Monitor Group and In co-operation with Alcatel, Bates Asia, Bayer, Citigroup, DHL, KPMG An Economist Intelligence Unit white paper With additional support from Fuji Xerox, Hitachi Data Systems, Norton Rose, Primasia, Russell Reynolds Associates, Sheraton Hong Kong, Timken Coming of age Multinational companies in China June 2004 Coming o Multinational companies in China f age LONDON 15 Regent Street London SW1Y 4LR United Kingdom Tel: (44.20) 7830 1000 Fax: (44.20) 7499 9767 E-mail: [email protected] NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: [email protected] HONG KONG 6001 Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: [email protected] Coming of age Multinational companies in China Contents 2 Acknowledgements 3 Preface 4 Executive summary 6 Introduction PART 1 10 A new environment 26 Addressing the market 42 Persistent headaches PART 2 54 Automobiles 66 Financial and professional services 80 Logistics 88 Pharmaceuticals 98 Retailing and consumer goods 110 Telecommunications 122 Appendix: Survey results © The Economist Intelligence Unit 1 Coming of age Multinational companies in China Acknowledgements Many hands and minds came together to create this © 2004 Economist Intelligence Unit. report. The Economist Intelligence Unit would like to All rights reserved. make special mention of the lead sponsors—Citigroup, All information in this report is verified to the best of the authors' and the publisher's DHL, KPMG and Monitor Group—and in particular those ability. However, the Economist who took time to give us valuable input: Tony May, Wu Xin Intelligence Unit does not accept and John Diener at Monitor Group; Paul Kennedy, Anson responsibility for any loss arising from Bailey and Andrew Weir at KPMG; Gary Clinton at Citi- reliance on it. group; and Christina Koh at DHL. They are not responsible Neither this publication nor any part of it may be reproduced, stored in a retrieval for our analysis, of course, but they were enthusiastic and system, or transmitted in any form or by any informed participants in the discourse. We would also means, electronic, mechanical, make special mention of our colleagues at the Economist photocopying, recording or otherwise, without the prior permission of the Corporate Network, in Hong Kong and in China—Lois Economist Intelligence Unit. Dougan Tretiak, as always for opening doors in China, and Harris Vertlieb, Jerry McLean and Pieter Tsiknas for their generous and important help with our survey. Also we would like to extend our gratitude to the many executives of multinational companies in China who agreed to be interviewed, and who often went out of their way to pro- vide us with insights into their businesses, and doing business in general in China. Without their input, it would have been impossible to produce this report. The main authors of the report were Simon Cartledge and Paul Cavey. Simon Cartledge, a former chief editor at the Economist Intelligence Unit in Hong Kong, runs his own consultancy, Big Brains, and is a regular contributor to our publications. Paul Cavey is the Economist Intelligence Unit’s Chief China Economist based in Hong Kong. Additional sec- toral contributions were made by: Graeme Maxton (automo- tive); Ross O’Brien (telecoms); Joanne McManus (pharmaceuticals); and Elizabeth Cheng and Rick Bullock. Other contributions to the report were made by: Edgar Fer- nandez, Michele Lee and Sam Wong. Thanks are also due to Elisabeth Paulson for her keen editorial judgement, Mike Kenny for the design of the report, and to Gaddi Tam for skillfully seeing it all through production. 2 © The Economist Intelligence Unit Coming of age Multinational companies in China Preface The seven years that have passed since the Economist Intelligence Unit last tackled the subject of multinational companies in China is a short period when set against the age of Chinese civilisation. But it is an awfully long time in a country that is changing as rapidly as modern China. Since 1997 the stock of inward foreign investment has increased by US$265bn, the country’s exports have more than doubled and the economy grown by more than 50%. A fourth generation of leaders has taken the stage, and China has joined the World Trade Organisation. In this context Coming of age: Multinational compa- nies in China is a report that is long overdue. Its central premise is that in the last seven years the experience of multinationals companies operating in China has changed as much as the country itself. This is a more controversial proposition than it might sound. There is still a widespread perception that China and foreign firms simply do not mix, that as a market China is “bound to disappoint”. No doubt there will be losers. Competition is intense, and the operational environment remains challenging. But increasingly there will be winners as well. In the last few years China has emerged as one of the world’s largest markets for a variety of