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Doing business in a changing China
Seeking similarities, respecting differences
US-China
business
services
issue 13 reprint
US-China business services
Doing business
in a changing China
Seeking similarities,
respecting differences
2
PwC View issue 13
By Alan Chu
Alan Chu leads PwC’s US-China Business Services.
As the fastest-growing major economy in the world,
China continues to offer global companies attractive
investment and business opportunities. However,
doing business in China also means navigating
the complexities that arise from China’s unique
historical, political, and cultural contexts. Despite
the challenges, leading US companies are succeeding
in China by developing collaborative relationships
with Chinese stakeholders and demonstrating the
agility to continuously adapt their strategies to the
country’s dynamic environment. These companies
are positioning themselves for long-term success by
embracing the Chinese proverb qiu tong cun yi,
which means “seeking similarities while respecting
differences.” In doing so, they are co-opting China’s
long-term interest in stability and prosperity into
their business strategies.
Despite the global recession,
China has remained a bright
spot for many Western multinational companies. According
to the 2010 China business
climate survey conducted by
the American Chamber of
Commerce in China (AmChamChina), 77 percent of respondents ranked China as one of
their top three global investment
priorities; almost all respondents
indicated they were profitable
or they broke even in China
in 2009 despite the economic
downturn; and 80 percent are
accelerating their investments
in the country this year.1
Charlie Denson, president
of the Nike Brand, probably
speaks for many when he says,
“We’ve moved China off the
emerging-markets list. They’re
the fastest-growing market
in the world. They have the
capacity—and they’re building
the capability—to become the
biggest market in the world.”
The size of the prize justifies
such optimism. Since the economic reforms started in 1978,
China has enjoyed an average
growth rate of 10 percent.
During the recent global recession, China overtook the US as
1 American Chamber of Commerce in the
People’s Republic of China, 2010 Business
Climate Survey Report, April 2010.
PwC View issue 13
3
the world’s largest auto market
and energy consumer. This
year, China surpassed Japan
to become the second-largest
economy in the world, after
only the US.2 In 1980, China
was not among the top 10
global economies by size. By
around 2025, PwC estimates
China’s economy will be larger
than America’s and will grow to
approximately 130 percent the
size of the US economy by 2050.
(See Figure 1.) This is likely to
be true regardless of whether
gross domestic product (GDP)
is measured in US dollar terms
at market exchange rates or
purchasing power parity,
because gradual appreciation
of China’s real exchange rate
during this period will eliminate the difference.3 Yet, as
Western companies continue to
place big bets on China, they
are confronting new challenges.
Benefiting from China’s economic expansion will require
more patience and tenacity
than ever before.
2 Bloomberg News, “China Overtakes Japan as World’s Second-Biggest Economy,”
August 16, 2010.
3 PricewaterhouseCoopers, The World in 2050, 2008.
4
PwC View issue 13
Understanding the
challenges
Global companies are struggling
with China’s seemingly contradictory political and economic
policies. In some ways, China
is moving toward aligning its
processes with those in developed countries. In other ways,
it continues to carry the risks
and challenges associated with
doing business in developing
countries. Many multinationals
fear that a more assertive China
is increasingly employing instruments of state capitalism to
promote economic nationalism
at their expense. Thirty-eight
percent of US respondents to
AmCham-China’s 2010 survey
reported feeling “unwelcome”
to compete in the Chinese
market, the highest proportion
to express this sentiment since
the organization began polling
its members. In a letter to the
White House earlier this year,
America’s Coalition of Service
Industries decried the new rules
of doing business in China as
“an unprecedented use of domestic intellectual property as a
market-access condition [that]
makes it nearly impossible
for the products of American
companies to qualify unless
Figure 1: China’s rapid rise to the world’s largest economy
1980
2010
2025
1 United States
1 United States
2 Japan
2 China
1 China (projected)
3 Japan
11 China
Sources: Various; PricewaterhouseCoopers, The World in 2050, 2008
they are prepared to establish
Chinese brands and transfer
their research and development
of new products to China.”4
At the same time, China also
seems to know—and appears
willing to concede—that it cannot go it alone. At the World
Economic Forum’s Annual
Meeting of the New Champions,
or the Summer Davos, held
in China in September 2010,
Premier Wen Jiabao said the
Chinese government was committed to giving equal treatment
to foreign and Chinese firms
in its procurement decisions
as well as to working with the
international community on
protecting intellectual property rights.5 Cheng Li, research
director of the John L. Thornton
China Center at the Brookings
Institution, explains: “During
the past three decades China
traded its markets for capital
and technology. That may be
changing now, but China also
cares about its relationship with
the West, particularly with the
United States. China still wants
all kinds of things, including
foreign markets, and the US
remains the single-largest
mature market in the world.”
