The Challenge for Multinational Corporations in China: Think Local, Act Global

The view of multinational corporations in China has changed dramatically since the late 1970s, when the nation opened its economy and welcomed foreign direct investment, and global players such as Volkswagen, Coca Cola and 3M began exploring the market. During the 1980s, other MNCs such as Motorola, Philips and NEC were received with open arms. They enjoyed corporate tax rates half those imposed on local companies, and they paid no duties on their capital goods imports. In general, they were revered by government and consumers alike. Even into the 1990s, as China and its people developed a better understanding of MNCs, the foreign companies were the objects of awe and admiration. At that time, Chinese consumers exhibited an almost unconditional preference for MNCs’ products and services.

However, beginning in 2000, when per capita GDP climbed above US$1,000,1 and especially since 2001, when China joined the World Trade Organization, both the Chinese government and consumers have changed their perceptions of MNCs drastically. MNC projects now are scrutinized much more for their fit with national interests. Furthermore, MNCs increasingly are getting local treatment. The coming equalization of the corporate tax rates (to be phased in as of January 1, 2008) between local and foreign companies attests to this. MNCs are now held to the same, if not stricter, standards than local competitors in terms of areas such as employment standards and environmental standards. And they are finding that those standards are enforced much more rigorously.

Chinese consumers also have become more demanding. As a rule, shoppers no longer see much difference between products made by Chinese companies and those made by MNCs. Indeed, their expressed purchase choices often are cast as negative reflections of how much more they had expected of MNCs. In some ways, China’s consumers feel let down. The cachet of the MNC is no longer there; savvy shoppers now emphasize objective details and product quality.

MNCs clearly have made significant contributions to China’s development. In 2004, 28% of China’s industrial output and 19% of its tax revenue was accounted for by MNCs.2 Furthermore, MNCs produced 57% of all exports from China in that year.3 By the end of 2004, 400 of the FORTUNE 500 companies had offices in China. Technology transfer and managerial knowledge are less tangible, but they represent other areas in which MNCs have had an impact, even though a recent government report declared that roughly 85% of intellectual property rights used in China are owned by MNCs.4

When China opened up, the initial expectation was that MNCs would bring cash, know-how and skills. But the nation’s economy has shifted very rapidly — more rapidly than many outsiders have appreciated. As such, much of what the MNCs first contributed is prized less. At its current stage of economic development, China has plenty of cash and has benefited from technology and management transfer (although the government remains concerned about the lack of intellectual property in Chinese hands). The current expectations of MNCs are much more qualitative and behavioral: They are supposed to be teachers and role models. (See “Adapting the MNCs’ Behavior to China’s Expectatons.”) And it is in those roles that they often fall short.

Less than two years ago, for example, fast-food giant McDonald’s Corp. was forced to cancel a television ad in China after viewers there found it offensive. The commercial depicted a Chinese man kneeling before an electronics salesman and begging for a discount. Viewers said that the commercial depicted the Chinese as poor and lacking in dignity. Explaining that it had been vetted by government authorities, McDonald’s China said the ad was trying to convey a message in an exaggerated, humorous way. Chinese viewers obviously thought otherwise: 80% considered the ad insulting.5

Toyota Motor Corp. ran into a similar situation in 2003 with two different print ads. One advertisement depicted a popular cultural symbol, a Chinese-style stone-carved lion, saluting a moving Prado GX, whose Mandarin translation means “despotic manner.” The slogan read: “You have to pay respect to it.” Many Chinese connected the lion with those carved on the Lugou Bridge in Beijing, the site of the first battle of the Second Sino-Japanese War in 1937. The second ad showed a Toyota Land Cruiser pulling a Chinese-made truck on a bumpy road. The truck’s trademark was too small to be identified, but the vehicle looked very similar to the Jiefang trucks built by First Automotive Works Corp., a Toyota joint-venture partner in China. A flood of comments on online auto forums claimed the ads were offensive; some citizens used the Web to call for boycotts against Japanese cars. Public resentment against Japanese companies is aroused easily in China due to Japan’s wartime occupation of the country. Toyota withdrew the ads from 30 Chinese publications and published apologies in response to the widespread indignation that the ads provoked.6

