The last 10 miles

The Last 10 Miles: China and Global Competition


October 2012

Glance at the 2011 Fortune Global 500 and you’ll quickly note the large representation of Chinese companies—61, to be exact.

But revenues are only one measure of a company’s performance. Despite their rapid growth and impressive scale, are Chinese companies truly competitive beyond their own borders?

For the most part, not yet. An old Chinese saying holds that if you stop at 90 miles of a 100-mile journey, the result is the same as if you stopped halfway. In that sense, Chinese companies have a ways to go. In many areas—strategy execution, talent development and brand management, to name a few—there is still a considerable gap in competitive prowess between Chinese businesses and the world’s leading global companies.

And those shortcomings show up in the numbers. In a recent study, Accenture found a yawning chasm between Chinese companies’ strong growth and their lackluster profitability.

In 2011, Outlook analyzed the extent and quality of Chinese companies’ operations outside their home country to discern their readiness to compete globally. The present article looks at the challenge of global competitiveness from a different perspective—by assessing the internal capabilities of Chinese companies.

We selected 99 domestic and foreign listed companies in three industries—construction, industrial machinery and pharmaceuticals—and analyzed their financial data over three and five years (see chart 1 and chart 2). We found that Chinese industries had grown much faster than their foreign counterparts. The difference was especially stark in the three-year period from 2008 to 2010, when Chinese firms suffered fewer shocks following the global economic downturn.

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However, when the microscope was turned on profitability, a different picture emerged. Using economic value as the basis for our analysis (net profit after deducting the cost of capital, or ROIC minus WACC), we saw that profitability across the industries was negative in China but positive elsewhere, with particularly large differences in industrial machinery and pharmaceuticals.

These figures reflect the growth pattern of Chinese enterprises: driven by investment to expand but characterized by low added value, low operational efficiency and low productivity. To rectify this imbalance between growth and profitability, Chinese companies will have to focus on developing capabilities related to strategy, operations, marketing, human resources and culture.

This is not news to Chinese executives. When asked where Chinese enterprises are in this post-crisis era, the largest number of respondents to our survey said, “The current situation is favorable to the development of Chinese enterprises, and we have to aggressively improve ourselves.” Close behind were those who agreed that Chinese enterprises “need to learn from global advanced management concepts” (see chart).

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Actions that back up these responses will be necessary if Chinese companies are to become competitive on the international stage. In our research, we’ve identified four barriers that they will need to overcome.

 

The underdeveloped private sector

China’s underdeveloped private sector is a major culprit behind the dearth of world-class Chinese businesses.

Among big companies, the ratio of state-owned to private Chinese companies is out of balance. For example, of the 61 Chinese enterprises on the Fortune 500, only four are not owned by the state. Many state-owned enterprises are still sheltered by preferential treatment and numerous protections from competition. Those dominant in their market, often because of a natural monopoly, have little incentive to innovate or to enhance their performance. (In some industries, however, such as steel, SOEs are under great pressure and are likely to adopt new attitudes and behaviors toward innovation and performance improvement as a result.)

Some companies, such as Sichuan Tranvic Group Co., have been successfully privatized. In 1997, the company (then known as Wei Yuan Steelworks) was a state-owned steel plant that, with annual revenues of just 530 million yuan ($85 million), was on the verge of bankruptcy. With its small scale and few technically advanced products, the enterprise suffered a heavy loss, defaulting on wages as well as water and electricity bills. Workforce morale was low. Against this backdrop, the plant’s senior management team decided in 1998, with government approval and support, to take the company private.

To make this happen, equity shares in the enterprise were transferred to select employees and managers. Compensation plans were changed to align employee interests with the company’s long-term interests. The company’s leaders quickly streamlined what had been an inefficient, overstaffed structure. Money saved through the restructuring was invested in new production capacity.

Progress was swift, and by 2000, steel production capacity and revenues doubled. By 2010 (the latest year for which we have figures), the Sichuan Tranvic Group was a 30-billion-yuan ($4.7 billion) company with operations primarily in steel smelting, cement and mining.

 

Weak strategic focus

Even successful global businesses face plenty of challenges when it comes to strategy development and execution. But they generally have decades of experience in developing capabilities that help them scan the future and prepare for it.

In contrast, Chinese enterprises have limited strategic planning and management capabilities. Indeed, many lack a long-term strategy at all.