4 Coalition of Service Industries news release, January 26, 2010.
5 Chris Oliver, “China’s premier assures foreign companies of fair treatment,” MarketWatch,
September 14, 2010.
So how are leading companies
managing these contradictions
and the resulting unpredictability? As Nike’s Denson points
out, “It’s hard to say how China
is going to evolve politically,
economically, or socially when
you get into the specifics of the
various provinces, consumer
segments, factions in the government, and so on. But what
we do know is that they are going to continue to progress. Both
the Chinese government and the
Chinese consumer want more—
that is, more access to the global
marketplace and more prosperity from the global economy.”
Appreciating
the differences
Many of the challenges of doing
business in China arise from the
country’s distinctive history and
culture, its geographic diversity,
and the role of the government.
Comprising more than 20 provinces, dozens of ethnic groups,
and hundreds of dialects, China
presents a diversity that is in
equal parts baffling and exciting.
Making sense of it is not easy in
an environment characterized
by rapid and dramatic shifts.
For example, for years, inland
China’s main role has been
supplying labor to coastal,
export-oriented areas, but that’s
changing rapidly. Now, by some
estimates, around 60 percent
of the government’s 4-trillionRMB stimulus package is
directed inland in central and
western China to such priorities
as transportation, affordable
housing, and rural infrastructure
projects. With more-competitive
History and ancestors exert strong influences on modern China, and a peek into
the past shows why many Chinese believe their own institutions and processes
are best suited to helping China reclaim its place as a leading economy.
labor costs, a relatively untapped
consumer market, and vast
reserves of iron ore, natural gas,
and coal, these parts hold great
promise for entrepreneurs and
established businesses alike.
But for many companies, the
hinterlands’ local bureaucracies, their rules and regulations,
and their segmented tastes and
preferences constitute a complicated puzzle.
In China today, growth is still
important, but addressing inequalities
has acquired a new urgency;
industrialization and urbanization are
continuing at breakneck speed, but
environmental efficiency has acquired
new currency; exports are still critical
to growth, but boosting domestic
demand is now a priority.
To succeed in this environment,
it is important to recognize that
local practices and customs are
very entrenched in China. History and ancestors exert strong
influences on modern China,
and a peek into the past shows
why many Chinese believe their
own institutions and processes
are best suited to helping China
reclaim its place as a leading
economy. China was the world’s
dominant economy from the
10th to the 15th century and a
pioneer in bureaucratic modes
of governance to maintain
economic, social, and political
order.6 Today, with the return
of considerable economic clout
after a long period of decline,
China seems eager to demonstrate its ability to address
its structural problems and
developmental challenges on
its own terms.
Appreciating the turning
point in China’s development
model, some companies say
cooperation—not collision—is
inevitable between businesses
on both sides of the Pacific.
In China today, growth is still
important, but addressing
inequalities has acquired a new
urgency; industrialization and
urbanization are continuing at
breakneck speed, but environmental efficiency has acquired
new currency; exports are still
critical to growth, but boosting domestic demand is now a
priority. In all of these shifts,
leading US companies are finding new opportunities to grow
revenues, increase profitability,
and realize further efficiencies.
6 Angus Maddison, Development Centre
Studies, Chinese Economic Performance in
the Long Run, Second Edition, Revised and
Updated, 960–2030 AD, OECD Publishing,
October 2007.
PwC View issue 13
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Figure 2: US FDI into China, as a proportion of total FDI received by China and China FDI
into the US, as a proportion of total FDI received by the US, from 2004 to 2009
Figure 3: Proportions of
greenfield investments
and mergers and
acquisitions in
cross-border FDI
6
6
US greenfield
investments in China:
$55 billion (62%)
China
Total FDI received:
$275 billion
US FDI to China:
$89 billion (32%)
US M&A in China:
$34 billion (38%)
United States
Total FDI received:
$1,126 billion
China greenfield
investments in US:
$533 million (4%)
China FDI to US:
$11.5 billion (1%)
China M&A in US:
$11 billion (96%)
Source: PwC analysis based on Thomson Banker One M&A & fdiMarkets.com 2010
8
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Figure 4: China’s cumulative
outbound FDI to regions around
the world from 2004 to 2009
1.6
5.2
(In percentages)
2.1
5.4
6.3
79.4
Source: PwC analysis based on Thomson
Banker One M&A & fdiMarkets.com 2010
Is protectionism a mutual concern?
