Competitiveness in
the “new” China:
Do multinationals
have what it takes
to win?
Wieger Joosten
The economic tailwinds that propelled
multinational corporations (MNCs) to lofty
heights in China over the past 35 years have
dissipated. MNCs now face headwinds that call
for new competitive strategies that are based on
more than quality, brand reputation and market
penetration. Marketing precision, organizational
agility and local collaboration and co-innovation
are the new keys to success.
A new China.
A new growth strategy.
Against the challenge of rising costs and the threat of new and nimble
local companies, it seems that “being global” in China no longer carries
the advantage it once did. Accenture Strategy research1 reveals that 75
percent of MNCs in China are now growing at a slower rate than China’s
GDP. If current trends continue, MNCs run the risk of losing about 10
percent of the value of their businesses each year. By 2020, they might
see half their business value in China erode.
Figure 1. MNC growth in China is slowing
Revenue growth (YOY, 2014-15)
Decrease > 10%
9%
8%
Decrease 5-10%
Decrease 1-5%
Revenue growth (YOY, 2012-15)
5%
75%
14%
Flat
18%
Increase 5-7%
Increase >10%
64%
64%
18%
20%
14%
16%
16%
22%
2013
2014
2015
66%
21%
Increase 1-5%
Increase 7-10%
77%
6.5% GDP
14%
6%
25%
19%
9%
2012
Down
Flat
Source: European Chamber Business Confidence Survey 2015, AmCham 2015 China Business Climate Survey Report,
Accenture & FT China Intelligence Survey 2015, Accenture analysis
2
Up
Ironically, despite China’s economic slowdown and the emergence of local
competitors, MNC leaders continue to be bullish about China’s potential—
and their own potential to seize new opportunities. Their confidence is
based largely on the growing wealth, urbanization and sophistication
of China’s middle class. It is reflected in MNCs’ beliefs, as well as their
investment strategies.
Figure 2. MNC executives are confident
72%
of MNC executives are confident to tackle
challenges in the next 3 years.
71%
of MNC executives are planning to increase
investments in China over the next few years.
Nearly a quarter of them are planning to
invest aggressively.
24%
66%
of MNC executives expect their performance to
improve over the next three years. The same
percentage believes their companies will continue
expanding in China for the next 10 years
Source: Accenture & FT China Intelligence Survey 2015, Accenture analysis
Optimism is generally a good thing. Blind optimism is not. The truth is
that MNCs—regardless of their industry sector—will find it increasingly
difficult to retain their competitive edge in the years ahead. The “new”
China is characterized by new pressures and trends. MNCs’ future success
is dependent on how well, and how quickly, they are able to respond.
Three actions can make all the difference.
Expand your vision by narrowing your focus.
MNCs need to face the reality that there is no such thing as an “average”
consumer in the new China. If the country’s 1.4 billion consumers have
anything in common, it is this: each one expects unique experiences to
satisfy their unique needs. Consumer goods giant P&G, which lost market
share in China to more nimble local companies, gets it. As CFO Jon
Moeller noted at a recent analyst conference, “we looked at China a little
bit too much as a developing market, as opposed to the most discerning
consumers in the world.”2
3
To win customers in the future, MNCs must not only become highly
responsive providers-of-choice, but also accurate predictors of their
customers’ specific needs and preferences. They need to represent more
than a reputable brand. They need to provide more and better products,
convenience, last-mile/zero-mile services, and instant gratification.
Consumers’ demands for seamless shopping experiences that save time
and make life easier are growing each year.3
MNCs also need to realize that precision is the new currency of success
in China. Targeting consumers with more personalized campaigns is one
example of this shift. Spending on mass-market television or print ads
has declined since 2014, and is expected to remain static or fall further
through 2020. Digital advertising, in contrast, is soaring. Companies
invested $23.5 billion in digital ads in 2014. This year, digital ad spending
is projected to exceed $40 billion. By 2020, that figure will more than
double.4 This suggests that companies realize the need to abandon
the one-size-fits-all products, services, channels and experiences that
satisfied customers in the past.
Today, brands must be highly differentiated. Go-to-market strategies
and communications must be localized and laser-focused. Customer
segmentation must be based on local attributes and consumer
characteristics that go beyond demographics to reflect unique
preferences, expectations, attitudes and behaviors. And offerings and
experiences must be personalized to better meet the demands of distinct
consumer groups. The benefits of more precise marketing approaches,
along with targeted consumer segmentation, offering development
and experience delivery, are clear. For one global consumer goods
manufacturer, Accenture applied a granular (by city and by channel)
segmentation strategy that identified the opportunity to improve sales by
80 percent in certain high-value locations.5
Unleash your “inner start-up.”
Emerging Chinese businesses are agile, fast and risk tolerant. MNCs, in
contrast, are more centralized, too dependent on global operations and
processes, and often too slow to keep pace with customer demands or
pursue new market opportunities. Their inability to innovate as quickly as
their local peers will pose a significant problem.
