Part of an ongoing research project for a better understanding of the China market, a Heidrick & Struggles survey of some 100 senior executives of predominantly US, European and Asian multinational companies (MNCs) responsible for business operations in China examines how well various models of reporting line structure in relation to their global headquarters function. The study also focuses on the factors driving their decision of either retaining an existing protocol or adopting a new plan more aligned to the needs of giving their China leaders a more direct line of sight to their global CEOs
By Seth Peterson
To operate at their best, global cross-border companies require clear and effective regional reporting lines for senior leaders. This is particularly true for multinational companies (MNCs) operating in China, given the country’s size and complexity as a market as well as its outsized importance as a source of revenues and future growth. Yet determining the best reporting relationship structure is a tricky proposition.
Indeed, a Heidrick & Struggles survey finds that companies in the region choose a range of reporting structures for their China heads. The survey, part of an ongoing research project for a better understanding of the China market (for more, see What China’s ‘new normal’ means for multinational companies on heidrick.com), is an examination of the various reporting-line models employed by MNCs and how well these function.
Although respondents are largely satisfied with their current chains of command, those who see a need for change overwhelmingly cite structures that give the China leader a more direct line of sight to global leadership and the CEO – one of the key findings of the survey of 100 senior executives in the Asia Pacific (APAC) region who oversee or are deeply involved in their company’s operations in China.
Roughly 90 percent of survey respondents represent US, European or Asian MNCs headquartered outside of China. These respondents are predominantly from companies in the industrial, consumer, technology, and healthcare sectors, with nearly half providing goods or services to both China and overseas markets.
In terms of scale, 70 percent of the respondents’ companies reported worldwide revenues last year of more than US$3 billion; and 80 percent of the organizations in the survey have been established in China as either wholly foreign-owned or joint-venture entities for more than ten years.
MNCs in China
Almost 40 percent of the respondents reported that China as a source of business revenue represents anywhere from 10 percent to 30 percent of their company’s total global earnings, while nearly six in ten said China contributes more than 40 percent of their income within Asia Pacific (APAC).
This importance is underlined by the fact that 42 percent of respondents said their company’s China leader sits on the global executive committee, or its equivalent.
While half of the business leaders of MNCs heading operations in China are indicated to report directly to their company executives who are managers responsible for all of Asia/APAC, 26 percent of the companies surveyed have a “flipped” structure, meaning their leadership teams in China oversee Asia/APAC operations.
Meanwhile, nearly 30 percent of respondents said their company’s China boss reports directly to global leadership (either the CEO or the global head of a business unit).
In the analysis of the responses to the survey, there seems to be a variety of reasons why some MNCs do not give their China heads oversight of operations covering the entire Asia/APAC region. The most commonly cited – by 65 percent of respondents – was the desire to avoid steering the focus of the company’s China leadership team.
While 44 percent of respondents said that their leadership team responsible for operations in China may not be the best qualified personnel to lead the entire region, 26 percent said the proportion of regional revenue generated by China is not large enough to justify such a reporting structure.
Of those companies with their China leader in the regional driving seat, 57 percent noted the fact that revenues in China make up the majority of their Asia/APAC total, and just over 28 percent said it was because of the effectiveness of their China heads in this role.
A change coming?
Although 44 percent of the respondents surveyed said their reporting structures had been in place from the very beginning of their company’s involvement in China, 69 percent said it was unlikely that these would be changed in the coming two to three years.
Yet, there was a striking pattern among 17 percent of respondents who indicated that a change is likely. Notably, every one of these respondents was in an organization where the China head currently reports to the Asia/APAC head, and every one of them said their company plans to adopt a reporting line that is more directly connected to their global leadership teams.
Among the reasons given for this change are the need to acknowledge China’s status as a strategic market, the belief that direct communication between China and global headquarters will be more effective, and the fact that it can be time-consuming and cumbersome to juggle and cater to the business needs of China and the rest of the APAC region together.
Despite only 17 percent of respondents anticipating changes in their company’s reporting lines within the next two or three years, 29 percent of those questioned weren’t satisfied with their company’s existing structure. In other words, 12 percent of respondents indicated they have suboptimal reporting lines, yet reported no plans to amend them.
The survey, in a deeper dive, also discovered a range of factors driving corporate decisions on whether or not companies plan to change or retain their current structure of reporting lines. It revealed that an array of issues, including those associated with cost, communication, and organizational efficiency, are often cited by respondents as disincentives to establishing direct reporting lines between China and their respective global headquarters.
For instance, a number of respondents said their companies are keen to avoid duplicating costs, in their finance and product-design departments. Some respondents believed their China revenues have not – and in the medium term will not have – reached a sufficient scale to justify such independent status within the next two to three years. Others observed that their global headquarters have too little understanding of China to add value through direct input.
Conservative corporate culture was another factor cited by respondents as inhibiting change, as was the shortage of local talent capable of taking up leadership roles for China and Asia/APAC.
Such findings are consistent with what many MNCs have experienced in the region, where many of the top MNC executive roles in Asia are still filled by expats. The localization of senior leadership roles in Asia from a business perspective remains a challenge.
This is partly due to the high turnover rate of talent in Asia, and partly because of the weaker communications skills of some local executives who may not be “globally savvy” enough or may lack an “expansive” perspective to interface with headquarters effectively.
Still, after more than two decades of development of international buisness and commerce, there is a pool of qualified MNC leaders in China from a local perspective, and top companies have had programs of talent development in place for some time. These often involve the recruitment and integration of employees overseas before their reassigment to Asia and periodic overseas rotations to help burgeoning leaders develop their internal networks.
In the longer term, these issues can be addressed with training and through opportunities to gain a broader range of experiences. In fact, for some leaders who have spent their careers operating only within the specific demands of the Chinese market, the opportunity to work abroad can be particularly eye-opening.
Those multinationals who prioritize cross-cultural training and exposure will reap the benefits of having a local Chinese team of leadership that is more prepared to engage with the global CEO in terms of strategic thinking.
Seth Peterson is a partner in the Industrial Practice in Heidrick & Struggles’ Hong Kong office, serving manufacturing businesses in the region across the C-Suite and main functions. He earned an MBA from Washington University’s Olin School of Business in St Louis and a Bachelor’s degree in Chinese Studies and International Relations from Grinnell College, Iowa. He studied Chinese in Taiwan as well. He serves on the board of the American Chamber of Commerce in Hong Kong and co-chairs the board of the non-profit AFS Intercultural Exchanges in Hong Kong.