Chinese businesses increasingly
aspire to “go global.” Take, for
example, Chinese automaker
Geely’s high-profile acquisition
of Ford Motor Company’s Volvo
brand. According to PwC M&A
research, in the first half of
2010, seven Chinese outbound
deals exceeded US$1 billion
in value, the largest being
Sinopec’s US$4.7-billion acquisition of a 9 percent stake in
Synacrude from ConocoPhillips.1
Chinese companies’ demand for
high-tech goods and services
from around the world is
increasing rapidly as they strive
to move up the value chain.
This is all good news for the
US because boosting American
exports to China and attracting
Chinese investment into the
Figure 5: Yearly average US outbound
FDI to China and China outbound FDI
to the US (as a proportion of total FDI
received by each country) from 2004
to 2009
(In percentages)
US will help revitalize the American economy and create new
jobs. Still, for many reasons—
ranging from the Cold War
legacy to tense negotiations
over such issues as currency
exchange rates—roadblocks to
increasing trade and investment exist. For example, US
Commerce Secretary Gary
Locke recently faced demands
in China for reforming US
export controls­—that is, relaxing restrictions on the sale of
dual-use technology (technology with potential for military
application) to China.2 Chinese
companies, from oil major
Cnooc Ltd. in 2005 to telecoms
equipment maker Huawei
more recently, have struggled
to make rapid inroads into the
US market because of alleged
national security concerns.
60
The charts illustrate US-China
cross-border investment patterns over the past five years.
From 2004 to 2009, the US
accounted for one-third of all
foreign direct investment (FDI)
received by China. In the same
period, the US received four
times as much FDI, to which
China’s contribution was very
small. (See Figure 2.)
More than 60 percent of all US
FDI into China is greenfield,
while the Chinese are relying
almost entirely on acquisitions
as they expand into the US.
(See Figure 3.)
The Asia-Pacific region accounts
for the vast majority of China’s
cumulative outbound FDI during this period. In contrast,
32.3
40
24.5
30
10
0
-10
Western Europe:
$14 billion
Africa:
$12 billion
United States:
$11.5 billion
Eastern Europe:
$5 billion
Central and
South America:
$4 billion
the US, the world’s largest FDI
recipient, received just over
5 percent of China’s outbound
investment. This is nearly
equal to Africa’s share. While it
reflects that natural resources
are a priority target for Chinese
investors, the US lags behind
the mature economies of
Europe in receiving Chinese
investment. (See Figure 4.)
This may be gradually changing.
Yearly averages show that
US investments into China
are large but declining, while
China’s investments into the US
are small but slowly increasing.
(See Figure 5.)
1 PricewaterhouseCoopers news release,
“China outbound M&A deal activity up by more
than 50%,” August 16, 2010.
2 “Wang Presses U.S. on Lifting Export
Controls After Locke Pledge Over Scope,”
Bloomberg News, May 24, 2010.
50.3
50
20
ASIAPAC:
$181 billion
29.3
19.5
26.2
0.1
2004
US FDI to China
0.1
0
2005
2006
China FDI to US
2.5
2007
0.3
2008
1.8
2009
Source: PwC analysis based on Thomson Banker One M&A & fdiMarkets.com 2010
Deng Xiaoping’s famous phrase mo zhe shi tou guo he, or “crossing the river
by feeling for stones,” resonated throughout China. For many who participated
in the growing pains of China’s economic transformation, an experimental,
learning-by-doing approach paid off.
Leading practices in China
In the 1990s, Deng Xiaoping’s
famous phrase mo zhe shi tou
guo he, or “crossing the river by
feeling for stones,” resonated
throughout China. For many
who participated in the growing pains of China’s economic
transformation, an experimental, learning-by-doing approach
paid off. US companies that
carefully managed such risks as
inadequate infrastructure and
regulatory uncertainty—while
taking advantage of China’s
manufacturing prowess and
market size—grew accustomed
to reaping rich rewards. But
now, as new patterns of growth,
investment, and consumption
emerge in the aftermath of the
2008–09 recession, successful
Western companies are adapting
to change by developing a more
nuanced understanding of
China’s dynamic sociopolitical
and cultural processes. They
recognize that China’s own
commitment to many of its new
priorities—rather than direct
pressure from the West—may
provide the strongest basis for
cooperation and collaboration.
Becoming adaptive and agile
Yum! Brands—the parent company of restaurants Kentucky
Fried Chicken, Pizza Hut, and
Taco Bell—understands and
adapts to China’s local practices
and changing priorities. The
first KFC opened in Beijing in
1987, and even as its fast-food
restaurants expand rapidly
throughout China, Yum! Brands
continues to deliver an upscale
dining experience. The company
successfully operates in more
than 650 cities in mainland
China, managing upwards
of 3,500 restaurants. The
operating profits of its Chinese
division grew to $600 million
last year from just $20 million
in 1998.7 Lily Hsieh, chief
financial officer of Yum! Brands’
China division, says the company knew it “needed to adapt
its brand essence to the local
market in a way that offered
distinctive value.”
