Our thought leadership on strategic management for multinational corporations in China

1. From Fringe to Core
Strategies for Multinational
Companies Operating in China
Edward Tse

2. Gao Feng Advisory Company
From Fringe to Core
After over 20 years of investment in
China, some multinational companies
(MNCs) have demonstrated successes
whilst others like Home Depot, Best Buy,
Media Markt, and Mattel have either
significantly scaled down their China
operations or have chosen to withdraw
from the market. For the successful
ones, China is now one of their most
important, if not the most important
market in the world. To many of them,
the outlook of their China business
continues to be strong and they plan to
continue to invest significantly in this
market. Prime examples of these are the
automakers especially those in the
premium segment, as well as companies
like Apple, Yum’s Group, Starbucks and
Honeywell.
So, what lies behind the performance
difference? Clearly, the industry makes a
difference. In China, there are broadly
three different types of market access
from the standpoint of foreign companies.
First, there are sectors which are closed
or largely closed to foreign participation
such as telecom operations, (much of) oil
& gas, military and defense, etc. Second
are sectors that are completely open.
Foreign companies, as well as Chinese
ones, are allowed to participate. Often,
these sectors are very competitive.
MNCs find not only their usual MNC
competitors in these sectors but also, in
many cases, Chinese competitors, some
state-owned and some private. MNCs
need to bring their best-in-class
capabilities to bear in order to be
successful. Examples of these are
consumer goods, retail, automotive parts,
etc. In between these two sectors is the
third type, the partially open industries.
They are neither completely open nor
closed. A case in point is the automotive
manufacturing sector where the Chinese
government dictates any foreign auto
OEM must form a joint venture with a
local auto OEM, with a maximum foreign
share of 50%. As such, the structure,
conduct and performance of any industry
sector depends on where that industry fits
within the regulation context. And, as
China continues its liberalization process,
this context is also evolving. So in short,
one cannot and should not generalize the
patterns of doing business in China
based on isolated data points, especially
ones that are outdated.
However, in every sector that MNCs are
allowed to operate, some companies are
better performers than others. For
instance, in the premium car sector, the
major German auto makers are doing
quite well while the Japanese ones are
almost nowhere to be seen. For the
Yum's Group, over half of global
revenues and profits now come from
China, but their key global competitor
McDonald’s is way behind in its China
presence. In fact, in these days of data
abundance and transparency, almost
every company can see the same set of
China market data, and yet we see
completely different strategies generating
completely different results.
In addition to strict industry and functional
knowledge, a deep understanding of the
China context is an essential component
for MNCs to become successful in China.
Unfortunately and surprisingly, this has
largely been ignored by many MNCs.
Too many companies believe that they
have figured out their own business and
are able to operate their business in more
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3. Gao Feng Advisory Company
From Fringe to Core
or less the same way in (many parts of)
the world. They expect China to follow
the same or more or less similar patterns,
and therefore they tend to “cut and paste”
their strategy or business model.
Sometimes this work but often times, it
doesn’t. Not only is China large and fast
growing, it is also complex with a range of
leapfrogging and time-space compressed
phenomena taking place at the same
time. Overlaid on top of all this is China’s
historical, political and social context that
makes the overall conditions quite unique
and most likely somewhat different to the
MNCs other markets.
In my view, the key to success for MNCs
in China is first and foremost the
companies’ local leadership. The local
leadership must understand and
internalize the China context as
mentioned above. It also needs to be
stable enough to build and instill the
critical institutional knowledge for doing
business in China, a valuable asset for
any MNC. The degree of alignment
between the China realities and the
expectations of the global headquarter
(CEO) often dictate whether an MNC can
succeed in China or not. Often the global
expectations can be overly optimistic or
overly pessimistic over a very short time
horizon, making decisions on China
erratic.
Based on all of the above, making China
work will require the MNCs to carefully
adapt their global operating model to
China. Many MNCs have developed
clear and strong global functional
capabilities and they tend to apply these
capabilities all over the world without
customization. However, the realities in
China force many MNCs to rigorously
examine what parts of the global
operating model can be leveraged for
China, and what part cannot – and by
implications will need to be developed in
China for China. This can be a
contentious process as global functions
are often very proud of their
achievements and status and
fundamentally believe the world should
follow the same standards and
processes. If local acquisitions are
involved, then the Chinese operators
would tend to argue that China is
(somewhat) different. The balance
between the two requires deep
understanding and reflection on changes
in processes, decision rights, KPIs, etc.
and importantly the mindset and culture.
Getting this right, however, is often what
defines whether an MNC can be
successful in China, or not.
