I’ve been visiting China for many years, and it’s amazing to watch how the “China question” keeps changing for Western multinational companies (MNCs). Here’s a 20-year perspective:
- Twenty years ago, the question was “Is China important?” I would argue that most MNCs took about 10 years to answer “yes.” By 2008 or so, everyone realized that winning in China was critical.
- Ten years ago, the question shifted to “Is China different?” It took another decade, but eventually most MNCs answered “yes.” Rather than treating China as any other market, companies began to shift strategies and allow their Chinese operations to do whatever it took to win. While I still don’t believe most MNCs have created real tailwinds to help their business, I’ve seen tremendous efforts to at least reduce the headwinds of “corporate support”!
- Today, the question has shifted to “Will winning in China transform the whole company?” I don’t see many MNCs answering “yes.” When it comes to winning in China itself, they aren’t all in yet. For this reason, they still haven’t seen the transformational impact it could have on the rest of the business.
I worry that their time is running out. Having answered two-thirds of the China questions correctly, most MNCs will still fail the exam. But there are 10 ways to change the answer to “yes”—and reap the benefits of winning in China before it’s too late.
1. Prepare for the era of scale insurgents. The prevailing paradigm that has underpinned business is changing—we’re moving into a new era. But shifts like this one have happened before. We studied the last 3,000 years of business history and found that business has evolved through a series of definable eras, which in the past two centuries have typically lasted about 40 to 50 years. (Watch this video to explore each era.) We’re currently in the Shareholder Primacy Era, which was born of the notion that company leaders must serve the interests of shareholders above all else. Initially, managers who thought like owners were all-important, and new industries were created, including private equity. But this era is breaking down. Public markets are changing. Employees’ and customers’ expectations are changing. Technology is changing. The next era will be the Firm of the Future, and it will favor companies with a strong sense of Founder’s Mentality and extraordinary scale. Scale alone will not be enough, though—speed will be equally important. Where are we seeing evidence of this new generation of companies? In two places: the US and China. Think of the Amazons and Alibabas (explore the story of Alibaba’s rapid growth). To win in China, you’ll compete against scale insurgents. You must ultimately become one. To do that, you need speed and scale.
2. Make China your Engine 2. You need to reimagine China as your second major engine of growth. Your core engine, or Engine 1, is the European and North American markets. These markets are incredibly important in terms of cash and profits generated. But your Engine 1 still faces fundamental problems. It’s too complex for the growth it will deliver. You built vast organizations for these markets, and historically, the complexity of these organizations was justified by the growth you got in return. But this no longer works. Your Engine 1 needs to be dramatically simplified and “rightsized” for the growth you can expect from Europe and the US. Your Engine 2 is China—it holds huge growth potential, but you can only capture this growth on a sustained basis by reimagining your firm.
The Engine 1 vs. Engine 2 problem is at least a century old. In fact, most large MNCs are probably moving from Engine 17 to Engine 18. You can’t survive in business for 100 years without redefining the company multiple times. To succeed, companies must detect a few common patterns:
- Business leaders never simplify Engine 1 fast enough.
- Therefore, they never sufficiently invest in Engine 2.
- Business leaders never free up Engine 2 to compete as it needs to compete, weighing it down with baggage from Engine 1 ways of thinking.
- Success in Engine 2 will help redefine Engine 1 and create the next wave of growth.
This last point is important. Rather than think of your China business as unique to China, you should think about China as the model for how you will compete globally over time. If you can win in China against scale insurgents, you can take those capabilities back to the rest of your business. You have to believe that the answer to the third China question—“Will winning in China transform the whole company?”—is “yes!”
3. Redefine “scale.” Your China business doesn’t need your global scale. The market is big enough. When your global functions try to add value to your China business by forcing it to adopt global norms, they’re actually creating headwinds. Most MNCs understand this, and in fact, they’re liberating their China business to compete based on a China-first approach. Nevertheless, there’s still too much drag from the corporate center. Every leader I meet says the business wastes time fighting the center for permission to do the right thing for Chinese consumers. Why? The global functions still believe that they’re bringing scale benefits to China by forcing the China management team to adhere to global strategies. If global functions want to help their Chinese business, they must do one of two things. The first option is to colocate and cocreate. Move to China and solve for China with the China team. They can’t compete otherwise. Alternatively, get out of the way. Presume trust in your China team.
4. Think ecosystem, not assets. Chinese entrepreneurs have something in common with US start-ups. Their founders don’t just think about how to run a business, they think about how to build an ecosystem. With the rise of platform companies and digital, organizational boundaries are blurring. Consider companies like Alibaba and Xiaomi. Leadership is no longer defined by the assets you own, but rather by your role in the ecosystem that surrounds you. Leaders have to think more aggressively about partnerships, insourcing and outsourcing, and building a consumer community. MNCs tend to be more internally focused. To become firms of the future, they’ll need to be borderless and pervasive.
