By Gong Li, Henry Egan and Andrew Sleigh
Companies have never had such an array of options when it comes to investment opportunities in the emerging world. However, as businesses rush to expand their geographic footprint in the next wave of emerging markets, are they paying enough attention to the biggest opportunity of all? Because take a closer look at the numbers and it’s clear that while the emerging market story may now have a broader cast of supporting actors, China remains the star of the show.
A broadening base of growth
With the United States, Western Europe and Japan facing a protracted period of slower growth, multinational companies are increasingly looking to emerging markets for growth opportunities. Compared with just a decade earlier, the options they can choose from have expanded, far beyond the BRIC economies (Brazil, Russia, India and China) that have dominated the emerging-market story so far. As globalisation continues to spread the benefits of growth and the business environments in many countries strengthen, investment is flowing into markets from South Korea to Saudi Arabia and Turkey to Thailand, to name just a few. Even Africa is finally beginning to generate business interest. Countries that only a few years ago would have been considered frontier now seem familiar to many multinationals. However, as businesses rush to expand their presence in the next wave of emerging markets, they need to remember that emerging markets weren’t all made equal.
But emerging markets weren’t all made equal
Recent research on emerging markets has obsessed about which countries might be worthy of joining the exclusive BRIC club; economies such as Indonesia, Mexico, South Africa and Turkey are vying for a seat at the table. However, a more pertinent question might be whether, from a purely economic perspective, Brazil, India and Russia belong in the same league as China in the first place. In 2010, China accounted for 23% of emerging-market gross domestic product (GDP), more than the remaining BRICs combined. And while the base of growth in the emerging world might be broadening, China’s prominence will actually strengthen over the course of this decade. With a forecasted growth rate in excess of 7% a year, China’s share of emerging-market GDP is expected to grow to 30% by 2020 (see figure 1).
A look across other high-level economic indicators reinforces China’s pre-eminence among the BRICs and other emerging markets. China attracted $185 billion of foreign direct investment in 2010, more than three times the amount that flowed into Brazil, the next highest recipient among emerging markets.1 In terms of large corporations, there were 61 companies from China in the Fortune Global 500 in 2011, more than all other emerging markets combined.2
Looking beneath the national numbers, China’s provinces are becoming significant economic players in their own right. If China’s provinces were countries, Guangdong would be the eight-largest emerging market by GDP and export as much as South Korea.3 Jiangsu and Shandong would be the ninth- and tenth-largest emerging markets, outranking Poland, Saudi Arabia, Argentina and South Africa (see figure 2).
The sources of China’s growth are also broadening. It’s no longer just a story about exports and investment. Rising wages, rapid urbanization and government policies to rebalance the economy are spurring growth of consumer spending. In 2010, China was the world’s fifth biggest consumer market. Over the course of this decade, its consumers are forecast to leapfrog the United Kingdom, Germany and Japan to become the world’s second biggest spenders (behind the United States). Companies that had previously viewed China as a source of supply are rapidly reorienting their businesses to tap into rising demand in China.
The size of the China prize
The opportunity in China is perhaps best illustrated by its growing dominance of many industries. It is already the number one or number two market for automobiles, PCs, mobile phones, luxury goods, home appliances and consumer electronics.4 It is forecast that China will account for almost half of all vehicle sales in emerging markets in 2015 (see figure 3). For automobile manufacturers this means that, in volume terms, China’s market will be almost as important as all other emerging markets combined. So achieving a given market share in China will be roughly equivalent to realising the same market share in every other emerging market. No wonder global car manufacturers – including Volkswagen, General Motors and Toyota – are betting big on China. And this isn’t just a case of positioning for the future. China is already Volkswagen’s biggest market in volume terms.5 In 2010, it shipped 1.9 million cars there, more than in North America, South America and Central and Eastern Europe combined.6
Act now or forever be behind
Of course, the opportunity in China won’t be as large or materialise as quickly across all industries. Each company will need to go through the rigorous process of assessing the size of the potential market and the investment time horizon. But for many companies, what happens in China over the coming decade will go a long way to determining the future leaders and laggards in their industry. Being number one in China will increasingly mean being number one globally. So if you don’t act now, not only will you been passing up a significant opportunity in China, you could be jeopardising your future global position.
