The key to being competitive

Wan: Since China's entry into the World Trade Organization in December 2001, many of the barriers to operating directly and efficiently in Chinese markets have fallen. As a consequence, competition has heated up in China for MNCs, not only among themselves but also with local Chinese companies. In this kind of frenetic marketplace full of opportunities, what is the key to being competitive?

Parrett: With great opportunities, you invariably get great competition. That's part of the level playing field that is rapidly emerging in China. That's why the fundamentals really count. From my trips to China and meetings with government officials and businesses, it is clear to me that both Chinese companies and foreign corporations - big and small - must focus on three things if they are to compete successfully: brand, supply chain management, and people.

Developing brand eminence and presence is more than just a label and an advertisement. In China, building a brand is, above all, an issue of delivering the product or service that Chinese consumers expect at the level they need or better. And doing that consistently, and in a quality way that enhances your reputation among consumers and business leaders. Businesses operating in China need to focus more on building their brands, especially in terms of consistency.

Supply chain management supports the brand quality by getting the right components or solutions in place in a timely fashion. In a fast growing market like China, supply chain management means an ability to be flexible, to anticipate shifts in market demands whether you are suddenly producing more laptops than desktops or having the right number of specialists to handle a surge in IPOs. Businesses need the right structure - a flexible structure - to serve a market like China. This is going to be a challenge for many Chinese companies.

Last, and perhaps most importantly, it's a matter of intellectual capital - the right people. There is no doubt a war for talent in China, but what cannot be forgotten is the growing importance of the need not just to find but to keep the right people. Turnover is as high as 40 per cent in some sectors - creating enormous challenges for companies and forcing new ways of managing people.

As a recent Deloitte Research study entitled It's 2008: Do you Know Where Your Talent is? suggests, this will continue to be a significant challenge, not only in China, but also in large parts of Europe and North America.

Wan: You have alluded to the importance of intellectual capital several times. What is unique to China?

Parrett: This is a subject I am addressing on a panel at the Fortune Global Forum on China and the New Asian Century. It is clear that new demographic realities will shortly affect workforce markets in China and around the world. And the potential for a shortage of talented workers is serious. That's why the intellectual capital strategy of corporations has to shift.

In the 1990s, we were told to fight "the war for talent." Tomorrow's battlefield will be very different. The focus will be on more than just acquiring and retaining talent. In China, while companies struggle with the recruitment war, they simultaneously must address retention issues and more. Companies will need to focus internally on identifying potential talent and then finding the appropriate ways to develop it, deploy it and help connect it with the other parts of the organization. In sum, companies will need to stretch their employees, give them new and unexpected opportunities and make sure that doing a job equates with learning all the time.

As a result of the need to retain the right people, what seems to be emerging in China is a whole new system of rewards that reach beyond basic compensation.

Growing in importance will be rewards such as work-life balance, training and development, new assignment opportunities and new ways of recognizing a job well done. In addition, multinationals, both Chinese and foreign, will need to provide Chinese workers with opportunities to develop their global skills sets by working abroad.

These types of benefits and rewards are especially new to China's workforce and employers, but they also represent new horizons to be explored with workforces everywhere.

Wan: Another issue you have spoken on many times in China is corporate governance and its role in enhancing competitiveness. Is corporate governance really a competitive advantage when investors seem to be taking the risk regardless?

Parrett: The answer is clearly yes - this was reinforced to me at the session I chaired on governance at the recent Boao forum.

The Chinese Government and businesses are tackling governance issues head on. Companies are increasingly aware of the need to take governance best practices and blend these to meet local realities, not only in order to continue to attract investment, but also for them to become world-class companies that can compete globally.

And governance requires appropriate protocols and procedures and rules and regulations. But it's equally important to remember that governance is also about principles and clear objectives. And the principal aim of good governance is to help a company achieve sustainable growth.

A recent Deloitte study entitled In the Dark, the underlying message about governance and managing growth is clear: businesses need to ask the broad questions about factors that drive current and future success - factors beyond the financial indicators.

