As business is becoming more globalized, more emphasis is being placed on the role of China and its impact on the worldwide business community. Multinational companies (MNCs) are looking for opportunities to enter or expand in this dynamic ecosystem, hoping to capitalize on its massive consumer market and innovative prospects. However, in the meantime we see a series of pulling-out or retreating of multinationals, such as Google, Ebay, Wal-Mart, L’Oreal, etc., from the ‘promised land’ of China. Why is this happening? What are the difficulties and problems behind? And what are the possible solutions?
(Panelists shared their insights and experiences on Identifying Investment Opportunities in the Era of Innovation. From left to right: Prof. Teng Bingsheng, Mr. Mao Jihong, and Mr. Chik Wai Chiew)
On July 16th, along with Teng Bingsheng—CKGSB Associate Dean and Associate Professor of Strategic Management—two CKGSB alumni Mr. Chik Wai Chiew, Partner at Tembusu Partners, an award-winning private equity firm focusing on emerging markets and China and Mr. Mao Jihong, President of Mixmind Art & Design, one of the most successful fashion brands in China, shed light on those questions at the first CKGSB Workshop in Singapore. Over 50 senior executives and observers, including journalists from leading local and international media, participated and discussed with the speakers on the struggles for MNCs and where the opportunities lie in China.
(Prof. Teng delivered a keynote speech on MNC’s Re-Looking for the “China Dream”)
During his keynote speech, Prof. Teng shared his views on the tougher environment in China, where MNCs are facing three main challenges. “The first and most important challenge is the rising labor cost,” explained Prof. Teng. “From 2008 to 2011, in three years, the overall cost of doing business in China went up by about 50%. As a result, multinationals have to face a much higher cost pressure. For example, according to one study, if you consider the difference in productivity between China and the US, actually the unit cost in China could be higher than that in the US, and that is why some of the leading manufacturers, including GE, have decided produce a selection of their latest models in the US, rather than in China.”
The changing business environment in China, which is the second challenge for MNCs, makes it more difficult for multinational companies to follow or adapt their strategy locally. “For example, the entire corruption campaign in China creates a great deal of uncertainty for multinationals, as in the case of GlaxoSmithKline (GSK). Because of the major investigation they faced a couple of years ago, there was debate around GSK on whether they should pull out of China or not. Even though they decided that China is just too important to ignore, they have to entirely change their marketing and sales strategies, which many people believe will be a huge challenge for GSK.”
The third challenge for MNCs—strong local competition—was explained by Prof. Teng and echoed in the following panel discussion on July 16 with Mr. Chik Wai Chiew and Mr. Mao Jihong. Some MNCs have decided to avoid their domestic competition in China. For instance, Wal-Mart has changed its strategy so that wherever its local competitor Wu-Mart has stores Wal-Mart will not, because they cannot face this kind of cut-throat rivalry presented by such local Chinese supermarkets. For companies like Mr. Mao’s, it is international brands that they are competing with head on in China’s luxury and fashion industry. As Mr. Mao explained, over the past decades, Chinese local brands have cultivated their own consumers, who are growing up with these brands, prior to international ones entering China. As a result, local brands have been able to better understand their consumers and create products that can convey their consumers’ expressions and beliefs about themselves, which MNCs are finding more difficult to achieve. “Alibaba combated eBay and, ultimately, was able to get eBay out of China because of its unique strategy as compared to that of its counterpart. Companies like Tencent and Baidu have also innovated and adapted their business models, which are now more effective than those of foreign companies in China.” Mr. Chik agreed and pointed to concrete examples he has seen as a successful investor in both China and Singapore, “[Compared with MNCs in China, Chinese local companies have the advantages of better understanding local consumer behaviors, owning stronger relations with the government, foresight of knowing how policy will be shaped, as well as their abilities to manage costs and their brands, to manage local Chinese talents, and to make decisions faster without having to deal with different time zones and cultures,” Mr. Chik explained. “Having attended the CKGSB EMBA Program, I have first-hand experience of looking at how my fellow classmates—who are experienced Chinese executives—work, and also how they view the business in China, which is amazing.”
Keeping in mind these challenges, MNCs can still seize opportunities in China if they can understand this market better and be flexible to adapt local strategies for the China market. Prof. Teng gave two pieces of advice for MNCs who are chasing their “China Dream”: “Multinationals need to shift from labor intensive businesses to technology intensive businesses, and figure out how to change their strategy accordingly.” But the fact that China’s growing middle-class will become the driving force behind consumption means that the outlook is bright. For example, that sector of society comprises the most important target audience for Mao Jihong’s brands, as well as the wider luxury fashion industry, while the resulting increase in demand for education, healthcare and other services also offers good opportunities for investors like Mr. Chik. This market requires resources and new technologies, and those are the areas that MNCs can exploit by leveraging their global resources.
CKGSB can help MNCs to better understand and grasp their opportunities in China, while effectively addressing the current challenges explained here. As one of China’s leading and most globalized business school, CKGSB can bridge executives in the East and West through our innovative global programs (including CKGSB-IMD Dual Executive MBA and full-time English MBA programs), where they can learn from each other and open their minds to different ways of thinking. The school is thrilled to have hosted this successful event in Singapore and will continue to address pertinent topics in today’s business environment through knowledge-driven panels and seminars in Singapore, featuring CKGSB’s world-class faculty, alumni and prominent guests.