China ventures need growth of 30pc to succeed

PUBLISHED : Saturday, 05 March, 1994, 12:00am
UPDATED : Saturday, 05 March, 1994, 12:00am

FOREIGN ventures are in trouble if their businesses in China are not growing by at least 30 per cent a year, said a senior Bain and Co management consultant.

''As an acid test, if an existing business is not growing at 30 per cent per annum, I would take a hard look at the business again,'' said Rick Yan, general manager of Bain & Co China Inc.

A company not growing at that rate either meant that the market which it was serving was not attractive enough or that its competitive strategy and implementation was not sound, he said.

Speaking at an American Chamber of Commerce seminar on developing entry strategies in China, Mr Yan said that it took only about 15 per cent a year to double the size of the China market in five years.

At the same time, many consumer markets were fragmented, with consolidation likely to take place in the next five to 10 years.

''To maintain relative market share, one should target to double market share in five years. Combining the two factors mentioned above, China businesses should target to quadruple their size in five years, which is equivalent to 30 per cent a year,'' hesaid.

He added that many American companies, attracted by the immense market potential, assumed that profitable business opportunities were there for the taking.

He said his company's experience was that this was not necessarily so.

''Based on our project experience, we found attractive profitable growth opportunities in 50 per cent of the situations,'' Mr Yan said.

His advice was for firms not to always assume that every product would be a winner in China, and to do their homework before putting money in.

Chief executives should not send their managers to China to explore the market without arming them with enough knowledge or giving support.

Mr Yan noted that most foreign joint ventures were focusing activities on three to five coastal cities where opportunities were becoming limited.

''How many MNCs (multinational companies) can now negotiate a good deal in Shanghai?'' he asked, as land and other input prices were rising quickly.

Those with operations in the key coastal cities should quickly expand to 15 to 20 cities elsewhere in the next five years, as this was where the opportunities would be found.

Companies, he added, tended to view China in unit or revenue terms but they sometimes came across the question of whether to focus on the top five per cent to 20 per cent premium market or go for the low-cost, mass market.

''Our experience suggests that they should focus on the premium segment,'' said Mr Yan, adding that most multinational companies did not have the Chinese management capability to build and operate plants with local cost structure.

''We have come across situations where a multinational company intended to enter the low-cost segment, but failed to achieve local cost structure, resulting in major losses.'' And in building the right infrastructure for a business, companies should complement their contact-based strategy with facts, as that would increase their credibility and negotiation leverage with Chinese partners.