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This article originally appeared

in the June 2009 issue of

The journal of
high-performance business

China

A tale of two Chinas


By Gong Li, Andrew Sleigh and Paul F. Nunes

The rise of a new economic superstructure in China—featuring


companies that are already world-class—is one of two sides to
the new China story. The other side is the extent to which many
other Chinese companies are struggling.
About the research
To build up a comprehensive picture of high-performance theories with several board-level representatives of Chinese
business in China, Accenture applied its proprietary financial high-performance businesses.
analysis to examine 13 industries in the country—the second
year running that we have done so. The latest candidate pool Out of the pool of 200-plus companies, 36 met Accenture’s
included 30 additional companies that now meet the criteri- definition of high performance—companies that are unequivo-
on of being publicly listed for five years or more. We created cally outperforming their local peers in terms of returns to
a detailed survey that was answered by nearly 100 senior shareholders, revenue growth, profitability, consistency and
executives from large, publicly listed Chinese companies. We positioning for the future.
also gathered valuable input by discussing our findings and

Zhejiang province, with its entre- However, recent Accenture research


preneurial spirit and small busi- suggests that although no company
nesses producing low-cost goods, in China will escape the effects
has in many ways been emblematic of the downturn, some businesses
of China’s extraordinary economic are dramatically better positioned
growth. Following its own devel- than others to weather this storm.
opment model, the eastern coastal During the past decade, the country’s
province became one of China’s strongest companies began to open
richest; in 2007, it boasted a GDP up noticeable leads over others in
of about $255 billion and per capita their industries (see “About the
disposal income for its urban resi- research,” above).
dents of $2,800.
Lately, their leads have widened.
Then the global economy hit a wall. The research indicates that the
choices that put these companies
Today, China’s businesses stagger on a path to high performance
under the burden of rising costs, before the crisis will also enable
sinking demand, talent shortages them to ride out the current tur-
and tougher regulations. As moil and emerge even stronger.
export activity sags and Beijing
encourages the phasing out of The rise of this new economic
“backward production practices,” superstructure in China—featuring
a major shakeout is well under companies that are already world-
way in many industries. And in class in their successes today and
once-booming Zhejiang in the their positioning for tomorrow—is
second half of 2008, companies one of two sides to the new China
were shuttered at a rate of more story. The other side is the extent
than 200 a month. to which many other Chinese com-
panies are struggling.
China’s companies find themselves
caught in a kind of economic The implications for global business
perfect storm. The world is sink- leaders are profound. On the one
ing deeper into recession just as hand, they need to recognize just
these enterprises are losing their how muscular China’s top perform-
traditional competitive advantages ers have become and adjust their
2
Outlook 2009
of low-cost labor, natural resources strategies accordingly. Yet they
Number 2 and capital. must not generalize about Chinese
competition; instead, they need to This widening performance gap has
assess the myriad opportunities now serious implications for competitors,
