McKinsey Greater China The leading management consulting firm in Greater China Tue, 18 Aug 2015 06:56:38 +0000 en-US hourly 1 Copyright © McKinsey Greater China 2014 (McKinsey China) (McKinsey China) 1440 McKinsey Greater China 144 144 Conversations with McKinsey Partners on the hottest topics affecting the Chinese economy and business. Welcome to the McKinsey on China podcast. In this podcast, consultants from McKinsey’s Greater China Practice delve into the issues and trends shaping business and the economy in this dynamic region. Since we launched the podcast in December 2011, we’ve published over 45 episodes on topics covering the full gamut of critical issues in China, including urbanization, globalization of Chinese companies, energy, consumers, electric vehicles, macroeconomic policy and reform, and more. Your hosts are Nick Leung and Glenn Leibowitz. Nick is the Managing Partner of McKinsey’s Greater China Practice. Glenn heads up McKinsey’s external relations and publishing group in Greater China. Subscribe to the podcast for free on iTunes and listen to it while you’re on the road (or airborne). We’d appreciate if you could write a short review and rate it too. You can also listen to it right here on this website. Suggestions for future topics? Feedback? We’d like to hear from you. mckinsey, china, mckinsey, china, chinese, business, business, economics, chinese, economy, consulting, business McKinsey China McKinsey China no no China’s Telcos Languish in the Shadow of the Internet Fri, 14 Aug 2015 09:37:47 +0000 China’s telcos find themselves going sideways at best, with little or no top-line growth.

However, they are required by the government to invest, invest, invest to bring higher speed internet to all of in China as fast as possible.  Yet of course, the bulk of the value created from a higher speed Internet will accrue to the Internet companies themselves, not the telcos.

In one sense, the telcos are providing an enormous social good, and so it makes a lot of sense that the government should own most, if not all, of their shares.  It also makes sense that the discussion about reconsolidating China’s telcos is gaining traction.  Creating a single company to build and operate shared infrastructure should reduce wasted investment.  Combining other parts of their operation may also make sense.

To quantify the performance challenges, in the first half of 2015, revenue and customer numbers were down, while usage volumes continued to rise.

Here are some stats that paint a picture of where the telco industry stands today:

  • Industry revenue was USD 119 billion, down 1.2% year-on-year.
  • Capital expenditure was USD 23 billion, up 5.6% year-on-year. This represents a very high percentage of revenue by international benchmarks, reflecting Li Keqiang’s demands to bring high speed internet to more of the population.
  • Total subscribers decreased 0.6 million in June to 1.54 billion. Mobile subscribers increased 0.6 million to 1.29 billion. Fixed-line subscribers decreased by 1.2 million to 241 million.
  • Broadband subscribers increased by 1.5 million in June, raising the total to 207 million.
  • Mobile internet subscribers saw a net increase of 35 million in June, bringing the total to 905 million.
  • Mobile internet data traffic reached 1.68 billion GB in June, up 93.6% year-on-year. Average monthly mobile data traffic usage per mobile subscriber reached 321 MB, up 83.7% year-on-year. The transition to China becoming a mobile dominated Internet is still underway, but with little benefit to the network operators.
  • 360 billion SMS messages were sent between January and June, a 4.7% decrease year-on-year.  Not a key metric anymore, and if my phone is in any way representative, the bulk of these SMS are junk promotions, largely for investment products that are alternatives to buying shares.


However much their share price fluctuates in Shanghai, the operation of China’s telcos seems to be tightly constrained.  While it has always been incredibly tough to be the CEO of a Chinese state-owned enterprise, being a leader in the telecom sector today seems particularly challenging: enormous political pressures to improve the quality of the network nationwide almost instantly; almost no ability to raise prices; much mid-level talent leaving to Internet companies; thousands of retail outlets that are becoming obsolete; pressure to keep hiring even if there is limited need; and finally, an expectation to grow profits.

Tough indeed.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter @gordonorr.

Image Credit: Flickr/Foxxyz

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How Some Chinese Government Officials Are Evaluated Fri, 14 Aug 2015 09:12:43 +0000 I want to bring to life with an example the rigorous way in which many Chinese government officials are evaluated.  It makes a typical corporate system of KPIs look warm and fuzzy by comparison.

The table below lays out the criteria used to assess the performance of government leaders in Foshan. It was published as part of research by the Fung Global Institute into the drivers of the city’s success.

The 33 metrics range from expected GDP growth to quality of public services to cost effectiveness.  Environmental protection gets a higher weighting than GDP growth.

Anyone capable of delivering against the full range of these metrics is certainly talented and probably deserves to be promoted.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter @gordonorr.

Image Credit: Flickr/Ib Aarmo

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So You’ve Bought an Airport for $10K. Now What? Wed, 12 Aug 2015 05:02:57 +0000 The Chinese consortium Tzaneen International recently announced that it was in the final stages of negotiating to buy Ciudad Real airport in Spain, 4km runway and all, for about US$10,000.

Some of the support buildings might cost a little more, but all-in the entire hardware of the airport and its support facilities would cost a few tens of millions of dollars.

What would I do if I were the buyer of this airport?

After all, there is a reason the airport is unused.  It’s a long way from any major cities, ground infrastructure connections are poor, and no airlines seem interested.  So purely as an observer, here are some of my thoughts for the leaders of Tzaneen:

Buy an option on as much land around the airport as possible. Don’t commit the capital just yet, but agree the price and an irrevocable right to buy.  If you are successful, you will really really want to own the surrounding land, which may be where the profits are to be made.

Create a reason for lots of passengers to fly through the airports.

  • There are few routes today that still require a stopover, but North Asia to Latin America is one of them. Create an agreement with Chinese airlines and even Korean and Japanese airlines that they stop over in Ciudad Real.
  • This will need the terminal to have the retail and other services to make this appealing – airside hotel, showers, restaurants and a wide range of retail outlets.
  • Approach Latin American governments to see if you can set up immigration and customs pre-clearance in Ciudad Real, giving a really meaningful benefit to travellers when they land in Latin America.
  • Create a partnership with European low-cost airlines to connect Chinese tourists to an ever wider set of destinations as tourists become more adventurous.  Also work with these carriers to hub in European passengers who want a low cost ticket to China.
  • Take advantage of being one of the very few airports in Europe to offer 24-hour take-off and landing.

Create reasons for passengers to stop and stay around the airport for a few days (ideally using facilities on land you have purchased). Build the largest, most comprehensive outlet mall possible. From Bicester village in the UK to Serravalle in Italy, Chinese tourists swarm to outlet malls and are likely to continue to do so. Maybe even create competing or specialized malls targeting differing customer segments.  Encourage Chinese and Western theme park operators to build by the airport.  With the weather you can offer a year-round destination.  And maybe later, attract other service industries – golf, medical services and the like.

Create reasons for freight to stop. Can you agree to create a free trade zone with the Spanish government to hold Chinese manufactured goods? Maybe also an assembly and manufacturing zone with preferential tax treatment? Work with the local Ciudad Real government to create a hub for premium organic agricultural products that can be shipped to meet the demand of the Chinese middle class.

Work with Chinese developers. There are many Chinese developers with significant experience outside China, especially in Europe. They continue to look for interesting new opportunities.  For facilities ranging from office developments to logistics parks, from theme parks to hotels, leverage the best that China has to offer.


It’s likely many of these ideas won’t hold up to economic scrutiny.  But it will require something as bold as this if not bolder to create a viable and profitable outcome that works for you, your investors, and the local government.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter @gordonorr.

Image Credit: Flickr/Ming Xia

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A Mobile Future in Private Banking Wed, 05 Aug 2015 07:28:56 +0000 The second wave of the digital revolution has arrived in banking. Following the introduction of Internet banking, in the 1990s, we have now seen the rise of digitally born banks (Air Bank, mBank, Simple), disruptive technologies shaking up the payments world (Square, Stripe), and personal-financial management software gaining ground (Mint, Nutmeg, Personal Capital). A closer look shows that these are mainly retail or mass-affluent offerings.

So what about digital services, especially mobile apps, for wealthy private-banking customers with financial assets of more than $5 million? When the digital revolution 2.0 started, the initial reaction of private banks was to wait and see. After all, personal contacts between a relationship manager and his or her clients are the underpinnings of private banking.

There was also a misconception that high-net-worth individuals are not digitally savvy, an illusion fostered by the fact that many wealthy clients are at least 60 years old. On the contrary, high-net-worth individuals have responded well to digital banking services and are increasingly assertive about what digital offerings they would like. For example, a McKinsey survey of wealthy customers suggests that they would welcome the opportunity to view their portfolios digitally as well as read market research and receive investment recommendations online (Exhibit 1).




In response to such research and the fact that customers have already embraced online brokerage services (for example, Charles Schwab, E-Trade, and Saxo) for quite some time, banks have built comprehensive online offerings, starting with the personal computer. The leading players now have well-integrated offerings on the “big screen,” where clients can find research, investments, and transaction and payments history on one site. Some banks, such as Credit Suisse Group and UBS, have begun to introduce mobile offerings.

However, most private banks’ mobile offerings still have a long way to go. Banks often choose shortcuts in development—for example, putting PC-based content into a mobile app with only minor adaptations. In our view, this approach is unlikely to engage the customer, who may not take the time on a mobile platform to sift through all the product and research information a private bank offers.

Some bankers may ask whether a smartphone offering is even necessary, given the small size of the screen. Will the private-banking client really read an investment report there? Our answer is absolutely yes. The smartphone is the device that will increase customer loyalty, because it prompts frequent usage. Frequent usage forms habits, and habits are difficult to change.

It is much harder to switch banks if that means leaving a favorite app, one a user opens at least once a week. This is where the current digital offerings of many private banks fall short. In contrast to digital content designed for the personal computer, content designed to be read comfortably on a smartphone must be presented in a way that allows users to absorb it in “short bites, not long meals,” when they are most likely to browse the device—for example, during taxi rides, commuting, flights, and boring meetings.

Satisfying the client requires a combination of the right content and uncluttered presentation. The following four suggestions can help private banks facilitate their customers’ use of smartphones.

Log-in: More than five seconds, and you’re dead
The standard way of logging in to a banking app involves a username and password. Often the username is a clunky, six-digit (or longer) number that is hard to remember. The password is alphanumeric; this takes long to key in on a smartphone. Customers may also have to use a security token. Such a log-in typically requires about 20 seconds, too long to encourage frequent usage. A log-in taking more than three to five seconds will discourage users from frequent use of an app.

  1. A more user-friendly approach to logging in involves three steps:
    Link a device to the account. A user would execute this step just once for a device, so programmers should apply a multistep security process. Such an approach enables a log-in without the user reentering the username every time.
  2. Read only. Once the app is linked, opening must be possible with a code of just four to six digits; the app welcome screen would already display a numeric keyboard. Pressing Enter would be unnecessary, because the app would open automatically when the user enters the last digit. This sounds like a minor detail, but it is not—it makes all the difference if the bank hopes to encourage users to log in more frequently. Frequent log-ins are habit-forming, as can be seen from how often people check their social media accounts.
  3. Write. For transactions or for viewing sensitive information, a second level of security (for example, a touch ID, a second password, or a token) can be applied. The additional processing time is acceptable, since most customers log in far less frequently to conduct transactions than to simply browse information. The best apps allow the user to set his or her own thresholds for second-level authentication.

Statement view: The big number in the middle
Reading a comprehensive financial statement on a smartphone is impossible, so don’t expect that customers will even try. There will always be a quiet moment at home when a customer can analyze all the details he or she wants, either on paper or on a personal computer or tablet. On a smartphone, banks should instead aspire to produce a much simpler statement with the client’s current net-worth number prominently displayed. “How much money do I have in the bank?” is what everyone wants to know. Complement this with the year-to-date performance—the second thing every private banking customer wants to know—and a few easy-to-read charts on current asset allocation (Exhibit 2).

Research: Produce news, not reports
Before the digital era, it was impossible to track how often customers actually read reports. This made it difficult to choose which topics should receive more or less coverage. In the online world, it is easy to track which reports customers are reading, because the bank disseminates them via the web and apps, making the measurement of traffic straightforward. While many banks have already put all their research reports online, none has created a habit-forming news flow for the smartphone. We think this will be a key to customer stickiness. A private bank wants to make sure customers turn to it when they are seeking investment news. Customers typically look at their smartphones during downtime, when they want distraction or entertainment. Therefore, we suggest producing an easy-to-read, visually appealing daily or weekly “investment newspaper.” For inspiration, look at the smartphone apps Flipboard and Yahoo News Digest.

Recommendations: Tell customers what to sell before telling them what to buy 
Investment recommendations are a complex topic. The two biggest challenges are contact frequency (too much or too little) and the identification of offerings that are relevant to the customer’s existing portfolio. Customers often ask, “Why is the relationship manager offering this product to me? Is it just because he has to sell it, or is it really meant for me?” There is an even more basic question to consider. After a private-banking customer has completed an initial asset allocation with the relationship manager, the client is often fully invested in the agreed-upon strategic asset allocation. Hence, if the bank calls the client to recommend the purchase of an investment, the client has to sell something first unless he or she has fresh money to put in. We therefore think contextual investment advice—counsel tailored to one customer—must be turned on its head: banks might first tell clients what has to be sold and only then what could be bought in replacement.




To accomplish this, private banks should consider creating an analytical capability that links investment recommendations to individual portfolios. In an ideal case, for example, suppose the chief investment officer downgrades stock A from buy to sell. All customers who own stock A would receive a push notification to their smartphones recommending that they sell their position and buy stock B or C instead. This is the granularity that digital recommendations must have. If done well, recommendations would work in tandem with the news-flow application. If the news-flow application reports, say, a weakening of the euro, then the push notification would make a concrete trade suggestion regarding how to adjust the portfolio in light of that news. Finally, the bank can then choose to enable direct in-app trading on that recommendation or to follow the standard path: a relationship manager making a call to discuss and confirm the trade so customers feel confident about their decisions.

By applying a rapid log-in, an easy-to-digest statement view, targeted news, and relevant recommendations, private banks position themselves to take advantage of the digital revolution, as their retail-banking counterparts have already done. Private banks that invest IT budgets in concrete, habit-forming digital approaches will reap the highest return on their digital investments.

Download the full report here

Vishal Dalal is an associate principal in McKinsey’s Singapore office, where Driek Desmet is a director and Christian Raubach is a senior external adviser.

Image Credit: Nicolas Nova/Flickr


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China’s Diverse Billionaires Mon, 03 Aug 2015 07:20:19 +0000 Mainland Chinese dollar billionaires are a new phenomenon. Today, there are just over 300; in 2000, there was only one.

Unlike in most of the rest of the world, where the newly hyper-wealthy are largely Internet entrepreneurs, Chinese billionaires come from many sectors – even some where we might believe that state-owned enterprises have all the advantages and dominate.

Less than a quarter are from technology sectors. It is not a surprise that many are from the real estate sector.  But we also have billionaires in pharmaceuticals, in autos, in retail, and in basic materials.

I believe we have seen billionaires emerge in more sectors in China over the last decade than in any other major economy in the world.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter@gordonorr.

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Chinese Business is Globalizing in These 4 Ways Mon, 27 Jul 2015 01:50:01 +0000 Globalization of Chinese business continues at pace.  I was asked to describe the four major ways in which it is occurring at a recent gathering of legislators in one of China’s key trading partners. These are:
  1. Sourcing abroad for Chinese demand
  2. Selling Chinese made goods abroad
  3. Investing Chinese capital abroad
  4. Chinese citizens going abroad, creating demand for services

1. Sourcing abroad for Chinese demand

What have I seen recently?

  • A major shift from rapidly growing demand for basic materials and energy to demand for agricultural products with the underlying theme that China is increasingly unable to feed itself – certainly unable to feed itself safely.
  • A Chinese urban middle class want food products they can trust to be safe for their children and themselves. They have a bias for internationally sourced foodstuffs, produced outside China and delivered direct to their home using ecommerce.
  • This is creating many global supply hot spots – for example: Argentina, Russia, East Africa for cereals; New Zealand, Australia, Western Europe for dairy; USA, Brazil for soya; USA, Chile for fruits; Southeast Asia for aquaculture.
  • Over and above this is demand for technology to apply to agriculture in China. As large-scale farms emerge, they can afford to invest in mechanization in advanced seeds, fertilizer and irrigation. Many such firms visit countries like Israel to find the technology they need.


2. Selling Chinese made goods abroad

What have I seen recently?

  • State-owned enterprises focused on infrastructure sectors increasingly see projects abroad as the way to keep their factories in China busy, as demand plateaus at home. “One Belt, One Road” and related financing initiatives provide policy and executional support.  In areas such as high speed rail, power stations, roads, ports, and airports, these companies are increasingly seen to deliver a world-class solution if they are well managed.
  • The more significant trend is how the best of China’s private sector companies are now growing their exports, not to stand still, but to sustain their historic high rates of growth. This spans many, many sectors including construction equipment, packaging materials, medical devices, low voltage electronics and auto components, to name a few.  These are not companies that survive by being the cheapest in what they do.  They have IP, they sell to multinationals in China, they are survivors of intense domestic competition, and live on cycles of extremely rapid product innovation.   The majority serve business customers today, but a few in consumer electronics and mobile technology are successfully targeting consumers.
  • Why are these private companies going abroad now? First and foremost because they have enormously high aspirations. They are #1 or #2 in China and want to become top 3 globally. Additionally, they feel that domestic markets have permanently become much tougher places to grow in and they perceive they are ready, having competed against multinationals in China successfully.  Finally, some are seeking additional capabilities (e.g. to improve productivity, to improve design) and IP that they believe they can access more easily by being international. Only at the margin, is government encouragement a relevant factor.
  • Organic expansion by these private entrepreneurs often involves setting up an international HQ, as a hub for attracting non-Chinese talent. Hong Kong is an obvious choice for many, but beyond that others look to markets outside of the region.
  • Organic expansion is often seen as too slow versus the aspirations of these entrepreneurs, which leads many of them to look for acquisitions.

3. Investing Chinese capital abroad

What have I seen recently?

  • Chinese capital moving abroad for several purposes – to acquire businesses, to acquire properties (by businesses and individuals) and to invest in large scale infrastructure building. In total this could be as much as US$500 billion this year.
  • Chinese businesses are looking to acquire assets that will grow their international business (e.g. sales channels for product from China, service organizations) and to access IP that they can use back in China. Increasingly, they are relatively hands-off acquirers – investing in well-performing businesses that they can add to without tightly integrating them.
  • Chinese PE companies are also looking to invest in businesses that they believe can be brought to China and scaled. There are many examples from Europe, spanning Israel to the UK.
  • Large Chinese insurers are buying international properties, usually in first tier cities, to diversify their holdings. Ping An and Anbang are leading examples.
  • In property and infrastructure, State-owned infrastructure builders bring ever more government finance behind them when they grow abroad. In addition, Chinese private sector property developers are looking for international projects to build (e.g. Vanke in residential, SOHO in office developments, CFLD in industrial parks).  These Chinese developers are very strong at attracting tenants from China to fill their developments which makes them very attractive to governments in the receiving country.


4. Chinese citizens going abroad, creating demand for services inside and outside China

What have I seen recently?

  • In 2014, more than 100 million Chinese tourists travelled outside China. Millions of Chinese students studied abroad. Uncounted numbers worked abroad.  Their expectations are rising for services adapted to their needs.  This ranges from hotels to retail services to tourist experiences.  These visitors experience local products and services when they travel and often seek to buy them again when they return back to China.
  • Even smaller enterprises need to identify how they can make it easy for Chinese customers when they return to China to continue to buy their services and products. China’s ecommerce champions and the new free trade zones are important aspects of this.



If we are competitors of these Chinese companies as they globalize, we will see strong pressure on prices and profits.  We will need to embrace some of the best practices of Chinese competition on eliminating what our customers don’t value and delivering faster new product development cycles while retaining our traditional heritage.

If we are customers, we will need to become comfortable sourcing from a new range of suppliers.

And if we are governments, we need to tread the fine path of encouraging Chinese investment, while not abandoning our historic local champions.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Will There Ever Be a “Silicon Valley” in China? Thu, 16 Jul 2015 02:49:58 +0000 To go from the factory of the world to a generator of innovation, China continues to invest billions of dollars and churns out tens of thousands of engineering graduates and PhDs.

Having its own version of Silicon Valley is a dream and core pillar of China’s move up the innovation ladder. Yet despite all the money and raw talent it’s throwing at the problem, China is a long way off from achieving its goal. To understand why, it’s helpful to reflect on what makes Silicon Valley what it is today.

Silicon Valley was built by people who understood technology and were willing to take risks and learn from failure. It has been the source of waves of business model disruptions that have transformed entire industries and created new ones. And it has absorbed billions of dollars of investment.

Do any of China’s major hubs of technological innovation meet any of these criteria?  Let’s take a look at the three biggest contenders for the title of innovation hub today:

Let’s take a look at Beijing. Beijing’s Zhongguancun has long played the role of China’s “Science & Technology Zone.”  It is home to both established technology companies such as Lenovo, and thousands of startups. Several universities in the area, the most notable being the prestigious Tsinghua University, churn out PhDs and computer scientists by the thousands.  So there certainly is no shortage of people who understand technology. And the investment tap is flowing quite readily, so there’s no lack of capital.

But a culture of risk taking? Hard to prove.  Disruptive business models that are changing industries and creating new ones? Not that I’ve noticed.

Then there’s Shenzhen. They’ve got the technology and the money, but lack a pool of talent that is willing to take risks and has the drive and capability to create business model disruptions. Maybe the legions of young talent leaving the major technology companies will converge to form a new innovation enclave, but I wouldn’t bet money on that happening anytime soon.

So that leaves Shanghai. Certainly Shanghai – future financial capital of China – would have the right ingredients to become China’s innovation hub?  There’s no shortage of capital. But there isn’t much by way of technology. A culture of risk-takers? Having lived here for half a dozen years, I have yet to see it.  Disruptive business models? Not here.

So despite China’s best efforts, we probably won’t see an innovation hub in the mold of Silicon Valley emerge in the foreseeable future. Not for at least another decade or even longer.

And we’ll almost certainly see some major failures along the way before it even happens. Today’s stock market rout is one example of the kind of shock to the system that could shake things up enough to create the change needed for innovation to take place.

But just because China lacks  a geography it can call Silicon Valley, it doesn’t mean it can’t still create its own sources of innovation.

While China is unlikely to see the rise of a geography-based innovation hub in the foreseeable future, there is mounting evidence that China’s version of Silicon Valley will actually look quite different.

In fact, evidence points to a very different model of innovation, one that is driven more by the vast corporate ecosystems within companies like the so-called “Big Three”  – Baidu, Alibaba, and Tencent – than it is by any geography-based ecosystem like we see in Silicon Valley.

Why? Because even today within the ‘safety’ of these companies, there’s a tremendous amount of experimentation and idea churn. The platforms these companies operate and the networks they have formed encourage the type of quick testing and learning we would expect to see inside Silicon Valley. Teams are formed that often compete against others internally.  Furthermore, the digital platforms that their businesses sit on allow for rapid changes and learning which encourages experimentation among their vast customer bases.

Tencent may have the most formidable of these corporate innovation ecosystems, with more than 200 investments in various ventures around the world and an ever expanding list of new businesses, from WeChat to WeBank. Its 800 million-plus user base could support an almost endless set of new businesses.

And what about China’s state-owned enterprises? With the possible exception of Huawei, most SOEs don’t have the sort of R&D and technology, culture of risk taking, or disruptive business models that are needed for true innovation to emerge.


So while there may be no geography-based innovation “ecosystem” like we see in Silicon Valley, China is likely to give birth to enterprise-based innovation ecosystems of the sort we see in companies like Baidu, Alibaba and Tencent.

Watch this space.

Image: Shutterstock/drical


Erik Roth is an entrepreneur, lecturer, serial innovator and lead McKinsey & Company’s Global Innovation & Growth Practice. He recently co-authored a report on innovation in China with the McKinsey Global Institute, which you can download for free here. Connect with Erik on LinkedIn here.

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Prices Fall Again! Chinese Manufacturers’ Latest Challenge Mon, 13 Jul 2015 08:32:09 +0000 While prices of products coming out of Chinese factories are not falling as fast as the price of shares of the Shanghai Stock Exchange, they have been falling for much longer, they show no signs of ending this trend and are actually causing much more pain in the real economy today than the gyrations of the stock market.

Factory prices in China have been falling now for nearly 4 years. The most recent number, for June 2015, showed an annualized pace of decline of 4.8% Keep that up for a few years and unless you change your business model or your raw materials and other inputs show equally rapid decline in prices you will find your profits disappearing faster than the wine at a Chinese banquet. And indeed in some industries that is the case today.

The root cause is an overshoot in capacity. As growth in domestic and export demand slowed, too many companies were showered with capital and they spent it building more capacity. This behavior was almost inevitable given the land grab mentality of many private sector and state owned enterprise entrepreneurs. If you don’t get to #1 by size and then stay there, what chance would you have of winning in the long term – this was the mantra of many. As provinces competed with each other to be home to the winner, they contributed to the over capacity by encouraging and even financing their local champion to overinvest.

So what are China’s entrepreneurs doing when faced with this?

The weak, the slow, the inflexible who are unable to adapt and change at pace at undergoing a slow decline. Continuous belt tightening and cost cutting, failed attempts at diversification, using capital to keep the business going rather than to expand capacity. However they tend not to disappear, they still produce, often using marginal prices to sell their output, sustaining the downward pressure on prices. This remains the largest segment of companies.

The adapters embrace change and in particular are embracing functional expertise as a way to change their game, genuinely reducing costs and enhancing speed to market. Historically, many Chinese companies have simply ignored the potential of operational excellence to improve efficiency. Today the best are looking at everything from getting more out of their existing capacity in the factory, tightening up supply chains, improving energy, water, heat efficiencies through a more scientific approach. We are seeing 20-30% improvements, so poor have prior operations been. It is not just in operations that we see the change. It is also true in information technology, where Chinese companies typically underspent their international peers by 50%. Using IT to further enhance operations, to get faster and better customer insights and to work more effectively with suppliers are hallmarks of these adaptive companies. Finally, a more scientific approach to marketing is generating superior insights and greater impact. Often by working closely with China’s largest internet companies, adapters are getting a level of instant insight on actual and potential customers that they have never had before.

These companies are the ones that we should worry about as the next wave of competition from China. They already produced a good enough (and sometimes very good) quality of product. But multinationals often could win against them through their superior functional expertise that delivered better value to the customer. As Chinese entrepreneurs finally master excellence from marketing to IT to operations they become much more threatening competitors both in China and beyond. These companies have always believed in change, in reinvention and this is simply the next change in their journey.

Others, the immediate internationalizers, have simply sought to continue to grow by applying the techniques that applied successfully in China abroad. They put their China product into international markets and see what works and what does not. They tend not to realize that the damage that a poor first impression can make in more mature markets, that customers are much less willing to give a second or third chance to a manufacturer who disappoints them the first time round.

Slowly this downward pressure on prices is changing Chinese companies for the better. The winners are completing their evolution to world class on all key dimensions and are becoming ready to be threats to multinationals anywhere in the world, not just China. There are though two major transitional side effects. One is that we will continue to see marginal product exported from China that will continue to hold back the “Made in China” brand. The second is that there will inevitably be loss of jobs in China. Even the best companies may need fewer people as they become more efficient and the poorer performers will gradually downsize to reduce their costs.

Great pain across the board but its an economy wide case of “what doesn’t kill you will make you stronger”. Silently there will be many of the former and much more noisily a few of the latter.

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The China Effect on Global Innovation Fri, 10 Jul 2015 02:32:37 +0000 How innovative is the Chinese economy? On the surface, the answer seems clear: by traditional measures, China is innovating at an increasing larger scale and is close to becoming the global innovation leader. In 2014, for example, the country spent nearly $200 billion on research and development, the second-largest investment by any country in absolute terms (and about 2 percent of gross domestic product). China’s universities graduate more than 1.2 million engineers each year—more than any other country. And it leads the world in patent applications, with more than 825,000 in 2013, compared with about 570,000 for the United States.

Are these metrics the most appropriate ones to assess China’s innovation ascendancy? We undertook a deeper examination of “micro” activity—processes, products, marketing, and organizational structures—and found a mixed picture: both world-beating commercial leadership and investments that have yet to pay off. Our perspective is that a more granular, nuanced approach is needed to determine if China is on track to convert itself from an “innovation sponge”—absorbing and adapting technology, best practices, and knowledge1 —into an innovation leader. And making that transition is critical; unless innovation becomes a priority, China may struggle to generate enough high-value-added, high-productivity work and jobs to support its growing urban population.

Despite the headline numbers, the impact of innovation on China’s GDP growth (as measured by multifactor productivity2 ) has declined in recent years. From 1990 to 2010, multifactor productivity supplied 40 to 48 percent of that growth. However, over the past five years, its contribution was just 30 percent, or some 2.4 percentage points of GDP annually—the lowest level since about 1980. To maintain annual GDP growth of 5.5 to 6.5 percent through 2025, China will need to generate 35 to 50 percent of it (2 to 3 percentage points) from multifactor productivity.

Innovation will also be critical to generating jobs and income, especially in services. Continued urbanization is expected to bring 100 million more residents to large Chinese cities by 2020. That will create a need for ten million new urban jobs every year, even as manufacturing employment drops.

Traditional approaches to assessing innovation involve evaluating the capacity of nations and corporate entities to undertake it. But for this study, the McKinsey Global Institute used an alternate method that looks at four archetypes of innovation and identifies the factors needed to innovate in different types of industries. We began by examining more than 30 industries to understand how innovation occurs in them, its drivers, and how it determines the success of companies. In this analysis, we looked at all kinds of innovations that have been commercialized successfully, from pure scientific discoveries to engineering breakthroughs to new business models to efficiency improvements. Each of the four archetypes of innovation we identified requires a different degree of R&D intensity, understanding of customer needs, and capital–labor intensity:

  • ƒCustomer-focused innovation involves solving the problems of consumers through novel products and business models. Industries in this category include appliances, mobile phones and smartphones, Internet retailing, and consumer packaged goods. These are characterized by high marketing intensity (typically about 3 to 10 percent of sales) and short development cycles of less than a year or two.
  • Efficiency-driven innovation mostly involves process improvements to reduce costs and production times and to enhance quality. Efficiency-driven industries include textiles, electrical equipment, and solar panels, which tend to have high capital and labor intensity.
  • Engineering-based innovation is about designing and engineering new products by integrating technologies from suppliers and partners. Industries that rely on this kind of innovation include aerospace, automotive, and telecom equipment. These have moderate to high R&D intensity, typically spend 3 to 14 percent of sales on R&D, and can have product life cycles of five to ten years or longer.
  • Science-based innovation involves developing new products through the commercial application of basic research. Industries such as pharmaceuticals, biotechnology, and semiconductor design rely on this approach. They may spend 16 to 33 percent of their revenues on R&D and devote 10 to 15 years of effort to bring an invention to market.

China sits apart from its peers by virtue of its uniquely dynamic and massive consumer market, its unparalleled manufacturing ecosystem, and the willingness of its government to invest in unprecedentedly large engineering projects. Yet the country has yet to make an internal-combustion engine that could be exported and lags behind developed countries in sciences ranging from biotechnology to materials.

By better understanding the way innovation works, Chinese business leaders, academics, and policy makers can more effectively focus their efforts to promote it. Building on the success of today’s innovators, they can create policies that support innovation in each of the four archetypes. In this way, China can continue to evolve into a more mature, productive, and innovation-based economy and may even provide a model for countries around the world.

This article is an edited extract from The China Effect on Global Innovation, a preview of an in-depth study to be released later this year by the McKinsey Global Institute. 

Image Credit: Flickr/Jiri Rezac

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Why Does South Africa Put Up Barriers to Chinese Tourists? Thu, 02 Jul 2015 02:33:48 +0000 For several years until mid-2014, tourist visitors from China were rising 30% annually and China had become South Africa’s 5th largest source of tourists.

Since then, visitor numbers have declined 32%, with a 46% decline in the 4th quarter of 2014.  Wow!

At a time when Chinese outbound international tourists grew close to 20% last year – visitors to Japan up 80%, to Australia up 18% – that takes some doing.

As a result of the decline, Chinese tour operators are now removing South Africa as a destination from their brochures and Air China has postponed a direct flight to South Africa

What happened?

In mid-2014, South Africa introduced new visa laws.  These require citizens of countries where South Africa requires a visa to come to South Africa to appear in person at the embassy or consulate to apply.  There is no “mail in” option available.

Specifically in China, this would require any potential traveler to come to either Shanghai or Beijing (there is one South African visa officer in each location) and wait in the city for several days while biometric data is taken and the visa is processed.  I have heard claims that the cost of travelling for the visa is greater than the cost of travelling to South Africa from China. This is simply diverting Chinese travelers to other countries – Botswana and  Kenya in Africa, Australia and New Zealand in the Pacific.

Why was this new visa law introduced? The South African government’s intent was to do (and to be seen to do) something about illegal immigration into the country.  However, this blunt, one size fits all policy was implemented without regard for the costs it would impose on the potential traveler or whether South Africa had an illegal immigration problem from that specific country.

If South Africa has consulates with visa officers in 20 or 30 cities in China, the issue might have less impact, although the process would still be time consuming.  But they don’t: they just have two.  I can find no research to show that there is illegal immigration of any scale from China to South Africa.

Can it be fixed?

How to get out of this situation before Chinese tourists are put off trying to go to South Africa for good?  One option, although likely to be politically impractical, is to move back to the old mail based visa application system.

Another might be to pay another country’s consulates to perform the service.

A final, slightly longer term, option would be for China to use its ICT partnership with South Africa to fund the installation of a state of the art biometric arrival system for South African immigration officers.  This could collect all the needed biometric information on arrival and make physical visits to a consulate unnecessary. This last option really should be doable and could be a very visible positive outcome from this partnership.

Let’s hope change happens. Otherwise I don’t see a turnaround in the downward trend of Chinese visitors to South Africa any time soon.

Many thanks to the China in Africa podcast for showcasing this issue.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image Credit: Flickr/whltravel

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The Crisis Facing China’s Professions Tue, 30 Jun 2015 08:33:28 +0000 China’s ongoing anti-corruption initiative is reputed to be moving in a new direction.  After arrests, trials and convictions of generals, senior politicians and top executives at state-owned enterprises, the new focus appears to be much more humble state employees such as teachers and doctors.

Teachers are being targeted for charging extra fees, requiring gifts in return for granting good grades.  Doctors are targeted for seeking kick-backs from drug companies and for charging extra fees to patients.

