CKGSB Knowledge Authors

New challenges and opportunities for MNCs in China

July 28, 2010

MNCs in China are facing more difficulties amidst increasing competition, and they feel they are losing advantage. How can they find their way out of this?

In December, French dairy giant Danone SA announced its suspension of its Shanghai yogurt production factory, although it will continue operations of its Beijing factory.

A spokesperson for the company has recently written an email stating, “Adjustments for our Shanghai factory will take place, at present our Shanghai factory’s operations have been suspended. We are making evaluations at this time to decide the future operational strategy of this facility.”

This situation has precedence. Just a week earlier, Nestle, the world’s leading nutrition and wellness company with headquarters in Switzerland, shut down operations at one of their three ice cream factories in China, in addition to suspending its retail business in Shanghai.

2011 was marked as a year in which many foreign brands in China failed to make successful inroads into the Chinese market. Earlier this year, Best Buy Co., the world’s largest consumer electronics retailer, closed five of its Chinese stores. In March, US toy manufacturer Mattel closed its Barbie flagship store in Shanghai after only two years of operations. Following this trend, La Maison, a European building material distributor, closed its seven stores in Shanghai and announced intentions to withdraw completely from the Chinese mainland market.

MNCs in China are facing more difficulties amidst increasing competition, and they feel they are losing advantage.

“MNCs too often adopt a one-size-fits-all approach that doesn’t satisfy Chinese consumers,” says Rose Wang, a CKGSB alumna with nearly 20 years of experience working with MNCs including Motorola, AMD and CISCO. “When products are not tailor-made to suit the particular [needs] of this market, the prices are higher, and due to the hierarchical system, the decision-making process of Western companies becomes much slower and inefficient. As a result, generic products are developed in the United States for the Chinese market, which often include features that are simply not what the local market wants,” says Wang.

Foreign businesses too often fail to understand that Chinese firms have matured, particularly in the high-tech sector, Wang explained. “As a PC user, I don’t see any reason to use HP or Dell. I think [Chinese brand] Lenovo has similar quality, features and better service,” says Wang. “It’s the same for TVs and refrigerators. Why should I choose Siemens when [Chinese brand] Haier has similar quality, better service and a better price?”

As competition continues to heat up, Wang and other observers say MNCs are often handicapped by a lack of autonomy.

MNCs Raise Expectations for the Chinese Market

At the same time, due to the weaker-than-forecasted GDP data from European countries as well as the slowly recovering US economy, many MNCs continue to expect and hope the revenues generated from the Chinese market will be the main contributor to the company’s global revenue growth.

According to PRC Ministry of Commerce spokesman Shen Danyang at a December 15 press conference, from January to November of this year, there were 25,086 newly established foreign investment companies in China, an increase of 3.23%. During the first 11 months of 2011, total foreign direct investment (FDI) amounted to $103.77 billion, an increase of 13.15%. Concurrently several European countries fell into a serious debt crisis and the American economy saw a decline in its growth during the same period.

Coach, the New-York-based luxury accessory brand, intends on making China its biggest market by 2014 with projected annual sales revenue of $500 million, which is five times as the total amount of their actual sales revenue for 2010.

The Dutch chemicals company, Akzo Nobel NV plans to double its sales revenues in China to $3 billion by 2015 and is focusing its efforts on increasing M&A opportunities in the country. Additionally, the company plans to allocate 15% of its global research and development (R&D) resources toward China within five years.

According to a December 7 Economist Intelligence Unit research report, which undertook a survey of 328 senior executives at non-Chinese MNCs, 49% of the survey respondents said that the fallout from the global financial crisis has raised their companies’ expectations for their China operations.

An analysis of the financial results for 70 MNCs showed that in 2010 only 10 companies had their China operations account for more than 20% of their total global revenues. For more than half of the companies analyzed, their China operations accounted for less than 10% of their total global revenues. But these foreign companies expect this situation to change. Seventeen percent of these MNCs foresee China as being their biggest market in less than five years, while another 21% expect this to happen within the next five to 10 years.

The majority of European and American companies in China right now “don’t act like entrepreneurs,” said Fanchen Meng, a former senior vice president of Siemens Greater China.

“Because the majority of MNCs still have their value chains and assets in Europe and the United States, it’s very hard for them to change,” says Meng, an alumnus from CKGSB’s China Country Manager Program.

Meng argues that foreign companies should make China an independent profit and loss center. For example, in a sign of recognition for China’s strategic importance, US auto manufacturer GM has located its Asia headquarters and profit-loss center in Shanghai.

What Will It Take for MNCs to Succeed in China?

Rose Wang believes companies should commit to developing more products tailored for the needs of the Chinese market. “There’s a lot of room for MNCs to make improvements in product localization and deliver what the local customers want.”

Wang points to the example of her former employer Motorola, which was able to develop flagship cell phone models out of their Beijing-based R&D center, including the company’s first smart phone in the 1990s. Likewise, GE developed a cheaper and portable ultrasound scanner using a local R&D team that was granted an unprecedented amount of autonomy for the project.

More importantly, MNCs continue to maintain their edge when it comes to innovations. Liao Jianwen, associate dean and professor of strategy at CKGSB, estimates it will take another decade before Chinese companies become true innovators. “To be innovative you have to be willing to take real risks,” he says. “But right now you can make money everywhere, so why take any risks? Acquiring more territory is more important than being innovative right now.”

Sun Zhenyu, president of the China Society for World Trade Organization Studies (CWTO) said at a recent conference that China is still the most attractive place for MNCs. He suggested that MNCs continue to increase investment in China and enhance cooperation with China, especially in the modern service industry, green-tech industry, and high-end manufacturing industry while expanding investments in central and western China.

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