Happy Birthday China! China is celebrating its rise to a world power over 60 years of Communist rule today, showing the world their capabilities in its biggest-ever parade of state-of-the-art military hardware. It has come a long way and still has a long way to go. I attended a cocktail party this evening and talked to many China observers on what this means to the world. And for multi-nationals?
This week I’ve been busy working on developing our China footprint or more precisely Shanghai is our beachhead office. I am excited but at the same time well aware of the challenges operating in that environment. Everything you know can be wrong overnight. No experts can tell you what's your market is like today and how it is changing tomorrow.
China's rapid urbanization will further change the social architecture of the country and causing pains. According to some McKinsey research, in 2025-2030 one in five of the global city dwellers will be in Chinese cities.
Based on current trends, China in 2025 will have 221 cities with more than one million people compared to Europe with 35. 25 of China's cities will have more than 5 million people
China's cities in 2025 will generate about 95% of its GDP (versus 75% today)
Of the 350 million people added to Chinese cities by 2025 (about the population of the USA) 240 million will be migrants
Asia’s emerging economies are already leading the way for a recovery, or was there a recession at all? It depends on how you look it at. Chinese societies are just taking a baby step to transform to a consumer society. As many US consumers are transforming out it (not sure if it possible at all). Are the largest global consumer companies ready for this momentous shift?
McKinsey’s advice is that even the most sophisticated multinationals must change significantly to realize Asia’s growth potential. The region is as diverse as it is vast. Its markets come in a bewildering assortment of sizes and development stages, and its customers hail from a multitude of ethnic and cultural backgrounds. Their tastes and preferences evolve constantly. The speed and scale of change in Asian consumer markets can surprise even experienced executives. To meet the challenge, global companies will have to organize themselves regionally to coordinate strategy and use resources in the most efficient way while at the same time targeting the tastes of consumers on a very local level.
The structural changes required by China's entry into the World Trade Organization (WTO) and the broader demands of economic globalization and the information revolution will generate significantly new levels and types of social and economic disruption. China has proven politically resilient, economically dynamic, and increasingly assertive in positioning itself for a leadership role in Asia. And becoming a global power.
For those Chinese brands, they are all gearing up to play the global game and most are not well prepared. China’s domestic market is becoming ever more crowded and a strong domestic market will power up Chinese brand for international expansion. There is an urgent call for Chinese companies to master new skills that traditionally reside with non-Chinese multinationals such as marketing, branding, talent development, customer service, M&A management etc.
It is not an easy path.
Take Lenovo for example, they are facing challenges both domestically and internationally. Lenovo is losing ground to rivals and Yang is replacing Amelio as CEO. Liu Chuanzhi, the company founder who stepped aside after the IBM deal, will return as chairman. It is a big setback. Despite a $93 million profit in domestic sales, overall results were hit by the losses in overseas sales and admitted that Lenovo was a "weak competitor" in the US and Europe. Weak is not a strong enough word to describe their marketing, pricing as well as distribution strategies. They still need to go global. Liu said in a press release. "But at this important time we want to pay particular attention to our China business as it represents the foundation of our global business and growth strategy."
The first problem is there is simply a lack of real global strategy and I don’t mean just a product strategy. Lenovo’s second challenge is a flawed sales and marketing strategies. They overrated their brand power and there aren’t much outside China. Replace the Thinkpad logo too fast. Lenovo failed to understand that blurry branding and not giving enough thoughts to pricing strategy.
Going global is not so simple. It is even more complex today with the Internet making information transparent, geo-politics and diverging consumer tastes. The most common mistake is companies see globalization as taking a superior (usually by false assumption) business model, product platform, branding and quickly adapting to another country. Oh yes it is about scale and that alone is not strategic.
The right approach is to rethink your business model globally, not taking an existing business model and adapting it to China or India. First step is to identify key differences in customer needs (often opposite) and understand how to answer to those needs. Not stripping down of an existing product line and call it localization.
The real strategic focus should not be on the tension between global scale economies and local considerations as it blinds companies to the very real opportunities. Instead, spend plenty of efforts to exploit the differences and
in their rush to exploit the similarities across borders, multinationals have discounted the original global strategy: arbitrage, the strategy of difference and design your business around those differences.
As more and more companies like Lenovo are slowly emerging on the global stage, they should put more thoughts on what strategies are available (Chinese firms prefer to spend money on feng sui consultants and not strategy consultants) and what implications do they pose for their more-established competitors from developed markets? How are these companies building marketing talent (a big limitation), leveraging low costs, and market access in their home countries? How do they approach global market entry, organizational development, and mergers and acquisitions? What opportunities do such companies present to Western multinationals? A feng-sui man cannot really give you answers on those strategic questions.