Such missteps and misunderstandings are not trivial matters. Although localized operations are congruent with the MNCs’ efficiency and effectiveness rationales and are essential to their bottom lines, localized behavior can prove disastrous. Toshiba found that out especially quickly in 2000. After an alleged defect in Toshiba’s laptops came to light worldwide that year, Toshiba paid about US$1.5 billion (or US$445 per person) in compensation to its American customers. But it did not offer the same settlement to Chinese customers, providing only corrective software. After widespread condemnation in the Chinese media, Toshiba fell from its position as China’s top laptop supplier to No. 3. Its market share dropped from 19% to 15% in a matter of months.7

Indignation and Losing Face

Making mistakes can be particularly costly in China. News travels quickly, and consumers can get surprisingly involved in the discussion. Their general admiration for foreign MNCs translates into high expectations, which quickly can turn into disappointment and disapproval. There are already more than 100 million “netizens” in China,8 many of them busily filling online billboards and chat rooms with comments, opinions and their own misconceptions and exaggerations.

MNCs must become more closely attuned to the role they are expected to play at this stage of the development of China’s economy. They are under increasing scrutiny by the Chinese government, so it is all the more important for them to understand their “face,” or status, in China — how they are perceived and thus how they should act.

In China, few things are worse than losing face. The concept has two bases: social prestige and moral integrity. The two factors are interdependent in that social status implies certain expectations about one’s behavior and that the face one is accorded by others will depend on how well one lives up to those expectations. This applies as much to organizations as to individuals. Although MNCs still are very well placed, their lofty status brings with it high expectations about their integrity. The higher they are in the hierarchy of corporations, the higher the expectations. China expects to benefit from the MNCs’ positive influence on the nation’s business environment and practices. (See “The Factors Determining an MNC’s ‘Face.’”) A loss of face casts a long shadow over the MNCs’ competitiveness and hence their future in China. To gain respect and face, global behavioral standards must be pursued.

Think Local — Act Global

Put simply, MNCs in China must turn the familiar mantra is “think global, act local” on its head. They must “think local,” which means fitting business models and approaches to the local reality with respect for the local culture and norms, with a sensitivity to the local political context and with appreciation for the roles that the Chinese government expects MNCs to play. Local managerial talent and input clearly are important factors. Local managers instinctively know the subtleties of the Chinese market and how to navigate the often murky environment. MNCs not only need to have their hands and feet in China — they must have their heads there too, in all senses of the word.

However, MNCs in China must also “act global” — that is, they must ensure that their behavior in China is in line with their behavior around the world. Localized behavior can come in many forms and can be disastrous. The following examples illustrate the kind of ill-advised localized behavior in which some MNCs have engaged. (See “The Behavioral Mistakes of MNCs in China.”) For any company wishing to succeed in China, they provide some lessons in what to avoid.

Don’t Apply Double Standards

MNCs can get into trouble in China when allowing local standards and practices to trump global standards and concerns. Both Colgate-Palmolive Co. and The Procter & Gamble Co. came under fire in the Chinese media in April 2005 for selling toothpaste containing triclosan, an antibacterial compound that a U.S. study, which did not involve toothpaste, found might cause cancer under certain conditions.9 When the study findings were reported by the British Evening Standard newspaper, British retailer Marks & Spencer Group plc decided to take the triclosan-enhanced tooth-pastes off its shelves. China’s national toothpaste standard does not stipulate how much triclosan is allowed; both Colgate and P&G claimed that the British response was an overreaction and kept their Chinese products on the shelf. Their response was backed by a subsequent report in the People’s Daily, China’s main newspaper.10 (Some retailers in China, including Carrefour SA in Shanghai, did refund consumers for the toothpaste brands that contained triclosan.) At that time, Colgate and P&G’s Crest brands accounted for 30% and 15%, respectively, of China’s toothpaste market. Colgate and Crest remain on the Chinese market today but are reportedly seeing declines in sales volumes. Sina.com reported that Colgate’s brand trust ratings dropped from 88% to 9% in one week.11

