Doing Business in China

Preparing for the Unpredictable

How are U.S. executives dealing with economic uncertainty in the People’s Republic?

Four experts weigh in

A number of years ago, I had a conversation with the legendary “Good to Great” author Jim Collins. We were discussing the characteristics of first-rate executives. One attribute: the ability to prepare for the unexpected. That means, among other things, putting the resources and personnel in place to deal with whatever the economic cycle might throw your way.

“You have to prepare for what you can’t predict,” Collins explained. “I don’t know what it is like in the desert, but I have to have someone who is good in the desert.”

That just about sums up what it’s like doing business in China in 2016: There’s no way to know how long the country’s economic malaise will last. But you better be ready, nonetheless.

There’s a lot we don’t know. Clearly, though, China’s growth has slowed a bit, with GDP down to 6.9 percent last year, and the coal, steel and aluminum industries are coping with overcapacity.

Despite some handwringing, U.S. firms appear to be optimistic that what ails the China economy is merely the result of growing pains. And, as is often the case, those same companies are opportunistic. The key, they say, is to adjust and take advantage of any economic uncertainty—hopefully at the expense of competitors. As the late Wal-Mart founder Sam Walton used to say, “Go where they ain’t.”

Explains Bill Gu, senior client partner with Korn Ferry in Shanghai: “Business people are tightening their seat belts, but most are confident. As a matter of fact, businesses are actively reviewing their China strategies, aiming to catch the next wave of opportunities.”

One example is AIG Insurance Company, China. Eric Zheng, its president and CEO, said AIG, in the face of decreasing consumer demand, is de-emphasizing auto coverage—and turning its attention and resources to insuring Chinese companies looking to do business overseas.

“When China was growing at a rapid clip, companies could afford to focus just on market growth and worry less about their margins,” said Ken Jarrett, president of the American Chamber of Commerce in Shanghai, which has more than 3,000 members. “With the squeeze on margins, there is now a much sharper focus on the allocation of resources and the smart management of operations.”

That theme is even played out in speeches by top party leaders. “We must strive to find ... new rice bowls,” said Chinese Premier Li Keqiang. He was talking about solutions for job creation. But he could have been easily doling out advice on how executives should think strategically in the coming years.

Are there more speed bumps ahead for China? Are executives doing business in China worried? If so, how are they adjusting? Are those concerns overblown? We asked four experts to weigh in.

In addition to Zheng and Jarrett, we checked in with Scott Beaumont, vice president of Google Greater China, who says predictions of China’s economic malaise are concerning but a bit overwrought. He still marvels at the ability of China’s business community to adapt. And we talked with Ross Shuster, the president of international operations for United Technologies Corporation’s (UTC) climate, controls and security division, who says companies need to keep an eye on the future—but dial back a bit to adjust for short-term bumps. (Example: asking vendors to lower their own costs.)

Whatever the future, they all appear to be headed into the desert fully prepared.

Scott Beaumont, Google (Greater China)

Don’t Believe All the Hype, but Prepare to Adjust

“China is actually doing better than is generally perceived externally. As always in China, there is not a simple yes or no, good or bad. True, the government missed its stated 7 percent GDP growth target and there is overcapacity in a number of manufacturing industries. But the services sector is robust and there is strong evidence that Chinese consumers are beginning to engage in a meaningful way to generate economic growth. Given that China’s savings rate is one of—if not the—highest globally, there is a lot of potential consumer power to unwind. As always, it is difficult to draw easy conclusions, but there are plenty of pockets in China where it is fun to operate at the moment: a good time to be in tourism, a good time to be in leisure, a good time to be in movies and a wonderful time to be an entrepreneur in the digital space. A ‘slump?’ You should be selective in how you believe the hype.

“How are companies adjusting? Again, it’s a mixed bag. Generically, those companies I see succeeding in the manufacturing economy are those that were quick to reduce their fixed-cost base and have sustained sales by purchasing inventory from others’ oversupply—although canny, that’s not a particularly inspiring story. But, in the service sector, the growth areas are in products that speak to the greater discretionary spend becoming available to a wealthier, more urbanized population.

“One thing you can applaud in Chinese business culture is the ingenuity. If there is a way between A and B, then B will be reached—though there is a valid qualification here as to whether the road traveled is the best one. Accordingly, businesses are quick to pivot to new opportunities. A famous example, if a little dated, is e-commerce giant JD.com. It started as a bricks-and-mortar retailer but saw the online opportunity and changed its business model almost overnight. As such, the threat of e-commerce to traditional retail has called into question the wisdom of building new malls. And yet, the mall operators are modifying these malls to be more entertainment-focused, rather than retail first.”

