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Life is getting tougher for foreign companies. Those that want to stay will
have to adjust
Jan 25th 2014
ACCORDING to the late Roberto Goizueta, a former boss of The Coca-Cola Company,
April 15th 1981 was one of the most important days in the history of the
world. That date marked the opening of the first Coke bottling plant to be
built in China since the Communist revolution.
The claim was over the top, but not absurd. Mao Zedong s disastrous policies
had left the economy in tatters. The height of popular aspiration was the four
things that go round : bicycles, sewing machines, fans and watches. The welcome
that Deng Xiaoping, China s then leader, gave to foreign firms was part of a
series of changes that turned China into one of the biggest and fastest-growing
markets in the world.
For the past three decades, multinationals have poured in. After the financial
crisis, many companies looked to China for salvation. Now it looks as though
the gold rush may be over.
More pain, less gain
In some ways, China s market is still the world s most enticing. Although it
accounts for only around 8% of private consumption in the world, it contributed
more than any other country to the growth of consumption in 2011-13. Firms like
GM and Apple have made fat profits there.
But for many foreign companies, things are getting harder. That is partly
because growth is flagging (see article), while costs are rising. Talented
young workers are getting harder to find, and pay is soaring.
China s government has always made life difficult for firms in some sectors it
has restricted market access for foreign banks and brokerage houses and blocked
internet firms, including Facebook and Twitter but the tough treatment seems to
be spreading. Hardware firms such as Cisco, IBM and Qualcomm are facing a
post-Snowden backlash; GlaxoSmithKline, a drugmaker, is ensnared in a
corruption probe; Apple was forced into a humiliating apology last year for
offering inadequate warranties; and Starbucks has been accused by state media
of price-gouging. A sweeping consumer-protection law will come into force in
March, possibly providing a fresh line of attack on multinationals. And the
government s crackdown on extravagant spending by officials is hitting the
foreign firms that peddle luxuries (see article).
Competition is heating up. China was already the world s fiercest battleground
for global brands but local firms, long laggards in quality, are joining the
fray. Many now have overseas experience, and some are developing inventive
products. Xiaomi and Huawei have come up with world-class smartphones, and Sany
s excellent diggers are taking on costlier ones made by Hitachi and
Caterpillar. Consumers will no longer pay a hefty premium just because a brand
is foreign. Their internet savvy and lack of brand loyalty makes them the world
s most demanding customers (see article).
Some companies are leaving. Revlon said in December that it was pulling out
altogether. L Or al, the world s largest cosmetics firm, said soon afterwards
that it would stop selling one of its main brands, Garnier. Best Buy, an
American electronics retailer, and Media Markt, a German rival, have already
left, as has Yahoo, an internet giant. Tesco, a British food retailer, last
year gave up trying to go it alone, and entered a joint venture with a
state-owned firm.
Some of those who are staying are struggling. IBM this week said that revenues
in China fell by 23% during the last quarter of 2013. R my Cointreau, a French
drinks group, reported that sales of its R my Martin cognac fell by more than
30% during the first three quarters of last year because of a plunge in China.
Yum Brands, an American fast-food firm, said in September last year that
same-store sales in China had fallen by 16% in the year to date. Its problems
were partly the result of a government investigation into alleged illegal
antibiotic use by its chicken suppliers.
Investors no longer celebrate firms with big investments in China. Our
Sinodependency Index weights American multinationals by their China revenues.
Sino-dependent firms used to outperform their peers, but in the past two years
their share prices have done worse than others .
As Jeffrey Immelt, the boss of GE, puts it, China is big, but it is hard
[other] places are equally big, but they are not quite as hard. Companies that
want to stay in China will have to put in even more effort. Many will have to
change strategy.
One China is over
First, rising costs mean that bosses must shift from going for growth to
enhancing productivity. This sounds obvious, but in China the mentality has
long been just throw more men at the problem . One way to get a grip on costs
is to invest in labour-substituting technology, not only in manufacturing but
also in services. Also, multinationals are falling behind local firms like
Alibaba and Tencent in exploiting a surge of big data coming from e-commerce
and smartphones.
Second, tighter control is another must. GSK s bosses in London admitted that
its problems in China were partly the result of executives acting outside of
our processes and control . Managers in headquarters must ensure that
executives behaviour and safety standards are as high as anywhere else in the
world. Chinese consumers are even more active on social media than those in the
West, so any scandal is instantly broadcast nationally.
Our interactive Sinodependency index gauges China's influence on the fortunes
of American multinationals
Lastly, a One China policy no longer makes sense. Most firms set up their local
offices when China s economy was smaller than $2 trillion. Although it will
soon be five times that size, many still try to run their operations from
Shanghai. That makes little sense when tastes in food, fashion and much else
vary between provinces and mega-cities that have populations as big as European
countries. Some 400m Chinese do not speak Mandarin. So even as CEOs need to
keep a closer eye on standards and behaviour, they should localise marketing
and perhaps product development.
China is still a rich prize. Firms that can boost productivity, improve
governance and respond to local tastes can still prosper. But the golden years
are over.
From the print edition: Leaders