As Yum! Brands rapidly expands
its presence throughout China,
it is reaching far beyond the
prosperous cities of coastal
China. Thanks to a combination
7 Yum! Brands press release, May 4, 2010.
of government push and market
pull, inland China is emerging
as the new epicenter of the
country’s growth. A few
companies recognize that just
as Chinese corporations are
competing against one another,
so are Chinese provinces and
municipalities—and that opens
up new windows of opportunities. “There is a clear difference
in operating styles compared
with Beijing and Shanghai,”
says Hsieh. “Our approach is to
adjust expectations as we move
farther west. We are investing
more time and effort in these
regions to educate people
about the value of developing
mutually beneficial propositions at mutually acceptable
costs. While we actively engage
regulatory touchpoints, we tend
to go beyond the letter of the
regulation—with an understanding of the human element
surrounding that.”
In China, that often means
partnering with central and
local authorities in supporting
priorities such as maintaining
social stability through steady
employment and improving the
environment through more
efficient use of resources.
“The government wants to see
e-commerce grow, so we’ve been
made to feel very welcome,”
says S.C. Lee, executive vice
president of California-based
Internet electronics retailer
Newegg. “We also provide intangible benefits—for example,
by helping develop cities the
government wants to upgrade.”
Newegg, along with other companies, was invited to invest
on favorable terms in Jiading,
a suburb of Shanghai. Lee
recounts how during last year’s
economic slowdown, when
other companies’ plans stalled,
Newegg earned tremendous
goodwill by becoming the first
to complete its development
in Jiading. At the same time,
the company is tackling the
inconvenient geographic
variations in innovative ways.
To deliver uniformly highquality customer service
throughout China, Newegg
has built its own logistics
company for sorting and
deliveries instead of relying
on external dispatchers.8
8 Loretta Chao, “Newegg Bets on B2C Growth
in China,” Wall Street Journal, May 19, 2010.
PwC View issue 13
11
Leading US companies realize that
a judicious mix of competition and
collaboration is key to success in China.
That may seem contradictory to most, but
some companies are eagerly embracing
the concept.
If the midsize Newegg’s greater
nimbleness and heritage
(it was founded by a Taiwanese
American) provide it certain
advantages in a changing China,
large US companies have their
own set of core strengths. Adept
at tackling a host of issues, from
coping with counterfeiting to
increasing transparency and
control over its supply chain,
Nike is now confronting a new
challenge in China: greater
competition from local Chinese
athletic apparel and footwear
companies that can make morerapid inroads into inland China
12
PwC View issue 13
at lower price points. Nike,
however, is confident of maintaining its market leadership in
China. Denson explains: “We
continue to emphasize creation
of a very specific awareness
around the Nike brand and
what it stands for, and we have
to continue educating consumers
that there’s a difference. As
economic prosperity continues
to inch westward, it is opening
up marketplaces and consumer
accessibility; and we have
the patience to wait for the
consumer [in inland China]
to trade up.”
Collaborating and competing
“together”
There is a pragmatic appre­
ciation in China for how
collaborating with the US will
accelerate development and
fulfill the aspirations of its
fast-growing middle class. It is,
however, equally important to
acknowledge that as significant
shifts occur in the complex
and interdependent US-China
business relationship, tactical
changes will not lead to success.
That’s why some companies are
adopting a whole new approach
in their China-focused strategies.
Leading US companies realize
that a judicious mix of competition and collaboration is key
to success in China. That may
seem contradictory to most, but
some companies are eagerly
embracing the concept. Take
Goodyear, for example, which
partners with local companies
as its vendors while competing
with them through brand power
and differentiation in a booming domestic market. “The
model we have built in China
is make in China for China and
buy in China for the rest of the
world,” says Pierre Cohade,
As China undergoes massive urbanization while building out distributed
renewable energy and smart-grid and electric vehicle infrastructures, US
companies have opportunities to deploy their technologies in Chinese markets
more rapidly and on a larger scale than in their home markets.
president of Goodyear Tire &
Rubber Company’s Asia Pacific
region. In other words, the tire
company operates a state-ofthe-art manufacturing plant
in Dalian to produce highvalue-added consumer and
commercial tires for the Chinese
market while also maintaining
a sourcing center in Shanghai
for the rest of the world.
Competition and collaboration
go hand in hand in the cleantech sector, which comprises
emerging environmental industries that aim to achieve the
multiple goals of environmental
protection, resource conservation, and economic growth.