being revealed as so many other Chinese and non-Chinese alike. By
Chinese companies lag behind. learning what propels China’s most
successful companies—the Grees and
China’s leading companies are Lenovos as well as the next wave of
pulling ahead of their peers at an strong players, such as Wuhan Iron
astonishing clip. Companies such and Steel Corp. and pharmaceuticals
as computer maker Lenovo, Gree giant Yunnan Baiyao Group Co.—
Electric Appliances and China business leaders in the rest of the
Mobile are achieving world-class world will be better able to compete
levels of performance, moving with them in global arenas.
smartly up the value chain with
higher-priced, higher-quality prod- At the same time, the frailty of many
ucts and services whose improved other Chinese businesses gives the
features appeal to carefully targeted country’s solid companies new open-
customers. In fact, nearly 90 per- ings for growth. Understanding what
The frailty of many cent of China’s high performers are creates high performance will help
prioritizing investments that will the average contenders to reach parity
Chinese businesses add more value to their products with the best Chinese companies and
gives the country’s and services over the next three thereby allow them to tap into new
years (see chart, page 4). opportunities afforded by the wide-
solid companies ranging domestic stimulus package
new opportunities By contrast, half of the low perform- now being implemented by Beijing.
ers are still relying on the low-cost
for growth. advantages that have served Chinese The downturn, coupled with the
companies so well until recently. performance gap, has also revealed
to non-Chinese companies oppor-
At the same time, many of their tunities in China that the country’s
local competitors are struggling blazing economic expansion has
now that the basis of competi- obscured until now. Those already
tion has changed so dramatically. with a presence there are well placed
Earlier this decade, China’s poor- to capitalize on the push to boost
est performers, powered by their domestic demand. Not only can
low-cost advantages, were grow- they promptly gauge local customer
ing nearly seven times faster than needs—for example, assessing where
their global peers. But in the past the rural component of the govern-
few years, they have fallen behind ment’s stimulus and reforms will of-
them in revenue growth. fer the most opportunities—but they
already have the commercial and
In terms of profitability—generating political links and the established
returns on invested capital higher distribution channels to quickly take
than the cost of capital—the pic- advantage of those opportunities.
ture has been consistently gloomy.
Measured over the long term, At the same time, they are positioned
Chinese companies have achieved to decide which of China’s weak per-
lower and even negative economic formers are worth trying to acquire,
profits compared with their global or at least to acquire key assets from.
counterparts. In the short term, Others that have yet to engage—
China’s high performers have made perhaps in the belief that most op-
huge strides to narrow the profit- portunities were spoken for by tough
ability gap with the world’s best domestic players—can now envision
companies. But the nation’s average how to participate in China’s next
3
Outlook 2009
and low performers have actually wave of growth, possibly through
Number 2 destroyed economic value. acquisitions or joint ventures.
Investment priorities
Accenture recently surveyed a wide range of Chinese companies. They were asked what
their most important investment priorities would be over the next three years.

