When the CEO of a multinational corporation was asked recently if he thought China was a real market, he said, "Not really. I think it will be many years before we see real profits and growth in China.” I was stunned!
There are many questions people ask about China, such as: How real is the opportunity in China? How big are the risks? Will economic growth continue to drive change in China? Are there reliable rules and regulations in business? Can one rely on predictable standards from year to year? How will an international company be treated as compared to local companies? Is China’s role in the region and globally really expanding, and how will it affect us?
The time is now to engage
While questions abound, we all know that China’s economy is expanding at an astounding rate of 9.5 percent, and that expansion will continue at a rapid pace. China is heavily investing in new factories and other fixed assets. The change in discretionary income is extraordinary. The pace of rising purchases in 2004 is stunning. There was a 13.3 percent increase in retail sales, 41.7 percent in mobile phones, 13.7 percent in household appliances, and 23.5 percent in vehicle sales. Exports are up by 35 percent, having spiked especially dramatically in the last few years. China has surpassed the United States as the largest trading partner for both the European Union and Japan.
These changes are not limited to just a few product areas. China is becoming the manufacturing capital of the world. The product areas are quite diverse, from detergent (up 34 percent) to air conditioners (up 25 percent) to microcomputers (up 25 %) to color televisions (up 5%).
The Chinese no longer want to just make things for us. They want leadership positions where they are active. We all may want to think that we are buying Italian, not Chinese shoes. But Italy is now losing out to China in shoe manufacturing. Ten percent of cellular handsets were designed in China last year. It is estimated that in 2008, 40 percent will be designed there.
In terms of innovative research, there are 300 foreign research centers that have been set up in China over the last three years. They undertake very high-end research, including some cancer treatments that were dropped in the United States.
Nokia has stated that it expects China to become its largest customer in the not-toodistant future. China is a critical market for multinationals. Of the top 500 global multinationals, 400 are invested in China, including all of the world’s top carmakers and over 90 of the top 100 information technology companies.
Every month 5 million new subscribers sign up for mobile phone service in China. It is the world’s largest market for mobile phones, with some 300 million users and 800 handset models to choose from. On average, every young urban consumer changes phones every eight months.
The capacity of many Chinese ports has expanded between 30 and 60 percent over the last year. Electrical output has increased by 14 percent, so the brownouts of the past are not likely to occur in the future. While annual U.S. oil consumption increased by 4 percent, China’s oil consumption increased by 31 percent. It is true that China’s base was small, but this figure indicates China’s major economic expansion. This rate of increase is pretty much consistent across all refined products, such as diesel, gasoline, jet fuel, and lubricants.
China has cash to invest as well. The country is funding projects in Latin America and it serves as a great resource for Russia. Furthermore, China is funding the U.S. Treasury deficit.
Since joining the WTO, China has a greater appreciation at the central government level of adhering to international standards. There is also appreciation of intellectual property rights, although major problems remain in the region.
China has a growing global influence. It now has a web of trade partners across Asia and Latin America. Russia borrowed $6 billion from China to fund its Yukos oil deal. Trade between China and India has grown dramatically, and China is increasingly a player in multinational organizations.
Communications in ethics and values is a must
The opportunities are numerous but there are some challenges regarding ethics and values. A joint venture with a Chinese company that has operations in the provinces may bring some unpleasant surprises. As changes from state-owned businesses to private enterprise are occurring rapidly, communications about core values remain critical. Human resources are one of the most important issues in China. The challenge is to find enough skilled people to serve as managers. Since talent is hard to find poachers are a threat and one has to be vigilant.
The Chinese are very ambitious and anxious to achieve. For the most part they are not so much looking for financial incentives but are rather interested in education and training. They want to be part of the global team and it is important to allow them to have that experience. The right mix of “expats” and local talent is necessary. It is important for businesses to focus on employees and provide continued education to ensure high performance and productivity. The cost of skilled talent is rising about 30 percent a year in some cities and strong HR initiative will be working to keep the best talent.
The first McDonald’s franchise in China was started in Tianjun by a young Chinese man who returned from the United State with tremendous energy and enthusiasm. He reflects the entrepreneurial spirit which is growing in China today.
Governance problems in China include a lack of transparency, a lack of sound regulatory frameworks, and routine corruption scandals. Therefore, it is not uncommon for companies to experience a crisis at one point in time, even at entities wholly owned by multinationals. In a crisis situation, one needs to collect all the facts, produce the materials needed and make sure to deal quickly with the proper contacts at the government level and the media. It is important to make sure that people are trained in dealing with the media and keep their relationships with the journalists. “Guanxi” (relationship building in Chinese,) and lobbying are still critical in China. Headquarters need to be continuously informed to help manage the expectations and insure that there are no surprises. This is especially true since the world’s most important publications have several reporters in China. Stories easily travel around the world.
The pharmaceutical market is growing much faster in China than in most of the developed world. In the United States, the market is growing by 7.7 percent per year. In some other countries, it is growing by single-digit percentages. In China, it is growing by 27.7 percent annually. Today, China is among the top ten markets in the world. China has become Asia’s source of deals for licensing compounds and for joint ventures. Distribution channels are now being restructured and consolidated. Local companies continue to dominate the pharmaceutical market. Continuing attention to patent issues is critical to success in all innovative areas and especially in pharmaceuticals. The central government is very responsive to patent questions recognizing that respect for intellectual property rights is fundamental to economic success. Enforcement, however, is another story. While penalties for infringement of intellectual property rights have increased, enforcement is uneven. There is a gap in the way the central government approaches the problem and the way second-or third-tier cities deal with it.
Expanding skill sets For all of us who use IBM PCs, we now own a Chinese product. Lenovo bought IBM’s PC business, becoming the world’s third largest PC maker. TCL, another Chinese company, has acquired a controlling stake in Thomson to become the No. 1 manufacturer of televisions. Shanghai Automotive Industry Corp. has proposed a takeover of MG Rover. The question is not why would Rover want to be purchased by the Chinese, but rather: Why would the Chinese want Rover? The answer is that the Chinese are ambitious to achieve leadership on a global scale and have significant funding capacity.
The Chinese certainly need better skill sets in branding. They need better brand names, logos, marketing, and distribution. If one looks at cellular phone handsets, the local market share went from zero a few years ago to almost 50 percent in 2003. This is a highly consumer-driven market. We have to take Chinese competitors seriously.
A communication agenda
The number of media outlets in China is mindboggling. It is always possible to fill a room for a press conference but it is also important to know, as always, whom we are talking to. We have to be very discriminating in picking the right media people.
The following public relations activities are absolutely necessary in China and must be done exceedingly well to obtain exposure: media relations, crisis communications, building strong cultural links between expatriates and locals, internal training, relationship building and lobbying, community relations, branding and educational campaigns. In China, we need to bring the same sophistication in public relations that we require in the developed world. Since we start from a base where people are not well informed about these issues, it is even more important that standard processes and quality controls be in place.
Wise companies should have a plan of action that insures they are present and visible, and are at their best to make a mark in the increasingly competitive China market.