Whether you are currently doing business in China or not, it is still essential to have a China strategy in place and to be aware of the realities of the Chinese marketplace. Corporate boards and their CEOs often make one of three critical mistakes: misallocating capital by investing too little or investing in the wrong areas; basing decisions on outdated assumptions; and, underestimating Chinese competitors by assuming they are producing lower quality goods or products created from copied IP.
In my article, 'Rethinking China,' in the January/February issue of NACD Directorship magazine, I note how the Chinese market has changed since the 1990s, how China will inevitably reshape competition in coming years, and what companies need to keep in mind as they adapt their strategies to the reality of stronger Chinese competitors both inside China and worldwide.
CEOs and boards need to pay attention to the China factor, even if they don’t have plans to sell in China and don’t have plans to use Chinese companies as part of their supply chains. In making strategic decisions, companies must be aware of China’s capacity to supply goods to foreign markets, either directly or through other competing multinational companies; and they must similarly be aware of Chinese competitors who are increasingly innovative and equipped to compete on a global scale.
Changing the way companies compete
The need to acknowledge China isn’t just limited to manufacturers. Chinese lenders and equity investors have an outsized impact in corporate finance, both in-country and globally; and Chinese construction companies are taking on a greater role in global infrastructure projects and are in roughly the same place as Bechtel just a few decades ago. Across all industries, Chinese innovation, competitive potential, and capacity must be given their due and taken into consideration when developing corporate strategies.
Supercharged Chinese companies are changing how American and global companies compete. Outdated models that still sometimes make their way into boardroom strategy sessions neglect to acknowledge the strength of Chinese competitors and the influence they have on the global marketplace. Sun Tzu said that he who underestimates his enemy is sure to be captured by him, and those corporate boards that still believe that Chinese companies pose no threat are putting themselves in serious jeopardy. Innovative and cash-rich Chinese firms are becoming major players globally, and not just by driving down costs. Companies like Huawei and Haier are ratcheting up innovation and leading the market.
New boardroom strategies needed
Future growth prospects will depend on how well a company competes inside China, as well as how effectively they defend their market share outside China against increasingly strong Chinese competitors and other multinational companies that have already forged alliances with Chinese partners.
Competing within China today requires more sophistication than ever. The old tactic of innovating in America with a long-term goal of selling to China is no longer viable. Not only do companies have to register new inventions in China even if they are not selling there, they must also be aware of original Chinese IP development when undertaking their own R&D.
For many companies, it is time for an all-in strategy regarding China. Firms like Intel, for example, have made big bets in cities like Chengdu, and Airbus and Boeing now have corporate strategies that acknowledge the reality that more than half of aircraft sales in the next 20 years will be to Chinese carriers.
Some companies will discover that they are not capable of competing in China or with China – at least not alone. They will likely need to affiliate or develop alliances with either Chinese partners or other multinationals.
Other companies will hear about the recent moves of McDonald’s, HP, and Yum Brands, and ponder whether they should also sell out now in an effort to monetize their historic investment in China before the value begins to decline.
What to do
We are entering an environment in which China could drive a multinational company’s strategy more than the company itself – in essence, rendering the company the tail rather than the dog – which is an outcome no board will want to see happen.
It’s time for multinational companies to delve into a deeper discussion about China strategy and how China will affect overall corporate strategy. This will prompt key decisions about whether to double-down on the current approach, seek alliances in order to survive, or monetize current business before too much change occurs. The initial question is simple: How will China, indirectly or directly, reshape our company? Many CEOs and board directors will be surprised by the answer.