By Jim Tompkins, CEO, Tompkins Associates
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Hello this is Jim Tompkins, CEO and President of Tompkins Associates and Tompkins International. I’m pleased to be with you today to do part three of our eight part series on Replacing China Myths with Facts.
You may recall this began with a discussion with Steve Crandall, the Vice President and General Manager of Technomic Asia and Tompkins International, who’s been based in China the past 15 years. Steve and I got really talking a lot about the rate of change in China, what is the impact on changing in capital, and what is going on with innovation and the technology base of China. We got so engrossed in our discussions that we lost track of time, so this has become part three of what will now be a nine part series.
Steve, let me continue on by talking about people in China. There is something like 1.4 billion or 1.6 billion people in China, we're not even really sure. In fact the rounding error of China is actually bigger than the population in the United States. But how have people changed in China and how does this affect organizations?
Steve
The people question in China, Jim, is really a good question. Every year Technomic Asia and Tompkins work with the American Chamber of Commerce in Shanghai for a manufacturing and company analysis. For the last several years we have identified that the number one barrier for growth in companies is not capital, it is not raw materials, it is people.How do you attract and retain good people is the number one difficulty. There are lots of difficulties, but what you began to see in the 80s, was it was hard to find a lot of the technical staff.
What you had in the beginning were paratroopers. You would send over your technology, your process manufacturing, control, finance. You would send over people that would setup your processes or your equipment and so you would have a very high expense in the beginning, because the capabilities were just not here. Well in the late ‘90s and early 2000s we began to see what has been called the return of the turtles. They were called sea turtles, because they returned to where they started. You literally saw tens of thousands of Chinese go abroad to study in Europe, Australia, and United States.
After they had three, five, or eight years of experience (and advanced degrees), these turtles began to return to China, often with foreign passports. They could return, and they spoke the language. They now had five-to-ten years of experience working in multi-nationals, and they now understood international quality as well as the international multi-national environment. You began to see thousands of these very talented people returning back to China, and many of them turned back into multi-nationals.
The next wave of that is that you began to see that these reformed sea turtles began to form their own companies. So if you look at quite a few of these rising Chinese companies, many of these people had international degrees, international working experience, and speak English fluently. Now what you see in China is that you have gone from not being able to find the people, to have a few of them trickle back, to now you have increased availability but difficulty keeping those same people. They are often in places like Shenzhen, Guangzhou, Shanghai, Suzhou, and Beijing, and there is a war for talent.
When companies identified that growing leadership and people are their number one challenges, it became the war for talent. It is very hard to attract and keep them for a long period of time. So learning and development, career paths received extra attention in trying to keep staff. I would also identify something; a lot of fortune 1000 companies, ten years ago, aggressively tried to localize their management. You saw companies that became 100% Chinese or almost completely Chinese in their upper level management.
What I have been seeing more and more of in the last few years is localized management, but now more international management. You’re seeing Indians, Singaporeans, or Americans that have learned to speak Chinese in these upper management roles. I believe that means that a lot of these Chinese companies are realizing that they need to compete and to play more globally, and they are recognizing they need a more global face on their team to do that. I am very familiar with a Chinese logistics company who about five to six years ago went out and hired globally the best people for business development, finance, and operations. So on their organizational chart they had Italians, Srilankans, Germans, all sitting on the management of this company. It is a three million dollar Chinese company, but it is a very global management team. You are seeing that happen a lot more, especially with Chinese companies recognizing the need to go global.
Jim
Steve, if China for China is a growing trend, how have you seen markets change and what strategies are you seeing?
Steve
Well this last bucket that you touch on is what I would call the market or the channel. It really reflects what the opportunities in China were. In the very early days as China was just beginning to grow economically, there just weren’t a lot of opportunities for equipment, for consumers to sell product. There were some, but they were really very small. Even in the very early days when you were trying to produce in China because labor was so cheap, which meant that raw materials were cheap; you had a very low cost of production.
