Focus, execution, and a thorough understanding of the local competitive dynamics are keys to running a successful business venture in China, panelists said at a recent Harvard Business School executive roundtable.
The discussion, "Getting to World Class: The Path to Success of Model Asian Companies," was held at the 2004 Asia Business Conference at Harvard Business School on February 14.
Setting the stage for the discussion, Bain & Company director Paul DiPaola said a Bain study of 150 high-performing public Chinese companies found four keys to business success:
- Sharp focus. All the companies focused on and invested in a strong core business. DiPaola said this finding surprised him. He had believed that leading Chinese companies would be broadly diversified.
- Operational excellence. Chinese companies take full advantage of low labor costs, low costs of raw materials, and linked supply chains. They also capitalize on IT to leverage those advantages.
- Astute technology acquisition. The companies are adept at either buying the right technology outright or doing technology transfer deals to get what they need.
- Strong partnerships. Chinese companies find the right partners and build strong relationships. They also tend to avoid joint ventures with MNCs, which are often nightmares to negotiate and difficult to execute.
But Chinese firms also face significant challenges as they walk onto the global stage, DiPaola said. For example, they risk losing that very same focus that made them so successful. Legend Holdings, a Hong Kong PC maker, has expanded into cell phones, MP3 players, and cameras, DiPaola said. "They are moving out of their very strong core business, and this will be very tough to manage."
Other challenges identified by DiPaola for Chinese companies include:
- Reliance on CEOs to make all company decisions, and a shortage of executive development programs.
- Lack of investment in R&D to create highly differentiated products and business models.
- Little experience in acquiring and integrating companies.
Christina Zhu offered the perspective of an MNC, Honeywell International, which has grown a successful business in China despite unexpected roadblocks. She is director of strategy and business development.
Historically, the first MNCs into China found success by "cherry-picking" the most lucrative and profitable markets whose customers matched the appetites of those in the U.S., Zhu said. But then the pickings got slimmer. Companies looking to broaden their business poured in lots of investment but were frustrated by Chinese culture differences, complex regulations, fragmented and heterogeneous markets, poor distribution networks, confusing governance and control issues, and increased competition from local firms, according to Zhu.
Local competitors know how to compete
That local competition, which sprung up "almost overnight," was particularly vexing. While MNCs had to learn the lay of the land and adapt business practices to the Chinese way of doing things, the native companies were able to exploit a dramatically lower cost structure and, most importantly, focus on customer needs.
| Chinese companies don't have a legacy; these companies start with a clean sheet of paper. |
| — Christina Zhu, Honeywell International |
"Chinese companies don't have a legacy; these companies start with a clean sheet of paper," Zhu said.
An example, she said, is Honeywell's business in turbochargers, equipment that increases engine performance. In the company's traditional markets, turbochargers have been purchased for use on heavy-duty trucks. But in China, the biggest market for turbochargers is in passenger cars. "We're still trying to figure that one out," Zhu said.
She said Honeywell is formulating a strategy to do more M&A deals in China. Acquisitions of Chinese companies have been difficult because of a lack of transparency on deal sources, difficulty in researching due diligence, and the complexity in valuing companies that get sweetheart government deals.
Two of the panelists were executives from Chinese companies representing different parts of the economic spectrum: a large state-owned company making the transition to global competitor, and a young start-up digging a foothold in China.
State-owned China National Cereals, Oils & Foodstuffs Import & Export, established in 1952, is one of the largest importer/exporters in China. As of 2002, the total import and export value reached $143.5 billion. CEO Mingchen Zhou said the company and country have managed a vast transformation from even ten years ago, when people used government food coupons to purchase necessities and now choose products off the shelf.
COFCO would like to do more business and partnerships with U.S. companies, he said. Already COFCO runs a Coca-Cola bottling plant and has a joint venture with Archer Daniels Midland to create edible oil products. He singled out McDonald's and KFC as brands that have made a large impact in China.
On the startup side, CEO Xingsheng Zhang provided the history of AsiaInfo Holdings, a provider of telecom infrastructure equipment and services, based in Beijing. The company was actually started in 1993 in Dallas by Edward Tian and James Ding, who then moved the company to China two years later in search of a huge market opportunity.
Along the way AsiaInfo transformed from a system integrator to a software development company. The company's top line has grown from $37.3 million in 1997 to $121 million in 2002. (In the bubble year of 2001, the company's revenue was $189 million.) The company is listed on NASDAQ.
China has been able to provide the company with a talented and educated workforce—97 percent of its 1,000 employees have college degrees, Zhang said. 