Giants flex muscle in China

PUBLISHED : Wednesday, 16 February, 1994, 12:00am
UPDATED : Wednesday, 16 February, 1994, 12:00am

LEADING multinational companies are moving aggressively in China to build up a dominant market share to pre-empt the entry of big rivals, according to a survey by management consulting firm McKinsey and Co.

The survey covers multinationals which have a significant presence in China and are regarded by their peers as top performers in the China market.

''China is a large part of their future, and the future is now,'' say McKinsey principal Stephen Shaw and consultant Johannes Meier in their report.

These typically successful companies are not in China just to take temporary advantage of its low labour costs before packing up and moving to another country when faster development inexorably drives costs up.

They are there for the long haul, have already figured out how to make profits and sustain them over time, and are working hard to lock out slower competitors.

The study found that many multinationals had gone through the learning process and were now moving aggressively into the second stage of involvement in China, focusing on managing local partners, keeping their business systems simple and laying the organisational foundations for a nationwide presence.

The multinationals are rapidly expanding both the number and the size of their ventures in China. They are planning to raise their invested capital in the country from an average of US$50 million today to more than $200 million within three years.

''The new objective is to build and hold a dominant share of the Chinese market, and to pre-empt, if possible, entry by other multinationals, and very importantly, to do so while making good money along the way,'' says the report.

To deal with the challenges of operating multiple ventures in China, the multinationals are establishing some sort of ''overlay'' structure to provide shared or centralised functions.

They are increasingly appointing top-level executives - group and company presidents, worldwide functional leaders, Asia-Pacific marketing chiefs - to head their China activities exclusively.

The report notes that finding and cultivating good local partners remains vital for business as well as legal reasons.

The multinationals are beginning to establish relationships with the decision-making authorities - the industry associations, commissions and bureaux - that sit above these operating partners.

Some multinationals have even begun cutting new deals directly with central government authorities.

Both AT & T and Northern Telecom have signed agreements with the State Planning Commission to develop a nationwide, multi-venture presence that encompasses all their product lines.

''Such initiatives are especially appropriate when the industry in question is primarily under central government control and is felt to be of strategic importance by the Chinese leadership, and when the multinational can provide a clear value proposition,'' says the report.

Having gained experience in China's harsh and often confusing operating environment, successful multinationals have also learned the importance of keeping things as simple as possible.

They tend to focus on their core global products, keep product tailoring to a minimum, and target China's top three urban markets.

However, many of them are building their own sales teams and distribution networks because of the failure of government distribution systems to actively sell their products.