Chinese companies emerging in a global world

Transformation from a China focused company to a Global company

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Good morning, my name is Stephen Maher and I have the great privilege to lead the International Business Unit for Mengniu.?This is a new Business Unit for Mengniu as I will talk later in the presentation.?While Mengniu is a relatively new Dairy company compared to other Global competitors it has been highly successful with a strong focus on quality, technology, organisation agility and very clear focus on the consumer and the customer.?Mengniu is very well led and the R&D team is experienced and very innovative.?These key attributes are essential for success not only in China but in transforming the company into a leading global dairy company, which is consistent with the theme of my presentation today about the growing emergence of Chinese companies in the Global consumer market across multiple countries and continents.

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Before jumping into the topic of todays’ discussion it is probably pertinent that I share some of my experiences that have helped shape my thinking on this topic.?I moved to China in late 1990 with a US Multi-national company some of you may have heard of; Procter & Gamble.?I was based in Beijing and tasked with expanding P&G presence in first Beijing and Tianjin and then successively, Northeast China, Northwest China and Henan and Shandong. This was a three year project.?Naturally, there was impatience from management to move faster but we had learnt in other regions that identifying and developing the right customers, product portfolio and forecasting accuracy were critical. Otherwise we would have significant business disruption.?I will talk a couple of these ‘transformational’ points later.?In 1995 I was transferred to Vietnam.?My objective was to set up our presence in Vietnam from Bac Lieu in the Mekong Delta to Hanoi and Haiphong in the North.?This expansion took time, however, this was achieved in two years.?While the geography may not have been as large as North China the complexities of poor infrastructure and limited cash from customers and consumers made the task significantly more challenging as China in 1990 was already quite wealthy, customers had ready access to cash and China was rapidly improving the infra-structure on the Eastern seaboard.?I spent three years in Vietnam establishing the distribution and customer network.

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After Vietnam, I returned to China for two years and then worked in Europe and the US for western multi-national companies.?I learnt first hand the experiences of western companies entering China and Vietnam to transform their markets into the western model only to learn that in the end the Asian markets (predominantly China) actually transformed the western companies.

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Allow me to take fifteen minutes to describe the key lessons learnt during this period of ‘Western Transformation’ and ‘Counter Transformation’ that may be of benefit for Chinese companies as they expand their businesses overseas and transform themselves into Global companies.

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Consumer Demand.?Naturally when a company enters a new market it already has a portfolio of products that were successful in the ‘home’ market.?While companies do conduct market research they tend to find conclusions that make them launch products in their existing portfolio.?My favourite example is Oil of Olay.?P&G was established in Guangzhou.?Guangzhou was hot and humid in the summer and cool and humid in the winter.?South China consumers were also wealthier than North China consumers (in the early 90’s).?The best selling variants were Oil of Olay lotion in the large 150ml bottle.?Contrast this to North China.?Hot in the summer, so similar to the south, but freezing cold and dry in the winter.?We learnt in the first season that crème , not lotion was the best selling and that the smaller 50gm jar was better selling than the larger 100gm jar due to price point.?In the north we had significant out of stocks in the first season of crème and an over supply of lotion.?We fixed our demand planning in time for the next season (12 months later).?We did a much better job of managing the product mix, however, in the second season we learnt that winter and Oil of Olay sales start much earlier in the North (around September in NW and NE China) which meant the customers further north and west were buying up all the inventory before the Beijing, Tianjin, Henan, Shandong and Hebei customers.?This meant that business boomed in NE and NW but for the first half of the season we were struggling to stay in stock in BJ/TJ regions.?This issue was disguised by the fact that we were gaining decent market share gains.?Our market share gains were driven by new distribution which is a false reality as anyone who has worked in China knows.?By the third season we had the product mix and the demand forecast by sub-region right and had an incredible season.

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China is a continent not just a country and understanding the differences was the biggest wake up call for US and European executives who had managed this in their previous career roles.?China must be understood through the prism of many different geographic regions.

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Learning for Chinese companies.?A Methodical geographic expansion into new countries and retail channels versus going national immediately would be an appropriate discussion for Chinese management teams to debate to minimise supply chain and demand mismatches as they expand overseas.

