By Jennifer Khoo
From left: Jeanette Chan of Paul, Weiss, Rifkind, Wharton & Garrison LLP, Stephan Kothrade of BASF, Steve Mullinjer of Heidrick & Struggles, Tom O’Reilly of Rockwell Automation, and Robert Grieves of Hamilton Advisors Ltd
Ever since Deng Xiaoping opened China’s doors to the world in 1978, the nation’s economy has grown from strength to strength. Foreign businesses raced to take advantage of China’s cheap manufacturing costs in exchange for Western investment and technical expertise, cementing China’s modern reputation as “The World’s Factory” for decades to follow.
Today, the situation is different. China’s market has matured. The needs of Chinese customers are more sophisticated, and domestic companies are equally, if not more interested in seizing business opportunities abroad than they are in foreign direct investment (FDI).
As the Chinese carve out new roles for themselves in the global economy as suppliers, business partners, collaborators and customers, MNCs have a fresh set of opportunities and challenges to consider when doing business in, and with, the new China.
Made in China 2025
Over the last 30 years, low-cost manufacturing and capacity expansion have formed the building blocks of China’s economy. Today, though the needs and ambitions of the nation have become more sophisticated, China’s manufacturing sector will always be a pillar of its success, says Tom O’Reilly, Asia Pacific President of Rockwell Automation.
Last year, the Chinese government unveiled its Made in China 2025 strategy, which aims to propel the nation’s manufacturing sector to a world-class standard via the application of technology, by 2025. The wheels are already in motion. More Chinese companies have started to leverage new technologies, IoT (Internet of Things) and connectivity to boost the efficiency and transparency of production processes, particularly within the country’s ill-reputed food industry.
For example, a number of Chinese manufacturers of infant formula have already partnered with foreign companies to develop IoT-enabled track-and-trace solutions for their products – from supermarket shelf, to factory, to dairy farm. O’Reilly sees major opportunities for MNCs in this space to provide the “tech levers” and industry-based expertise that Chinese companies may currently still lack.
Where global innovation is concerned, China is still a work in progress. Although China is already a world leader in terms of cost and market driven innovation, it lags behind in terms of engineering and original technological breakthroughs, notes Steve Mullinjer, Regional Leader of Asia Pacific at executive search firm, Heidrick & Struggles. “The question is, in the next 5-10 years, will China emerge as a global leader in tech innovation? The data suggests it will,” says Mullinjer.
China spends more than US$200 billion per year on R&D and innovation globally, second only to the US; it produces around 30,000 science and engineering PhD students each year, and is among the top three global filers of international patent applications after the US and Japan. But perhaps most telling of China’s commitment to global tech leadership are the actions by some of its national champions, says Mullinjer. In 2015, Chinese telecom device maker Huawei invested US$9.2 billion in R&D, amounting to nearly 15 percent of its annual income, more than the US$8.1 billion Apple reported spending.
The data is certainly impressive, but the reality is that China has no choice but to make innovation a national priority. According to a prediction made by IMF economists in 2013, China will hit what is called the “Lewis Turning Point” sometime between 2020 and 2025 – the point at which China “moves from having a vast supply of low-cost labor to a labor shortage economy.”
In other words, it is the point when a production-based economy like China loses its cost advantages, says Mullinjer. To avoid this scenario, the transition from a production-based to a knowledge-based economy isn’t only desirable, but necessary.
A tilted playing field
Using a football analogy to explain the market conditions in China, Mullinjer says, “China is a tilted playing field, and foreign MNCs are at the lower end of it. In the early years, foreign MNCs got early runs on the board and experienced fantastic growth, simply because the China team was inexperienced, and the rules of the game weren’t clear.
Fast forward to today – the market is mature, the Chinese are still fielding their B-team, they aren’t yet playing in A-division, and they’ve got a referee that’s biased with the rules against the MNCs,” he adds. “It’s not a game the MNCs can win, so they need to play a different game.”
Mullinjer advises MNCs trying to break into the Chinese market to align with the Made in China 2025 plan. There will be industry sectors that come in and out of favor. Foreign companies should study these and time their market entries accordingly, to maximize chances of success. For example, traditional sectors like steel, cement and agriculture are areas which haven’t been very profitable recently. The pharmaceutical and technology sectors on the other hand, are currently booming.
Where talent is concerned, Mullinjer advises MNCs to build “globally competitive and diverse” teams on the ground in China. But this doesn’t necessarily mean localization, nor does it imply diversity in an ethnic context, contrary to many modern-day hiring trends.
Rather, it is about training western senior executives to be China-savvy, and to promote diversity in the context of thought, at an organizational and individual level, Mullinjer believes, adding that MNCs should adopt the risk taking mindset of domestic firms, which is the willingness to experiment and “make mistakes fast.”
Collaboration, not competition
Stephan Kothrade, President Functions Asia Pacific, President & Chairman Greater China at chemical manufacturing company BASF, says that MNCs shouldn’t feel threatened by competition from a stronger China and that as Chinese companies become more sophisticated, they also become better partners, better collaborators and better customers.
From Kothrade’s experience, the most interesting opportunities have arisen from meeting domestic needs of sustainability. The situation in China today is that consumers are becoming more demanding and expect a better quality of life – be it fresh air, clean water, or safe food, particularly amid all the scandals and health concerns associated with food production in China.
Supported by more robust Chinese regulations and the government’s stricter approach to law enforcement, the goal of sustainable development is becoming more attainable than ever. This has created many opportunities in the chemical industry for both MNCs and local firms.
“Sustainable development is indeed now business development in China,” says Kothrade.
For example, BASF partnered recently with Kingenta, a Chinese fertilizer company, to produce a novel type of fertilizer product for the Chinese market which significantly reduces soil pollution from nitrogen run-off. Partnerships like this can address China’s need to produce high-quality food to feed its growing, health-conscious population, while minimizing environmental impact at the same time, says Kothrade.
Jeanette Chan, Managing Partner of China Practice at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, spoke about opportunities for Chinese-foreign collaboration from a media perspective. “As Chinese consumers become more wealthy and the need to improve their lives increases, so does their demand for premium [media] content, to see what’s out there in the world,” she says.
Demand for premium content is a two-way street. In the new paradigm of China, “Xi Jinping also wants to ensure that Chinese culture is known outside of China. The country now also has a need to export premium content to the rest of the world,” Chan says. However, the Chinese understand that they are not naturally good storytellers or media scriptwriters as compared with their western counterparts, and it presents MNCs with another avenue for collaboration.
Practically speaking, aside from patience and investment, O’Reilly says there has to be a definitive need in the market to make a successful case for Chinese-foreign partnership, particularly with regards to technology.
“You may have a successful product line in North America or Europe which may not really satisfy the same need in China,” he points out. “The market has matured, the companies have matured, so your technology had better be world-class. Sometimes MNCs fool themselves into thinking that Chinese companies would want their technologies which may not be world-class.”
Mullinjer recommends being open to partnership opportunities with Chinese companies in markets outside of China, as foreign firms are not structured to compete effectively in highly regulated Chinese environments, and will never have an equal footing on China’s “tilted playing field.”
As China is currently in the middle of an important transition into a more sustainable growth model, Kothrade says that the current period of sluggish economic growth it is experiencing is only temporary, and we can still expect China to grow much faster than all the other established economies in the medium-to-long term.
Regarding competition versus collaboration with the new China, Kothrade says that competition is everywhere, and all companies face the challenge of staying ahead of the curve, regardless of which market they are in. Consequently, he believes that we should instead focus on opportunities for collaboration, and advises MNCs to adopt a sanguine outlook. “There is enough room for both of us,” he says.