Yes, the 21st century will be the ‘Asian Century’. This is one of the few predictions most economists can agree on. Between 2000 and 2017, Asia’s share of global real GDP in purchasing-power-parity terms rose from 32% to 42%, and its share of global consumption from 23% to 28%. By 2040, these two measures are expected to increase further to 52% and 39% respectively [1].
The individuals and companies that build this growth will have a strong influence on 21st century commerce, politics and culture. China’s influence can be seen already as it has a 17.4% share of global GDP. By comparison, the EU has 15.4% [2]. Within Asia, China is the largest and fastest growing economy by far. China’s GDP is 5 times bigger than India’s and 3 times bigger than Japan’s. China is at the forefront of growth, innovation and change and as such will play a big role in the next phase of globalization and industrialization.
What this means is that: you need to be part of China’s growth to be a leading multinational in the 21st century. The question is “how?”. How to navigate the Chinese market? How to build sustainable revenue? How to link and manage the China operations with the global operations?
In our experience of building the China expansions of innovative companies and investing therein, the best approach is to see “China as a Venture”.
“China as a venture” means that multinationals should see themselves as a venture again when entering China. This means starting small, looking closely at the market, being entrepreneurial, adapting constantly, hedging bets, keeping the burn-rate low, moving fast etc. Basically, it means to be a young company again and to grow up in a challenging but rewarding environment.
Seeing “China as a venture” is simple in theory, but hard in practice. This practice is even harder to explain. China expansion is a frontline experience that is difficult to relay. But, we can share some of our own internal experience based guidelines. Here is four of them:
1. Make sure all facts are verified on the ground. When considering any potential expansion or partnership, you need a lot of verification. Local customers, facilities, markets, companies, infrastructure, government initiatives etc. all need to be inspected. All facts need to be triple verified through other sources. Verified facts are the foundation of strategy.
For example, China is home to 121 unicorns (by comparison Europe has 36) [3]. Unicorns are often seen as proof of market growth and potential great partners. In reality, unicorns need to be carefully examined before any conclusion can be drawn. What is fuelling their valuation? What do they base their projections on? Are they truly suitable partners or more likely competitors? To verify this, local teams need to meet them, review their operations, market and competitors. Only thereafter can a plan be developed.
2. Work only with people you trust. China operates at great speed. This speed means that the human risk factors are greater. People are ambitious and competition moves fast. When choosing between capabilities and trust, choose trust. China is large, if you are not successful in one place, you can still try in another. But if you enter into a bad partnership, you can lose the entire market.
Be careful when entering into a partnership or deal without understanding the counterparty’s objectives, or hiring a senior manager without really knowing the person. Surround yourself with people you know you can trust. Trust can come from referral, but needs to be built up, tested and reviewed. You can only trust people whose benefit to your China expansion is clear and agreed upon. This particularly applies to investment.
For example: assets under management of funds that cover Greater China was $624 billion for PE and $391 billion for VC in 2019 [4]. Some of these funds look at cross-border collaboration as a growth strategy. This can be inbound or outbound. Offers from such funds can look very appealing to a multinational. However, some of these offers and the strategies and objectives that come with it, may not be certain, clear or beneficial. It is important to have a local team in place that can share their views on the offer and the counterparty.
3. Keep teams compact as long as you can. Working for a foreign company is still sought after by many Chinese employees. This is not because of the higher pay (leading Chinese companies usually pay better), but because of the work-life balance and international component. This is beneficial, but you may attract some people that look great on paper but are not that productive in practice. Do not be too critical on English language skills. Good people are not always good English speakers and vice versa. Until the China market strategy is formed and there is revenue, you want to keep the team small.
For technology companies for example: China produces five million STEM graduates and China’s R&D expenditure represents 23.2% share of global R&D expenditure. Comparatively, the EU produces one million STEM graduates and holds 20.5% of global R&D expenditure [5,6]. Despite this abundant talent pool and post-graduation R&D experience, it can be daunting to find the right people. Offering high paying jobs is not the only or best answer to this challenge. This can quickly lead to large teams, high overhead, high expectations and low overall productivity. The best approach, in our experience, is to keep the teams small and versatile until the revenue stream and specialized needs are clear.
4. Localise your product & scale fast. Given China’s unique business landscape, product localisation is essential. Localisation is required across all business sectors. China differs in not just customer needs (both for business and consumer segments), but all the way to the nuances of technology regulations and standards that will need adapting to. First step is to start testing the existing product in the right environment and using the feedback from these pilots and first customers to improve the product.
The need to localize and scale quickly is more urgent today than 20 years ago. Foreign companies expanding to China need to achieve stable revenue and scale quickly to keep up with Chinese competition. There are no clear figures on this, but in our experience on average a new technology has at most a 3-year head start in China. After 3-years, but probably before, domestic competition will have caught up with a foreign company’s product. This makes the challenge of expansion in China today so different from the companies that arrived 20 years ago. Localizing and growing quickly are essential to achieve a defendable market share.
If you would like to discuss expansion further, please reach out to contact@lvspartners.com.
LvS holds private events from time to time on the topic of China expansion. Our last event was with the European Chamber in Shanghai. Please see [Online & Offline] Optimizing a China Expansion Strategy for New and Well-Established Businesses. If you would like to receive an invite for these, please email us as well.
Sources
- McKinsey & Co. 2019, The Future or Asia.
- IMF Word Economic Outlook Database 2019.
- CN Insights 2021, Complete List of Unicorn Companies.
- McKinsey & Co. 2020, In search of alpha: Updating the playbook for private equity in China.
- R&D World 2020, Global R&D investments unabated in spending growth.
- Eurostat Data Explorer 2020.