These companies are still stuck in a planned-economy mindset, with its legacy of government administration. They base their strategy formulation not on changes in the market but on non-economic factors. In other cases, a lack of experience with changing economic and market conditions hampers their strategic efforts.

Chinese organizations also struggle with strategy execution. Some companies’ strategies are little more than slogans, which cannot be implemented in practical terms. Even if a company has set growth and profit objectives, it may not have defined any metrics for assessing progress toward these goals or even allocated the resources needed to realistically pursue them. In our survey, more than 30 percent of respondents agreed that Chinese companies “fail to assess the enforcement of their strategic plans.”

However, one company that has not only managed to develop and execute a sound strategy but has even developed successful business after successful business (what we call “jumping the S-curve”) is COSCO Shipyard Group Co. Started in 2001 as a ship repair company, COSCO Shipyard soon established a dominant presence. Within the decade, the company had diversified into shipbuilding and offshore engineering (see Sidebar 1).

 

Absence of global brands

Global high performers have strong brand recognition, whether with consumers or other businesses. Few Chinese companies can make that claim.

This gap shows up in assessments of brand value. In a 2010 ranking of the world’s 500 most influential brands, only 17 Chinese brands were included—and only four Chinese brands ranked in the top 100.

Although Chinese enterprises have gotten a late start in brand building and positioning, some have stepped up their effort. One of the best-known brands beyond China is Haier, the appliance manufacturer that employs more than 80,000 people globally and has operations in more 100 countries.

Haier’s focus on brand building can be seen in its development of a high-end series of products under the Casarte brand. Launched in 2007, the product line includes wine cabinets, air conditioners, washing machines, water heaters, kitchen appliances, convenience appliances and integrated kitchen cabinets. In China’s tier-one cities, Casarte’s brand recognition increased from just 6 percent in 2009 to 29 percent in 2011, according to a brand survey by Ipsos.

These products have quickly become dominant in their markets. A double-door refrigerator, for example, which costs from 15,000 to 20,000 yuan ($2,400 to $3,200), captured 46 percent of the market compared with 25 percent for the runner-up brand.

Like its global competitors, Haier listens to its customers, using technology to enable two-way conversations. “In this era of personal media, we have to capture the needs of individuals,” explains Zhang Tieyan, director of Haier’s global branding operation—a relatively common idea in high-performance businesses but not so common in China.

Haier ranks in the top 10 best-known Chinese brands. Its brand diversification strategy has enabled the company to expand across sectors. And through its strategy of going global to build brands, Haier has gained entrée to dozens of international markets. This disciplined, deliberate approach has helped Haier evolve, step-by-step, into a brand powerhouse.

 

Difficulties managing talent

Successful global competitors understand that talent is a key differentiator in today’s world. They have processes and systems in place that help them build talent-powered organizations—which define, discover, develop and deploy talent effectively. Chinese companies stand to benefit from a similar focus on talent.

Lack of key talent and high employee turnover are major problems for Chinese enterprises. A 2006 white paper published by Manpower showed that the vacancy rate of senior management positions in China was more problematic than in many other countries, and that the turnover of management personnel in China was 25 percent higher than the global average.

Brain drain is commonplace in Chinese enterprises, primarily because many lack clear performance management mechanisms. Promotions are often based on length of service, not job performance. Even in companies that have merit systems, an annual review is often a mere formality. Chinese companies also tend to invest less in training than Western enterprises do.

At the leadership level, this lack of focus on meritocracy and development can hurt organizational performance. Not only are top leaders often appointed through opaque processes, but the timing of appointments frequently does not align with company needs. The system for leadership appointments at state-owned enterprises also makes it difficult to cultivate successors. And it saps any incentive for companies to develop leadership training programs.

The message this sends to aspiring leaders? You have little hope of advancing. Better to defect to other organizations that offer more opportunity.

There are some bright spots however, like the Port of Qingdao. That bustling enterprise, which runs one of the world’s busiest ports, has for years put an emphasis on training, from the lowliest migrant worker to the very top of the company (see Sidebar 2).

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Not all Chinese companies share these shortcomings. Many have made remarkable strides in the past three decades of reform and opening up. Collectively, they are contributing to a kind of economic miracle, promoting social progress and occupying increasingly important positions in the global economy.

But if they are to enter the next phase as global competitors—and as high-performance businesses—they are going to have to step up their game.

