Competing in China – the multinational’s perspective, plus the development of Chinese MNCs
Op-Ed Commentary: Chris Devonshire-Ellis
Nov. 24 – This is Part III of my essay concerning the discussions and findings of the annual Economist China Summit, bringing together the cream of China-based businessmen, academics and analysts. Part I may be viewed here and Part II here.
In this session, a panel of MNCs and corporate advisors were brought together to discuss the evolution of MNCs in China and how to remain competitive with domestic businesses. On the panel were Rajeev Molares, Asia-Pacific president at Alcatel-Lucent; Shane Tedjarati, present and CEO at Honeywell China and India; Jiang Weiming, president at DSM China; and Robert Poole, vice-president at the U.S.-China Business Council.
Risks and rewards in China
“The debate about the risks and rewards of China is an endless one. Foreign MNCs are increasing investment. Many are profitable and optimistic about operations over the next five years, but these same respondents to foreign business climate surveys also say China is getting more cumbersome to deal with. The financial and regulatory costs of doing business in China are increasing across the board. Some say China is becoming protectionist and opaque in its commercial practices. Can foreign firms afford to say no to China’s market opportunities? Is China becoming less open to foreign businesses?”
First up to answer the above statement was Rajeev Molares of Alcatel-Lucent, who stated that 90 percent of MNCs are confident about China. However, he said that companies now have to evolve multiple strategies for China. Stating the phrase “becoming the Chinese competitor,” he said that an additional factor now has to be added to the evolutionary process. Whereas before it had been a two-stage plan – namely initially setting up on the ground with representative offices, then moving on to being a Chinese company such as a WFOE or in some cases a JV – foreign companies in China now need to start thinking of themselves as “the China competitor.” This means taking on other competing businesses in China by creating new innovations, and by creating a new type of global company in which Chinese executives are seen globally.
Shane Tedjarati of Honeywell said that investing in marketing excellence is key, and that 80 percent of global trade volumes are now in or with emerging markets. The key is changing global businesses mentalities, so often either strongly American or European-based, to become “Global challengers with Chinese DNA.”
He quoted an Arabic phrase that says “Trust in God, but tie your camel” and stated for example that in China, Honeywell are often subjected to IP theft, and that over 100 copycat businesses have mimicked Honeywell products in Suzhou alone. Honeywell has defeated this and the number now stands at zero, he said, through a combination of quality products, costings, and litigation. It is now possible to get the financial manufacturing costs right in China, and the superior quality of Honeywell products make them “the China competitor.”
He stated that MNCs are increasingly outsourcing manufacturing – a move to West China and Central China is well underway – and that global companies are evolving to becoming more service-orientated than pure manufacturing. They are continuing to sell to China at increasing rates, and MNC networks throughout China are being upgraded at a higher rate than those in Europe.
Turning to Chinese domestic companies, Tedjarati suggested that Chinese companies are failing because they have not invested sufficiently in their brands, they have an inherent lack of management operating systems, and an overall lack of infrastructure, all of which means that well-managed MNCs could take them on and compete in China.
China’s multinationals? Truth or myth?
The Global MNC session was followed by a mirror session in which a panel composing of Chinese MNCs – namely Shi Zhengrong, chairman and CEO of Suntech Power; Patrick Zhong, head of global investment at Fosun Group; and Wang Shuo, managing editor of Caixin – all suggested why Chinese companies will become globally competitive.
Shi Zhengrong, whose company is the world’s largest manufacturer of solar panels, began by asking why there are no Chinese global brands, and compared this with Japan, saying that in the 1960s Japan didn’t possess any global brands either, but now the likes of Sony, Toyota, Nissan and many others are world famous. He stated that Suntech’s position as a global leader in its market has been because they had recognized the market for solar power is international, and that Suntech’s senior management is all made up of executives with international experience. Shi himself has been educated in Australia, and has used that background to return to China and build a multinational company.