While these activities are deeply corrosive and should be stamped out, attacking them directly addresses only part of the problem.  Teachers, doctors and many other government employees are simply not paid enough to become full members of China’s new middle class.

Twenty years ago, low pay in these professions did not matter so much. The professions were highly respected, and the best students from universities were selected and allocated to these roles.  Private sector roles were not a draw for students as there weren’t very many of those jobs anyway.

Why would a talented graduate start a career in these professions today?  Respect from society has eroded (as a result of the behaviors above). Doctors fear physical violence from family members of their patients.  And the financial rewards are insufficient to acquire middle class trappings of a new home and car.

Many who have made their career in these professions are retiring early or switching out mid-career into the private sector.  The quality of members in the professions is at risk of rapid decline. A new aggressiveness in stamping out corruption will accelerate these trends.

What is missing is a long term plan to pay teachers, doctors, civil servants and even the police higher wages.  These need to come close to matching equivalent roles in the private sector.  As the private sector education and medical services industries grow, establishing such benchmarks will become easier and easier.  But today wages lag so far behind that a benchmark is not required.  Several years of double digit increases is clearly needed.

However, is local government ready to fund such a move? Hardly, as most are in fact deeply in debt and constrained by their need to repay outstanding loans.  It is much less costly in the short term to push the anti-corruption priority than it is to deliver any wage increases.

This problem is not going to be fixed any time soon, allowing erosion in the professions to continue.  But it will not go away and one day the government will have to pay up.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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How China Can Help Europe Grow Fri, 26 Jun 2015 04:34:52 +0000 My colleagues at the McKinsey Global Institute published their latest work a few days ago.  It focused on how Europe can renew itself to achieve sustained GDP growth of 2-3%.  An astonishingly low aspiration when viewed by Chinese policy makers.

Key actions they propose are in areas of new investment and job creation, in increasing competitiveness, and capitalizing on what they believe is a willingness of citizens to reduce their social protections in return for more working hours and pay.

I read the report from end to end looking for their ideas on how China, as the world’s second largest economy, still growing at twice the aspiration set out here for Europe, and with large aspirations of its own to increase trade and investment flows across the world.  All I found were a couple of suggestions to create “a robust trade agreement with China…”

This is a missed opportunity.  There is a lot more that Chinese businesses, Chinese capital, Chinese domestic demand and even Chinese international tourists can contribute to re-energizing Europe.  Their potential should be realized.

Opportunities for China to contribute to the re-energizing of Europe

Chinese investment in Europe

China’s “One Belt, One Road” outbound investment strategy extends well into Europe.  European countries should take advantage of this commitment. Europe is not short of opportunities to upgrade or renew its infrastructure.

Why not embrace Chinese capital and experience to accelerate renewal and launch some catalyzing investments?   The U.K. for example has contracted with a Chinese infrastructure player for the new tidal power generation facility off the coast of Wales, and is in discussion over nuclear and high speed rail projects.

Chinese companies have already invested in several ports and shown interest in investing to enhance rail freight transportation.  Long term capital invested in the ground in facilities that upgrade economic and environmental performance should be welcomed.

It is true that sometimes Chinese companies have overreached in their asks leading to a breakdown in negotiations for major projects, but rapid learning is underway, and a few initial failures should be the foundation for many more successful partnerships in the future.

China’s private sector champions, and there are many, are looking to become world-class global players, adding global research, global marketing, and global insights into their organizations.

Many have explicit plans to internationalize their top team, following in the footsteps of Lenovo and Huawei. They are looking to make organic investments as well as acquisitions.

Making it as easy as possible for clusters of organic Chinese investment to emerge, for example in logistics parks, industrial parks, and service company hubs in major city centers, are necessary enablers. It makes sense to bring in the leaders in developing such facilities in China such as GLP, CFLD and Soho, as they can draw in their existing customer base.

Many of the best research universities in Europe have portfolios of inventions to commercialize.  The China market may be a large part of the commercial potential, and Chinese private sector companies may well be best equipped to capture it.

Universities in Europe should be supplementing their traditional European development partners with enterprises from China.


Chinese tourism, if well-handled, could easily increase by a factor of 10 over the next decade.  France only issued 300,000 or so tourist visas to China last year; that number could easily rise to 3 million.

More direct flights from many more second-tier Chinese cities, continued work to ease the burden of getting a visa if you live in more remote cities in China, more marketing of the range of sights beyond the obvious – are all needed.

Many visitors will not just spend during their stay, but will continue to buy products they discovered during their trip if they can be made easily available through the growing cross-border e-commerce services offered by Alibaba and, creating ongoing revenue streams for European companies.


More broadly, China’s middle class are seeking higher quality products and services back in China.  They want safe, they want genuine, they want convenience, and they want value.

New free (or at least freer) trade agreements will absolutely help to bring more European services and products to China, but the pace at which these tend to emerge may have most of us in retirement before they are launched. Don’t lose sight of where opportunities exist today – ranging from healthcare and education services to sports and leisure in services.

In another service area, the pilot of allowing Chinese individual investors to buy on the Hong Kong Stock Exchange will undoubtedly grow.  Europe needs to ensure that its financial markets have the opportunity to welcome Chinese investors, bringing fresh capital into their markets.

China is in the throes of finalizing its next 5-year plan. And with its recently launched “Made in China 2025” list of 10 priority industries, there will be opportunities in several of them for European companies, for example in:

  • Robotics
  • Energy saving and new energy vehicles
  • Power equipment
  • New materials
  • Medicine and medical devices
  • Agricultural machinery


Many of the solutions to Europe’s challenges lie within Europe.  But some lie outside. Given the scale of the challenges ahead, European leaders should embrace the contributions that Chinese capital, businesses and citizens could make to the coming transformation.

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China’s Growing Pains Thu, 25 Jun 2015 01:50:51 +0000 For three decades, the inexorable rise of China has been a fundamental force in the global economy. Questions about what China would do next have long shaped economic analysis and corporate strategy. What sub-segment of manufacturing would it tackle next? Where would it invest? How would its rising wealth and soaring new cities affect world commodity markets?

Today, China has risen. It has passed Japan in GDP and is closing in on the United States. This raises new questions about China’s role in the global economy. It should also encourage new ways of thinking about China and the world.

Even now, the focus of China watching has shifted from concerns about how it might dominate a new world order to whether its slowing growth will drag down the rest of the global economy. Whether Chinese GDP grows by 7.5 percent or 7 percent per year—or even by 6 percent or less it still adds a Canada to global GDP every 2 years.

More importantly, we should be concerned about how China deals with the forces behind its slowing growth. Some of these forces, such as aging and skill gaps, are seen around the developed world. Some, such as rising labor rates, are standard for developing economies that are moving up toward middle-income status. Others, like the soaring debt that has attended China’s rapid urbanization are unique to China.

The Challenge of an Aging China

Aging, for example, will have outsized impact on China. As the world’s most populous economy, China will be hit hard by the costs of aging. The number of Chinese 55 or older is expected to rise from 26 percent of the population today to 43 percent in 2030. Public pension expenditures are expected to rise from 3.4 percent of GDP today to 10 percent in 2050, and public health costs are expected to rise even faster. By 2040, China could have more dementia patients than in all advanced economies combined. All this happens at a relatively low level of per capita income.

Indeed, China is getting old before it will get rich. Usually dependency ratios (the number of minor children and senior citizens in proportion to the number of working age citizens) drop in developing economies as they industrialize and only rise when they have become middle-income or wealthy.

China’s dependency ratio has already begun to climb and could approach current EU levels (above 30 percent) by 2020, even though China’s GDP per capita (based on 2010 US prices) then is projected to be just $8,000, compared with $49,000 in the United States and $32,000 in South Korea.

Aging also challenges China’s labor-intensive growth model. In the past few decades, tens of millions of Chinese workers entered the global labor force, helping to drive GDP growth and lifting hundreds of millions of Chinese out of poverty. This demographic dividend is disappearing because of aging and a low birth rate. In January 2013, China’s National Bureau of Statistics announced that the country’s working- age population actually fell in 2012 and it has continued to decline.

At the same time, China faces a looming skills gap as its economy moves to a more consumption-based and services-oriented economy, a pattern that all developed economies have followed. Despite a dramatic expansion of post-secondary education, China could have 23 million too few high-skill workers (loosely defined as those with college degrees) by 2020.

Debt, Infrastructure, and Financial Strain

China also has a difficult path to navigate between maintaining healthy growth and controlling the enormous debt that has been incurred to support that growth, particularly in the years since the global financial crisis. China’s total debt rose to 282 percent of GDP in 2013, from 158 percent in 2007, and is higher as a share of GDP than US debt.

About a third of this debt is associated with booming real estate markets, including debt of supplier industries such as construction, steel, and cement. These industries now have excess capacity and real estate demand has softened. Also, it is not clear how the shadow banking system that has funded these industries can cope with defaults—even though it seems to be widely assumed that the government would intervene to avoid a debt crisis.

The most troubling debt challenge, however, may be in local government finances. With the encouragement of the central government, local governments have run up $2.9 trillion in debt since 2009, much of it issued by off balance-sheet entities known as local government financing vehicles. The central government has initiated reforms and efforts to restructure local government debt—including by allowing provinces to roll loans into bonds, but demand for these bonds has been weak.

At the same time, urbanization continues apace with 100 million more citizens coming into cities by 2020. Continuing urbanization is important for continuing growth, but will require additional investment in housing and infrastructure—and additional financing.

Advanced Challenges for an Advancing Economy

If we think about all these challenges, we begin to see China in a very different light. The qualities and strategies that have brought it so quickly to the forefront of global economies will continue to serve China, but are not sufficient to tackle these challenges.

Modern China finds itself confronting a full range of economic and social challenges that are characteristic of advanced economies, even as it remains a developing economy (at least by the metric of GDP per capita).

 * * *

I’m a senior partner in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here. Read my latest work as co-author of No Ordinary Disruption (PublicAffairs, May 2015), which examines how long-term shifts in the global economy challenge long-held assumptions.

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Chinese Consumers Deserve Better Service Tue, 23 Jun 2015 12:08:20 +0000 Does China have a demand or supply problem in services?

Many observers moan about how Chinese consumers need to pull out their wallets and spend more, but little thought seems to be given to offering services that they would actually want to spend money on.

JP Morgan recently calculated that Chinese consumers have US$9.2 trillion on deposit with banks, and most of it is staying put in the banks.  Given this visible reluctance to spend, there is an argument that we need demand stimulants. Could the government stimulate spending, for example, through a tax credit on a wellness check?  On a wealth management check up?  On a home air quality check?

Maybe, but if the service on offer is low quality or untrusted, it will probably make no difference over the medium term. What is needed is a higher quality of services.

Cinema offers a great example of how, when offered a quality service, Chinese consumers embrace it.  China has many world-class cinemas (including as many modern IMAX screens as anywhere in the world), that show the latest Hollywood and domestically produced movies (creating the second largest box office revenues in the world, behind only the US), and for which patrons pay global prices of up to US$20 for a seat.  And they pay that price frequently.

Contrast that with an example from sport – Chinese soccer.  The quality of the product is poor, the quality of the stadiums is mediocre, and a season ticket price of not much more than US$100 still doesn’t get fans in to fill the stadiums. A better quality of game in a higher quality of stadium would, I believe, lead to a virtuous cycle of more money coming into the industry, funding further improvements that attract more fans.

Similarly, if airlines flew on time more frequently, more people would fly on them. Airlines would perform better as a result, as would hotels and ground transportation.

I am hopeful that the opening of Disney in Shanghai in the near future can create a role model for delivering a quality service experience, and being able to charge well for it as a result.

The reason so many services remain cheap in China is because providers have not moved beyond “the cheaper the better” mindset that is so prevalent in the manufacturing sector. As a result, services are of terrible quality.  It is not surprising that consumers won’t spend more.  They are increasingly discerning and won’t pay for rubbish.

Internet based innovators are a major driver of change by not only providing services at lower cost, but also often with lower investment of time from the consumer and delivering a higher quality service.  But not all services will be delivered by Internet.

We need a broad push to make higher quality services available. If they were, consumers would buy more services and spend more on them as well.

Image credit: Flickr/Toby Simkin

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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This is Why Chinese Consumers Are Still Glum Thu, 11 Jun 2015 06:31:57 +0000 Chinese consumer sentiment in May, as measured by the Westpac MNI China Consumer Sentiment Indicator, remained at the same five-year low reached in the previous month.

This is disappointing news given the actions the government has taken over the past six weeks to stimulate consumption. As exports and investments remain weak, China needs consumers to drive growth the way they have over the last year or so.

What are consumers worried about?

  • Consumers are facing a slower pace of income growth than in prior years. For many, high double-digit annual income growth has slipped into the mid-single digits. Those in the public sector, government, and state-owned enterprises, are finding they are having to make contributions to their pension that outstrip any headline wage increases they supposedly enjoy.
  • Those with children graduating from college are finding there is a considerable likelihood that their kids are graduating in debt, can’t find a job, and are moving back home.
  • In some cities, especially in the northeast, the local economy is struggling badly as traditional capital-intensive industries struggle to renew themselves. The residence hukou system forces people who might otherwise look for jobs elsewhere to remain in their current city, while the weak local property market makes it nearly impossible for many to sell.
  • Real interest rates remain pretty high, despite the recent rate cuts.
  • Many feel that their personal job security is lower today than in the past.

On top of these concerns, three other factors stand out:

  • Many of the middle class don’t need to spend much: they own their home, their car, and most large consumer durables.
  • Many of the middle class avoid spending on services because they can’t find the quality they’re seeking.
  • Many goods and services are getting cheaper – why not wait to buy them?

We should keep a close watch on the confidence of the Chinese consumer. It can tell us a lot about how consumption is likely to develop.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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The Old Rules on Investing in China Still Apply Tue, 09 Jun 2015 01:37:29 +0000 I ran across a group of foreign investors the other day who are frustrated by their joint venture partner in China.

As I heard their long list of complaints, I could have closed my eyes and been back in the 1990s.  It was as if none of the lessons from that era had ever been heard.

What had they done wrong?

  • Invested in a remote city whose only connection to the investors was that it was twinned with a city in their home country. The hard-nosed business decision would have been to invest closer to the market and where imported materials would arrive.
  • Invested with a successful local entrepreneur who had no track record of working with foreign partners.  No other multinationals to provide a reference or exert influence on the local entrepreneur.
  • Allowed their capital to be almost entirely used up on capex for the factory. What’s gone is gone and is now bolted to the ground.
  • Had no one on the ground or even present in the country other than a plant manager they had appointed.
  • Had ambiguous paperwork on who owns exactly what share of the business.

Unsurprising that the local entrepreneur is looking to increase his share in the business before allowing the plant to go live. The leverage is all with him.  Only question for the foreign investors is whether they want a smaller share than they thought they had in an operating business or a larger share in probably nothing.

Please know the history of what works and what won’t work before you launch your China JV.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Exports of Fresh Produce to China Are About to Get Really Big Mon, 08 Jun 2015 10:08:41 +0000 China’s second largest ecommerce company,, just invested US$70 million in an importer of fresh produce, FruitDay.

FruitDay is one of many firms seeking to deliver fresh fruit and vegetables to China’s middle class.  They claim to deliver in up to 300 cities, but the vast majority of sales probably come from less than 10 cities.

One reason for this is differing income levels across cities, but more importantly is the lack of cold chain infrastructure across China.  Modern cold storage facilities are expensive and until recently few companies were willing to pay for it.

Today the cost of land is so high in many cities that it can be impossible to create a winning business plan for cold storage facilities.  Similar problems arise for operators of cold storage trucks.  These are problems that will be solved, even if it involves local government subsidizing land used for cold storage facilities.   I expect that the Shanghai Free Trade Zone will soon host a few of these facilities.

Imported = safe

Chinese consumers associate imported fruit and vegetables with safety and quality, as they do with imported milk.  This creates a willingness to pay a premium.  Additionally, consumers have less trust in what they buy in a store, believing that produce has passed through multiple distributors to get to the store. And so even if it was high quality originally, it may have been diluted or mixed with lower quality produce somewhere along the way.

Buying directly online makes consumers more comfortable

Buying online directly from the importer and having produce delivered direct to the home by the importer gives greater comfort that the produce is what it says on the packet (and if it turns out not to be the case, there is at least a single company to go after).  Demand ranges from traditional apples to cherries, avocados and kiwis. This is good news for many farmers outside China.

Expect Chinese investment in overseas farms

Producers of fruits and vegetables can expect to see rapidly growing demand for a wide range of their output.  As usual this will likely be accompanied by large flows of Chinese capital to invest in farms.

I see this today in countries ranging from Chile, to the United States and to many parts of South East Asia.  I have not seen it, but it would not surprise me if we see agricultural exports from Japan to China growing fast also, given the Chinese middle class fascination with the quality of all things Japanese.


Greater international competition will directly or indirectly lead to greater consolidation, investment in domestic agriculture, and an acceleration in raising standards.

This will be good news for international cold storage logistics service providers, both by air and ship.  It’s also good news for governments that subsidize their farmers – there should be less need to do so.  And finally, it’ll be good news for the Chinese government that wants the domestic agricultural industry to shape up and improve its quality and safety.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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This is Why China Should Enforce its Construction Standards Wed, 03 Jun 2015 02:12:23 +0000 The recent nursing home fire in Henan province that killed nearly 40 people was tragic.

What it also most likely demonstrated was the continuing failure to enforce mandatory standards in China’s construction industry.

While we have (hopefully) moved beyond the era when buildings fall over due to shortcuts taken in the laying of their foundations, there are still too many buildings with deep safety and simple quality flaws.

We are rapidly heading into an era when much that has been constructed even less than 20 years ago is deteriorating fast. Those who purchased an apartment 20 years ago may be sitting on large but mostly theoretical paper profit as the building literally crumbles around them.

Consider public buildings.  Have fire resistant materials been used?  Have appropriate exit paths been built in?  Have best practices in restricting the ability of a fire to spread been adopted?

Or thinking of the priority now given to energy efficiency and smart buildings – have energy efficient insulation materials been used?  Have double or triple glazed windows been installed?

China’s construction policies and requirements are generally good (the same can be said about food safety and environmental standards).  We should make heroes out of the building inspectors who truly stand up for the requirements.  They should be encouraged to publicly name and shame.

It would not take much in the world of social media in China to create a wave of public opinion that would force the adoption of better practices.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Having An Impact On A Billion Lives Thu, 28 May 2015 01:18:43 +0000 After finishing a project at Cedars-Sinai Medical Center in Los Angeles, Bo Chen, an Associate in our Beijing office, wasn’t sure what he wanted to do next. Because of his background in neuroscience research, he expected to continue along that path when, at his wife’s urging, he attended a McKinsey recruiting event. The rest, as they say, is history.

McKinsey China: What attracted to you McKinsey?

Chen: After the initial McKinsey talk, I was invited to attend a 3-day Insight Asia program and met with Partners/APs from the Asia office to get to know more about what they did. I learned about some of the work in the healthcare industry that McKinsey was doing in China, and was extremely impressed with the reach and impact they had. Their engagements affected thousands of hospitals and potentially over a billion people. How many people can say their work has directly impacted that many people?

McKinsey China: You went from China to the US and then back to China- and now you are frequently on client engagements in the US again. How have you managed the transition between cultures?

Chen: It can be challenging at times, but I’m grateful for the opportunity to be working in a truly global firm. Healthcare is something that I feel passionate about, and challenges in healthcare systems of different countries are all unique, and thus require creative solutions. At McKinsey, I’ve had the chance to work with similarly passionate people from around the world and it’s been an amazing learning experience.

McKinsey China: In between traveling back and forth from China to the US, what do you enjoy doing in your spare time?

Chen: I love reading history books. Currently I’m reading Deng Xiaoping and the Transformation of China by Ezra Vogel and it’s fascinating. He is a true strategist. Of course I learned about Deng Xiaoping growing up, but the research in this book goes into minute detail, providing an amazing insight into this great mind as well as putting his key decisions into historical and personal context.

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China Is Betting Big on These 10 Industries Wed, 27 May 2015 04:44:02 +0000 China’s government launched its “Made in China 2025” program last week.

With its 10 priority industries and milestones for creativity, quality, digitization and greenness, there is a lot for anyone operating in these industries in China or elsewhere to look at.

We can be certain that behind these priorities will be a wave of cash and incentives to manufacturers and to consumers.  We can be sure that many Chinese companies, private and state-owned, are revising their strategies to align with the government’s priorities and that local capacity will rise exponentially.

And while experience reminds us that success will be elusive in some sectors, in several it is likely that Chinese companies will become much, much stronger global leaders by the end of this period as a result of very Darwinian competition.

Customers may be the biggest beneficiaries in the decade ahead as the government’s strategy drives companies down the experience curve much faster than would otherwise have been the case.

What are these industries where China will be “promoting breakthroughs in 10 key sectors?” Many of them are familiar from earlier priority lists.

Information technology: Especially where Beijing has emphasized the need to wean China off foreign technology, and for China to become a “cyber power” in its own right. Expect lots more investment in semiconductors and acquisitions of international technology companies by Chinese companies.

Numerical control tools and robotics: China is already becoming a leader in low and mid-range numerical control machines. An increased emphasis on robotics will help drive productivity increases and also increase required skills for the remaining jobs in factories.  Expect lots of exports by 2025, if not much earlier.

Aerospace equipment: China seeks to become a leader in satellite technology and is hoping to move beyond its first domestically made passenger jet, which is heavily dependent on foreign technology.

Ocean engineering equipment and high-tech ships: Some of this links to ongoing investment in infrastructure in the South China Sea. China is hoping to be able to grow a strong export sector in this space.

Railway equipment: China is already exporting its high speed rail products to countries from Malaysia to Russia. Beijing clearly wants to grow its competitiveness in this area, including through infrastructure projects in the “One Belt, One Road” initiative.

Energy saving and new energy vehicles: Combines the priority to clean up air in Chinese cities with the long-standing (and long unmet) ambition to win international recognition for Chinese-made cars.

Power equipment: Energy efficiency is the key goal here also. Smart grid and smart city technology are the central priorities.

New materials: The government views this as a key area for true research driven “invention”. If China can become a leader in inventing and commercializing new materials we will have fewer conversations on “does China innovate”.

Medicine and medical devices:  Chinese medical device manufacturers have been growing very rapidly in recent years and are already starting to export.  With further government support, this may accelerate.

Agricultural machinery: Yet another sector where China is looking to enhance efficiency and create a platform for exports. Yet as we have seen with the auto sector, it may not be easy.

A few examples of the milestones to go with this

  1. Increase R&D spend as a percentage of sales from 0.95% to 1.68%
  2. Increase labor productivity annually by 7.5% to 2020 and by 6.5% annually thereafter
  3. Reduce energy consumption per unit of added value by 35% by 2025
  4. Reduce water consumption per unit of added value by 35% by 2025

A broad and far-reaching set of priorities that will expand domestic demand, grow local manufacturing – and in multiple sectors –  increase exports significantly by 2025.

In a future post, I will look into the implications for foreign companies of these initiatives.

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From Rocker To Consultant Wed, 20 May 2015 09:08:05 +0000 “Rock musician” may not seem like it goes with “management consultant,” but Jeffrey Liu from McKinsey’s Taipei office is both. From a music career to launching a startup, Jeffrey brings a diverse background to the firm.

McKinsey China: Tell us about your music career

Jeffrey: I lived in Taiwan until I was 12 and then moved to the US. I was part of a band throughout high school and university and after I graduated, I gave myself one year to pursue music, so the group moved to Taiwan.

McKinsey China: What kind of music did you play? And what was the band’s name?

Jeffrey: Alternative rock. I was the lead vocalist and did a lot of the songwriting.  Our name was Ashz. Unfortunately, the band didn’t make it, but I was given an opportunity to be a freelance songwriter at a startup record label called Hummingbird Music. After some time though, I wanted to try my hand at a more traditional job, so I left the record label, and after briefly working at a startup, I ended up at KPMG for about five years.

McKinsey China: How was your experience working for a startup?

Jeffrey: I learned a lot; you have to when there are only 20 people at your company and you have to wear many hats. After a while, I decided I needed to get a solid foundation at a bigger company, so I left. After becoming a manager, I became interested in consulting and decided if I were going to go for consulting, then I’d want to be at the best firm- McKinsey. I wanted to be close to my parents in Taiwan. So on my business school application essay, I literally wrote that I wanted to work for McKinsey in Taiwan. And here I am! I think I was the only one of my friends who actually ended up doing what I originallyplanned.

McKinsey China: Have you been able to keep up with your interest in music?

Jeffrey: Definitely. For our annual  New Year’s office party at McKinsey, a group of colleagues and I put together a performance. It was a blast. We’re actually trying to set up some more regular weekend jam sessions and I promised to write an original song for the office.

McKinsey China: What do you like most about working at McKinsey?

Jeffrey: I love the community. As you develop in the firm, you have people who are genuinely interested in your career, but you also have the opportunity to nurture other people, which makes the bonds especially strong. And even during a client engagement, which requires a lot of work and time, we’re all in the trenches together. I haven’t met a person I haven’t enjoyed working with. And when we finally make it to the end and think back on the project, it’s always the best feeling.

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Can Software Companies Make Money in China? Wed, 06 May 2015 08:06:07 +0000 Our instant answer – “Of course not, there’s no IP protection.  How could anyone make money in software in China?” – is increasingly wrong.

There are now more than a dozen listed Chinese software companies with a valuation of over US$1 billion. And these are not valuations based on vaporware (software announced publicly and promoted even though it does not yet exist) –these companies make significant profits.

How are they doing it?

Mainly with businesses as their customer.  We know that Chinese companies still only spend half of what their peers in other markets spend on technology as a percentage of revenue. And this has long held back the development of the enterprise software market in China.

However, there is an acceleration in spend underway as companies seek to digitize their business and increase operating efficiencies.  The government has embraced this trend and is pushing investment in software as a tool for increasing domestic innovation.

Local software companies also benefit from tax breaks and domestic software requirements – the government makes up a bit over 15% of total IT sector spending.  But much of this would really not matter if there were no customers willing to pay.

What are their customers willing to pay for?

A lot of it falls into the category of applications with Chinese characteristics – markets that have historically been small, but are growing fast now.  Applications where the benefit to the business is not only ongoing, but where there is real value in having access to the current iteration of the software itself or a database that it accesses.  Some examples include:

  • ERP based on Chinese accounting standards.
  • VAT solutions for the Chinese government’s unique VAT rebating system that enables more accurate and faster payments from the government.
  • Investment platforms sold to new digital entrants in financial services .
  • Property management solutions sold to developers as they seek to diversify their revenues as new sales decline.
  • Management solutions for mobile devices, enabling security across the myriad revisions of Android that employees may have on their devices.
  • Digital maps to enable many location driven applications.
  • Medical information management systems for Chinese hospitals, connecting to the many different Chinese reimbursement systems.

I believe there is a lot more of this to come.  Businesses are paying today – and will pay more in the future – for applications that enable them to establish closer connections with their customers and achieve greater efficiency in their internal operations.

They generally have no choice but to go outside, having never invested to build a decent internal IT capability themselves.  There has probably never been a better time to be a Chinese software company.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Why China’s Consumers Will Continue to Surprise the World Tue, 05 May 2015 05:55:22 +0000 China has an awesome consumer story. Yet lately you can’t pick up a newspaper, go online, or watch television without hearing continual moaning about the country’s slowing economic growth and the need for “rebalancing.” The reality is that Chinese consumers are going to continue to increase in wealth and complexity. And if you’re worried the country’s economic importance is declining, you’re probably looking at its performance the wrong way.

Don’t worry about consumer spending as a percentage of GDP

As in most developing Asian economies, China’s early growth was based on savings, investment, and exports. You get your population to save, move to the cities, work in factories, and make stuff. This is sold, and cash is brought back home for investment. Plus, you get some foreign investment as well. This process enabled China to develop its infrastructure largely with its own cash. That, by the way, is not the norm. Developing economies typically borrow from foreigners and then default—for example, American states such as Mississippi and Florida were chronic defaulters on foreign debt as they initially developed.

One of the downsides of this investment-first approach is that it makes consumption look small and often like it’s shrinking. Chinese consumption decreased from approximately 51 percent of gross domestic product in 1985 to 43 percent in 1995, 38 percent in 2005, and 34 percent in 2013. By comparison, consumption is around 61 percent in Japan and about 68 percent in the United States. In fact, China’s small and decreasing consumption percentage is one reason why people keep talking about “rebalancing”—the need for the economy to become driven more by consumer spending than investment and exports.

Our position? Don’t worry about this stuff.

First, from 2000 to 2010, the size of the Chinese economy more than doubled1 . So consumption grew from around $650 billion to almost $1.4 trillion. Regardless of its relative percentage of GDP, China’s consumption has been growing faster than just about any other country’s in absolute terms. Second, just getting consumer spending back to 43 percent of GDP, the level in 1995, would have a huge impact on “rebalancing.” It would also create the largest consumer market in the world. Third, most of these numbers are wildly inaccurate. Consumer spending is nearly impossible to measure in such a big, complicated economy. Combining a vague number with two other big vague numbers (investment and net exports) is very fuzzy math. Until economists start putting uncertainty estimates on their China calculations, relative percentages aren’t worth paying much attention to.

Household income is what matters, and it’s great

The number you really want to keep in mind is household income. You can’t have consumption without income. And here’s where it gets really awesome. China’s household income is huge. It is now likely above $5 trillion a year. Plus, lots of income is unreported, so this is really the lower boundary for true household income. Developing economies—especially the BRIC nations of Brazil, Russia, India, and China—are frequently grouped together, but Chinese consumers dwarf all the others in terms of household income (Exhibit 1).

Exhibit 1

China’s household income dwarfs other emerging markets.

Rising discretionary spending is the exciting part

Discretionary spending is buying the stuff you like but don’t need. Or you only sort of need. And, fortunately, people seem to have an endless appetite for everything from entertainment to skiing to caffe lattes. Chinese citizens are now moving beyond being able to only afford the basics of life, and their discretionary spending is taking off. Growth in spending on annual discretionary categories in China is forecast to exceed 7 percent between 2010 and 2020, and growth of 6 to 7 percent annually is expected in a second category of “seminecessities.” Both of these categories are growing faster than spending on actual necessities, which are expected to grow around 5 percent a year, about the same as expected GDP growth (Exhibit 2).

Exhibit 2

Discretionary categories are showing the fastest growth.

Finally, an important related issue is the Chinese tradition of saving. If we compare spending and saving rates across the emerging markets, we see a spike in savings in China. That spike is fairly understandable. First, it’s cultural. Second, they are precautionary savings—no social safety net means if you get sick, it’s all on you. Third, Chinese savings are not unique. Japan, Korea, and Taiwan all hit 30-percent-plus savings rates in their early development. And fourth, without much of a consumer-finance system, it’s tough to use debt to hit truly spectacular consumption levels. After all, a vacation home or car may cost the equivalent of a year’s income.

That’s our rant on China’s macro consumer situation. Basically, we believe it remains a great story. It may be volatile. It’s also somewhat unpredictable. But you just don’t get a consumer growth story this good anywhere else.

This is an edited excerpt from The One Hour China Consumer Book: Five Short Stories That Explain the Brutal Fight for One Billion Chinese Consumers (Towson Group, 2015). For more details about the book, visit

About the authors

Jeffrey Towson is a managing partner of the investment firm Towson Capital, and Jonathan Woetzel is a director in McKinsey’s Shanghai office. They are both professors at Peking University’s Guanghua School of Management in Beijing.

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Can Chinese Car Companies Finally Succeed in 2015? Tue, 05 May 2015 03:39:05 +0000 Something very unusual happened in China’s passenger vehicle market in the first quarter of 2015: China’s domestic brands grew much faster than the overall market.

While the total market grew at an already rapid clip of 11%, Chinese brands such as Great Wall, Geely, BYD and Chery all grew even faster – at 24%, 56%, 22%, and 20%, respectively.  Meanwhile, joint ventures selling global brands such as VW, GM and Hyundai saw almost no growth.

Is this a blip or the start of a trend?

If it is a trend, it has certainly been slow in arriving.  For more than 20 years, China’s 5-Year Plans have promised the emergence of a world class domestic automotive industry.  Yet in a market that has grown from one million vehicles in 2000 to nearly 20 million today, the share of Chinese brands has remained stubbornly low at around 25%.

Who holds domestic share has changed.  The legacy state-owned Chinese car manufacturers hold much less share than in 2000, and younger independent car makers such as Great Wall and Chery have grown their share.

What has held Chinese brands back for so long? 

  • While there has been massive market demand, the social recognition for Chinese brands has been low, reinforced by memories of when the quality of Chinese brands was indeed much lower than international competitors. First time car buyers wanted the social status that came from driving an international brand car.
  • Domestic companies often lacked both talent and the systems to develop their own talent. They would not have been able to develop a quality vehicle themselves, and they worked poorly with global suppliers who might have been able to help them.
  • Winning in the auto business requires a long-term perspective matched to the length of vehicle lifecycles. The leaders of China’s state-owned companies are often rotated off to government appointments in less than half the lifecycle of a car, creating an enormous mismatch in timeframe between management and the needs of the business.
  • Large-scale, long-term investment in R&D was therefore not a priority, as the consequence of lower than ideal investment would only be seen after the current leadership had moved on.
  • Large profits flowing from joint ventures with global companies reduced the incentive to do anything bold, such as a massive scale up in R&D.

Several things are changing now:

  • The quality of Chinese brands in 2014 reached the level of foreign brands in 2011, according to surveys by JD Power and others. The quality gap is rapidly shrinking, domestic brands are investing in marketing to communicate this, and consumers are becoming discerning enough to move beyond the inferred social status of the vehicle brand.
  • Chinese brands such as Great Wall are now investing heavily in R&D and are collaborating much more effectively with global suppliers. Chang’an has taken the lead in developing a global network of R&D facilities from Detroit to the U.K. to Japan, and now spend an equivalent percent of revenue on R&D as the global top five car makers.
  • Chinese brands such as Great Wall have become much more sophisticated in building an understanding of consumer needs, allowing them to lead successfully in new segments of the SUV market.
  • Internationally experienced talent from global car makers are joining Chinese producers, bringing new skills including long-term project management, design and marketing.

This argues more for a trend than a blip, but the Chinese car market is not static.  New forces could yet knock domestic producers back again.  The emergence of electric vehicles at scale, of more “silicon”-intensive digital cars, of shared car services, and even of autonomous vehicles may change the game again.  Global brands face these challenges worldwide and potentially have more resources to put against the transitions.

