Chinese Business Strategy

By Tony Clark, 2-Dooz Inc. – July 29, 2013 (Original Publication Date)

The Wall Street Journal recently examined the topic of why Chinese companies lack homegrown luxury brand power.  Though the focus was on brand development, the wide-ranging article highlighted several factors in current Chinese business strategy, which are believed to be contributing to, but go way beyond brand building.  Three of these, which incidentally are not unique to China, caught my attention.

High Workforce Turnover Rate

The WSJ reported that the annual employee turnover rate in China is 19% and is well above the 5% turnover rate experienced in Germany, according to consultancy Roland Berger.  In the US, the current quit rate is below 2% according the Bureau of Labor Statistics.  A high turnover rate is significant in that it can signal a negative impact on productivity, which in turn can portend reduced profit margins, because of higher recruitment, training and related costs.

Lack of Quality Craftsmanship

The Journal article cites the lack of reliable suppliers as a key reason for the lack of quality craftsmanship in China.  The aforementioned high workforce turnover rate may also be a contributing factor.  High turnover rates can lead to lower product and service quality due to a reduction in the number of skilled, experienced workers.

Short Term Focus

The WSJ article confirms that Chinese business strategy is addicted to short term gratification, noting, “There is also the question of patience … Chinese businesses want to make their brands a success in three years.”  The smart money in China is not interested in a business unless it can quickly generate high returns. 

Of the above three business factors, the one that I want to focus on, because of how it relates to innovation, is “short term focus.”  What’s at play in China is the same dynamic that can be found in the U.S. and other developed economies.  There is an overemphasis on short term payoff and this often comes at the expense of innovation, which takes time, patience, and is fraught with risk.  Businesses subscribing to this philosophy are essentially following a “you go first” strategy.  They are happy to let pioneering innovators take the risks.  But, once the coast is clear, they quickly follow.

While it is true that Chinese companies do copy products that were first developed and marketed in the U.S. and elsewhere, this is not sufficient proof, as many westerners have argued, that the Chinese lack the ability to be innovative.  My reading is that the Chinese are merely currently placing a higher value on short term profitability than on innovation.  Chinese companies are happy to let U.S. led projects first do the heavy lifting—for example, performing primary market research, business development and demand generation activities.  After a product opportunity has been proven in the U.S. market, the Chinese companies are happy to quickly follow the lead. 

Overall, the Chinese are pursuing a viable, pragmatic business strategy; one, to be honest, that many large companies in the U.S. are following.  Smaller companies are left to take on the innovation risk.  Larger companies then either acquire these startups, after they have proven themselves, or start copycat projects of their own. This is precisely what many Chinese companies are doing. 

Those are my thoughts.  And, as always, I invite and look forward to learning what you think.

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