They will have to recognize the gap between their own competitiveness and that of international leaders. And they will want to deepen their understanding of the challenges lurking in international markets and develop strategies for surmounting them. These are the last 10 miles that Chinese companies must walk to finish their journey.

 

For further reading
"Can Chinese companies win in the global big leagues?Outlook 2011, No. 3
"Jumping the S-curve,” Outlook 2011, No. 1
"A tale of two Chinas,” Outlook 2009, No. 2

 

Sidebar 1 | Jumping the S-curve at COSCO Shipyard Group Co.
High performers show an unusual ability to create one successful business after another—to “jump the S-curve” of performance before they are forced into drastic measures by competitive or economic forces outside their control.

COSCO Shipyard, founded in June 2001 and initially engaged mainly in ship repair, has grown into an integrated enterprise specializing in both ship repair and building by entering the large vessel and offshore engineering markets—that is, creating deepwater drilling and storage platforms for the oil and gas industry.

When COSCO Shipyard was established, the majority of its affiliated companies suffered losses. That changed rapidly, as management chose a low-cost approach to expansion based on the integration of resources, with the goal of scaling up production and reducing acquisition costs through new construction, renovation and leasing. By 2005, four out of China’s top 10 ship repairers were affiliated with COSCO Shipyard.

But the company did not rest on its laurels. Instead, it augmented its ship repair business by expanding into the ship conversion market—converting ships into floating storage or production units. By 2007, the company’s ship conversion operations at its Nantong and Dalian shipyards accounted for more than 70 percent of its total ship-related revenue.

Although the ship repair market was thriving, given the low barriers to entry and limited technical requirements, competing shipyards of all sizes had proliferated around China, and fast-growing foreign competitors were popping up all over Southeast Asia. The intensifying competition triggered price wars, putting companies dependent on ship repair in a perilous position. COSCO Shipyard turned to the technologically demanding industries of shipbuilding and offshore engineering to diversify its business and stay ahead.

This change in direction presented many practical problems—personnel who lacked the required skills, inadequate technology, insufficient funding, inferior equipment and skepticism within the ranks. Management proceeded with the strategic transformation anyway, against all odds.

Barriers to entry in the industry were high. Many customers were demanding products that had never been fabricated before. COSCO Shipyard acted boldly even as many other companies shrank from these hurdles. The brand strength it had gained through its successful ship repair business helped it win customers’ confidence.

After taking orders, the company launched a global talent recruitment program. The business set its sights on Singapore and South Korea, both sources of top-notch talent. The former specializes in manufacturing offshore drilling platforms, while the latter excels at fast delivery with guaranteed quality. COSCO Shipyard hired an offshore engineering expert from Singapore as project manager. A group of experts and technicians from the manager’s previous job followed him to the company. Before long, a design and construction team of about 30 members took shape. The team later brought in domestic experts and quickly expanded to more than 300 members.

The arrival of foreign experts brought changes to COSCO Shipyard’s construction management system. Using a shipbuilding management information system designed in Korea, COSCO Shipyard built a proprietary management system for shipbuilding. And by hiring experts from Singapore as offshore engineering project managers, the company widely promoted the Singaporean management approach.

COSCO Shipyard regarded advanced technology as crucial to gaining a firm foothold in the high-end market. In April 2006, the company set up a research center in Harbin, focusing on deepwater engineering and technology. In 2007, it established new centers in Shanghai, Nantong and Guangzhou to provide affiliates with timely onsite technical guidance and service. The company has also reinforced its competitiveness by introducing a digital shipbuilding approach, to rapidly increase production efficiency, ensure shipbuilding quality and shorten the production cycle.

This huge investment has generated high returns. The company—which has seven large-scale enterprises of offshore engineering and shipbuilding, and eight enterprises specializing in ship equipment and services—employs more than 10,000 people, while its subcontractors employ nearly 45,000. In 2010, revenue topped 18.8 billion yuan (nearly $300 million), a CAGR of 38.5 percent since 2000 . (Back to story.)

 

Sidebar 2 | Creating human capital at the Port of Qingdao
Companies that are successful on the global stage understand that developing talent is perhaps the most crucial capability of all. It’s a lesson that has not been lost on the Port of Qingdao.