Chinese car brands are coming ever closer to winning in the current market,   and this may be happening just as the market is about to transform again.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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China and Wine: A Perfect Pairing? Thu, 30 Apr 2015 02:53:07 +0000 A friend recently gave me a bottle of red wine from the first harvest of his new vineyard in Shandong province – output so new that the bottle does not even have a label.  I admit I have not drunk it yet, so sorry ratings not available on its quality.

When I saw some news reports this week that China had become the world’s second largest wine producer I was concerned my friend might be caught in the classic China overinvestment trap. That’s when an idea catches hold and entrepreneurs run to invest until many times potential demand is quickly supplied. Probably true here.

But I was also a little surprised with the headline and so I looked at the source material from the OIV (International Wine Organization).  I found a rather different and more interesting story. (Some of the misunderstanding may have arisen because their slides are in French)

What the OIV points out is:

  • That while China has overtaken France to become the #2 country in acreage of vineyards, it is only #8 in wine production, with less than a quarter of France’s volume. South Africa and Australia both produced more wine than China in 2014. How would I explain this?
  • Many Chinese vineyards, like my friend’s, are brand new and producing nothing at all
  • Vineyards that are producing wine are doing so with very low volumes per hectare, reflecting unsophisticated management practices and some less than ideal growing conditions
  • Lots of grapes grown are not used for wine production. Production of raisins has been rising 20% plus annually
  • That China’s production of wine actually fell 5% in 2014. Perhaps a reflection of lack of demand for cheap low quality domestic wine in face of an increased supply of fair quality imported wine.  Or maybe weather was a factor? Most likely reason is that it was more economically attractive to produce raisins
  • That China’s wine consumption fell 7% last year, keeping China as the 5th largest wine consumer (at 7% of global consumption), ahead of the U.K. but behind Germany. I can see several reasons for this:
  • The overall economic slowdown (beer consumption has also suffered) leading consumers to pull back on discretionary spending
  • The ongoing anti-corruption campaign and its impact on banqueting
  • Many entrepreneurs have built massive wine stocks in recent years and are moving their spending into new areas.
  • Personal imports from Hong Kong (where duty on wine is 0%) may have grown even further.

So I hope my friend enjoys the emotional returns from his vineyard investment, as I fear the financial returns may be many years away.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Supercharging the Development of Electric Vehicles in China Wed, 22 Apr 2015 07:34:18 +0000 Executive Summary

China is entering a new phase of economic development, with a focus on achieving more sustainable growth. Faster adoption of electric vehicles (EVs)1 is widely seen as an effective way to reduce China’s growing dependence on imported oil, relieve pollution in congested urban areas, and help domestic OEMs and suppliers to gain a competitive edge over their stronger international rivals.

Yet, despite having invested more than RMB 37 billion in various forms of subsidies to OEMs, suppliers, consumers and researchers, China lags behind other leading markets in the development of its EV industry ecosystem. China has also missed its own targets for EV sales, infrastructure roll-out, and technology.

This paper looks at the current EV ecosystem in China, and highlights potential lessons that can be drawn from successful experience in other countries. It then seeks to frame a set of questions and options to inform discussions about the policy framework required to enable the development of electric vehicles in China. This paper does not make or imply recommendations for action by government or industry players.

What we have learned in analyzing public policies in China and other countries can be summarized as follows:

  • Giving consumers greater choice in EVs, both imported and locally-produced battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs), can stimulate EV demand and foster competition.
  • Policy support to new, non-traditional entrants could bring stronger competition on the supply side and spur incumbents to faster action.
  • While one-off financial incentives to encourage EV purchases are important to stimulate early demand, recurring financial incentives such as free or discounted parking and highway tolls, and non-financial benefits such as sharing of dedicated bus lanes and dedicated parking, to name only a few, are just as important.
  • Government has an important role to play in working with the automotive and utility industries and other infrastructure providers to define a consistent set of national standards for EV charging and infrastructure development, and to provide additional policy support for developers, landlords, tenants and consumers to jointly push for the faster rollout of charging facilities.

These learnings raise some potential questions and choices on how China might mosteffectively stimulate the development of electric vehicles:

  • Could there be a benefit from creating a national, harmonized list of EVs that qualify for subsidies? Including both imported and locally-produced BEVs and PHEVs on a nationally harmonized list could help to mitigate local protectionism;
  • What is the most effective balance between traditional and non-traditional OEMs and suppliers? Introducing stronger competition to the EV supply side, for instance by issuing EV-only production licenses to non-traditional automotive OEMs and suppliers, can help stimulate innovation;
  • What is the role for balancing financial and non-financial incentives to consumers to encourage EV purchase and make EV usage more convenient?
  • How might the government collaborate with OEMs, suppliers and utility companies to develop a national standard for charging and communication protocols in order to avoid wasted and duplicate investments in non-compatible charging infrastructure and technologies?

Other choices, such as import duty exemptions or reductions for qualified EV products and the lifting of foreign ownership restrictions and JV requirements for EV production, could have a greater near-term impact on EV adoption and the development of the EV ecosystem. They would also send a clear signal of the government’s determination to promote EV development in China. However, these measures would likely present challenges for local industry players.

Policy options such as restricting new vehicle registrations to EVs in heavily polluted and congested cities would likely have only a limited impact on reducing air pollution. Such options can also trigger unintended negative consequences for the automotive industry, such as the possibility of significant write-downs in the value of their R&D investments.

There are clear and significant benefits for China in developing EVs – for its environment, its local automotive industry, and its aspiring car buyers. We hope our perspectives will provide a fact base for constructive discussions among policy makers and industry players as they seek to position the EV industry on the right path going forward.

Download the full report

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Supercharging the Development of Electric Vehicles in China Wed, 22 Apr 2015 07:11:52 +0000 Executive Summary

China is entering a new phase of economic development, with a focus on achieving more sustainable growth. Faster adoption of electric vehicles (EVs) is widely seen as an effective way to reduce China’s growing dependence on imported oil, relieve pollution in congested urban areas, and help domestic OEMs and suppliers to gain a competitive edge over their stronger international rivals.

Yet, despite having invested more than RMB 37 billion in various forms of subsidies to OEMs, suppliers, consumers and researchers, China lags behind other leading markets in the development of its EV industry ecosystem. China has also missed its own targets for EV sales, infrastructure roll-out, and technology.

This paper looks at the current EV ecosystem in China, and highlights potential lessons that can be drawn from successful experience in other countries. It then seeks to frame a set of questions and options to inform discussions about the policy framework required to enable the development of electric vehicles in China. This paper does not make or imply recommendations for action by government or industry players.

What we have learned in analyzing public policies in China and other countries can be summarized as follows:

  • Giving consumers greater choice in EVs, both imported and locally-produced battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs), can stimulate EV demand and foster competition.
  • Policy support to new, non-traditional entrants could bring stronger competition on the supply side and spur incumbents to faster action.
  • While one-off financial incentives to encourage EV purchases are important to stimulate early demand, recurring financial incentives such as free or discounted parking and highway tolls, and non-financial benefits such as sharing of dedicated bus lanes and dedicated parking, to name only a few, are just as important.
  • Government has an important role to play in working with the automotive and utility industries and other infrastructure providers to define a consistent set of national standards for EV charging and infrastructure development, and to provide additional policy support for developers, landlords, tenants and consumers to jointly push for the faster rollout of charging facilities.

These learnings raise some potential questions and choices on how China might mosteffectively stimulate the development of electric vehicles:

  • Could there be a benefit from creating a national, harmonized list of EVs that qualify for subsidies? Including both imported and locally-produced BEVs and PHEVs on a nationally harmonized list could help to mitigate local protectionism;
  • What is the most effective balance between traditional and non-traditional OEMs and suppliers? Introducing stronger competition to the EV supply side, for instance by issuing EV-only production licenses to non-traditional automotive OEMs and suppliers, can help stimulate innovation;
  • What is the role for balancing financial and non-financial incentives to consumers to encourage EV purchase and make EV usage more convenient?
  • How might the government collaborate with OEMs, suppliers and utility companies to develop a national standard for charging and communication protocols in order to avoid wasted and duplicate investments in non-compatible charging infrastructure and technologies?

Other choices, such as import duty exemptions or reductions for qualified EV products and the lifting of foreign ownership restrictions and JV requirements for EV production, could have a greater near-term impact on EV adoption and the development of the EV ecosystem. They would also send a clear signal of the government’s determination to promote EV development in China. However, these measures would likely present challenges for local industry players.

Policy options such as restricting new vehicle registrations to EVs in heavily polluted and congested cities would likely have only a limited impact on reducing air pollution. Such options can also trigger unintended negative consequences for the automotive industry, such as the possibility of significant write-downs in the value of their R&D investments.

There are clear and significant benefits for China in developing EVs – for its environment, its local automotive industry, and its aspiring car buyers. We hope our perspectives will provide a fact base for constructive discussions among policy makers and industry players as they seek to position the EV industry on the right path going forward.


Click Here to Download a Free PDF of This Report

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Will China Get Fat Before It Gets Rich? Mon, 20 Apr 2015 03:59:59 +0000 The rising wave of obesity around the world and its health and economic costs cannot be ignored—even in China. This is no longer a “western” problem. Today, 62 percent of the world’s obese people are in developing countries.

Global scourge

More than 2.1 billion people—nearly 30 percent of the global population—are overweight or obese today. That’s nearly two and a half times the number of adults and children who are undernourished. Obesity is responsible for about 5 percent of deaths worldwide. The global economic impact from obesity is roughly $2.0 trillion, or 2.8 percent of global GDP, roughly equivalent to the global impact from smoking or armed violence, war, and terrorism.

A problem for China?

The fact of the matter is that rapid industrialization and urbanization is boosting incomes (Exhibit 1). Higher incomes mean more food and often a more sedentary lifestyle. The risk of obesity rises.

In China, the prevalence of obesity in cities is three to four times the rate in rural areas, reflecting higher incomes in urban areas and therefore higher levels of nutrition and food consumption and often less active labor. The prevalence of obese and overweight people rose at 1.2 percent a year in Chinese adult males between 1985 and 2004 and 1 percent a year in adult females.[1] Today, the top social cost to China is air pollution, the second is smoking, and obesity ranks only ninth. That ranking could rise very quickly.

Famine and feast

There is worrying evidence that obesity can entrench itself even more quickly in countries that have experienced food scarcity in the recent past. Take the Micronesian island of Nauru, which, until the mid-20th century, experienced repeated food shortages and starvation. Once food poverty was a thing of the past, the prevalence of obesity and type 2 diabetes soared to among the highest worldwide. In 2010, 94 percent of men and 93 percent of women were overweight, and approximately 71 percent of the population was obese.[2]

What needs to be done?

Without action, almost half of adults in the world will be overweight or obese by 2030. MGI’s recent economic analysis of obesity looked at 74 interventions that are being discussed or piloted somewhere in the world (including restrictions on advertising of high-calorie food and drink, calorie and nutritional labeling, and public-health campaigns); we had sufficient information to compare 44 of these internationally. The conclusion was that each single intervention is likely to have only a small impact on its own. Only a systemic, sustained portfolio of anti-obesity initiatives will work—implemented on a large scale. Everyone needs to play their part from government to retailers, consumer-goods companies, restaurants, employers, media organizations, educators, health-care providers, and individuals.

Individual responsibility for health and fitness is vital, but experience shows it is insufficient on its own. People need help and that means changes to the environment in which they are making choices. Such changes include changing marketing practices, and restructuring cities to make it easier for people to exercise.

Change is cost-effective

MGI’s initial analysis of obesity in the United Kingdom found that almost all of the 44 interventions are cost-effective. So it is well worth China experimenting with solutions and trying them out—before obesity takes hold and becomes an expensive problem.


[1] Barry M. Popkin, “Will China’s nutrition transition overwhelm its health care system and slow economic growth?” Health Affairs, volume 27, number 4, 2008.

[2] Nauru country health information profile 2011, statistical annex, World Health Organization.

* * *

I’m a Director in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here.

Read my latest book, The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories

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Ghost Towns or Zombie Cities? Mon, 20 Apr 2015 03:27:58 +0000 The endless articles about Chinese overbuilding leading to ghost cities, I find way overblown.  Almost all of the articles refer to the same one or two locations and fail to create a coherent picture of China overall out of the narrow specific examples.

In fact, if we are sticking with the dramatic titling, I think they are missing the point.  There is a much greater chance of the emergence of zombie towns and cities in China than of more ghost cities.

What is a “zombie town”? It is a town where 50, 60, 70% of economic output and tax derives from one industry.  And that industry is now entering decline.  It could be coal mining, steel production, textile production.  The skill base in the town is all focused on this industry, the tax base pretty much all comes from this industry or from property sold on the back of incomes generated in this industry.

The talented and moderately wealthy may be able to leave and find work in other cities, despite not having a residential permit to be based there.  This is one area in which Shanghai continues to grow so robustly as it sucks in talent from cities that offer fewer opportunities.

Western economies have seen many single industry cities decline over time, often also in mining and heavy industries.  We have all seen how hard it is to turn such declines around.  One of the few examples I can think of in China is Dongguan, which has shifted from the lowest-end electronic assembly to becoming a dynamic center for China’s robotics industry (but that was more of an evolution than a reinvention).

While intellectually government officials are aware of the reinvention challenge, I believe not enough is being done,.  Local government has very limited options. They are likely already heavily indebted and they find their finances even more strained as the property cycle ends with no developers willing to buy land from them anymore (they may even own the leading local property developer).

It will take extensive central government support to repurpose an entire city’s economy.

Expect to hear more about zombie cities and less about ghost towns in the future.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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The Business of Soccer in China Tue, 07 Apr 2015 03:20:35 +0000 Returning to one of my long term themes in China – the development of domestic soccer.

Earlier this month, soccer returned to the priority list of China’s leaders. Xi Jinping, Li Keqiang and friends held a meeting to discuss how to improve the still dismal state of Chinese soccer. Success in soccer is linked to the realization of the Chinese dream. Presumably, this means that lots of money will be thrown at the problem.

It will be great to have more qualified coaches, more pitches and more grass roots participation, but will it achieve the desired outcomes? Not without broader changes and, as with so many initiatives to improve an industry in China, greater foreign participation.

We need to view soccer as an industry, an industry trying to attract discretionary spending from Chinese consumers directly through tickets and merchandise, and indirectly by viewing TV channels that pay market rates to air games and buying products/services from sponsors of the teams.

We are a long way from having all the enablers necessary to justify this. Just contrast what people will pay to watch a movie in China to what they will pay to watch a soccer match. A Chinese movie fan will readily pay US$20 to watch the latest movie on an IMAX screen; but season tickets for a Chinese soccer team can still cost less than US$100.

What do we need?

  • Fans will only pay up if they believe they are watching genuine competition between teams. Anti-corruption initiatives need to apply consistently to soccer as much as any other industry.
  • Teams need to be allowed to retain more of the revenue they generate. Teams should own and operate their own stadiums. They need to be able generate and then choose how they spend and invest their cash – on players, facilities and on fans.
  • A market price for TV rights needs to be established and paid. It is only a generation in Europe since soccer rights were almost free. Value can rise quickly if a marketplace for the rights is established.
  • Leading international soccer teams need to be encouraged to buy into Chinese teams and to integrate their development programs. Transfer of best practice, rotation of talent for international experience, capability and skill-building programs – all the usual benefits of foreign engagement.
  • Oh and yes – we need to find the Chinese Messi and Ronaldo – to become the visible figure heads of the emergence of a world class soccer industry in China.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Where Should China’s Middle Class Invest? Wed, 01 Apr 2015 06:26:24 +0000 This is becoming a burning question in many households across China. I ask many financial industry experts, but get distressingly few answers.

It doesn’t seem likely that buying property as an investment will earn positive returns in the next few years in many cities. There is already an overhang not just of new build supply, but also of properties bought as investments. Right or wrong, the mindset for many is that they have enough, if not too much domestic property.

So what else is on offer?

For those of a risk-seeking mindset, they could invest in the main stock markets even after the 80% run up since July last year.

And then there is the new Third Board exchange, with its couple of thousand private companies. Not sure there is much in the way of reliable investor research available for the brave individuals who invest in these companies.

Taking advantage of the Shanghai-Hong Kong through train? A similar education process is needed to convince mainland investors to use the through train to invest in Hong Kong listed stocks. And given how much of the market in Hong Kong is made up of mainland companies and mainland dependent companies, in the end they may not choose to do so.

High yield trust products? The government is trying again to convince investors that they won’t stand behind all these products. Do you believe them? If not, then this still offers some of the best returns you can get.

Corporate or the new local government bonds? Expectations are for interest rates to decline, and so offer some capital appreciation for bond holders. Advice from professional investment advisors is often to focus on these.

International property? Chinese investors continue to invest at scale in premier real estate hubs around the world, whether for appreciation in value or diversification, I’m not sure.

And what about under the mattress? If we are heading into a period of consumer deflation in China (we have had factory price deflation for 3 years already) then I suspect a lot more money may well end up there.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

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Meeting China’s Affordable Housing Challenge Mon, 16 Mar 2015 08:37:13 +0000 Like everything else in China, the affordable housing problem is bigger than in most other places. In our recent research, A blueprint for addressing the global affordable housing challenge, we looked at the affordable housing gap (the number of households that live in substandard dwellings and/or pay a disproportionate share of income for housing) in cities around the world. We estimate that 200 million urban households in Asia, Africa, and Latin America live in substandard housing; 62 million of those are in China.

China has unique challenges

China has unique challenges and opportunities in housing. Because of rapid urbanization, demand for housing has outstripped supply, despite a building boom that created a massive construction sector that now accounts for about 15 percent of GDP. China’s cities may not have the sprawling squatter communities that are seen in the large cities of other developing economies, but it has tens of millions of housing units that either do not meet basic standards for essential amenities (plumbing, electricity), cost or space (even using a localized standard of 50 square meters for a four-member household compared with 90 square meters in the United States).

Across China, 60 percent of households in cities of more than 7 million cannot afford basic housing at market rates. In total, China’s affordable housing gap (the difference between market-rate housing costs and 30 percent of income for households in lower-income groups) equates to about $180 billion per year, or about 2 percent of GDP. That’s about 28 percent of the global gap of $650 billion, based on data for 2400 cities.

Not surprisingly, the housing affordability gap is concentrated in China’s largest cities, where residential property prices rose by as much as 86 percent from 2008 to 2014 (Exhibit). Today, about 14 million low-income households in China are financially overstretched by rent or mortgage payments exceeding 30 percent of income. And, based on current trends in urbanization and income growth, the number of low-income households in Chinese cities could rise by 56 million by 2025. Shanghai could add 2.3 million low-income households and Beijing could add 2.5 million. Four of the five cities in the world with the fastest-growing population of low-income residents are likely to be in China.

Four opportunities to close the gap

How can China halt the expansion of the affordable housing gap and begin to move millions of urban households into decent housing that they can afford? In our research, we find that there are four opportunities globally to improve the supply of affordable housing: securing land for development at the right price and in the right place for low-income households to integrate into the economy; improving productivity of construction firms; raising the efficiency of building operations; and expanding access to housing finance.

China is making progress in most of these areas, but there are still gaps in both policy and implementation. For example, to reduce land hoarding and speculation in cities, China imposes penalties on owners who leave tracts undeveloped. The government also releases public land for development every year, granting 70-year land leases. And local governments are starting to pursue innovative approaches to incentivize private developers to include affordable housing in their projects. In Nanjing a pilot land auction was held last December in which developers competed to maximize affordable housing once a target price was reached.

However, there are still shortcomings in China’s land policies. For example, industry continues to squeeze out other uses for land. Limits on building heights reduce the opportunity for densification. And while government’s own programs for building affordable housing are significant—from 2012 through 2014, government built an estimated 13.4 million units—local implementation of the new policy varies. In some places, for example, the migrant workers who are most in need are still excluded from publicly-financed housing.

Around the world, we find that advanced design and construction methods, including use of industrial approaches (such as greater use of pre-fabricated components), can cut construction costs by as much as 30 percent, helping make new construction more affordable. Chinese companies, such as the Broad Group, are pioneering new low-cost construction processes, but overall China’s construction industry faces the same productivity challenges that are seen around the world, including rising wage rates: average monthly wages in Chinese construction rose by 76 percent from 2008 to 2012.

While China spends about half as much as EU-27 nations on operation and maintenance as a share of housing costs, it has taken steps to improve efficiency. From 2006 to 2011, China funded energy-efficient retrofits (new heating systems, insulated windows, etc.) for 182 million square meters of housing in northern provinces. And in 2004, China regulated the property management industry and introduced a certification scheme for provider firms to encourage professionalism and cost-effective service.

Affordable housing can be an economic opportunity for China. We estimate that $94 billion to $104 billion per year would need to be spent on construction to close China’s affordable housing gap by 2025. Even a small share of that could help to engineer a soft landing for the construction industry as the building boom slows. The real estate market has softened considerably, with the value of transactions dropping by 14 percent from April 2013 to August 2014—and by 31 percent in Shenzhen. Inventories of unsold housing have risen to as much as 77 weeks’ worth in Tier 3 cities. Financing affordable housing would also be an opportunity for China’s banking industry. We estimate that it would take $300 billion to $400 billion a year in mortgage underwriting to close the affordable housing gap and perhaps a fourth of that would be needed in China.

Equally important as adopting new methods and pursuing the affordable-housing opportunity is ensuring the money that is spent is used effectively and efficiently. This requires comprehensive planning and targeted policies to encourage construction and rehabilitation of affordable housing. It also requires a clear understanding of how housing fits into an overall plan to integrate low-income Chinese into the modern economy and begin to raise their incomes. Hong Kong provides a model for successful transit-oriented development that includes affordable housing. Likewise Singapore excels in construction management with its CONQUAS construction quality assessment system. By adopting market mechanisms and best global practices, China can make affordable housing a reality for all.

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Photo credit: Chris/Flickr 

I’m a Director in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here.

Read my latest book, The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories

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It’s Time To Reset China’s Economic Relations With Africa Mon, 09 Mar 2015 09:19:21 +0000 A week in South Africa and I am even more convinced that now is the time for China’s best private sector companies to take the lead, resetting the China-Africa relationship and growing new profitable businesses as they do. Whether under the umbrella of China’s “One Belt, One Road” go international initiative, or simply off their own desire for growth, now is the time.

There will still be opportunities for China’s state-owned infrastructure builders as Africa extends it road, rail, power and telecom systems in the years ahead, but that is only part of the story.

The China traders who have made a living selling marginal quality “Made in China” goods will find life much tougher. Their golden period is over. As China’s ecommerce giants come to Africa, with local language websites and partnerships with local banks for payment, they will gradually displace the traders with higher quality, more reliable products. Local delivery logistics can be a challenge, but will be addressed.

The many private Chinese companies that equip factories, offices, hospitals, schools and homes should be targeting the growing demand that comes as Africa’s middle class expands, from Kenya to Nigeria to South Africa itself. China’s quality but value-priced medical testing equipment, consumer electronics, solar solutions, air conditioners, and more will see extremely rapid growth.

Now is the time to establish brands in the minds of first time buyers. Not only should these companies be looking to sell into Africa, they should also be establishing on the ground service operations and factories. Bringing quality manufacturing and service jobs into key African markets will be a catalyst for a changed relationship.

Agricultural exports to China are still a neglected opportunity. If Australia exports more than US$4 billion of agricultural products to China and has set agriculture as the cornerstone of the new free trade agreement between the countries, why should exports from South Africa be under $200 million? Chinese capital is investing in cold chain and related logistics around the world in addition to production. There must be partnership opportunities to be developed in this.

Chinese private capital can move productively into other sectors also. Chinese property developers are looking for international opportunities as their domestic market cools. Companies such as Soho, Vanke and Fortune Land have developed strong reputations for the quality of their business, residential and industrial park developments. There must be partnership opportunities to bring these capabilities (and their capital) to African cities and industrial zones.

Finally, Africa needs to embrace the Chinese tourist much more. It remains very hard for Chinese travellers to get a visa to vacation in many African countries, the marketing of the attractiveness of African vacations in China is lacking, and the number of direct flights is insufficient. Unsurprisingly, the numbers of visitors are in the low hundreds of thousands, with modest growth when they have the potential to rapidly scale into the millions.

A door is open. Let’s hope that the opportunity is taken.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image: GovernmentZA / Flickr

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Japan Is Back On The Map For Chinese Spenders Thu, 05 Mar 2015 08:12:15 +0000 Throughout all the geopolitical ups and downs, Chinese investors and tourists have been opening their checkbooks wider and wider in Japan.

Japanese property is seen as a very secure investment and with CIC, China’s sovereign wealth fund, putting more than $1 billion into Meguro Gajoen, a landmark development, many more will follow. Fosun has also made sizeable investments in Japanese property.

And it’s not just big companies investing in Japanese real estate: many individual Chinese are also doing so. Prices are comparable to Beijing and Shanghai – maybe even less after the yen’s depreciation – and rental yields are much higher than in Hong Kong. Relatively cheap, easy to get to, low pollution, appealing food, and great shopping – what is not to like for wealthy Chinese looking for secure overseas investments?

Chinese tourists are seeking much the same. Last year, 2.5 million Chinese tourists visited Japan, an increase of more than 80%. Hotels and service industries have adapted well to the influx, and 2015 will likely see another very large increase in numbers.

Chinese students have maintained a low profile in Japan, but are there in very large numbers. Something like 80,000 have studied there in recent years, building language and business skills that put them at the front of the line in being hired in Japan or China.

Even Chinese language schools are becoming part of this trend. Beijing Language and Culture University is setting up a campus in Tokyo, with courses due to start in April. Japanese students are reluctant to go to Beijing because of the pollution, and by having a campus in Tokyo, the University expands its potential market massively.

Increased connectivity and investment from China into Japan has to be a good thing. Let’s hope for more in 2015.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image: halfrain / Flickr

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Putting China’s Debt Into Perspective Tue, 03 Mar 2015 03:38:37 +0000 China’s total debt quadrupled between 2007 and 2014, which was about one-third of the $57 trillion in debt added globally during that period. Can this possibly be safe?

To answer this question, the McKinsey Global Institute devotes an entire chapter to China’s debt in the new report Debt and (not much) deleveraging. The key issue is whether China can slow the growth of debt without unduly crimping GDP growth, which already has fallen to the lowest rate in nearly a quarter century (see my Jan. 27 post here).

Our conclusion is that China’s debt situation warrants careful monitoring. In broad terms, China’s debt has moved from a developing economy level (158 percent of GDP in 2007) to advanced-economy status (282 percent in 2014, a bit higher than the United States and Germany). Not only does the speed of this debt buildup raise alarms, so does its composition. Almost half of new debt is flowing into the property sector and related industries, and around 30 percent of debt is provided by a shadow banking industry, whose lending standards and exposures are not easily discerned.

That’s not ideal but it may be manageable. Household and government debt are both low, even by the standards of developing economies, while debt of non-financial corporations is high. China has the financial wherewithal to weather a debt-induced crisis. And China’s government is taking steps to reduce the risk of crisis.

The report focuses on three areas of potential risk: a concentration of debt in the property sector; reliance on shadow banking; and the large debts of local governments.

  • Real estate. Nearly half the new debt in China since 2007 has gone to real estate development or related industries such as steel and cement. Now, the property sector is cooling off. The value of residential real estate transactions in 40 Chinese cities, after rising 26 percent per year for 10 years, fell by 14 percent from April 2013 to August 2014—and by more than 30 percent in Beijing and Shenzhen. While Chinese households are not, in general, over-extended with mortgage debt, a deep and prolonged housing slump could have huge impact on the construction sector, which accounts for 15 percent of GDP and includes tens of thousands of small players who would not be able to meet their debt obligations. The steel and cement industries, which already have excess capacity, would also suffer.
  • Shadow banking. The so-called shadow banking system—consisting of unregulated non-bank lenders—accounts for 30 percent of all new credit since 2007. Shadow banks, such as trust companies, raise money from wealthy investors seeking high returns and lend to players in real estate as well as to companies that cannot qualify for bank loans. Not only is shadow banking concentrated in real estate, the quality of its underwriting is not known—nor is the total exposure of shadow banks. One trust company missed its payment to investors because a single borrower—a steel company—missed a payment.
  • Local governments. As a result of China’s rapid urbanization and limitations on how local governments can raise revenue, the debt of local government in China has grown to more than $2.8 trillion. About $1.7 trillion of this is owed by local government financing vehicles, off-balance sheet entities that are used to fund investments in infrastructure, social housing, and other types of construction. The ability of some local governments to pay back their debts is in question: a 2014 audit found that more than 20 percent of recent loans were used to pay older debts and that almost 40 percent of debt servicing and repayments were funded by land sales.

Chinese policy makers are certainly aware of the risks associated with unsustainable debt and are taking steps to reduce them. The government has imposed punitive interest rates for mortgages on second homes, and banned purchases of third homes to cool off the real estate market . (However, facing slower growth, the central bank cut interest rates last fall—illustrating the tension between growth and safety). In shadow banking, the government has imposed stricter product marketing rules on trust companies. To reduce reliance on land sales and LGFVs, the government has allowed cities to issue municipal bonds (on a limited basis). The state also has changed the incentives for local governments, emphasizing sustainable economic development, social harmony, and environmental protection, which takes pressure off cities to build more costly infrastructure. If these measures are sufficient—and are implemented consistently—China’s debt might remain merely a potential concern for the global economy.

Image: Jan / Flickr 

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I’m a Director in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here.

Read my latest book, The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories

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Merging State Owned Enterprises Achieves What? Tue, 03 Mar 2015 01:21:30 +0000 Last year plans were announced to merge China’s two leading providers of high speed rail equipment – CNR and CSR. Both are state-owned enterprises (SOEs). Both are already world-scale given the volumes they have been producing for China’s domestic needs.

Demand looked to be plateauing in China. So was this announcement a far-sighted move to enable capacity to be rationalized? Very unlikely – allowing SOEs to lay people off is still a step too far in many cases.

Official statements talked about the opportunity to create a global champion of the scale to compete against Siemens and GE. Yet both had already achieved this scale.

It’s not much more likely that the announcement was the result of the embarrassing (to the Chinese government) of the two companies bidding aggressively against each other for international contracts from Turkey to Argentina to Malaysia, even when other bidders had dropped out. And domestically, having only one major supplier reduces the potential for bribe giving, always important in the context of the anticorruption campaign.

Despite the relatively weak logic for mergers between giant SOEs, it seems more will be coming. In the nuclear power plant construction industry, CNNC and China General Nuclear (CGN) are on the same path as CNR and CSR. Rumors of CNPC and Sinpoec being merged to create an oil giant twice the size of Exxon are becoming loud, recreating the “industry” structure of 20 years ago.

What could be next? Telecom? Could the government argue that capital expenditure would be more efficient with only one operator? That there would be fewer local price wars to sign up customers? Maybe even that there would be fewer disruptions as streets are dug up to lay cables?

And then maybe even banks? Even though China’s “Big 4″ banks are already some of the largest in the world by assets, surely they could be larger still? And is it not possible to argue that China has too many banks.

What we end up with is arguments for inertia, for the status quo, for less competition and less efficiency, which in the end the consumer will pay for. Too many SOEs are already in “do as little as possible” mode as a result of the anti-corruption program. Having them embark on a multi-year merger program will focus them internally, with extensive organizational infighting on who gets what role and the like.

Performance improvement will slip way down the agenda. Yet for a government official tasked with “doing something”, setting a merger in motion might seem like a low risk way of doing a lot. And by the time it is all settled down, any official will likely be long gone to their next role.

Finally, almost all of these companies are listed and have minority shareholders. Will directors be standing up for their interests in this process? Surely the intent of bringing in more independent directors as announced in the 2012 plans for SOE governance is exactly for this situation. Let’s see.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image: Spreng Ben / Flickr

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Northern China’s Water Deficit Tue, 03 Mar 2015 01:17:35 +0000 There has been much doom and gloom recently in the media about water supplies in Brazil. Sao Paolo, Brazil’s economic hub, is running out of water according to recent government announcements. Reservoirs have run dry, ground water is receding, pipes leak scarce water away, and residents and businesses face de facto rationing. Social order could be stressed.

This made me wonder – how close are we to this happening in northern China, especially in and around Beijing? And how well prepared is government to mitigate the situation if it did?

It’s more than a decade since water intensive industries were banned from setting up operations around Beijing. And Beijing uses 20% less water today than in 1980 despite significant population growth. Yet even with that reduction, we saw unauthorized drilling of private wells not just in the countryside but in central Beijing last year by individuals desperate for supply.

We can’t blame industry as they use less than 20% of water consumed, with the heaviest consumers shut down over the last decade. Industrial water consumption is down 40%. Farmers have switched from rice to corn to use less water. Today, 30% less farmland is irrigated.

Certainly central government has invested heavily to avoid such scarcity, with the South-North water diversion project, costing more than $60 billion, coming online now to supply a billion cubic meters to Beijing annually. Almost 100% of waste water is recycled in Beijing through new processing facilities.

Water prices have been pushed up significantly. And still the water table around Beijing continues to fall – more than 10 meters since 2000. We are not at an equilibrium point yet. Some estimates put consumption still more than 50% above sustainable supply.

We have always kept a “back up” supply of 50-60 liters of bottled water in our apartment. I don’t think we’ll be eliminating that.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Black Dragon Pool, Lijiang China, strudelt / Flickr

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Chinese Investment In Russia Picks Up Steam Fri, 13 Feb 2015 03:53:40 +0000 According to the Chinese Ministry of Commerce, non-financial direct investments into Russia in 2014 increased by over 250% to more than USD 8 billion.

However, a lot of the contracts were signed back in May 2014, and currently, many still remain as just intentions.

Some examples beyond oil and gas:

  • Several Russian banks acquired financing from Chinese banks: VTB received a credit line of USD 2 billion; VEB, a leasing of USD 300 million; and VnesheconomBankhas, a framework agreement for USD 2 billion.
  • RusHydro and Sanxia signed a contract for the construction of two hydroelectric power plants in Russia.
  • Eurocement signed procurement contracts worth nearly USD 1 billion with China CAMC Engineering and other Chinese suppliers.
  • Great Wall Auto started building a plant in the Tula Region.
  • Volga Group created a JV with China Harbour Engineering (CHEC).The JV’s primary activities will be coal mining and logistics services, including the construction of a container terminal in the Far East region of Russia.
  • Huawei won a tender for the construction of optical fiber communications in the Far East region.
  • Chengdong investment acquired 6% of the Moscow Stock Exchange for USD 100 million.
  • The Russian Direct Investment Fund and China Investment Corporation jointly acquired a company that is responsible for the construction of a railway bridge over the Amur River.