In 2012 the world’s eyes will be on China as we see a leadership change in the country’s Communist Party. It might also be the right time for companies to re-train their sights on the country. This is not to say that you should simply forget about other emerging markets and focus all attention on China. These markets present tremendous growth opportunities in their own right, not to mention the benefits associated with geographic diversification. But you need to make sure that you’re sufficiently focused on China, and not spreading your company’s resources too thinly across the emerging world.
The China challenge
Companies understand the long-term strategic importance of China, even if they don’t fully appreciate its relative weight among emerging markets and how fast the opportunity is unfolding. All large multinationals now have some kind of China strategy in place; many have laid out ambitious plans for the market, making bold statements to analysts and investors about capturing market share in China and how big they expect their operations to be in 2015 or 2020. Recognising the significance of China is not the problem here. The challenge comes in matching ambition with action.
In our experience, few companies are committing the resources required to achieve their lofty goals in such a complex and challenging market. Why is this? For many companies with deep roots in developed markets, growth in China presents a dilemma: with the lion’s share of revenue still generated in the United States and Western Europe, it’s difficult to divert investment dollars and – perhaps more importantly – management time to China. Persuading a business unit to relocate a top-performing executive from Boston to Beijing can be difficult when China still only represents a small percentage of global revenue. Yet, without this commitment of resources, China is unlikely to generate the sort of returns that companies are craving and investors are demanding.
How can companies overcome the China challenge? Much of the answer lies in positive discrimination: that is to say, directing a disproportionate amount of investment and management time to China than it would otherwise currently deserve. This might raise questions about why countries such as Brazil and India aren’t afforded the same special treatment. In some industries where China is less dominant or foreign participation is limited (such as telecommunications or energy) this will be a valid concern. However, as the earlier evidence suggests, these industries are likely to be few and far between.
Have you made China your top priority? Based on our work with multinationals entering and operating in China, here are five questions to ask yourself:
1.How many of our senior leaders are based in China?
China is a complex and challenging place to do business. Adaption is crucial: you can’t simply transplant your existing business to China and expect to succeed. You need to make sure that your business model, products and services, and operations are fit for purpose in China. To make the necessary adjustments, you’ll need some of your best people – and the ones making the decisions – on the ground. This is the only way that they will really get to grips with the nuances of the Chinese market and it will also enable them to make the quick decisions required to respond to this fast-evolving country. This is not to say that you should rely solely on expats to run your operations in China. Building a strong local leadership team is vital, given the importance of local knowledge and relationships. However, for many multinationals, moving some experienced leaders to China will be necessary and unavoidable, particularly given the competition for top managerial talent in the country.
Getting people to relocate to China might seem like an obvious point but, as with many things related to China, it’s often easier said than done. Very few C-level executives of Western multinationals are based in China. Even regional heads running the Asian or Asia-Pacific operations of global businesses tend to opt for the easier surrounds of Singapore or Australia when choosing their base. However, companies such as Intel have made shifting top talent to China a priority. It was recently announced that Sean Maloney, one of its most senior executives, would move to Beijing from Silicon Valley to become chairman of its China operations.7 Yet, it shouldn’t just be leaders of your Chinese or Asian operations that spend an extended period of time in the country. If you see China as a significant part of your future business, anyone aspiring to run a global business unit or function should have spent time in China and understand the dynamics of the market.
Aside from relocating senior leaders to China, some companies are using innovative approaches to give their top team greater exposure to China. Starwood Hotels is a good example. Rather than holding ad-hoc meetings in China, it moved its eight-member leadership team to Shanghai for five weeks in 2011, from its US headquarters.8 However, you shouldn’t just think about visiting China’s more-developed and wealthy megacities. Beijing and Shanghai now resemble the major modern centres of Western economies in many ways. Executives that only spend time in these cities often come away with an unrealistic view of China. Instead, you should look beyond China’s eastern seaboard to some of the fast-emerging second and third-tier cities to get a better understanding of the scale of the opportunity in China and the complexities of doing business there. Take Zhengzhou, the capital of Henan province, for example. It is forecast that the city will have a bigger economy than Sweden or Switzerland by 2020.9
2. Does the head of our China business report directly to the CEO?
Given how fast most industries in are growing and evolving, responsiveness can be an important competitive advantage. Yet in many companies, the China lead often has two, three, sometimes even four reporting layers separating them from the CEO. To get things done, the boss in China must first get the approval of several regional and business unit heads.
