What the West Doesnt Get About China

When many managers think about China, they imagine a container ship whose hold and deck are brimming with cartons of toys, clothing, iPhones, and other goods bound for the world s consumer markets, whose populations power China s economic engine. That view couldn t be more wrong. Despite the Chinese government s well-publicized program to encourage domestic consumption, few Westerners grasp just how much progress the country is making on this front. Although millions of peasants live on subsistence wages, millions more Chinese are moving to urban centers and achieving a recognizably middle-class lifestyle. Consider just a few data points that give evidence of China s unexpectedly fast-paced move toward a more balanced, consumer-driven economy: In a variety of consumer categories including such items as shoes, consumer electronics, and jewelry China already ranks as the number one or number two market in the world. (See the sidebar An Emerging Market? Not in These Categories. ) An Emerging Market? Not in These Categories China is already the world s largest or second-largest consumer of a variety of products: Global Ranking: 1 Bikes and Motorcycles (7%)* Shoes (12%) Automobiles (22%) Mobile Phones (22%) Luxury goods (19%)

Global Ranking: 2 Home appliances (12%) Consumer electronics (15%) Jewelry (13%) Internet use (63%) *compound annual growth, 2005 2009

The combined flow of shipping containers between Asia and North America and Asia and Europe is already less than the flow among Asian nations with much of the latter consisting of goods imported to China. Domestic demand accounts for most sales of Chinese-produced air conditioners, motorcycles, trucks, and steel.

Adoption rates of new technologies among the rising middle class exceed those of nearly every other developing country. China has 400 million internet users, most with broadband access. Mobile telephony is ubiquitous in urban areas, and most of its consumers have leapfrogged landlines. China s cities are growing so quickly that the country now has more urban centers than most Western nations do. For instance, China has about 90 cities with a middle-class population of 250,000 or more; the U.S. and Canada together have fewer than 70. According to projections, by 2020 China will have 400 cities with at least 250,000 middle-class inhabitants and 50 of those cities will have more than 1 million middle-class inhabitants. And by then it is expected to have 800 cities whose residents real disposable incomes are greater, on average, than those of Shanghai s residents today. Looking beyond consumer markets, we find that Chinese companies are already recognized as among the world leaders in numerous B2B technologies, including wind-turbine blades, solar panels, high-speed rail equipment, steam boilers, port terminal cranes, and electric-transmission equipment. Few Western managers who visit China get a realistic picture of its economic development. They typically go to Beijing or Shanghai. They stay in five-star hotels often Hiltons and Hyatts. There s apt to be a Starbucks in the lobby. The familiar atmosphere leads them to think that China s market will someday resemble a typical Western economy, full of Western-made products. But in fact, cities far from Beijing and Shanghai are teeming with goods and services from domestic companies and if Western companies don t get to those cities soon, they ll be left out. To be sure, despite its rapid progress China is still far from self-sufficient in a number of areas. It remains dependent on foreign multinationals for market access many Chinese companies lack the ability to generate significant export trade on their own. The country can provide a college education for a growing share of the population but still relies largely on foreign universities for top-flight graduate education. Its only traditional energy resource is coal, and its demand for imported oil has been a major factor in rising prices over the past decade. China is also a net importer of food. Finally, it lacks the innovative pharmaceutical and health care sectors of Western economies, and as its consumers become increasingly upscale, they will demand more of the pills and procedures that Westerners take for granted. How MNCs Should Navigate the Emerging China Although every multinational has a China strategy, most companies aren t moving quickly enough for their strategies to succeed. To better position themselves, they need to be aware of these trends: First, the rise of domestic competitors will happen faster than most MNCs expect. Local companies in some high-growth markets for example, Xizi in elevators, 7 Days Inn in budget hotels, and Midea in consumer appliances have already become leaders. Multinationals that hope to have strong market share a few years down the road need to establish themselves now. Second, whether or not they are currently selling in China, companies looking to capitalize on the opportunities there need to be ready to do business in hundreds of locations, not just in a handful of