2015 will see another wave of Chinese investments in Russian energy. Initiatives discussed in the media include:

  • Chinese banks funding the Yamal LNG project, which will include the construction of a liquefied natural gas plant.
  • Chinese investors entering into the Vankor oil production venture, one of the largest oil production projects in the country
  • Chinese investors entering the Udokan copper field.

Additionally, there will likely be a broadening of investments to other sectors, such as:

  • A new high speed rail line out of Moscow.
  • Entertainment projects such as theme parks in southern Russia.
  • Service infrastructure projects from airports to hotels to bring more Chinese visitors to Russia.
  • Agriculture projects in wheat, fish, pork, premium fruits and dairy, among other products
  • Technology substitution projects.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Mark Turner / Flickr

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China’s iConsumer 2015: A Growing Appetite for Change Tue, 10 Feb 2015 02:27:50 +0000 Chinese e-commerce is developing even faster than previously believed, with Chinese iConsumers embracing online commerce and major retailers rushing to offer ever more sophisticated online services.

McKinsey’s iConsumer China 2015 survey tapped into the behaviors and desires of China’s 630 million Internet users, across different city tiers and throughout rural areas (Exhibit 1). The research shows robust growth in social commerce, a trend toward transforming physical retailers into mere ‘showrooms’, and mounting consumer enthusiasm for more online-to-offline (O2O) services. Combined with a dramatic increase in online food purchasing and unexpected levels of online engagement among the rural population, these findings show Chinese digital consumers, already among the most advanced in the world, are embracing and demanding more innovative online shopping experiences at a rapidly accelerating pace.


Download the full report here

Image credit: Jason Howie/Flickr

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The Temperature Is Rising In China’s Medical Device Market Mon, 09 Feb 2015 01:22:56 +0000 The potential of China’s medical device market has led many multinational and local players to place large bets. But with lower growth, more intense competition, and government actions on pricing and compliance, it’s becoming a lot tougher.

China’s medical device market has been growing at annual rates of close to 20% for much of the past decade. Stagnant or declining growth in mature markets hasfueled enthusiasm for China and has led medical device players to place big bets there. Billions of dollars have been invested in manufacturing and R&D capabilities. Many multinationals have acquired local companies to tap into the China opportunity.

But the market is entering a new phase of development. Following the crackdown on non-compliant practices in the pharmaceutical industry, many medical device executives are investing heavily in minimizing compliance risks in their own commercial models, which often rely heavily on extensive, multi-layered distributor networks into which they historically had limited visibility.

Government guidance, suggesting hospitals should give greater consideration to local products in their purchasing decisions, has created uncertainty. And now, market growth is hovering below 15% – still fast by global standards, but a challenge for China.

How do industry leaders feel about their businesses in 2015? We talked to the general managers of 16 leading MNC medical device companies, representing about half of the MNC-generated revenues in China’s medical device sector. These executives remain positive toward the opportunity in China (they certainly don’t want to be transferred elsewhere), but at the same time, point towards areas where significant improvement will be required.

There is broad consensus that growth in the 10-15% range will continue. Market fundamentals certainly support this – demographics, the growing burden of non-communicable diseases, and improving affordability are leading to rising patient volumes and a concomitant need for medical supplies. Inpatient admissions continue to grow by more than 10%.

It’s therefore not surprising that three-quarters of the executives we surveyed expect to sustain their high levels of investment in China and continue efforts to localize their business activities. The surge in new privately-run hospitals is expected to be a new source of growth, though most growth is still expected to come from the larger class III hospitals in major cities.

Sales forces will need to change a lot – companies that make this switch best will come out ahead. In the past, a fast ramp-up of salesforce was a fairly sure way to drive growth; only one out of four executives now sees salesforce expansion as a priority.

By contrast, more than two-thirds believe that salesforces will have to become more broadly skilled to sell to a wider range of customer segments. Many see the distributor model if not dying, then at least consolidating dramatically as it has in so many other industries.

The “value segment” – the largest and most price sensitive segment-has been seen as the source of a key threat, the place local companies learned to compete and move up market. This is changing. More than half of the executives we asked now see this segment as a key source of growth.

Finally, executives express a shared concern around finding and retaining suitable talent, even in a market where millions of university graduates fail to find good jobs.

2015 will be a year of major change in the sales and marketing model used by medical equipment manufacturers in China. The industry will see new talent, new skills and new ways of working with (fewer) distributors.

Standing still means falling behind.

I’d like to acknowledge the contributions to this post by my colleague Florian Then, a Partner in McKinsey’s Healthcare Practice in China.

For a related article on this topic, please check out “How medical-device manufacturers can transform marketing and sales capabilities”

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: NEC Corporation of America / Flickr

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Deciphering Chinese Economic Statistics Mon, 02 Feb 2015 10:26:48 +0000 I was looking this week at the Chinese government’s (National Bureau of Statistics) data on income and consumption for 2014 and comparing the current data to historic figures.

At the aggregate level, in China overall, there appears to be a headline fall in savings rate (income less consumption) from 31% to 27% between 2013 and 2014. This is relevant as savings rates have risen each year since 2005, and this would break the trend.

My next step was to look at urban savings separately from rural savings. Urban incomes appear to have risen 7% in 2014, expenditures to have risen a little faster, so the savings rate fell from 33% to 31%. Nothing in that to contradict what I hear and see in the economy.

That meant rural citizens were the main source of the lower national savings rate. And indeed, the statistics report that the rural savings rate fell from 26% in 2013 to 15% in 2014 on the back of a 27% increase in consumption (versus a 12% increase in 2013). I didn’t see what would have caused this, nor do I see signs that consumer goods companies are suddenly selling a lot more in rural areas.

Was the number right before? Is the number right now? Or is there really a discontinuity in rural consumption?

We asked NBS for an explanation, which they were very willing to provide (and I give them credit for their openness). The answer we received was that the NBS expanded the coverage of their rural survey in 2014, and that the (higher) 2014 data is not comparable to prior years. Which leads to the question of which survey is more accurate – the former survey with lower incomes and higher savings? Or the 2014 survey with higher incomes and much lower savings. Or neither of them?

And why, if the survey’s coverage was expanding, was it finding wealthier rural areas that it missed before to investigate. It would perhaps be easier to understand if they were adding more remote and poorer areas.

One thing is for sure: Don’t draw any trend charts including 2014 rural income or consumption.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image: Ken Teegardin / Flickr

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China’s Malls Reboot Fri, 30 Jan 2015 02:42:44 +0000 Even government officials have worked out that something has to be done to reinvent malls (many run by government owned property developers) in their city centers and suburbs if they are to remain viable.

Not only are Chinese buying more and more online, but also when they do shop in physical stores, they want to shop in their local community, within walking distance from home. They are increasingly stepping away from the anchor hypermarkets in the malls that they have to drive to.

In Shanghai, for example, officials are celebrating the conversion of electronics-focused malls into “cultural and entertainment” centers. Doubtless we will soon see an overly supply of these. Metro City, for example, is converting part of its space into a 700-seat theater. Pacific Digital City is going further. It’s demolishing part of the current mall to build a recreation center. Other malls are not renewing leases for electronics vendors and are replacing them with restaurants. Where electronics-focused malls lead, others will follow.

Will the consumers flock to these repurposed malls in sufficient numbers? I doubt it. Will demand for eating out really grow that rapidly? Will restaurants be able to afford rents that mall owners need to charge to cover their interest payments? We will see.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Remko Tanis / Flickr

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What Should China Do About Slowing Economic Growth? Wed, 28 Jan 2015 01:24:55 +0000 China’s economy is slowing from its blistering pace of recent years. Recent data shows that GDP grew by 7.4 percent in 2014, the slowest rate for 24 years.

Premier Li Keqiang told global leaders attending the World Economic Forum in Davos that this slowdown is no cause for concern, that there would be no hard landing, and that China is now focused on ensuring an “appropriate” pace of economic expansion.

His remarks point to an important truth about China’s growth in the years ahead. It is not the precise rate of growth that is the key issue, but what drives that growth. What’s important for China is changing its growth model from one that is investment-driven to one that is productivity-led.

An aging China

China, in common with many other countries, is aging. Over the past 50 years, rapid population growth meant expanding labor pools, boosting growth. But population growth is now slowing—with major implications for growth.

China’s labor force could shrink by one-fifth over the next 50 years. On current trends, China could have one dependent aged 65 or more for every two working-age citizens. Peak employment could occur as early as 2024, concludes a new McKinsey Global Institute (MGI) report Global growth: Can productivity save the day in an aging world?

Productivity imperative

This puts the onus even more heavily on raising productivity to drive GDP growth. China has already made huge strides to improve productivity, which has increased 14-fold over the past 50 years, and been responsible for three-quarters of China’s growth over that period.

But because of dramatic demographic change, even at those rapid rates of productivity growth, over the next 50 years China could grow at a 30 percent slower rate—an average of 5.3 percent a year compared with 7.6 percent over the past half century.

That would still be a significantly faster rate than in other major economies but there is plenty of scope for China to accelerate its productivity-growth rate and do even better.

The opportunity

About 80 percent of the productivity opportunity MGI has identified in emerging economies such as China comes from catching up with best practice in operations and business approaches; the rest can come from innovation, not just in the use of technologies but through imaginative ways of managing businesses and processes.

Let’s look at four key sectors:

  1. Today, China’s huge automotive industry has 67 percent of the productivity of the average in developed economies. But if China were to move from its large number of small plants to a smaller number of large operations, productivity could rise by up to 50 percent
  2. In agriculture, there is huge scope to boost productivity through mechanization, which is still relatively low in China with nine tractors per 1,000 hectares compared with 27 in the United States and 16 in India. Taking Zhejiang Province as an example, the evidence suggests that mechanization could reduce the labor needed to cultivate rice by more than 40 percent. This of course has an implication for migration which is one reason why government policy in this area has been cautious
  3. China is transforming retail through e-commerce players like Alibaba. By 2020, online sales could be as high as $650 billion, equaling the size of today’s US, Japanese, UK, German, and French markets combined. Online retail has far higher productivity than the bricks-and-mortar variety. Currently, labor productivity in China’s online retail sector is two-thirds of the US level, a much narrower gap than the 75 to 80 percent gap in retailing overall. If China’s online retailers were to match the productivity of their counterparts in other countries, this could boost overall retail productivity by 14 percent. In physical retailing, moving to modern formats is the most powerful way to boost productivity. Here, too, China is making progress. The share of traditional grocery stores fell from 31 percent of grocery sales in 2000 to 15 percent in 2009, largely through regulation encouraging more consolidation in the sector.
  4. The productivity imperative is particularly acute in health care because spending is growing so fast. China’s spending has almost tripled in five years and is projected to reach $1 trillion by 2020. Making health care more efficient is a potent source of productivity. Today, patients spend an average of 10 days in hospital, which is expensive. But there are ways to reduce hospital stays. Japan has cut the (still lengthy) time people spend in hospital by nearly a week since 2000. It did so by moving toward less invasive surgical procedures, and using digital technology to monitor patients at home.

Slower growth can be smarter growth and China can continue its march toward prosperity. Productivity and innovation need to be front and center of this journey.

* * *

I’m a Director in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here.

Read my latest book, The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories

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China’s Auto Sector Puts On The Brakes Tue, 27 Jan 2015 08:10:38 +0000 More and more industries in China will engage in a fight for a smaller pool of profits, not just among themselves, but also upstream and downstream with their suppliers and customers. Stresses that had lain hidden in an era of rapid growth will become very visible. Industries that have had above average profitability in the past may be most challenged.

Take the automotive sector for example.

While the market for all vehicles is still expected to grow at 7% this year, this is less than half the rate of recent years. Demand for passenger cars is expected to grow at only 3%. You can be sure that the supply of vehicles will grow faster than that. The era when dealers would beg for allocation of vehicles to sell is over.

The fine print in contracts that dealers may never have considered the implications of in the past is now driving relationships. To remain profitable, dealers have to hit volume targets (as is common around the world), leading to a wave of discounting to clear inventories that have reached close to two months across the industry.

Unfortunately for dealers, social media and auto-focused sites on the Internet make it fairly easy for potential buyers to find the best deals, increasing discounting pressures.

Dealers are taking action, however. Many are talking to the media to try to drum up sympathy. More pragmatically, others are consolidating. Almost all are organizing under the umbrella of the Chinese Automotive Dealer Association, a kind of union for owners of car dealerships. And not without impact, as BMW’s recent RMB5.1 billion payment to its dealers shows. Other vehicle manufacturers are “in the headlights” now.

Industry analysts have claimed that some global automotive OEMs have made up to half their global profits in China in recent years. This appearance of having deep pockets creates an expectation that OEMs will help out less profitable parts of the industry. Domestic OEMs may be harder hit as despite being large, their profitability typically remains much lower than their international competition.

And in the medium term are a number of unavoidable challenges for the industry, especially for dealers in first and second-tier cities. Seven major Chinese cities, most recently Shenzhen, have imposed limits on annual sales of vehicles. More are likely to follow. These could reduce sales in these cities by over 30%.

Moreover, with penetration of cars per household in these major cities already hovering at 0.6–0.7, how high is it really going to go from there? Demand is shifting to fourth, fifth and even sixth-tier cities – maybe some dealers will be able to fund expansion into these newer markets, but most will not.

And on the horizon is the challenge posed by the Internet: I can’t believe that Tencent’s and’s half billion-dollar investment in BitAuto (one of China’s top two internet sites focused on the automotive industry) did not have as part of its logic that they might at some point enable vehicle manufacturers to bypass dealers entirely in selling cars to customers. After all, China’s consumers love buying online.

This year (and next) it is probably better to be a car buyer than a seller.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Marianna / Flickr

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What Is China Buying? Thu, 22 Jan 2015 08:41:58 +0000 What can we tell about the state of demand, and of the overall state of the Chinese economy, from the latest import numbers?

Looking at Q4 2014 versus Q4 2013:

  • The value of iron ore imports, used to make steel used largely in housing, cars and white goods, fell 34% to only US$18 billion! Due to a decline in prices though, this still means that volume rose 6% – so growth, albeit slow growth. A slightly more positive message than earlier in the year.
  • A similar story for oil. The value of oil imports fell 9% to US$50 billion, volumes rose 13%. I’m not able to separate how much of this went to stock piles, unfortunately.
  • And in agriculture, a mixed picture: import of nuts rose nearly 40% in value and volume as Chinese consumers went crazy for various nuts. Soybean imports fell 9% to only US$9 billion in the quarter.
  • Machine tool imports rose 15%, a good sign for future industrial output.
  • Automotive is concerning. The value of imports rose by almost a third in the first three quarters of the year, but only by 5% in the fourth quarter. This still represents US$15 billion of imports (at a value of roughly US$42,000 per vehicle). Maybe imports overshot in the first three quarters. Otherwise we see here signs of China’s larger spenders really pulling back.

Pay close attention to what China is buying in 2015. Look to what it can say about consumer confidence

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Simon Cunningham / Flickr

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China Clamps Down On Stock Investors Wed, 21 Jan 2015 05:16:49 +0000 On Friday the China Securities Regulatory Commission (CSRC) took action to limit margin trading on the Shanghai Stock Exchange. A major reason why is visible in the chart below:

As a result of the recent rapid increase in share prices, many new (and unsophisticated) investors are being attracted in – new investor accounts rose to nearly 2 million in December from only a couple of hundred thousand a month earlier in the year. There are almost 100 million individual investor accounts on the Shanghai Exchange now.

In the past, when the market index has risen fast and then adjusted, investors have demonstrated noisily to show their displeasure and to blame the government for allowing it to happen.

What we see now are preemptive actions to try to prevent a reoccurrence in 2015.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Ken Teegardin / Flickr

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This Is What Government Efficiency Looks Like Wed, 21 Jan 2015 00:56:42 +0000 Having been frustrated by so many occasions when governments should have been able to perform a task more efficiently, more quickly or correctly the first time, I feel I have to highlight a recent experience that way exceeded my expectations.

I was in London for a day of meetings earlier this month. I needed to perform my annual task of renewing my passport as pages in the current passport were close to full.

I made a 15 minute appointment online for 2:15 in the afternoon. I filled in the form, which seems to get simpler each year, in about 10 minutes. I arrived early for the appointment and was seen early. I was able to collect the new passport at 6 pm the same day.

And the cost of doing this – at about US$210 – is less than the cost of renewing the passport in the past in Hong Kong or Shanghai.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Chris Fleming / Flickr

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The Growing Squeeze on Autos in China Tue, 20 Jan 2015 08:14:44 +0000 Shenzhen has become the 7th major city in China (after Beijing, Shanghai, Guangzhou, Tianjin, Hangzhou and Guiyang) to impose limits on new car purchases. The trend is clear and is likely to come to more cities in the months ahead.

Shenzhen imposed a hard cap of 100,000 new license plates annually, a 180 degree turn around from a year ago when the Mayor committed to rely on market forces to improve traffic conditions. Additionally, the city banned all vehicles without local license plates from central Shenzhen during rush hour. (I wonder if this will impact the many dual license plate cars that drive from Hong Kong into Shenzhen every morning.)

100,000 new license plates compares to sales of over 500,000 vehicles in Shenzhen in 2014, about half of which were new sales and half were replacement. Shenzhen’s total vehicle stock is now just over three million (but with only one million official parking spaces).

Replacement sales should be relatively unaffected, as existing owners will be able to take their current license plate to a new vehicle. However, their current car will be worth less as potential buyers would have to buy a license plate first. Prospective buyers probably won’t bother.

The secondhand car market is likely to be severely impacted as it will be close to impossible to obtain a license plate, as plates will be issued half by auction (favoring wealthier buyers) and half by lottery (discouraging anyone from exploring a purchase until they have won a license). And 20% of licenses will be reserved for electric vehicles, further reducing the number of potential licenses open for second hand buyers. The market for moving secondhand cars out of Shenzhen into neighboring cities that have not imposed license restrictions will grow.

In the new car market in Shenzhen, first time entry level buyers will be disadvantaged. Scarcity of licenses will shift the market towards premium vehicles, whose owners can afford to pay for a license in the auction or the grey market. But eventually the premium market may also find itself squeezed by the additional costs imposed on car purchase.

Purchases of new cars in cities still without license restrictions may see a one-time boost in 2015 as buyers rush to buy in fear of imminent restrictions. Indeed, some entrepreneurs may seek to stockpile license plates in these cities in anticipation of something that costs very little today becoming overnight worth many thousands of dollars. Inland provinces are already the faster growing markets for new cars in China.

Perhaps you could argue that these restrictions might be more PR than substance. In many of the cities with restrictions the ratio of car ownership to households already exceeds 0.7. It’s not likely to go much higher given the cost of parking and the length of the drive to work.

If local governments invested more in their public transport it would be one of the most productive and sustainable actions they could take. Beijing, for example, has added over 230 miles of new subways in the last 7 years, as illustrated in this graphic.

Imagine what the traffic congestion in Beijing would be without this.

Read more of my views on my blog, Gordon’s View. And please follow me on Twitter.

Image credit: Chris / Flickr

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Will 2015 Be A Year Of Safer Food In China? Fri, 16 Jan 2015 03:45:27 +0000 2014 ended with yet another unfortunate case of a food safety lapse in China as a fast-food chain announced that it is investigating Chinese media claims of staff manipulating the expiry date on various foodstuffs.

In many ways not a surprise, given the frequency with which such events have occurred over the year. Food service in China remains an industry with high turnover, with many relatively new and unskilled employees, and with a high degree of delegation to local restaurant managers.

Creating a culture that rejects taking short cuts and that puts safety first is a tough and in many ways never-ending task. Stores are benchmarked and ranked against each other on profit and revenue, and often profits are low.

It is unsurprising that the wrong choices can be made at the local level. Even as increasingly large-scale and professional suppliers are providing fully safe food to restaurants, effective control in the store remains the ultimate challenge.

I am more confident of progress in packaged foods sold through supermarkets or even direct to consumers, certainly in first and second tier cities. As larger companies, both Chinese and non-Chinese, establish a safety element in their brands, they need to push upstream themselves, either directly owning suppliers or at least managing all the way back to the farm.

The farms themselves are consolidating at an incredible pace. In many sectors, the era of the family plot of land as farm is ending. Large customers won’t buy from them, and as it has become increasingly simple to sell land use rights, many farmers choose that option as the next generation has already moved to the city for good.

I am hopeful, but not certain, that in 2015, as these trends continue, that we will get more comfortable with the quality of what is sold by national food brands in national retail chains. I wish I could be more confident about restaurants, individual or chain – but the challenges to control behavior in individual outlets remains enormously high. And remember it only takes one failure in one store to taint an entire chain’s reputation.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

Image credit: Eddie F / Flickr

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China Has Four Times As Many Trademarks In Force As Any Other Country Wed, 14 Jan 2015 15:31:45 +0000 According to a recent report by the World Intellectual Property Organization (WIPO), China has almost four times as many trademarks in force as any other country, including the US and Japan: 7.2 million trademarks in force in China, compared with less than 2 million trademarks in any other country.

Moreover in 2013, China saw 1.8 million applications for trademark registration (mostly made by resident firms)—a 16% increase over 2012—versus 600,000 applications in the US. I don’t believe that companies would increasingly be investing their money and time in registering their trademarks if they did not believe there was value in protecting their intellectual property in this way. Good news for all businesses that this is becoming the mindset, and a reminder to all those doing business in China to register their own trademarks there as early as possible.

In agriculture, China has become one of the leading countries for registrations of new plant varieties, now second behind only the US. Even in Chinese agriculture, recognition of the value of IP is rising. In some ways, this is not surprising: as farms consolidate and industrialize, much more science is coming into their operation through better use of fertilizer, irrigation and seed.

Much more detail on all this in the annual WIPO report.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

Image: Tom Maglieri / Flickr

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This Is How Chinese Real Estate Is Going Digital Wed, 14 Jan 2015 06:54:21 +0000 The construction cranes hovering over the Beijing and Shanghai skylines have come to symbolize China’s high-flying real estate sector. But for all the staggering sums that have flooded into new urban properties, it’s easy to forget that China privatized its housing market less than two decades ago. This young market is still evolving—and like most adolescents, it is still experiencing growing pains.

Like many sectors of the Chinese economy, real estate is also in the early stages of going digital. This transformation will shape how deals get done in the future, and it will speed up development of the infrastructure, standards, and practices that are the hallmarks of a mature market.

The vast majority of US home buyers and tenants now use the Internet as their primary tool for finding properties, and a similar shift is underway in China. Websites such as use search engines to filter property listings by location, property size, and price range. Online platforms are helping developers and agents target consumers and close deals quickly, reducing their marketing and carrying costs.

Some companies have partnered with major search engines and portals to gain consumer insights. Vanke, one of China’s largest developers, began experimenting with location-based advertising last year, using the Tencent social ad platform Guangdiantong to push property ads to a targeted group of QQ (instant messaging) users in Shenzhen. Online real estate marketing is taking off, and the potential is enormous, considering that US developers now spend more than 60 percent of their advertising budgets online.

Local governments, too, are realizing the Internet’s power to match buyers and sellers quickly. They now have the ability to move land auctions online and conduct them in a more transparent way. Wuhan now gets 90 percent of its total local land auction revenue through digital transactions.

Taobao, China’s largest C2C e-tailing site, launched an auction platform for foreclosed properties in 2012. Courts register as “stores” and list seized and forfeited properties for sale, allowing buyers to bid on them within a set time frame. This approach reaches a much larger buyer base across the nation than local auctions. Among the early adopters are courts in Zhejiang province on the east coast. The conversion rate and the premium obtained through online auctions are 20 percent higher on average than those achieved through traditional methods.

Mortgage application and approval processes are moving online, which could save consumers time and money, as well as help banks become more efficient. Online real estate platforms have recognized the value of connecting users with these services and have begun to offer a selection of mortgage offers from different banks.

Developers looking for new revenue sources are introducing online property management and community service platforms that connect residents through social networks, forums, and chat groups, and manage regular administrative and maintenance work such as garbage removal and repairs. These platforms also offer value-added services such as housework, gardening, dry cleaning, and elder care.. But because this type of market links online information to a customer’s physical location, privacy protections will be crucial to whether or not this market can grow.

All these innovations are going to contribute to making the real estate sector that much more productive but the Internet may have an even greater impact by shifting actual demand, especially for commercial properties. The explosive growth of China’s e-tailing market has ratcheted up demand for state-of-the-art warehouses while squeezing retail development. Malls now attract fewer tenants, and there is downward pressure on rents. Shanghai’s K11 Art Mall and Beijing’s Parkview Green are adapting by dedicating more space for restaurants, entertainment, and even art shows at the expense of retail. Another big shift in demand is related to office buildings. As the Internet enables employees to work remotely without compromising efficiency, companies can take advantage of the trend to optimize office space and reduce associated costs.

The Chinese government has its own stake in integrating the Internet more fully into the real estate sector. It now has the ability to create a registration system that could set the stage for imposing property taxes for the first time. This would require a herculean effort to standardize paper-based transaction and title data—and it would no doubt rankle the growing urban middle class. But a national property tax could provide a reliable source of revenue to local governments. It could also prove to be a valuable tool for cooling off an overheated market.

I’m a Director in McKinsey’s Shanghai office and Director of the McKinsey Global Institute (MGI) in Asia. I also co-lead the Urban China Initiative (UCI), a thinktank devoted to transforming China’s urban future. Visit the UCI website here.

Read my latest book, The One Hour China Book: Two Peking University Professors Explain All of China Business in Six Short Stories.

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China’s Rising Internet Wave: Wired Companies Wed, 14 Jan 2015 05:39:17 +0000 Until recently, China’s Internet economy was consumer driven. The country leads the world in the number of Internet users, and Chinese enterprises deploy sophisticated e-commerce strategies. The same companies, though, have lagged behind the United States and other developed nations in using the Internet to run key aspects of their businesses (Exhibit 1).

Exhibit 1

China’s Internet has been more consumer than enterprise driven.

That’s changing. China’s companies are quickly climbing the adoption curve. Their increased digital engagement will not only give the economy a new burst of momentum but also change the nature of growth. China sorely needs a new leg of expansion because the industrial growth of recent years—driven by heavy capital expenditures in manufacturing—will be difficult to sustain. The Internet, by contrast, should foster new economic activity rooted in productivity, innovation, and higher consumption.

For global companies counting on China for continued growth, the new Internet wave will change the nature of competition: it will enable the most efficient Chinese companies to grow more quickly, shine more transparency on business and consumer markets, and create conditions for a better allocation of capital.

A new McKinsey Global Institute report looks broadly at the coming transformation.1 Our research shows that Chinese companies are investing heavily in the building blocks of the Internet economy: cloud computing, wireless communications, new digital platforms, big data analytics, and more. Across six sectors (Exhibit 2), which accounted for 25 percent of Chinese economic activity in 2013, we find that increased Internet adoption could add 60 billion to 1.2 trillion renminbi (about $10 billion to $190 billion) in GDP to individual sectors by 2025. About one-third of these gains will come from the creation of entirely new markets, the remainder from productivity gains across the value chain. When we scale up this level of growth across all sectors of the economy, we find that Internet adoption could add 4 trillion to 14 trillion renminbi to GDP by 2025. The Internet is also expected to contribute 7 to 22 percent of total GDP growth from 2013 to 2025.2

Exhibit 2

The adoption of new Internet applications may have a substantial economic impact in key sectors of China’s economy.

As the new technologies cascade through markets, less productive business models will cede ground to more innovative ones. Companies will realize broad productivity gains in operations by automating processes, streamlining product development, and digitally reinforcing their supply chains. Similar improvements will take shape in marketing and distribution as sales organizations deploy the Internet to expand their reach and enrich customer interactions. Consumers and businesses alike will benefit from lower prices and transaction costs, as well as better goods and services. And in a significant shift, a more wired world will allow China’s entrepreneurs and small and midsize businesses—often handicapped by lower productivity—to scale up rapidly at lower cost.

Five implications

More specifically, our exploration of how Chinese enterprises are integrating the Internet into their processes suggests five implications for competition and market dynamics:

1. A burst of digitally driven productivity

China’s industrial expansion will probably slow down from its levels during the past decade, and companies are struggling with excess capacity. Many are looking to the Internet for a new set of tools to engineer productivity improvements. In the automotive sector, one example is Anji Logistics, a subsidiary of SAIC Motor. Using sensors and communications capabilities—the Internet of Things—the company manages logistics for automakers and other OEMs, helping them optimize inventory levels and transport routes.

Our findings, in fact, indicate that supply-chain and operations improvements will be the most potent contributor to Internet-led value gains in autos.

China’s chemical industry, while still in the relatively early stages of Internet use, is exploring ways to employ big data on inventory levels and shipments to improve forecasting and product planning. In China’s dynamic real-estate sector, online markets operated by players such as Anjuke and SouFun are streamlining information-search and transaction processes, thus shaving commissions and bringing down prices for customers. Healthcare providers are implementing remote patient monitoring to stretch their footprints to underserved patient populations while substantially saving costs for patients with chronic disease.

2. Greater access to financing and lower risk

An underdeveloped financial infrastructure has constrained some areas of China’s economy. The growing use of Internet platforms, combined with increased data and analytics capabilities, means that China’s financial institutions can allocate their scarce resources more effectively and expand the economy’s base of borrowers and investors.

One of China’s most significant gaps is in lending to small and midsize enterprises. Data about a growing number of companies and new analytics tools are giving banks better ways to target risk, thereby lowering the incidence of nonperforming loans and increasing the confidence of lenders. Digitally mediated transactions, meanwhile, are reducing lending costs—another benefit for smaller business borrowers.

A parallel trend is unfolding in consumer lending. Digitization allows banks and other credit suppliers to monitor huge numbers of transactions and to evaluate the risks posed by borrowers more effectively while expanding loans. Regulators are authorizing pilot programs in online lending by newly formed private players. Technology companies such as Alibaba and Tencent are using access to massive amounts of data to lower lending risks and expand the horizons of consumer credit. Our research suggests that better risk management could create the greatest amount of additional value in China’s financial services.

Securities firms, insurers, and banks are building mobile and online channels to distribute new and more specialized products to a long tail of investors. Online discount brokers, for example, are using Internet platforms to lower commissions on investment products. This development has given rise to popular products such as Yu’ebao (created by Alipay), a money-market fund that lets consumers easily move excess savings to accounts bearing higher interest. Online mortgage lending is taking hold as well, expanding the base of home buyers.

3. A growing base of consumers and richer interactions

Social technologies and new digital platforms ease the way for richer interactions with customers and allow companies to meet demand from a more diverse range of buyers, often in new or hard-to-reach markets. Jiangsu Sanfangxiang and Shandong Chambroad, early movers among China’s domestic chemical manufacturers, are using e- commerce platforms to cut administrative and transaction costs and to provide a base for closer collaboration with their customers. Following the pattern in the B2C realm, China’s B2B players are using Internet technologies to expand their markets from large cities to smaller ones. Chemical manufacturers in the agricultural sector are sizing up the potential for big data to help farmers monitor crop conditions in real time, allowing these companies to customize their offerings of products to increase farm yields.

Automakers, meanwhile, are finding that popular vehicle-shopping sites, such as Autohome and BitAuto (, help them to identify and inform likely car buyers. That is proving to be an important tool for increasing conversion rates among undecided shoppers. Chinese car buyers, like those in the West, are demanding systems offering GPS, maintenance alerts, and diagnostics that not only improve the customer experience but also offer robust data to manufacturers for improving products and marketing efforts. In addition, Internet sites are sparking China’s online used-car markets, where companies like Cheyipai and Youxinpai are bridging the information gap and helping dealerships source quality used cars.

Across consumer markets, companies are using China’s established social and search sites, such as Baidu, to mine data on ever-changing tastes and customer preferences. Their ability to expand delivery through mobile channels is growing as well. In real estate, China’s big residential-property developer Vanke has experimented with location-based advertising, using Tencent’s advertising platform, Guangdiantong, to build awareness among potential buyers. Vanke has also partnered with online marketplace Taobao to offer promotional coupons to purchasers. In healthcare, advanced communication technologies permit China’s first-tier hospitals, via regional health-information networks, to extend high-quality treatment to underused lower-tier hospitals by linking patients to medical specialists.

4. Lower barriers to innovation

The Internet blazes new pathways to innovative products, services, and business models. Digitally enabled innovation will add a new dimension to the efforts of Chinese companies, large and small, to compete as they climb the learning curve.

In consumer electronics, companies are gaining familiarity with open-source processes that can transform R&D. These processes widen access to innovative designs that can differentiate products and get them to market faster. Mobile-device maker Xiaomi has built a community of fans, known as mi fen (a play on words that means rice flour and is short for Xiaomi fan), who provide feedback and recommendations for smartphone designs, consumer-friendly features, and other improvements. Computer maker Lenovo held a chuang ke3 competition where 50,000 participants contributed close to 100,000 product ideas.4 Some participants even developed their products with funds raised on crowdsourcing platforms. Volkswagen’s China operations, meanwhile, launched the People’s Car Project to develop new concepts. To shape product innovations, chemical manufacturers are starting to share information with suppliers and customers, hoping to enlist their expertise.

As Internet capabilities are integrated with a growing number of products, new business models are arising. China’s fast-moving Internet-TV market is a case in point. Because Chinese consumers are highly price sensitive, vendors often make little money from hardware. Instead, they are looking for ways to use digital platforms to create “multisided” markets where revenue streams flow from services such as media content and advertisements. LeTV, for instance, provides its Internet-TV set-top-box hardware for free but charges 490 renminbi for a 12-month subscription. This model has sparked new collaborations between China’s TV manufacturers and content providers seeking to bundle services with hardware offerings. Some companies are swiftly turning to successful new models pioneered beyond China’s borders. Following the trend in Western cities where popular smartphone apps have revolutionized taxi services, residents of China’s major urban areas now use Didi and Kuaidi to summon the nearest available cab.

5. New competition as the Internet empowers entrepreneurs and small businesses

Internet technologies lower entry barriers across sectors, giving unexpected competitive power to new players, from online insurers without field agents to mobile-service providers with capital-light models. This new competition may render the business models of some established players obsolete, weeding out companies that can’t adapt. In China, businesses with fewer than 1,000 employees contribute 70 percent of GDP.5 Yet for the most part, they lag behind bigger players in productivity. Going digital will neutralize some of the disadvantages these enterprises face, by helping them manage supply chains more effectively, cement customer loyalty, lower transaction costs, and achieve wider distribution.

One example of the trend is appliance maker Xiaogou. Originally lacking the scale or capabilities to build up a network of brick-and-mortar distributors, Xiaogou shifted to the exclusive use of online platforms for marketing and distribution. We expect that a growing number of smaller Chinese enterprises will eventually become “micromultinationals” by operating from new platforms, particularly as the number of digitally savvy Chinese entrepreneurs continues to grow.

