises may be disillusioned by the somewhat unproductive, lack of innovativeness and commercial sense of their partners. In some cases, local governments may not be 100% in sync with the central government, creating confusion for companies.
However, there are still a large number of sectors where these emerging pockets of opportunities could mean new opportunities for MNCs. Growth across different sectors or geographies is expected to vary, with demand patterns possibly manifested in a discontinuous and multi-dimensional manner. At the same time, customers, competitors and channels may also change significantly; maintaining the status quo or doing what MNCs used to do in China will likely be insufficient to capture the full potential such new opportunities could bring. Often, the changes or disruptions could also bring risks as new competitors, technology or business models, coupled sometimes with government policies, could offer unforeseen threats.
China is neither entirely rosy nor entirely doomed. But given China’s size, speed of growth, resilience, its increasingly important role in the world and its ambition, odds should be in favor of this country. MNCs need to examine China within a China context, which is combination of the country’s history, culture, politics, socio-demography and economy. Without a full appreciation of the China context, which by definition evolves, MNCs typically will miss the point. Unfortunately, many MNCs view China as just another “emerging market” in the world and too many believe in a cookie cutter approach by simply cutting and pasting their global approach (products, services, business models, organizational structure, etc.) to China and expect that to work. Sometimes, this would work but more often than not, it wouldn’t. The demand patterns and competitive dynamics in China are often more complicated and diverse than what MNCs are used to. While many MNCs have been talking about “localization” for the past one or two decades, the great majority of them are still treating local managers as executional operators rather than thought leaders. Without a critical mass of local managers who are accepted as thought leaders at the senior levels of the MNC globally, it is very difficult for MNCs to truly appreciate the realities of China (both opportunities and threats). As a result, mis-alignment between the global headquarters and China’s realities often take place creating frustration from both sides. As competition intensifies, especially that coming from Chinese players who are typically speedier, more agile and more willing to accept ambiguities, many MNCs will begin to lose ground.
What China means for an MNC, and how the MNC can best seize untapped opportunities from the most populous country in the world and to the extent possible, mitigate the associated risks, depends not only on the China market, but more essentially, on how the company perceives China, and how ready it is to align both strategically and organizationally for China. Opportunities and turning these into rewards, are primarily a result of the organizational mindset.
1: Credit Suisse, Global Wealth Report 2014
2: Bloomberg Business (Source: National Development & Reform Commission of PRC), China Said to Accelerate $1 Trillion in Projects to Spur GDP (Jan 6 2015)
3: Cheung Kong Graduate School of Business, “Private Healthcare in China: Will Business Sentiment Survive?” (May 26 2014)
4: Worldwatch Institute, Worldwatch Report #182: Renewable Energy and Energy Efficiency in China: Current Status and Prospects for 2020
5: Forrester Research, China Online Retail Forecast, 2014 to 2019 (February 4 2015)
6: International Data Corporation, The China Smartphone Market Picks Up Slightly in 2014Q4 (Feb 2015)
7: Internet Live Stats
8: Cornell University, What Is the Opportunity in China (Presentation)
9: Deutsche Bank Research, Understanding China’s Consumers
10: Hurun Research Institute, Hurun Wealth Report 2014
11: International Federation of Robotics, 2014 statistics
12: China Outbound Tourism Research Institute, April 2015.
13: Thomson Reuters, Ageing China draws investors to its “hot as Internet” healthcare sector (Feb 10 2015)
Cheung Kong Graduate School of Business, China’s Pollution Problem: Rise of the Smog Warriors (Apr 29, 2014)
CNBC, Chinese Pollution, American Profits (Dec 13, 2014)
15: Harvard Business School Case Collection, Going Social: Durex in China
About the Authors:
Edward Tse is founder and CEO of Gao Feng Advisory Company. He built and ran the Greater China operations of two leading international management consulting firms for a period of 20 years. He has consulted to hundreds of companies – both headquartered in and outside of China – on all critical aspects of business in China and China for the world. He also consulted to the Chinese government on regional strategies, state-owned enterprise reform and Chinese companies going overseas. He is the author of over 150 articles and three books including the award-winning The China Strategy. His fourth book China’s Disruptors is coming out in mid-2015.
Paul Pan is Managing Director based in Beijing. With more than 20 years of industry and management consulting experiences, Paul has extensive consulting experiences in SOEs, POEs and MNCs with focus on health care, consumer, internet, IT, energy and chemicals. Paul holds first-hand experiences in globalization, M&A and PMI by working at Lenovo & Google.
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