The New Shanghai Knights

The priorities at GE’s China operations, headed by Norbom, are hardly different. The company’s revenue from emerging markets stands at 22 percent of total revenues, less than four percentage points of that coming from China. Emerging markets’ contribution is expected to reach 30 percent in the next three years or so, and bulk of it will come from China. “We have to grow by two to three times of GDP every year,” says Norbom. “We hit that last year with new partnerships and increasing localisation. We want to build China as GE’s second home market.”

The Tipping Point
For most multinational companies, home is by far the biggest market. Foreign markets are only an opportunity for further growth or diversification. The emergence of China has challenged that model. The GM story is a clear example that the Asian nation could potentially become the market to be in for MNCs. The list of companies that are aggressively tapping the opportunity is virtually endless: Carrefour, Boeing, Volkswagen, L’Oreal, Coca-Cola, P&G, Amway, KFC, McDonalds…!

In 1997, L’Oreal began its China operations from scratch. But today, China is one of L’Oreal’s top five markets globally. From 182 million renminbi (RMB) in 1997, the company’s sales have grown to 6.95 billion RMB in 2008. For Procter & Gamble, the Chinese market ranks No. 2 in sales volume and fourth in revenue. China is the biggest international market for Motorola.

Image: federic J. Brown/ AFP for forbes India

LONG DRIVE Terry Johnsson, GM China/'s vice president. If it maintains the current pace of growth, GM China likely to overtake the parent company soon

A clutch of Indian companies have also made deep inroads into China. NIIT, which entered China 13 years ago, runs 183 co-operative education and training sites across 25 provinces and cities today. During the first three quarters of 2009-2010, China contributed 17 percent of NIIT’s IT training revenues. “When we entered, the country was also looking for [alternative] forms of education. Today, the government is telling us that this is the way to go — you are too slow,” says Prakash Menon, president, NIIT China.

Packaging giant Essel Propack is also one of the pioneers in China and rakes in a fifth of its global revenues from there.

But the landscape is also littered with examples of MNCs who approached the China opportunity and failed miserably. Consider the case of Peugeot. It set up shop in China in 1988, and a couple of years later it was forced to sell its production facilities to Honda. Peugeot approached China with a French mindset largely driven by the headquarters. It stationed expatriate managers on the ground and failed to understand local realities. The big bosses didn’t pay much attention to China. “The Peugeot CEO never even bothered to come to China until the joint venture had to be dissolved,” says a company watcher.

On the other hand, Volkswagen, which entered the Chinese market at roughly the same time, is a roaring success today. “There was no one in the pioneer team who had any experience in China and we faced millions of problems every day,” says Martin Posth, the founding chairman of Shanghai Volkswagen and the author of 1,000 Days in Shanghai. “But to use a Chinese phrase, we put stone by stone together and the Chinese (workers) learnt very fast.” So the company partnered locally, invested in local resources, training and introduced modern management methods.

Shifting the Locus of Control
Doing business in China has its share of peculiarities because the environment has been constantly changing for the past three decades. China shifted from a Maoist system to a mixed one and is now moving to a market-based economy. Laws are being modified and the ground reality is constantly changing. “This is a very different animal from what you see everywhere else,” says Jonathan Story, Emeritus Professor of International Political Economy, INSEAD, and author of China UnCovered: What you need to know to do business in China. “We have to have an organisation that is very close to the ground on China. That organisation’s head has to have a direct line to the CEO. In short, you need a Mr. China on the ground.”

The key to success is learning to treat China differently. And not everyone manages to do that. “I have seen over the years, that there is often a tension between the local general managers in China and the headquarters,” says Edward Tse, chairman, Greater China, Booz and Company. “In almost all cases, it is difficult for the global CEO, sitting wherever they are, to understand the pulse of the China operation. But that is starting to change. People in boardrooms are realising that the opportunity in China needs to be handled differently. That, in turn, is resulting in more freedom to the Chinese subsidiary, greater resources especially for research  and development (R&D), streamlined reporting relationships, quicker decision-making, and of course, reflection of China in global strategic plans.

“But for that, the CEO at the top has to be genuinely interested in China,” says Tse. In GM’s case, the then CEO John F. “Jack” Smith was keen on a China presence and was personally involved in negotiations with government officials. He had to hardsell GM to China — and that meant taking the potential joint venture partner to see their plant in Brazil and agreeing to take on a lot of the risk. Unlike what they would have done in other markets, GM stationed in China a senior executive — a corporate vice-president. “This was basically a signal to China from Jack Smith all the way down the organisation that being present in China would be a priority,” says Johnsson. In GE too, the China charge was first spearheaded by former CEO Jack Welch and his successor Jeff Immelt.

In some cases, the locus of control seems to be shifting to Shanghai and Beijing. Let’s cut back to GM for a bit. As the parent struggled with a bankruptcy and got a government bailout, GM was split into two entities — GM and General Motors International comprising of all operations outside the US.

This was done because GM was being bailed out in the US by the taxpayers’ money. General Motors International was headquartered in Shanghai. “That’s a big change. Five years ago, GM looked at China as an emerging market. But very quickly China has become really the most profitable market for GM globally,” says a company watcher.

It is happening in other companies too. Today IBM runs all its emerging markets based out of Shanghai — and this includes China, India, Latin America and Africa. Its centre for excellence for global sources is based in China too. “The headquarters need to be willing to empower sufficiently the local operations to tap into the local understanding of the market and the customers, empower enough resources at the local level in order to research and develop the right kind of product, and go to the market with that,” says Tse.

Anil Gupta, author of Getting China and India Right and INSEAD chair and professor of strategy, INSEAD, provides consultation to several MNCs trying to get their arms around China. “If you let the US-based president run the operations, you get integration but US thinking,” says Gupta. “In the current time frame, it is generally better for a company to be biased in favour of letting the China CEO run the show because integration is something they can tackle four or five years hence. They would have captured the market opportunity.”

That’s exactly why the headquarters gave Paolo Gasparrini, president and managing director of L’Oréal China, a free hand. Says Gasparrini, “Our CEO says that China has to take its destiny in its own hands. So we have to drive our own R&D, take our own internal decisions and more and more, drive our own development.” Given the potential of the Chinese market, it was imperative that L’Oreal devised products that worked with Chinese hair and skin types. The company invested handsomely in local research and sourcing. Next, Gasparrini went ahead and acquired two Chinese companies — Yue Sai and Mininurse — to understand different Chinese consumer segments. Interestingly, Gasparrini is now contemplating how to launch Yue Sai, an inherently Chinese brand, globally.