High performers
12%
Investments to help maintain Average performers
31%
a low-cost advantage Low performers
50%

88
Investments to help add more
69
value to products and services
50

Source: Accenture High Performance Business China survey, 2008

Positioned for excellence They also have a clear understand-


Just how have China’s high per- ing of how to actually capture
formers excelled as rising costs more of the source and flow of that
have eliminated past advantages? value. They are building higher-
And how have they positioned end products that command higher
themselves to prevail in the face price premiums and greater profit
of global recession? margins, and they are expertly cap-
turing more value by taking greater
Accenture’s research has isolated control of other parts of their value
nine attributes mastered by China’s chains—either upstream, on the
top companies—traits that not only supply side, or downstream, in their
offer insight and example for other sales and distribution channels.
Chinese enterprises but that serve as An increasing number of leading
important reminders for all busi- companies are using mergers and
ness leaders of what it takes to excel acquisitions to realize these goals.
in today’s ferociously competitive
climate—economic downturn or no. The Erdos Group, China’s flagship
Here is how China’s best companies cashmere producer, has made con-
have extended their industry leads— certed moves to control its entire
and why they promise to be highly industry’s value chain. The company,
competitive in global markets. which accounts for 30 percent of
global cashmere production, owns
1. They are moving up and many farms from which it sources
across the value chain. raw materials. It also runs its own
Chinese high performers are product design, development and
guided by the overriding need to production centers, and it has built a
add value to their products and national cashmere product engineer-
services. They know that when ing and technical research center.
customers instantly associate their
brands with quality and service, The latest chapter in the Erdos
4
Outlook 2009
they can expect to see substantial growth story: The company has
Number 2 improvements in margins. opened seven international sales
companies and 30 branded retail equipment maker DongFang Electric
stores in cities where the fashion Corp., getting involved in the
industry is prominent and where global market means carrying
overseas demand for cashmere out technology transfers with non-
products has been strongest—Los Chinese companies.
Angeles, London, Tokyo, Moscow,
Köln, Hong Kong and Milan. At the A global view of intellectual capital
same time, Erdos, like other Chinese is called for as well. Pockets of
cashmere producers, is shifting its specialized knowledge exist world-
reliance on exports to a greater wide; for example, Chinese com-
emphasis on domestic sales. The panies in the biotech business are
company will invest nearly $118 able to forge close relationships with
million over five years to set up 100 their counterparts in the centers of
flagship shops in China. biotech research and clinical trials
in Singapore.
By contrast, Accenture’s survey
found that China’s low performers The high performers’ global outlook
Chinese high performers are less likely to be diversifying complements rather than conflicts
or planning to diversify into other with their sharp focus on domestic
look beyond the nation’s parts of their own industry value markets. Yantai Wanhua Polyure-
borders to obtain the chain. Less than one in five low thanes Co. is proof of that. The poly-
performers indicated any intention urethane producer sees its efforts
tools for profitable to move upstream within their to attract international talent and
growth—talent, capital own industry over the next three
to five years.
management know-how as valuable
for helping it grow at home, where its
and innovative ideas. greatest opportunities currently lie.
2. They are globally aware
and “super local.” However, China’s best compa-
More than three-quarters of the nies are careful to identify the
Chinese high performers surveyed domestic markets with the most
already consider themselves global immediate potential. Although
or at least regional companies. (Only the government is pouring stimu-
a third of the low performers think lus incentives into poorer rural
of themselves that way.) But although communities, nearly 90 percent
many have robust sales outside China of China’s high performers iden-
and some have a presence overseas, tify metropolises such as Beijing
the key difference between Chinese and Shanghai as the heart of their
high performers and their peers is business. So the bulk of their
that they have global mindsets. They investments in new, higher value-
look beyond the nation’s borders added products and services are
to obtain the tools for profitable geared to China’s larger cities.
growth—talent, capital and even
the innovative ideas that are the Beverages leader Yantai Changyu
lifeblood of long-term growth and Pioneer Wine Company is a prime
profitability (see chart, page 6). example. Most end customers for
its wines and spirits are higher-
At Baosteel Group Corp., a global income consumers in cities in
mindset means that more than China’s coastal region. Sales of
1,000 of its employees have been the company’s higher-end products
trained in Japan, and the company are growing rapidly.
has absorbed lessons from General
Electric and other US companies 3. They are implementing
about building a stronger and more controlled and pragmatic growth.
5
Outlook 2009
predictable supply of experienced There is a marked difference in
Number 2 managers. At power generation approach between China’s strongest
Global sourcing
Survey participants were asked to identify the primary geographic sources for five key resources (all companies).

