As China’s economy evolves — growing larger, more complex and more competitive — so is the way that multinational corporations (MNCs) are managing their operations there. CEOs and other senior executives at MNCs in the U.S., Europe and Asia are focusing more of their time and their companies’ resources on China, according to experts at the Boston Consulting Group and the Wharton School.

Research by BCG suggests that the MNCs that have had the most success in China are those whose top managers have gone out of their way to stress the importance of their China businesses in relation to their global operations. At the same time, the managers on the ground in China are also changing. Expatriates still hold the most senior positions in China, but Chinese locals are assuming a greater role in both middle- and senior-management ranks.

In years to come, multinationals will face new challenges in their China operations: nurturing the growing number of more educated and experienced Chinese managers and leveraging their China operations in a way that contributes to their global competitive advantage.

In past years, the typical general manager in China was assigned the relatively straightforward task of either selling his multinational’s products in that country or helping the parent firm establish operations to leverage China’s strength as a low-cost producer. To be sure, these remain important responsibilities; indeed, the number of companies that wish to outsource to China is accelerating. But the demand on China managers has become more multifaceted, according to Jim Hemerling, senior vice president and director in BCG’s Shanghai office.

For one thing, China managers still have to address significant growth in demand in China and all of the challenges inherent in competing against foreign and domestic companies in what is already a vast, difficult market. They also must deal with the global migration of customers. Industrial companies or suppliers that provide components to assembly plants are finding that more and more of their customers are migrating their manufacturing to China either because of demand or China’s attractiveness as a low-cost space. Hence, China managers must now interact with a constant stream of visits by customers from many parts of the world. Furthermore, general managers of MNCs in China must strengthen their ability to develop managerial talent — as well as engineers and scientists — within China.

“These global forces are coming together to produce a significant change in the role required of the China GM,” Hemerling says. “That person now has to be the impresario or orchestrator of a much more complex set of management demands. You already have a GM working hard to compete against foreign and domestic competition, to grow his domestic business, arranging visits, meeting customers, setting up large outsourcing organizations. Now he has to make sure his company is getting its share of the talent. That’s quite a change in role. It’s one thing if you’re a company like General Electric that has tremendous resources and can put in place a China CEO who orchestrates those processes. But for many companies, the China GM or CEO is really stretched to meet this change in complexity.”

Benchmarking Best Approaches

In 2003, BCG conducted a survey to benchmark the best corporate approaches to China. The study focused on ways in which 14 MNCs manage their overall presence in China from a broad corporate perspective, as distinct from the level of individual business units. BCG also looked at how MNCs ensure sufficient global visibility of their China operations and how functions and processes are carried out. Specifically, the consultancy analyzed the MNCs from a number of perspectives: how the multinational manages its China operations; target setting and management processes; government and public relations; localization and human resources development; the role of the China operation; the relationship of sourcing to sales and marketing; and the extent of cross-product development activities.

The study found that leading MNCs treat China uniquely in at least 10 ways:

  • The China operation has a very senior, accountable sponsor at the global level; at Samsung, for example, the China CEO is one of three top group executives.

  • Clear, bold targets are set internally, and sometimes externally; GE has goals of $5 billion in sales and $5 billion in sourcing by 2005.

  • A continual, top-down management push is reinforced with management processes; Michael Dell of Dell Computer and other CEOs visit China at least once a year.

  • The MNC is willing to change its rules regarding global priorities and norms to favor China; Kodak moved its Asia headquarters to China.

  • China-specific products are pursued; virtually all major MNCs have China-specific products.

  • The MNC works aggressively to bring the industry value chain, including R&D, into China; Samsung set up a 300-person handset R&D laboratory in Beijing.

  • Managers are nurtured for the long term; Motorola University runs management development programs in China.

  • Government relations and public relations are strongly emphasized; Pepsi has stepped up its government-relations focus on the central government and less on provincial governments.

  • The China operation is given a truly “value-added” role; Kodak’s China organization prepares an integrated strategy across six businesses.

  • China is made a global or regional center — or both — for key responsibilities; Nike says its China operation will become increasingly important in the build-up to the 2008 Olympics.

“With the survey, we tried to look at some general ways in which these MNCs, despite being large, complicated, global organizations, were able to achieve some sustained focus on China and orient their companies toward accelerated activities in China,” says David Michael, a vice president in BCG’s Beijing office.