5. Commit to speed. Not to put too fine a point on it, but Chinese founders are running circles around their multinational counterparts. Most of these founders and owners have only known the extraordinary turbulence of China. They have thrived by adapting often and fast. Speed is in their DNA. Look at Alibaba founder Jack Ma, who announced in October 2016 that pure e-commerce would soon be dead. He envisioned the concept of “New Retail.” Within a year, Ma bought a major stake in RT-Mart, a leading brick-and-mortar retailer. He then announced the introduction of online shopping kiosks and mobile app systems for ordering and payment in all RT-Mart stores. Data from these New Retail technologies could provide Alibaba and RT-Mart with a complete omnichannel view of the purchasing behaviors of hundreds of millions of Chinese consumers. This initiative, which is one of dozens, is taking place in a matter of months, not years.
This is the competition in China. They win with speed and scale. MNCs must compete with speed. This demands that they learn the skills of founders—not only to come up with new ideas, but also to quickly industrialize innovations across the whole enterprise. Multinationals take too long to turn innovation into something that can be scaled. They aren’t investing in the notion of a scaling community, or a group of people that takes the innovation from the innovators and turns it into something that can be adopted by the executors. There’s simply too much yield loss between ideas and results.
6. Develop systematic learning skills. Scale insurgents recognize that one of the most important benefits of scale is the ability to learn. They embrace failure—but they shorten cycle times so that failure happens relatively quickly. Then they learn, adapt and try again. Western companies are disadvantaged for two reasons. First, they apply an Engine 1 lens to failure. What do I mean? In Europe and North America, you run very mature and stable businesses. You measure demand variances in basis points. People get fired if demand variances are off by 1%. That might be okay for Engine 1, but this is a disaster for Engine 2. In China, your people face nothing but turbulence. You can’t win without failing, because everything needs to be tested and adapted. You can’t measure demand variance in 1% or 2% ranges—you’re dealing with 50% to 100% ranges. That’s the nature of the market. You have to fail a lot and learn a lot. Second, for companies in China, taking the time to learn and compare notes is a luxury. If you learn at all, it’s a random event. But if you can learn in a more systematic way, and help the rest of the company understand, you can gain the benefits of speed and scale. This is why we put such a huge emphasis on learning in our micro-battles approach. You must develop a learning system to win in China.
7. Start embracing the chaos. As I’ve talked to leaders of MNCs in China, I’ve learned their secret hope. They hope the Chinese companies will grow up, professionalize and become just as hopelessly bureaucratic as their Western competitors. Well, guess what? That ain’t happening. The Chinese companies are acting like scale insurgents. Rather than build a huge hierarchical organization with layers and layers of professional managers, they’re keeping structures flat. They’re building their companies around franchise players and encouraging teams to mobilize and demobilize as they take on specific strategic initiatives. They’re embedding flexibility, not rigidity. Rather than hope they become you, you need to become them.
8. Abandon your five-year plan. The only time you see Chinese companies create a five-year plan is when they’re about to IPO or sell themselves to a Western firm. The market is moving too fast for companies to be under any illusions that they can anticipate sales five years out. Here’s one example. Both JD.com and Alibaba now face new social commerce competitors, like Pinduoduo and Yunji—players that barely existed a few years ago. Instead of spending endless hours debating five-year plans, Chinese companies pursue “today forward, future back” strategies. They regularly discuss how they think the market will evolve over a 10-year period. They think about what they can do immediately to win in that future.
9. Rethink your talent model. To put it bluntly, MNCs are losing the talent war in China. Many new companies are organizing themselves around partnership, even at the front line. Local Chinese insurgents provide stock options and other programs. Select Yonghui Superstores locations, for example, have launched a partnership program, allowing store managers to act as partners. Twenty years ago, the opportunity to be part of a global company was a differentiating factor; MNCs could attract the best Chinese talent with offers of global training and rotation. This is no longer the case. The lure of shares in a Chinese start-up far outweighs the offer of a salary with a global firm. To win, you need to innovate your ownership and incentive systems.
10. Harness your competitive advantage—while you still can. Notwithstanding all the challenges Western companies face in China, they are thriving. Why is this? They arrive in China with one extraordinary competitive advantage. Chinese consumers believe that Western companies have the systems in place to guarantee safer products. They don’t hold the same view of Chinese companies. But the gap is quickly closing between Western MNCs and the best Chinese brands on the issue of trust and safety. Premium insurgent Chinese brands are emerging overnight, from SeeYoung, a silicone-free shampoo brand, to Saky, an oral care brand.
All of this is great news for Western companies. The answer to the third China question is yes: Winning in China will transform who you are as a company. You’ll need to become a scale insurgent—one that will define the next era of business. You’ll discover new ways of working, take them back to your core business and launch the next wave of growth. Winning in China will not only help you there, but everywhere. Losing in China isn’t an option. So why are we still creating so many headwinds for our China teams?