This article originally appeared in the 2012, No.

2, issue of

The journal of high-performance business

Special Report: The new growth agenda II

Think you’ve got China figured out? Think again
By Gong Li, Henry Egan and Andrew Sleigh

Very few Western companies are committing the resources required to succeed in China. Failure to focus on this complex and challenging market will mean not only passing up a significant opportunity—it could also jeopardize your future global position.
accenture.com/outlook

At the heart of many recent conversations about globalization is speculation about which countries might be worthy of joining the BRIC economies in the ranks of elite emerging markets. Indonesia, perhaps? Or Mexico? South Africa and Turkey are also mentioned as candidates. 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. Consider just a few facts. In 2010, China accounted for 23 percent of emerging-market gross domestic product, more than the remaining BRICs at the time combined. That same year, China attracted $185 billion of foreign direct investment, more than three times the amount that flowed into Brazil, the next highest recipient among emerging markets. In terms of large corporations, there were 61 Chinese companies in the Fortune Global 500 in 2011, more than all other emerging markets combined. Moreover, while the base of growth in the emerging world might be broadening, China’s prominence will actually increase over the course of this decade. By 2020, the country’s share of emerging-market GDP is expected to grow to 30 percent. Look beyond the national numbers as well. If China’s provinces were countries, Guangdong would be the eighth-largest emerging market by GDP and would export as much as South Korea. Jiangsu and Shandong would be the ninth- and tenth-largest emerging markets, outranking Poland, Saudi Arabia, Argentina and South Africa. And as for the cities in China’s interior, Zhengzhou, the capital of Henan province, for example, is forecast to have a bigger economy than Sweden or Switzerland by 2020. 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 govern-

ment policies to rebalance the economy are spurring the growth of consumer spending. The country is already the world’s No. 1 or No. 2 market for automobiles, PCs, mobile phones, luxury goods, home appliances and consumer electronics. China is expected to account for almost half of all vehicle sales in emerging markets by 2015. This means that, in volume terms, China will be roughly equivalent to all other emerging markets in this sector combined.

Ambition vs. action
As the world watches a major leadership change play out in China, this might be an opportune moment for Western companies to recalibrate their business goals for the country—particularly in the context of their strategies for emerging markets as a whole. This is not to suggest abandoning other rapidly growing economies and focusing all attention on China. These markets present tremendous opportunities in their own right, not to mention the benefits associated with geographic diversification. But companies need to make sure that they have a wellconsidered China strategy in place and that their resources are not spread too thinly across the emerging world. To be sure, the opportunities in China will vary from industry to industry. Each company will need to go through the rigorous process of assessing the size of any potential market and the investment time horizon. But for many, what happens in China during the coming decade will go a long way to determining the future leaders and laggards in their industry. Being No. 1 in China will increasingly mean being No. 1 globally. Failure to act quickly in China will not only mean passing up a significant opportunity; it could also jeopardize your future global position. In fact, most companies do recognize China’s long-term strategic importance, 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

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Lion’s share
China's share of emerging-market GDP has been rising steadily in the past two decades. By 2020, China is projected to account for almost one-third of all emerging-market GDP.
Other emerging markets Brazil, Russia and India China 58 49

67%

68

21 19 25% 19 23 30

8% 1990

14

2000

2010

2020f

Note: Real GDP at 2005 prices and market exchange rates Source: Economist Intelligence Unit; Accenture analysis

some kind of China strategy in place; many have laid out ambitious plans for the market and routinely make 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. But recognizing China’s significance 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 this complex and challenging market. Why? For many companies with deep roots in developed markets, growth in China presents a dilemma: With the lion’s share of the revenue still generated in the United States and Western Europe (their current economic travails notwithstanding), it’s difficult to divert investment dollars and—perhaps more important—management time to China.
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lies in “positive discrimination”—that is, in directing a disproportionate amount of investment and management time to China. But shouldn’t countries such as Brazil and India be afforded similar treatment? In some industries, where China is less dominant or foreign participation is limited (such as in telecommunications or energy), this will be a valid concern, and these situations should be addressed on a case-by-case basis. However, the evidence suggests that these industries are likely to be few and far between. Based on Accenture’s work with multinationals entering and operating in China, we believe that answering five questions will help you determine what you need to do to make the country your top priority.