A lot of the initial business was done by Hong Kong trading companies, especially in the South, that were managed by Hong Kong, you didn’t see a lot Chinese companies trying to go out directly, you had a lot of agents in the middle. Then about 2000 you saw European companies coming into China and saw China as being the next generation and so they began to set up their own WFOE (Wholly Foregn Owned Enterprises), companies in China, taking advantage of labor and raw materials. So then you had a wave for market and production for a lot of U.S. and European companies. What you began to see about ten years ago is a growing consumer market within China. Companies then began to re-evaluate their strategy from a low cost manufacturing to now looking at a China for China strategy.
One of the temptations is to look at China as an either/or. That it is a market we either buy things from cheaply and when they are no longer cheap we do not buy from them. Or we don’t sell for them and it is now simply a China for China. I think the best in class companies are taking China for what it is, which it still is a very low cost manufacturing base, but you can add on to that it is becoming a very good and robust market to sell into. As you are looking at your revenue stream, your top-line opportunities, you can play off of your supply base and leverage off of that into a China for China play. This does not mean you eliminate your China for export market, but you are now adding on to that a China for China. In the initial ways into China, you saw companies looking primarily at Tier One cities, Beijing, Shanghai, Shenzhen, Suzhou, a lot of the initial sales were to the state-owned enterprise, whether it was Shanghai Auto or some of the other large oil and gas companies.
You still see a lot of the regional state-owned enterprises, but in addition to the major cities, the major players, you are beginning now to see a lot of regional players. Especially now in fragmented markets, you are seeing in the retail space company names that are really powerful regionally, but may have not developed nationally. So you are seeing Tier 2, Tier 3, I have even heard people talk about lists of Tier 6 companies (I don’t know how small that has to be). But there are literally hundreds of cities that would still represent major markets and so you see people looking at strategies, China for China into the other tiers. We have even completed a couple of projects lately in a couple of other industrial sectors, and in Tier 1 markets we are seeing that there is little to no growth. So the growth rates are in the single digits, whereas you are still seeing growth in the 20-30 % growth rates in some of the other lower tier cities. When China talks about market growth or GNP growth of 9.5%, the real story is that you have got markets like Shanghai that are showing 4% and some of the smaller cities that are seeing 30% growth. Average in these markets you are seeing close to ten, but a real different story among cities.
The other relationship you are seeing on the market side is the rail-links and the road network that China is putting in place. You are seeing the equivalent of a US interstate system going in China which is opening up and making road transportation viable to hundreds of new cities. On the market side what you are seeing is a ‘race for space.’ Which means companies like Wal-Mart, YUM Brands, you are seeing a frantic race to open stores in these tier 2, tier 3, tier 4 cities. In the beginning you saw that the market did not exist in the 90s and there was no market for the product or the market was just closed because of accessibility. In the service industries you are started to see these markets crack open in 2000s. So for WTO compliance, you saw a lot of these opportunities become available. In healthcare services you are now seeing that foreign companies can now play, there is a minority and in some areas a majority owner in a lot of the healthcare fields. Although it requires you to do your homework, because the openness is uneven, and it is important to look at how fragmented a city or a region is.
Jim, the last point that I would add under market and channels (originally China’s real strength) was manufacturing, and the low cost of manufacturing really made it a powerhouse;, people call it the World’s Factory. Well what you are seeing next in the evolution of China is some real strong channel partners. We did an agricultural equipment partner a couple of months ago, and what we found was there are some franchise networks that have hundreds or even one case had over a thousand dealers in their network. You have to go do your homework, whether it is pharmaceutical, agricultural equipment, industrial distribution, and service, it is important to find out who is in that channel, because a lot of these players have developed more quickly than you might think. They may represent a distributing partner or even a potential acquisition target, as these companies are looking for more brands to fill up their portfolio. We are seeing on a channel side that there are some great opportunities, they already exist and can put you several years down the market. You can actually get in and acquire these relationships, but you really have to do your homework and make sure that your strategic objectives are aligned with these companies. Thank you very much!
Jim
Wow, thanks a lot Steve, I certainly appreciate the depth of information, and I know the listeners of this podcast will really benefit. Let me sign off for today and ask you to join me again in a couple of weeks when we look at the fourth part of this series, where we welcome back Steve Ganster, the EVP of Technomic Asia and Tompkins International, who will help us understand growth in China and how that is evolving. So for now I would like to say goodbye and wish you well, look forward to talking with you all again real soon.
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