8% 5% 87% For the current time


Talent (workforce)
23% 8% 69% Expected in three years’ time

6 10 84 For the current time


Capital
19 10 71 Expected in three years’ time

22 5 73 For the current time


Raw materials, energy
35 12 53 Expected in three years’ time

19 12 69 For the current time


Consumers
43 13 44 Expected in three years’ time

28 4 68 For the current time


Innovation and ideas
45 12 43 Expected in three years’ time

Global Regional China only

Source: Accenture High Performance Business China survey, 2008

and weakest performers when it to shareholders’ near-term concerns,


comes to managing growth. Although as most average and low performers
there is still a widely shared concept appear to do—China’s high perform-
in China that success means being ers realize that the best way to deliver
the biggest in an industry, only the long-term value is by taking good
high performers have learned how care of their customers, their employ-
to harness scale’s real advantages. ees, and the communities and society
They realize that increased size brings within which they operate.
opportunities such as economies of
scale, distribution networks and nego- This perspective puts customers at
tiating power, and, unlike their peers, the forefront of the high perform-
they have built processes and operat- ers’ mindset. China Mobile offers
ing models to take advantage of those an example of customer conscious-
opportunities so they have greater ness in action. The company spends
control of their future growth. significantly to improve its service
and promises customers that “if the
The high performers are also bill is wrong, we return double.” To
particularly pragmatic about back that promise, the telecommu-
growth. To begin with, they work nications leader has invested in a
hard to ensure that their growth differentiating technology—a sophis-
rewards a variety of stakeholders, ticated billing support system.
not just shareholders (see chart,
page 8). Rather than focusing solely China Mobile is one of many high
6
Outlook 2009
on narrow financial metrics when performers that also place a premium
Number 2 developing strategy—tending chiefly on meeting employees’ needs. The
rationale: Engaged and contented The new approach circumvents the
staff members are more productive, talent challenge often found in such
more attuned to customers’ needs and companies, where technology staff
more willing to “go the extra mile.” and those from service functions
At consumer electronics company are not on a defined “management
Hisense, business leaders empha- track” and therefore are unable to
size the importance of a culture of reach senior positions. In addition,
cohesion for improving employee CNOOC staff are not restricted to
retention. Companies like Hisense conventional Chinese pay scales
are unlikely to reduce investments when they are located overseas.
in training or career development for Now CNOOC can offer attractive
the sake of improving results in the expatriate compensation packages—
next financial period. as global rivals like ExxonMobil
Corp. and Total do.
4. They put a premium on
innovation in many forms. 5. They build innovation systems.
The performance gap is readily Chinese high performers’ approach
apparent in terms of approaches to is to make innovation repeatable,
innovation. China’s top companies not accidental. So they foster pro-
More companies are want to extend their leads using cesses and structures that signal the
filing for patents, or new products and technologies fitted strategic importance of innovation,
to their customers’ needs; the poor encourage knowledge sharing and
suing to enforce patent performers tend to focus more on collaboration, and provide the right
rights, in China than incremental improvements of existing
products (see chart, page 10).
kinds of incentives to their employ-
ees. One example: Seeking out top
anywhere else. technology talent, Web search firm
Nearly nine out of 10 of the high Baidu uses the Web itself to tap
performers surveyed see investments China’s engineering savvy, sponsor-
designed to help add more value to ing a yearly programming competi-
products and services as their most tion that asks entrants to create, for
important spending priority over instance, a martial arts character
the next three years. “A product’s using the fewest lines of computer
advantage is temporary,” Li Chunbo, code possible.
board chairman of Zhejiang Medi-
cine Co., said recently. “If we want Further, the high performers do not
to lead the market, we have to have limit their evaluation to incremental
a keen passion for product quality revenues from new products; they
and for R&D. In fact, the quality of place enormous importance on the
our products reflects the company’s enduring value of a strong intel-
overall quality and strength.” lectual property portfolio. More
companies are filing for patents,
Superior distinctive capabilities, and suing to enforce patent rights,
one of the building blocks of high- in China than anywhere else. News
performance business, stem from reports say that China’s State Intel-
innovation on many levels—not only lectual Property Office received
in terms of new-product develop- nearly 700,000 patent applications
ment but in business processes. China in 2007, far greater than the num-
National Offshore Oil Corporation, ber received in the United States.
known as CNOOC, is a case in point. Chinese patent filings are climbing
In 2003, the company introduced an at more than 20 percent a year.
innovative new talent management
process that gives all employees—for Says Yunshu Zhou, general manager
example, technicians as well as pro- of pharmaceuticals company Jiangsu
7
Outlook 2009
fessional engineers—an opportunity Hengrui Medicine Co.: “Only when
Number 2 to climb the career ladder. we have new drugs with intellectual
Multiple stakeholders
Survey participants were asked to indicate which stakeholders are given top priority
when they formulate strategy.