Virtually nonexistent five years
ago, China’s cleantech market,
aggressively backed by the
Chinese government, is estimated to reach $1 trillion by 2013.9
While many in the US rue the
cleantech race with China,
some believe in harnessing
China’s strengths to their own
advantage. As China undergoes
massive urbanization while
building out distributed renewable energy and smart-grid and
electric vehicle infrastructures,
US companies have opportunities to deploy their technologies
in Chinese markets more rapidly
and on a larger scale than
in their home markets. “The
generally shorter productization
cycles in China may well lead to
accelerated commercialization
of cleantech products,” says
Victor Westerlind of venture
capital firm RockPort Capital
Partners. “It was the same with
how 19th-century American
industrialists copied British
technology,” he adds.
US-headquartered eSolar is just
one example. Through a licensing agreement, the company
has partnered with Chinese
electric power equipment
maker Penglai Electric to use
its concentrated solar panels
to help build at least 2 GW
of solar thermal power plants
in China over the next
10 years.10 Interestingly, such
arrangements no longer follow
predictable cross-border
patterns. The Chinese government has signed cooperation
agreements to license its highspeed electric rail technology to
General Electric in the state of
California, with the understanding that at least 80 percent of
the components will come from
American suppliers.11
9 The China Greentech Initiative/PricewaterhouseCoopers, China Greentech Report, 2009.
10 eSolar press release, “eSolar Partners with Penglai on Landmark Thermal Agreement for China,” January 8, 2010.
11 Keith Bradsher, “China Is Eager to Bring High-Speed Rail Expertise to the U.S.,” New York Times, April 7, 2010.
PwC View issue 13
13
Finding the right partner and managing the alliance, however, can be tricky
in China. Practices such as due diligence processes, financial reporting systems,
and communication styles are often not only different from those in the US
but also varied across different Chinese regions.
Forming strategic alliances with
domestic Chinese companies
When it comes to dealing with
fierce competition from domestic Chinese companies that are
armed with capital, skills, and
hard-to-beat knowledge of the
local environment, a few US
companies are beginning to
think outside the box. “There
are a lot more ways to structure
synergistic relationships than
just traditional joint ventures.
You have to think about how
to enter the market by bringing
along allies who are seeking not
to keep you out but, rather, to
compete vigorously with their
own domestic rivals,” says
Robert Kuhn, author and
advisor to Chinese and foreign
firms in China. Take the case
of General Motors (GM).
Last December, the Detroitheadquartered company
reduced its stake in Shanghai
General Motors Company to
49 percent. Its Chinese partner
SAIC will have the right to
approve budgets, strategy, and
senior management appointments, but GM is securing its
place in a lucrative market.
China is now the world’s largest
auto market, and GM sells more
cars there than in the US. The
relationship with SAIC will also
help GM make inroads into
other high-growth regions such
as India, where SAIC is investing up to $350 million in GM’s
existing operations to produce
and market low-cost vehicles
already successful in China.12
Finding the right partner and
managing the alliance, however,
can be tricky in China. Practices
such as due diligence processes,
financial reporting systems, and
communica­tion styles are often
not only different from those in
the US, but also varied across
different Chinese regions. Hsieh
of Yum! Brands, describes her
organization’s approach to
finding partners in China:
“Information accuracy and
quality of management are the
most important criteria. We
find that companies already
listed or on the path to be listed
have better disclosure standards.
We also spend a lot of time with
senior management in order
to understand their mind-set,
sense of integrity, ground rules,
and behavior styles.”
12 Norihiko Shirozu and Patricia Jiayi Ho,
“GM, SAIC Reshape Partnership,” Wall Street
Journal, December 5, 2009.
Preparing for more than
one future in China
Ultimately, companies that are
finding continued success or
new opportunities in China’s
evolving environment are those
that are prepared for more than
one future in China. “You have
to be very adaptive and agile
to be successful in China,” says
Goodyear’s Cohade. “China
forces you to change your business model; it forces you to
acquire new competencies at a
pace that is much faster than
anywhere else.”
Business agility is the key to
thriving amid China’s constant
change and, as China has
evolved, so has Goodyear’s business model. Just six years ago,
the company was selling the vast
majority of its products to Original Equipment (OE) customers
such as automobile companies.
Today, the company is catering
to an increasingly sophisticated
car market. In the process,
Goodyear has built significant
brand awareness and established
a branded distribution network
from scratch, by providing
training, development, and
assistance for retailers around
the country. “So many people
are first generation here—that is,
first-generation driver, first-generation retailer, first-generation
mechanic—so even though
people are brand driven, in many
ways you’re starting from a clean
slate.” Confident in its brand
power and robust distribution
network, Goodyear is now focusing on using multiple channels
such as its own retail outlets and
independent dealers to target
various market segments with
differentiated products.