Established in 1892, the Port of Qingdao employs 24,000 people. It is one of the world’s eight busiest container terminals as well as one of China’s top two domestic ports for foreign trade, boasting assets of some 27 billion yuan ($4.2 billion) and an annual throughput of 372 million tons.

The Port’s success owes much to its commitment to talent development and to becoming a learning organization.

This commitment starts at the lowest levels. For example, the Port has eliminated the distinction between migrant workers and full-time employees, offering equal pay for equal work regardless of employment status. Employees share equal opportunities for learning as well. Low-level workers who show outstanding performance can be promoted to higher technical posts and gain professional titles. This non-discriminatory system, unusual in Chinese companies, has earned the loyalty of employees and strengthened their motivation.

The learning process starts as soon as an employee is recruited, beginning with orientation training and continuing through his or her entire career. On-the-job training is mainly targeted at practical problems in the workplace. For instance, managers conduct technical Q&A sessions to address issues regarding production and machinery. That kind of training is more readily accepted by workers than more formal approaches.

The Port also uses technical seminars and onsite equipment management exchanges to promote best practices developed by teams. Skilled workers are required to take technical examinations every month, and the results are linked to year-end appraisals. Moreover, the organization holds a skills contest every year to encourage employees to put their learning into action.

Thanks to the training, a large number of formerly low-level employees, including migrant workers, have become the backbone of the Port’s workforce.

Training and career development at the Port are not just for entry-level employees. All executives must participate in intensive training camps that end with a rigorous examination. Apart from class hours, trainees are given demanding homework assignments.

Executives must also participate in field surveys during the coldest and hottest days of the year as another form of learning. For about one week each in summer and winter, they work side by side with dockworkers and are paid by the piece. Even Chang Dechuan, president of the Qingdao Port Group and chairman of the board, must unload cargo. The field survey program is 23 years old and has generated firsthand data for business decision making, as operational problems are often solved onsite.

Employees anywhere can learn on the job when they have the right incentives. At the Port of Qingdao, those who come up with new and better ways of working win a special kind of award: the new method carries their name.

For instance, Wang Linlin, a “weighman” who came up with a way to reduce per-vehicle weighing time from 36 seconds to 33 seconds, had the “Linlin fast measurement method” named after him. His achievement enabled the Port to process more than 10,000 additional ore wagons carrying some 600,000 tons of ore. The “Xueliang oil conservation method,” invented by Zhou Xueliang, was held up as a national energy conservation and emission reduction demonstration project for its triennial savings of 287 tons of fuel oil, which save the Port more than 2.2 million yuan (nearly $350,000).

In fact, more than 290 employee brands representing some 1,500 unique skills have emerged. All have helped improve the efficiency of the Port’s operations. (Back to story.)

 

Sidebar 3 | About the research
Our study drew on a survey, in-depth interviews with company executives, literature and media analysis, and methodologies developed by Accenture.

The survey
We surveyed 143 executives between May and July 2011 from several industries, such as energy, pharmaceuticals, manufacturing, services, construction and real estate. More than half the companies had over 5,000 employees and 2010 revenue that exceeded 10 billion yuan ($156 million). Non-listed state-owned companies accounted for 62 percent, followed by listed companies, at 28 percent. The rest were non-listed private enterprises.

Interviews
We conducted in-depth face-to-face interviews with more than a dozen executives from influential domestic companies in different industries. These interviews gave us access to a rich vein of firsthand information. While we used an outline to structure each interview, we encouraged respondents to freely offer their own views and questions as a way to foster greater interaction and exchange of ideas.

High-performance analysis
We adopted the Accenture High Performance Business methodology to compare the differences between sample Chinese and foreign enterprises measured by the five metrics for business performance: profitability, growth, positioning for the future, longevity and consistency. To do this, we selected 99 listed companies at home and abroad in three sample sectors: construction, industrial machinery and pharmaceuticals. We then compared their financial data in the five-year period from 2006 to 2010.

 

About the authors
Gong Li is the chairman of Accenture Greater China. He is based in Shanghai.

Bo Wang is the managing director of management consulting for Accenture Greater China. He is based in Beijing.

Kathy Yi Liu is a Beijing-based senior manager at the Accenture Institute for High Performance.

David Light, a senior research fellow at the Accenture Institute for High Performance, is the Institute’s editor-in-chief. He is based in Boston.

 

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 This Article is Tagged: Emerging Economies.
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