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Abstract

Despite gigantic strides of progress, exotic descriptions of China continue to dominate the outsider’s view of its business environment and what it takes to succeed in China. My experiences over the past 5 years, in China, have dispelled many of these myths. What I have learned from conversations with business leaders, managers and friends is that business in China is influenced by a set of critical variables – similar to other markets – that must be managed in order to succeed.

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China and the 8 DragonsA primer for multinational corporations seeking a foothold in China

- Anand Arkalgud

2 | Infosys

Talent1

Product and Innovation 2

How is talent in China any different? Talent, fundamentally, is no different in China than anywhere else in the world. Smart engineers, from good universities all over China, are on the market. To most of us, the word ‘talent’ conjures up an image of people with diverse educational backgrounds, technical expertise, market knowledge and the like. What we often overlook is that all these capabilities come into play only when bound by corporate culture, value systems and governance, typical of a multinational. It is wise not to underestimate the effort required to nurture talent for your purposes to establish these “binding forces” within your organization in China. The “multinational mindset” is prevalent, for the most part, only in the younger generations of talent, not the ones before. While Chinese industries that have been around for a while, they’ve been dominated by State Owned Enterprises. These have a broader agenda than the typical multinational corporation. Employees hired from these businesses aren’t necessarily “job-ready” for an MNC environment. Assimilating them needs conscious effort and hard work, not to mention training in both hard and soft skills as well as matters related to corporate culture and governance.

Grasping the expectations of talent in a dynamic market, such as China, mandates a shift in conventional Western mindset. In a country, that has sustained tremendous growth momentum for over 20 years, it’s no surprise, really, that its people want to be an integral part of that growth. They want to grow at a comparable pace. And, they evaluate their own potential for growth by looking at how their employers are faring in China. Quite obviously, they don’t want to commit themselves to the wrong lane and risk being left behind. So, talent in China perceives itself as competing with everyone in China not just within the company or even the industry of employment.

For an organization seeking a foothold in China, the decision of where to locate facilities is greatly influenced by this growth expectation. There is significant motivation for talent, from across the country, to shift to larger cities like Shanghai, Beijing and Shenzhen where opportunities are greater. But, that move comes at an increased cost of living that employees expect significantly improved remuneration packages to address. Else, employees may not be able to withstand the impact of the shift for long. With this as background, where to locate your office, is a tricky decision to make. While, getting started in a tier 2 city, in China, may prove to be a good first move, if your organization has long-term ambitions in China, dropping anchor in a tier 1 city, as soon as feasible, is unavoidable. As talent gravitates towards the big cities in search of growth and opportunities, today you can perhaps manage with local workers, in your tier 2 city operations, driven by managerial talent imported from tier 1 cities. But, it won’t be long before the lure of faster growth in a bigger city draws them all away.

This brings us to the subject of a highly mobile talent pool and the ensuing attrition. It may be caused by a variety of reasons that range from bachelors looking for higher paying jobs, so they can buy a home to secure a bride, to more prosaic causes like peer pressure. Companies must be prepared to train more people than they need.

However, over-engineered efforts to manage attrition (pay more and promote before time) is a surefire formula for failure. It’s, perhaps, even advisable to begin by assuming that attrition is a known challenge, and strengthened processes to deal with it effectively. Empowering employees and carving out clear roles for them in the company’s growth story will also motivate them to stick on longer. Focusing organization efforts on “managing-to-attrition” is likely to be more fruitful than efforts focused on “managing attrition”. A long term solution is to scale the business as fast as possible.

While it may sound obvious, the fact is that one can only sell a good product or service to someone who can clearly see and appreciate its benefits. Companies must be willing to make enormous effort to educate the buyer (and the organization’s hierarchy), in China, about a product and how it delivers on its “better than before” value proposition. I say “enormous effort” because institutions that influence buying decisions in the developed world – like independent industry analysts who also play buyer-advisory roles - don’t have a comparable play in China. So, products brands must take on that role too to fill in for this “institutional void”. Because, if consumers do not buy into the “better than before” story, they won’t pay a higher price to buy your product – even a great one that’s in demand everywhere else the world over.

In more mature markets, the emphasis is primarily on efficiency in the product value proposition. In China, growth is the primary need and efficiency is a growing but distant third or fourth on the list of considerations. So, when “better than before” propositions are crafted, it is also important to address how this will help buyers capitalize on the all-important growth opportunity.

