The Chinese learns from you and kicks you out of the market
China loses its allure
Life is getting tougher for foreign companies. Those that want to stay will have to adjust
The Economist
Jan 25th 2014 | From the print edition
ACCORDING to the late Roberto Goizueta, a former boss of The Coca-Cola Company, April 15th 1981 was “one of the most important days…in the history of the world.” That date marked the opening of the first Coke bottling plant to be built in China since the Communist revolution.
The claim was over the top, but not absurd. Mao Zedong’s disastrous policies had left the economy in tatters. The height of popular aspiration was the “four things that go round”: bicycles, sewing machines, fans and watches. The welcome that Deng Xiaoping, China’s then leader, gave to foreign firms was part of a series of changes that turned China into one of the biggest and fastest-growing markets in the world.
For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over.
More pain, less gain
In some ways, China’s market is still the world’s most enticing. Although it accounts for only around 8% of private consumption in the world, it contributed more than any other country to the growth of consumption in 2011-13. Firms like GM and Apple have made fat profits there.
But for many foreign companies, things are getting harder. That is partly because growth is flagging (see article), while costs are rising. Talented young workers are getting harder to find, and pay is soaring.
China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging. A sweeping consumer-protection law will come into force in March, possibly providing a fresh line of attack on multinationals. And the government’s crackdown on extravagant spending by officials is hitting the foreign firms that peddle luxuries (see article).
Competition is heating up. China was already the world’s fiercest battleground for global brands but local firms, long laggards in quality, are joining the fray. Many now have overseas experience, and some are developing inventive products. Xiaomi and Huawei have come up with world-class smartphones, and Sany’s excellent diggers are taking on costlier ones made by Hitachi and Caterpillar. Consumers will no longer pay a hefty premium just because a brand is foreign. Their internet savvy and lack of brand loyalty makes them the world’s most demanding customers (see article).
Some companies are leaving. Revlon said in December that it was pulling out altogether. L’Oréal, the world’s largest cosmetics firm, said soon afterwards that it would stop selling one of its main brands, Garnier. Best Buy, an American electronics retailer, and Media Markt, a German rival, have already left, as has Yahoo, an internet giant. Tesco, a British food retailer, last year gave up trying to go it alone, and entered a joint venture with a state-owned firm.
Some of those who are staying are struggling. IBM this week said that revenues in China fell by 23% during the last quarter of 2013. Rémy Cointreau, a French drinks group, reported that sales of its Rémy Martin cognac fell by more than 30% during the first three quarters of last year because of a plunge in China. Yum Brands, an American fast-food firm, said in September last year that same-store sales in China had fallen by 16% in the year to date. Its problems were partly the result of a government investigation into alleged illegal antibiotic use by its chicken suppliers.
Investors no longer celebrate firms with big investments in China. Our Sinodependency Index weights American multinationals by their China revenues. Sino-dependent firms used to outperform their peers, but in the past two years their share prices have done worse than others’.
As Jeffrey Immelt, the boss of GE, puts it, “China is big, but it is hard…[other] places are equally big, but they are not quite as hard.” Companies that want to stay in China will have to put in even more effort. Many will have to change strategy.
One China is over
First, rising costs mean that bosses must shift from going for growth to enhancing productivity. This sounds obvious, but in China the mentality has long been “just throw more men at the problem”. One way to get a grip on costs is to invest in labour-substituting technology, not only in manufacturing but also in services. Also, multinationals are falling behind local firms like Alibaba and Tencent in exploiting a surge of big data coming from e-commerce and smartphones.
Second, tighter control is another must. GSK’s bosses in London admitted that its problems in China were partly the result of executives acting “outside of our processes and control”. Managers in headquarters must ensure that executives’ behaviour and safety standards are as high as anywhere else in the world. Chinese consumers are even more active on social media than those in the West, so any scandal is instantly broadcast nationally.
Lastly, a One China policy no longer makes sense. Most firms set up their local offices when China’s economy was smaller than $2 trillion. Although it will soon be five times that size, many still try to run their operations from Shanghai. That makes little sense when tastes in food, fashion and much else vary between provinces and mega-cities that have populations as big as European countries. Some 400m Chinese do not speak Mandarin. So even as CEOs need to keep a closer eye on standards and behaviour, they should localise marketing and perhaps product development.
China is still a rich prize. Firms that can boost productivity, improve governance and respond to local tastes can still prosper. But the golden years are over.