One of the key takeaways from BCG’s research is that MNCs grow their China operations from the top down, not the bottom up. “It needs to be top down because you need to reallocate global-level resources and activities if you are to really make a commitment to China,” says Michael. “To accelerate investment successfully in China over time, you need to bend the rules that otherwise might prevail inside your company. You need to be able to allocate more management talent, more senior time and attention, and more investment than the near-term financial returns might otherwise warrant. If the regular rules say you need a two-year payback from the day you set up operations, you have to understand that a China investment probably won’t achieve that goal. Companies that have achieved breakthroughs in China — establishing a presence in places other than Beijing and Shanghai, achieving more product customization and localization, establishing deeper distribution channels — bent the rules to make China a priority. Not every company makes it past that threshold.”

Another important finding: Bringing the industry value chain to China and building for the long term are also important. “You can’t just have a little sales arm here,” Michael explains. “You’ve got to be ultimately customizing and modifying your products for the local market. And you need enough value-added activity, like R&D, so that you can establish closer relationships with local suppliers and demonstrate commitment to local customers.”

The View from Europe

Paris-based Xavier Mosquet, senior vice president and head of BCG’s operations practice in Europe, says Volkswagen and Michelin are two examples of European companies that understand the importance of China, both locally and globally, and have established well-oiled operations there. Though Volkswagen later ran into difficulties, it was ahead of the curve in recognizing China’s potential role in its operations.

“Volkswagen saw very early on that the Chinese market would be demanding and sophisticated, so the cars it sells there are up to European standards,” says Mosquet. Michelin, the number-one player in the tire business in China, established a joint venture with China’s top tire maker, and in doing so struck one of the first initiatives of its kind that gave the non-Chinese company a controlling stake (51% in Michelin’s case). Michelin also has been able to upgrade the standards of tires sold in China and educate consumers about the advantages of such improvements.

Mosquet says CEOs of European MNCs are catching on to China’s importance as a market. “I think most of them are getting organized, if they are not already totally organized. Are they putting enough effort into it? That’s something that could be challenged. I think not all have upgraded the level of resources needed, given the challenge, but they understand it’s an important issue of a strategic nature. They also understand it’s not easy. China is a complex market. Those who know most about it understand there will be ups and downs. Not all of them think about the downs, and that makes a big difference.”

Additionally, do European CEOs fully understand the broader role that China can play in their global operations? “There is a general understanding of that,” Mosquet explains. “For many CEOs, however, it is still an abstraction. They don’t necessarily have a full-blown plan of what it means in terms of the scale — the role of manufacturing or the role of China in terms of technology — and how and to what extent they can and cannot rely on that country to provide shared services for their operations in the rest of the world.”

The Role of Expats

Expatriates still make up the majority of CEOs and other top executives in China. Increasingly, however, MNCs are turning to Chinese executives to fill the ranks of senior and middle managers. One reason is that Chinese managers have the natural advantage of knowing the language and the culture. Another is that the cost of transferring managers to China and supporting them and their families can be expensive. John Wong, chairman of Asia Pacific for BCG, says a typical expat manager may earn $200,000 to $300,000 a year in base salary and receive a $10,000 housing allowance each month. His firm may also give him $20,000 to $40,000 annually to educate his children in private schools, pay $20,000 to $40,000 a year to cover the cost of trips back home, and also pay his taxes. “You can find really good managers in China for a lot less,” says Wong.

“Multinationals are relying on expatriates less and less,” notes Wharton management professor Marshall Meyer, who has studied Chinese companies extensively. “I’ve seen some companies that are down to one expat manager; in one case, even the chief financial officer was not an expat.”

BCG’s Michael sees the issue differently. “The reality is that the flood of expats coming to China has never been greater,” he says. “The tight integration of China into global business necessitates expat participation. It would be wrong to believe that the era of the expat is over.”

Indeed, even those who point to the generally diminished role of expats in European and U.S. multinationals admit that there are exceptions. Most of the companies with which Mosquet has worked have made strides in local integration and have reduced the number of expatriates. He adds: “Where this is less true is among companies that were using China as a place where they produce for the world, not just local markets. Both in R&D and engineering they have actually, at least temporarily, increased the level of expatriates, and that may be more permanent. That’s because they want to make sure what’s happening in China is integrated with the rest of the world — in the same way that European multinationals have Americans in their operations. In a plant serving the China market, you’re likely to find fewer Europeans. They are too expensive, they’re not there to stay, and their language skills are not sufficient. If you want to become a more sophisticated manager, you need to be able to speak to Chinese at a level that allows for subtlety and quick interaction.”