Managing in the new environment

Since the Chinese market lies at the heart of growth strategies for many global companies, senior executives must ready them to compete on the new terrain. Four principles will help define their response.

Zero in on the customer. Given the size and rapid growth of China’s consumer market, companies have often prospered by focusing on large-scale production and mass-market channels. Looking forward, customer needs will become increasingly fragmented. To meet this challenge, companies have to widen their choice of suppliers, glean the more detailed customer insights available from better information, and ultimately produce a broader and more complex portfolio of products targeted to what consumers really want.

Consider the competitors you don’t know yet. The Internet has unleashed a new era of intense competition, and companies will need to be fast and flexible to stay ahead. Competition can emerge rapidly from unexpected corners, and as barriers between sectors become blurred, start-ups based on digital models will gain momentum. Leaders will need to commit resources to the digital transformation to maintain their position. Although the cost of these efforts will strain companies in the short term, they will open the way for long-term benefits.

Retool operations for a digital age. Agility is the key word. Across the new Chinese landscape, Internet capabilities will require much more than a focus on customer-facing operations. A new operating strategy will integrate Internet technologies into back-office functions, production processes, and supply chains, to achieve new efficiencies. CIOs and other technology specialists will need to change their mind-set about big data, adopt multichannel models, and champion operational improvements.

Drill down on your organizational capabilities. Across China, companies are facing talent shortages for highly specialized roles in big data analytics, particularly in sectors such as finance, where changes are coming fast. Meantime, labor-intensive industries will need to attract more knowledge workers as digital technologies become “wrappers” for many goods and services. Outside hiring to attract new talent will be needed, but companies must also be creative about developing their talent pipelines, exploring industry collaboration to create skills in short supply in China, and seeking out partnerships with universities.

The open-ended characteristics of Internet technologies will challenge traditional business models that keep value-chain activities in-house. The next phase of change will tax the capabilities of companies in China, and executives should be open to collaborative ecosystems involving partnerships with upstream suppliers, downstream vendors, and consumers. China’s increasingly wired landscape, in short, is changing the face of business there and challenging the strategies even of companies that have prospered through earlier waves of tumultuous growth.

About the authors

Yougang Chen is a principal in McKinsey’s Hong Kong office; Jeongmin Seong is a senior fellow of the McKinsey Global Institute, where Jonathan Woetzel is a director.

Image Credit: Amanda Mills/FSP

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Four Trends Shaping China’s Retail Banking Landscape Thu, 08 Jan 2015 07:13:48 +0000 China’s retail banking revenues have grown 30 percent a year since 2009 and could exceed RMB 2.6 trillion (over US$430 billion) by 2020, making the country the largest retail banking market in Asia. Intense competition for the Chinese retail banking consumer’s wallet has accompanied this fast growth. Meanwhile, the retail banking landscape has faced several challenges, including interest rate liberalization, major regulatory changes, and the rise of digital finance.

To better understand Chinese banking customers, McKinsey conducted in 2014 a personal financial services survey of more than 3,500 consumers across Tier 1, 2, 3, and 4 cities. (McKinsey has done similar personal financial services surveys since 1998, and most recently in 2007 and 2011.)

Highlights of our current research include:

  • Chinese consumers are still among the least loyal in Asia. For example, less than half of Chinese consumers will remain loyal to their primary bank when offered more attractive pricing terms from competitors, compared with nearly 70 percent in emerging Asia.
  • Consumer needs and behaviors are becoming increasingly similar across China. For example, penetration of several banking products now varies by less than 5 percent across tier cities.
  • The country’s “Big Four” banks are less dominant. For example, their market share is eroding across tier cities and income segments.
  • Digital banking is going mainstream. Today, more than 70 percent of Chinese consumers say they would open an account with a pure digital bank.

Implications for traditional retail banks and Internet players are far-reaching. For retail banks, a key to success in the future is moving toward more of a total relationship model. Internet players, for their part, must better understand how to integrate financial services with the Chinese consumer’s digital lifestyle.

Download the full report here

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How Do The Chinese Bank Today? Tue, 23 Dec 2014 05:07:05 +0000 China’s retail banking revenues have grown 30 percent a year since 2009 and could exceed RMB 2.6 trillion by 2020, making the country the largest retail banking market in Asia. Intense competition for the Chinese retail banking consumer has accompanied this fast growth. Traditional retail banks face several challenges including interest rate liberalization, major regulatory changes and the rise of digital finance.

What do we see?

Chinese consumers are not loyal to their banks. For example, less than half of Chinese consumers will remain loyal to their primary bank, compared with nearly 70 percent in emerging Asia. A typical Chinese consumer has accounts with 3 banks, up from 2.5 in 2011. However, the Big 4 banks are gaining almost none of these new accounts. Consumers are adding accounts at the smaller joint stock banks.

Consumer banking needs and behaviors are becoming increasingly similar across China. For example, penetration of savings products and mortgages now varies by less than 5 percent across tier 1, 2 and 3 cities. Even in third tier cities, credit card penetration is over one third, up from only 5% 3 years ago.

The “Big Four ” banks lose more share. While 73% of consumers still say a Big 4 bank is their primary bank that is down from 78% three years ago and leaves the Big 4 only holding 48% of retail deposits (down from 55% 3 years ago). This decline is consistent across tier of city and income segments. If consumers decide that their salary no longer needs to be deposited in a Big 4 bank, the share slide could accelerate.

Digital banking is mainstream. Today, more than 70 percent of Chinese consumers say they would open an account with a pure digital bank and only 40% are not using internet based banking services. 5% are exclusively using Internet companies for their financial service needs. Almost the entire population is aware of epayment options and nearly three quarters are aware of online investment options

Implications for traditional retail banks: Lower share means fewer branches, fewer employees. Digital means new skills. The government means new regulation. Follow the customer means expand internationally.

A total transformation ahead.


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What could happen in China in 2015? Mon, 22 Dec 2014 08:13:18 +0000 It seemed harder to prepare my “look ahead” this year. On reflection, I believe this is because political and economic leaders in China have clear plans and supporting policies that they are sticking to. You can debate the pace at which actions are being taken, but not really the direction in which the country is traveling. This means a number of the themes I highlighted for this year will remain relevant in 2015:

  • Improving productivity and efficiency will remain the key to maintaining profitability for many companies, given lower economic growth (overall and at a sector level) and the impact of producer price deflation on multiple sectors.
  • The impact of technology as it eliminates jobs in services and manufacturing will become even greater (but still not in government).
  • As a result, the government will keep a sharper focus on net job creation and the quality of those new positions. Companies will hire even more information technologists to keep up in the race to exploit technology better than their competitors.
  • The push to lower pollution, and now carbon emissions, will lead to even greater investment in domestic solar and wind farms, boosting the global position of Chinese producers.
  • High-speed-rail construction will continue domestically and increasingly abroad, as Chinese companies become the builder of choice for high-speed rail globally. Beyond these, there are several additional themes that will be important in 2015. I describe them below.

What else may happen in 2015?

China will be the focus of many, many boardroom discussions around the world next year. Unlike most previous years, the topic won’t be whether to double down on China—it will be whether to hold or even reduce exposure to a particular sector or the country overall. With China experiencing lower growth, greater competition, and more volatility, it won’t only be multinational companies having these conversations. Similar questions will be asked by senior executives of many of China’s private-sector leaders, who are looking to sustain their historic growth rates by pivoting to new sectors within China and especially to international markets. Most companies will ultimately decide to stick with their current China strategy, but there will be real choices and trade-offs on the table.

What will be at the center of these conversations? I believe that it will be a debate about Chinese consumers and how they will behave in a slowing economy and, ultimately, the extent to which they will be the driver of economic growth over the next few years. Let me elaborate.


Next year will likely see the lowest annual income growth in China for at least a decade, with knock-on implications across the economy. Early signs are already there. Government data show urban disposable income rose in single digits year on year in the first nine months of 2014, a hint at the big shift that is under way. The vast majority of the economy has seen double-digit wage growth for the past decade, with the minimum wage in many cities doubling in less than five years. This has created an expectation that this is simply the new normal for income growth. It is not. As a result, workers are pricing themselves out of the market: for example, International Monetary Fund research in China suggests that a 10 percent increase in the minimum wage leads to a 1 percent fall in employment.

The manufacturing sector provides a telling example. Manufacturing wages are up fourfold in dollar terms over the past decade. In recent years, private-sector enterprises have had to agree to annual wage increases three to four percentage points higher than state-owned enterprises in order to narrow the significant pay differential that had developed by 2010. The challenges for low-skill assemblers in Guangdong and Zhejiang are well documented. They are downsizing, as countries from Bangladesh to Kenya gain share. The cost of technology that substitutes for labor in factories has plummeted, displacing more and more workers. Chinese assembly lines today bear no resemblance to those of a decade ago. The best Chinese private companies are as capital intensive as an equivalent factory in the United States. Employers today are under enormous short-term pressure to reduce wage costs amid ongoing weakness in the Purchasing Managers Indexes and persistent deflation in producer prices.

Service industries will also be affected. For example, Chinese airlines use e-ticketing to substitute for desk agents at least as aggressively as any mature-market airline. Telecommunications, financial services, and retail are all being challenged by “people lite” Internet-based business models from new competitors, which have already led them to substantially reduce hiring. In 2015, they will need to quietly cut back further, whether they are in the private sector or a state-owned enterprise—it doesn’t matter. In some sectors, such as professional-services industries, entry salaries are actually falling. I believe 2015 will be seen as a tipping point for wages in China.


Job seekers next year will realize that the historical attractions of working in state-owned enterprises and government are not coming back—the job for life, opportunities for status, high pay, and other perks are gone for good. Smaller state-owned enterprises are, in many cases, anyway destined for the more commercially demanding world of private ownership. Many larger state-owned enterprises are recruiting less and encouraging departures to improve efficiency. Lower growth means fewer promotion opportunities, and the upcoming regulatory limitations on the multiple of highest and lowest compensation in state-owned enterprises will increase wage compression.

The private sector has become the driver of job creation in China, with official statistics (likely understated) showing an increase of 50 percent or more in private-sector jobs over the past five years. However, many of these jobs are relatively low skill and low paying. In 2015, the service sector’s criticality to job creation will be called out even more by the government, with expanded policies to encourage service-sector hiring and additional focus on the quality of jobs created.

In the government sector, the official salaries of teachers, doctors, and civil servants remain low, and opportunities for side arrangements are shrinking. Eventually, the government is going to have to pay its employees more—but I don’t see that happening at scale in 2015, despite the growing number of cases of teachers striking for better pay. The number of students taking the central-government entry exam fell this year despite an increase in open positions. There has to be a connection.

The substitution by technology of certain categories of service jobs that have been at the heart of the growing middle class—call centers, shop assistants, bank tellers, insurance agents—will accelerate in 2015. Even those who retain their jobs will wonder if technology will displace them next. Critically, their confidence in their personal economic future will decline.

At the city level, we will start to see signs of the “Detroit-ization” (post-auto) or “Glasgow-ization” (post-shipbuilding) of some Chinese cities. Many cities are heavily dependent on a single industry, not just mining or steel but often a specific single manufactured good—lamps, socks, or automotive wheels. While great in times of fast growth, the reverse is also true. It’s not just that real-estate construction is no longer a driver of growth in those cities. Construction, even when it overshot true demand, was always driven off the back of the success of an industry creating jobs and incomes that enabled citizens to buy housing. That success will no longer be there. And with loans to business often guaranteed by other companies in the same industry in the same city, a single default can quickly cascade into other otherwise viable companies. In 2015, we will see the first of many “city transformation” programs as cities go through a Chinese version of restructuring and workout. Hopefully, cities at risk will see what may be coming and will act early to create new economic engines.

It’s all about consumer confidence

As a result, Chinese consumers will feel less financially secure in 2015. Fewer will feel they have a job for life, most will see wages rise more slowly, many of their real-estate investments will decline in value, and lower interest rates will make other investment products look less attractive. Overall, the momentum of their wealth generation will slow dramatically after a decade of remarkable acceleration. And if they have children graduating from college in 2015, they will likely see them struggle to get a good job.

Lower consumer confidence may then translate into lower growth in discretionary spending. Fortunately for many in the middle class, they have already bought their home, car, and other core trappings of middle-class life. Many Chinese consumers could easily postpone further big-ticket-consumption items and, at the same time, cut back on daily consumption spending. Price deflation reduces the perceived opportunity cost of waiting to spend. Already there are signs of this. Recent Nielsen numbers showed only a 3 percent increase in annual purchases of fast-moving consumer goods. More specifically, food and beverage company Tingyi reported a 13 percent decline in turnover in the third quarter of 2014, while beer volume sold by brewing and beverage group SABMiller fell in its most recent reporting period. And remember: very few in the current Chinese middle class were in the middle class the last time there was an economic slowdown. They could well overreact to a small slowdown and turn it into a larger one as a result.

With fewer attractive investment options in China, the opportunity to invest in Hong Kong–listed companies through the Shanghai–Hong Kong stock-exchange connection will look more attractive in 2015. Currently, a lack of awareness about the available stocks and a high minimum investment are holding people back, and the fund flows are way below daily limits. In 2015, that will change.

Where will growth come from?

The result of all of this is that drivers of economic growth will be harder to find in 2015. Increasing consumption has accounted for more than 50 percent of GDP growth for the past couple years. Its share, for reasons laid out above, will likely be smaller next year. Infrastructure investment is directly under government control and will likely remain at current levels and contribute to growth as it did this year. However, property investment—historically, the driver of around 15 percent of GDP—will probably have another weak year. Residential supply has exceeded demand in many cities, and investor interest has diminished as prices have stagnated. While the picture is city specific, significant unsold inventory exists in many cities, and new building is only adding to it. Policy support will have some impact in growing demand, but it would take much lower real interest rates to make a meaningful difference. Could growth be driven by exports? Not since 2007 have net exports contributed more than a percentage point to China’s growth. Recovery in the United States has not led to a growth in net exports, and a big boost from demand in Europe in 2015 seems unlikely, even with lower oil prices.

Students reinvent themselves for the jobs of 2015

It will be another year of frustration for students, both those graduating and those still in school considering their prospects. A substantial proportion of new graduates will not find jobs that require a degree. Indeed, many will find what they learned and how they learned at university has done little to prepare them for the 2015 job market in China. Other than for an elite minority, starting salaries will be flat yet again, at levels less than the income level of a full-time taxi driver (student starting salaries have only increased 1 to 2 percent annually over the past five years, one of the few categories in the economy where wages have not risen). The consequences will become increasingly obvious—graduates will be unable to pay off their education debts, let alone save to buy a home or a car or to become meaningful middle-class consumers.

The way forward for most is finding employment in the private sector, services, or small and midsize enterprises, or becoming an individual entrepreneur—none of which average students have been prepared for by their education or their family. Growth in vocational schools is being boosted by many newly graduated students who realize they need to gain more work-relevant skills. Those students still in school will become more vocal in demanding change in what and how they are taught.

Individuals going global

Governments around the world will compete harder to capture a greater share of China’s international tourism and outbound-investment boom. The new US ten-year multientry visa sets a bar for other countries to follow. The United Kingdom’s guaranteed 24-hour turnaround on visas for premium business travelers sets a bar for speed, although the $1,000-plus price is eye watering. Beyond visas, many countries also offer popular investment paths to a passport or permanent residency. The majority of those using these schemes in most countries are Chinese. In the most popular countries, limited supply is allowing governments to push up the required investment dramatically. We might hear about a $10 million passport this year.

Airlines are also big beneficiaries of this growth in international travel, with a new wave of growth in direct flight connections to key global cities from second- and third-tier Chinese cities (two recent examples are Wuhan to San Francisco and Changsha to Frankfurt). While these routes have been subsidized initially by local Chinese governments, the subsidies won’t be needed for long. The big Middle Eastern airlines are also expanding beyond Beijing, Guangzhou, and Shanghai, for example, with Qatar Airways now flying into Hangzhou. Next year will see the launch of dozens more direct flights to non-Asian destinations from second- and third-tier Chinese cities.

Chinese innovation—seriously

Does China innovate? Next year, we will finally stop asking that question and focus on the global impact of the innovation that is clearly taking place. The number of Silicon Valley–based investors visiting China to learn from Internet-enabled business is now remarkable. These folks don’t waste their time on sight-seeing trips.

Beyond the Internet, hundreds of midsize companies in the Chinese industrial sector are creating their own version of the German Mittelstand, providing ever-more-serious competition to Fortune 1000 competitors. No longer focused simply on cheap, they deliver great value, listen to what customers want, and develop products in response. Only this month, on a visit to India, I noticed a tipping point. No longer were there complaints about the low quality of Chinese industrial goods; instead, there were compliments about their remarkably high quality. Biotech, pharmaceutical, consumer electronics, medical tech, drones, graphene, and telecommunications equipment are just some of the sectors where aggressive Chinese midsize companies lead the way in their field, often privately owned by a founding chairman or CEO who has a true passion to become a global leader.

Rule of law increases its impact in 2015

A comment you’ll hear less in 2015: I can do this—it’s China. Businesses will more fully recognize that anticorruption initiatives and rule of law with Chinese characteristics are long-term foundational elements of this leadership’s platform—they’re not optional, and they’re not going away. Companies will need to become clear about how recent statements—such as President Xi declaring that the objective of advancing the rule of law is conducive not only to updating state governance but also to deepening reform—apply to them.(1)

We will see the government standardize more of its approaches to decision making on business and regulatory issues, using the precedent of cases heard. For example, reviews of acquisitions should be faster, with clearer conclusions. We will also see the government leveraging technology more to monitor, audit, and impose sanctions on bad behavior, from tax avoidance to overly aggressive entertainment of government officials. Where could anticorruption investigations bite in 2015?

  • in an Internet company where a senior executive gets investigated for begging forgiveness, rather than asking permission, once too often
  • in local government, where rapid asset sales made it possible for some sales to be made to favored individuals at below-market prices
  • in companies that have yet to fully get their sales forces under control

Return of the DVD store

Shops offering pirated DVDs will make a comeback in 2015 as the rule of law extends to what can and cannot be shown online, pushing very popular international series off the Internet. US series including The Big Bang Theory and The Good Wife have already been blocked, and rules announced in September by the State Administration of Press, Publication, Radio, Film and Television require unapproved shows to be removed from websites by the new year. Perhaps only in China will the selection of available online content be more tightly controlled than the availability of physical content. Or maybe the international providers of virtual private networks will learn to accept payment from UnionPay cards, and demand for their services will skyrocket. Cinemas will likely also benefit, as good-quality online sources for newly released movies have almost entirely disappeared.


A footnote: be careful with national-level statistics from China in 2015. In times of slower growth, they are historically less reliable.


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(1) “Xi says China adheres to socialist path in rule of law,” Xinhua News Agency, Global Post, October 10, 2014,

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China’s Drug Industry Must Innovate Sun, 21 Dec 2014 05:02:07 +0000 80% of the sales of multinational pharmaceutical companies in China in 2014 were derived from mature products that are off-patent, of which over 70% were launched more than 10 years ago. These numbers do not indicate a sector with a surfeit of innovation.

Yet many are innovating in the healthcare industry in China, and more could be doing so soon.

Innovators are bringing IT into Chinese healthcare at pace and scale. These range from personal healthcare innovations such as Baidu’s Jiankangyun, to Tencent’s physician network, to Alibaba’s e-pharmacy, to EMR services from many players, including cross-cutting players like Neusoft.

The pace of change driven by innovative use of data across the healthcare chain will be faster in China than most other countries as consumers embrace the Internet from shopping to finance and now healthcare, and the government encourages experimentation that delivers patient benefits and lower costs.

In parallel, we are seeing massive private sector investments in hospitals and clinics, from local, Asian and global institutions. This is leading to new, highly visible best practices in treatment, and closer linkages between the best hospitals and the emerging health insurance industry. The impact on the much larger public hospital infrastructure will be gradual but significant.

Chinese domestic pharmacos are becoming both higher quality and more innovative. Huahai, for example, is investing tens of billions of RMB in production and research facilities, and the pipeline of new class 1 drugs at all stages, from pre-clinical and on, from Chinese pharmacos now exceeds 200, from less than 100 just four years ago.

While the quality of the innovation generated at this point is certainly subject to debate, the increase in flow cannot. And even the multinationals, despite their reliance on older drugs to grow revenues, are investing heavily in R&D facilities in China. In just the last 12 months, Sanofi committed 1,400 staff to an R&D hub in Shanghai, Amgen inaugurated its R&D Center at ShanghaiTech University, and J&J opened its Innovation Center in Shanghai.

In biopharma, the story is even more exciting, with a fourfold increase in investment in R&D over the last six years, and a doubling of international drug patent filings. These Chinese companies need a short path to market for their drugs to earn a return on their investments.

Both local companies and multinationals are finding the pathway to markets for their innovative drugs slower and more difficult to navigate than they would like. Multinationals have continued to innovate globally, but only 50% of the global top-selling drugs launched since 2008 are currently available to Chinese patients. The vast majority of new drugs launched in China since 2008 are still not on the national drug reimbursement list, including ten class 1 drugs launched by domestic companies.

This is a problem common to all players in the industry, regardless of national origin, and requires a common solution, a solution based on trust. The industry needs to present a common face to the regulators, and there needs to be increased collaboration, as you see today between Sanofi and Zai Labs, Merck Serono and BeiGene, BMS and Simcere, Pfizer and Hisun.

Some of these partnerships leverage local capabilities, some focus on co-development of multinational assets, some on the co-development of China assets. Players will partner in some spaces and compete in others. Regulators embrace these partnerships, and recognize that shortfalls in innovation are an industry level problem, that the real issue holding it back is impact on cost and the need for new capacity and capabilities. They will reward innovation, but maybe not so much the sort of innovation that we focus on here; perhaps more innovations that lead to higher manufacturing quality and the like.

All those involved in the industry recognize that a turn to innovation has to happen, otherwise the industry will increasingly look out rather than in, using Chinese talent to innovate, but bringing these innovations to patients outside China rather than close to home.


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The Hangzhou Paradox Fri, 12 Dec 2014 01:13:43 +0000 Hangzhou, home of Alibaba and many other successful Internet ventures, has created a massive wave of millionaires in 2014.

Yet of the 70 cities tracked by the National Bureau of Statistics, Hangzhou has the largest year-on-year decline in house prices at 9.1%.

Why? Is it because citizens of Hangzhou are:

  • Now so wealthy that they aren’t really interested in investing in property anymore and are putting their money elsewhere?
  • Investing in real estate in other cities such as Shanghai and Hong Kong?
  • Haven’t been able to access their paper wealth yet and a boom in house prices is just around the corner?

Or, the real estate market is so over built to swamp any wealth effect from Internet IPOs?

What do you think?

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Looking For Work In China? Check Out Smaller Companies Wed, 10 Dec 2014 01:07:49 +0000 Last weekend a couple of hundred students gathered in a standing room only room at the Saïd Business School at Oxford University to listen and debate on all things China.

A distinctive aspect of the program was that it was not just business, but also foreign policy and culture, which led to some interesting cross-cutting debate. It’s a good format and I encourage the organizers to find a larger venue for next year. Appropriately, I was confined to the business panel.

The panel had a really engaged discussion on “level playing fields”, rule of law, and the future of “national champions”. I see greater and greater transparency, compared to only a few years ago, on what regulations are – cross industry and industry specific (such as pricing in pharma) – and more consistent enforcement on local and international companies.

The students’ view of the business world seemed to lag a bit, perhaps reflecting their time out of China. One student, for example, was explicit that he had access to proprietary information from a corporation that he should not have, and asked a question referring to that information specifically. My fellow panellists, from business and government, were very robust in describing examples of how important it is to know and to follow regulations and laws in China in 2014. I hope he and other students internalized what was said.

My general remarks focused on where the students might find opportunities in business if they move to China upon graduating. As 90% of the audience were Chinese, it seemed a good bet that most would be considering this. I took a bit of a deep dive on IT services and then the food related industries. I pointed out how job creation in state-owned enterprises is now almost non-existent, and that this is not likely to change. I ended by encouraging the students to consider how they can develop entrepreneurial skills, and how they might look for opportunities with private sector SMEs.

Always enjoyable to be in Oxford, even on a wet November weekend.

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9 Ways The Chinese Government Promotes Innovation Mon, 08 Dec 2014 01:00:10 +0000 In innovation, as in most areas of the economy in China, the government plays a material role, sometimes positive and effective, sometimes not.

A few of the positives include:

  • Expanding higher education from 1 million to 7 million graduates a year over the last 15 years, deepening the available talent pool to work in R&D enormously
  • Encouraging multinationals to set up R&D centers in China in which many Chinese graduates could learn the disciplines needed to innovate and to commercialize innovations at scale
  • Not squashing the Internet. By doing relatively little, by allowing experimentation in business model, by permitting ambiguous legal structures, by not trying to regulate in advance, the government enabled the emergence of Internet champions in China
  • Allowing people to get wealthy. Successful innovation leads to large scale wealth creation. The government has embraced this when it has occurred in the private sector
    Providing access to state funded research teams. For example, many biotech and medical startups have benefited from partnerships with the Chinese Academy of Sciences and leading universities
  • Encouraging the development of the VC and growth capital sectors.Many global and local VC funds have successfully brought to Chinese entrepreneurs not only capital, but also the experience needed to grow and relevant networks
  • Creating competition between local governments. Competition between cities to attract and grow companies has always been intense. This has created the opportunity to play off cities against each other to get the best possible mix of incentives and market access

The impact of this next set of levers has been more mixed

  • Providing capital. The government has made money available in line with their 5-year plans, for indigenous innovation and more. Not always with great results, as seen in solar and semiconductors, areas where capital was perhaps spread too thinly across too many players and was insufficient by itself to create a winning set of companies
  • Imposing industry structure through requiring joint ventures. In some industries, such as high speed rail, the joint ventures between domestic and international companies clearly accelerated the development of stronger domestic companies able to create their own innovation. In other sectors, like passenger cars, the impact has been less significant

Going forward, the government may take on a bigger and more complex role of creating the environment for entirely new industries such as electric vehicles or city-wide health management solutions.

In electric vehicles, for example, the government can subsidize the development of vehicles, the selling price, the installation of charging points and more. Moreover, it is probably one of the few governments that could actually mandate the use of electric vehicles. We will see if it does.


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Foreign Investors Show How China’s Economy is Changing Fri, 28 Nov 2014 05:56:53 +0000 Foreign investment into China dropped slightly in the first 10 months of 2014, by 1% to $96 billion. That by itself is perhaps a little surprising as China certainly continues to grow, and will likely represent between a quarter and a third of global GDP growth this year.

Within the total number, a major shift is taking place. Investment in services rose 7% to $53 billion. That’s right – more than half of foreign investment into China so far this year is going into services. These companies don’t view China as the factory for the world; they view domestic demand for their services driving their growth.

Yes, you can argue that most foreign companies that were ever going to build factories in China have already done so. But those factories are here, and they are not expanding that much. Maybe gains in productivity can match growth in demand.

Net net though, I believe it is very positive for the Chinese economy to have that much foreign investment coming into many service sectors, to provide new services that will be purchased by Chinese consumers, and to stimulate domestic competition to improve (in the same way that foreign investment has stimulated Chinese manufacturers to improve over the last 20 years).

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Want More Opportunities? Pick Uncertainty Over the Safe Route Tue, 25 Nov 2014 05:50:16 +0000 I have been in China for over 20 years and with McKinsey for nearly 30. It might seem, therefore, that everything was very linear and that the only major choice I might have had was to leave China, or perhaps to leave McKinsey and stay in China. To me it has been pretty much a no-brainer to stay in China for most of that time frame.

As for doing something else in China, there certainly has not been a shortage of opportunity elsewhere. But the development of so many private Chinese companies continued to create new and varied opportunities for me to serve as a counselor to top management teams. I really didn’t believe I was going to have more impact elsewhere. And as McKinsey became more successful in China, I had the opportunity to spend time in global leadership roles at McKinsey.

But earlier there were choices. They were the choices that got me from a town in the north of England to McKinsey in China. If I had turned left rather than right in any of these four choices, I would likely never have come close to China, let alone spend 20-plus years building an institution in China.

1. Boarding School or Not

When I was 10, the construction workers in the town I was growing up went on an extended strike. I don’t really recall for how long, but it was long enough to prevent the school I was supposed to be going to from being finished. Instead, we had to go for half days to a shared school where the teachers seemed more interested in supporting the striking builders than teaching the students.

After a few months, my parents took me to visit a different school, a boarding school about 30 miles away from home. Did I have any idea whether or not it was better? No, I had no clue. But it was certainly different and on that basis, I decided yes I wanted to go. And so I did. Pretty much the rest of my academic career followed from taking advantage of the opportunities that this decision opened up.

Why did I make this choice? Looking back, I think it’s because I like to do the things I know least about.

2. Engineering or Business

Engineering always seemed a natural career path. I was successful at math and physics. There were lots of industrial companies around where I grew up and lots of people working there seemed to call themselves engineers. My grandfathers and father had studied engineering. To get some experience and to improve my cash flow at university, I sought sponsorship from an engineering company. By working there for 9 months before university (for the grand sum of GBP55 per week) I learned a lot. Most importantly, I learned that if I wanted to run something, to be a decision maker in this kind of business, it was pretty unlikely that I would get there if I became an engineer.

It took me a while to work out what other options might be possible – I was committed to completing an engineering program at that point. In the summer of my second year (on a three-year course), I visited the U.S. and showed up on half a dozen business school campuses to see what they were like. My choice on graduating was to take up a position as an entry-level engineer or to move to the U.S. and study for an MBA (something only one person I knew at that time had ever done).

Taking the option that I understood less but which was truly different – another country and a reboot of what I would study – was the one to take. I barely knew what you studied at business school, but that made it all the more interesting.

3. BCG or McKinsey

After about three months at business school, companies that I had never heard of started showing up and inviting us out for dinner. This was new to me and required me to buy new “non-engineer” suits quickly. For my summer position, I joined BCG in London. Why? They seemed a little edgier, a little more upstart, and Bruce Henderson’s thought leadership struck a chord. The summer taught me the basics of what management consultants did, and I was hooked. It seemed a path to those roles and decisions that engineers rarely got a chance to take.

But McKinsey or BCG? Their offices were a couple of hundred yards apart in London. But I had worked at one, and I had not worked at the other. This decision actually took me awhile, probably longer than all three other choices described here combined. It’s impossible to say how long I would have stayed at BCG had I gone there, but as a result of the choice, I have had the opportunity to grow at McKinsey for nearly 30 years (having had the luck to join London at a time when some of the firm’s greatest talent who went on to lead the firm globally was based there).

Why did I make the choice for McKinsey? Again, I think it was because I knew what BCG was like, and while I thought I knew what McKinsey would be like, I could not be certain.

4. London or China

The point at which I came closest to leaving McKinsey was in 1993, just after I was elected a partner. I had climbed that mountain, and I could not really see what the next one was going to be and why I would get excited by it. I actually picked up the phone when search firms called.

Then by chance, on a recruiting trip to Chicago, I met my former study group member from business school, now a partner at McKinsey in Hong Kong. He described what it was like to be in a tiny office in an enormous geography, where few people knew of consulting, let alone McKinsey. The unknown, and in this case truly unknowable, beckoned again. It took only a few weeks to decide to move to Hong Kong, and then a little while later, on to Beijing. And China has been home ever since.

This worked for me, but I’m not sure it would sell many copies if I tried to turn it into a career planning philosophy and book.

Three common themes:

1. Make a big change only rarely.

2. Pursue what you don’t know, rather than what you do.

3. Don’t agonize, trust your instincts and get on with it.

Read more of my views on my  LinkedIn Influencer blog. And please follow me on Twitter.

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Do Chinese State-Owned Enterprises Innovate? Tue, 25 Nov 2014 05:47:49 +0000 Not could they, but do they? “Could” would focus on whether they have the talent and the capital as inputs to conduct innovation. In most cases, they do have lots of great talent and a strong balance sheet.

But do they innovate? Only in a few instances, where it is the only way to keep customers. In most cases, the barriers to innovating are too high. For example:

  • A CEO’s key performance measures (KPIs) may make no mention of innovation and he has no incentive to do anything not directly in his KPIs.
  • There is an implicit requirement at most SOEs that a new business make money in its first year.
  • Consensus-based decision-making is slow and cumbersome and pulls towards the status quo.
  • Regulatory influence may seem an easier path to sustaining performance than innovating new products and services.
  • The pay off from innovation may be beyond the time frame of the CEO and Chairman.

Where innovation has taken place, it has largely been in those sectors where China’s market – power, rail, transmission, etc – has become the largest worldwide, and in which international players are having a real impact in terms of the share they are capturing. State-owned enterprises have upped their game through partnerships and other means. Now they are starting to export and compete globally against the multinationals they spent 20 years learning from in China.

There could be a lot more innovation from the talent in Chinese SOEs, but it’s not likely to happen.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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Chinese Innovation Has Gone Global Tue, 11 Nov 2014 09:33:47 +0000 More and more Chinese products are finding their way into our lives across a remarkably broad range of sectors, including many we may not realize. Yes, we know that the clothes we buy tend to have “Made in China” on the label. And if we look at the small print on the sticker of our smart phone, tablet and PC, it will most likely say “Assembled or Made in China.”

There is not a lot of innovation associated with that historically. But even in these sectors things are changing. The center of gravity for innovation in fibers and fabrics has in recent years been South Korea. Now, some of the most exciting innovation, especially for creating fibers from recycled products, is happening in China. In PCs, the global market leader is now from China. In smartphones, the buzz today comes from a Chinese company only a few years old and many global telecom operators have made a Chinese handset vendor their supplier of choice.

China’s leading industrial companies are achieving more and more successes internationally, supplying products whose country of origin we might never naturally think much about. Chinese nuclear companies are venturing into the UK. Their high speed rail train producers have a contract in Russia, and hope to land deals in Malaysia and the UK soon. Boston’s public transport system just agreed to purchase Chinese-designed, made in the US vehicles for its renewal. Huawei has been supplying network equipment to telcos in Asia, Africa and Europe for many years. And now, the servers that support the IT operations in many businesses will be made, sold and supported by a Chinese company.

China’s Internet giants are not content to remain domestically focused. Baidu has a Bahasa search engine for South East Asia and is gaining share in several ASEAN markets. Alibaba has local language sites in many markets, has made acquisitions and taken stakes in firms, such as luxury ecommerce site 1stdibs in the US, and is investing in logistics and support services from Singapore to South Korea to Italy. Tencent has invested in a portal in Thailand, a social network in Korea, and continues to gain share as a social media platform in many European markets.

