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WSJ's The Experts

The Six Biggest Mistakes Multinationals Make in China

If multinational companies want to win in China before it’s too late, here’s what they should stop doing.

  • August 16, 2018
  • min read

Article

The Six Biggest Mistakes Multinationals Make in China

This article originally appeared on WSJ's The Experts.

Despite the turmoil brewing over an unfolding trade war, China remains a critical proving ground for multinational corporations. Ten years ago, for Western multinationals entering or expanding in China, the main question was “Is China different?” Most eventually answered “yes.” Rather than treating China as any other market, companies began to shift strategies and allow their Chinese operations to do whatever it took to win.

And yet, after visiting China for many years, meeting with both founder-led domestic companies and multinationals, I still don’t see many multinationals who are really doing whatever it takes to win. And I worry that time is running out, because the unique selling proposition of Western brands—quality and safety—is eroding as Chinese brands quickly catch up. For example, Bain & Co. in collaboration with Kantar Worldpanel has tracked fast-moving consumer goods in China for six years and each year, local brands have gained market share against foreign competitors. Local brands grew by 7.7% in 2017, capturing a 98% share of market growth, while foreign brands increased by a scant 0.4%.

If you want to win in China before it’s too late, here’s what you should stop doing.

Don’t try to fit China operations into a global mold. A China business doesn’t need your global scale; the market is big enough. When functions such as marketing and finance try forcing China operations to adopt global norms, they actually throw up barriers. Every multinational executive I meet says the business wastes time fighting the center for permission to do the right thing for Chinese consumers. If global functions want to help, they can either co-locate and solve for China with the China team, or they can get out of the way and presume trust in the China team.

There’s an important external dimension to consider as well. Chinese entrepreneurs don’t just think about how to run a business, they think about how to build an ecosystem. They no longer define market leadership by the assets they own, but rather by their role in surrounding networks of enterprise. Multinational executives will benefit by more aggressively building external partnerships and even a community of consumers.

Don’t be so quick to punish failure. In U.S. and European multinationals, people get fired if demand varies by 1% from the forecast. In China, companies deal with 50% to 100% ranges, which require a different approach to manufacturing. China’s insurgents embrace failure, but they shorten cycle times so that failure happens relatively quickly. You have to fail a lot and learn a lot. If you can learn in a more systematic way, and help the rest of the company understand, you can gain the benefits of speed and scale.

Don’t tame the chaos. As I’ve talked to multinational executives in China, I’ve learned their secret hope: that Chinese companies will grow up, professionalize and become just as hopelessly bureaucratic as their Western competitors. That’s not happening. Chinese companies have not built huge hierarchical organizations with layers of professional managers. They’ve kept structures flat and encouraged teams to mobilize and demobilize as they take on specific projects.

Abandon the five-year plan. The only time Chinese companies create a five-year plan is when they’re about to go public or sell themselves to a Western firm. The market moves too fast for companies to anticipate sales five years out. For example, some of China’s big social commerce competitors barely existed five years ago. Chinese companies pursue “today forward, future back” strategies, discussing how they think the market will evolve over a 10-year period, and then what they can do immediately to win in that future.

Stop using the same compensation structure as at home. Multinationals are losing the talent war in China. Many Chinese startups organize themselves around partnerships, even at the front lines, by providing stock options and other programs. The lure of shares in a Chinese startup far outweighs the offer of a salary with a global firm. Multinationals thus need to innovate ownership and incentive systems.

Don’t take your competitive advantage for granted. Notwithstanding all the challenges Western companies face in China, some are thriving because of one extraordinary competitive advantage: Chinese consumers still believe that Western companies generally have the systems in place to guarantee safer products. But the gap is quickly closing between multinationals and the best Chinese brands on the issue of trust and safety.

Winning in China will help the rest of the company adopt an insurgent mind-set. Rather than treating the China business as unique to China, consider it as the model for how you will compete globally.

James Allen is co-leader of the global strategy practice at Bain & Co. and co-author of “The Founder’s Mentality.”

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