Success in China requires strategic ideas balanced with operational plans that are actually executable. In addition, since required solutions depend on a company’s experience and maturity in China, needs will change over time. For example, a multinational company may initially require assistance developing an entry strategy, conducting due diligence and integration, while establishing a baseline HR infrastructure. Later, profitable expansion, organizational transformation and technology implementation may become much more important. Finally, sound financial controls and processes, low cost sourcing and supplier performance assessments may be priorities throughout the entire life cycle.
How can multinationals optimize the global value generated from their China business units? The proceeding checklist summarizes many practical success factors – and challenges – for multinationals entering or expanding their operations in China. These tips may help avoid some common pitfalls.
Market Entry: · China is not one uniform market; it has significant uneven economic development and regional cultural differences · The unique regulatory and infrastructure conditions of China often make outside products unfit without some modification or adjustment. · Western-style management practice often fails in the context of Chinese business culture. · Local brands may not have the global reach and reputation of foreign ones; however, they do have local roots and their loyalty is growing.
Pricing and Profitability: · Most consumers in China are not accustomed to increasing prices, so a thorough understanding of segments, channels, and change management challenges is key. · Prices often vary by region and province within China. · More time is required to collect, scrub, normalize, and analyze price and cost data in China compared to other more established markets such as the USA and Europe. · A thorough and objective analytical approach is needed to counter the inevitable push-back from sales reps in China to raising their customer’s prices. In addition, relationship in China is key, more so than in other markets and regions. Actual price realization will depend on the abilities of the sales force and their relationships with their customers.
Human Resources: · Most surveys in China rank employee retention as the number one HR challenge. A common misconception is that compensation is the root cause of these retention problems. Multinationals erroneously believe as long as they pay more than their competitors, they can retain their Chinese staff. However, this is a major blind spot. · The three major cornerstones for employee retention are internal equity, career development and on-going training. · For recent graduates, young professionals and Chinese returnees, career development is a major motivator to stay with a company. · Training makes a difference. Chinese staff views training as a major benefit as well as a sign that their company treats people as valuable capital rather than a labor pool. Companies with comprehensive training programs generally enjoy lower turnover rates in China.
Sourcing: · Recognize that switching to China based sourcing will represent a significant change in the way your company does business. Costs will be lower, but supplier development, management and risk will be higher. Discussions over risk-reward tradeoffs need to take place before moving forward. · Supplier capabilities vary immensely within China. Onsite evaluations and due diligence studies including financial, operational, quality and social responsibility reviews must take place early on. · Relationships are vitally important to the Chinese, so it’s important to build a high degree of trust, communication and integration with each supplier from the outset. The more strategic and complex the commodity, the greater the level of integration is required. · Some staff need to be located in China for supplier validation, integration, monitoring and development. You will not realize the full potential of China sourcing if you do not invest in developing your key suppliers.
Systems Implementation: · Infrastructure in China is changing rapidly and what held true last year most likely will not today. · Allow adequate time for systems training, not just for initial implementation, but also for ongoing training of user and outside system support. · If a China roll-out is contemplated, Chinese resources must be involved early on to minimize surprises and provide a basis for commonality. · If financial systems are to be changed or upgraded, it is critical to obtain local Financial Bureau certification. The requirements vary from province to province and can be very bureaucratic.
Process Improvement: · Justification for process and system improvements in China will be driven less from a cost-saving mentality and more from a market-expansion mentality. · Before considering a shared services strategy, the corporate structure must first be reexamined from a legal and tax perspective within China. · While Chinese processes are generally simpler compared to US or European standards, they are usually not documented and communication gaps tend to be more severe between key functional areas.
Growing a business in China presents very unique challenges that should be factored into investment and profitability objectives. Temper your entry strategy with very realistic expectations as you launch operations, localize products and services, and establish an employee base in China. Finally, business operations may vary from province to province as there is no “one size fits all’ concept in China. As a result, strategic ideas must be balanced with operational plans.