Both behind the scenes and in products and services we use daily as consumers beyond China, Chinese innovators are capturing greater market share.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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Do Joint Venture Boards Do Anything In China? Thu, 06 Nov 2014 08:58:55 +0000 I sometimes get asked how to make joint venture boards in China more effective. Generally there are two answers to that question:

  1. If the board is already in place, rather than in the process of being set up, then it is probably too late to do anything much about how it operates – live with it.
  2. Why are you trying to do things through the board anyway?

The board is never the total solution for corporate governance of joint ventures, and in China, it may not be part of the solution at all. There is a whole class of joint ventures which are entirely dominated by one party and the passive partner is along for the ride. These companies tend to be almost run as if they were part of the dominating company with the board meeting as infrequently and briefly as possible to meet legal “must do’s.”

But the board is never the total solution, and generally it is largely more of a ratifier than a decision maker, even for joint ventures where both parties need each other and both make material contributions. Usually the shareholder agreements say who appoints who and how many to the board and management positions. It can simply be management from the joint venture on the board, or someone from the China or even global top team of the multinational.

There is almost never an independent director role. All directors represent one or other shareholder. The exceptions to this can probably be counted on one hand and are there to create a very specific escalation in case of deadlock to a party both partners trust. However, the actual use of the escalation mechanism is very infrequent.

Other types of formal escalation mechanism do exist. There are several examples of joint ventures between a large private sector Chinese company and a large international investor that allow deadlocked decisions to go to the controlling owner of each party.

Boards that work most effectively tend to be ones where the investors know that they need each other and that they are joined at the hip indefinitely for business, not regulatory reasons. These boards tend to have members who stay for an extended period and when they roll off it is because they have been promoted into more senior positions in their corporations. Having former board members in very senior positions at headquarters is great for the long-term relationship between partners and is a characteristic of many of the more successful arrangements.

Net net, expecting to rely on board meetings as a primary forum for dispute resolution in Chinese joint ventures is likely to lead to disappointment and frustration.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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Yes, Chinese Companies Innovate Mon, 03 Nov 2014 08:53:01 +0000 Hopefully we are getting beyond the debate on whether Chinese businesses innovate to what the impact of that innovation will be in China and globally. From biotech to the Internet to logistics, I see companies creating new business models, products and services, most of which are informed by their own development work and the needs of the market in China as they see it.

Whether it is a Chinese biotech company creating the world’s first Hepatitis E vaccine, or an innovative new drug for treating lung cancer … the list can go on. Each of these companies has assembled a team of world-class researchers from China and outside, provided them with modern, well-equipped facilities, and given them the space to research.

On the Internet, beyond the famous firms making headlines, I see companies innovating to address issues such as consumer fear of unsafe food products with, for example, QR coded products that are tracked from field to home and delivered within 48 hours.

In financial services, innovative use of data allows one-minute credit assessment for particular needs. In logistics, major companies provide benefits and discounts on services, and spares to their owner-operator drivers, for allowing in-truck monitoring of their driving practices and location.

The value-driven innovation that Chinese companies have pursued for many years continues to be a vibrant source of innovation – from Sany in construction equipment through the myriad of $100 smartphone producers to the companies that have captured a 75% market share of stents in China. This will remain a core part of the strategy of most private sector Chinese companies for years to come.

This strategy means designing and engineering to the quality, durability and functionality needs of the customer exactly, not more than they ask for. And once confident in achieving that level, gradually moving on to serving customers with greater needs, and incrementally improving the performance and cost of the product to do so. In many industrial and electrical sectors today, I see a swathe of Chinese companies starting to make this transition, and to explore serving international, not only local customers.

What is your best (and worst) example of Chinese innovation this year?

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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Let’s Eliminate The Frustrations Of Air Travel Sat, 01 Nov 2014 08:46:43 +0000 In the unconstrained world of my imagination, I would like to eliminate all the unnecessary delays, inefficiencies, inconveniences and outright incompetencies associated with air travel.

To calibrate, I fly between maybe 200 times a year, with overnight flights several times a month . I often fall asleep before take-off, and have been known not to wake up until landing. I check luggage maybe once a year. I eat on the plane maybe once a month. (I have often wondered if there shouldn’t be a discount for the no-luggage, no-food segment of travellers…)

1. Start in the air

Install world-class air traffic control systems globally — on all planes, in all airports, in all skies, so that weather-related delays are consigned to history.

2. In the airport

Firstly, departures:

  • Ensure online check-in works everywhere, even Lahore, and works in the same way. This frees up check-in counter staff for those who need them, and makes no-luggage travellers very happy.
  • Once you’ve checked I have a visa, trust that it will still be there the following week when I am making the same trip. Don’t force me to go to the check-in counter for a visa check that you know that I have.
  • One quality security check is enough — I know it may go against the “full employment act” that so many airports seem to adhere to, but check my bags once, my passport once, my boarding pass once. I don’t really care where in the journey from street curb to plane seat it happens, but once is enough. In extreme cases it can be four times in less than 100 yards.
  • Provide information boards that actually have information, and that information is accurate. Why should the information on my smartphone app be different than on the airport information board, or to what the staff at the gate are empowered to share?
  • Have as many shops as you like (I spend a lot in them), but do include a couple of good restaurant options. As the counterpoint of not eating on the plane, I do like to try to eat in the airport.
  • Make the airport Wi-Fi free, or if not, make it really simple to buy a scratch card or electronic equivalent without having to go through a credit card torture test of approvals to spend $10.


  • Have enough transit points spread around the terminals that passengers know that they can count on getting off the plane to being in the right departure area in 15 minutes.
  • This is where lounges are important. Two wishes. One: have enough showers, maybe not to meet peak demand, but at least more than one for an entire business class. Two – just because it is lunch time in your time zone doesn’t mean that all passengers want to each lunch. Make allowances for people whose head is in a different time zone.


  • Land on the runway closest to your terminal, not the one in the next state. Certain airports seem to delight in getting the plane to land as far from the terminal as possible
  • Give passengers a bottle of water as they get off the plane. Almost everyone is slightly dehydrated and somewhat grumpy as a result.
  • Size immigration to maintain a line less than 10 minutes long.
  • Put something interesting on the video screen to distract people waiting in line, not an endless loop of how many sniffer dogs are inspecting your checked luggage right now.
  • Create an app that will guide me to the driver waiting in his car to pick me up.

3. On the plane

  • Minimize the noise pollution. No in-flight announcements about the weather/temperature that we can see if we look out the window, and announcements in three languages maximum.
  • Install a set of buttons on the seat to press that turn on a do-not0disturb light, a no-meal light, etc.
  • Install Wi-Fi on all planes. I will not use it every time, but it’s great to know it’s available.
  • Standardize on one global set of rules for using electronic devices and putting luggage under the seat in front. No more having to remember this airline requires all bags in the overhead, this one does not.

All conceptually doable, but today we move in very, very small step toward my vision.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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Where Next For China’s Chemical Industry? Fri, 17 Oct 2014 15:08:51 +0000 In return for sharing some views on China’s macro trends and direction on government policies, I was able to learn a lot recently about the direction of China’s chemical industry from a group of senior executives from a range of chemical companies.

What did they have to say?

  • Asia will generate 70% of global growth in demand for chemicals between 2012 and 2020]
  • China’s demand for chemicals in 2020 will be about 70% of total Asian demand and 8x the demand from Japan.
  • Key priorities for China – Increase self sufficiency through heavy investment in technologies like coal to olefins – Develop own technology and push it to scale through captive domestic demand (pretty similar to many other industries) – Grow strong domestic champions.
  • China’s imports are mainly very basic petrochemicals to which value is added domestically.
  • Scale of domestic capacity build up in recent years has moved China from net short to net long (e.g., PET, PVC, acrylic acid).
  • Private Chinese companies are reaching global scale (e.g. Wanhua, NHU).
  • The Asian chemical industry has changed from one led by Japanese producers to one with leading players in each major market who are in the global top 20 (see below).


Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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China’s Airlines: Flying Higher Wed, 15 Oct 2014 06:15:02 +0000 China’s Big Three state-owned incumbent carriers—Air China, China Eastern Airlines, and China Southern Airlines— and their subsidiary airlines have been a bright spot in the airline industry globally, averaging until recently returns of 15 percent. Their success presents a marked contrast to the industry as a whole, which has averaged returns on capital of under 5 percent in recent years. The industry in Europe and the United States was badly shaken when large traditional carriers were caught off-guard by regulatory changes, and low-cost entrants rapidly captured large market shares. While the forecast market evolution in China does not present as stark a picture, returns have been lately falling off and a number of factors are converging that promise to change the industry landscape.

China is moving ahead with reforms in state-owned enterprises, designed to promote efficiency and profitability. Regulations on new entrant airlines and the speed of growth of private airlines are being relaxed. The effect of the reforms will tend to increase market competition. As latent demand for airline travel is building in China, the stage is set for both market expansion and disruption. With the advantage of hindsight on the experience in Europe and America, Chinese carriers are in a good position to develop effective strategies to ensure that the more competitive environment also creates value.


Travel in China is an enormous but disproportionately earthbound industry. Thirty-five billion long-distance domestic trips are taken each year on traditional (i.e., not high-speed) trains and motor coaches. Based on benchmarks for travel propensity, we estimate that the number of travelers in China could easily rise by 50 or 60 percent as market conditions relax. The McKinsey Global Institute foresees threefold growth in the number of people in China able to afford airline travel in the next ten years. The upper strata of China’s fast-growing middle class is poised to become the principal engine of consumer spending—including air-travel spending—over the next decade. Combined with China’s newly affluent class, this segment will account for 80 percent of urban consumption by 2022, up from 30 percent in 2012. Outbound international air travel has been historically constrained by relatively tight visa regulations imposed on Chinese travelers by destination countries; these are steadily being relaxed, further stimulating travel demand.

With only 4 percent of the population owning passports, China still overtook the United States and Germany as the world’s leader in international travel in 2012. In 2013 more than 97 million Chinese traveled abroad, spending $129 billion in their destination countries. In 2014 the number of outbound Chinese tourists is expected to exceed 112 million.2 Meanwhile, inland tier-three and four cities have been developing rapidly, with stronger middle-class growth than in the urban strongholds of the eastern seaboard. These growth spots are creating opportunities for new air routes. Today China lags behind Brazil and India in passenger flights serving tier-three and tier-four cities; China’s international connectivity is especially concentrated in a handful of tier-one cities. This picture is about to change dramatically. China’s current five-year plan shows 70 new airports under construction and feasibility studies for 28 more. McKinsey’s research indicates that the availability of air travel will grow all over China, but it will increase 20 percent faster in tier-three and four cities than in tier-one and two cities.


China’s Big Three carriers face significant but surmountable barriers in the coming years. Competition is increasing, putting downward pressure on the price of airline tickets. With yields per kilometer of around 9.5 U.S. cents, China’s domestic fares rival those of the US market, where travelers have more disposable income. This contrasts with carriers in adjacent markets – notably South East Asia – where new entrant low cost carriers are offering very low fares. By offering lower fares on domestic travel, the Chinese incumbents can awaken latent demand, stimulate further consumption, and reduce exposure to any new entrants. Incumbent carriers may have to shift their marketing strategy to handle the new demand. Presently, distribution is disproportionately centered on direct sales and traditional travel agencies, with little e-commerce. Branding similarly remains traditional and out of tune with a new generation of travelers. McKinsey’s research on the Chinese millennial traveler (20- and 30-year-olds) shows a more globally minded generation that is confident, independent, and looking forward to traveling. They are also Internet-savvy: 58 percent of those surveyed reported they were likely to book online.



With potential demand building in the Chinese market and greater competition expected, a scenario is developing whereby new entrants could capture much of the latent demand. China is the largest remaining air-transport market without significant penetration from new entrants, including carriers with a low-cost business model. China’s airline regulator, the Civil Aviation Administration of China (CAAC) has recently praised the efficiency of Spring Airlines, one of the few private new entrants. The CAAC has made it easier to set up a new carrier and for existing carriers to expand their fleets. A lesson from the European and American experience with new entrants is that after the market was penetrated by low-cost carriers, traditional carriers fell into losses due to market overcapacity and inflexible cost structures. The latent demand was by and large captured by new entrants. After a competitive shakeout, some of the new entrants survived, including Ryanair in Europe and JetBlue in the United States. Incumbent carriers often went through bankruptcy or tough restructurings. In China today, incumbents do not face so extreme a danger, but they can study the experience of European and American carriers and make corresponding moves to adapt profitably to the changes.



US and European carriers were unable to react fast enough to the new entrants in their markets. Their high cost bases were designed for an era when air travel was a luxury. Chinese incumbents are in a better position to act to counter the risk. Four moves will go a long way to securing a profitable future.

Grow to serve new demand. Latent demand is burgeoning and competition from low-cost entrants is looming. Incumbents can best prepare to capture
this demand by restructuring and adding needed capacity now. They should do this even if it means two or three years of lower profitability, since the prize, in serving the new airports and the new demand in tier-three and four cities, will be large. The new strategy will need to address constraints to growth, including the price sensitivity of the new travelers, the time needed to train pilots, and slot restrictions in major airports. Each airline will have to allocate existing resources efficiently but expand early to serve the new customer segments and geographies, including new airports and existing secondary hubs.

Improve efficiency. We estimate that incumbent Chinese airlines operate at a 30 percent cost disadvantage against new entrant Spring Airlines. The primary reasons are lower daily aircraft utilization and lower-density seat configurations. A typical aircraft in the fleet of a Chinese incumbent will operate for 9 or 10 hours per day, while at Spring, planes operate for 12 hours on average. The incumbents can become competitive with better scheduling for pilots, crew, and aircraft. Similarly, processes both onboard the aircraft and in airports can be streamlined to adapt to the lower fare environment.

Modernize sales and branding. Chinese incumbents can modernize their sales and branding strategies. Incumbents have higher distribution costs because they use traditional travel agency channels and need more staff than low-cost carriers. Brands need revitalizing to ensure appeal to a newer generation of traveler. Incumbents can push for 50 percent Internet distribution, for example, both to reduce costs and to attract new selfdirected customer segments. Last year, Spring Airlines exceeded 90 percent in the share of sales made through e-commerce channels; 24 percent of their individual travelers booked with mobile devices.

Drive other sources of revenue. Internationally, customers have proved to be less sensitive to the pricing of ancillary services (such as baggage, seat selection, and meals) than to the core ticket price. Mindful of the need for lower ticket prices, the Big Three carriers can explore the willingness of their customers to pay for some of these ancillaries. They can also look for other sources of revenue: cross-selling travel products such as hotels, transfers, or tours, and—in recognition of the burgeoning demand from China’s express delivery market—carrying more cargo in the belly of the aircraft.



Some carriers globally have responded to the challenge by setting up their own subsidiary low-cost carriers to compete with new entrants. The philosophy behind this approach is that low-cost carriers serve a different customer segment than do mainline carriers. We believe this is a misconception and that the strategy it supports distracts management attention and company resources from the real solution. For Chinese incumbents, this solution is to expand and improve productivity in their core airlines. The direct route, of improving the existing airline, can be difficult, but we have seen carriers succeed. LAN in Latin America recognized the risk of new entrants capturing latent market demand. The airline underwent a major restructuring and developed from a traditional full-service carrier into a more productive, leaner carrier offering lower fares. The new business approach allowed LAN to capture growing demand for air travel, stimulate new volumes from bus travelers, and cement its leadership position in the market.


China’s Big Three carriers are well positioned to understand and surmount the new market challenges. They have a lot to win in capturing China’s large and growing latent demand for air travel. It is only natural, however, that big growth should require big efforts to capture it. The authors acknowledge the contributions to the development of this article made by Peimin Suo, an analyst in the Shanghai office.


About the authors
Alex Dichter is a director in McKinsey’s London office and leads the firm’s airline practice globally, Jin Yu and Steve Saxon are principals in the Beijing office, and Mathieu Weber is a specialist in the Luxembourg office.


Download a PDF of this report: China’s Airlines – Flying Higher

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Evaluating Our Partners Tue, 14 Oct 2014 14:59:15 +0000 McKinsey is a global partnership of close to 1,500 colleagues based in more than 60 countries around the world. Without successful partners we cannot be a successful firm. One of the key ways in which we maintain our values and connectivity is that we run a single integrated global evaluation process for partners.

Let me bring this to life with my involvement in the process in the spring of this year. I am based in Shanghai and responsible for evaluating our partners in Russia, Ukraine, Poland and the Czech Republic.

Of course, we leverage technology, but the core of the process is the time I invest face to face with these partners. The first step in the process has me receiving a number of documents electronically that detail which colleagues a partner has worked with, which clients the partner has served, and a write up from the partner of his own assessment of his growth as a leader over the last year.

Leadership has multiple relevant dimensions for us – people leadership, entrepreneurial leadership, Firm building leadership, and knowledge leadership, as examples. Based on this, I will conduct interviews with as many of the colleagues a partner has worked with as it takes for me to get comfortable that I have a complete picture of their achievements. This will be a minimum of 15 but could be a lot more. I will also have a lengthy discussion with each partner I am evaluating, sometimes several, each several hours in length. As this was the first year I was evaluating these colleagues, I flew to visit them in their offices so that we could get to know each other better.

With this deep qualitative input from the interviews, I sit down to prepare a structured summary of everything that I have learned, and make a recommendation on rating, but more importantly, on what the key points of feedback should be. I do this by writing a draft of the feedback memo.

Few things are absolute in the process. One element that is, however, is any shortcoming on values. If colleagues have values concerns about a partner, it is impossible for them to be highly rated, and feedback must lead off with this topic.

Armed with my write ups, I set off to spend a week in the McKinsey Learning Center in Kitzbuhel, Austria with 50 partner colleagues that have been making the same preparations. We divide into teams of about a dozen partners from all around the world, and go through a process of challenge on each colleague being reviewed.

I summarize my findings on a specific partner to my team. I am challenged on the thoroughness of my preparation, on the rationale for my findings, and my recommendations for feedback are picked apart and put back together. Once the colleagues in the room are confident we have a full understanding, we vote, and until there is a clear majority on the outcome we will continue the discussion. Indeed, even if there is a clear majority, any individual can reopen the discussion if they feel the majority is missing the importance of some topic. Some days the team will meet long into the evening.

It is always tempting to view the process as done at this point, but in many ways the most important step is yet to come. Giving feedback in writing and verbally is the step that leads to impact and helps our colleagues become more successful in the year ahead. I practice extensively in advance how I am going to communicate the key messages. On the videoconference feedback sessions, I test multiple times to ensure I have really made myself clear. Allowing the feedback conversations to run as long as is helpful for the recipient is part of the plan. Following up a few months later is also.

This is incredibly time intensive for all concerned, and while we add technology to enhance the process, we consider it absolutely essential that this remains a global process. It has been this way throughout my nearly 30 years at McKinsey, and I don’t envision it ever changing.


Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

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A Pocket Guide To Doing Business In China Fri, 10 Oct 2014 14:17:51 +0000 China, a $10 trillion economy growing at 7% annually, is a never before seen force reshaping our global economy. Over the last 30 years, the Chinese government has at times opened the door wide for foreign companies to participate in China’s domestic economic growth. At other times, it has kept the door firmly closed. While some global leaders, such as automotive OEMs, have turned China into their single largest source of profits, others, especially in the service sectors, have been challenged to capture a meaningful share of revenue or profits.

In the following post, I summarize some of the trends shaping the next phase of China’s economic growth, which industries might benefit the most, and what could potentially go wrong. I also lay out what I believe it takes to build a successful, large-scale and profitable business in China today as a foreign company.

Trends shaping growth and creating new opportunities in China

As the contributions of net exports and real estate to economic growth diminishes, the focus on infrastructure and domestic consumption, as traditional and new sources of growth for the economy respectively, rises. Whether or not the current growth of the Chinese economy is sustainable depends on the evolution of several trends.

Government policy continues to be the critical shaping force. As the mini stimulus delivered in Q2 2014 demonstrates, the government still possesses levers to push up and down GDP growth rates quite rapidly. In other ongoing government initiatives, the “marketization” of prices for electricity, water, land and capital is having a major impact on the behavior of business, leading to a new focus on productivity, even in state-owned enterprises. Progress in bringing more private capital into state-owned enterprises is slow at the national level, with few scale examples such as the $30 billion partial privatization of Sinopec’s gas stations underway. At the city level, much more momentum is building with local governments selling out of non-core activities such as hotels and many manufacturing businesses. The anti-corruption campaign continues aggressively throughout state-owned enterprises, and government has itself become a material brake on growth. Officials and executives are simply unwilling to make decisions that could possibly be held against them later. President Xi has pursued anti-corruption as a theme for more than a decade; he is not going to back off.

The Chinese middle class, the people who are buying new homes, who today are buying 18 million cars a year (delivering a third of global auto industry profits), and who are starting to spend more on services, are critical. Only if they remain confident in their personal economic future will they continue to increase their spending and become a larger driver of economic growth. By 2022, more than 50% of urban households should be in the middle class (in current $, US$20-40k annual household income), an increase of more than 100 million households over the coming decade.

China is now more than 50% urban, but 10-15 million people a year will still be moving to cities from the countryside. Rural migrants already in the cities need to be better integrated. City governments need to make their cities more livable, more efficient and better able to integrate their migrants. Smart cities is a clichéd term, but China’s cities need everything from more efficient mass transit to water usage. Investment to deliver this will be massive, indicating how the construction of China’s infrastructure is not yet done.

Many businesses are coming under a new level of cost and margin pressure.

  • Margins of industrial state-owned enterprises have fallen by a third over the last four years. Often the industries they compete in, from steel production to telecom network equipment, are simply growing much more slowly. By the standards of China over the last 30 years, they have become mature industries. This leads to three outcomes – initiatives on productivity, diversification and globalization. The latter two are more often conducted on the basis that prior success in one industry in China will automatically lead to success in the next industry and country.
  • Multinationals selling to Chinese consumers often continue to perform extremely well, using their skills in consumer insights, branding and pricing to differentiate from local companies, who while large, are still developing world class functional capabilities. Multinationals selling to government, at the other end of the spectrum, find market access much more challenging.

China is home to some of the world’s largest, most successful and innovative Internet based companies. The pace at which Chinese consumers are embracing the Internet is at the cusp of causing major disruptions to many sectors in China. Perhaps because consumers are still new to our traditional ways of shopping or banking (only having had modern shopping malls for a decade in many cities), consumers are very willing to switch to buying online. When the experience of going into a Chinese bank branch is so poor, it’s not surprising that consumers would rather transact online.

Almost no consumer facing business in China can succeed without an online and off-line strategy today. Mall owners are struggling to find a new economic model. Retailers are trying to bring order to their nationwide distribution chains to exert control over the price at which their products are sold online. Online wealth management products have been able to gather US$100 billion dollars in less than 100 days, forcing traditional banks to increase rates on much of their deposit base. The impact on jobs is just starting to appear, but many millions of sought after white collar jobs will be eliminated in the next few years.

The risks

This growth is not risk-free. Perhaps most critically, Chinese consumers remain relatively unsophisticated. A loss of confidence as a result of a default in a wealth management product, or a decline in housing prices in a specific city, could easily become a nationwide contagion creating a vicious cycle of consumers withdrawing from spending, thereby worsening market conditions. One has to be over 40 to remember a recession in China.

Other risks to growth include geopolitics, especially China’s relationship with Japan, where the government’s credibility depends on being seen to do the right thing by the internet classes. A final and rising risk is the underemployment of graduates. Of seven million graduates each year, maybe only three million find jobs that require a degree. The remainder find their aspirations to join the middle class and own a home and car possibly permanently out of reach. They are a large, dissatisfied and growing segment of society.

Industries with potential for faster growth in the next decade

Many of the industries with the highest growth potential in China over the next decade are in the services sector, but not all. For example, energy and agriculture will have segments with very rapid growth. Below is a very brief snapshot of where we see opportunities.

Etailing: The online share of retail in China, at 8% in 2014, is higher than in the U.S., and is not close to reaching saturation. Increasingly, this is conducted through mobile devices (helping Apple sell more than US$30 billion of devices in China annually). The payments system is in place, logistics are improving, online providers are trusted. Many retailers will adapt, often with far fewer physical locations. Malls will have to become destinations for services beyond retail.

Logistics: Modernization of supply chains is a key enabler of increasing productivity in many sectors in China today. Until recently, most goods were carried by individual truck owner-operators. As express parcels become a US$100 billion industry on the back of etailing, ecommerce companies themselves are investing billions in modern warehouses and trucks. Alibaba alone is committed to spending billions of dollars on its own logistics. Third party carriers such as SF Express are rapidly becoming regional leaders on the back of growth in China. Even in agriculture, massive investment is underway in cold storage and cold carriage to reduce wastage and provide higher quality food products to China’s middle class.

Education: Nearly two-thirds of registered kindergartens in China are privately owned. Private universities are expanding. Traditional and online vocational learning schools are publicly listed multi-billion dollar businesses. Niche businesses, such as preparing children to apply to US, UK and Australian high schools and universities are also flourishing. Chinese willingness to spend on tutoring and support for their children is almost unlimited. As the middle class becomes wealthier, the increased ability to spend will drive market growth.

Healthcare: More than 1,500 new private hospitals opened in China in 2013, a number of which are 100% foreign-owned. The shortcomings of the mainstream public healthcare system in China are not likely to be overcome quickly. Patients are looking for solutions where both cost and quality are more certain, and private and foreign companies are being encouraged to deliver. There is a related boom in supplying equipment to these new facilities.

Tourism: Available hotel rooms in China have tripled over the last decade. Four million mainland Chinese visited South Korea in 2013, four million visited Thailand. China’s middle class expect to take 3-4 weeks of vacation each year and no longer accept visiting the overcrowded, over exploited traditional domestic destinations. Disneyland’s opening in Shanghai in 2015 could trigger a new wave of investment to create higher caliber resorts.

Wealth management: China represents more than 50% of Asia ex Japan growth, with high net-worth (HNW) assets expected to reach US$16 trillion by 2016. The more than 1 million HNW individuals in China remain generally unsophisticated as investors, seeking advice on how to broaden their investment portfolio both onshore and offshore.

Entertainment: China is the second largest movie box office market in the world, despite tickets costing upwards of US$10 and DVDs still being available for $1. In 2013, more than 1000 new theaters opened, yet admissions per capita are less than one-fifth of South Korea.

IT Services: Finding the CIO in a Chinese company is often hard, especially in a state-owned enterprise. Historically regarded as simply a support role for the business, CIOs were pushed 3-4 levels down in the organization and attracted little talent (which went to Internet startups). A typical Chinese company spends only 2% of revenue on IT versus international benchmarks of around 4%. As these companies struggle to bring technology into the core of their operations, they need massive amounts of help to do so. Already the cost of good IT talent is soaring. Most Chinese companies will be unable to solve their technology challenges for themselves.

Clean energy: China already produces the 60% of solar panels and wind turbines for the global economy. Increasingly it is consuming this output domestically. For example, 11GW was installed in large scale solar farms in 2013, and this will grow another 30% in 2014. China is also investing heavily to exploit its shale gas assets and develop cleaner coal technologies.

Agriculture: China does not feed itself today and will be challenged to do so in the future, certainly not with the kind of quality and value-added products that the middle class seek. Continuing food safety crises illustrate the challenge. For many successful technology investors, such as Legend Holdings, agriculture is the new Internet. Chinese companies are investing in agriculture outside China at scale, from Chile to the Ukraine, for China. They also invest in China, especially in value-added products – such as fruit and the production of frozen ready meals.

Doing business effectively in China

Often in China, the fundamental barrier to success is often less about identifying the opportunity, and more about the inability to execute the plan more effectively than others. One’s own management team, the team’s relationship with corporate headquarters, the role of and relationship with joint venture partners – all play a key role. Joint ventures have been part of doing business in China for over 30 years. In many sectors, they remain the only way to participate, often in a mandatory minority position. But there are a number of clear learnings:

Establish the right strategic positioning.

  • If regulations require you to have a joint venture partner and a minority position today, assume it will be that way forever in the core business activities. From automotive to financial services, the lesson is that it won’t change. If that model is not attractive today, do not invest in the hope that it will change.
  • Follow the evolution of government policy and align your stated intent with such policy as far as possible. Using the words from government statements in your statements communicate your commitment to China.
  • Be clear if you are in China for the opportunity in China, or if you are in China for the opportunity that China creates for you in the rest of the world. This can lead to a very different presence in China.

Many likely joint venture partners are highly successful and very large within China, who see international partners as little more than a temporary accelerator of growth.

  • Their mindset is increasingly that there are fewer and fewer things to learn from foreign partners. They don’t need the capital, they can hire the skills, and they have the customer relationships, insights and, most critically, the government relationships. Even state-owned enterprises now hold this mindset.
  • Simply promoting “this is how we do it in America/Germany/Japan” will not win friends. What one can do today is make a long-term commitment to help a Chinese joint venture partner expand internationally. This may well be at a cost to the international partner’s existing business, and needs to be seen as part of the total China investment.
  • Establish from the outset a clear hierarchy of who interacts with whom at the joint venture partner and with relevant government officials. Chinese partners like the certainty this provides. Ensure that the committed executive shows up for board meetings and the like, and don’t delegate.

Place a trusted senior colleague in China with a commitment to have him/her be there for the long term. He or she is your go-to person when things get volatile in China, someone whose viewpoint the global management team will trust, and someone the head of your joint venture partner will also learn to trust. Usually they will be very strong in people development, with skills almost overlapping with a head of HR. And they need to be 100% trusted to enforce compliance and to role model required behaviors. Typically, make this person Chairman of your Asia or China operations, as senior a title as possible.

Talent acquisition and development, at all levels, remains highly time consuming and often frustrating for multinationals. Loyalty to an employer often comes low on an individual’s priority list. Turnover will likely be high and should be planned for.

  • Hiring mid-career executives is increasingly common, and in almost all industries, the available talent pool is deepening. Both Chinese and global search firms have rapidly growing businesses serving local and international companies. It is imperative to do thorough background checks. Getting people to leave quietly in China often involves being silent on the cause of separation.
  • At the entry level, many graduates are available. However, many lack workplace-relevant skills, including even those with MBA qualifications, which are more often bought than earned, and often come with a lack of self-awareness that can lead to a mentality of entitlement. As a result, many corporations hire and then weed out aggressively during the initial probation period. Once on board, retention of high performers often depends on a highly variable compensation structure and dismissing underperformers.
  • While you will likely have to work with “sons and daughters” of government officials as business partners, it does not mean that you have to employ them. Outside of some companies in financial services, few international firms do.

If protecting IP in China is a concern, consider it very hard if that IP needs to actually come to China. Some companies in the technology sector have been very successful, even while not bringing core IP into China. Secondly, consider if the cost of loss of IP could be contained solely in China. Again in technology, multinationals have aggressively and successfully sued Chinese companies outside China that have taken IP from them in China and used it outside China. China is evolving fast on IP protection with more and more Chinese companies suing other Chinese companies. It is increasingly likely that a Chinese partner will recognize the value of IP and be willing to protect IP developed jointly with them. A practical means of making it harder for global IP to leak into China is establishing a standalone IT architecture for China that has no access to servers at headquarters.

China is likely to be a more volatile economy going forward. Taking a through cycle viewpoint rather than a quarterly performance versus plan mindset is key to motivating your China team and convincing them that you are committed to China for the long term. Indeed, downturns in China have proven attractive moments to double down. When partners or government are under stress, new partnerships and licenses can become available to foreign partners who are willing to step up and invest. Even after 30 years, few multinationals have this mindset.

Don’t do anything to compromise your global brand and reputation. If you can’t do business the way you want to, then don’t do it at all. There may be opportunities to make money in the short and medium term, but short cuts will eventually be made transparent. The Chinese government will be well aware of how you are operating and the anti-corruption campaign is not going to go away. Don’t assume that because your suppliers are international companies that they are automatically operating to the global standards you expect; verify that they are.


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This Is How Taipei Can Regain its Mojo Sun, 05 Oct 2014 03:44:34 +0000 Taipei has many strengths – educated workforce, clean air, great high tech companies, Asia’s leading international schools. And it’s faster to get to downtown Shanghai from downtown Taipei than it is to get to downtown Shanghai from downtown Beijing.

Yet so many conversations with Taiwanese business people are doom-filled diatribes against the government and others for preventing things being as good as they should be. The lack of self-confidence is alarming.

What would I suggest as a few bold initiatives?

  • Play up the connectivity with Shanghai. Encourage people to split their weeks between the two cities, maintain two offices, two homes. Increase the number of flights from Songshan Airport in downtown Taipei to Hongqiao Airport, in downtown Shanghai. Build business parks that are adjacent to each airport. Promote Taiwan as a weekend home destination, the “closest clean air” to Shanghai.
  • Play up the pool of highly productive Mandarin speakers in Taiwan who have lower wage demands than peers in Shanghai for roles from office support to R&D.
  • Build creative industries at scale, learning from South Korea. The film Lucy was certainly creative and it was made in Taiwan. Why not 10 times more of these productions?
  • Get serious about developing medical tourism as an initiative and build it to scale, for everything from health checks to plastic surgery to heart bypass surgery. Partner with the companies insuring wealthy mainland Chinese to accept their insurance programs in Taiwan. Do it now or the opportunity will be taken by others.
  • Build the North Asian “Orlando”, a cluster of theme parks seamlessly connected to and close by Taoyuan Airport, located an hour outside of Taipei. There are many theme park companies around the world who would leap at the opportunity to build within a two-hour flight of tens of millions of middle class Chinese.
  • Green Taipei further. The city is already pretty green. But go even further, and turn it into a role model eco-city. Replace all motorbikes with e-bikes, roll out trams, reclaim and green over empty lots, and create micro parks from spaces that are used as parking lots today.
  • Rebuild and contemporize Taipei’s office and residential buildings. Given their fragmented ownership, this is not easy, but is a must for the city to show a modern face to the world. Allow mainland developers to participate in the rebuilding – most are looking to diversify outside China. Allow the mainland developers to market to mainland buyers.
    These won’t all happen, but they could, and they would make a difference.


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Why The Internet Economy Causes So Many Problems For Chinese Officials Fri, 03 Oct 2014 03:39:38 +0000 There is something of a panic setting in among the mayors of Chinese cities as they see Internet-related businesses becoming more and more significant. They know they don’t fully understand how it works, but they do know their children, friends and family use it a lot. They see companies with enormous valuations, but they don’t see the jobs. And they see lots of excitement and hype today, but they don’t quite see where it will end up tomorrow, and if the outcome will be good for them and their careers.

In the short term, we see many cities fighting to offer subsidies to attract Internet companies in the same way they fought to attract multinationals in the past. But service companies with a virtual product may not create many jobs locally, and certainly may not create much in the way of tax income. Governments are using tools fit for the last generation of businesses, not the current.

