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Organizational localization: The holy grail for Chinese firms

by CKGSB Knowledge

August 22, 2010

Executives from top multinational corporations give students a glimpse into strategies for localizing operations and decision-making in China during a private roundtable discussion sponsored by Cheung Kong Graduate School of Business (CKGSB). Participants discuss growing local autonomy, increasing competitiveness and reaching long-term objectives.

Bring Over the Brains

More than three decades after the first multinational company stepped into the Chinese market, MNC executives now propose to bring in not only their companies’ brawn, but also the brains, so as to achieve a far more strategically valuable form of localization and to stay competitive.

“Localization doesn’t mean having 100 percent homegrown talent.  At a higher level, localization is about decisions being made at the local level to serve the local market,” said an attendee at the discussion. “If decision-making is made in China, it means a company is more localized,” echoed another participant.

Brian Viard, professor of strategy and economics at CKGSB, speaking at the roundtable discussion, said that many executives agreed that bringing their brains to China is the heart of organizational localization. Local authority is a higher level of localization than operational changes, referring to localizing the supply chain, and product localization, which means developing the product or giving it unique aspects better suited to the Chinese market.

Simpler Management

Many attendees expressed that just having a high-quality product was not sufficient to succeed in China, including some MNCs with products considered best of the breed.

In 2003, eBay launched in China after purchasing Eachnet, a bellwether in China’s online auction industry with about 80 percent market share. Three years later, however, little profit came out from its $300 million investment in China. By the time eBay left the Chinese market, its market share had fallen sharply to 20 percent.

Competing with Local Companies

Localizing the brains remains an incomplete task for MNCs. It is often difficult for country managers to negotiate sufficient autonomy from headquarters, especially given the trend by many MNCs to centralize authority in their home country and to organize profit-loss statements by business line.

“You would have decisions being made in a product line or business line that in theory would apply to all their businesses around the world, which puts the country managers in the position of trying to implement a strategy that was made generically to a specific market,” said Viard.

Managers thought the impact for them was that they often could not make decisions quickly enough to respond in the local market.

“They had to wait or try to work with the headquarters to try to alter their decisions so that they could then respond to local competitors who are probably quicker to react to the changes,” said Viard. Local competitors, on the other hand, could adapt more quickly than MNCs, because they did not have these multiple levels of management to navigate.

The contrast has become even starker as MNCs lose advantages under old preferential policies. Many participants felt that the government in China is now shifting more towards supporting local enterprises relative to MNCs.

The historical preferential treatment for MNCs is a result of China’s reform and opening-up policy instituted in 1978. In China’s Eleventh Five-Year Plan, the government drew up plans to develop the country’s technology and abandon policies distinguishing domestic and international companies.

“This would force MNCs to think more like local companies in order to survive, which would then hopefully flow up to the headquarter level,” said Viard. “The competition was shifting where MNCs will in fact now be competing much more against local firms as oppose to competing against other MNCs.”

How to Survive?

To improve competitiveness, one popular strategy is to send promising Chinese managers abroad to work for a period of time at headquarters, both to soak up global corporate values and perhaps also to act as junior emissaries for China operations.

“Most of them felt it was extremely important to have a very good relationship with executives at headquarters. Some of them felt you had to have a very strong backbone and a lot of guts when you are dealing with the executives outside of China,” said Viard.

Some of the most successful MNCs have sought to align their business growth priorities with local government’s policies, which may pay off both in terms of improving government relations and in boosting revenues.

In a similar vein, MNCs seeking to burnish their image in China have teamed up with SOEs and forged R&D partnerships with local university research teams.

Another strategy to help local operations is to bring in expats with specialized knowledge for short-term stints in China. They can serve as carriers of the company’s global values while working in the China office and help clear up misconceptions about the local market back at the headquarters.

Some attendees predicted that 10 years from now, the boundaries between MNCs and local Chinese companies will blur. The MNCs would adapt and become more like local companies and compete more directly against them. In the meantime, the pressure is on for MNCs to keep localizing.

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