1. How many of our senior leaders are based in China?
Persuading a business unit to relocate a top executive from Boston to Beijing can

How can companies overcome the China challenge? Much of the answer

be difficult when China still represents only a small percentage of global revenue. But this kind of local presence is critical if China is to generate the sort of returns that companies are craving and investors are demanding. Adaptation is crucial in this complex market: You can’t simply transplant your existing business to China and expect to succeed. Your business model, products and services, and operations must be tailored for 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 senior leadership will come to grips with the nuances of doing business in China and be able to respond quickly to this fast-evolving market.

If you see China as a significant part of your future business, anyone aspiring to run a global business unit or function should spend time there, learning 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 the country. Starwood Hotels & Resorts Worldwide is a good example. In 2011, rather than holding occasional ad hoc meetings in China, the Stamford, Connecticut-headquartered company moved its eightmember leadership team to Shanghai for one month. But don’t limit such initiatives to Beijing and Shanghai, which now resemble major Western business capitals in many ways. Executives who spend time in only these cities often come away with an unrealistic view of China. Instead, look beyond the country’s eastern seaboard to some of the fast-emerging second- and thirdtier cities to get a better understanding of the scale of the opportunity in China and the complexities of doing business there.

Relocation
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, moving some experienced leaders to China will be necessary and unavoidable, particularly given the competition for top managerial talent in the country. As with many things related to China, of course, relocation is often easier said than done. When choosing their base, regional heads running the Asian or Asia Pacific operations (including China) of global companies tend to opt for Singapore or Australia, where the language, culture and commercial practices are far more familiar. However, other companies, such as Intel Corp., have made shifting top executives to China a priority. Sean Maloney, one of the chip maker’s most senior leaders, moved to Beijing from Silicon Valley to become chairman of the company’s China operations.
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2. Does the head of our China business report directly to the CEO?
Given how fast most industries are growing and evolving in China, responsiveness can be an important competitive advantage for a Western company. Yet in many multinationals, two, three, sometimes even four reporting layers separate the senior China executive from the CEO. To get things done, the boss in China often must first get the approval of several regional and business-unit heads. This kind of bureaucracy slows decision making and can dilute outcomes. In some cases, important proposals are rejected at a lower level and never even make it to the CEO’s desk. Also, country-level performance indicators

Yet it shouldn’t be just the leaders of your Chinese or Asian operations who spend an extended period of time in the country.

Provincial powers
A number of China's provinces are so large that even on their own, they have bigger economies than a number of emerging-market countries. In 2010, three of the provinces (Guangdong, Jiangsu and Shandong) each had larger GDPs than Poland, Saudi Arabia and Taiwan, among other countries.
Comparing China’s provinces to other emerging markets, by GDP ($ billions)
$5,926 China and its provinces Other emerging markets

2,088 1,726 1,479 1,034 1,015 734 707 665 596 574 469 448 430 418 379 370 364 333 319

298

a

India

il

dong

nesia

iang

Turk e

Chin

gdon

Pola n

Braz

Taiw a

ntin

Mex

i Ara

h Ko

Jian

h Af

Hena

Russ

Shan

Indo

Zhej

Sout

Guan

Saud

Arge

Note: Nominal GDP at 2010 market exchange rates Source: The Economist, “Comparing Chinese provinces with countries,” February 25, 2011; Economist Intelligence Unit; Accenture analysis

are often buried in broader Asia Pacific numbers, obscuring both progress and challenges in China. And with profit and loss accounting run at the regional level, China operations must compete with those in other Asia Pacific countries for investment dollars, again reducing the local executive’s ability to act quickly and decisively in the market. Shortening reporting lines can help increase responsiveness in China by speeding up decision making and giving leadership at headquarters a better handle on what’s happening on the ground. Intel, for example, treats mainland China and Hong Kong as a

separate geographic unit; the company’s China management reports directly to the head office, 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.