Ken Jarrett, ACC (Shanghai)

U.S. Firms Are Adjusting—Now—to Economic Risks

“Our members do see slowing growth as a significant business risk, with 64 percent, in our annual survey, saying that a drop in China’s GDP rate will moderately or significantly affect their company. Moreover, 31 percent said that slower market growth was the No. 1 risk to business expansion plans. That said, the majority of U.S. companies, 71 percent, remained profitable, and companies have a long-term commitment to the China market. In fact, 81 percent plan to increase their investment in 2016 and 80 percent have a five-year optimistic outlook. This is lower than last year’s figure of 85 percent but still high.

“Overall, we are seeing declines in the number of companies reporting revenue growth. This is especially true in the manufacturing sector. To be sure, new investment continues, but the scale of new investment is smaller. Companies are responding by looking at ways to strengthen their competitive edge. For example, in the manufacturing sector, we are seeing more investment in R&D and automation. For services and retail, there is greater investment in e-commerce, digital and the expansion of sales, marketing and business development teams.

“For all companies, cost management matters even more and companies must continue to innovate and tailor products and services to the Chinese market. For instance, in the area of cost management, our survey results show that 12 percent plan to decrease headcount in 2016. Looking at headcount plans by sector, 20 percent of manufacturing companies plan decreases while the corresponding figure for retail is only 3 percent. In fact, 58 percent of retail companies plan headcount increases. This is an example of the differences we now see across sectors and industries. American retail companies by far have the most bullish perspective. For example, both Gap and Starbucks continue to expand.

“Companies may find they need different skill sets in their executives in this new environment. Changes that make companies more efficient, more responsive to customers as they fight for market share or more innovative can only be good over the long term. One consequence is to reinforce the need to be more attentive to customers. For example, one strong trend in recent years has been the explosion of e-commerce in China, especially in the B-to-C realm. This is an area where Chinese companies have swiftly developed their businesses and have a deep understanding of their customers. U.S. companies have some catching up to do there.”

Ross Shuster, UTC

Deal With the Short Term, Focus on the Long Term

“China is becoming more mature economically. As is the case with every other mature economy in the world, there are economic cycles. Since we are relatively dependent on the real estate and construction industries, there has been pressure on new orders. Additionally, due to the economic environment, we have seen increased pressure on pricing. As a disciplined multinational business, we have always been focused on cost and productivity. But in order to achieve that productivity while balancing growth pressures, our focus and actions have had to intensify in parts of the business that are impacted.

“In terms of adjustments, the pricing environment has required us to work with our suppliers to reduce their costs. But the environment has also generated some opportunities for us. The depreciating renminbi has had a positive impact on exports from our China factories. We also find that the slowdown has made some merger and acquisition opportunities more achievable.

“For the mid- to long term, we are still optimistic about the business prospects and the overall economy. We see the traditional drivers, such as urbanization, having a continued runway for the long term, which in turn drives construction and infrastructure development.

Additionally, we continue to see growing demand for products with higher energy efficiency, which is good for our air-conditioning business, as well as higher and more sophisticated demands for ongoing maintenance and support services, which benefits all of our businesses.

“For successful companies in China, it has never been about short-term prospects. Successful companies invest for the future while delivering short-term results by dealing with current economic realities.”

Eric Zheng, AIG (China)

Go where the business is

“The Chinese economy is settling into a ‘new normal’ phase. To succeed, it is critical to be able to adapt to the changing environment and to position one’s business to meet the customers’ changing needs. A slump in one area may bring opportunities in another. For instance, as exports from China taper off due to sluggish global demand, Chinese contractors and other companies are pursuing overseas opportunities in construction and direct investment. We are adjusting our strategy by focusing on supporting Chinese companies venturing overseas. In addition, as China shifts from an export-driven economy to a consumption-led economy, outbound travel is growing rapidly, powered by the emerging middle class. Our branches are located in more affluent coastal regions and are well positioned to support growth in outbound travel.

“It is hard, of course, not being affected by China’s growth prospects, whether it applies directly to your business or not. But if we can become our clients’ most valued insurer, we would be successful whether China grows 10, 6 or even 5 percent a year.

“Last year, we adjusted our consumer insurance strategy by focusing on outbound travel insurance while de-emphasizing automobile insurance. It was a major shift. We had invested heavily in building capabilities for auto insurance after China had opened up mandatory third-party liability auto insurance to foreign insurers. Our decision was based on our findings that the domestic auto market had become extremely competitive and, as a foreign insurer, and latecomer, we might not necessarily have a competitive advantage due to our limited scale and our lack of local knowledge.

“While China remains a land of opportunities, we must remain focused on where and how we can compete effectively—and profitably.”