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Language , Culture and communication is one of the major issues any company faces in expanding overseas.?There are many management books lining the shelves of libraries, bookstores and on-line retailers.?The message is clear, as a species humans from all over the world appear to want to re-invent this transformation.?My experience tells me that it is a mindset transformation not an intelligence transformation.?Very smart leaders from many different countries, upon reading books and articles on the topic of language, culture and communication between different countries functions and business units, believe they have the ‘silver bullet’ solution on how to integrate a new business into an existing home grown business.?The fact of the matter is that most executives over-look one startling fact…… when you enter a new market or buy a new company; it is not that the new market / new company needs to change to adapt to the parent companies language (including acronyms and anecdotes), culture and communication style.?In fact both the parent company needs to evolve (at a lower level of change) as well as the new business.?The very reason a company enters a market or buys a company is because they also recognise the intrinsic value that the new market / new company business will bring to the parent company.?However, beyond the brands and revenue the ?intrinsic value is in part due to the ways of working, culture and communication style.?If you take the brands, customers, technology, supply chain of an acquired company and change 100% of the language, culture and communication of the acquired company staff you will reduce the agility, ingenuity and capability of the people running the business.?I will have to take my shoes off to count how many times companies need to learn and re-learn this lesson.?The assumption is that the acquiring company is far more efficient and successful than the acquired company or new market…… otherwise the acquisition would be reversed!?When American companies expanded to China in the 90’s , on the whole, they brought in foreigners to run the business and hired only English speaking graduates.?This was done so that they could efficiently transfer western ways of working to the Chinese workforce.?In Manufacturing , R&D , Finance, Corporate Communications, Legal and to an extent HR foreigners or English speaking graduates were hired.?For the Commercial operations this was not as successful.?Certainly having the English speaking skill was important but to have this as the first cut of which candidates you would interview and then hire was a large mistake.?My learning evolved from having English speaking graduates who I could transform through English language training programs to a majority of team members who were recruited for their capability not their language skills.?I also learnt that if I am to operate in a foreign country or a new business I have to learn their language and their culture.?This could be the only way I would be able to explain my point by associating the point I was making to the person I was speaking to?in terms of their experiences, language and culture.?Remember translators can only translate what they understand not what the other person is trying to tell you.?In the 90’s many senior executives running the China business lived in Hong Kong.?They and their families would live in Hong Kong, travel to China from Tuesday to Thursday (if that).?How can someone sitting in HK understand how to market and build market share in China??Around about the late 1990’s China leadership teams were forced to live in China if they were running the China business.?The first Commercial function to move into China was Manufacturing and then Sales, this fact, which seems so obvious now but only changed as China was considered a hardship posting…. too difficult for families to live versus HK, Singapore or Taiwan.?Another key learning in China was that a conversation with , even an English speaking person, was about twice to three times longer than if I had the conversation with an Austrlaian colleague.?I often found myself saying “我知道你ting到le，但是你明白吗？“ or “我告诉你我的经验，你经验是什么？”just to check learning.?Ensuring the team understood the meaning, the execution and the intent of the execution was critical to make things happen in China.

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As Chinese companies think about expanding overseas there are three key messages:

1.??????Be prepared to change your culture, language and communication style,

2.??????Pre-recruit local talent and bring them to your China operations to learn your ways of working, culture, etc

3.??????Be on the ground and be prepared to listen even if the person does not speak the Chinese language.?Someone that does not speak your preferred language is not necessarily less capable of being better than you in their local market.

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Related to my previous point is the topic of localisation.?In my experience western companies sent out executives to work in China who were very qualified in their home country but close to incompetent in China.?They enjoyed the???ex-pat lifestyle and the benefits.?There was a general financial benefit for staying as an ex-pat versus returning to the home market.?This seems contradictory as the longer a person is in a country the more they should be absorbing and learning and then applying this to greater business success.?This is probably true to an extent but the challenge is that when ex-pats are in a foreign country they seek out other ex-pats and try to create their own world interacting with their own type of people versus immersing themselves into the local culture or training up their local replacement.?At times training up your local replacement was a challenge due to the huge gap between levels and experience but in the modern world in China, SEA, ANZ, Europe and US the executives are of similar calibre.?An organisation reliant on ex-pats is more of a vulnerability as they tend to talk to each other versus understanding the market requirements.??When a company expands overseas they will be successful when they leverage the best of local traditions and leverage change in areas they can bring produictivity.