For Nike, being prepared for
more than one future is also
about continuously making
strategic and operational adjustments to its supply chain. “We
are comfortable having one foot
on each side of the fence,” says
Denson, explaining how the
company’s two large manufacturing partners are choosing two
different paths in response to
China’s wage inflation, with one
developing Vietnam as the new
sourcing base and the other putting its faith in inland China.
These leading companies
know that accommodating the
realities of China is not about
embracing every difference.
Rather, it means finding a common platform and recognizing
China’s new priorities—whether that means developing the
inland, generating employment,
reducing inequalities, using
resources more efficiently, or
building up smart infrastructure. And it means partnering
with China’s private and public
sectors from a position of
strength. An expanding and
stable Chinese economy means
greater opportunity for US companies that have the flexibility
not just to weather change but
to prosper from it as well.
An expanding and stable Chinese economy means greater opportunity for US
companies that have the flexibility not just to weather change but to prosper
from it as well.
PwC View issue 13
15
“The political landscape in China
today cannot be defined by any
ideology or the policies of a strong
leader like Chairman Mao or
Deng Xiaoping. The leadership is
becoming increasingly diversified,
and the leaders’ views are also
becoming more transparent. There
is some public debate going on.”
Cheng Li, Director of Research, John L. Thornton China Center
of the Brookings Institution and author of China’s Leaders
Two views
In 2012, at least a dozen of China’s top
leaders, including President Hu Jintao and
Premier Wen Jiabao, are likely to retire,
making way for the next generation of
political leadership. The time is right to
assess some of the different views on the
vision for future development of the Chinese
economy. For US companies, especially now,
ignoring those different views could be a
costly mistake.
While China is a market prized above all, more and more US companies are
perplexed by its increasingly unpredictable business environment. In particular, understanding and predicting China’s policy shifts and resulting changes in
the commercial, regulatory, legal, and business landscapes can pose significant
challenges to US companies seeking to develop a China strategy that will be
properly aligned and reconciled with those changes.
But how can we achieve that understanding? Some say the answer lies in
revisiting our assumptions about China’s government. While still clearly a
one-party system, China’s government is no longer a monolithic entity charting
a linear course of economic development. Specifically, while China’s political
leadership may agree in principle on the need to reform various parts of the
economy, there isn’t always agreement on the process, timing, and degree of
change needed to realize that vision of reform.
Are US companies, then, at the mercy of unpredictable policy twists and turns
in China? There’s certainly guesswork involved, but some companies are better
at it than others. These companies are beginning to understand the different views within China’s leadership. By better understanding the different
views, one can gain insights into China’s leadership and their decision-making
processes. Of course, dividing China neatly into two categories is as much
an oversimplification as dividing America into red states and blue states. But
doing so is a way of beginning to understand the policy differences within the
Chinese political leadership.
More important, in the absence of a clear direction regarding exactly how
the Chinese will reshape their economy, global businesses should know the
differences and the commonalities in the points of view of Chinese leadership
and develop strategies that can quickly adapt to this dynamic environment.
While most of the differences discussed in the following chart are subtle and
may appear to be even minor, they can have significant impact on businesses
operating in China.
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PwC View issue 13
Within China’s one-party system, various entities are staking different positions on the important issues that will shape China’s
socioeconomic future. The labels “seeking comprehensive reform” and “promoting the tried and tested” do not indicate that
China’s political leadership is divided into clear-cut factions with distinct ideologies. Rather, the labels make for a convenient
way of understanding two broad views around which diverse opinions, and not various individuals, have loosely coalesced.
Seeking comprehensive reform
Promoting the tried and tested
Guiding
principles
•Promote scientific development to maintain social
stability. Focus on addressing geographic and
economic inequalities, encouraging environmental
sustainability, and gradually promoting democratic
reform. This will ultimately lead to the creation of a
harmonious society.
•Support continued economic growth in order to
preserve social stability. Continue with existing
governance structures, and emphasize the value of
experience while cautiously embracing meritocracy
within the political ranks.
Industrial and
trade policy
•Spur the economic development of inland regions
and second- and third-tier cities—for example,
through infrastructure investments—to address
social inequities.
•Balance inland development with continued
progress of tier one and coastal cities that have
led China’s economic transformation.
•Promote labor reforms to enhance worker rights,
improve working conditions, and address income
inequalities.
•Manage the pace of labor reforms with an
understanding of its impact on China’s global
competitiveness (e.g., compared with such
locations as Vietnam), wage-driven inflation, and
employment generation that is seen as key to
maintaining social stability.
•Encourage domestic consolidation to create companies with the scale and strength to compete with
global firms.
•Support consolidation in key sectors while promoting the growth of small and/or private enterprise to
foster entrepreneurial agility and innovation that will
serve China well in the long term.