In most customer-centric multinational corporations doing the new, or at least some level of continuous innovation, is part and parcel of the performance culture. And mere imitation has a clearly negative connotation. In China, however, healthy innovation entails assimilation of the existing before doing the new. Getting started by “copying’ might indeed be the best solution to many problems. I would go so far as to argue that it is the best way to rev up the growth machine. Ask anyone who has spent some time in China, and they will tell you with a sigh of relief that once you set a direction, things get done, and this is very favorable for business. But then again, there’s the question of balancing copying with creating need for the new and “better than before”, which then means nurturing creativity, initiative and other attributes of healthy innovation.

Innovation is as important to the Chinese as anyone else, but innovations that succeed are ones that not only reflect the best in the world, but ones that are likely to create opportunities by questioning traditional business trajectories rather than ones that emulate global knowledge. To sum it up” it is not about gaining market share in China, it is about growing the market by creating new experiences that consumers will want in the future”

Infosys | 3

Markets3

Scale 5

Government6

Leadership4

What struck me, when I moved to China, is that the business environment has not matured to a point where companies are categorized into logical segments. It falls upon the buyer to determine these details, in the absence of coverage by analysts or trade press. Then, to separate the wheat from the chaff, the buyer must be guided by criteria shaped by his own experience over the years.

First off, there is a general wariness of being cheated or overcharged. In the absence of clear ways to discern a good product or service from a bad one, buyers tend to behave in a manner that seems to suggest that; “I am very likely to be disappointed with the purchase, I’d rather be disappointed by paying less”! This wariness is often addressed by negotiating hard on price, inserting substantial penalty clauses in contracts, buying from people who can be influenced in case something goes wrong and so on. This is often referred to as local business culture and many companies feel obligated to try and cater to these asks. The challenge is that we (people working for Multi-National Corporations) are required to adhere to corporate governance norms, ensure our contracts don’t carry unreasonably liability, profit from our business deals, and so on. These two don’t mix very well, and companies have to decide whether they have what it takes to persist and win in such markets.

This brings us to the subject of business relations and alliances - which ones to pursue and which to avoid. The topic of institutional voids is very relevant to China, understanding the explicit and implicit capabilities and dependencies that your company relies on to deliver success (in home markets), and using that knowledge to understand the changes required in your business and mental model for creating success in China, is critical. Other times, there’ll be inescapable reasons for partnering – such as the need to comply with regulations that prohibit expansion in the absence of a local partner – but opportunism is not one of them.

And finally, don’t put too much energy to “figure out the market”. In a dynamic market, like China, this can prove futile. Growing affluence and changing aspirations will keep the goal post moving. Business must be in a position to adapt to these changes.

Success is impossible without the right leadership. A truism the world over, this takes on added significance in China - where lack of leadership can bring disappointment and delay the realization of the market’s true potential. The China business leader is ever so critical to building the DNA of local operations.

“So, are there no leaders in China?” One look at cities like Shanghai will show how incredulous that question is! My view is that this is less about the availability of leadership and more about grooming local leadership to match the organizations purposes. Early and sustained exposure to global practices clearly pays off rich dividends. Having consulted many seasoned heads of multinational companies in China, I found the following piece of advice most convincing: “Find the best man for the job; someone who understands what your company does,

what it wants to do, and what it stands for – instill in him the conviction and the integrity of purpose of this organization and empower him so he does not ever feel the need to apologize for it!”

An organization with a global talent pool will probably have the right Chinese leaders in its midst, to do the job. Failing that, it can bring in an expatriate to drive the business forward. It’s important to hire someone who will not shy away from saying NO, nor hesitate to say why business must not be pursued under given circumstances. Because, in China, one has to say NO, perhaps, more often than in other parts of the world.

Size matters in China, to the extent that “great” and “big” are synonymous. The appeal of big companies lies more in their job creation and career growth potential than in revenue and profitability. In the absence of vocal trade media, energies expended to create the perception of a “big and influential brand takes on an exaggerated importance. Size and brand decibel levels count during hiring, in government relations and in business deals. Whether a company succeeds or not depends on the scale of its ambition and the decisions it takes to achieve it. That being said, being conservative or small in China is not a good strategy as the cost of doing business is high (unlike developed countries where SMEs have a favorable ecosystem giving them a fair chance). In China, the following go in a company’s favor: FDI (Foreign Direct Investment), large scale or high wage employment, or operations in certain industries/ fields which are of interest to the government. Being a small company in China does not exactly feed this appetite.

