The China question

Talking about turnaround in a market that has been growing by double digits for most of the past three decades may seem like an unnecessary exercise. Yet China, one of the most intriguing but complex markets in the world, is an ideal exception to the old adage that a rising tide raises all boats.

While there are many illustrations of commercial success in China – 44 per cent of the US-China Business Council’s members surveyed in the past year said their profitability in China was higher than their worldwide profitability – there are still many cases that have not met expectations. In 2005, for example, US and European businesses were leaving the China power generating market, and companies as diverse as Whirlpool, Yahoo and eBay have been disappointed with their results.

China remains a difficult place to do business, whether it is an M&A, joint venture or greenfield investment. Thus, as the number and value of cross-border transactions in China continue to surge, we believe that many will require a vigorous turnaround of the businesses concerned.

Recently, we studied three expatriate executives in different turnaround efforts in China. This article examines their situations and thoughts about what leadership traits are needed to achieve success in such transactions.

The expatriate executives

Sindy Watson is an executive in the Asia-Pacific region of a European technology company. Since the early 1980s, the corporation had been involved in a joint venture with a state-owned enterprise in China, but problems emerged over issues of technology and control. Her company had three choices: exit the market; go it alone; or try to rekindle the joint venture (the least popular option within the company).

Ms Watson and her Asia-based colleagues believed that China might be the best future the company had, so they hijacked the annual budget planning meeting. Instead of feeding the CEO with “accounting history”, they successfully won him over with the “future promise” of China.

Ms Watson then became part of a team that moved the company’s regional headquarters to Shanghai and restructured the relationship with the Chinese partner. Today, China is one of the most profitable divisions and a powerhouse of intellectual capital for the entire corporation.

Richard Pitt ran the international operations of medical solutions business Santésol until he took charge of operations in China. The company had been there for 12 years, but he believed that it should be more important in China, and China should be more important within Santésol. He became an avid student of the market, pursuing every source of information he could and passing on Chinese contacts to his overseas colleagues, knowing that he was building a network of allies at home. By proposing the transfer of some outsourcing and R&D activities to China, Mr Pitt also made headquarters open to the prospects of transforming China into a partner, rather than merely a market or a competitor.

Arnaud Jaccard established and ran a successful joint venture between a European multinational corporation and a state-owned enterprise in China. Three years after retiring, he returned to Shanghai as CEO of a demoralised Chinese machinery manufacturer.

Mr Jaccard wanted to turn around the company within six months and then build it into an international exporter. The challenges were formidable: a factory without foreign experience; an organisation where personal relationships mattered more than performance and seniority outweighed competence. In his first week, Mr Jaccard focused on showing the workforce that he saw them as the primary asset and valued their contribution.

Lessons from turnarounds

Despite the differences between these situations, there are enough similarities to draw some useful conclusions when thinking about turnaround in China.

■ Strong belief Each case was powered by a belief in China as an opportunity. Ms Watson had lived in the region long enough to appreciate what was happening. Mr Pitt was mentored by old China hands who believed in the market’s future. And Mr Jaccard had worked in China for nine years and was devoted to its potential. Belief enabled them to engage in an energetic but demanding effort to turn belief into reality.

■ Determination to understand China Each individual made a determined effort to learn all they could about China. Although they used different means, including networking, observing, listening and analysing market data, they all became students of China as well as effective business leaders.

■ Fast pace Each person acted quickly. This speed allowed them to always be ahead in shaping key conversations about the future of their companies. In other words, they seized politically opportune moments within the company to influence China-related choices.

■ The capacity to change In a rapidly changing market like China, being unencumbered is a major advantage. Each of the three insisted on sufficient independence to allow them to act fast, do things differently and not look back. Nevertheless, none of them ever neglected the need to communicate back to and obtain support from corporate headquarters.

■ Enduring vision Each individual knew exactly what they wanted to get out of China in measurable terms. They understood that they needed to strike a balance between short/medium-term goals and long-term vision, and, hence, they never lost sight of the necessity to deliver business results today before realising dreams tomorrow.

For example, while Mr Pitt had to travel widely and engage in numerous meetings to identify opportunities, he also used the latest technologies to ensure he was always accessible to make key decisions on day-to-day operations.

■ Proactiveness to expand their role All were flexible enough to take on additional responsibilities if required. For example, when Ms Watson migrated from a marketing position to a coaching and bridging role, she transferred her organisational knowledge and international management expertise to the local team, and also represented the region in dealing with headquarters.

■ Involvement of other colleagues Each of these individuals built allies by involving more, rather than fewer, people. As soon as they recognised an opportunity, they shared it across the organisation. For example, Ms Watson shared the sales forecasting technique, a best practice developed in China, with the rest of the Asia-Pacific region. They also invited, and paid for, their overseas colleagues to visit China in order to change their mindsets. The more colleagues buy in, the more allies there are to pursue a collective action, rather than having only one person influencing headquarters.

■ Comprehensive follow through Beyond good ideas, it is the follow through which makes the difference. Each individual followed up continually. It may not be glamorous, but it does turn dreams into reality.

■ Focus on details Each leader is a case study in incessant action: extensive travel, endless meetings and lots of promises. More important, however, is how they embrace the details. For example, within the first week of his new assignment, Mr Jaccard had modified the lunch schedules of factory workers, fixed broken windows and cleaned factory floors. Success was built on the details that others had overlooked in pursuit of grand strategy.

■ A preference for face-to-face This is not leadership through e-mail. Each of these individuals wanted to fully assess their counterparts – employees, customers or suppliers – and strengthen the relationship as quickly as possible. Face-to-face contact was the only way to achieve this.

■ Trust in local employees Each leader respected local talent as real assets and relied on them for ideas, insights and imagination. This led to powerful working relationships that allowed the organisation to move quickly in a completely new direction. For example, Mr Jaccard’s actions to improve working conditions were done in a manner that clearly conveyed his devotion to the workforce.

Emerging markets are different in many ways. What is reassuring from looking at these three examples, is that the means to success is not all that different from what is regarded as good practice anywhere.

William A. Fischer is a professor at IMD and has written extensively about China’s economic reforms. In 1998-99, he was executive president and dean of CEIBS, Shanghai.

Rebecca Chung is a research associate at IMD.

The authors’ research includes China’s role in a multinational corporation’s global value chain and leadership. This article is based partly on their case study which won the Emerging Chinese Global Competitors Award in the 2005 Case Writing Competition organised by EFMD.