Wang Shuo of Caixin Media said that Caixin provides the best editorial content about China than any other publication, including China Briefing and The Economist, and that they intend to become like Reuters. Stating that they had already established a bureau in Hong Kong, Shuo believes they will become a Chinese MNC by providing the best available content about China to the rest of the world, and they are uniquely positioned to do that. Pointing to their new recent column in the Asian Wall Street Journal, Wang said that from next year Caixin will be operating an English language TV news channel in Hong Kong, and that this will springboard them to global status through syndications with Bloomberg, CNBC, the New York Times and so on (although this reporter can’t quite equate that with actually developing a business as a global MNC).
Patrick Zhong of Fosun suggested that the rise of Asian global brands is directly attributable to the hosting of the Olympics, saying that Japan’s rise in the development of its MNCs only began after the hosting of the Tokyo Olympics in 1964, and had taken 20 years to realize, and that the same is coming true of South Korea’s hosting them in 1988, and that 20 years on we will see the results. By 2028, he suggested (20 years after the Beijing Olympics), we will see Chinese MNCs competing around the world.
Chinese companies not paying their bills – don’t worry it’s just cultural
I then personally asked of the panel an issue I have found when dealing with Chinese companies, in that often they are very tardy when paying their bills, and that up to 50 percent of them often do so. I also suggested that, in my experience, many Chinese companies actually refuse to settle outstanding invoices in full, and seem to equate the extent of the debt due against the legal cost of recovery as a business strategy. I also suggested the same is true of cutting corners in the manufacturing sector, and asked what could be done to educate Chinese companies towards more professional standards in honoring contracts as it is my belief that this habit made overseas businessmen wary of dealing with Chinese companies and is therefore preventing their development.
The panel somewhat fudged the issue, and looked rather uncomfortable, but I did receive a reply from John Ma, professor at Peking University, who suggested it is purely down to cultural differences. Stating that business deals in the West are arranged too quickly to allow relationships to develop, in China business takes the form of personal relationships that take time to develop. Accordingly, in the eyes of Chinese businessmen who I don’t know very well but who also owe me money, they feel I have no credibility with them and therefore they feel no honor or obligation to pay as a result of this “lack of personal credit.” He suggested I read a book about this titled “The Psychology of Chinese People.” I didn’t take up with him what could have been a very entertaining debate; however I thought I would share this academic response with our China Briefing readers. On that note, the conference drew to a close. My executive summary will follow tomorrow.
This is Part III of a three part report.
Chris Devonshire-Ellis in the founding partner and principal of Dezan Shira & Associates. To read his report on last year’s Economist China Summit, please click here.
The Economist Newspaper has been published since 1843 and is one of the world’s leading newspapers detailing the global economy and its political influences. The Economist runs, through its conferences division, a global series of high profile events. To view the Economist conference schedule, please click here.
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One always argued that the Chinese lacked “curiosity” and “creativity” crucial in becoming true marketers. Westerners had always an edge there, one of their few remaining “added values” in the global economy. To a certain extent that still applies, but Chinese are fast-learners. Their education system is gradually being characterized as being “opening up” and even within families Tiger Moms are not necessarily the norm anymore.
@Matthijis – Appreciate your comments. To be honest, even though I have the utmost respect for the Chinese companies involved with this session – one of whom which is a USD billionaire – I didn’t really get any feeling of awe when confronted with their explanations of why Chinese companies would become MNCs. Chinas large, state owned enterprises aside – which I think are so distinct they are almost a separate category – my personal experience has been that of over reliance on Chinas government policies, and little actual innovation or charisma. I’m still not buying the China MNC debate, I think they’re still way behind and many still haven’t expanded within China. We’re already seeing the problems with Chinese owned businesses listing in the US, and I believe you can’t have a flourishing export market without a strong domestic market. Very few Chinese companies fulfill that beyond the State Owned Enterprises. Is a Chinese wave of entrepreneurs about to be unleashed globally? In my view – not yet.
Thanks – Chris
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