products—and for a number of leading multinationals as well. China is no El Dorado. But it is a market that has started to come of age. © The Economist Intelligence Unit 3 Coming of age Multinational companies in China PART 1 Persistent headaches Executive At an operational level, doing busi- ness in China remains very challeng- summary A new environment ing. Infrastructure has improved For multinational companies, China’s during the last few years, but market has started to come of age. remains deficient relative to The growth of the “middle class” is demand. Restrictions on foreign creating strong consumer demand, firms in the manufacturing sector and there is also a burgeoning busi- have been eased, but in the services ness-to-business market. Improve- sector they remain oppressive. ments in infrastructure and a Across the economic spectrum, skills relaxation of regulations have made shortages are severe and violation of these markets much more accessible intellectual property rights is rife. than was the case just a few years These issues affect all companies, but ago. A broadening and upgrading of present the most serious challenge the activities of multinational firms to small foreign firms that are new to has accompanied these changes. For China and lack international and many big companies China has country-specific experience. Larger become a major global market and, firms are coming up with strategies in some cases, a large profit centre. to address these issues, if not resolve China’s importance is currently not them. evident in all industries, but these sectoral differences are likely to ease over the next few years. Addressing the market Accompanying the rise in demand in China has been an intensification of competition. While this represents a new strategic challenge for multina- tionals, the development of China’s economy has also opened up new ways in which they can respond. For- eign firms have more opportunity to bring their sophisticated brand- building and marketing capabilities to play in the China market, and to localise production, markets and sourcing to lower costs. The emer- gence of a local market for mergers and acquisitions is allowing big for- eign firms to buy up local competi- tors. The net result? Executives in China are spending more time think- ing about the kind of strategic plan- ning issues that tend to pre-occupy their counterparts in more developed markets. 4 © The Economist Intelligence Unit Coming of age Multinational companies in China PART 2 Logistics Retailing and Not yet connected The logistics industry has developed consumer goods Overcoming regulations and building rapidly in recent years, with state Automotive brands Good times today, but an uncertain domination of the sector giving way Big companies like Carrefour and tomorrow to strong competition among foreign Wal-Mart have already established China’s automotive sector continues and domestic third-party logistics themselves in key cities in China, and to expand rapidly. As developed- providers. The supply-side of the will benefit from the lifting of restric- world markets have stagnated, there industry has nevertheless failed to tions on foreign retailers at the end has been a headlong rush to China by keep pace with the even faster of 2004. The further expansion of the major foreign automakers—most increase in demand. Restrictions in these and other foreign chain stores of which are now present in the mar- the sector are being relaxed, but will ease some of the distribution dif- ket. Profit margins are high but risk logistics providers still face a number ficulties currently faced by the inter- being undermined by over-capacity of regulatory hurdles. The develop- national fast-moving consumer and competition. Multinational auto ment of the industry is restrained goods companies. Procter & Gamble firms will need to devise long-term also by China’s over-stretched physi- and Unilever have already estab- strategies that take into account a cal infrastructure and other problems lished large businesses in China, potentially diminished role in the ranging from limited IT systems to although their early dominance of market. pilferage of freight in transit. some markets has been broken down by domestic competition. The Pharmaceuticals increasingly crowded market renders Financial and profes- brand-building more important. Cultivating demand and biding time sional services China remains a small market for Still dreaming of the future most foreign pharmaceutical firms. Of all industries in China, the finan- But sales have been growing Telecommunications cial and professional services sector A strategic and crowded market strongly, and the business environ- is the one where the gap between China is a prodigious market for for- ment has improved. Regulations and current reality and future expecta- eign telecoms equipment manufac- the nature of the national healthcare tions is the greatest.