China loses its allure
Life is getting tougher for foreign companies. Those that want to stay will have to adjust
The Economist
Jan 25th 2014 | From the print edition
ACCORDING to the late Roberto Goizueta, a former boss of The Coca-Cola Company, April 15th 1981 was “one of the most important days…in the history of the world.” That date marked the opening of the first Coke bottling plant to be built in China since the Communist revolution.
The claim was over the top, but not absurd. Mao Zedong’s disastrous policies had left the economy in tatters. The height of popular aspiration was the “four things that go round”: bicycles, sewing machines, fans and watches. The welcome that Deng Xiaoping, China’s then leader, gave to foreign firms was part of a series of changes that turned China into one of the biggest and fastest-growing markets in the world.
For the past three decades, multinationals have poured in. After the financial crisis, many companies looked to China for salvation. Now it looks as though the gold rush may be over.
More pain, less gain
In some ways, China’s market is still the world’s most enticing. Although it accounts for only around 8% of private consumption in the world, it contributed more than any other country to the growth of consumption in 2011-13. Firms like GM and Apple have made fat profits there.
But for many foreign companies, things are getting harder. That is partly because growth is flagging (see article), while costs are rising. Talented young workers are getting harder to find, and pay is soaring.
China’s government has always made life difficult for firms in some sectors—it has restricted market access for foreign banks and brokerage houses and blocked internet firms, including Facebook and Twitter—but the tough treatment seems to be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a corruption probe; Apple was forced into a humiliating apology last year for offering inadequate warranties; and Starbucks has been accused by state media of price-gouging. A sweeping consumer-protection law will come into force in March, possibly providing a fresh line of attack on multinationals. And the government’s crackdown on extravagant spending by officials is hitting the foreign firms that peddle luxuries (see article).
Competition is heating up. China was already the world’s fiercest battleground for global brands but local firms, long laggards in quality, are joining the fray. Many now have overseas experience, and some are developing inventive products. Xiaomi and Huawei have come up with world-class smartphones, and Sany’s excellent diggers are taking on costlier ones made by Hitachi and Caterpillar. Consumers will no longer pay a hefty premium just because a brand is foreign. Their internet savvy and lack of brand loyalty makes them the world’s most demanding customers (see article).
Some companies are leaving. Revlon said in December that it was pulling out altogether. L’Oréal, the world’s largest cosmetics firm, said soon afterwards that it would stop selling one of its main brands, Garnier. Best Buy, an American electronics retailer, and Media Markt, a German rival, have already left, as has Yahoo, an internet giant. Tesco, a British food retailer, last year gave up trying to go it alone, and entered a joint venture with a state-owned firm.
Some of those who are staying are struggling. IBM this week said that revenues in China fell by 23% during the last quarter of 2013. Rémy Cointreau, a French drinks group, reported that sales of its Rémy Martin cognac fell by more than 30% during the first three quarters of last year because of a plunge in China. Yum Brands, an American fast-food firm, said in September last year that same-store sales in China had fallen by 16% in the year to date. Its problems were partly the result of a government investigation into alleged illegal antibiotic use by its chicken suppliers.
Investors no longer celebrate firms with big investments in China. Our Sinodependency Index weights American multinationals by their China revenues. Sino-dependent firms used to outperform their peers, but in the past two years their share prices have done worse than others’.
As Jeffrey Immelt, the boss of GE, puts it, “China is big, but it is hard…[other] places are equally big, but they are not quite as hard.” Companies that want to stay in China will have to put in even more effort. Many will have to change strategy.
One China is over
First, rising costs mean that bosses must shift from going for growth to enhancing productivity. This sounds obvious, but in China the mentality has long been “just throw more men at the problem”. One way to get a grip on costs is to invest in labour-substituting technology, not only in manufacturing but also in services. Also, multinationals are falling behind local firms like Alibaba and Tencent in exploiting a surge of big data coming from e-commerce and smartphones.
Second, tighter control is another must. GSK’s bosses in London admitted that its problems in China were partly the result of executives acting “outside of our processes and control”. Managers in headquarters must ensure that executives’ behaviour and safety standards are as high as anywhere else in the world. Chinese consumers are even more active on social media than those in the West, so any scandal is instantly broadcast nationally.
Lastly, a One China policy no longer makes sense. Most firms set up their local offices when China’s economy was smaller than $2 trillion. Although it will soon be five times that size, many still try to run their operations from Shanghai. That makes little sense when tastes in food, fashion and much else vary between provinces and mega-cities that have populations as big as European countries. Some 400m Chinese do not speak Mandarin. So even as CEOs need to keep a closer eye on standards and behaviour, they should localise marketing and perhaps product development.
China is still a rich prize. Firms that can boost productivity, improve governance and respond to local tastes can still prosper. But the golden years are over.
