Gold Rush China

Maintaining your presence in China needs a sophisticated business strategy.

China has been open to business now for a quarter of a century. For many the first phase of doing business with the country was simply to have a presence. But today that's not enough - everybody has a presence in China, and simply being these is not enough.

Put it this way: 450 out of the Fortune 500 are there, and of the 10 per cent that aren't it's a safe assumption to say that the majority don't want to be. It's now all about having the right strategy for doing business there and McKinsey consultant Jonathan Woetzel (along with co-author Jimmy Hexter) has written the book on it.

'Operation China: From Strategy to Execution' is an extraordinarily clear and approachable analysis of how to get results in a continent-sized country that to most of us is still a closed book. The title is somewhat unfortunate, as China's gerontocracy leads the world in the frequency with which it implements its death sentence. But you can't judge a book by its title, and what goes on between the boards is valuable information.

"Don't be fooled," says the jacket blurb, "by outdated assumptions about what it takes to compete in China. Before your company races ahead to joint the fray, take this opportunity to learn the facts from two of the foremost experts in the region."

Woetzel is perhaps uniquely placed to comment on the territory. Not only has he previously published two books on China's economy, but he is fluent in Chinese and he lives in Shanghai. During his 22 years with McKinsey he's led their China Corporate Finance practice and served a broad range of Chinese multinational companies on strategy and operations. E&T caught up with him at the consultancy's London headquarters on Jermyn Street and asked him a few questions.

Engineering & Technology: What do you need to do business in China?

Jonathan Woetzel: In essence it comes down to two things: aspirations and people. In the first case we find that companies that tend to win on execution have a much higher set of aspirations. You have to recognise that in China if you are growing at 30 per cent you may well be losing market share.

The people issue is a lot more difficult. Their management teams are on average ten years younger than everywhere else in the world. That is due to the fact that China doesn't have a managerial class, or a managerial education system or a managerial anything. So you're dealing with a territory where the concept of business is new.

Business has only been around in China for 25 years. Career paths, training and development are the things that differentiate a company in China and the ability to offer that is becoming increasingly critical. So now we are starting to see companies moving their management structures into the country, particularly if you look at the electronics field, but we are starting to see it in chemicals and automotive.

Those are the two things - aspirations and a people. The key is not the quality of the system but the quality of the people who are running it and affected by it.

E&T: Do you see Chinese-based firms becoming globally dominant?

JW: In the sectors where China is a significant source of the demand then there is no question that China will have a significant role to play. If we look at the electronic, chemicals and automotive sectors we are seeing that more and more.

E&T: Companies that originally invested in China did so largely because of the low costs - is that still a reason to go to China?

JW: Not as much of a reason. There is still a cost argument, but it's moved up the value chain a bit. More than 60 per cent of China's exports are now machinery and electronics, so it's no longer the land of textiles and toys. What China is clearly aiming at is integrated supply chains across these technologies and one very critical element of their competitive advantage is their cost structure.

E&T: How sustainable is the model that you're talking about?

JW: Sustainable development is the theme for the Chinese government at this point. The model is evolving - it has no choice. It will no longer be enough to be a big employer - things will have to be done in a way that is consonant with our expectation for a better quality of environment. The good news is that China has an environmental lobby. Relative to Korea, Taiwan and the United States at comparable stages of their development, China is much more aware of the environmental impact of its modernisation. At a recent party congress the government elevated the Environmental Protection Agency (EPA) to a ministerial agency. Today the EPA has real enforcement powers on a national level. We're starting to see some progress.

E&T: Values, ethics and corruption are not words that feature in the index of your new book. How important are these concepts in China at the moment?

JW: China comes out relatively well in the international rankings on corruption. It's not Switzerland, but it's not Mexico either. Any of the objective readings I have seen generally put China around the middle with the rest of the developing country pack. But there is a generally positive trend. It's all about building trust through repeated interaction with customers, suppliers and employees and doing so consistently over a long enough period of time to create a distinctive image in the market place. The worst thing a company can do in my opinion is to come in and go out - people remember you leaving and you lose the trust.

E&T: Is there a business philosophy that works best in China in terms of governance?

JW: The essence of the meritocratic principle - that the outcome should be the best possible outcome - is there, but China is a hierarchical society. Like it or not there will be a hierarchy on the factory floor.

It would be very difficult to take a top-down approach to compensating individual workers. Rather it would be the team that gets rewarded with the leader of the team deciding exactly who gets what. So there is a subtle difference from the way you design compensation in a Western setting. In the West everybody gets what they get depending on what they've done.

E&T: Is there one single mistake companies are making in their Chinese approach?

JW: It is largely in the boldness of their assumptions. There's still a cautionary approach of "let's try it - let's try little bits and pieces here and there, but let's not actually commit to much higher aspirations". China is not a place for playing around and not a good place for a portfolio strategy. Number one makes money, number two makes a little bit, number three breaks even and everyone else loses. Very intense competition - so markets get squeezed. It's a quandary for some, because they say "how can I commit to a market that's not even there?"

E&T: So is China a market just for big players?

JW: It's a market that is for people who are able to grow quickly. Going to China means reigniting your entrepreneurial energy. The Silicon Valley to Shanghai plane is always full - those communities are now integrated. 'Green tech' is another area now where everybody's got big dreams.

E&T: Can you comment on the effect you think the Olympic games are going to have on doing business with China?

JW: As an economic event the Olympics are a non-event. It might help Beijing real estate a bit, but it doesn't really affect anything in terms of total investment. The driver of the Chinese economy is investment driven by urbanisation. That, and the emergence of the Chinese middle class are the megatrends. The Olympics just marks a moment in time. It is an important moment that I think it leave some scars. The Chinese government is acutely 'face conscious' and protests over human rights issues associated with the Olympic torch are regrettable. If you look at the past to moments when China feels that it is being picked on, the businesses that have been supportive of China have been very well received.

E&T: Can you sum up your new book in a few words?

JW: Win China or lose everywhere. We think that the standard being set in China for performance will ultimately dictate who the winners are going to be. 

'Operation China: from Strategy to Execution' by Jonathan Woetzel and Jimmy Hexter is out now in Harvard Business School Press. For more information visit www.hbspress.org [new window].

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