Why China needs Better Practice – Part I

All the Aces: How adopting better practices gets results

Seeing as we just can’t help ourselves from discussing things Chinese, today we continue by investigating what “best practiceâ€? means in China and how business must up their game if they’re going to compete in the region in the long-term.

Although the archetypal picture of China is of a business environment that’s conducive to rapid growth and profitability, recent research has shown that many multinationals who have operations in the country are failing to do as well as they might.

Even so, it isn’t the case that these larger corporations (and smaller firms alike) are doing particularly badly in Chinese markets – 64% of members of The American Chamber of Commerce in China reported making acceptable profits or even very good profits from their Chinese operations. The message, however, appears to be that this situation could be so much better, if only companies demanded the same rigour and attention to detail that’s applied in their other international locations.

The problem, it seems, is that because things like labour costs and other overheads are relatively cheap in China, this masks underlying inefficiencies in operations and manufacturing that simply wouldn’t be tolerated in more developed markets. For instance, a recent report on multinationals operating in China suggested that this kind of waste has served to reduce profits, on average, by between 20 and 40 percent.

Moreover, putting up with lower standards just because the headline figures are so favourable isn’t just limited to Chinese manufacturing operations – Companies buying goods from China often enforce lower standards in their procurement procedures than elsewhere, with further cost savings being missed out on as a result.

Concentrating on manufacturing in particular, it’s nevertheless true that some of the inefficiencies found in Chinese operations can partly be put down to structural difficulties that companies many experience in China, but not elsewhere.

For instance, throwbacks to a planned economy, such as outmoded distribution networks, poorly equipped suppliers and a lack of any, let alone reliable, market data may partly have excused profligate practices at Chinese operations. For instance, it was not uncommon to find such difficulties being overcome by simple, and ultimately wasteful, duplication – e.g. double- or triple-sourcing of supplies, hiring more staff or buying redundant machinery.

However, China now is an utterly different kettle of fish from a couple of decades ago, when privileged access was commonplace and merely having a presence in the country would guarantee success. Today, Chinese companies, many with superior local knowledge and more established business relationships, compete just as strongly with, if not better than, Western corporations.

This kind of increased competition within Chinese markets means that the room for manoeuvre that rapid growth and untapped markets hitherto provided may well begin to tighten soon. That aside, even where this breathing space is still enjoyed today, the fact remains that a company’s full potential in China will still not be realised if sub-standard practices continue to be tolerated.

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