that determine success
Across industries, we have seen companies that achieved success
in China while others failed. To cite some examples:
FMCG: In the fast moving consumer goods (FMCG) sector, Procter
& Gamble (P&G) is widely regarded as one of the most successful
foreign companies in China. Its hair care and cosmetics products,
among others, are leaders in these respective spaces. According
to the Economist, P&G's China revenue exceeded $1.8 billion
at the end of 2003 and profit has been increasing at a rate of
140 per cent per year. Today, China is the sixth largest market
for P&G in revenue terms and it is forecasted to become the
second largest after the US in a few years. When P&G entered
China over a decade ago, Wella, another MNC hair caremarketer,
also set up in the country. Wella was never able to make its business
model work in China and eventually sold its business to P&G.
Passenger cars: In this industry, the success of Volkswagen is
legendary. As an early mover, Volkswagen commanded over half of
China's passenger car market for a long time. Increasing competition
in the last year has caused its market share to drop by a fair
amount. Nevertheless, China today is the largest market for Volkswagen,
outside Germany. Peugeout, on the other hand, another early mover
which entered China in the mid 1980s, made the decision to withdraw
from China in 1997 after years of significant financial losses.
A later entrant, General Motors, however, has achieved strong
performance so far, and continues to grow.
There are many similar examples in other industries. In the personal
computer industry, early movers and once dominant players in China
such as AST and Compaq could not sustain their success in China,
while as a relatively late comer, Dell has been able to chip away
market share from market leader Lenovo.
In liquid packaging, Tetra Pak has built a strong position in
China while most of its peers are not getting much traction in
the marketplace. In fast food, both KFC and McDonald's have built
a large number of restaurants across China and are very profitable,
while most of their international peers are not remotely close
to the successes of these two companies.
Many foreign companies entering and operating in China go into
an environment that is very different from markets with which
they are familiar. Understanding the large number of new variables
(which includes previous constants now also becoming variables)
is already a major challenge, but because China is undergoing
very rapid change, new entrants need to enter a rapid learning
cycle in order to stay current and make the right decisions as
the environment changes. Managing in China involves much more
moving parts than other more mature or more familiar markets.
This requires multiple dimension considerations of non-linear,
discontinuous attributes in a fast-changing and highly uncertain
environment. Repeatedly we have seen that when given the same
information on China, companies in the same industry come to very
different conclusions and decide on very different approaches.
The result is that companies with very similar competitive positions
in their home markets can arrive at very different end points
in China - some will be winners while others will be losers.
Our research of the winners and losers reveals the following
key common factors for the winners:
Ability to understand the real China. In particular, the regulatory
context and its implications for competitive advantage and market
dynamics, especially on the supply side.
Value proposition and business models commensurate with market
evolution, including need for true integration with a company's
global business system.
Willingness or ability to appreciate and adapt to local cultures
throughout China. Specifically, willingness to set aside existing
assumptions about the Chinese environment and how it would change
or behave; learning by spending real time in the market.
Organizational nimbleness in adjusting to a rapidly changing
Ability to successfully learn from previous experiences and/or
benchmarking within the proper context, having an effective feedback
loop in place.
Ability to build strong local teams on the ground, in particular,
ability to attract and retain leaders who are entrepreneurial
and can work effectively in an ambiguous environment.
When developing a China strategy, CEOs must ask themselves a
series of critical questions (see box below left).
There will inevitably be trade-offs, and the answers to many
of these questions will have direct implications on the resources
that the company can and should invest in China, as well as on
the competitive risks that they will face.
The writers are managing director, and director, respectively,
of Booz Allen Hamilton in Greater China