Is It Too Late To Enter China?

By Edward TseChairman of Booz & Company, Greater China

The author of The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy  

(Basic Books, 2010)

HBR : April 2010

The Dilemma

The world is hit by a profound recession in 2009

However, China’s economy is projected to grow by more than 11%

Presence of several risks : • Vulnerability of IPR

• Stringent government restrictions

• Rivalry from State-Owned-Enterprises (SOEs)

• Incredible government backing being provided to domestic companies

Should a foreign company invest in China?

China At A Glance

The Scenario Explained

• There are several risks associating with investing in China• Loss of IPR• Government’s capricious imposition of restrictions• Prohibition of entering into core businesses like telecommunication,

energy and mobile.

• However, companies on Chinese soil have witnessed unprecedented growth• No. of private companies shot up from 140,000 in 1992 to 6.6

million in 2008• Of the Fortune 500 companies, 480 are already in China

China V/s the US – A Revelation

• China surpassed the US as the world’s largest automotive market in 2009

• Top 500 Chinese companies’ net profits were $170.6 bn in the first half of 2009 exceeding the US’s top 500 companies’ $98.9 bn

• China is expected to replace the US as the world’s largest economy sooner than predicted

The China Context – One-World Strategy

• 3 C’s for the world : Customers, Competitors and the Companies

• 4 C’s for China as the core: Customer, Competitors, Companies and Context

• Official China• Communist party-ruled• Economic liberalization would continue• The pace of liberalization is solely controlled by the party

• Companies wishing to invest in China must understand the government’s policies and modify their strategies accordingly

The Story of Google in China

Google entered the Chinese market in early 2000

Created a Chinese-language version of its home page

Google created Google.cn located in China and subject to Chinese filtering

Physically entering China and exposition of censorship drew lot of criticism

Competitors like Yahoo and Microsoft were gaining presence in China and getting ahead

Headquartered in the US, Google wasn’t subject to Chinese censorship

Dilemma: Whether to compromise their mission by abiding to censorship

Or compromise their mission of entering China altogether and abstain from any

censorship imposed by the Chinese government

Google decided to exit China and not to loose its core values

However, other companies benefitted by forming a tie-ups with the local players

China’s Domestic Competitors to Global Internet Giants

• Alibaba.com

• Sohu.com

• Taobao.com

• Renren.com

• Baidu.com

Competitive China: Challenges Ahead

• Growing labor and raw material costs

• Companies in China would have to • Reduce their consumption of raw-materials• Mitigate the environment impact of their operations• Improve the quality of products• Hone their management skills

• Shifting consumer demands due to urbanization

• Large no. of generic brands owing to huge middle class population’s demands --- no brand loyalty

5 Questions for Shaping China’s Strategy

1. How open is—and will be—our industry in China?• Building connections (guanxi)• Set-up fully owned operations in China• Ready to accept intermittent intervention by Chinese government

• 2. What business models should we use?• Sourcing-centric• Sales-centric• Blend of the above two

5 Questions for Shaping China’s Strategy..

3. Can we live with China’s uncertainties?• Tough decision making due to pace of change, lack of data

and high executive turnover• Willingness to take huge risks

• 4. How can we integrate our China operations with our businesses elsewhere in the world?• Stand-alone business model of MNCs facing tremendous

pressure due to rising labor and material costs and Yuan’s appreciation

• Will have to integrate their China operation with the businesses elsewhere

5 Questions for Shaping China’s Strategy..

• 5. Can we move more parts of our value chain to China?• Re-location of value-chain activity to China• Setting up research and development centres in China• Developing product based on these research and then

catering to other countries which have similar demands• Improvement of the quality at competitive price

Few Things That China Manufactures

THANK YOUPresented by:

Ankesh Dev

1301-507