Moreover, the Internet is starting to lead to financial losses for city-owned state-owned enterprises (SOEs). In retail, in food, in consumer goods and electronics, many companies are locally-owned state-owned enterprises. They have been losing share to more dynamic private and multinational companies that embraced online selling and digital marketing more quickly.

More broadly, the increased productivity of Internet businesses, especially in retail and financial services, are leading to job losses, losses of well-paid jobs that are nowhere nearly made up by new jobs in growing sectors such as logistics. Consequently, there will likely be a loss in tax revenues for local government.

And finally, government officials are being encouraged to leverage the Internet for their own activities, to make them more efficient and more transparent. A complex set of challenges for anyone to face, let alone a government official with all the checks and balances they have to deal with.


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Happy 65th Anniversary, China Tue, 30 Sep 2014 03:50:37 +0000 I’m meeting this evening with the Mayor of Shanghai (and many others) to celebrate China’s National Day, the 65th anniversary of the People’s Republic of China. It means that we are in Shanghai and working on one of the quietest days of the year. Few clients and almost no colleagues around. Watching the traffic flows on the highway outside the office, I see there’s less than a third the normal volumes.

If you want to go anywhere over a Chinese national holiday period, you need to leave earlier and earlier to avoid the mad rush for the airports. It also quickly makes you realize how woefully sub-scale China’s tourism infrastructure is. Yes, the airlines and trains may be able to get you there, but they also get so many other people there that the opportunity to enjoy your destination is almost impossible. Try going to Hangzhou to see the lake, or Suzhou to see the gardens. You will really just see the backs of the heads of thousands of other colleagues. It will be fascinating to see who wins when the Disney park opens in Shanghai – will it be the Disney queuing system, or the overwhelming crowds of visitors, that comes out on top?

It makes me realize that my family and I have been living in China for almost a third of these 65 years. No one, least of all I, would have predicted that 20 years ago. We’ve lived in Beijing and Shanghai; downtown, suburbs and now downtown again in an apartment that gives a great view of the strengths and weaknesses of Shanghai today. You can see the physical infrastructure – the roads and the buildings that define the Shanghai skyline today – but you can only see them on a good day when the air is sufficiently clean.

So if the Mayor asks this evening, what would my birthday wish for Shanghai be? The challenges of the city are broad and complex. Selecting just one, I would wish for Shanghai to lead China in a rapid transformation of its education system. A successful, economically vibrant Shanghai will need to have millions of people working in services, in creative industries, and in technology-enabled sectors. It needs to be educating people now in these skills, whether at university, at vocational colleges, or in high school.

The Shanghai government is wealthy enough to fund, in cooperation with the private sector, bold, large-scale experiments that show the rest of China where to follow. The need and opportunity is there, I hope the leadership will be too.


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Oxford University Focuses On China Wed, 24 Sep 2014 03:30:28 +0000 Oxford University opened its brand new China Centre recently amid much fanfare and the presence of royalty. Dickson Poon, from Hong Kong, provided key funding and was present to cut the ribbon. The building is very impressive, a far cry from the run-down engineering facilities I recall as a student. As the building is located on the grounds of one of the colleges, St Hughs, it will readily integrate into student life.

Most importantly, the facility will bring together professors and researchers studying China from across the spectrum of programs in the university – medicine, history, politics, economics, business and more – to allow cross-disciplinary initiatives to develop. Moreover, the Centre should become a focal point for the 900 Chinese students at Oxford and the many hundreds of non-Chinese who are interested in China. Outside of term time, the combination of meeting rooms, social areas and residential accommodation will make the Centre a sought after destination for corporate events.

I was privileged to be asked to talk at the opening. I leveraged some of the research work of the Urban China Initiative, the group that McKinsey co-sponsors with Columbia and Tsinghua Universities to develop solutions to China’s urbanization challenges. I focused on the Urban Sustainability Index, especially its identification of turning points in population density and absolute population, and the geographic mismatch between population and social services in Beijing. I concluded with a discussion on how the development of Internet businesses in China is changing citizens’ needs for what they most need in their local community.

I was also asked to participate in a panel chaired by Andrew Dilnot with Jonathan Fenby, former editor of The South China Morning Post; Rob Gifford, head of the China section of The Economist; and Sun Shuyuan, a filmmaker. A generally upbeat session, although with concerns about the increasingly nationalistic tone of some of the political rhetoric.

Best wishes to Rana Mitter, who leads the Centre, and all those involved.


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Image credit: University of Oxford

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Is This The End Of The Golden Era For MBA Schools In China? Fri, 19 Sep 2014 03:21:34 +0000 A few days ago, something that business schools had been aware of for a while became public – executives from state-owned enterprises or government departments were told they could only attend third party learning programs if they paid themselves. As most of these people don’t officially earn enough to be able to afford this, schools have seen class sizes shrink by up to 50%, especially in their highly profitable EMBA programs.

State-owned enterprise executives were attending these programs in increasing numbers as a perk of their role. The companies were fairly price insensitive and schools knew this. They also knew not to make the course too demanding.

Government officials were given scholarships by the schools to attend. Schools could then market the networking opportunity to private sector executives considering their programs. EMBA programs in China often seemed to attract remarkably high level private sector executives. They also seemed able to attract high level executives from multinationals to give guest lectures or to teach a course. Both may be harder in future.

Potential students will perhaps think much harder about the potential benefits of an MBA – full time or part time. Historically, the qualification came almost automatically as a consequence of paying for the program, which over time has reduced the value of the MBA in the marketplace. Potential students who really want to learn will need to identify courses where plagiarism is not accepted, where attendance at and participation in class is required, and where exams are meaningful. Not all schools have the faculty to ensure these requirements are fulfilled.

The best schools will adjust and thrive. However, many of the mid-tier ones may never have it so good again.


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An Essential Strategy for the Essential Drug List Thu, 18 Sep 2014 03:04:55 +0000 The Essential Drug System (EDS) is one of five priorities that support the government’s overall healthcare reform objective. The impact of EDS on the pharma industry became more prominent with the release of the 2012 version of the Essential Drug List (EDL) and its supporting policies. With their exposure to EDL increasingly significant, and the government signaling an acceleration of the pace of implementation, MNCs can no longer afford to postpone confronting the implications of EDL on their growth potential and market strategy.

In a recent survey of 50 top executives from MNC pharmacos, almost two-thirds of the respondents expect the new EDL to have a negative impact on their business. Why are industry leaders so strongly of this view? Are there any opportunities among the provinces’ diverse implementation approaches? What should pharmacos do to cope with the changes, mitigate their impact, and potentially capture some upside? In this article, we offer our perspectives on the new environment, what it really means, and on the implications for MNCs.

Download the PDF: An Essential Strategy for the Essential Drug List

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Should I Join A Chinese Company As A New Graduate? Sun, 14 Sep 2014 03:11:49 +0000 You were born and raised outside of China, and you’ve just graduated from a good university. You have done well and you are excited to be joining the workforce. You want to start off well and in a way that allows you to stand out from the crowd. You are thinking about whether joining a Chinese company in China is the way to go. Most likely, that’s not such a good idea.

“Seeking growth opportunities, I’m dynamic and entrepreneurial, committed to Asia, deep expertise to offer, ……..” is the usual opening in the emails I receive asking how to connect with a Chinese company. Some writers are already in Asia, many are not.

A few initial questions you’ll need to answer first, to get calibrated:

  • Just why do you think you have relevant skills? Do you think anyone else will see it the way you do? Given a choice between you and a Chinese candidate, who presumably might be willing to commit long term, why would anyone at this company select you?
  • Do you realize that you are competing against 7 million who graduate from universities in China each year, less than half of whom get a job requiring a degree?
  • Do you realize that skilled blue collar workers get paid more in China than new university graduates? That companies have China pay scales that they are not going to blow up simply because you happen to have attended university outside China, or because you hold a non-Chinese passport?
  • Have you ever worked in a job where you are on call 24×7 – if your boss has an idea you respond, if he wants to meet on Sunday evening you meet? Or where the organization structure, roles and responsibilities are not written down? You need to be comfortable with extremes of flexibility and ambiguity.
  • Have you checked out the cost of accommodation in Chinese cities? You have heard about the real estate boom in China: it translates into new graduates living in dormitory style accommodation.
  • How important is privacy to you? Your colleagues will know everything about you, from how much you get paid, to what you did on the weekend.
  • What will you do when you see behavior that you think might be illegal? Norms are not the same.
  • What are your language skills? If you have a unique skill to offer, then maybe you can be successful with less than fluent Chinese.

If you get through these positively:

What kind of Chinese company to join? Life will be easier if you join a company that already has a good number of non-Chinese employees, a company that competes with and sells to international as well as Chinese customers.

What kind of priorities to set for yourself:

  • Establish clear goals and a timeframe
  • Focus on a single boss and over deliver for him
  • Be humble
  • Do what you can to dispel the image of a “lazy foreigner”

Have you joined a Chinese company in China right out of college? How did it work out for you?


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Tianjin Takeaways Sat, 13 Sep 2014 03:07:31 +0000 Having spent the last 2 days in and around the World Economic Forum event in Tianjin, I have time to reflect a bit as I wait for the apparently endlessly delayed flight to Shanghai.

First and foremost, I was struck by the consistency of priorities described by all government speakers, from Premier Li Keqiang’s opening and onwards. In many ways, his speech was a high speed restatement of the priorities from the 3 Plenum and before. Marketization: tick, sustainability: tick, support to SMEs: tick, protect IP: tick… All very forward-looking and upbeat, challenges framed as generic rather than specific, no mention of the real estate market, or of wealth management product defaults.

I was very pleased to hear the emphasis on job creation. Unemployment and underemployment can quickly become corrosive in major cities. It would be only too easy to create GDP growth without job growth in China today as technology enables new levels of productivity in manufacturing, services and agriculture. But that would clearly be unsustainable.

The discussions on how to enable greater entrepreneurship and creativity through education were very positive, although I remain concerned about the slow pace of change. And I still don’t believe anyone has fully embraced the scale of retraining that is going to be needed for individuals joining the workforce today without the needed skills, or for those, such as assembly line workers and bank clerks, who find their current roles eliminated.

As usual, the Forum orchestrated the logistics of a large scale conference very smoothly. This included down to the details of ensuring that in the conference center we could all access Facebook, Twitter and Google services, not something we could do once we stepped outside.

All the tables at the venue also had a small notice reminding us that this was a “green conference”. My suggestion to the organizers on how to push this one step further next year is to stop distributing a 15cm thick book to all attendees with everyone’s profile – the app is just fine – and stop giving us all a logo bag, the vast majority of which simply get left in hotel rooms, and which this year saw a good number have the strap or handle fall off before the end of the conference.


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Why China’s Ecommerce Industry Developed So Fast Sun, 07 Sep 2014 13:14:02 +0000 I get asked this in almost every country I visit, usually closely followed by the question: “Could the same happen here?” To try to answer, I focus on the following six points:

1. First and foremost, China manufactures too much of almost everything.

This has created an enormous supply of product that manufacturers, distributors and retailers are looking to get rid of at a marginal price, ideally into a part of China that they are not focused on. Chinese mom and pop retailers, distributors and the millions of contract manufacturers have seized this opportunity gratefully.

E-commerce potentially enabled this, with a C2C model with almost no barriers to entry that allowed anyone with as little as a box of T-shirts, legitimate or fake, to set up as an online supplier.

2. There was never a shortage of capital.

China’s investing community has been only too willing to fund ecommerce startups. Take group purchasing, a la Groupon with Chinese characteristics. At one point there were 5,000 startups playing in this space. This enabled Chinese ecommerce players to focus on growth, not profitability, and to wait for a long time before they had to go to the public markets for capital.

3. The consumer had to be ready to spend and in China they were.

By the mid-2000s, China’s middle class was rich enough to be shifting its spending from necessities to optional spend, but still value-driven enough to want to look for a bargain. These consumers had often bought their home and were now looking to purchase items to fill it. Their spending was enhanced from 2008 on by the strategy of the government to push up wages by more than 10% annually. Spending and incomes are highly correlated in China.

4. The Internet and physical infrastructure to join these sellers and buyers needed to be in place.

Thanks to China’s state-owned telcos’ responsiveness to the performance goals set by the government to bring broadband to tens of millions of new homes every year, Internet coverage grew quickly, allowing the middle class to browse online from their homes, rather than having to go to the Internet cafes. E-commerce logistics benefited significantly from the physical infrastructure that China had built over the last 20 years to bring products from factories to ports for export. Much could easily be leveraged to bring product from factory to China’s middle class consumers who were overwhelmingly based in coastal cities.

China had many “subsistence” logistics providers in addition to the state-owned China Post parcel service. These owner-operated truck drivers drove inter-city carriage prices down to almost marginal levels, and an entire new industry of last mile scooter-based delivery agents grew up in cities, earning only a few hundred RMB a month. So costs of getting product to buyers was very low, and even that low cost was absorbed by ecommerce players focused on growth, not profits.

The lack of readiness of several key players meant they neither recognized nor responded to the threat for several years. Large retailers were focused on their own land grab of physical locations and simply didn’t see what was happening. Even if they had, most were more real estate managers than sophisticated retailers, renting space to brand owners. They had no capabilities to move quickly online.

Brand owners themselves had relied on distributors and franchise stores to maximize their China coverage. Their control of the channel was modest. When hundreds of vendors popped up online selling their product, they had limited levers to control. They had perhaps even less control of the factories to which they had outsourced production. If overruns ended up online, what recourse did they have? Private and state-owned mall owners, focused on the expansionist behavior of large retailers, continued their breakneck expansion also, not seeing that some of their key sectors such as electronics and clothing would soon be reducing, not growing, their store footprint.

5. Banks were also unable to anticipate where ecommerce was heading.

They missed the opportunity to move into the online payments space, to capture the trading and financial information on millions of retailers that would have enabled them to better assess risk in lending to China’s SMEs. Instead, the online players were allowed, in a regulatory grey zone, to create their own payment systems. From this, they have built lending and investment businesses, credibly moving now into full service online banking.

6. Sometimes passivity is a key enabler. And it was here.

The government had no grand plan for or against ecommerce, and in its early days, largely stood back and observed whether or not this would turn out to be a positive. As it seemed to be allowing millions of small scale businesses to get established and flourish, the experiment was seen to be a success, even if players had not always sought licenses they might have required, or had ownership structures that may not fully align with regulations.

Will any other country put together this mix of ingredients in the same way? Unlikely.


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What’s Next For Chip Makers In China? Wed, 03 Sep 2014 12:57:08 +0000 (Note: In an earlier post, I talked about development’s in China’s semiconductor industry, including shifts on the policy front. In this post, adapted from a recent article I wrote with my colleague Chris Thomas, I talk about the implications for multinational chip makers.)

China is by far the largest consumer of semiconductors; it accounts for about 45 percent of the worldwide demand for chips, used both in China and for exports. But more than 90 percent of its consumption relies on imported integrated circuits. Integrated-circuit companies in China entered the semiconductor market late—some two decades after the rest of the world—and have been playing catch-up ever since in an industry in which success depends on scale and learning efficiencies. The Chinese government made several attempts to build a local semiconductor industry, but none really took hold. Now, however, things are changing on both the business and policy fronts.

Low-cost smartphones designed in China are flooding the market. For instance, Android phones designed in China now represent more than 50 percent of the global market, compared with their negligible presence five years ago. Lenovo’s significant deals early in 2014—first acquiring IBM’s low-end x86-based server business for $2.3 billion and then buying Motorola from Google for almost $3 billion—further suggest that the customer base for hardware is moving to China.

Multinational corporations in every industry—from automotive to industrial controls to enterprise equipment—increasingly are establishing design centers on the mainland to be closer to customers and benefit from local Chinese talent. McKinsey’s proprietary research indicates that more than 50 percent of PCs, and between 30 and 40 percent of embedded systems (commonly found in automotive, commercial, consumer, industrial, and medical applications), contain content designed in China, either directly by mainland companies or emerging from the Chinese labs of global players. As the migration of design continues, China could soon influence up to 50 percent of hardware designs globally (including phones, wireless devices, and other consumer electronics).

Fabless semiconductor companies are also emerging in China to serve local customers. For instance, Shanghai-based Spreadtrum Communications, which designs chips for mobile phones, and Shenzhen-based HiSilicon Technologies, a captive supplier to Huawei and one of the largest domestic designers of semiconductors in China, are among the local designers that have shown rapid growth over the past few years.

There has been slower but steady progress among local foundries. As global players such as Samsung, Taiwan Semiconductor Manufacturing Company, and Texas Instruments set up shop in China, leading local foundries such as Shanghai Huali Microelectronics Corporation, SMIC, and XMC are poised to benefit from the development of a true technology cluster.

A market-based policy effort

The government, realizing that earlier bureaucrat-led investment initiatives failed to bring the desired results, is now aiming to take a market-based investment approach. In this case, decisions about allocating for-profit investment funds will be managed by professionals but will remain aligned with the government’s policy objectives. Chinese officials have convened a unique task force charged with setting an aggressive growth strategy. This group helped develop a policy framework that is targeting a compound annual growth rate for the industry of 20 percent between now and 2020, with potential financial support from the government of up to 1 trillion renminbi ($170 billion) over the next five to ten years.

To avoid the fragmentation issues of the past, the government will focus on creating national champions—a small set of leaders in each critical segment of the semiconductor market (including design, manufacturing, tools, and assembly and test) and a few provinces in which there is the potential to develop industry clusters.

For instance, Tsinghua Unigroup, a state-owned enterprise, recently bought two of the top four Chinese fabless companies—in 2013, it acquired Spreadtrum for $1.7 billion and RDA Microelectronics for $0.9 billion—and aims to combine them into a single entity. The new policy framework specifically encourages consolidation within China’s assembly-and-test market segment.

Implications for semiconductor players

China released the high-level framework for its new national semiconductor policy in June 2014; the details and the long-term effects of its new approach to developing the industry remain to be seen. Will it lead to a world-class semiconductor industry, or will Chinese semiconductor companies continue to lag behind global players? Three medium-term effects seem likely.

1. Pressure for localization will increase

China’s strong desire for national champions may further tilt the system in favor of local players. According to industry estimates, Chinese original-equipment manufacturers will design more than half of the world’s phones in 2015. Under the national-champions model, they may be encouraged to take advantage of domestic suppliers’ low-cost strategies and strong local technical support.

2. More partnership opportunities will arise for second-tier players

Many of the Chinese government’s previous policies have not offered opportunities for global players to benefit. However, government leaders in China’s semiconductor sector are now beginning to realize that the country needs to partner with global technology companies to improve the local talent base and supply chain. As a result, they are more open than ever to “win–win” engagements between global players and national champions.

3. Chinese companies will become more aggressive in pursuing international mergers and acquisitions

Indeed, it would be quite difficult for Chinese players to build a complete and competitive semiconductor value chain without capitalizing on foreign assets; collaborations between Chinese and global players probably will not be enough to meet the country’s objectives. We should expect China to continue to actively seek opportunities to acquire global intellectual property and expertise, usually with the intent of transferring them back home.

How should multinational players respond?

Most global semiconductor players have invested heavily in their Chinese operations over the years, but many are still operating below their potential, especially in functions beyond sales and marketing. Considering the emerging policy and business trends we’ve just discussed, we believe it’s a good idea for leaders to inventory their company’s current position in China.

This process should start with the most timely and immediate concern—the potential effects of changing Chinese policy. Questions for reflection might include: How will you align your operations with the Chinese government’s new plans? Are your relationships in China strong and deep enough to provide you some warning of potential risk as a result of domestic-policy changes?

Market-level questions might include the following: Given the different buying factors and supplier-management philosophies of Chinese customers, do you still have a winning product road map? Can you respond to the emerging needs of Chinese-based customers as fast as a local company can? Have you followed your global customers as they set up design centers on the mainland?

Capabilities-level questions might include the following: How are you leveraging Chinese manufacturing and design talent to win in China—or to win globally? Are your leaders in China as strong and empowered as they are in your home region? Do your global leaders have enough connections in, experiences with, and insights about the Chinese market? How robust is your talent pipeline in China?

There is no one right answer to any of these questions; depending on its role and standing in the market, every company faces its own unique challenges in China.


Read more of my views on my LinkedIn Influencer blog. And please follow me onTwitter.

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When Online Business Meets Government Planners In China Mon, 01 Sep 2014 12:51:15 +0000 I received a call last week from a group of planners at the National Development and Reform Commission (NDRC), China’s top economic planning body. They had just read our recent report on developments in China’s Internet, and had some questions.

Firstly, they wanted to know how we had done the analysis, and secondly, they wanted us to talk at an event they were hosting later that week for a group of senior government officials from across Asia who were meeting in Beijing.

It was not difficult to address the first question, but as with any interaction with the central government, our response had to be in the form of a structured memo. At the event, we were invited to participate in both panels, joining senior executives from Baidu, Alibaba, Uber and relevant Chinese ministries. My role was largely to synthesize the presentations and Q&A at the end of each discussion.

Positively, business enabled by the Internet was seen by the group as a key driver of innovation, reform and growth, something that had to be embraced and actively managed, not passively allowed to develop around government.

The optimistic saw it as a driver of job creation and an opportunity to catch up if handled well. A cheaper and faster way to growth was certainly the line of the Internet companies themselves.

Government officials were rather more skeptical, highlighting the potential for parallel job destruction. While the pace of technological progress does enable rapid change, this imposes massive challenges on governments as legislators and regulators, where they tend to move at a much more deliberate pace. Indeed, one of the conclusions of the group was to set up a working group for further study on the topic.

Prerequisites for Citizens, Businesses and Government

Current workers, students, the retired, minorities and rural residents all need to be given relevant capabilities to use the Internet – literacy, numeracy and some technological proficiency. They also need to be given opportunity through low cost access to the Internet and, where needed, to financing. Cloud based solutions are essential. The third prerequisite for citizens is the development of trust in the Internet overall and in Internet based businesses. This includes how their personal information is handled, how their payments are handled, and that products and services would be reliably safe and genuine.

Businesses are looking for talent to join them, and the opportunity to experiment. This latter is clearly a source of tension with the role of government to protect as well as enable. Further businesses were looking for the opportunity to scale seamlessly across borders. With each Asian country, and often each region within a country, having its own regulations, this seemed an aspiration more than a prerequisite.

Government officials were looking to learn from each other on how to legislate and regulate. There is much best practice to be shared and the idea of creating a clearing house to do so seemed a very positive step. The role of government in ensuring cities and countryside both have needed infrastructure is critical and also in education, particularly in educating a new generation of citizen entrepreneurs to launch small-scale Internet-based businesses.

Impact on Related Industries

There was excitement and concern about the impact of the Internet on related industries. Excitement for sectors like logistics, but concern for traditional providers of financial services, travel and even taxi services. All could see that large scale change was inevitable, but many were concerned that during the era of transition, more jobs would disappear in the first stage, and it could be many years, if ever, before new jobs were created.

I found the government leaders to be well informed and, probably rightly given their roles, heavily concerned about the possible societal downsides of such rapid change to an overall economy. All had seen cities or regions where traditional industries, such as mining or textile production, had disappeared, and were well aware of the challenges of revitalization that this posed. Businesses were focused more on the micro and the specific, on how they had created jobs themselves rather than the impact on the entire sector or economy.

* * *

It’s great that these dialogues take place, especially on a multinational basis. Also great to see Chinese government officials hosting and fully engaging on the topic.


Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

Image credit: Frank Yu / Flickr

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Coming Soon To A Market Near You: Chinese Private Enterprises Wed, 27 Aug 2014 14:00:21 +0000 It’s a good time to be leading a private enterprise in many sectors in China. We all know about the Internet and consumer electronics, but in many industrial sectors it is also the case. I can’t fully disaggregate how much of this is due to China’s new leadership pulling back some of the advantages state-owned enterprises possessed, and making it at the margin harder for multinationals, rather than this being an on-going trend that is reaching a tipping point.

Certainly in conversations with the heads of multinationals in China, the challenges of a) keeping track of all these focused private sector attackers and b) explaining to global headquarters that these guys are genuinely good at what they do, comes up more and more.

China is creating a new Mittelstand, that core of mid-sized industrial companies (often family-owned) that have been the backbone of the German economy for so many years. Few of these emerging Chinese players are multibillion dollar businesses yet, most have turnover in the hundreds of million or even tens of million, and are fast-growing. They are family-owned, often led by entrepreneurs just entering the midpoint of their career – they plan to be around for a long time.

They are tough competitors – those who survive the intense competition in China are good at whatever it is they focus on. They are competing against a myriad of other private companies, state owned enterprises and global giants. China may be the largest country market for their products worldwide, but it is also the most competitive.

What has changed in recent years? Growth in the domestic market is certainly one factor. Much improved ability to hire talent is for sure another as state-owned enterprises are seen as a less attractive career choice. Banks are finally starting to pay attention to private enterprises allowing them to access debt from the formal banking system for the first time, lowering costs. They have also become much smarter on IP, recognizing its importance and going abroad to buy or license what is needed.

It won’t be long before they get bolder on going international, organically expanding their sales network – southeast Asia, India and Africa are generally high on the list. Acquisitions in more mature economies are also on their list.

Watch out!

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

Image credit: World Economic Forum / Flickr

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Semiconductors in China: Brave new world or same old story? Tue, 26 Aug 2014 09:12:07 +0000 By Gordon Orr and Christopher Thomas

Executives of global semiconductor companies have had their eyes on China for many years, primarily as a customer-rich end market and a source of innovation. But now they will need to take an even closer look. Government stakeholders in China have been reconsidering the risk posed by the country’s heavy reliance on others for semiconductor components and capabilities, and they are carrying out policy changes that could correct for this dependence. Pair these policy efforts with private-market forces that are slowly but surely strengthening the capabilities of mainland semiconductor companies and multinational chip makers competing in China will likely face a very different operating environment—one with new risks and opportunities.

What’s changing?

China is by far the largest consumer of semiconductors; it accounts for about 45 percent of the worldwide demand for chips, used both in China and for exports. But more than 90 percent of its consumption relies on imported integrated circuits. Integrated-circuit companies in China entered the semiconductor market late—some two decades after the rest of the world—and have been playing catch-up ever since in an industry in which success depends on scale and learning efficiencies. The Chinese government made several attempts to build a local semiconductor industry, but none really took hold. Now, however, things are changing on both the business and policy fronts.

Low-cost smartphones designed in China are flooding the market. For instance, Android phones designed in China now represent more than 50 percent of the global market, compared with their negligible presence five years ago. Lenovo’s significant deals early in 2014—first acquiring IBM’s low-end x86-based server business for $2.3 billion and then buying Motorola from Google for almost $3 billion—further suggest that the customer base for hardware is moving to China. Meanwhile, Beijing and Shenzhen have become innovation hotbeds for wearable devices and other connected consumer electronics. Technology companies in these regions are not trailing others in this area of innovation; they are running neck and neck with other early entrants.

Multinational corporations in every industry—from automotive to industrial controls to enterprise equipment—increasingly are establishing design centers on the mainland to be closer to customers and benefit from local Chinese talent. McKinsey’s proprietary research indicates that more than 50 percent of PCs, and between 30 and 40 percent of embedded systems (commonly found in automotive, commercial, consumer, industrial, and medical applications), contain content designed in China, either directly by mainland companies or emerging from the Chinese labs of global players. As the migration of design continues, China could soon influence up to 50 percent of hardware designs globally (including phones, wireless devices, and other consumer electronics).

Fabless semiconductor companies are also emerging in China to serve local customers. For instance, Shanghai-based Spreadtrum Communications, which designs chips for mobile phones, and Shenzhen-based HiSilicon Technologies, a captive supplier to Huawei and one of the largest domestic designers of semiconductors in China, are among the local designers that have shown rapid growth over the past few years.

There has been slower but steady progress among local foundries. For reasons including costs and scale—and, in some cases, export controls—these players traditionally have been reluctant to invest in cutting-edge technologies, always lagging three or four years behind the industry leaders. But the performance gap is shrinking. As global players such as Samsung, Taiwan Semiconductor Manufacturing Company, and Texas Instruments set up shop in China, leading local foundries such as Shanghai Huali Microelectronics Corporation, SMIC, and XMC are poised to benefit from the development of a true technology cluster. At the same time, fewer and fewer chip designs will be moving to technologies that are 20 nanometers and below; following Moore’s law is becoming too expensive and is of limited benefit to all but a small set of global semiconductor companies. As a result, low-cost, lagging-edge Chinese technology companies will soon be able to address a larger part of the global market.

A market-based policy effort

The Chinese government is now putting significant funding and effort behind new policies relating to the development of the semiconductor industry. The government’s previous attempts to build the industry, dating all the way back to the 1990s, had mixed results because funding plans and incentives were focused more on research and academia than on business. Additionally, investments were fragmented—at one point, the government had invested in 130 fabrication sites across more than 15 provinces, none of which was able to capitalize on the scale and scope of its neighbors’ sites, and supporting industries never materialized.

The government, realizing that earlier bureaucrat-led investment initiatives failed to bring the desired results, is now aiming to take a market-based investment approach. In this case, decisions about allocating for-profit investment funds will be managed by professionals but will remain aligned with the government’s policy objectives. Chinese officials have convened a unique task force charged with setting an aggressive growth strategy (see sidebar, “A different type of task force”). This group helped develop a policy framework that is targeting a compound annual growth rate for the industry of 20 percent between now and 2020, with potential financial support from the government of up to 1 trillion renminbi ($170 billion) over the next five to ten years. Investments will be made by a national investment vehicle (the National Industry Investment Fund) and provincial-level entities. These entities will invest across multiple categories, including project finance and domestic and foreign acquisitions, as well as traditional research and development subsidies and tax credits.

To avoid the fragmentation issues of the past, the government will focus on creating national champions—a small set of leaders in each critical segment of the semiconductor market (including design, manufacturing, tools, and assembly and test) and a few provinces in which there is the potential to develop industry clusters. For instance, SMIC, a leading foundry headquartered in Shanghai, is building a 300-millimeter fab in the Beijing Economic and Technological Development Area. The company signed cooperation agreements with the national and local governments and announced a joint investment of $1.2 billion. Investors include the Beijing Municipal Commission of Economy and Information Technology, the Institute of Microelectronics of Chinese Academy of Sciences, and the Beijing city government.

The Chinese government has actively pursued consolidation to spur the creation of national champions. For instance, Tsinghua Unigroup, a state-owned enterprise, recently bought two of the top four Chinese fabless companies—in 2013, it acquired Spreadtrum for $1.7 billion and RDA Microelectronics for $0.9 billion—and aims to combine them into a single entity. The new policy framework specifically encourages consolidation within China’s assembly-and-test market segment.

Implications for semiconductor players

China released the high-level framework for its new national semiconductor policy in June 2014; the details and the long-term effects of its new approach to developing the industry remain to be seen. Will it lead to a world-class semiconductor industry, or will Chinese semiconductor companies continue to lag behind global players? Three medium-term effects seem likely.

Pressure for localization will increase. China’s strong desire for national champions may further tilt the system in favor of local players. According to industry estimates, Chinese original-equipment manufacturers will design more than half of the world’s phones in 2015.1 Under the national-champions model, they may be encouraged to take advantage of domestic suppliers’ low-cost strategies and strong local technical support. Additionally, in the wake of global data-privacy and security concerns, there has been even more of a push from the Chinese government for state-owned and private enterprises to purchase from local system suppliers (that, in turn, are more likely to source from local semiconductor vendors).

More partnership opportunities will arise for second-tier players. Many of the Chinese government’s previous policies have not offered opportunities for global players to benefit. However, government leaders in China’s semiconductor sector are now beginning to realize that the country needs to partner with global technology companies to improve the local talent base and supply chain. As a result, they are more open than ever to “win–win” engagements between global players and national champions. For their part, top-tier multinational semiconductor companies traditionally have had less incentive to share their intellectual property or transfer technology to China. As such, second-tier players may fare better in this evolving ecosystem since they have less to lose than global giants—and everything to gain. In the winner-takes-all semiconductor markets, these players may benefit from their Chinese partners’ deep pockets, becoming better able to match the investments of market leaders.

Chinese companies will become more aggressive in pursuing international mergers and acquisitions. Indeed, it would be quite difficult for Chinese players to build a complete and competitive semiconductor value chain without capitalizing on foreign assets; collaborations between Chinese and global players probably will not be enough to meet the country’s objectives. We should expect China to continue to actively seek opportunities to acquire global intellectual property and expertise, usually with the intent of transferring them back home. What’s still to be determined, however, is how global governments will react to proposed deals in light of the emerging policy and market changes.

How should multinational players respond?

Most global semiconductor players have invested heavily in their Chinese operations over the years, but many are still operating below their potential, especially in functions beyond sales and marketing. Considering the emerging policy and business trends we’ve just discussed, we believe it’s a good idea for leaders to inventory their company’s current position in China.

This process should start with the most timely and immediate concern—the potential effects of changing Chinese policy. Questions for reflection might include: How will you align your operations with the Chinese government’s new plans? Are your relationships in China strong and deep enough to provide you some warning of potential risk as a result of domestic-policy changes? Do you have an early sense of what those risks might be, and a rapid-response plan to address them? Could you gain advantage by approaching the government with a win–win idea?

For multinational companies operating in China, it is impossible to separate political and regulatory concerns from business—which is why it is also necessary for leaders to take stock of the overall market and the capabilities they bring to the table.

Market-level questions might include the following: Given the different buying factors and supplier-management philosophies of Chinese customers, do you still have a winning product road map? Can you respond to the emerging needs of Chinese-based customers as fast as a local company can? Have you followed your global customers as they set up design centers on the mainland? Which Chinese champions are emerging, and which markets will they attack?

Capabilities-level questions might include the following: How are you leveraging Chinese manufacturing and design talent to win in China—or to win globally? Are your leaders in China as strong and empowered as they are in your home region? Do your global leaders have enough connections in, experiences with, and insights about the Chinese market? How robust is your talent pipeline in China? Can you act as “one company” in the country, or do organizational silos prevent collaboration across the sales, product-development, government-relations, and manufacturing functions?

There is no one right answer to any of these questions; depending on its role and standing in the market, every company faces its own unique challenges in China. Accordingly, we have seen leading semiconductor companies adopt a number of different approaches. Some have taken the initiative to develop R&D capabilities in China, designing chips and applying for patents locally. Others have consolidated all their activities (sales, marketing, and operations, for instance) under a China CEO who reports directly to the global CEO. One company created an advisory board of senior global executives dedicated entirely to coordinating and pushing the China agenda. Other companies have taken a talent-first approach—for instance, promoting a former China head to a global executive position to add China expertise to the boardroom and soliciting personal commitments from the CEO to visit the country every few months to review status and remove organizational barriers.

