The year 2014 has turned out to be another volatile one in China, and looking ahead to 2015, we should expect this volatility to continue. These few years, as President Xi Jinping initiates his reform agenda, will be a turning point and will cause some turbulence. But as reforms are implemented with increasing vigor, new business opportunities will arise. Indeed, many companies continue to do well within this more uncertain and challenging environment, although disparities between sectors have become stark. Companies need to avoid being distracted by the volatility, adjust their approaches, and seek out opportunities as they arise.
A recent InterChina survey of over 50 China country managers reflected how the prospects for the years to come vary wildly depending on the sector and even within sectors. The across-the-board boom of the past has ended with China’s slowing economic growth, leaving a more heterogeneous economy. Sectors such as healthcare and automotive components stand out as high growth sectors for international companies, both due to demand growth and relative strength against local competitors. The consumer space is mixed, with imported food booming, luxury goods slowing, and many mainstream categories stagnating. Industrial companies active in wind power, oil and gas, automation, and railways are doing well, while others in construction and infrastructure suffer. Other boom sectors, such as the Internet, will remain difficult for international companies given the strength of local competitors. Now more than ever, prospects and opportunities need to be assessed at the sector level.
In our survey, nearly all China country managers recognized a “more uncertain and challenging environment.” International companies will need to adjust, both strategically and operationally. The traditional success factors for China, such as headquarter commitment, a capable local team, a China-tailored approach, and the right focus in terms of government relations, will all remain critical. However, a further set of initiatives should now be considered, and all of these are very sector or industry specific.
REVIEW STRATEGY FREQUENTLY
The continuous state of uncertainty and change will require an increase in the frequency of strategic reviews, possibly every two years or even more frequently. In particular, sales and profit goals will have to be continually assessed against market realities; customer sectors will have to be monitored so that only the most attractive are focused on; product and service portfolios will have to evolve to meet changing market needs, including investment in new product development specifically for the Chinese market; and new sources of growth will need to be identified and pursued as they emerge.
OVERHAUL OPERATING MODELS
With slower growth, growing competition, and rising costs, profitability is no longer the given it once was. For companies that fixated on the top line for the last 20 years, this will require a drastic shift in mentality. This is not just about running internal operational excellence programs, such as lean manufacturing. Companies also need to look at whether their operating model is still fit for purpose. By operating model, we mean something specific: how your organization, people, processes, and technology are configured to deliver on your strategy. Many companies’ current operating models, often the result of piecemeal decisions, will now need overhauling to see them through the period ahead.
A major consequence of the shift in the economic growth model will be faster consolidation in many sectors, and acquisitions will become obligatory for either establishing a significant presence or staying competitive. International companies will need a clear picture of the consolidation dynamics in their specific industry. Preferred targets may not be available, and thus relationships will need to be established and cultivated with a view to the future.
China has always been considered a complex and dynamic market. Despite the challenges ahead, there is again cause for optimism. International companies now have the opportunity to expand and consolidate their presence and play a larger role in the new economy. The turbulence will be manageable, and while what worked in the past will no longer be enough, the better prepared companies will flourish as long as they focus on their sector opportunities and don’t get too distracted by volatility and uncertainty.