China is changing more rapidly than ever, but has your China strategy adapted yet? In the aftermath of the US financial crisis in 2008, companies from North America and Europe rushed into China, seeking to grow both sales and profits. However, with China’s growth slowing over the past two years, costs shooting up, the government making life difficult for multinational companies, and confusion following the reforms emanating from the Third Plenum in November 2013, some companies are heading in the opposite direction.
In early 2014, American cosmetics and skincare products powerhouse Revlon announced that it would pull out of China completely. Despite entering the world’s largest personal care products market in 1996, Revlon was able to generate just 2% of sales from China 17 years later. It therefore decided that it was time to rethink strategy. Around the same time, the French beauty company, L’Oréal, said it would stop selling its flagship brand, Garnier, in the country.
Retailers such as America’s Best Buy and Germany’s Media Markt also quit China last year while after nine years, Britain’s Tesco concluded that it was unlikely to make a dent on its own in China and entered into a joint venture with a state-owned enterprise, China Resources Enterprise. And Western Internet companies such as Yahoo!, eBay, and WhatsApp have failed to make a dent on local leaders such as Baidu, Alibaba, and WeChat, all but giving up on the Chinese market.
However, many multinational corporations cannot afford to quit China. Not only do they need the sales and profits that China — still the biggest and fastest-growing market in the world for almost anything — provides, but also, they realize that it will be tougher to re-enter the market in future. China is already the world’s fiercest battleground for global brands and more local companies are joining the fray. That leaves country managers in China with two choices, neither of which will be an easy sell at corporate headquarters (HQ) that are still looking for substantial top-line growth and above-average profits in emerging markets.
Go for Broke. One option is for multinational companies to go flat out for market leadership in China; that is, try to be either No. 1 or No. 2 in the market. The CEOs of companies that have adopted this strategy – such as KFC, PepsiCo, Kraft, Audi, BMW, and L’Oreal – spend all their time thinking about how to get bigger, faster — and don’t worry about efficiency, synergy, or cost.
The downside is that these companies may not make profits in China, at least not for a very long time, partly because of the huge investments they must make. Moreover, year after year, local rivals from both the public and private sectors have been getting better, as mentioned earlier. They have learnt to offer global quality at low prices, squeezing multinational companies’ margins and profits.
Indeed, Western multinationals that have picked this strategy may be able to pull it off only by forming alliances with rivals or acquiring them. There’s no dearth of examples: Bayer Healthcare acquired Topsun to become one of the leaders in the OTC medicines segment and Dihon in the TCM (Traditional Chinese Medicines) niche. Between 2008 and 2012, Walmart more than doubled sales by adding 100 hypermarkets to its existing 400 stores, acquiring Trustmart in 2011, and picking up a majority stake in online retailer Yihaodian in 2012. Japan’s Hitachi has struck as many as 36 alliances and joint ventures with Chinese companies such as Haier and Shanghai Electric. And Caterpillar purchased mine safety company ERA for $677 million to break into the coal industry. However, it had to take a $580-million charge after turning up book-keeping problems at an ERA subsidiary five months after the deal closed.
Accept that Less is More. Several CEOs are realizing the limits to growth in China, and have focused on boosting profitability rather than sales. Abandoning the desire to become market leaders, they have become selective. They aren’t recruiting countless sales reps or extending their distribution to hundreds of cities every year. They are gearing up to make more money with fewer resources by focusing on the most profitable products, regions, and sales teams. These companies include DSM, Bayer Material Science, Solvay, P&G, and IBM.
A smaller-and-selective strategy isn’t necessarily good news for HQs; they can no longer depend on China for growth, and must invest in other markets across the globe. Furthermore, their China teams, which have been chasing growth for years, may be on the bubble. Not all of them will have the skill sets and networks to ensure efficiency, so several companies may well have to start afresh in China.
How do companies decide which of these two approaches will work for them? One, they must evaluate their customers’ prospects to see if it’s worthwhile investing for growth. In a dynamic market like China, a review of trends is necessary every one or two years. Some sectors, such as chemicals and construction materials, are already plagued with slow growth rates; others such as consumer goods are reaching maturity so adding offices, salespeople, and distributors may boost sales but not profits.
Two, it’s important to evaluate if being the biggest kid on the block is necessary to bargain with customers. In some industries, scale lowers supply chain costs but it doesn’t provide bargaining power over buyers.
The third question is whether the Chinese market, geographically, provides synergies or turns out to be several dozen (or hundreds of) standalone markets scattered across the country. If customers don’t link across regional or municipal borders, as they do in the retail and healthcare industries, size won’t matter.
It’s tough to decide which play to pick, but companies that are unable to make up their minds will have no choice but to gallop out of China like Revlon — an unimaginable prospect until the Year of The Horse.
source: In China, Go for Broke or Accept that Less Is More April 04, 2014 at 01:00PM