What role does China’s government play in business success? That question is best answered by remembering that the government owns a large percentage of companies (in Shanghai, State-owned enterprises account for around 50% of GDP); judiciary is a branch of the government, as is law enforcement (or the public protection bureau); and the public does not vote on policies – it is the government which debates and decides based on the inputs received.

China’s corporate law is going through rapid evolution, leaving an impact on business operations and bottom-line. While paid advisors offering “interpretation” of these laws abound, companies need to beware of those with poor credentials. The challenge, however, lies in telling the good from the not-so-good.

Employees care about whether or not their company is recognized by the government. This is understandable considering the latter’s ownership of industry and land assets.

It’s logical to view the government and State Owned Enterprises as growth-enablers, and it’s judicious to nurture relationships that qualify your enterprise to be considered for business by the largest employer in the land.

© 2012 Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

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Guanxi7 Growth8

Guanxi stands for networks or relationships. The truth is that the old boys club exists everywhere. What’s so different about China’s Guanxi that it merits so much discussion? A conversation I had with a Chinese colleague will explain the reasons why I drew the conclusions I finally did.

He asked me, respectfully enough, why I thought I was picked to head business development in China when I don’t have the benefit of Guanxi (as a newcomer to China almost 6 years ago). In turn, I asked him if he had Guanxi, and he confidently replied in the affirmative. I then asked him if he could leverage Guanxi to get prospect X to consider us for a technology transformation program they had on the cards. He replied in the affirmative again. I pressed on asking if we could leverage Guanxi to enable us to apply for this project quoting double our rate-card prices. He was aghast and exclaimed that would be impossible. In fact, a distinct price benefit would certainly be part of the selection process, he said. I then asked if his Guanxi would get the same prospect X to consider us for a building construction project they were inviting proposals from vendors for. His refusal was equally emphatic this time. We had no track record in the business, he said. So, Guanxi couldn’t get us to run a race we weren’t anyway qualified to run, nor could it assure us of victory. Then exactly, what does Guanxi do?

In the absence of the ability to make a comprehensive assessment of the quality of the suppliers’ proposals or their track record, one tends to lean on relationships to provide favors and in return get some assurance that you have a party that will be willing to work with you if the going gets tough.

It is abundantly clear to me that the way to building a sustainable business is founded on best practices and good governance. Guanxi can perhaps help, but must not be overestimated.

I recently ran into the head of business for a multinational in China. As we got talking, I commented on how exciting it must be to be growing so fast, and that I thought China was a good region to be in at this time. He followed up a very long pause with a longer question; “Who told you that we are doing so well? It is true, of course that our revenue is growing by 20-30% a year over the past few years. This is certainly positive, but both the market and our competitors seem to be growing faster – we are obviously losing market share?

“We seem to be getting a good part of this growth from sales of our high-end products where we have a significant technology advantage, and few or no real local competitors. However, with our commercial products which make up a large percentage of our portfolio globally, we don’t seem to be making much progress. We haven’t figured out how to design, position, price and sell our products in the broader segment effectively. This is cause for concern, as the volumes in the high-end market are not very big.”

We tend to celebrate double digit growth rates. I don’t want to be a Grinch, but growing double digit while losing market share is not what we had in mind! Managing expectations and performance management in our China operations is a big challenge – it is hard to explain to employees why double digit growth rates in this market means that we are doing pretty badly!

About the Author

Anand Arkalgud Vice President & Building Tomorrow’s Enterprise (BTE) Expert, Infosys Limited

Anand’s professional journey started in India just under two decades ago, and then traversed Australia, the United States and China, where he has lived and worked in a career spanning different industry segments, and service lines.

Anand now leads a group of Infosys experts who endeavor to partner with key clients to future proof their enterprise. He is also passionate about and leads efforts to identify opportunities and challenges for companies in emerging markets.

Until early 2011, Anand was responsible for establishing and growing Infosys business in the Greater China region. He has played a key role in Infosys’ emergence as one of the fastest growing multinational business and IT consulting company in China. Before moving to China, Anand was a senior member of the Hi-tech and Manufacturing practice with Infosys in the US.

Anand holds a degree in Instrumentation technology from the University of Mysore, and an MBA from the University of Queensland, Australia.