the current megacities. This has dramatic implications for organizational structure, distribution infrastructure, choice of business partners, and the amount of capital needed. Third, companies must prepare for extraordinary growth in demand. Some Western companies today are struggling to handle 35% annual sales growth in China but the markets they re playing in are growing at 60%. Despite their enormous investments in human and capital resources, these companies are already ceding share to competitors and their competitors will increasingly be Chinese companies. In a market growing this quickly, it can be worthwhile to build excess capacity, and it s smart to take a hard look at whether your present forecasts may be overly conservative. Fourth, Western companies need to understand that Chinese consumers have very different needs than consumers in their home markets. Chinese households don t want cappuccino machines; they want water filters, air filters, and soy milk makers (at the moment, one of the hotter consumer categories in China and one with no foreign competition). The classic example involves automakers, which had to learn that many Chinese who can afford cars like to employ drivers so backseat features are very important to them. Fifth, MNCs must realize that product adoption rates will be higher in China than in most markets they ve experienced, meaning that in some categories, the competitive landscape will be settled quickly. Companies that don t strive to be number one at the outset won t have the luxury of entering and being competitive later. Sixth, as Chinese companies gain prowess in their home market, more will expand abroad. They are likely to move into Africa and South America before they enter North America and Europe. Whether they realize it or not, Western companies aren t fighting just for a position in the Chinese market they re also fighting to forestall potential competitors in other emerging markets and eventually on their own turf. MNCs may not be inclined to pay much attention to small local companies in China today, but they should. Last, Western companies will increasingly be on their own when dealing with many of the politically based difficulties of doing business in China. The power of Western governments to impose their will on the Chinese is diminishing rapidly if it was ever really there at all as the rise of China s own markets makes the country less dependent on Western companies. Competing in China will have less to do with government policy and more to do with offering the right products and services to the right customers at the right price. Some Western companies are showing adroitness in exploiting the new opportunities in China. Among them are General Motors, General Electric, Honeywell, Phillips, Emerson, and Yum Brands. (See the sidebar How Five Multinationals Figured China Out. ) But these are exceptions. Most Western companies underestimate how quickly the Chinese market is developing and how little time they have to establish a competitive foothold particularly in cities other than Beijing and Shanghai. How Five Multinationals Figured China Out Volkswagen The German multinational was the first Western automaker to enter China, establishing its initial joint venture there in the 1980s, when other car manufacturers considered the country too risky. By

the 1990s it had captured up to 90% of the market for passenger cars. Though it has since lost share to other overseas companies, it sold 1.9 million vehicles in 2010. Yum Brands The parent company of KFC, the first fast-food chain to open in China, Yum is the largest and fastestgrowing restaurant chain in the country. It currently operates nearly 3,800 restaurants (more than 500 of which opened in 2010) in 700 cities across China. Procter & Gamble The consumer-goods giant has several brands that hold the top spot in the Chinese market, including Rejoice, Safeguard, Olay, Pampers, Tide, and Gillette. Fully 98% of its employees are Chinese, including many in top management positions. P&G recently opened the Beijing Innovation Center, which will provide global R&D support, and plans to invest at least $1 billion in China over the next 5 years. Nokia Having initially entered China as a network equipment supplier, Nokia is now the largest mobilephone manufacturer in China, and China is its largest market. General Electric GE has operated in China for many decades in sectors including energy, aviation, health care, and transportation. It plans to extend its Chinese operations even further and recently announced five new deals expected to generate $2 billion in revenue. In many ways China today is what the United States was to Great Britain in the late 1800s. British managers couldn t imagine or execute the strategies necessary to do business in a geographical landscape far vaster than their home market. The same challenges now face Western managers in China, but on an even greater scale: Never before have businesses had to deal with market opportunities spread across such a wide geography, with so many different languages and ethnic populations. These are challenges that require aggressive action and ones few companies are currently prepared to meet.