While 92 percent of MNC leaders see innovation as critical, only 32
percent believe they are leaders in funding innovation. The lack of
investment in innovation is due largely to the tremendous cost pressures
that MNCs now face. We found that nearly two-thirds (65 percent) of
MNC leaders consider cost pressure to be the greatest challenge they
will face in the next three years. Labor-related expenses are particularly
troubling. Wages for MNC employees today are 19 percent higher than
wages of local company employees. MNCs could justify their higher
employee salaries when they dominated markets and posted record
profits. But, today, with local players claiming more market share, the
historic MNC wage growth is unsustainable.
4
Innovation is very critical
for 68 percent of MNCs
in China. Innovations
in new products/
services (48 percent)
and business models
(20 percent) will be
particularly important.
Figure 3. Labor costs are, by far, the most concerning for MNC leaders
5%
5%
Talent & labor costs
4%
Production and raw material costs
10%
54%
11%
11%
IT & infrastructure costs
No, all are under control
Logistics cost
Other
Advertising and marketing cost
To respond to the threat posed by leaner Chinese companies, MNCs need
to adopt a start-up mentality. This means they need to adopt strategic
cost management principles and apply zero-based concepts to free up
capital to re-invest in innovation and fuel growth. They need to embrace
more flexible operating models and boost productivity by automating
manual labor, increasing spans of control, and simplifying approvals for
faster decision-making. They also need to operate more efficiently. This
is an imperative that MNCs understand. According to our research, 80
percent of MNC leaders are planning to improve their cost efficiencies as
they pursue top line growth. Process optimization, business consolidation
and digital technologies will all play a part.
Figure 4. 2 most critical capabilities MNCs are relying on to manage the cost
Optimize processes, e.g by applying lean, or
other methodologies
Centralize and consolidate local business activities
37%
Organization and government simplification
37%
IT enablement
Improve bargaining and controllability of upstream market
through expanding in upstream industry or supply chain
Outsource and/ or offshore local business activities
Reduce demand, stop doing work
other
47%
29%
23%
12%
6%
2%
Source: Accenture & FT China Intelligence Survey 2015, Accenture analysis
Funding is certainly a key driver of the innovation that will enable MNCs
to swiftly respond to Chinese trends and consumer needs. But funding
is not sufficient. MNCs will also need to create a culture of innovation
and a mindset that encourages risk-taking. Training programs, workforce
incentives and talent strategies should all be designed with the goal of
making innovation part of the organization’s DNA. Company leaders must
be visible advocates. Appointing a “chief disruptive growth officer” can
help drive the change from the top down.
5
Go local (and check your ego at the door).
Two-thirds of executives believe China-born MNCs will become
competitive powers in the next 10 years. But many local companies
don’t plan on waiting that long. They are already gaining market share,
especially in the sectors of retail, consumer goods and consumer
electronics. And they are doing it with remarkable speed. Huawei
Technologies Co. Ltd. is but one example. Through its new smartphone
brand, Honor, the Chinese manufacturer targets digital natives via a
direct-to-consumer channel.6 In the process, it usurped the former market
leader, Samsung, in just six months.7
Which MNCs are at risk?
MNCs in certain sectors in China are more threatened than others by
local competitors. MNCs operating in the packaged foods and beauty
and personal care sectors, for example, have seen their market share
drop since 2012.8 One reason local companies are gaining ground
is that they often have a better understanding of local consumers’
preferences. Also, products and processes are generally easily recreated
and can be offered at a lower cost. As local companies’ expertise grows
in the coming years, so will their market share.
Some MNCs, however, are poised to fare better over the next 10
years. This is especially true for those that operate in sectors that
rely on complex technologies or product development processes,
which Chinese firms find difficult to replicate. Similarly, MNCs in the
life sciences and consumer health space continue to differentiate
themselves with sophisticated R&D practices. GE, Siemens and
Philips currently account for 70 percent of China’s high-end medical
equipment market.9 It’s likely they will hold their leadership positions.
The question, though, is for how long?
Forward-thinking MNCs are starting to view local players not as threats,
but as partners. In fact, a third of MNCs (34 percent) see market success
and future growth coming from collaborations with local companies.
