Same Destination,Different Situation

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Coach, which doubled its sale in China to 100 million U.S. dollars in 2010, worked out an ambitious plan to increase its revenue in China to 500 million U.S. dollars and take 10% of the Chinese market.

AkzoNobel, a Dutch chemical company, wants to double its income in China to 3 billion U.S. dollars in the next five years. Another Dutch company Unilever plans to fourfold its sale in China to 10 billion U.S. dollars by 2020.

The increasing ambition comes from the confidence in China’s economy. When the other major economies in the world are hit by depression, many multinationals are doing the same with AkzoNobel, Coach and Unilever – increasing their dependency on the income from China.

But there are also some companies taking the opposite path. Recently, Nestlé temporarily stopped its ice cream retailing in East China and stopped the construction of relevant factories in Shanghai. Meanwhile, Danone closed its yoghurt factory in Shanghai. From 2011, there were frequent reports about the withdrawal of Barbie Doll’s flagship store and La Maison Paris, a home improvement material retailer under Saint-Gobain Group.

Meanwhile, survey results show that many multinationals are still bullish on China but they are balancing their investments in China and other countries. Apart from the flourishing consumer product companies, many of multinationals no longer placed China in the prominent place of their agendas or schemes. According to the survey, 37% of the respondents answered that their headquarters “considered China to be of great importance to their global strategies”, lower than the 53% proportion in the survey in 2004.

Consumption Outlook Pushes China Strategy

The research report Outlook Analysis: Multinationals and China published by Economist Intelligence Unit (EIU) shows that half of the respondents (about 49%) pointed out that the impact of global economic crisis raised their expectation for the Chinese market. Big enterprises (with the income of over 5 billion U.S. dollars) have strong investment will and ability. 73% of the enterprises are hoping that their business in China can create more income.

Though the Chinese market also features the problems of increasing labor cost and inflation, 31% of the respondents think that the low-cost manufacturing field of China is where great opportunities lie in the next five years. About 76% of the respondents attach importance to the increasing market in China. EIU forecasts that the GDP per capita of China in 2015 will be over twice as much as the 4,500-USD level in 2010 to 10,000 U.S. dollars. The annual increase of disposable income is expected to be over 10% from 2011 to 2015.

Martin Judge, founder of The Judge Group, explained that his confidence in the Chinese market comes from the economic transformation of China, which gives him more opportunities in the human resource and technology consultancy. “Under current situation, a U.S. company has at most 2%-3% increase every year, but in China, the two-digit annual growth rate is quite easy to get.” The aforementioned survey shows that 56% of multinational respondents consider the growing outlook of the industries they are in is the main driving force for their strategies in China. 58% of the respondents said that the increasing resident income in China, as well as the policies that shift the economic stimulation power to the domestic demand, will bring the largest impact upon its strategies in China.

Since many multinationals are bullish on the opportunities in the Chinese market, then how many and how great are these opportunities? Actually, presently China is still a relatively small market for most multinationals.

The EIU collected and analyzed the financial reports of 70 companies in 2010 and only 14% of them saw their income from China take more than 20% of its global income. Only 8% of the respondents said that China was their largest market. Apart from General Motors, Volkswagen and other automakers, there are not many enterprises considering China as its biggest market. Half of the companies admitted that the Chinese market could only contribute to 10% of their global income.

However, such a situation is expected to be changed soon. 17% of the respondents forecasted that China would become their largest market in the next five years and 21% of them thought it would happen in the next five to ten years.

Weakened Traditional Advantages of Multinationals

For some multinationals, the role of China in their business stopped increasing“not because China is not an important market for many enterprises”. Xu Sitao, director of the China Region of EIU Global Forecast, said that the operation and competition environment is tougher than before. With the rise of other emerging markets like Indonesia and Malaysia, multinationals are no longer willing to places all their things into one basket. “Nike moved their factories out of China not because the investment environment in China deteriorated. It only explains the change of China in the global industrial chain.”

On the other hand, in Xu Sitao’s opinion, those companies which quitted China due to the weak performance could, or should combine their global operation advantages with the innovations in China and be more localized when participating in the competition.

For example American construction supplier Caterpillar saw their sales increase by 300% from 2005 to 2010, its market share in China dropped from 11% to 7%, as shown in the survey of Great Britain-based engineering machinery consulting company Off-Highway Research. The ones taking away its market share are the Chinese local enterprises instead of its deadly rival Komatsu.

For a long while, multinationals are considered to have better technologies and more efficient brand management. Thus they have big appeal for the Chinese local talents. However, various clues show that these traditional advantages of multinationals began to be weakened. The above survey shows that only one quarter of the large companies (with income of more than 5 billion U.S. dollars) believe that their technologies and brands are better than others.

The shortage in human resources is another challenge the multinationals have to face. Devanlay Asia Distribution takes charge of the supply chain of Lacoste in the Asian-Pacific area. Its CEO of Asian-Pacific Area Frank Cancelloni said: “We spent over six months in recruiting a regional human resource director. The existing 500 salespersons are the most important human resources for the company. But how can we retain them if other apparel retailers or new brands try to take them away from us?”

Manpower Group made two surveys in 2006 and 2010 and compared the results of them, finding that the number of job-seekers that are willing to join in private companies had a 5% increase during the five-year interval while the number of people willing to join in multinationals dropped by 10%.

According to Xu Sitao’s analysis, the improving competitive power of Chinese local enterprises is on the one hand attributed to their fast development – more and more Chinese companies can provide the same or even better salaries than the multinationals. Many local enterprises are trying to go abroad and are able to provide attractive positions for job-seekers. On the other hand, many Chinese companies having achieved suc- cess has bigger flexibility in their internal operation system and the employees can have fast promotion while managers own bigger autonomy in fixing their own responsibilities and working environment,

The Chinese companies are gradually considered a big threat even in the international market. In 2004, 66% of the multinationals did not consider Chinese companies as their competitors in the international market. Now the proportion dropped to 22%. Many multinationals began to think of how to make use of their resources in China to win the competition in the Chinese market.

Most of them chose to find Chinese partners and built cooperative relationship in the sale of special products in other markets. For example, General Motors and its Chinese partner Shanghai Automotive Industry Corporation founded a joint venture in India with halving half of the stake. Kevin Wale, executive director of General Motors (China), said that the best way to achieve success is to move a part of business pattern and products of China into India.

In order to deal with the challenges in the Chinese market, the multinationals should reorganize their structure to match the attention they paid to the Chinese market, just as Xu Sitao advised. Now only 8% of multinationals have the CEOs of China Region in the board directors (45% of companies’ CEOs of China Region should report to their regional headquarters – usually Asia or Asian-Pacific Area). However, 40% of them have already confirmed that they had sent senior executives to their China region to improve their understanding of China and accelerate the process of making decisions in the headquarters.