The easiest way to "sell" the need for a China strategy is to pose the prospect of close competitors suddenly enjoying 30% to 40% reductions in labor costs from China sourcing. Almost as easy to document is evidence that 1.3 billion consumers of increasing affluence await the luxury of Western brands. (By 2025 China is predicted to become the world's largest economy).
Consider the approaches taken by the large multinational corporations (MNCs). In China, General Motors Corp. has become a market leader with its Buick brand, and General Electric Co. -- with nearly a century of involvement with China -- values the country as a market for both end products and low-cost sourcing. In 2002, GE trumpeted its 2005 China goals to generate "$5 billion in revenues and $5 billion in sourcing." That represented a doubling of GE's 2002 revenues, and the company succeeded.
By 2002, four of GE's businesses already had service and production capabilities in China. And GE Plastics had as many salespeople in China as it did in the U.S. Also, that was the year GE announced its intent to save big by China-sourcing 25% of its consumer-products business. In 2003, CEO and chairman Jeffrey Immelt told shareholders: "Keep in mind, $5 billion in sourcing from China generates $1 billion in cost savings for GE."
GM and GE deservedly get high marks. "Among China players, the experts consider their strategies as role-model highlights of the last decade's China 'gold rush,'" says consultant Steven H. Ganster, CEO, Technomic Asia (Shanghai, Chicago and Minneapolis).
But not everyone experiences role-model success, and Ganster expects the failure rate to rapidly increase as more inexperienced players seek a China presence. In 1984 his client list -- those seeking a China connection -- were primarily multinationals such as GM and DuPont & Co. "Even though they sought help, they already had a global perspective and base of experience to draw on."
Ganster now notes an accelerating interest from smaller organizations. "At present approximately half of our clients are small- and medium-sized enterprises that have never ventured beyond the continental U.S." He says the change reflects a fundamental shift in U.S. manufacturing. "SMEs today are motivated not in terms of the 1990s China gold rush, but as a business imperative tied to today's business needs. Their immediate reasons to come to China are much more complicated, difficult and often defensive as they follow their customer base."
First Step In Strategy: He says the growing truth is that more and more companies are beginning to recognize that they have no choice but to pursue a China connection. "China is no longer a discrete strategy -- the global supply chain is much more integrated. Even those not seizing the China market opportunity have to deal with the country as both a source and as a competitor. It's important to appreciate why China's position represents both an opportunity and a threat."
Knowing why a company should even consider a China strategy is the first step -- knowing how is the central point of Ganster's new book, "The China Ready Company" with Kent D. Kedl (China Pathways LLC, Aurora, Ill., 2005). With a readiness assessment guide, the book leverages Ganster's 20-year consulting history at Technomic Asia.
Preparation is crucial Ganster tells IndustryWeek: "For some SMEs, poorly designed strategies will turn the China marathon into a race of attrition. China has to be looked at in terms of the total business strategy. The implication is that the old business model may not work anymore."
He emphasizes that preparation is key, yet some SME's may lack the willpower and financial commitment to send management study teams to establish a China strategy. "Performing that due diligence could involve $225,000 in travel and lodging expenses," he warns.
But that preparation also will enable the creativity to face the main challenges:
- Addressing the rapid pace of change
- Defining your addressable market
- Understanding the value chain
- Being cost competitive
- Dealing with corruption
- Finding and retaining human resources
- Implementing effective relationship management
Not Just Manufacturers: The preparation step also is an important means of challenging common assumptions and misperceptions about China. For example, while Ganster's book emphasizes the significance of China to Western manufacturing companies, he tells IW of broader implications. One concerns software providers, and he cites the instance of Fourth Shift, an enterprise solution provider that strengthened its home market in the U.S. by going to China early. (He says other successes not mentioned in his book include fast-food operations such as KFC and Pizza Hut.)
Top-notch Automation: Mention China's manufacturing prowess, and conventional thinking quickly fixates on labor cost so low that automation, at best, is an afterthought. "Wrong," says Jeff R. Garwood, a GE officer and president and CEO, GE Fanuc Automation, Charlottesville, Va. The joint venture, a provider of industrial controls and software, is experiencing a China customer base that is emphasizing industrial infrastructure development. "Our sales activity in China clearly indicates that they're committed to best-in-class automation. The Chinese do not consider automation less relevant just because they have a low cost of labor."
He says some of GE Fanuc's most advanced systems were first purchased by Chinese manufacturers.
R&D Emphasis: Some China newcomers also are surprised by the growing R&D emphasis, says global marketing consultant John A. Caslione, president and CEO, Andrew-Ward International Inc., Chicago. "China's universities graduate more than 1 million each year, and almost 10% have engineering degrees.
"To be fully capable in any big market, you need to do product development specifically for that market. Look at it as an extension of the precept that R&D needs to be contiguous with the manufacturing process."
Microsoft opened its Beijing lab in late 1998, and Shanghai in 2003 saw GE opening its third Global Research Center. Other participants include Oracle, Motorola, Siemens, IBM and Intel. Foreign-owned labs number in the hundreds. In terms of R&D expenditures, Caslione says China in October 2004 overtook Germany and is now third in R&D expenditures following the U.S. and Japan.
Know Regulatory Limits: Preparations for any China investment should start with a review of how the regulatory environment varies across provinces and cities, says Koay Peng Yen, president of Greater China for APL Logistics, Shanghai, a worldwide provider of supply-chain management. He notes substantial differences in tax regimes and tax incentives for foreign investors. "Start with the U.S.-China Business Council, Washington, D.C., and the American Chamber of Commerce headquartered in Beijing."
Expect Culture Change: Ganster says the Western winners in China will gain more than incremental success. He's referring to how the engagement will change the very culture and structure of the successful companies. "The winners, by discovering muscle and flexibility that they never knew they had, will remake their organizations."
Ganster says China reveals itself as a special test for senior managements. "Smart companies are designing their operational model [specifically] to make money in China, instead of merely transplanting the market approach and structures they have used in mature Western markets."
He says creativity and innovative approaches are necessary because the rapidly emerging business climate has not yet sharply defined the roles of market players. Also, Ganster emphasizes the need for corporate management to provide staying power adequate to withstand the rigors of the competitive marathon.