International Business Strategy: Why China?

I had the privilege of hearing Jimmy Hexter, Director of McKinsey & Company, Beijing Office, speak at UC Berkeley’s recent Asia Business Conference. From his extensive experience doing business in Asia, he addressed the audience with a talk on why companies that want to stay competitive in a global marketplace need a strategy for business in China. I found his description of the importance of China to be fascinating. I will definitely keep this information in mind as I enter future business roles.

Why is China so important for global business strategy?

1- Size of the market
650 Million Chinese now live in urban areas. By 2025, China is projected to have 1 Billion urban residents. Each year 20 Million Chinese people either move to cities or are swallowed by them. After a house and a car, the first purchase of a typical Chinese family is a 50” big-screen TV. China is a hotbed of demand, and offers huge opportunities to leverage economies of scale.

2- Local competition
Multi-national companies that sell their products in China now find that local businesses are their biggest competition for market share. When multi-nationals first outsourced manufacturing to China, they relied on inexpensive labor and neglected best practices. Local competitors now understand design and manufacturing best practices so relying on inexpensive labor alone is no longer an option. Companies that fail to leverage industry best practices often face competing Chinese products that offer better value.

3- Emerging Talent
China has 1.3 Million college graduates each year. Multi-national companies are now empowering local R&D to design products in China for its own market, other emerging markets, and for global markets.

Mr. Hexter told the story of a U.S. semi-conductor company who attempted to design and manufacture a chip for the Chinese market. Once their product was launched, they found that a Chinese company was producing better chips at lower cost. In response, the U.S. company improved the design of their chip and lowered their costs and prices. After these changes, the chip was such a resounding success that it was exported to other markets. Today, only 20% of these semi-conductors initially intended for the Chinese market are actually sold in China.

How can companies incorporate China into their strategic plan?
According to Mr. Hexter companies should treat China like a second home market. Few multi-nationals understand Chinese perceptions of their products and tailor their value proposition to Chinese consumers. Companies should appoint board members from China and develop personal relationships with their largest Chinese customers.

To illustrate his point, Mr. Hexter told the audience a statistic about pianos. There are 60 Million piano students in China, he said. Chinese need pianos for small spaces, and they prioritize getting a good value for their money. Who will design and manufacture a piano to satisfy this demand, he asked us? Then, why wouldn’t that piano be well-suited for export to other markets around the globe? How will piano manufacturers in these markets recognize and respond to this competitive threat?