In China, issues like customer satisfaction, product and service quality, ethical conduct, reputation, operational performance, and employee commitment are really beginning to resonate among business and government leaders.

Maybe Chinese businesses can take the lead globally and look closely at these issues. According to the Deloitte report, most western CEOs feel this information is important to track and report on but many are unable to do so. There is a real disconnect.

Wan: Beijing, Shanghai and Guangzhou are still dominant. Do you see this changing any time soon ?

Bowie: Certainly, we see a growing focus among multinational companies on deepening their China strategy by expanding into new regions. In a recent study we conducted, we found that CXOs of multinationals in China thinking how to sell into third- and even fourth-tier regions, and bringing into China the wider portfolio of sophisticated goods and services that they typically market in other countries.

Having now accumulated a critical mass of experience in the country, witnessed a substantial improvement in the domestic business environment, and seen a very tangible increase in raw demand, foreign firms are daring to think more ambitiously about China. They are building on lessons learned to transform their China operations into an increasingly important part of their global businesses.

This brings a new level of complexity to their businesses in China, and executives will need to work hard to meet the resultant demands. Existing markets in China are also becoming more sophisticated, suggesting that customer retention strategies, much neglected in the past, will become increasingly important in the future.

Domestically, foreign companies need to utilise China's rapidly improving infrastructure to raise the efficiency of their distribution and sales channels, and ideally find and develop a niche in the value chain. Looking outwards, companies need to define and plan for the role that their China operations can most valuably play in their global businesses.

Companies outside of China will increasingly find themselves competing against more China-centred multinationals. Businesses that can take the best of both worlds - research and development capabilities from their home markets, for example, and low-cost procedural innovation from China - will become strong world players. Such hybrids threaten to take global market share from multinationals that do not incorporate China more fully into their global strategies.

Wan: What challenges do you see for Chinese and multinational companies "going west"?

Parret: In American history, the west has been traditionally viewed as a region of dreams and opportunity. I think the same holds true for China. I recently visited Chongqing to deliver a speech. There I was struck by the reality of vast opportunities awaiting both Chinese and foreign companies in the west. The improvements in infrastructure from expressways to the information highway are very impressive. But much remains to be done.

One of the biggest challenges facing businesses wanting to take advantage of the opportunities presented by the west is attracting and developing the right intellectual capital to go and stay there. This is something the government is acutely aware of - and businesses need to continue to focus on.

There is still scope for additional incentives to encourage leading minds to return and settle in the west - for example the creation of "intellectual capital zones" that could provide a ready source of research and development for companies locating in western China.

Why not? If manufacturing can be brought to a country with an abundance of labour, why can't "intellectual capital zones" take hold in a country with a tradition for bold new ideas? After all, China has been inventing and exporting ideas for centuries. Ideas that have changed the world, such as: paper, moveable type, gunpowder, and the compass.

Businesses need to attract the right people. This means:

Having innovative business strategies that are exciting to people

Having the right human resource strategies, including remuneration policies that address regional differences

Training and developing people from widget-makers into true service providers who know their customers

Supporting innovation maybe through centres of innovative excellence

Actively co-operating with government to build a community

Actively developing one's own industry as opposed to just one's own company.

If I look at Deloitte in China as an example, we have:

Worked with the government to develop accounting standards

Worked with SAT to develop tax policy

Consulted on technology systems,

Organized the CPA Future Leaders Summit, the first of its kind focusing on supporting the development of China's accounting professionals

Developed and ran courses for accountants in conjunction with the National Accounting Institute and are now looking at the launch of the Deloitte Institute to support learning and leadership of the industry.

Such simple measures will not only stop an existing brain drain, but provide stimulation that will attract newly inbound or those returning back to their family home.

By developing a system of mutually supportive infrastructure, China's "Go West" policy can transform the western region from a point of departure into a desired destination.

This is a special time. China has embarked on one of the greatest economic transformations ever undertaken by any nation.

Looking ahead, I am optimistic that valuable capital, financial and intellectua, will choose to "Go West."

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