Is it too late to get into the China market?

Karen Cho |

Is it too late for multinationals to enter China right now? Not so, according to Edward Tse, Booz & Company’s senior partner and chairman for Greater China.

“I think for many companies, China is such an important market that it’s never really too late ... If you're a late entrant, you need to really find a unique value proposition that is differentiated against your competition. So by no means China is going to be an easy place to enter or to do business,” he told INSEAD Knowledge shortly before speaking to MBA students at the school’s Asia campus in Singapore.

Considering that international interest in the Chinese market has not waned, Tse’s latest book, ‘The China Strategy: Harnessing the Power of the World’s Fastest Growing Economy’ should resonate with those still thinking about hedging their bets on China.

But first, they need to disabuse themselves of the notion that China is an anomaly. “I think many companies in the past have treated China either as a standalone market, a fringe market or a marginal market that is of interest, of some potential, but really not in an integrated sense for global strategies. And some companies treat China as a source for sourcing, for export of products back to their home countries, and so on."

“But increasingly what we're seeing is that China is no longer just a promising market. For many companies, China is becoming one of the most important, if not the most important market in the world for them. And importantly, because of the requirements of the China market, companies find that they need to establish research and development and product development capabilities on the ground in China in order to be responsive to the needs of the China market ... Hence my recommendation to many global companies that they cannot just consider China on an isolated basis. They need to consider China as an integrated basis as part of their global strategies.”

Another point of consideration, Tse adds, is establishing partnerships with local Chinese companies. “I think the partnership strategy is important, because in China the Chinese government requires foreign automakers (for example) to form joint ventures with local Chinese automakers. And the partnership strategy can make a difference as to whether or not you'll be successful. A strong partner can help you in navigating the market and therefore help you to be successful. On the other hand, a weaker partner can potentially be helpful as well, because then perhaps (you) can have more decision rights regarding how you make a decision, or what kind of product to provide to the marketplace, how you navigate the channels, and so on.”

This was how Toyota and General Motors, who were themselves relatively late entrants into the car market, were able to succeed and overtake Volkswagen, even though it had first-mover advantage.

Both, he said picked good business partners. “In the case of Toyota, when they came in, there weren't that many other choices and they picked a good and decent partner. And they worked with them and created a pretty good success story. On the other hand, General Motors was also a latecomer. They came in and picked a very good partner in SAIC (Shanghai Automotive Industry Corporation) and together they also created somewhat of a success story -- in fact a very successful story.”

Yet another determinant for success is an appreciation of what Tse calls the ‘China context’. “You need to develop a deep understanding of the China market and then identify what kind of product and service offering that is right for the China market. You cannot just plug and play. You cannot just pick something that works elsewhere and say this must work in China.”

“I think the first thing to do for many of these companies is to really understand the China market. And, as you know (again with) General Motors, in particular the Buick brand, maybe it wasn't the top brand in America -- the home country for General Motors. But when it comes to China they have done a very good job in promoting that brand.”

The China context also encompasses the country’s 5,000-year-old culture, history and its people. “I’ve seen it during my career that multinationals actually end up making wrong decisions; sometimes it’s strategic decisions, sometimes micro-decisions (that) they do not appreciate the China context well.”

Multinationals though, despite their breadth and scope, have also another challenge to contend with -- and that is that Chinese companies are fast coming into their own. Tse is referring here to the likes of Lenovo, Huawei and ZTE (Zhong Xing Telecommunication Equipment Company), who are paving the way for other homegrown companies. “These are the companies who are not afraid of making adaptations and experimentations ... They move very fast and they put money into doing R&D, and they’re just more responsive to the market’s needs compared to some of the Western incumbents.”

“China is producing both tremendous opportunity (regarding) market demand, but at the same time, China is also producing a new set of competitors. So you need to deal with that.”

Some multinationals, he adds, are circumventing this “competition of mindset.” Because it’s virtually impossible to “be more Chinese than the Chinese,” by taking part in joint-ventures with Chinese companies, they have “that kind of DNA” that only Chinese companies possess.

According to Tse, others may even acquire Chinese companies and set up different organisations so that the Chinese firm will run the business in a Chinese way. Or some may also choose to develop their own organisation outside the mother ship, but in their own “greenfield way” of creating an organisation, so they don’t mix the DNA.

“There are different ways the multinationals are doing (things), and frankly this is at a still very early stage for the multinationals. I think they are still testing the ideas and what options will actually work for them.”

Regardless, Tse believes it all comes down to competence. “What differentiates the winners and losers is to what extent a company can develop and bring their best capabilities to bear and they can compete head on with their competitors and win in the marketplace through their differentiated capabilities.”

'The China Strategy: Harnessing the Power of the World’s Fastest Growing Economy’ is published by Basic Books.

This article was written by Karen Cho, based on an interview for INSEAD Knowledge. You can find Edward Tse's article 'Is It Too Late to Enter China?' in the April 2010 edition of the Harvard Business Review.

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