33%
Customers 43%
25%

27
Shareholders 49
55

27
Wider community/society 2
15

13 High performers
Employees 6 Average performers
5 Low performers

Source: Accenture High Performance Business China survey, 2008

property rights can we move beyond The high performers know they
low-price competition.” can develop distinctive capabilities
if they can ensure positive customer
Like any other business process, experiences at every point of interac-
innovation must be monitored and tion between company and customer.
measured if it is to be done properly. They understand that there is little
China’s high-performance businesses point in developing higher-margin,
understand the importance of quanti- value-added offerings if they
tative measurements of their innova- can’t provide equivalent levels of
tion activities. They track metrics customer service to cope with the
such as incremental revenue from ever-rising expectations of their
recently developed products and the customers.
number of patents or trademarks
granted. By contrast, almost half of They are also becoming highly
the country’s remaining companies proficient at understanding and
do not carry out such activities. focusing on the needs of many dif-
ferent customer segments over a
6. They build businesses with wide range of “touchpoints.” China
the customer at their core. Mobile’s GoTone service, aimed at
This is another attribute where there its high-value customers, is a tiered
is a stark difference between China’s loyalty and service program that
strongest companies and its poorest includes a dedicated hotline for inqui-
performers. The former prioritize ries as well as access to VIP airport
investments that enhance customer lounges across China and reduced
satisfaction and loyalty; the latter membership rates at golf courses. The
8
Outlook 2009
continue to chase new customers provider’s M-Zone plan, targeting
Number 2 (see chart, page 11). teens and twentysomethings, hosts
special events for members, such as that collectively can do much to
appearances by pop stars. improve retention and upgrade
workforce skills.
7. They are “talent powered.”
China’s high performers steadily 8. They use IT as a source of
acquire the skills and make the right competitive advantage.
investments in human capital that Most Chinese companies can leapfrog
allow them to compete more easily several generations of hardware and
in sophisticated markets and to software because, as a rule, they are
extract more value from their prod- not burdened by the legacy IT systems
ucts and services. One example: Meat that their global counterparts struggle
processor Luohe Shuanghui Enter- with. Many of the high performers
prise Group Co. now controls many are exploiting this advantage to the
aspects of its value chain, including fullest, actively deploying enterprise
700 company-run retail stores. In a resource planning systems—SAP and
China’s strongest cor- recent interview, Shuanghui CIO Liu Oracle suites just like those used by
Xiaobing explained his company’s global leaders elsewhere.
porations are expanding perspective: “If we can get appropri-
ate talent—especially senior manage- Although most high performers
their involvement with ment—we will control every part of continue to use IT to keep a lid
the nation’s education the value chain ourselves.” on costs, some are also moving to
adopt new technologies that can
system to help ensure These globally minded companies help them transform the ways they
that future graduates are casting the talent net wide, work with their customers, suppliers
reaching out to expatriates they and employees.
have the necessary skills. hope will join the flow of hai gui,
or “sea turtles”— returning Chinese China Mobile views its IT function
who bring a wealth of global work as a potential source of revenue.
experience. Its executives are looking at
offering other corporations the
Like their counterparts elsewhere, technologies and services that the
China’s strongest corporations will telecom company has developed to
continue to struggle not only with fulfill internal demand and improve
finding top talent but with retaining its own competitiveness. The com-
it. Besides rethinking compensa- pany is also constructing a B2B
tion packages, they are expanding e-business platform that uses IT to
their involvement with the nation’s integrate its supply chain, greatly
education system to help ensure that lowering costs and risk for its
future graduates have the necessary business partners as well.
skills. For instance, appliance maker
Gree, in an effort to identify the best 9. They practice sustainable growth.
talent for recruitment, has held a More Chinese high performers
series of competitions in universities see long-term benefit in serious
around the country to encourage efforts that reduce their impact
students to come up with innovative on the environment. They know
new design ideas. that consumers (and investors) will
keep pushing for stronger “green”
And whereas many of their rivals efforts from business. One 2007
emphasize salary and benefits, the poll revealed that nearly seven out
top performers think more broadly, of 10 Chinese consumers said they
in terms of talent development— would prefer to buy products and
a blend of factors, including well- services from green companies.
defined career paths, training and
9
Outlook 2009
education, knowledge sharing and Sustainability efforts will be critical
Number 2 an amicable working environment, to those companies intent on com-
New technologies, new products
Survey participants were asked to characterize their current R&D strategies.

