An open China market is not a ticket to success for foreign companies, unless they change their mindset
Edward Tse says while foreign companies clamour for China to speed up its market reforms, they need to rethink their strategies to survive in an increasingly competitive business environment
At this year’s Boao Forum, President Xi Jinping reiterated China’s commitment to further open the country’s market to foreign companies and improve intellectual property rights protection, an issue that has long been a concern for foreign companies operating in China.
A couple of weeks before Xi’s speech, at a press conference at the end of China’s Two Sessions, Premier Li Keqiang said China would not force foreign companies to transfer their proprietary technology to China.
While some say the plans lack detail, the leadership’s commitment to opening up China further for foreign business shouldn’t be underestimated.
So, what are the implications for foreign multinational corporations? Is there anything CEOs should do differently?
For a long time, some Western politicians, business executives, lobbyists and the media have held the view that foreign companies can’t grasp all the opportunities in China because of a lack of market access, unfair competition and poor intellectual property rights protection.
While such criticism is not unfounded, it is not the whole truth. Since its reform and opening up some 40 years ago, China has been gradually opening different sectors to foreign participation. Today, while some sectors, such as commercial banking and insurance, remain relatively closed, many others are entirely open, such as consumer products, appliances, retail and automotive parts.
Though there is a 50-50 joint venture requirement for automotive manufacturing, China’s automotive market as a whole is very open in terms of products and markets. And, Beijing has just announced it will scrap the foreign ownership restrictions in the automotive manufacturing sector over five years. In the tech sector, pundits have correctly pointed out that Facebook and Twitter are blocked in China, but they forget to mention that LinkedIn, eBay, Airbnb and Amazon e-commerce are not.
A remarkable development in China in recent decades has been the rapid rise of entrepreneurship. Today, China’s economy is best described as a duality (state and non-state). Business innovation, often enabled by technology, is thriving, driven largely by entrepreneurial companies, such as Alibaba and Tencent, which are now some of the world’s largest by market capitalisation. Droves of young people are being entrepreneurial, aspiring to be the next Jack Ma or Pony Ma. An increasing number of fast-growing, sizeable innovative companies are emerging that have built large ecosystems of collaborative partnerships.
China has found its own development path, the “China development model”. At the top, the central government actively plans the direction of the country. At the grass-roots level, entrepreneurship is thriving, driving economic growth. In the middle, local governments compete and sometimes collaborate in clusters of cities within regions. This model has become a major source of resilience for China’s growth.
Given this evolution, corporate decision-makers need an informed and sophisticated view of the country to devise an effective China strategy.
First, their strategy requires a thorough understanding of the China context, which is evolving in a peculiar and multidimensional manner. While China’s reform has been largely gradual, changes can at times be abrupt and rapid. Too often, foreign companies enter China with a market strategy at the business-unit level, using a linear, incremental approach. By focusing on the micro conditions, they often miss the big picture.
Second, China should be at the core of any global strategy. The speed of development, uniqueness, complexity and strategic importance of China requires foreign multinationals to fully embrace China as an integral part of their strategy and organisation, not just one of many markets.
Third, companies should participate in China’s thriving innovations, rather than being bystanders due to a lack of awareness or unwillingness to take risks. Companies could consider engaging in businesses that may not be their traditional core but could provide opportunities for growth, and also form ecosystems with Chinese companies.
I am not advocating diversifying aimlessly. However, I have seen numerous cases when CEOs missed opportunities in China because they either didn’t know about them or felt they needed to focus on their “core competencies”. As a result, they also missed out on the chance to learn from Chinese consumers and the best Chinese companies.
For example, by investing in Autohome, a leading Chinese online automotive advertising platform, Telstra, an Australian telecom and media company, whose core business in China is restricted by foreign participation rules, made a profit of around US$2.5 billion in less than 10 years.
Fourth, foreign multinationals should train their China managers to be thought leaders and place them at senior levels. Too often, they treat their managers in China merely as operational people. Strategy and major decisions come from the global or regional headquarters, making it difficult for businesses to come up with an effective strategy for China.
Finally, foreign companies need to shorten their decision-making process and become more agile and flexible. After all, China is evolving fast and competition is intense. Chinese companies are known for bring fast, nimble and innovative. Foreign multinationals should become “more Chinese than the Chinese”.
The rise of China and the simultaneous development of technology are changing the country – and the rest of the world – fast. China is on the verge of a sustained, generational rise that will generate even more opportunities, and challenges, for global businesses. Foreign companies need to figure out how to deal with this.
Clamouring for equal and full market access is not entirely fruitless but that is not where the real game is being played. China will reward those who are innovative and discover new ways of creating value. This requires foreign multinationals to approach China with a different mindset.
China will continue to open up and embrace the rest of the world, perhaps not all in one go, but its direction is clear. CEOs and boards should ask themselves: “How can we capture the potential that China offers us?”
Edward Tse is founder and CEO, Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is also author of China’s Disruptors