Doing Business In China
Saturday, July 26, 2008
China: only the start?
No discussion on global sourcing is complete without mentioning China. At last count, 450 of the Fortune 500 companies were doing business there, while countless small and medium-sized firms are tapping the country for everything from auto parts to zinc chloride.
Of course, sourcing here is never easy — from finding the right partners to navigating culture, language and rapidly changing regulation, to say nothing of rising labor costs and all those horror stories (toys with lead paint, poisonous dog food and tainted pharmaceuticals, to name a few).
But according to Jimmy Hexter, a director in McKinsey & Co.'s Beijing office and a co-author of the book "Operation China: From Strategy to Execution," the real risk for U.S. companies is not doing enough in China.
CRAIN'S: Why do you say U.S. companies aren't doing enough sourcing in China?
MR. HEXTER: We work with clients who have moved product to China — maybe they've moved it into their own factory, maybe they've given it to a supplier — and they've saved 20% or 30% on cost. But what they find over time is there's at least another 20% or 30% to go in cost savings because manufacturing in China is not as efficient as it is elsewhere. Most local facilities don't yet have lean manufacturing in place, so there's much more potential in China than people realize.
What's holding companies back?
To take advantage of China you're talking about changing the location of decision-making in companies, you're talking about resources moving from this place to that place. And that's very difficult for a company. The other thing that's getting in the way is talent. There's an enormous stress on the local talent pool in China today, whether it's people to man the factories, manage the factories or run the sales force.
Aside from higher labor costs, what does that lack of talent mean for U.S. managers thinking about China?
The CEO of a Global 50 company recently told me, "I just have to get used to the fact that when I go to China the person I'm talking to in my company is 10 to 20 years younger then the same person in the same role back home." You have to get comfortable with that. Then it's a question of how you manage it, how you train for it. On the plus side, we're going to see a lot of innovation in talent management coming out of China that can be applied globally. Often the place in a global corporation that's under the most stress becomes the source of the greatest innovation.
How will China's rise affect U.S. business practices?
Not only will it get bigger, but in most industries at least some of the functions will find their global best practices deeply embedded in China, whether it's the sourcing function, the supply chain or the way products are developed. Entire industries will be reshaped.
Really?
This will happen in almost every industry. I know that sounds crazy, but imagine it's 1990. You're sitting in Silicon Valley and you say, "Guys, here's where we're going. We need to just design the computer chips here in California. There's going to be a Taiwanese company that's going to design the motherboards. We're going to take all of that into Kunshan (China), and then a different company is going to assemble the product after buying a bunch of the components from Chinese companies and Japanese guys that have factories there." You would have been fired — there's no question. But that's how notebook computers are made today.
What else will change?
China has 650 million urban residents. Over the next 20 years, 350 million more Chinese will move to the cities, so we're going to have a billion urban residents. If you take rising wealth and more kids in the cities, there's going to be 150 million piano students in China. They are going to want to buy a $100 piano. Now, the $100 piano doesn't exist today. So who's going to design and manufacture the $100 piano?
It's going to be somebody who's thinking about China right now, whether it's a Chinese company that's looking at that market or a U.S. company. Now apply that to other industries. They need energy, they need health care. Who's going to provide it? If you're not thinking about it until later, you're too late.
Of course, sourcing here is never easy — from finding the right partners to navigating culture, language and rapidly changing regulation, to say nothing of rising labor costs and all those horror stories (toys with lead paint, poisonous dog food and tainted pharmaceuticals, to name a few).
But according to Jimmy Hexter, a director in McKinsey & Co.'s Beijing office and a co-author of the book "Operation China: From Strategy to Execution," the real risk for U.S. companies is not doing enough in China.
CRAIN'S: Why do you say U.S. companies aren't doing enough sourcing in China?
MR. HEXTER: We work with clients who have moved product to China — maybe they've moved it into their own factory, maybe they've given it to a supplier — and they've saved 20% or 30% on cost. But what they find over time is there's at least another 20% or 30% to go in cost savings because manufacturing in China is not as efficient as it is elsewhere. Most local facilities don't yet have lean manufacturing in place, so there's much more potential in China than people realize.
What's holding companies back?
To take advantage of China you're talking about changing the location of decision-making in companies, you're talking about resources moving from this place to that place. And that's very difficult for a company. The other thing that's getting in the way is talent. There's an enormous stress on the local talent pool in China today, whether it's people to man the factories, manage the factories or run the sales force.
Aside from higher labor costs, what does that lack of talent mean for U.S. managers thinking about China?
The CEO of a Global 50 company recently told me, "I just have to get used to the fact that when I go to China the person I'm talking to in my company is 10 to 20 years younger then the same person in the same role back home." You have to get comfortable with that. Then it's a question of how you manage it, how you train for it. On the plus side, we're going to see a lot of innovation in talent management coming out of China that can be applied globally. Often the place in a global corporation that's under the most stress becomes the source of the greatest innovation.
How will China's rise affect U.S. business practices?
Not only will it get bigger, but in most industries at least some of the functions will find their global best practices deeply embedded in China, whether it's the sourcing function, the supply chain or the way products are developed. Entire industries will be reshaped.
Really?
This will happen in almost every industry. I know that sounds crazy, but imagine it's 1990. You're sitting in Silicon Valley and you say, "Guys, here's where we're going. We need to just design the computer chips here in California. There's going to be a Taiwanese company that's going to design the motherboards. We're going to take all of that into Kunshan (China), and then a different company is going to assemble the product after buying a bunch of the components from Chinese companies and Japanese guys that have factories there." You would have been fired — there's no question. But that's how notebook computers are made today.
What else will change?
China has 650 million urban residents. Over the next 20 years, 350 million more Chinese will move to the cities, so we're going to have a billion urban residents. If you take rising wealth and more kids in the cities, there's going to be 150 million piano students in China. They are going to want to buy a $100 piano. Now, the $100 piano doesn't exist today. So who's going to design and manufacture the $100 piano?
It's going to be somebody who's thinking about China right now, whether it's a Chinese company that's looking at that market or a U.S. company. Now apply that to other industries. They need energy, they need health care. Who's going to provide it? If you're not thinking about it until later, you're too late.
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