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Language , Culture and communication is one of the major issues any company faces in expanding overseas.?There are many management books lining the shelves of libraries, bookstores and on-line retailers.?The message is clear, as a species, humans from all over the world appear to want to re-invent and create transformation.?My experience tells me that it is a mindset transformation not an intelligence transformation.?Very smart leaders from any different countries upon reading books and articles on the topic of language, culture and communication between different countries functions and business units believe they have the ‘silver bullet’ solution on how to integrate a new business into an old business.?The fact of the matter is that most executives over-look one startling fact…… when you enter a new market or buy a new company; it is not that the new market / new company that needs to change to adapt to the parent companies language (including acronyms and anecdotes), culture and communication style;?In fact both the parent company needs to evolve (at a lower level of change) as well as the new business.?The very reason a company enters a market or buys a company is because they also recognise the intrinsic value the new market / new company business will bring to the parent company but this intrinsic value is in part due to the ways of working, culture and communication style.?If you take the brands, customers, technology, supply chain of an acquired company and change 100% of the language, culture and communication of the acquired company staff you will reduce the agility, ingenuity and capability of the people running the business in the new country or business you acquired.?I will have to take my shoes off to count how many times companies need to learn and re-learn this lesson.?The assumption is that the acquiring company is far more efficient and successful than the acquired company or new market…… otherwise the acquisition would be reversed!?When American companies expanded to China in the 90’s , on the whole, they brought in foreigners to run the business and hired only English speaking graduates.?This was done so that they could efficiently transfer western ways of working to the Chinese workforce.?In Manufacturing , R&D , Finance, Corporate Communications, Legal and to an extent HR.?For the Commercial operations this was not as successful.?Certainly having the English speaking skill was important but to have this as the first cut of which candidates you would interview and then hire was a large mistake.?My learning evolved to having a group of bi-lingual high potential team members but the majority of team members were recruited for their capability not their language skills.?I also learnt that if I am to operate in a foreign country or a new business I have to learn their language and their culture. ?This could be the only way I would be able to explain my point by associating the point I was making to the person I was speaking to?in their experiences, language and culture.?Remember translators can only translate what they understand not what the other person is trying to tell you.?In the 90’s many senior executives running the China businesses lived in Hong Kong.?They and their families would live in Hong Kong, travel to China from Tuesday to Thursday (if that).?The first Commercial function to move into China was Sales this fact, which seems so obvious now, was in place as China was considered a hardship posting…. too difficult for families to live versus HK, Singapore or Taiwan.?Another key learning in China was that a conversation with , even an English speaking person, was about twice to three times longer than if I had the conversation with an English speaking colleague.?I often found myself saying “我知道你听到，但是你明白吗？“ or “我告诉你我的经验，你经验是什么？”just to check learning.?As Chinese companies think about expanding overseas there are three key messages:

4.??????Be prepared to change your culture, language and communication style,

5.??????Pre-recruit local talent and bring them to your China operations to learn your ways of working, culture, etc

6.??????Be on the ground and be prepared to listen even if the person does not speak your preferred language.?Someone that does not speak your preferred language is not necessarily less capable of being better than you in their local market.

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Related to my previous point is the topic of localisation.?In my experience Western companies sent out executives to work in China who were very qualified in their home country but close to incompetent in China.?They enjoyed the???ex-pat lifestyle and the benefits.?There was also a general financial benefit for staying as an ex-pat versus returning to the home market.?This seems contradictory as the longer a person is in a country the more they should be absorbing and learning and then applying this to greater business success.?This is probably true to an extent but most ex-pats seek out other ex-pats and try to create their own world interacting with their own type of people versus immersing themselves into the local culture or training up their local replacement.?At times training up your local replacement was a challenge due to the huge gap between levels and experience but in the modern world in China, SEA, ANZ, Europe and US the executives are of similar calibre.?An organisation reliant on ex-pats is expensive and tends to create high turn-over of talented local staff as they are unable to break the glass ceiling of entering the local leadership ranks dominated by ex-pats.?Local talent tends to be around 30-50% less expensive than a fully loaded ex-pat.?As Chinese companies look to expand overseas they should learn from the Western company’s experience.?Ex-pats should be utilised but they must have three goals:

1.??????Deliver the business objectives,

2.??????Identify, train 2-3 replacements (and the replacements’ replacement) within 18-24 months, and

3.??????Be the catalyst that brings the parent company culture to the new business but also the catalyst that brings the new business innovations to the parent company.

Ex-pats should also be incentivised not just on #1 above but also #2 which provides a financial reward to localisation efforts for the ex-pat.

