Is Your China Venture Recession-proof?

Sigmund Floyd is President of Valushar, a management consultancy focusing on strategy and tactics for multinational companies operating in China.

A new era has arrived. Despite the enormity of the global crisis, China is well positioned to weather it and emerge relatively unscathed. Companies taking a long-term view have introduced their best technology, good manufacturing practices and management expertise to China, while some others have not. At this stage, a renewed commitment should be made to the domestic market. By recognizing that the China market is of equal or even greater importance than the home market, companies can use the current crisis as an opportunity for long-term change.

First, the assumptions inherent in the North American business model must be thoroughly aired and challenged. Success or failure in the domestic market often hinges on the ability to make deep changes in fundamental thinking. In general, it is important to target market niches – a “one size fits all” approach is no more likely to work in China than anywhere else.

It is better to focus on several strategic accounts than to use a shotgun approach. Chinese companies are naturally mainly interested in products and technology that are not available from Chinese suppliers – technological products and know-how should be emphasized, not me-too products. Once key accounts have been identified, work closely with key them and develop products and services tailored to their needs.

While it may sound obvious, products and services for the Chinese market are needed at Chinese price points. R&D must be tasked with developing products at a realistic price target, while maintaining a performance profile that comfortably exceeds that of local competition. This can be greatly facilitated by having an R&D presence in China . From a supply chain perspective, to ensure quick turnaround and to minimize costs, raw materials need to be sourced in China for Chinese products. Though competent supply chain professionals in China are not cheap to hire, their expertise is critical. With the general uncertainty prevailing in the employment market, the timing to hire new technical and professional personnel probably could not be better.

Unfortunately, consistent application of Western “best manufacturing practices” like Six Sigma or ISO certification or even Lean, does not guarantee success in the domestic market. What counts to be successful are two things: flexibility, and low cost. It is important to keep working capital low, which means that there must be greater emphasis on short run make-to-order with fast turn-around times.  In a surplus capacity situation, this is a realizable objective provided production staffing has not been overly cut back.

Environmental, health and safety issues deserve special mention. The central government, local governments, Chinese employees and the general public have become deeply concerned over the toll taken on the environment by indiscriminate development. Ensure your EHS efforts in China are world-standard, and promote them vigorously, to your employees, your customers and to the local government. It is an often-undermined source of competitive advantage.

Less demand in the short term can mean it is an excellent time to develop the capabilities of local staff. This does not mean however that wholesale elimination of experienced expatriate personnel is the right thing to do. Most Chinese local managers have come of age in an environment where the “R-word” was not even in the national lexicon. They have little concept of what it means to downsize an operation or stabilize losses. It is not uncommon for some local staff to have an entitlement mentality which must be challenged, while at the same time coaching them to take on more proactive leadership.

While not necessarily loyal to employers themselves, Chinese employees tend to value organizational stability more than U.S. employees do, and reducing work hours across the board is preferable to paying out costly severances. Wholesale handing out of pink slips could prejudice a company’s entire future. Even in this difficult environment, companies need to pay special attention to retention of their key employees.

In summary, companies that wish to enjoy long-term success in China must have an investment mentality despite the tough times. This does not mean the time is right to jump in and make new investments – indeed, it may not be – but protecting the value of the assets that are in place also requires spending to continue. Take a hard look at your customer base and make the necessary adjustments to become a participant in the domestic market.  Don’t assume it will be easy, but approach it with the mentality that “yes, we can.”

©Sigmund Floyd

Sigmund Floyd is President of Valushar, a management consultancy focusing on strategy and tactics for multinational companies operating in China. He speaks, reads and writes Mandarin Chinese.

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