MNCs should ask themselves whether
their China business should be part of the
foundations of their entire business – is it
possible, for example, to use capabilities
developed in China not only to succeed in
China but to enhance their performance
globally? Indeed, could they plausibly
apply advantages acquired in China to
their global operations in a way that
would result in China becoming the core
and integral part of their global strategy
instead of a fringe presence?
Of course, the answer isn’t always “yes”
(though it could be “not yet”). As
mentioned before, the China market
brings a number of peculiar
characteristics and as a result, the
demand pattern in any sector in China
can be much more complicated and far-
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4. Gao Feng Advisory Company
From Fringe to Core
ranging that any markets in the rest of the
world. Often companies find that they
need to use a much larger number of
product market segments to fully
characterize the China market than other
markets in the world. In addition,
boundaries of industries are often being
re-defined due to emergence of a range
of enablers, among which the prevalence
of the wireless internet is probably the
most influential.
The combination of a complicated and
quickly changing demand pattern, hyper
intensive competition (in open sectors),
fluidity in industry boundaries, and
discontinuities in the regulatory context all
require companies, both foreign and
Chinese, to continuously develop new
sources of competitive advantages in
order to secure a better position in the
market. These new sources of
competitive advantages can manifest in
various ways – newer products, brands,
ways to go to market, service models or
even the entire business models, as well
as “intangible” capabilities such as speed,
agility and flexibility.
MNCs will find themselves compelled to
integrate the advantages that China-
based operations have into their global
value chains – research and developing
products there, selling into its markets,
and then using the economies of scale
China allows to take those goods to the
rest of the world. In many arenas, China
either is already or has the potential for
being the world’s leading breeding ground
for business innovations. Mentally,
MNCs should not view China merely as a
marginal or fringe market. Instead they
should put China right at the core and as
an integral part of their global strategies.
Without the proper position, the China
business would not be given the proper
priority or resources to support its growth.
Not only this would place China at the
right priority of the companies’ global
business, it would also enable the
companies to adjust their global
organization that gives the China
operations the right levels of decision
rights, agility flexibility and resilience.
After all, it is a shift in (or adoption of)
corporate mindset and culture that cater
for the centrality of China in companies’
global business.
China is going through a real
transformation. As a whole, it is already
the world’s largest or second largest
economy. On a per-capita basis, it is
going from a relatively low income
country into one that is considered
“middle class”, within the next decade or
so. The government is undertaking a
large number of reforms covering social,
economic and other areas -- and
eventually political. Reform of the state-
owned enterprises is already underway.
The rapid rise of the private sector is
more evident than any time before.
Entrepreneurship is thriving in China.
This transformation will bring both
tremendous challenges but also
opportunities to all types of businesses,
MNCs included. They key is whether one
can see through the veil and identify the
real opportunities and prepare for
capturing them before they arise, while
have a sensible way to manage the risks.
MNCs should not be distracted by short-
term events that may have some news
worthiness, but should focus on thinking
through the China context and draw
implications for their China strategy on a
medium and longer term.
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5. Gao Feng Advisory Company (www.gaofengadv.com) is a pre-eminent strategy and
management consulting firm with roots in China and global vision, capabilities,
resources and network. We help our clients address and solve their toughest business
and management issues -- issues that arise in midst of fast-changing, complicated and
ambiguous operating environment. We put our clients’ interest first and foremost. We
are objective and we view our client engagements as long-term relationships rather
than one-off projects. We commit to helping our clients to not only “design” the
solutions but assist in implementation, often hand-in-hand with the clients. We believe
that every member of our team can contribute to problem solving for our clients, from
the most senior to the most junior.
Our seniors are former senior consultants at leading management consulting firms
and/or senior executives at large corporations. We believe clients would benefit the
most from a combination of consultants with substantive experience in consulting
coupled with line management professionals. Therefore, we organize ourselves into a
core consultant team augmented by a broad team of “extended team members” with a
large variety of skills and expertise to best serve the needs of our clients. In addition to
our team in the Greater China offices of Beijing, Hong Kong and Shanghai, we have a
global network of collaboration partners with a wide range of experience, capabilities
and resources.
About the Author
Edward Tse is founder and CEO of Gao Feng
Advisory Company. He built and ran the Greater
China operations of two leading international
management consulting firms for a 20-year
period. He has consulted to hundreds of
companies – both headquartered in and outside
of China – on all critical aspects of business in
China and China for the world. He also
consulted to the Chinese government on
regional strategies, state-owned enterprise
reform and Chinese companies going overseas.
He is the author of over 100 articles and three
books including the award-winning The China
Strategy.