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Route to market and cost to serve are two very significant cost lines on any company both locally and internationally.?However, there are two important considerations as any company expands overseas.?The first is: in the home market the parent company deeply understands this structure and has their success model.?Second, enormous amounts of in-efficient spending can be provided to the wrong or least efficient customer if your route to market is wrong.?Let me illustrate this point:

1.??????In Australia the largest three retailers control >80% of the market…. If you go through a wholesale network, (like in China) you have no chance of being competitive in Australia or limit yourself to the Chinese consumers in Australia,

2.??????In contrast in China no retailer has market leadership in more than one or two provinces; in fact retailing is very local in China….. if you go to Wei Hai in east Shandong province the largest retailer controls >50% of the retail business but unless you were from Wei Hai, maybe Yantai or far east Shandong province, you would not know about this retailer.?Foreign companies could spend fortunes with national retailers in China and not increase their market share in Shandong at all.

3.??????The opaqueness of off-line and on-line is making it more challenging to understand the impact of your cost to serve and your investment in route to market.

If you consider the above information the decision to bring in ex-pats to a market is a very challenging decision.?If the ex-pats arrive in a new market thinking they will change the route to market that exists this could be a fatal mistake.?If the parent company understands what the route to market is and where their local experts can bring value in productivity or efficiency then an ex-pat is of considerable value in driving efficiencies.

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Let’s now talk about how Chinese companies are able to compete in a global market as they look to expand beyond China.?The biggest challenge for Chinese companies that Western companies did not have to experience when they expanded to the China market was that the categories the Chinese companies are expanding to are developed categories.?Back in the early 90’s Western companies were able to bring the FMCG products, consumer focused marketing and superior manufacturing and quality controls to the market and be highly competitive versus local Chinese competition despite considerable price premiums.?This makes the challenge for Chinese companies to expand overseas in Europe, US, SEA, ANZ, MEA and to a large extent LA very challenging.??Unlike their Western company counter parts in the early 90’s in China and most of the developing world Chinese companies will have to dislodge entrenched high market share local and multi-national competitors that have establish their brand equities, trust with the local consumers and against well depreciated assets of existing market leading brands.?In this environment there are only three ways for Chinese companies are able to enter and this requires a long-term investment strategies:

1.??????Sell products at a lower price than competitors but offer the same benefits,

2.??????Sell products at the same price as competitors but offer more benefits, or

3.??????Bring disruptive technology to either expand the category in a new segment that entrenched competitors will have to invest to compete, trade channel efficiencies or improve productivity so customers are able to make more profitable margins versus selling existing products.

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There are many successes for Chinese companies overseas and these are predominantly in the digital, electronics or communications categories.?FMCG remains an area that Chinese companies are yet to demonstrate consistent success.?

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The transformation of Chinese companies to Global companies is actually a great opportunity.?Chinese companies in the 2020’s have incredible advantages versus their western counterparts entering China in the 1990’s.?

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Four big differences for Chinese company transformation:

1.??????Chinese Diaspora,

2.??????Successful business in a home market that is the largest consumer market in the world,

3.??????Created the future of ‘new’ retail, and

4.??????Created the future of digital, social, community media (and it is integrated eg Alibaba, JD, etc).

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#1

For a start there are large Chinese communities overseas, there are many Chinese students who have studied overseas and are fluent in both mandarin and foreign languages, Chinese are avid travellers and, like Americans, love to see their own brands and buy their own brands in foreign countries (and there are more Chinese tourists than American tourists in most countries).?Contrast this to when I moved to Beijing in 1990….. the only place foreigners could meet socially was ‘Franks Place’ to the east of Capital Stadium.?If you wanted to shop in foreign stores you had to use FEC.?Chinese companies have a huge pool of talent to draw from and to build their business from in a ‘comfortable’ way.?Western companies in China did not have large Foreign immigrants, students, business professionals living in China…. They had to carve out their market starting from scratch.?Chinese companies have ‘locals’ that recognise their brand, to buy these brands and want to work for these companies …… and Chinese does not mean Mainland Chinese only – it includes all Chinese.

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Key point:?Chinese companies have a far greater advantage to expand and leverage local talent than any western company had in China if they are willing to leverage overseas Chinese.

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#2?

In the 70-80’s American companies had a significant advantage as America was the largest consumer market in the world.?Many US companies were able to invest and expand overseas because they had the financial strength of leading market shares (and profit) in the US to successfully enter foreign markets, create categories and build market share.?Many people from foreign countries travelled to America and became familiar with the brands and maybe even comfortable with the brands.?Many foreigners watched American movies and became familiar with the ‘colloquial’ language the brands flashed across the screen.?When US companies expanded overseas they not only had the financial balance sheet to support this growth but they also had the familiarity of ‘colloquialisms’ and product familiarity to facilitate the expansion.?Think of McDonalds – even the French eat ‘French Fries’ from American inspired McDonalds!

