A Dynamic China Requires A Dynamic Strategy

By John Furth, Managing Vice President, Business Strategy Solutions, Hitachi Consulting China and Southeast Asia are becoming massive, dynamic markets for industrial products. To be successful in those markets, manufacturers need to be able to adapt to an ever changing environment.

Throughout most of the past 10 to 20 years, western industrial manufacturers took a fairly simplistic approach to China and much of Southeast Asia -- viewing the region as a low-cost manufacturing center. Times have changed, however, and we are now witnessing the emergence of, among many things, a massive and dynamic market for industrial products driven by large infrastructure projects, vigorous demand for cars, the industrialization of the farming sector and increasing interest in more computer-driven automation and machinery.

Given that competition has risen exponentially as these markets start to mature, continued success requires best-in-class operational efficiency and a large degree of structural and organizational flexibility in order to adapt to an ever changing environment with its own unique purchasing behaviors, standards and technologies.

Recognize the Key Strategic Drivers of Success in this Market

To be successful in these markets now you have to understand they demand low-cost, mass-produced, standardized products. Successful companies need to leverage economies of scale and avoid intricate, high-cost customization. The good news is that this approach eliminates brand dilution, duplication of divisional efforts and services, conflicting strategic decisions and positions the company to leverage best practices regardless of physical location to increase market share and revenue.

While a centralized organizational strategy that is capable of producing the volumes needed works well on one hand, on the other a high degree of autonomy is needed to ensure market responsive regional sales and marketing teams on the ground.

Other drivers of success that are unique (or at least pronounced in importance) in this part of the world include a long-term commitment to the region, applying western management styles while using local middle management talent, converting as much as possible to local sourcing, and emphasizing quality and brand in marketing efforts among many others.

Choose Your Location Carefully

In the 90s, western companies focused on the large cities on China’s coast to reap first-mover advantages that included cheap labor and land and government and regulatory incentives. However, this has changed in the past few years as the high penetration of Western competition expands and domestic and regional competition gain ground. This has resulted in higher costs of doing business for everyone, with estimates of the year-on-year increase ranging from 15-30 percent.

In the meantime, however, other areas in China and Southeast Asia have become more attractive for many of the same reasons that coastal China had been in previous decades.

Now companies are actively building alternative manufacturing sites to regain advantages lost in coastal China. For example, wages in inland China are about half of those on the coast, while a presence there preserves access to large and lucrative Chinese markets.

Other countries in Southeast Asia are even less expensive, have more favorable foreign exchange rates, well-trained work forces and more flexible regulatory and government controls. Vietnam, for example, has emerged as the premier destination for international industrial manufacturers due to its optimal combination of low production costs, government stability, proximity to export markets, and advantageous tax rates.

Implement Your Company’s Global Best Practices Immediately

High growth rates that have been seen over the past 15 years are not possible anymore without a thoroughly planned strategy. Studies show that three out of four companies today lack fundamental best practices in their Chinese and Southeast Asian operations.

Although many companies have implemented good Enterprise Resource Planning (ERP) and Material Requirements Planning (MRP) systems that manage inventories and optimize product flows, many of these operations have weaknesses and/or haven’t addressed the needs of the region. These include poor or non-existent network modeling and optimization systems, assembly line and supply chain weaknesses, poor or non-existent statistical forecasting, etc. One U.S. heavy machinery manufacturer stresses in a recent report that its Asian expansion depends on the application of technology from global divisions, as the goal is to gain market share while expanding the market through technology.

Recent studies indicate that firms can cut operating costs by 15 percent annually while generating 30 percent more revenue by applying best practices in the region.  Global strategic and operational best practices must be implemented by international industrial manufacturing companies in China and Southeast Asia to address the weaknesses resulting from a dependence on low costs alone to drive profitability.

Use Partnering and Technology to Stay Flexible

The key consideration for any company wishing to do business in this part of the world is the need to balance local market responsiveness with the need to centralize as much as possible to keep costs down and achieve a variety of synergies.

One way to retain the necessary flexibility is through the use of Joint Ventures and partnerships. Indeed, this has traditionally been the way that most companies entered these markets. Acquisitions and Joint Ventures provide access to regional markets without large strategic shifts in focus. However, these days the forms of partnerships have gotten more complex with multiple outsourcing and tiering models. 

Internet technology also allows companies to facilitate the balance between centralized and decentralized action. The use of websites for the dissemination of information, sales & marketing activities, etc. has dramatically increased and offers western industrial product companies a great chance to steer activities in China and Southeast Asia from afar -- thereby outfitting a more centralized organization with a decentralized face to the market.

In the end, the formula for achieving success in a more mature Chinese and Southeast Asian economy is dramatically different from even just a few years ago.  This is a rapidly changing market that has its own rules about mass-production, economic models, need for partnerships and JVs and organization structure.  The strategies today are perhaps different than the ones used by many manufacturing companies to enter the market years ago and, given everything that is going on, could also change again. That’s the challenge.

Hitachi Consulting is the global business and IT consulting company of Hitachi Ltd. For more information, visit http://www.hitachiconsulting.com.

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