Recruiting in China

I wanted to take a few minutes to lift our thinking out of the chaos and calamitous scenarios bombarding us in the news today to revisit and expand on one of our earlier podcasts by my cohort Kent Kedl on the topic “Why China Matters.”

In that podcast, Kent encouraged us to keep our eye on the ball with respect to China — in terms of what it can contribute to both our top and bottom lines. He also warned us to keep our attention on China’s ability and increasing interest to invest in the West.

As many of you no doubt have heard, there are a range of scenarios being bantered around about a Chinese auto company buying GM. While I think there are many hurdles to this scenario, even its possibility should grab our attention. China will continue to increase its standing in the world economy and thus affect our business, negatively or positively, whether we like it or not. Therefore, it has to remain on our strategic radar.

In this podcast I wanted to give you some perspective on the “talk on the streets” from companies and observers actively playing in China’s market in order to get a read on their views of the opportunities and challenges facing western firms doing business there. I’ll also touch on the tactics and initiatives being considered as a response. These insights are assimilated from a range of sources, including our own Technomic team, our many clients (who comprise both large and small/medium sized firms both sourcing and selling in China), from local Chinese businessmen, as well as from our friends at AmCham-Shanghai.

First let me acknowledge that all is not rosy in China either. Most firms are planning for lower growth (though you will note they do use the term “growth”) and, as you would expect, they see recession in Europe and the U.S. Credit is tight and the market for public offering of equity is very difficult. China’s stock market has also tumbled. Competition is becoming even fiercer with resultant price/margin pressure.

This margin pressure extends throughout the whole supply chain. So local management see as the keys to success a major focus on cash and cutting costs while trying to maintain and even develop their human capital, attempting to keep morale up. They are looking to be more innovative and to excel in their supply chains. We continually hear the buzz words, “get lean,” “best practice” and “China is the best place to be.”

Digging deeper

Let’s probe a couple of these areas a little more deeply and identify some specific measures and initiatives being implemented by those companies taking a more proactive position in these tough times.

Supply chain excellence remains a central theme with a focus on inventory reduction, scrap/waste elimination, capacity rationalization and better/smarter purchasing. As mentioned, credit risk management is a high priority as is the preservation of cash. One thing the Chinese businessman has taught me over the years is that “cash is king,” or emperor as the case may be.

Importantly, and a central point I want to get across, is the continued emphasis on growth. China, despite some slowdown, still offers attractive possibilities to expand the top line, even in this world recession. To achieve this, companies are trying to get smarter in their commercial strategies, selecting high value/high margin projects, targeting higher growth industries and especially import substitution (perhaps a warning here for those of you feeling comfortable with your export channels into China’s marketplace). Additionally, they are maximizing access to global and regional accounts, trying to exert as much account leverage and influence as they can.

The central theme here is proactivity. In these turbulent market conditions, disruptive strategies can be very effective, especially if your competition is distracted by such mundane things as survival.

Let me also address a question that I hear constantly these days: Is manufacturing leaving China? I know how to say the word “no” in about 10 languages, so consider it said. Now, is China’s manufacturing profile changing? Absolutely! We see some attrition where manufacturing is very people intensive, has low margin and is highly polluting. The government seems content to let this type of manufacturing either survive on its own, or migrate to other Asian countries like Vietnam. We are seeing little abatement in manufacturing FDI coming into China.

Look what at China offers manufacturers:

A strong and deepening supply chain and infrastructure
A major and continually growing domestic market in addition to export potential
Large volume scale and its benefits to cost competitiveness
An ample workforce that can be trained and empowered
Significant latent productivity to be gained by further process improvements
A very supportive pro-business government
Talk to Westerners who have dealt with government, employees and unions in Vietnam, India or other developing southeast Asian nations. This may open your eyes to the positive things China offers.

As we have repeated over the past year, China remains a strategic market for a dual-strategy approach: tapping the local market while developing secure and competitive sourcing for both domestic and international markets. And to quell the rumors of China’s impending demise that I see reported in the U.S. media, note the following:

According to the “2009 Economic Blue Paper” released Dec. 2 by the Chinese Academy of Social Science, a central government think tank, China’s GDP is expected to grow 9.8 percent or so this year and should be able to be maintained at a growth rate of some 9.3 percent in 2009. The minimum GDP growth rate for 2009 as set by the government is 8 percent. Anything lower than this is not acceptable to the government, whose top priority is to maintain social stability. So I can imagine that the Chinese government will do whatever is possible to accomplish this “break-even” growth rate for 2009. The government has both the will and the means to make this happen, and we have seen no hesitation in the past for them to take action.
If you like mind boggling numbers, note this one: Pledged investment by the central government for 2009/2010 is RMB 4 trillion! My calculator doesn’t have so many decimal places, but I reckon that’s almost $580 billion. Local governments are committing substantial funds, as well, which could significantly increase or even exceed this already massive figure. The central government even earmarked almost $15 billion for investment projects for the 4th quarter of 2008 to pad GDP a bit. As the Summer Olympics this year showed us, China can do things on a mind-boggling scale.
The EIU forecasts that by 2030 China will have over one billion middle- or upper-class consumers and be second only to the U.S. in economic output.
So, yes, China will have its struggles, but it ain’t going anywhere.

Finally, let me leave you with a few take-aways in terms of actions you might consider with respect to China as you review your 2009 strategy:

A clear theme among our client base is “smart growth.” This means being aggressive but more pointed in your projects and target markets/customers. To be effective, you must have current and accurate intelligence on your marketplace.
Manufacturing efficiencies are there to be had. Explore lean strategies and bring your best practices to China. Even if you are working with third-party vendors, in the right buyer-supplier relationship, you can effectively transfer process knowledge to key partners to help them improve their competitiveness.
Re-think your supply chain from start to finish. The recent dynamics in global markets have changed the landscape of sourcing costs and moving product around. Look at ways to optimize your supply chain and use it as an offensive weapon. You can exploit the strain your supply chain partners are feeling to develop a more efficient process and a more competitive supply structure. You may find, like the Detroit Three, as our auto companies are now called, that they are open to about any conditions in order to get “bailed out” of their present circumstances.
Lastly, chaos is the breeding ground for disruptive strategies. Look at going forward or backward in your supply chain in order to add value and enhance control. Consider an aggressive acquisition. There are many cost-effective assets to be had in China if you know how to find and cultivate them. A strategic move here could alter the playing field in your market, both in China and internationally. With the lull in market demand and the difficulties in going IPO, you may find that there are more friendly targets out there among Chinese manufacturers than there have been in the last couple of years when many of these same companies were demanding 20-30 times earnings for a piece of the action.
I hope these insights from the front lines have been helpful and that you will consider some of the actions I suggested. It is interesting to note that when the Chinese use the word for crisis (wei ji), it is a joining together of two words: “danger” and “opportunity.” Let’s not forget the second part of this meaning for crisis as we battle this economic environment.

http://www.technomicasia.com/blog/2008/12/15/why-china-matters-part-2/