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Key point: China is becoming a major player in entertainment, sports and digital social / community media.?Leverage this and tailor the message to a Glocal audience.

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#3

China is the leader in digital retailing.?I used to laugh (on the inside) at my western friends who used to talk about how wonderful Amazon, etc were with digital retailing.?Amazon may have started the process but the Chinese companies completely out executed Amazon, Walmart and Carrefour. The Chinese were fully integrated B2B, B2C, C2C, O2O and whatever acronym you can come up with well before the Western companies even thought about this.?In the digital world the critical mass is not about how many consumers you have but how you are able to triangulate the data.?The Chinese companies are masters of this.?Not just Alibaba and JD which probably everyone knows but FMCG companies who are able to track the product from production > to warehouse > to customer > retailer > consumer.?They are able to track this data by category, by segment, by sku by production code.?However, unlike Western companies it is not on excel spreadsheets that are generally filed and not used, it is on sophisticated algorithms that identify patterns that Chinese companies use to adapt production, sales and marketing activities.

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Key point: Chinese companies need to invest in the same level of technology overseas as they do in China (which will be a negative to the P&L in the short term) to out compete entrenched local competitors.

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#4

Retail is a constant evolution.?There is always money to be made in retailing so there will always be retailers.?The challenge is that the retailers will always have to evolve. From the ‘hawkers’ in the street to the supermarket, to the hypermarket to the digital market… there is always a buyer and always a seller.?The leading market in digital retailing is China.?No-one will ever catch China.?A different market may be a higher % but China will always have more consumers.?The success of digital retailing is driven by the number of transactions.?The more transactions the more information you are able to collect and with sophisticated algorithms encourage future sales.?The example I will provide you is from a large US retailer from the 90’s.?In the early 90’s personal computers were beginning to be purchased and was a lucrative market for retailers beyond ‘Computer stores’.?This particular major retailer purchased a large quantity of personal computers sensing opportunities to make significant profit.?Now remember this is a new category so most retailers would not have experience with selling the product (beyond computer stores).?This large US retailer commenced the sales week promoting the personal computers but sales were sluggish……. Except for one store.?In this one particular store sales were well above projections, expectations and even ambitions.?The head of the retail division rang the store manager and asked what was going on in his particular store that caused the sales to increase………. The answer was simple; he put a demo model out on display so people could play with it and then they bought.?Immediately the Division head advised all store managers to put a display model out and sales picked up immediately.?The power of data and people leveraging the data is incredible.

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Key point:?Chinese companies have a far superior knowledge of how to digitalise data and leverage data than any other country / company in the world.?Chinese companies also have the ability to look across social, mobile, community and retail platforms to analyse data.?In addition, Chinese companies are quite familiar with working with algorithms to identify trends so they do not need to have a human look at all the data.?Technology is a key competitive advantage for Chinese companies in China and in expansion markets that they should not lose sight of.

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In closing I would like to share my thoughts on transformation.?I am not the person that will tell you how to build technology, leverage technology or create technology to create digital transformation.?I have worked in the FMCG industry for 35 years and see the fashion of ideas and opinions come and go.?I am the person who will share with you the fact that transformation is not simply technology it is really mindset.?I am not saying I am correct but I definitely believe unexplained business success is one generation from bankruptcy or being acquired.?We have all heard the age old adage “crap data in ; crap data out”.?In the past we have been beholden to third party agencies telling us what consumers think, purchase and believe…… in todays world we are able to create this direct connection between company and consumer.?A company is then able to ensure they listen to their consumer and modify their product, logistics and customer base to adapt to what consumers really are looking for.?Western companies will need to change to this environment, Chinese companies have evolved in this environment.?The competitive advantage is with the Chinese companies to expand: their huge home consumer market, their agility and speed to change, their digitalisation adaptability and their innovation cycle pace are all areas to leverage.

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In the past I would ask my team “我知道你听到但是你明白马？to “咱们都明白和同意吗？“

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So as ‘Singles Day’ spreads throughout the world let us remember two things:

1.??????This is a Chinese Global phenomenon, and

2.??????Retailing and brands are local so FMCG companies better figure out how to compete in a consumer market driven by Chinese ingenuity (ie Singles day 11.11)

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Let me know if you like this article.?I plan to publish an article about a specific Chinese company (Mengniu and the CEO Lu Min Fang decision to buy Bellamys Organic and the unfortunate lessons learnt for Chinese companies)?