In China and elsewhere across the globe, government intervention in the semiconductor market has been a mixed bag—some successes, some missed opportunities. Still, the Chinese government is better positioned than most others to make a big policy bet, with its massive customer and installed-manufacturing base, its deep bench of engineering talent, and its financial resources. It can afford to be patient, confident that macroeconomic forces make its hand incrementally stronger every year.

If the government follows through on its policy intent and steers substantial investment and support toward the domestic semiconductor market over the next decade, it will prompt global players to make their own moves—whether forging new and different partnerships with Chinese players, managing overcapacity in critical segments, or developing complementary or competitive policies of their own.

Whether this policy is ultimately effective or not, its impact will be felt across the industry.

About the authors

Gordon Orr is a director in McKinsey’s Shanghai office, and Christopher Thomas is an associate principal in the Beijing office.

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China’s digital transformation Tue, 26 Aug 2014 03:32:08 +0000 As individual companies adopt web technologies, they gain the ability to streamline everything from product development and supply-chain management to sales, marketing, and customer interactions. For China’s small enterprises, greater digitization provides an opportunity to boost their labor productivity, collaborate in new ways, and expand their reach via e-commerce. In fact, new applications of the Internet could account for up to 22 percent of China’s labor-productivity growth by 2025.

Yet the Internet is not merely a tool for automation and efficiency; it also expands markets rapidly. Greater adoption of web technologies in China could lead to the introduction of entirely new products and services if government and industry take the right steps to maximize the potential (exhibit). A new report from the McKinsey Global Institute (MGI), China’s digital transformation: The Internet’s impact on productivity and growth, projects that new Internet applications could fuel some 7 to 22 percent of China’s incremental GDP growth through 2025, depending on the rate of adoption. That translates into 4 trillion to 14 trillion renminbi in annual GDP in 2025.


The adoption of new Internet applications may have a substantial economic impact in key sectors of China’s economy.

China's digital transformation - McKinsey China


That 10 trillion renminbi gap between the two numbers represents the economic growth at stake. The low end of the projection assumes that the country’s current trajectory continues, with adoption of Internet applications increasing at a moderate pace, under existing constraints. The upper end assumes that China builds a supportive policy environment, individual companies move decisively, and workers adapt to the demands of a more digitized economy.

The MGI report focuses on a set of Internet applications that could penetrate more deeply across key sectors of the country’s economy, including big data; improved demand forecasting, online sourcing, and marketing; Internet banking and payment systems; the Internet of Things; and e-commerce. The six sectors analyzed in the report are already beginning to undergo sweeping changes.

In consumer electronics, for example, the critical factors will be growth in connected devices (such as smart home appliances and Internet TVs) and online media content. China’s fledgling used-car market has enormous room for growth if powered by e-commerce. Chemical companies can use the Internet to enhance their R&D capabilities, enabling collaboration with customers and external experts. In financial services, online money-market funds, discount brokerages, and third-party online marketplaces have already begun to emerge. Chinese home buyers and renters increasingly search online to find the property that’s right for them. More broadly, the Internet is reshaping the market for commercial real estate as e-tailing decreases the need for retail space and increases demand for modern warehousing. And in healthcare, web-based tools such as electronic health records and clinical decision-support systems can elevate the quality of care and play a critical role in making the system more efficient and cost effective.

Increasing digitization is forcing companies across all industries to rethink their operations and become more customer-centric. Owners and CEOs will have to be deeply engaged as they make decisions that can radically affect how their companies do business. Industries will face increasing talent shortages, and larger companies may respond by making targeted acquisitions of tech firms.

From a policy perspective, China’s government faces multiple challenges in harnessing the Internet for economic growth. Building out networks is crucial to bringing more of the population online and facilitating the adoption of new Internet applications, while a balanced set of regulations for data sharing could remove constraints on the adoption of big data. Increased business usage of new Internet applications is likely to have a neutral or slightly positive impact on the total number of jobs—but a more striking effect on the composition of the labor market. The economy will need fewer workers for routine activities that can move online, while demand will increase for workers with digital skills. Government and industry can ease this dislocation by ensuring that training programs are available to help workers continually refresh their skills. China can also adapt school curricula to build digital literacy and create a true education-to-employment pipeline.

Beyond creating economic momentum for China, the Internet will enable growth based on productivity, innovation, and consumption. It will sharply intensify competition, allowing the most efficient enterprises to win out more quickly. The impending shift toward the Internet across key sectors of the economy will pose some risks and disruptions, but it can ultimately support China’s goal of creating a more sustainable model for growth.

Download the executive summary: China’s digital transformation

Download the full report: China’s digital transformation


About the authors

Jonathan Woetzel is a director of the McKinsey Global Institute, where Yougang Chen is a principal, Michael Chui is a partner, and Elsie Chang and Jeongmin Seong are senior fellows; Gordon Orr is a director in McKinsey’s Shanghai office; Alan Lau is a director in the Hong Kong office; and Autumn Qiu is a consultant in the Beijing office.

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Where Have All The Expats In China Gone? Sat, 23 Aug 2014 07:29:09 +0000 It is clearly not a good time to have a business targeted at foreigners in Shanghai. In the last week, our landlord and several other business owners have asked us this question. Our apartment block has gone from 100% to less than 70% full for example.

What’s going on?

Well, if you look out of the window of your apartment on an average day, it’s kind of obvious. It’s the air. Yes, it may be better than Beijing and a host of other Chinese cities, but that doesn’t make it good. And when the grandparents ask what are you doing to their grandchildren’s lungs, they don’t differentiate between cities. This has been a force that just builds and builds. Buying more air filters doesn’t really eliminate the problem, in some ways it just makes you more aware of it.

Multinational companies are localizing more, reflecting the fact that there is more quality local talent available at entry, mid and senior level positions. And if you are going to have expats, see if they can work on a fly-in, fly-out basis, and so avoid the cost of supporting the family move.

More multinationals are focused on performance in China today rather than investing for the future. If current year performance is below plan (as is the case for a good number today), costs have to be reduced. For many multinationals, the sectors in which they compete in China have passed their years of peak growth, and management takes a more mature market mindset to moving in more people.

Shanghai has many schools targeting international students. A number are pretty average in their performance in preparing kids for universities around the world. The reputation of the poorer ones has an impact across all schools, and can lead families to move out of Shanghai as high school approaches for their kids.

The exodus of Japanese executives and their families continues as Japanese businesses feel their growth prospects in China are limited.

The opportunity to get from downtown Taipei to downtown Shanghai in only a touch over 3 hours is leading quite a number of executives to move their family to Taiwan, and spend 4 days a week in Shanghai, 3 back in Taipei.

And finally, a new residential center of gravity is emerging in Shanghai. The developments out beyond the Hongqiao transport hub are lower cost and newer than many of the options in Pudong, and certainly offer more space than in downtown. If your business is in the Hongqiao area or requires frequent domestic travel by plane or train, it makes a ton of sense to live there. And if you do, the number of times you come downtown could easily fall close to zero.

Read more of my views on my LinkedIn Influencer blog. And please follow me on Twitter.

Image credit: Paul Arps / Flickr

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Should I Stay At A State Owned Enterprise? Wed, 20 Aug 2014 07:19:17 +0000 I was asked this question last week by someone I have got to know through my work with universities in China. This individual was in his mid-30s, a graduate in a technical subject from a leading Chinese university, and has some international exposure.

How did I respond?

First of all, with a review of the prospects for the state owned company (SOE) he worked for and its industry. I generally suggest that the talented and ambitious focus on growth companies in growth industries due to the number of leadership opportunities it creates. You don’t have to wait for senior executives to retire in order to move up.

Was this the case here? Clearly not. His industry has gone through its years of rapid growth, and they are gone and not coming back. The industry has a shocking amount of overcapacity today, many competitors are losing money (even though this specific company is not), and consolidation/shrinking is more on the minds of management.

More broadly, the prospects for SOEs overall seem less bright under China’s current leadership. The SOE-first industrial strategy of the prior leadership is being gradually set aside, with a more level playing field for private Chinese companies emerging. While salaries at leading SOEs remain very attractive, the anti-corruption campaign has reduced the level of associated benefits that a manager at an SOE can expect.

If the broader context is not bright, how did the specifics of this person’s role look? Did they give a promising foundation for at least the next few years of his personal career?

On the positive side, his current boss sounded like an inspirational person, with a broad range of experiences inside and outside state owned enterprises. However, beyond his boss, too many colleagues sounded as though they had joined the company because it appeared to offer a secure job for life, with a good salary and high prestige in the community. This translates day-to-day into a conservatism, a desire to maintain the status quo, and often really not being enormously committed to delivering their best on tasks. But as long as the current boss was there, interesting projects were likely to be available.

Current projects certainly sounded very interesting, with real growth potential. Management has clearly recognized that their current core industry has matured, and they are looking to diversify, committing very large amounts to making acquisitions. This creates great opportunities to learn about these industries and target companies through due diligence, and if an acquisition is made, to move into that new business.

However, this has led to the realization that the decision-making process at the SOE, driven by consensus building, is slow. While slow decision-making can be a strength in some situations, in deciding whether and how much to bid for a company, it is not. So far, all projects have led to offers not accepted. Clearly the frustration of not closing any deals is growing and ultimately was, I think, the driver of having this conversation.

If he were to move to another company, was he well prepared, and where would he go? Potentially, the companies that he is evaluating are an option – they are in fast-growing industries that make use of his technical skills. Maybe a startup, but he needs to be very clear on the personal cash flow implications of moving there from a well-paying SOE – do his life and family commitments permit it?

And multinationals? He had investigated this and found that he was likely to be hired only in an R&D role, which wasn’t really where he wanted to direct his career.

While my friend’s current projects were clearly broadening his skill set beyond technical areas and into broader business topics, I suggested that if he wished to accelerate this, and to have something to show possible future employers about his commitment to general management roles, that he consider some kind of part-time MBA – either online, or by taking classes in the evening.

In the end, I suggested that he set himself a deadline for deciding to stay or go. If by that point no acquisitions had been made, they are probably not going to happen (after the SOE is using up its financial resources to support its declining core business). In the meantime, work to get a qualification that demonstrates commitment to a broader management role, which will make him more attractive if he does decide to move, and also be relevant if he stays.

What would you have said?

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: Steve / Flickr

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Less Than 10% Of China’s Top Cities Meet Clean Air Standards – Now What? Tue, 12 Aug 2014 06:53:15 +0000 9 out of 161 cities pass China’s own standards for clean air – is this good news?

If you set expectations low enough, almost anything can seem to be good news. That any of China’s top 161 cities met the Ministry of Environmental Protection’s standards in the first half of 2014 can seem like a win after a year of so many depressing stories of pollution levels in cities across China. This is the case even if a number of the cities that passed are really beach resorts without a factory anywhere to be seen and the bar for passing is not that high.

That the Ministry was willing to publish these statistics, with less than 10% of cities passing, is also for sure good news. Hopefully this creates a precedent for future semi-annual public assessments, and creates pressure on those close to meeting the standard to get their act in gear and do so.

I am not sure that it was a coincidence that China increased its target for installed solar capacity in 2014 back up to 13GW this week. While it makes a tiny difference to the amount of coal consumed, it is a move in the right direction.

If I were in the leadership of one of the 9 cities that met the bar, especially if I were in the leadership of Shenzhen, I would be ecstatic. I would be turning this instantly into a major marketing program to attract service industries and white collar jobs to my city. Shenzhen is much further down the path of becoming a hub of service industries than many realize. Tencent and many other Internet companies are based there, as are the R&D giants Huawei and ZTE and many of China’s most dynamic financial institutions.

Given all the talk of people moving out of Beijing for pollution reasons, being able to say “Come to Shenzhen – the top-tier Chinese city with clean air” is a great pitch. It would not surprise me to see advertisements for Shenzhen popping up in international media in the next few weeks, extolling the green virtues of the city and with testimonials to its clean air.

And this would be another piece of good news: to have Chinese cities competing with each other on the basis of who has cleaner air, rather than who has the fastest GDP growth, has to be a positive development.

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: Kalyan Chakravarthy / Flickr

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Why Would Your Corporate Culture Be Embraced In China? Wed, 06 Aug 2014 02:30:42 +0000 Corporate cultures don’t get transferred by osmosis. They don’t get transferred through long memos and videos, or by holding the occasional town hall meeting by a fly-in, fly-out senior executive. The less familiar new hires are with the kind of culture you want to instill, the longer it will take, and the harder the work will be. In China, in general, it will be very long and very hard.

This is in part why successful foreign companies are either very small or very big. In small companies, owners who do a bit of everything and treat their business as a full time passion can make their culture what they wish. Larger companies that have the global resources to invest against something they regard as non-negotiable can succeed in instilling culture over time.

Mid-sized companies too often just hope for the best, that their local leader will invest the time to build the right culture, alongside all the million and one other things expected of them. A triumph of hope over reality in many cases.

Some things to consider:

  • Be hands on instilling, talking about, and demonstrating how your values and culture translate into everyday actions. Plan for the time, and plan for the costs on an on-going basis.
  • Document all your policies, make them easily available, and enforce them consistently. It doesn’t matter if it’s your newest salesperson or your head of sales and marketing who is charging his groceries as entertainment expenses – deal with them decisively.
  • If you hired your China head in China and they never worked for you elsewhere, how can they be credible in communicating and reinforcing your culture? Invest in transferring senior and trusted leaders from headquarters who will be based in China.
  • Be sceptical when you hear statements like “We’re better off with a decentralized model”, or “We’re 100% compliant on all that.” Really stress test for yourself so that you are confident what you’re hearing matches reality – don’t accept assertions.
  • Great financial results do not by themselves imply adherence to your corporate culture. Don’t make an exception for China management just because results are good. The faster you are growing your China business, the more challenging it is to educate new colleagues in your core values.

You wouldn’t expect a Chinese corporate culture to be easily embraced outside China. So why should your corporate culture be easily embraced in China? It is hard work to make it happen, but it can be done, and the rewards are real.

You can read more of my views on China on my blog, Gordon’s View. And please follow me on Twitter @gordonorr

Image copyright: sjenner13 / 123RF Stock Photo

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Preparing China’s Graduates For The Next Wave Of Internet Enabled Growth Mon, 28 Jul 2014 02:25:56 +0000 I just published with my colleagues at the McKinsey Global Institute a new (and lengthy) report on China’s Internet and its potential impact on China’s future growth. We believe that the Internet has the potential to enable China’s economy to grow 1% point faster on average each year between now and 2025. This growth should be enabled by greater Internet based productivity growth, especially in small and medium-sized enterprises (SMEs), greater Internet based consumption, and greater innovation. In combination, these should bring stronger market forces to more and more of China’s economy.

While China’s Internet has been very consumer centered to-date, with the emergence of the largest e-retail sector in the world, over the coming decade business adoption will become a priority. Too few Chinese businesses use cloud services, location-based services, the Internet of Things or related solutions today. Indeed, the average Chinese company spends less than 2% of revenue on IT, only about half of their global peers. Supplying Chinese companies as they invest to catch up will be a massive market opportunity.

Some Chinese companies will be held back in catching up by lack of in-house IT capabilities. CIOs are often not at the top management table and were not always hired for their ability to bring together a business and a technology viewpoint. Quality CIOs are a very scarce resource.

Many winners will emerge from this faster Internet enabled growth. A larger economy should create more wealth and potentially more jobs. Yet there will potentially be losers. Government, business and individuals all need to act now to minimize the impact on those who may lose their current jobs as a result of this transformation, and who may not be well-equipped to find new jobs to replace them.

The chart below shows our analysis of possible job losses and gains. The only overlay I would add is that the losses are somewhere between probable and certain, while the job gains are only possible. And the job losses will likely happen in the early part of the projection period, while the new jobs will emerge at scale somewhat later.

McKinsey China

Government needs to stimulate the creation of low cost vocational retraining at massive scale for those who lose their jobs as a result of Internet enablement, perhaps with a new range of qualifications and certifications that those trained up can obtain as proof of capability. From bank clerks to factory workers, from security workers to call centers, Internet enabled productivity will make many roles obsolete. These workers need to be guided to develop the right new skills.

Employers have an enormous social responsibility here. They cannot and should not simply lay off large numbers of workers; they must help with the retraining of their staff so that as many as practical can be redeployed.

Students and educators need to better anticipate the skills that will be needed. It is clear that universities in China are not equipping graduates with relevant skills for the changing economy. They will have to do better in preparing 7 million graduates a year to enter the workforce.

Individuals will also need to look after themselves. I am convinced that they will seek vocational training in massive numbers. This will also be a very fast growing business opportunity, one which will potentially occupy much of the space in malls given up by retailers who have shifted to selling on the Internet.

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image copyright: leungchopan / 123RF Stock Photo

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8 Reasons Why Employers Should Pay You More For Moving To Beijing Fri, 25 Jul 2014 06:18:11 +0000 Some companies are proposing to provide extra pay – including “pollution hazard pay” – for expats living in Beijing. Please!

Made me think about what other reasons one could try to arm-twist an employer for a few dollars more, wherever one might get posted in emerging markets:

1. Eating food in restaurants or perhaps even eating at home. After all, I don’t know how the food has been prepared, if it is past its sell-by date, or if it was sprayed with pesticides?

2. Driving a car. The accident rate must be higher here than whatever benchmark we can get the HR guys to use. It’s not the cost of repairing the car, that’s covered by insurance. The chances of personal injury are higher and I suffer stress just thinking about it.

3. Taking overnight flights on local airlines. Seats that hardly lean back, lights on throughout the flight, being woken up for meals you don’t want, announcements made every 30 minutes during the flight. This leads to serious sleep deprivation.

4. Knowing that my email is being accessed by government security services. Oh wait, sorry, that also happens back where our HQ is, so I can’t really ask for extra for that.

5. Living in an apartment built to local construction standards, or worse. It might fall down.

6. Water. Surely I need to import all the water I use?

7. Clothing allowance. Not only will my clothes be damaged by the air pollution, but at some point the maid will put my suits in the washing machine (this did happen to my colleague a few years ago).

8. Video conferences and conference calls between midnight and 6 a.m. You wouldn’t do this in HQ land – why do I have to? Double compensation for calls on Friday night.

Where do you draw the line? Net net, in my view, before you even get started. If it is the extra money, not the opportunity, that is what determines whether you move or not, I suggest you don’t.

I just don’t see how any of the recently proposed expat allowances (or my more creative suggestions) are anything other than an insult to the talented and committed local colleagues in the city you are thinking of moving to. They breathe the same air, eat the same food, live in the same buildings, travel on the same roads and get on the same middle of the night videoconferences.

Do you really want to be looked at by them, your peers, your direct reports and maybe even your boss, as the guy who has to be paid extra to do what they see as normal?
You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: Jesse Varner / Flickr

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Who Reads Newspapers In China? Fri, 25 Jul 2014 05:50:53 +0000 Despite their influence, relatively few copies of China’s major newspapers are printed every day. For a country of 1.3 billion, that only 3 million copies of People’s Daily are printed daily (source: Danwei) seems pretty low. In comparison, the Sun newspaper in the U.K. (population 60 million) prints 3 million daily, Times of India 4.1 million, Yomiuri Shimbun in Japan 13.5 million, The Wall Street Journal 2.4 million, and The New York Times only 1.9 million*.

This is reinforcement that the vast majority of Chinese citizens receive and consume their media online both from formal news organizations and through social media and from CCTV, with its hundreds of millions of viewers daily. It is not surprising that companies fear an exposé from CCTV more than from print media. Its immediate radiation is so much larger.

Many copies of Chinese newspapers seem to be distributed for free. Their economics cannot be pretty, especially not when they and their peer state-owned enterprises are being asked to become more market-oriented. Consequently, we see the rush to split out parts of their operations that could conceivably be run on a for-profit basis and to promote their listing on local exchanges. The number and nature of visits from Chinese state-owned media to their European peers is growing and changing. Rather than polite exchanges of opinion and commercial arrangements for content sharing, Chinese visitors want to get deep into the business models of how they are funded from public and commercial sources.

A further consequence will be greater economic pressure on journalists, who traditionally have been paid very little, and who supplemented their incomes elsewhere. Newspapers are unlikely to be paying more overall, and indeed, they will likely thin their ranks of journalists. However, they will pay more for stories that generate online views and consequently advertising revenues. Everyone in China understands pay for performance, whether in the private sector or state-owned enterprises. This may also be coming soon to Chinese journalists – a good time to be a great journalist, a bad time to be a general piece writer.

* People’s Daily, Wikipedia, ABC

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: Philip / Flickr

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Technology Delivers Safer Food In China Wed, 23 Jul 2014 05:47:19 +0000 Food safety, or the deep felt belief in its absence, is one of the most powerful forces shaping consumer behavior in China. This shows itself in many ways, from the cottage industry of travelers bringing infant milk formula back from every trip abroad, to total contempt for tap water.

Manufacturers are increasingly backward integrating to try to control every step in the food chain that determines what goes into their products. Yet still, retailers and food producers live in fear of adulterated ingredients somehow getting into their products. The government is subsidizing the development of modern cold storage facilities in many cities. Yet consumers remain skeptical and are asking for proof that a product is safe, is as fresh as it claims to be, and was grown where it claims to come from.

Technology is being deployed to do this in a growing number of ways. Below are a few representative examples. If they scale over the next few years, China might be on the verge of finally emerging from its food safety crisis.

  • Joyvio, founded only a few years ago by Legend Holdings, has become one of China’s largest blueberry and kiwi fruit producers. Consumers can track information about their fruit such as farm of origin, product type, planting conditions, quality control steps, and packaging type, by scanning the QR code on the fruit with their smartphone.
  • Metro has traceability scanners in the meat section of their stores where you scan your selection and learn where the animal was raised, where it was slaughtered, how long it has been in transit, and if it has been frozen during the process.
  • Online platforms are becoming increasingly cost competitive for supplying imported foods in China’s major cities. In Shanghai, COFCO reports that 23% of online food sales are of imported foods.
  • Yihaodian, the online only store now controlled by Walmart, has opened a pilot offline store in Shanghai offering pick up and return, as well as home delivery.
  • SF Express, one of the most important providers of logistics services that enables ecommerce in China, is offering subscription based food delivery services, with a time guarantee of 48 hours from farm to home through its online marketplace. is forming partnerships with specific producers to enhance its own fresh offerings.
  • Sun Art, the hypermarket chain, is working with convenience stores for the stores to serve as pick up and payment points for products ordered on (their online site).

Lots of experimentation underway to better integrate online and offline and bring greater convenience to the consumer regarding where, when and how they make and receive or collect their orders. I expect the pace of change to be very rapid as retailers play out a new land grab, trying to occupy the best sites in high density residential areas for these new multi-purpose locations – retailer, pick-up point, payment point and more.

Less time in transit should mean fresher food with less spoilage; more information should mean greater confidence; more efficiency should mean lower costs. It is more than likely that technology enabled food delivery is the key to a safer food environment for all its citizens.

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: Carnie Lewis / Flickr

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Who Depends Most On China For Exports? Mon, 21 Jul 2014 05:40:22 +0000 China’s imports grew only 7% in 2013 over 2012. Which countries are most dependent on China for their exports and so are most impacted by slower growth in imports?

Close neighbor South Korea sends almost 30% of their exports to China, Japan over 20%. From further afield, Australia sends over 35% of their exports to China and Chile nearly 25%*, however this is only 6-7% of their respective GDP. In contrast, many Southeast Asian countries’ exports to China are 8-12% of their GDP in scale.

McKinsey China

The chart also highlights:

  • Growth in exports to China are unlikely to be a major growth driver for the EU, given the current base is only 1.1% of GDP.
  • Russia really does have the opportunity to pivot to the East for its energy exports and achieve significant growth, with only 6.5% of its exports coming to China today.
  • As India’s new government sets a higher growth agenda, debottlenecking India’s exports to China could make a material contribution

By category, instruments and electronics continued to be the fastest growing categories at 20% and 15% respectively. Agriculture was third with a growth rate of 10% and I don’t believe it will be long before it becomes the second fastest growing sector.

*Main source: UBS

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

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Shanghai’s Smartest Heading To Oxford Sat, 19 Jul 2014 05:34:53 +0000 50 of Shanghai’s brightest students gathered last week for an introductory video conference with the administrators from Oxford University. All have places to start at the university in September. All they have to do now is to navigate the visa and financial support processes. Indeed, the conversation during the session and after focused very much on the cost of studying abroad.

While clearly very talented, these students are not from any moneyed elite. Studying abroad is a major financial challenge for them. They are fortunate that the number of scholarships available is rising very fast, ranging from older funds such as the U.K. government’s Chevening Scholarship and the Jardine scholarships, to new funds donated by successful Chinese entrepreneurs. Oxford and other universities realize the challenges that such students face and that the best may simply not apply in future.

Almost all have places in the sciences or engineering, around 60% are women. The skew away from liberal arts is unsurprising. Tackling something like politics, philosophy and economics through the tutorial system in English as a second language is a high bar.

As a pool of talent for multinationals to consider hiring, this is an outstanding group. Ensure that your Oxford recruiters are on the lookout for talent for China, not just London!

It was great to meet these talented students, understand their aspirations and try to ease some of their anxieties as they set out for Oxford. I look forward to remaining in touch with them in the years ahead.

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Enabling The Next Internet Wave In China Thu, 17 Jul 2014 13:14:30 +0000 The leaders of China’s Internet success stories are rapidly becoming part of China’s establishment, interacting frequently with senior government leaders. Last week, for instance, several China Internet CEOs were part of Xi Jinping’s trip to Seoul. As they have these opportunities to spend time with policymakers, what should they be arguing is necessary for the next era of China’s Internet economy to be as successful as the one they have already profited from so well?

  • Enhancing workforce skills. It should be obvious to all that universities should be graduating students equipped with the technical and business skills to succeed in operating companies. It is, however, entirely obvious today that they are not. Government action to make university curricula relevant for the growth in internet related jobs is.
  • Sustaining openness to international ideas and capital. China has profited greatly from an Internet industry structure that encouraged the development of China relevant business models and local champions to deliver them. Yet often inspiration and stimulation for the business model came from outside China. And today, much of the world is looking to China’s internet leaders for their own inspiration. There is very much a two-way flow of ideas and investments. This benefits everyone.
  • Enhancing data protection for individuals from businesses who are using their data. Many private companies and state-owned enterprises hold vast amounts of information on their customers. While new laws have been passed regarding how they are allowed to use such data, what permissions they should obtain, and the like, consumer confidence in the system is low. It could take only a few high profile breaches of personal information (e.g. from a bank or a telco) to have Chinese citizens pull back from providing their personal data so freely online. It is essential that China’s leading Internet companies are seen to be role models in data protection.
  • Encouraging national markets. Most Internet businesses are born national. Yet regulations at a city or provincial level can hold back the development of efficient national markets that would benefit consumers. Constraints on selling second hand cars across provincial boundaries is one example. Policymakers should roll back regulations that constrain markets to the provincial or city level.
  • IP protection. Increasingly, China’s internet leaders are developing a substantial amount of in-house intellectual property. They want to be certain they can protect this IP in China and internationally as they globalize. Ensuring they can get swift redress when they find their IP being used by others is key. For an Internet player guilty of using someone else’s IP, a small financial fine in 12 months is almost irrelevant when a business is growing at Internet speed. Courts need to decide quickly if a business model is legitimate or not.

Swift action on these levers will place China’s Internet industries in a much stronger position to succeed going forward.


You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: Thomas Galvez / Flickr

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China Malls Reinvent Wed, 16 Jul 2014 13:12:44 +0000 One of the most notorious failures among many in China’s shopping malls is the New South China Mall in Dongguan. Originally marketed as the largest mall in the world and targeting the entire Pearl River Delta with premium outlets, it quickly fell into disuse and ended up like this.

Now it is reopening under new ownership, focused simply on local residents in Dongguan and with a very different mix of outlets. On its first day back in business last month it claimed 80,000 visitors. (I tried but was not yet able to find a picture of the new crowds). I am sure a lot were visiting out of curiosity, but just maybe they will keep coming back to what in some way is now the largest restaurant in the city. Fully 40% of the space is now given over to food consumption. Conventional retail takes only 30% and is mostly local brands.

The remaining space is for experiences stores, trying to make the mall a destination in which people will remain in for hours. The retail space may shrink further as the mall owners see offices, clinics, opticians, dentists, kindergartens, tutoring for children, and gyms as the next focus of their renovation. What the new owners are doing, on a massive scale, is representative of what is changing in malls across China.

Traditional retail outlets cannot support the economics of most malls; new services are the future if there is one at all. The need to reinvent is high, although hopefully most can avoid bankruptcy as they do so.


You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

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China’s Courts Take To The Internet Tue, 15 Jul 2014 13:05:39 +0000 China’s courts may not be world leaders in many regards, but in one area at least, they seem to be innovating in ways that others might follow. Around 200 courts out of 3,100 nationwide have registered as “stores” on Taobao, China’s leading online retailing marketplace. The earliest adopters were in Zhejiang province in East China, where almost 100% of courts now use Taobao.

The courts are using Taobao to sell foreclosed properties, seized and made forfeit as part of the court’s proceedings. Going online allows the courts to list assets for free rather than have to pay someone to advertise and organize local auctions. Clearly, they also reach a much larger pool of potential buyers. Taoabao claims that courts are realizing prices on average 20% above their historic levels and that more assets are being sold at the first time of offering. As a result, creditors are receiving higher and faster pay outs, and the courts are seen to be more transparent.


You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: xtockimages / 123RF Stock Photo

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Bringing Technology Into Chinese Healthcare Mon, 14 Jul 2014 12:56:10 +0000 China’s healthcare system is facing massive growth in demand as the urban population grows and the middle class expands. As in so many countries, demand grows at a pace which financial resources do not match. In an effort to get more from less, China’s healthcare administrators, hospitals and patients are exploring how technology can help. In many ways, China’s systems encourage local experimentation with the more successful solutions getting scaled nationwide over time. Some examples include:

  • Telemedicine pilots are scaling across the country. Zhejiang has a telemedicine network connecting 500 community health centers (the entry point into the healthcare system), 150 city hospitals and a dozen provincial level hospitals. By handling thousands of expert interactions and even intensive care cases remotely, inpatient costs fell over 10%, 40% fewer patients needed to be physically transferred to the next level in the healthcare system, and as a side benefit, complaints fell by nearly 30%. Even military hospitals are participating in these networks, with China’s leading 301 military hospital conducting 100 remote consultations a week in 2013.
  • Online “consultancy” platforms connect patients and doctors directly online. One of the leading platforms in China, Chunyuyisheng, has more than 15 million consumers registered along with 10,000 physicians and claims to receive hundreds of thousands of queries a day. While a first question is usually free, these sites successfully charge consumers modest fees. More than 1 million members of the Chunyuyisheng platform are paying $1-2 per month for the opportunity to ask unlimited questions and receive answers within the hour. Some of these platforms connect directly into a hospital’s outpatient scheduling systems and can facilitate consumers making appointments with the right specialist.
  • Neusoft, one of China’s leading providers of healthcare management systems, is running city level pilots, under the Xinkang brand, that combine real time healthcare monitoring of the general populations with in-home monitoring of chronic conditions and hospital consultation.
  • E-cards that hold healthcare related information and which allow patients to make appointments online, check in, record a diagnosis, and pay, have been rolled out to almost all residents in Shanghai’s Minhang district, which has a population of 2.5 million. All healthcare information that was previously held tightly by a single institution is now shared across all facilities in what is called a “Regional Health Information Network”, easing transfer of patients across facilities. The cards even allow an automated warehouse to deliver medicines to a patient who swiped the card without automatically involving a pharmacist.

I expect these pockets of innovation to rapidly scale. The benefits of more efficient use of scarce funds and greater patient satisfaction will rapidly draw later movers to adopt these solutions. One final reason that this will be the case: social media in China today is a great disseminator of consumer-facing innovations. Citizens in cities where they don’t get the new services are quickly aware of them, and are able to push for their delivery.


You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image credit: sunabesyou / 123RF Stock Photo

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Team Building In China Mon, 07 Jul 2014 05:00:18 +0000 I have just come out of our Values Day offsite in Shanghai, an annual event for everyone in the office (and in McKinsey offices worldwide) at which we celebrate and discuss our core values. For most of the year we assume that we are instilling our values through role modeling and real-time feedback. Today we explicitly stand back and talk about our values.

With over 500 colleagues in Shanghai, from an enormously wide range of backgrounds and lengths of experience with our firm (from one week to nearly 30 years), the organizing committee always faces the challenge of making the day fresh and relevant. Breaking down the inherently strong hierarchy that is always going to be present in a China-based organization, for example.

This year, the team did a great job by breaking us into small groups to develop a short performance about daily life in our firm, and how we do and don’t live our values. Critically, everyone had to play a role different from that which they take on a day-to-day basis. For example, in my group the analyst was the project manager, the research leader played the client, the assistant was the partner, and I was the assistant. Developing the story line for the role play forced everyone to think out of their usual context and required everyone to make a contribution, with no one sitting silent waiting for the senior person to speak.

We were given a values topic and asked to develop a scenario on stage in front of the entire group, where at first everything was done wrong, and then we repeated the scenario, but this time modeling best practice in living our values. Fun and thought-provoking, and as always, a prize for the best performance – a bit of competition always helps.

Earlier in the day in different groups we had undertaken the “collage exercise”. We were given a random stack of magazines and newspapers and asked to cut images and words from them to stick to a flip chart in a way that communicated our mission and values. This is a great exercise to do at the table as you discuss what a particular word or image means for one individual and see if it also resonates with the group. In the end, the charts can look quite similar so presenting back to the group is perhaps not as interesting. But much is to be gained in developing them and giving everyone at the table, from all roles in the office, the opportunity to describe what our values mean for them individually.

It is particularly important that we do this in China where it is all too easy for hierarchy to become the be all and end all. Regular events like our Values Day, combined with other initiatives through the year, like our charity and volunteer days and sports events, create and reinforce the connections that would not normally develop through daily work. A people-based firm cannot thrive without them.

Beyond just colleagues, team building in China needs to draw in family members to understand what we do all those long hours in the office, often out of town, and with whom. Summer events with children, in-office events to celebrate promotions, and the occasional weekend retreat with spouses, all reinforce connections and commitment. In an environment that is so opportunity-rich in China for the talented colleagues we have in every role, it is not just about living our values, but also smart business practice, to make everyone feel a committed and valued member of the firm.

You can read more of my views on China on my LinkedIn Influencer blog. And please follow me on Twitter @gordonorr

Image: Me and colleagues at our Values Day offsite in Shanghai

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