This reporting structure creates a number of problems. First, the added bureaucracy slows decision making and can dilute outcomes. In some cases, important proposals are rejected at a lower level, never even ending up on your CEO’s desk. Second, country-level performance indicators are often buried in broader Asia-Pacific numbers, obscuring your progress in China and any challenges you might face. And third, with profit and loss accounting run at the regional level, China must compete with other Asia-Pacific countries for investment dollars, again reducing your ability to act quickly and decisively in the market.
By shortening reporting lines, you can help increase your responsiveness in China by speeding up decision making and giving your leadership team a better handle on what’s happening on the ground. Intel, for example, treats mainland China and Hong Kong as a separate geographic unit, which means the company’s China management reports directly to its US headquarters, rather than as part of the Asia-Pacific region. Intel’s move underscores the importance of China which, in 2011, overtook the United States to become the world’s biggest PC market.10
3.Is China represented on our leadership team and board of directors?
Despite many companies’ proclamations about how important China is to their business, the senior leaders and board members of most Western multinationals are still overwhelmingly American or European. A recent survey found that only 8% of the China bosses of multinationals sat on the board of their companies.11 This is yet another example where action trails ambition. If you’re serious about accelerating growth in China, you need to make sure that the country’s factored into all of your high-level decisions. To do this, China needs to be sufficiently represented on your leadership team, board of directors, and other important decision-making committees. Again, positive discrimination may be required. China might currently account for less than 5% of your business, but if you intend to grow it to 10% or 20%, China needs to be constantly on the mind of your top team.
One way to do this is to appoint people with experience of China to top positions. For example, Nestlé recently signalled its growing intent in China and emerging Asia by appointing Wan Ling Martello as its chief financial officer. Martello, a US citizen of Chinese and Filipino origin, speaks Mandarin, Hokkien Chinese and Tagalog.12 Elsewhere, Philip Morris, the US tobacco giant, appointed Jennifer Li as an independent director. Li is the chief financial officer of Baidu, China’s leading online search company. The move underlines the group’s increasing ambition in China, the world’s biggest consumer of cigarettes.13
Another way to factor China into your high-level decisions is to restructure your top team. The leadership teams of most multinationals remain dominated by C-level executives and global business unit leads based in the West. One option to overcome this is to promote the leader of your China operations to your leadership team, ensuring that they have a seat at the table in all top-level discussions. For example, Sam Su, head of Yum Brands in China (owners of KFC), is the only geographic leader among Yum Brands’ senior officers, emphasising how important China is to the company’s future growth.
4.Are our corporate functions and capabilities in China as strong as they are at home?
Until relatively recently, the vast majority of foreign multinationals saw China as a source of supply. Using China as a manufacturing base was a reasonably straightforward and discrete process that could effectively be outsourced, while most high-value functions remained close to the corporate centre. However, with China’s transition from the world’s factory to its shopping centre, this is changing. Designing growth strategies, developing a deeper understanding of customers, building brands, and attracting and retaining talented employees are now vitally important to succeed in China. Yet, few companies place the same emphasis on corporate functions and capabilities in China as they do in their home markets. Rarely is the quality and level of sophistication as high, and many of the most important decisions are still taken back at corporate headquarters.
R&D is a good example. China today hosts about 1,000 foreign-owned R&D labs. However, these labs often focus primarily on local adaptions of innovations, rather than developing cutting-edge technologies and products for global markets. There have been some headline-grabbing examples of “reverse innovation”, such as GE’s electrocardiograph machine, where a product developed in China was exported back to developed markets. However, such examples are few and far between. Most high-value R&D remains rooted in companies’ home markets or other developed markets. Consider the top five US-based companies by patent applications in 2010: IBM, Microsoft, Intel, Hewlett-Packard and General Electric. While their patent applications originating in China are rising, they still only represented 1.8% of global patent applications filed by these companies in 2010.14
The same could be said of other corporate functions and capabilities. For example, how many companies have a strategic planning capability in China? How many employ the same sophisticated analytics to segment their customers in China? How many businesses go through the same rigorous HR processes in recruiting employees? China is a difficult place to do business. Unless you put in place top-notch functions and capabilities, you’ll have little chance of success.
Some companies are are leading the way. Nokia, for example, recently announced plans to relocate its Asia-Pacific headquarters from Singapore to Beijing.15 Despite Singapore’s ranking as the world’s easiest place to do business, Nokia wanted to get closer to the vast pool of potential consumers in China, a market that the phone manufacturer sees as crucial to its future growth. Nokia already makes over one-third of its phones in China. The new Beijing headquarters will bring additional capabilities to China – everything from strategy to supply chain expertise and HR to procurement. This announcement seems to be part of a broader trend: the number of multinationals with regional headquarters in Shanghai rose from 224 in 2008 to 305 in 2010, including 74 Fortune Global 500 companies.16
5.Are we taking a coordinated approach to China?