A number of them are already showing how it is done. A major global
brewer is forming partnerships with local players to create exclusive
nightlife experiences.10 Sportswear giant Adidas has moved its entire
production capability to Chinese suppliers.11 And Jaguar Land Rover
created a joint venture with Chery Automobile to produce models
specifically tailored to the Chinese market.12
As these examples illustrate, collaboration can take many forms. One
of the most promising is the creation of ecosystems, through which
MNCs can deliver innovative products and experiences at scale. Dell,
for example, has demonstrated its long-term commitment to China by
pledging to invest $125 billion over the next five years. As part of this
strategy, it signed a strategic agreement with Kingsoft Cloud to build
local partnerships in the big data and cloud space. All told, the computer
company expects to sustain a million jobs within its ecosystem.13
6
To create the most successful ecosystem, MNCs need to put a structure
and process in place to identify the best potential partner(s). They
need to establish rigorous controls to allow the partnership to flourish
for all parties. And they need to think about the long-term value that
collaboration can bring by constantly assessing whether they can leverage
their partnership advantages to drive success in other markets or in other
lines of business. For example, EMC initially partnered with Lenovo to gain
access to server and storage markets in China, but plans to expand the
synergies of the partnership to other global markets.14
What characterizes a successful ecosystem?
Accenture Strategy research indicates that three factors enable
successful co-innovation with local partners:
• Mutual long-term benefits. To create a win-win ecosystem, local
companies deliver access to new ideas and new market channels.
MNCs bring not only investments to the table, but also overseas
connections, technology and talent.
• A commitment to exchanging information. To best meet the needs
of China’s consumers, ecosystem partners must create differentiated
experiences. To this end, they must share their knowledge of
customers to generate the insights they need to deliver what
competitors can’t.
• An open mind. Ecosystem partners should keep alliances fresh by
always seeking to expand the network to other local players that
can help drive market success.
What got you here won’t
get you there
Until now, MNCs in China have been playing not to lose. Now they must
play to win. That will be a daunting challenge for those MNCs that are
unable to respond to the customer demands, cost pressures and local
competitors that define today’s China. To thrive in the years ahead,
MNCs will need a new strategy for China—a strategy that is guided by
granular insights, enabled by agile operating models, and realized through
personalized experiences and new partnerships with local leaders.
7
Join the conversation
@AccentureStrat
Contact the Author
Wieger Joosten
[email protected]
Additional Contributor
Selina Zhao
[email protected]
References
Accenture and the Financial Times , China Intelligence Survey,
2015.
1
“Why P&G’s CEO Says the Company Needs to Be More Nimble,”
Fortune, February 19, 2016. Retrieved April 24, 2016 from http://
fortune.com/2016/02/19/procter-gamble-ceo-nimble/
2
Accenture, “The Future of Commerce has Arrived:
Understanding the New Asian Consumer,” 2016.
3
eMarketer, “Digital Ad Spend Rises in China Despite Economic
Slowdown,” March 9, 2016. Retrieved May 10, 2016 from http://
www.emarketer.com/Article/Digital-Ad-Spend-Rises-ChinaDespite-Economic-Slowdown/1013677#sthash.f3W24lQe.dpuf
4
5
Accenture client experience
Richard Trenholm, “Huawei reboots its image with new Honor
brand,” CNET, October 28, 2014. Retrieved April 26, 2016 from
http://www.cnet.com/news/huawei-reboots-its-image-withnew-honor-brand/
6
EEPW, “Apple, Samsung & Huawei share the high-end mobile
phone market in mainland China,” April 30, 2015. Retrieved May
10, 2016 from http://www.eepw.com.cn/article/273355.htm
7
8
Euromonitor, Accenture analysis
MEI.NET.CN “Three foreign enterprises take 70% market
share of China’s high-end medical equipment,” August 1,
2014. Retrieved May 10, 2016 from http://www.mei.net.cn/
yqyb/201408/569063.html
9
10
Accenture client experience
Laurie Burkitt, “Adidas to Close China Factory, “ Wall Street
Journal, July 18, 2012. Retrieved April 26, 2016 from http://www.
wsj.com/articles/SB10001424052702304217904577534074222
825982.
11
Angela Monaghan, “Jaguar Land Rover seals Chinese joint
venture,” The Telegraph, November 18, 2012. Retrieved May 2,
2016 from http://www.telegraph.co.uk/finance/newsbysector/
transport/9684276/Jaguar-Land-Rover-seals-Chinese-jointventure.html
12
Dell press release, “Dell Announces Its New ‘In China, For
China’ Strategy to Support Job Creation; Propel Entrepreneurship
and Innovation,” September 10, 2015. Retrieved May 2, 2016
from https://www.dell.com/learn/us/en/vn/press-releases/201509-14-dell-announces-its-new-in-china
13
Reuters, “China’s Lenovo to partner EMC on storage, server
products,” July 31, 2012. Retrieved May 2, 2016 from http://
www.reuters.com/article/lenovo-emc-idUSL4E8J108Y20120801.
14
About the Research
In September 2015, Accenture Strategy and the
Financial Times surveyed 119 executives of multinational
corporations operating in China to better understand the
challenges they faced and the opportunities for future
success. The organizations the respondents represented
reported an average of US$2.5 billion in revenues and
11,000 employees in China.
About Accenture
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About Accenture Strategy
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