•Aggressively implement environmental policies
designed to reduce pollution. This includes providing greater market access to foreign companies in
exchange for advanced technology.
•Encourage participation by domestic companies
in the cleantech industry. Harness the advantages
offered by local companies to manage the costs
associated with higher levels of environmental
efficiency.
Monetary policy
•Consider renminbi revaluation to mitigate the risk
of domestic inflation and reduce the import bill.
•Resist renminbi revaluation because of concerns
about its impact on export competitiveness as well
as the appearance of bowing to foreign pressure.
How they will
boost domestic
demand
•Encourage government spending on social
programs, including healthcare and education.
•Balance spending on new priorities with existing
ones. Establish clear standards—for example,
related to the quality of healthcare—before determining levels of government spend.
•Boost domestic demand and private consumption
to move away from heavy reliance on export-led
growth.
•Sustain momentum for export-led growth that has
delivered prosperity over the previous two decades.
Value savings because of their impact on lowering
the cost of capital and encouraging investment.
“There is tension over how you build the society. Do you
continue to focus on the wealthy areas to generate higher
efficiencies, or do you do it in the rural and inland areas
to avoid the instability that comes from greater and
greater income disparity? The answer is, you do both in
some combination, but they are arguing over the specifics
on how to do it.”
Robert Lawrence Kuhn, advisor to the Chinese government and author of How China’s Leaders Think
By Alan Chu and Lawrena Colombo
Lawrena Colombo is a partner in PwC’s People and Change practice.
People and Change
Aligning your talent strategy to China
business strategy
Does your talent strategy reflect the ever-changing realities of China? How can
you implement rigorous recruiting and retention processes as well as develop
future leaders to grow and sustain your business?
Many companies are familiar
with China’s current labor market trends, such as demands for
pay hikes and better working
conditions, high turnover rates
due to a shortage of the commercial skills necessary for a
global enterprise, and evolving
labor laws like the one introduced in January 2008 to grant
greater contractual rights to
workers. On a daily basis, these
companies are competing for
talent in a market that is seeing
a roughly 10 percent increase
in salary every year and whose
workers in the 25- to 30-yearold age-group stay in their jobs
for a year or two on average.
But a few companies are also
paying close attention to the
unique characteristics of China’s
labor market that cannot be
managed by simply tweaking
human resources (HR) policies that originated or worked
elsewhere, including other
high-growth countries. Take
agricultural and construction
equipment manufacturer John
Deere, for example. Dave Whan,
the company’s director of talent
management strategy and policy
design, says, “In developing the
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PwC View issue 13
employee value proposition in
China—whether it’s compensation, recognition, or the intrinsic
value of the work itself—where
we place emphasis can vary
region by region. To become
an employer of choice in every
region, our approach will
be similar, but we’ll have to
customize it based on feedback
we receive from both current
employees and the market.”
John Deere is responding to a
phenomenon some observers
have described as China’s
increasingly “segmented” labor
market, wherein vast pools of
labor in the countryside coexist
with shortages in coastal cities.1
Addressing such evolving trends
reflects the growing desire
among leading companies to
develop a talent strategy for
China that is more assimilated to
the local environment, believing
it would be an important source
of competitive advantage.
In the critical area of leadership
and talent development, for
example, a few companies
are recognizing that building
up skills locally—rather than
depending exclusively on
expatriate talent—is necessary
in an environment where complex social dynamics underlie
all business interactions. S.C.
Lee, Newegg’s executive vice
president, who leads a strong
Chinese American management
team, feels strongly about this:
“We employ several Americans
who speak Chinese, and we send
them to China both as expats
and for short-term projects,”
he says. “But we are very clear
that we are sending expertise to
China because we believe that
general management responsibility resides locally.” At Newegg,
the American employees focus
on transferring skills and knowledge to the local Chinese, who
in turn have the opportunity to
work in the US headquarters on
specific projects.
Companies that are taking the
lead in implementing such
measures are among those
whose business leaders demand
more value from HR, such as
to help grow the bottom line,
quantify talent needs, recruit
the best candidates, and
develop and retain the highest
performers.2 John Deere’s Whan
says, “Management expects the
HR community to be a proactive
business partner. That requires
us to have the business acumen
to contribute to strategic conversations and respond with speed
and agility to changing circumstances, such as when we are
entering a new market.”
In China, that can be particularly
challenging not only because of
profound cultural differences
but also because of the rapid
socioeconomic shifts occurring
there. But with China becoming increasingly influential as
both a market and a competitor,
some companies are gradually
adapting to specific Chinese
practices. These companies
are positioning themselves for
long-term success by aligning
their human capital strategy to
China’s changing realties as well
as the country’s cultural norms.
