> Rethinking profitable growth: the productivity imperative for foreign multinationals in China
Rethinking profitable growth: the productivity imperative for foreign multinationals in China
About this study
This study is part of a program of research we are undertaking on productivity in China.
This report examines how foreign multinationals are adjusting to this new environment.
The survey on which this report is based was conducted by the Economist Intelligence Unit using its Opinion Leaders Panel.
C-suite executives and senior managers from over 200 foreign multinational corporations responded to our survey between March and May 2012. All respondents were based in China.
This report draws on findings in our white paper China's productivity imperative.
Eighty-four percent of executives surveyed say that productivity will be either "extremely" or "very" important to business performance in the next one to three years.
Foreign multinationals have had a good run in the past decade in China, benefitting from world-beating productivity gains, an expanding labor force, rising inflows of investment and accommodating government policies that have kept the price of inputs low.
Demand has been supported by domestic investment in industrial capacity and infrastructure and – until the global financial crisis – steady growth in the world’s major markets.
Although conditions have grown tougher in the last few years, our survey found that most foreign multinationals in China remain profitable.
There is a growing awareness, though, that past performance is no guarantee of future success.
The old engines of growth in China are starting to run out of steam.
Growth in exports and productivity has slowed in recent years.
Earlier rounds of market liberalization and privatization have largely run their course. Very rapid expansion of capital investment – such as the massive fiscal stimulus unleashed in 2008-10 – has led to a decline in capital efficiency, and will eventually inhibit growth if productivity does not accelerate.
Raising productivity is now critical for China's economic future.
Productivity on the government agenda
Companies can expect increasing pressure to raise productivity in coming years because of pro-efficiency government industrial policy.
Cost inflation is likely to become a permanent feature in a slowing economy as the government implements reforms to input factor (labor, capital, natural resources) markets to lift average incomes and increase resource efficiency.
Feeling the pulse of foreign multinationals
Foreign multinationals in China know that the game is changing.
Executives and managers across industry sectors overwhelmingly acknowledge the increasing significance of productivity. Eighty-four percent say that productivity will be either "extremely" or "very" important to business performance in the next one to three years.
Companies are already feeling the pressure of rising costs. Half of our respondents identified labor costs as the leading factor impacting profit.
Other important factors included exchange rate movements, commodity costs, and competition from domestic companies.
Nor are companies able to pass these rising costs on to their customers. 85 percent of our respondents expect that they can pass on a third or less of rising costs to their customers.
As margins come under pressure and demand is redistributed, the old paradigm of doing business in China is going to change, perhaps radically.
Most of our respondents considered that more needed to be done to align their operating models with the new business environment.
Almost two-thirds of our respondents agreed that their companies needed to improve their competitiveness in the local market and to overhaul their organizational structure in China to tap new opportunities.
Many foreign multinationals have already achieved a great deal from back-office initiatives, and are now shifting the focus of their performance improvement programs to the front office, with special emphasis on sales and marketing effectiveness.
In terms of technology, there is more scope for companies to capitalize on investments already made in core business systems, such as enterprise resource planning.
Very often companies fail to capture the full value of IT because implementation does not match the unique operating practices and local requirements of the Chinese market.
Leading companies are also leveraging new technology enablers such as mobile internet, e-commerce, cloud computing, and data analytics to drive productivity.
We looked closely at our survey results to identify what high performing foreign multinationals were doing to raise productivity.
For these purposes, we classified 'high performing' companies simply as those reporting the highest levels of profitability.
From a list of 50 productivity improvement methods, the top five undertaken by these high performing respondent companies were:
Business unit strategy reviews
Improved people development and management
Cost reduction programs
Enterprise resource planning (ERP), and
Greater autonomy for country management
Significantly, all five of these methods require a strategic, crossbusiness approach to improving productivity.
Moreover, we were struck by the fact that these high performers were much more likely to have adopted these initiatives compared with the others in our sample group.
The implications are clear.
A call to action
In our view, for many foreign multinationals in China, adopting these and other initiatives to proactively and urgently improve productivity will be key to their future success.
The days of foreign multinationals in China focusing solely on growth are disappearing fast. Instead, executives now have a mandate for "profitable growth", placing huge pressure on local leadership teams.
To achieve this goal, five lessons emerge from our survey:
Leading companies are adopting strategic, cross-functional approaches to raise productivity. Whereas in the past the focus was on growing the "top line", strategic planning is being rebalanced to give more weight to productivity goals such as targeting customers more effectively and reducing inputs per unit of revenue.
Leading companies are working to ensure that increased decision-making power is given to their China leadership teams, balanced by a rigorous approach to risk, controls, and governance. Significant transformation needs to be made to business and operating models for foreign multinationals to capture fast growing domestic consumption.
Proactive and successfully executed cost management programs are essential. This means aggressively managing costs across the organization, but also making bold investments to upgrade operations. Managers in China are often choosing to initiate these programs themselves, to get ahead of cost cutting directives from headquarters.
When designing and implementing IT systems, leading companies need to balance the importance of globally consistent processes with local needs, then work to improve the level of compliance.
As wages continue to increase, companies are transforming process flows that impact labor productivity and doing more to incentivize and motivate their staff.
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