For many years MNCs would assign expats to China for a period of perhaps three years and then transfer them. It was a cumbersome approach to managing China operations because the expats would be taken out of China at just about the time they had gained the experience to do their jobs well. “The MNCs have treated China as a training ground,” says Wong. “Expats bring a huge amount of value. But changing people every three years is not the most productive thing to do. But some MNCs say it’s important for that manager to have mobility. And often the only way to get them to go to China is to promise them a bigger and better job.”

Smart MNCs have discovered the disadvantages of the three-years-and-out formula and have adjusted accordingly, says Michael. “Big MNCs are beyond the strategy of rotating people in on a short-term basis. They are seeking people for longer periods of time, and they are also relying on local mangers or expats who have a commitment to being in China for longer periods. The reality is you just can’t manage a business by rotating a succession of people for two- or three-year time periods.”

Michael adds that the role of expats has narrowed. The local China operations of many multinationals have become very large and complex. By necessity, as they grow, they must rely on local teams of managers. Expats play a particular and relatively narrow role in most major MNC operations. The MNCs that are in more of a start-up or exploratory mode are usually expat-driven, but companies that have mature operations in China rely predominantly on local Chinese managers.

Wanted: Young Managers

Educated, experienced managers from the People’s Republic of China are, like good managers anywhere, worth their weight in gold, and the war for Chinese talent is being waged vigorously, says Harold Sirkin, senior vice president and director in BCG’s Chicago office and head of the firm’s global operations practice. “Multinationals rely on Chinese managers who may have worked for several years for Western companies — maybe even for one of their own divisions — or at least have been trained in the West.”

The demand for talented Chinese senior managers outweighs the supply, in large part because people in their 40s and 50s, who would be expected to assume such positions, were in school during the country’s cultural revolution and were not well educated, according to Wharton’s Meyer. Another reason for the dearth of managers with more than 10 years’ experience is that it has only been in the past decade or so that China’s economy has exploded. “There is just a scarcity of people with 10-plus years of experience working for MNCs in China,” notes Hemerling. “The scarcity applies to manufacturing, marketing and sales — although less so — and in technical functions like engineering.”

Educated younger people — those in their 20s and 30s — are in a much better position than their elders to attain positions with MNCs. Many have earned degrees from top business, engineering and science programs, and many are being trained by the multinationals themselves. “There are huge numbers of grads coming out of engineering and business schools who have zero to five years experience,” says Hemerling.

It may be that the young managers are coming along just in time. Competition among companies in China is growing ever more intense, and managers who cut their teeth on Chinese operations 10 or 15 years ago may not be up to handling a new environment in which MNCs demand so much more from their managers in China. According to Wong: “Ten years ago, managers of MNCs that came to China didn’t always know what they were doing. But they hung out a shingle and headquarters said, ‘You’re growing from a base of zero by 10%, and you’re doing well.’ Today, sales have grown, and managers have to pick up where the previous guy left off. So the job is much more challenging. Now you have young guys who have to get up to speed from a higher level. Before, there was a lot more tolerance for a lack of profitability and mistakes.”

One major issue that lies ahead for executives of MNCs in China is having the foresight and steadiness to manage the ebb and flow of business cycles. As it develops, the China market will inevitably experience downturns — perhaps lengthy ones — to counterbalance the era of rapid growth that has captured the world’s attention in recent years, Mosquet predicts. This will mean planning manufacturing capacities aggressively enough to meet demand in what is the biggest market in the world but also being able to cope with a slowdown without being hurt by overcapacity. Are U.S. firms better prepared to handle downturns than European MNCs? One slight difference is that American companies tend to be larger than European companies, and in that respect, they will have an advantage, notes Mosquet: “Sales in China might not constitute as big a share of their overall U.S. corporate revenues as they do for European companies. But for companies of equal size, U.S. and European firms will be in the same situation.”

Another major challenge for MNCs is achieving an even greater level of integration of their Chinese business activities into the global company.

“In the past it’s been simple to have, let’s say, a global manufacturing platform in China,” Michael says. “You have 10,000 assembly-line workers helping you make products you sell all over the world. That’s now a relatively straightforward thing to do. It’s another thing to have 10,000 R&D engineers, software engineers and programmers integrated into your global operations. The next wave for companies will be to truly make a China-based capability and leverage it for the benefit of their global competitiveness, not just in manufacturing but in a variety of other aspects of the company. The talent is available to achieve this goal. It requires some development, but it is available. It’s an internal challenge for large companies to manage the change in the norms of the way they do business to achieve that result. The best companies will be able to do this, and the worst companies will never be able to do it. How long it takes is in the hands of the companies.”