A resolution for the Year of the Tiger: Will Chinese businesses finally stop chasing after unsustainable growth targets?

The lunar Year of the Tiger may prove to be a pivotal one for Chinese businesses.

Behind all the bright lights and glitter of the upcoming celebrations, the outlook for many companies in China looks a lot less festive. With much uncertainty looming on the horizon, the one constant this year will likely be increasing challenges.

For many Chinese companies, the modus operandus for the past decade has been to set sky-high targets, and then throw a ton of resources to try to hit them. In budgeting meetings that I have joined, oftentimes revenue targets were set by high level aspirations, such as “2x revenue in 5 years”, or “at least three times GDP growth”. Usually set by visionary founders or chairmen/chairwomen, these slogan-like topline growth targets become the marching orders for the company for the rest of the year.

Most executives may not put much faith in their ability to meet these stretch targets, but have no choice but to play along. The interesting part though, is that many times by year-end, these targets are not only met, but even exceeded, often buoyed by a vibrant domestic market and breakthroughs in marketing tactics.

The success of this target-setting process, in turn, bolsters the confidence of the leader to continue this process the following year, even as some members of their executive team voice their doubts. ?“My executives just don’t have sufficient ambition and a high-level perspective to see the real potential of the market”, these leaders sometimes tell me.

Given this “KPI inflation,” increasingly companies have been meeting their KPI targets in form, but not in substance. This is probably exacerbated by forward-looking indicators such as new customer acquisition or new revenue contracts, where investors are accustomed to “Chinese-level” growth targets.

What’s wrong with ambitious KPIs? Nothing, of course, unless you are acquiring customers for more than their lifetime value, selling contracts with negative margin in order to bolster the topline, pumping sales for short-term cash flow but creating long-term liabilities, or signing meaningless non-binding MOUs. The list goes on.

To be fair, over-stretched and inflated KPIs is not a new topic, and certainly is not limited to the Chinese market. However, the challenge is that for many companies, chasing topline growth has come at the expense of building solid fundamentals. When the company is singularly obsessed with marketing and sales, often what falls behind are the integrity of the operating platform, the efficiency of the processes, and the aligned culture and capabilities of the organization.

Over the next year or two, across industries ranging from the internet and ecommerce to real estate to financial services, there will be a lot of cleaning up to do thanks to the growth sprint of the past few years. We are seeing unprecedented demand among business leaders to build a smarter operating infrastructure, right-size their organizations, and transform them into more agile players. ?

This is not to say that growth is not important. In many ways, growth is the only pathway to survival. Indeed, compared to any other market in the world, the mad rush to scale and relevance in China is unparalleled. There’s an expression in Chinese that evokes the fear of falling behind the competition that many executives harbor: ‘diao dui’ (“掉队”), which literally means falling behind your peers and getting left behind.

Chinese CEOs are not oblivious to the fact they are pushing unsustainable growth targets, but they’re caught in a bind. If they don’t generate this growth, they can’t retain their market position. Next, valuations come under pressure and stock prices start falling, triggering a downward spiral. This is the reality of the Chinese corporate rat race. Short-termism is a prerequisite to survival.

But what’s the alternative? Sky-high expectations, inflated growth numbers, and an increasingly low-quality top line which often breeds a punishing corporate culture that pushes the limits of integrity in reporting numbers. This also results in an unhealthy organization and undisciplined operating model. All this pressure eventually leads to the day of reckoning where it all falls apart. When it does, the fall from grace is extreme and painful, and businesses can only recover after a long period of restructuring and re-adjusting market expectations.

As we look forward to the Year of the Tiger, how should you start thinking about addressing the fundamental holes that you’re creating as you chase this growth? Of course, you can’t avoid the growth question. But at the same time, it starts to feel like fixing a plane while flying at 35,000 feet.

The success of many Chinese businesses has been built on their ability to grow fast without getting into trouble, or often times, their ability to grow out of trouble. This formula may no longer work in China’s next phase of development. My hope is that as most corporates realize this together, the proverbial rat race will become a more realistic, and a more sustainable, journey. The Year of the Tiger hopefully will be the year where slogan-like growth targets will no longer be in vogue.

The alternative is too high of a price to pay.?