We are developing new products 25%


that build incrementally on previous 53%
products of our own. 58%

We are using new and emerging 56


technologies to develop new products 30
that will lead the market. 26

We are developing new products 13


that build on existing products that 15
are already in the market. 16

6 High performers
Other 2 Average performers
0 Low performers

Source: Accenture High Performance Business China survey, 2008

peting in higher-margin markets ronmental management—verifying


outside China. For the companies that its manufacturing operations
focusing on markets inside the meet the strictest environmental
country, there are opportunities standards. And Lenovo points to the
to appeal to the newly awakened high marks it received in 2007 from
environmental sensibilities of Greenpeace for its advanced practices
Chinese customers while staying in handling electronic waste.
ahead of China’s increasingly active
environmental regulators. So what does this new wave of Chinese
high performers mean for business
Companies in resource-intensive leaders inside and outside China?
industries are leading the way.
Wuhan Iron and Steel, once known Imagine the business world as it
as a major source of pollution, could be five years from now. Harbin
recently implemented a new system Power Equipment Co. is on the short
in a major coke plant that will recycle list to build a massive hydroelectric
more than 95 percent of the water project in Chile. Automaker Chery’s
used at the plant, compared with just name flashes in lights in New York
47 percent previously. The company, City’s Times Square. And Gree wins
which plans to achieve zero waste- a giant contract to supply “green”
water discharge of this year, is now air conditioners for all municipal
devoting 10 percent of its fixed-asset buildings in Atlanta—and to service
investments to energy-saving and them for 10 years.
environmental-protection facilities,
according to China Daily. The point is not whether these
scenarios actually play out; it is
Elsewhere, Zhejiang Medicine Co. that, judging by detailed analysis
has won ISO 14001 certification—an of the attributes of China’s high
10
Outlook 2009
internationally recognized bench- performers, there can be little doubt
Number 2 mark signifying high levels of envi- that many of them will soon reach
Customer focus
Survey participants were asked to identify the highest priority for their
company’s current customer-related investments.

81%
Enhancing customer
70%
satisfaction/loyalty
50%

6
Attracting more new
15
customers
35

13 High performers
Generating better customer
15 Average performers
understanding/insight
15 Low performers

Source: Accenture High Performance Business China survey, 2008

such milestones. Senior managers there is no better time than now to


who think that China’s most suc- examine the three building blocks
cessful enterprises have succeeded of high performance and identify
largely thanks to their low-cost the weaknesses that have so far
advantages must now accept that prevented them from joining the
those companies have the mind- ranks of the high performers.
sets, systems and capabilities to be
ferocious global contenders from But remember: Time is of the
here on. If these companies have essence. The global economic slump
managed to compress into 30 years means that many average players
the development that took much of could quickly share the plight of the
the rest of the world two centuries low performers—losing momentum
to achieve, what might they be and fighting for the remnants of
able to do by 2040? dwindling markets. And where does
that leave the underachievers? They,
For the Chinese companies that rate too, have customers and resources
as average performers—and for the that, coupled with Beijing’s efforts
non-Chinese companies that now to stimulate domestic demand, could
have fresh opportunities to partner make them highly attractive partners
with them or even to acquire them— or acquisition targets.

If there is one big idea that should come from a fresh look at China’s economy, it
is this: Last year’s assumptions about the nation’s competitiveness are long out of
date. Global business leaders need to face up to the power and the positioning
of China’s top companies—and expect to go head-to-head with them from now on.
But at the same time, they would be wise to assess the myriad opportunities now
being revealed as so many other Chinese companies lag behind.
11
Outlook 2009
In other words, there are long-term business benefits to seeing both sides
Number 2 of the new China story.
About the authors Paul F. Nunes is an executive research
fellow at Accenture’s Institute for
Gong Li is the chairman of Accenture— High Performance in Boston, where
Greater China, leading a team of nearly he directs studies of business and
4,000 people. With more than 20 years marketing strategy. His work has ap-
of cross-industry business consulting peared regularly in Harvard Business
experience, Mr. Li has collaborated Review—including “Can Knockoffs
with clients in government and a Knockout Your Business?” (October
variety of industries, including elec- 2008) and “The Tourism Time Bomb”
tronics, high tech, energy, petrochemi- (April 2008)—and in numerous other
cals, financial services and consumer publications. He is also the coauthor
products. Based in Shanghai, Mr. Li also of Mass Affluence: Seven New Rules
has extensive experience working with of Marketing to Today’s Consumers
Chinese state-owned enterprises on (Harvard Business School Press, 2004).
various programs, including corporate In addition, Mr. Nunes is the senior
restructuring, process transformation contributing editor for Outlook.
and commercialization.
paul.f.nunes@accenture.com
gong.li@accenture.com

Andrew Sleigh is a senior manager in


Accenture’s Corporate Strategy group.
He is located in Beijing, where he
focuses on assisting clients with their
merger and acquisition activities. Prior
to this role, Mr. Sleigh was the China
lead for the Accenture Institute for
High Performance and has authored
Outlook is published by Accenture. numerous articles on China’s unique
© 2009 Accenture. operating environment.
All rights reserved.
andrew.sleigh@accenture.com
The views and opinions in this article
should not be viewed as professional
advice with respect to your business.

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