China Daily

Multinationals can learn from Chinese companies

The nation began its quantum economic leap by borrowing a three-phase strategy first used in Japan and South Korea.

By Steve Ellis, Orit Gadiesh and Paul DiPaola

Published on January 24, 2007
min read


It is the "Chinese Miracle" all right, but its roots lie in Japan and South Korea. The nation began its quantum economic leap by borrowing a three-phase strategy first used in Japan and South Korea: They established local manufacturing, often for low-cost sourcing to multinationals; they acquired know-how and technology through licensing and joint ventures; and they bought assets and brands abroad to secure global positions. But unlike their regional counterparts, Chinese companies have mostly done away with sequencing, instead condensing three phases into one. It took Japanese and Korean firms on average 25 years to reach global leadership; Chinese companies will achieve this in 10 to 15 years. Such a shortcut taken by Shanghai Automotive Co Ltd. Started in 1984 as a manufacturer of farm tractors, the company later built its auto manufacturing arm, borrowing innovation through government-negotiated agreements, including those with GM and VW. It also purchased a stake in South Korea's Ssangyong Motor to blunt challenges from regional rivals. And in 2000, the company bought two models from Britain's Rover Group to sell under its own brand. Last month the automaker announced it will acquire the joint-venture assets of its parent company, Shanghai Automotive Industry Corp. The $2.4 billion deal brings all of the company's partnerships under a single umbrella, making it the largest publicly traded carmaker in China. In addition to compressing their build, borrow and buy phases, companies like Shanghai Automotive move ahead by harnessing the innovation and energy common to most start-ups, combined with the centralized, coordinated planning of nationwide turnaround projects. We call this the "start-around" approach, one which has helped key players in China quickly overcome weaknesses and adapt to market changes. Another reason Chinese companies can advance so quickly is that they typically start off targeting the low-cost, lower-quality segment, where the high volumes make up for small margins. These volumes put companies on a fast learning curve, accelerating the growth process and preparing them for the rapidly growing middle market. It's what we call the "good enough" market, the segment of acceptable quality goods at unbeatable prices, and it's a breeding ground for global competitors. For foreign multinationals, the way to get ahead in China's fast lane is to take advantage of what these companies are missing in their race to secure a global presence. There are three important areas where Chinese companies get stalled. The most significant is customer loyalty, in terms of both the end consumer and intermediate distributors. Chinese companies historically dealt with fewer distributors, relying instead on mega-retail channels. Customer insight takes time to develop, and global firms have many more years of experience to draw upon. The battle for talent will also be critical, as firms seek out people with global experience. Multinationals are experienced in developing strong leadership, and will rely on their best-in-class programs for recruiting, developing and deploying management. Then there's innovation. Corporations today are unlikely to repeat this mistake. Constant innovation and compressed product cycles will characterize Chinese and multinational firms alike. Not only development phases, but various industries and sectors will be integrated: One day soon, R&D will converge across cosmetics, pharmaceuticals and food industries. Emulation will become progressively more difficult; Chinese companies may find themselves continually playing catch-up. In the end, however, it's important to remember that the race will be won by those who endure the longest. Here, China has another advantage: The centuries have taught its people to be patient. With their emphasis on quarterly earnings, today's multinationals may have yet another lesson to learn from China's companies: the idea of thinking forward in decades.

It is the "Chinese Miracle" all right, but its roots lie in Japan and South Korea.

The nation began its quantum economic leap by borrowing a three-phase strategy first used in Japan and South Korea: They established local manufacturing, often for low-cost sourcing to multinationals; they acquired know-how and technology through licensing and joint ventures; and they bought assets and brands abroad to secure global positions.

But unlike their regional counterparts, Chinese companies have mostly done away with sequencing, instead condensing three phases into one. It took Japanese and Korean firms on average 25 years to reach global leadership; Chinese companies will achieve this in 10 to 15 years.

Such a shortcut taken by Shanghai Automotive Co Ltd. Started in 1984 as a manufacturer of farm tractors, the company later built its auto manufacturing arm, borrowing innovation through government-negotiated agreements, including those with GM and VW.

It also purchased a stake in South Korea's Ssangyong Motor to blunt challenges from regional rivals. And in 2000, the company bought two models from Britain's Rover Group to sell under its own brand.

Last month the automaker announced it will acquire the joint-venture assets of its parent company, Shanghai Automotive Industry Corp. The $2.4 billion deal brings all of the company's partnerships under a single umbrella, making it the largest publicly traded carmaker in China.

In addition to compressing their build, borrow and buy phases, companies like Shanghai Automotive move ahead by harnessing the innovation and energy common to most start-ups, combined with the centralized, coordinated planning of nationwide turnaround projects.

We call this the "start-around" approach, one which has helped key players in China quickly overcome weaknesses and adapt to market changes.

Another reason Chinese companies can advance so quickly is that they typically start off targeting the low-cost, lower-quality segment, where the high volumes make up for small margins.

These volumes put companies on a fast learning curve, accelerating the growth process and preparing them for the rapidly growing middle market. It's what we call the "good enough" market, the segment of acceptable quality goods at unbeatable prices, and it's a breeding ground for global competitors.

For foreign multinationals, the way to get ahead in China's fast lane is to take advantage of what these companies are missing in their race to secure a global presence. There are three important areas where Chinese companies get stalled.

The most significant is customer loyalty, in terms of both the end consumer and intermediate distributors. Chinese companies historically dealt with fewer distributors, relying instead on mega-retail channels. Customer insight takes time to develop, and global firms have many more years of experience to draw upon.

The battle for talent will also be critical, as firms seek out people with global experience. Multinationals are experienced in developing strong leadership, and will rely on their best-in-class programs for recruiting, developing and deploying management.

Then there's innovation. Corporations today are unlikely to repeat this mistake. Constant innovation and compressed product cycles will characterize Chinese and multinational firms alike.

Not only development phases, but various industries and sectors will be integrated: One day soon, R&D will converge across cosmetics, pharmaceuticals and food industries.

Emulation will become progressively more difficult; Chinese companies may find themselves continually playing catch-up.

In the end, however, it's important to remember that the race will be won by those who endure the longest. Here, China has another advantage: The centuries have taught its people to be patient. With their emphasis on quarterly earnings, today's multinationals may have yet another lesson to learn from China's companies: the idea of thinking forward in decades.