Odgers Berndtson interviewed over a dozen China-based executives across a variety of industries for our white paper ‘The challenge for multinationals in China’. We asked them to share what they see as their biggest challenges and opportunities, as well as their leadership strategies for the future.

Their advice is to have realistic expectations of China’s market opportunities and competitors, to implement structure and discipline in local operations, and to trust in local talent. Companies that equip themselves to meet the challenges of this unique market head-on have a greater chance of success.

In this first of two extracts from the white paper, the executives describe their experiences of China’s rapid industrial transformation, competitive landscape, and consumer expectations.

Setting the scene

An economic powerhouse and emerging global superpower, China’s economy is ranked number one in the world by the IMF, based on GDP at purchasing power parity. It’s overtaken the US, and China has the population size and the ambition to keep widening the gap.

President Xi Jinping’s ambitious Belt and Road initiative will boost China’s economy and extend its cultural influence even further. Those land and sea foreign infrastructure investment projects will reach as far as Western Europe and Africa.

In addition, the government’s ‘Made in China 2025’ initiative is focused on upgrading the country’s industrial and high-tech sectors with the aim of making China the world’s leader in technology.

These two initiatives are both threats and opportunities, not only to foreign countries, as evidenced by the reactions of various governments and international organizations but also to the MNCs that operate in these countries. Nevertheless, from electric vehicles to pharmaceuticals to artificial intelligence, China is poised to become an even more dominant player.

As the president of a London-listed engineering company remarked, “the Belt and Road initiative and the ‘Made in China 2025’ policy have increased focus on the development of advanced manufacturing capability and are accelerating the maturity of the Chinese market.”

Industrial revolution

China’s economic and industrial transformation over the past few decades from mass production to high-quality manufacturing has proceeded at an unprecedented pace.

The CFO of a printed circuit board (PCB) manufacturer reflected, “China has gone from being the ‘workbench of the world’ to a world technology leader. And now Chinese companies want to be seen as equal partners, not as cheap labor with production capabilities.”

“China is now advancing quickly towards intelligent manufacturing and local governments are supporting businesses in this effort.”

In addition to changing the way Chinese companies view themselves, the government’s success in bringing about this transformation has changed the way Chinese citizens view themselves and their future. The Head of Digital for a multinational bank explained, “Recent rapid economic growth has made the Chinese very positive about the future and has increased their faith in the government. This has produced a fervent nationalism where before there was an admiration for all things Western.”

Of course, this rapid transformation also requires MNCs to adjust their understanding of the Chinese market to match the new reality. An executive at a US-based biotechnology company explained, “MNCs have for a long time thought of China as a center of manufacturing. Now that China is an innovation center and in a leading position in the world, MNCs need to change their mindset.”

An executive at a semiconductor manufacturing company headquartered in Europe counseled, “Even old China hands that have spent their whole careers here will fail if they do not adjust their thinking.”

Pressures and challenges

One of the unique challenges associated with doing business in China is how fierce the competition from local companies can be, a phenomenon that MNCs often overlook.

Even though Starbucks opens a new store in China every 15 hours, the Head of Digital for a multinational bank shared, “MNCs have to constantly watch their flank. For example, Starbucks’ challenger Luckin Coffee opened 525 stores in just nine months and was recently valued at US$1 billion. As a result, Starbucks is feeling the heat in its second largest market.”

The president of a London-listed engineering company concurred: “Chinese companies are nimble and very quick to respond to the development of new technologies. In addition, IP enforcement is still not strong enough in China to protect MNCs, although this is changing now that Chinese companies are coming up with many of the new technologies!”

The regional president of a multinational industrial conglomerate agreed that a key challenge for MNCs is competing with local companies, some of which, like Huawei and Xiaomi, are becoming MNCs themselves.

He noted, “When there are technological breakthroughs, local players are very quick to adapt, while MNCs are not nimble or responsive enough. Local players have a very strong fighting spirit.”

In addition to being quite aggressive and speedy, local competitors also benefit from a significant home-field advantage.

A banking executive elaborated, “China is often spoken of as an uneven playing field and it’s true that MNCs operate under a more complex and restrictive legal framework than their Chinese counterparts. When you have to run every decision up to the chain of command, it’s difficult to react quickly. Chinese companies, on the other hand, take an ‘act first, apologize later’ approach...”