In an effort to quickly scale their businesses across borders, many companies have reduced the importance of their country managers in favour of product-led business units that span geographies. With the power held by business units, important strategic and operational decisions tend to be determined by the leaders of these departments and then rolled out across geographic markets. In North America and Western Europe, where the business environment and customer preferences are more mature and tend to be more homogeneous, this approach often makes sense and increases speed and efficiency. However, given the complexity of the market in China, the importance of relationships, and the role of government, there is a premium on local knowledge and adaptability.
Some companies are adapting their entire operating model in emerging markets to be more responsive at the local level. Take Pfizer, the pharmaceutical company, for example. It operates a business unit specifically focused on emerging markets, alongside its eight product-led business units. In effect, it is saying that developed markets are more homogeneous, so products take precedence, whereas in emerging markets, geography is still the dominant decision-making dimension.
However, large organisational reshuffles can be distracting and costly. Another option is to bring together a cross-functional team focused on China. This team should include leaders of business units, corporate functions and your China operations. Its role shouldn’t simply be to rubber stamp decisions about strategy and investments; it should be actively involved in designing and executing your strategy in China, and monitoring your progress in the market. To make this work, investment dollars need to be shifted from business units to the geographic level. Without this money and decision-making authority, the team is simply another layer of bureaucracy.
As the balance of economic power in the global economy continues to shift east and south, emerging markets are becoming a critical battleground for companies across industries. However, in thinking through your options in emerging markets, you should ask yourself whether your company is focusing enough attention on China. Get it right in China over the next decade and you’re likely to be among your industry’s leaders; get it wrong and you’ll be playing catch-up for the foreseeable future. Success won’t happen overnight, but by following the practical steps laid out in this article your organisation will be more focused on China and better positioned to succeed in this complex and fast-moving market.
About the authors
Gong Li is Chairman of Accenture Greater China, leading a team of more than 5,800 people. With 25 years of cross-industry business consulting experience, Mr. Li has collaborated with clients in government and a variety of industries, including electronics, high tech, energy, petrochemicals, financial services and consumer products. Based in Shanghai, Mr. Li also has extensive experience working with Chinese state-owned enterprises on various programs, including corporate restructuring, process transformation and commercialisation. ([email protected])
Henry Egan is a manager in Accenture’s Geographic Strategy team. The team advises Accenture’s leadership on the company’s geographic footprint and develops strategies to accelerate growth in priority countries, with a focus on emerging markets. He previously worked for the Accenture Institute for High Performance, the company’s macroeconomic think-tank. He is based in New York. ([email protected]) Andrew Sleigh is the Director of Research at Accenture’s Management Consulting Innovation Center in Singapore. Here, Accenture engages with a broad mix of industry experts and thought leaders to debate, develop, and publish research findings that enable Accenture clients and other stakeholders in Asia Pacific to understand key business challenges in the region. He previously managed the China arm of the Accenture Institute for High Performance, based in Beijing. ([email protected])
References
1.Economist Intelligence Unit
2.Fortune Global 500, 2011
3.Economist, “Comparing Chinese provinces with countries”, February 25, 2011
4.Harvard Business Review, “What the West Doesn’t Get About China” June 2011
5.In China, Volkswagen has a 50% stake in the Shanghai Volkswagen joint-venture and a 40% stake in the First Automotive Works joint-venture.
6.Volkswagen Group, “Annual Report 2010”
7.Financial Times, “Intel joins Beijing push with executive move”, May 24, 2011
8.Wall Street Journal, “GE Bases X-Ray Unit in China”, July 26, 2011
9.Economist Intelligence Unit, “CHAMPS: China’s fastest-growing cities”, 2010
10.Wall Street Journal, “China Passes U.S. as World’s Biggest PC Market”, August 24, 2011
11.Economist Intelligence Unit, “Multinational companies and China: What future?”, 2011
12.Financial Times, “Meet Wan Ling Martello – Nestlé’s Mandarin speaking CFO”, September 28, 2011
13.Economist Intelligence Unit
14.US Patent and Trademark Office
15.Wall Street Journal, “Singapore Loses Nokia to China”, January 12, 2012
16.Financial Times, “Intel joins Beijing push with executive move”, May 24, 2011
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