3. Is China represented on our leadership team and board of directors?
A recent survey found that only 8 percent of the executives running the China operations of multi-nationals sat on the board of their companies,

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Sout

Thai

land

UAE

ia

ico

g

gsu

dia

d

n

a

y

Iran

rica

rea

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In the driver’s seat
In 2015, China is expected to account for almost half of all car sales in emerging markets.
Breakdown of forecasted global vehicle sales by volume (%)
96.8 million 54.2 million

28% 56% 3% 6% 8% 10%

Other emerging South Korea Russia Brazil India

Emerging

44% Developed

45%

China

2015f worldwide vehicle sales
Source: Global Insight; Accenture analysis

2015f emerging-market vehicle sales

which are still run overwhelmingly by Americans or Europeans. This is yet another example of action trailing ambition. To accelerate growth in China, the country must be factored into all high-level decisions. To ensure this happens, 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. One way to keep China constantly on the mind of senior leadership is to fill top positions with people who know China. For example, Nestlé recently signaled its growing commitment to China and emerging Asia by appointing Wan Ling Martello as its chief financial officer. Martello, a US citizen of Chinese and Filipino descent, speaks Mandarin, Hokkien Chinese and Tagalog. Elsewhere, tobacco giant Philip Morris International appointed Jennifer Li as an independent director. Li is the chief financial officer of Baidu, China’s leading online search company. The

move underlines Philip Morris’s increasing ambition in China, the world’s biggest consumer of cigarettes. Another way to factor China into high-level decisions is to restructure the top leadership team, which at most multinationals remains dominated by C-level executives and global businessunit leads based in the West. One option: Promote the leader of China operations to that top team. For example, Sam Su, head of Yum! Brands (owners of KFC) in China, is one of the only geographic leaders among Yum! Brands’ senior officers, emphasizing 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

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For further reading
“Can Chinese companies win in the global big leagues?” Outlook 2011, No. 3 “China’s high performers take the long view,” Outlook 2010, No. 3 For these articles and other related content, please visit www.accenture.com.

a reasonably straightforward and discrete proposition that could be effectively outsourced, while most high-value functions remained close to the corporate center in the West. This is clearly changing, however, with China’s transition from the world’s factory to its shopping center. Designing growth strategies, developing a deeper understanding of customers, building brands, and attracting and retaining talented employees are now vitally important to success in China. Yet few companies place the same emphasis on corporate functions and capabilities in China as they do in their home markets. R&D is a good example. China today hosts about 1,000 foreign-owned R&D labs. However, these labs often focus on local adaptations of innovations rather than on developing cuttingedge technologies and products for global markets. There have been some headline-grabbing examples of “reverse innovation,” such as General Electric’s ultrasound machine, a product developed in China and exported back to developed markets. But such examples are rare. Most highvalue 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, HewlettPackard and GE. Although their patent applications originating in China are rising, they still represented only 1.8 percent of all global patent applications filed by these companies in 2010. The same situation characterizes 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? How many businesses go through the same rigorous HR processes in recruiting employees? China is a difficult place to do business; unless companies put in place top-notch functions and capabilities, they’ll have little chance of success.

Some companies are leading the way. Nokia, for example, recently announced plans to relocate its Asia Pacific headquarters from Singapore to Beijing. 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. The new Beijing headquarters will bring additional capabilities to the country— everything from strategy to supply chain expertise and HR to procurement. Nokia’s announcement appears 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.

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 favor 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

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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, this kind of organizational reshuffle 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 strategy in China, and monitoring 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.

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 organization 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. He is based in Shanghai. gong.li@accenture.com Henry Egan is a New York-based manager in Accenture’s Geographic Strategy team. henry.egan@accenture.com Andrew Sleigh is the director of research at Accenture’s Management Consulting Innovation Center in Singapore. andrew.sleigh@accenture.com

Outlook is published by Accenture. The views and opinions in this article should not be viewed as professional advice with respect to your business.

The use herein of trademarks that may be owned by others is not an assertion of ownership of such trademarks by Accenture nor intended to imply an association between Accenture and the lawful owners of such trademarks.

As the balance of economic power in the global economy continues to shift east and south, emerging markets are

For more information about Accenture, please visit www.accenture.com

Copyright © 2012 Accenture All rights reserved. Accenture, its logo and High Performance Delivered are trademarks of Accenture.

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