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view 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 7 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 PwC View issue 13 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. 16 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 18 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] For more insights on business issues you care about, get the full issue of View magazine at: www.pwc.com/view To request additional copies of View or to comment: www.pwc.com/view. PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. © 2010 PricewaterhouseCoopers LLP. 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