When it comes to shaping and
executing talent strategies for
China, companies are at different stages of maturity. To create
a roadmap for action, it may be
useful to chart practices along
this growth trajectory: becoming more efficient (optimizing),
becoming more effective (growing), and innovating (leading).3
1 “The next China,” The Economist,
July 29, 2010.
2 PricewaterhouseCoopers, 10Minutes on
Transforming HR, March 2010.
3 This illustration makes use of PwC’s Competitive Leadership ModelSM, which helps map a
company’s focus and vision, its position relative
to industry peers, and an actionable plan for
achieving market leadership.
Acquisition
Optimize
Grow
Lead
•Rely on expatriates for key managerial
roles. Recruit local talent by targeting
top-tier universities and experienced
candidates in coastal cities.
•Target talent based on a thorough understanding of China’s diverse labor market,
taking into account regional variations in
wage inflation, labor laws, turnover rates,
and skill sets.
•Align recruiting strategies with long-term
strategic priorities. Recruit with openness to Chinese managerial practices that
are adapted to the domestic business
environment. For example, Chinese-style
communication skills and ability to understand and navigate relationships in regions
where the company plans to expand may be
important drivers of organizational success.
•Emphasize English-language skills and
familiarity with Western practices as
prerequisites for recruitment.
•Be alert and responsive to regulatory
changes, and act in accordance with
Chinese labor laws.
Retention
Engagement
•Design monetary and other shortterm motivators as tools of retention.
Incorporate benchmarking data on
compensation to design salary ranges
for target positions.
•Target the benefits to different segments of
China’s diverse workforce. For example,
offer higher compensation in coastal cities
but more training and development in
inland areas.
•Create working conditions that comply
with regulatory considerations such
as labor and tax laws. This includes
upholding health and safety standards,
overtime compensation, nondiscrimination, etc.
•Offer a work environment aligned to stakeholder expectations. For example, recognize
that younger, more-individualistic Chinese
(typically products of one-child families) are
demanding a higher quality of life, measured
not necessarily by wages.
•Start with job descriptions and organizational structures proven to have
worked in the US, and gradually adjust
them to accommodate local expectations around roles and responsibilities.
•Create work processes that are assimilated to local issues such as an education
system that is trying to keep up with rapid
growth and global economic integration. For
example, support growth and development
in standardized roles and responsibilities;
and as people excel, provide them with
the developmental platform to move on to
more-specialized functions.
•Design HR operations to mostly mirror
those in the US headquarters, with
some adjustments to reflect cultural
factors such as language barriers,
communication styles, and attitudes
toward hierarchy and authority.
Leadership
development
•Where local talent is not readily available,
use expats as bridges to support and
develop local management talent for the
future.
•Focus on the development of Western
leadership skills with less consideration of skills that may be relevant in
the Chinese context.
•Provide cross-cultural training to build
knowledge and awareness regarding
differences in norms, practices, and
behaviors.
•Provide guidelines and techniques for
understanding and addressing underlying cultural biases and for establishing
processes for conflict resolution and best
practices that will address future issues.
•Foster development of firm-specific skills,
and use long-term motivators and hard-toreplicate benefits customized to different
demographic groups.
•Connect employer brand with consumer
brand, recognizing the importance of employees as current and future consumers in a
rapidly expanding market. Engage employees
with the same ideas and concepts used for
engaging consumers through unifying brand
values—be it integrity, innovation, fun, teamwork, or other defining attributes.
•Proactively address the risk of high turnover
by developing dynamic and detailed standard
operating procedures that account for Chinaspecific differences and challenges.
•Offer incentives to employees to own the
working processes, and continuously monitor
the evolving environment to update and refine
procedures as needed.
•Create institutional processes to rally people
around cross-border and cross-cultural initiatives. For example, engage Chinese Americans
around Chinese business development
efforts, and increase the exposure of talented
Chinese nationals to other growing markets
such as India and Indonesia to build future
regional leaders.
•Integrate China business strategy into the
formal succession-planning methodology
and leadership development plans.
•Tap into personal and cultural differentiators
of future leaders as a business-needs-driven
rather than a diversity-focused strategy.
•Invest in long-lead development items such
as language skills and expatriate experience.
•Recognize the competitive advantage offered
by foreign-born executives in leadership
positions in corporate America, and address
the unique set of challenges involved in
developing leadership talent from China as
a matter of necessity for future success.
•Conduct succession planning for key positions that need to be replaced by Chinese
local managers.
PwC View issue 13
19
Contacts
Alan Chu
350 South Grand Avenue
Los Angeles, CA 90071
(213) 356-6520
[email protected]
Lawrena Colombo
One North Wacker
Chicago, IL 60606
(312) 298-2413
[email protected]
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