The reality is that, even though they fall under the same regulatory and legal framework, enforcement as applied to local companies and MNCs is vastly different.

The president of a London-listed engineering company noted, “Twenty years ago, the Chinese government courted foreign companies. Today, foreign investment is still needed, but there are new sources of cash from a more mature Chinese private sector. There are even some sectors where local companies get support from the government, which gives them an advantage.”

An executive at a semiconductor manufacturing company headquartered in Europe agreed: “It is harder now for MNCs than it has been in the past.

The speed at which companies like Huawei are able to change strategy, develop and roll-out new products gives MNCs a very high bar to clear.”

Keys to success

All of the China-based executives we spoke to agreed that understanding and adapting to the local market is the key to succeeding in China. The regional president of a multinational industrial conglomerate put it succinctly: “Solutions produced in Europe or North America will not be effective here.”

“MNCs should follow, to the extent they can, local business practices and strategies. If companies don’t deviate at all from the policies set by their global headquarters, they will fail in China.”

The regional president of a multinational industrial conglomerate concurred: “MNCs that don’t understand the local culture and simply roll out global policies will struggle. For example, building relationships and trust (with employees and business partners) is very important in China and should be prioritized. Trust helps managers control costs and facilitates faster decision making.”

Coca-Cola, KFC, and Apple were called out by an executive at a US-based biotechnology company as MNCs that are succeeding in China, thanks to their success at localizing their product offering. The CEO of a multinational manufacturing company added Wal-Mart to that list, noting that they sell live fish in their Chinese stores.

An executive at a US-based biotechnology company agreed: “The mistake MNCs make is to believe that if something works in the rest of the world, then it will work in China. Companies need to focus on responding to local customer requirements.”

Seeing the world differently

There’s no question that China’s unique business culture – which includes concepts like saving face (miànzi) and the importance of personal connections (guanxì) – can pose challenges for outsiders.

As one executive at a multinational manufacturing company advised, “Western leaders need to listen to what is not said, rather than to what is said.” This may sound like a Chinese proverb, but achieving this level of understanding begins with a long-term commitment to the market and a willingness to learn, grow and adapt to a new culture.

A U.S. semiconductor development company executive noted, “Everything about China – its market, people and consumer behavior – is unique. Understanding both the culture and how Chinese government policy is evolving is critical to success. Therefore, it is necessary to have executives based in Shanghai or Beijing in order to know what the market really wants.”

Importantly, what the market wants is not uniform throughout the country. The CFO of a PCB manufacturer explained, “China is actually many diverse consumer markets requiring the localization of both products and services. MNCs need to understand China region by region and to tailor their offering accordingly.”

In addition to being extremely large, the executives we spoke to stressed how fast moving the Chinese market is. The PCB executive continued, “Chinese consumers expect and adopt the very latest technologies (like 5G) faster than anywhere else. As a result, companies need to have a very solid online business strategy and a holistic online to offline commerce model.”

“The Chinese market moves more quickly than the rest of the world” and demands that services be “accessible, mobile, immediate and consumable in ever-smaller chunks.”

Undoubtedly, MNCs that understand China’s culture, market and consumers have a much better chance of success.

Closing the gap

So all MNCs have to do to crack this giant market is adapt to a completely foreign culture, understand a plethora of different but connected consumer groups, and move at breakneck speed to keep up with technological developments and changing demand. Easier said than done.

Reassuringly, the MNC executives we spoke to in China report seeing more cultural overlap in recent years, thanks to the globalization of business and the increasing openness of the Chinese market.

“Recently there has been some convergence in the way Chinese and Western people see the world, but it will take more time to fully close the gap. Cultures do not change overnight.”

The CEO of a multinational manufacturing company agreed that business culture in China is beginning to shift as “companies are increasingly adopting a more global perspective.”

In the second and final extract from our China white paper, we will focus on the hiring, leadership and workforce challenges that MNCs encounter in this unique market and how to overcome them.

Read our white paper ‘The Challenge for Multinationals in China':

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James Gathercole

Based in Shanghai, James is a Partner in Odgers Berndtson’s Greater China practice. He works in key technology sectors, including hardware (semiconductors, solar, and contract manufacturing), softw...

Steacy Sun

Steacy Sun is a Partner in the Shanghai office of Odgers Berndtson where she focuses primarily on assignments in the Life Sciences and Healthcare sectors. She has worked in the executive search ind...

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