It is worth noting that MNCs must not interpret food safety concerns in the sole context of China’s regulatory framework. They must listen to the sensibilities and views of Chinese consumers as well. A case in point: Kraft Foods Inc. and Campbell Soup Co. have been criticized for applying double standards, since they use genetically modified soybeans in China but not in Europe. Legally, both companies are in the right: China does not forbid the use of GM soybeans as long as the product labels disclose the information. (Indeed, China has been an early adopter of the technology and has granted six licenses for GM crops.) The core issue, however, is that global worries about genetically modified crops — circulated by organizations such as Greenpeace International — find their way into China, and into the eyes and ears of Chinese consumers.12

Know the Law and Follow It

Many MNCs undermine their local credibility with their ignorance of regulations. Samsung Corp. ran afoul of Chinese regulators in just this way. When the South Korea-based consumer electronics giant was ranked as 2004’s top consumer electronics brand in terms of brand equity,13 a local distributor promptly included this information in its in-store promotional materials. Government authorities were not amused, however: Strict laws prohibit the use of “No. 1,” “best” and similar status-oriented references in any advertising in China.

Don’t Bend the Rules

Some MNC executives characterize Chinese business practices as immature or corrupt. Yet most Chinese believe that corruption was not part of local business practices until MNCs appeared on the scene. This argument is based on the MNCs not understanding China’s business environment and the cultural fabric that characterizes behavior and social interaction in China. Many Chinese feel that MNCs do not understand guanxi, or social networks, and therefore, to get ahead, the companies often buy their way into the market.

One company that paid dearly for such behavior is insurance and financial services giant American International Group Inc. After the China Insurance Regulatory Commission opened a regulatory investigation on illegal selling practices, AIG admitted in January 2005 that its Hong Kong and Macau agents were illegally selling insurance policies in China. As a consequence, CIRC asked AIG to withdraw its application for a group license. The result was that Trieste, Italy-based Assicurazioni Generali SpA was able to jump into the top spot, even though AIG had been the “first mover” in China’s insurance industry. Indeed AIG had enjoyed a unique legal arrangement as the only wholly foreign-owned insurance operation in China, so one can imagine how the Chinese government felt about the insurer’s behavior.14

Lucent Technologies, the U.S. communications equipment company, was at the center of a similar outcry. In a case that was well publicized in the United States, Lucent dismissed its China operations president and three senior executives in April 2004 for offering “commissions” to suppliers in China.15 Reports show that of the 500,000 bribery cases investigated in China over the last 10 years, 64% involved foreign companies.16 MNCs should note that Chinese law attributes commercial bribery by local employees to the employer, even if management is unaware of the practices.

Avoid Making “Symbolic” Acquisitions

These involve the purchase of local brands, sometimes with the promise of strengthening them, but instead diminishing their presence or killing them off. Chinese observers often view such acquisitions as deliberate attempts to keep local companies at bay or to liquidate them altogether. For example, in 1994, Unilever acquired a five-year lease for Maxam, at that time China’s leading toothpaste brand, through a joint venture with a local company. Three years later, it stopped advertising the brand. A Shanghai business acquired Maxam from Unilever in 2001 and spent more than RMB500 million to revive it. But its move came too late; the damage had been done.17

Avoid Employing Aggressive Tactics Over Intellectual Property Rights

Another contentious issue has been the aggressive, litigious handling of intellectual property rights disputes by some MNCs in China. Approaches such as those undertaken in recent years by Cisco Systems Inc.,18 Royal Philips Electronics NV.19 Sigma Tel Inc.20 and Microsoft Corp.,21 while certainly based on legal grounds within and outside China, are locally perceived as attempts to deter the emergence of local businesses and are in line with the historical Chinese view of imperialistic behavior in China. Apart from damaging the company’s corporate image, such aggressive behavior can play into the hands of competitors that have opted for more of a partnership approach.

Guard Against Management Insensitivity

With restructuring going on in many MNCs in China, some companies have been labeled as having particularly insensitive management styles. In the restructuring process that followed the June 2005 sale of Siemens AG’s mobile phone unit to Taiwanese electronics company BenQ Corp., laid-off employees accused Siemens of following improper legal processes and of discrimination and unfair salary differences between German and Chinese managers. They took their grievances to the streets, garnering ample media attention.

Don’t “Strip-Mine” Profits

MNCs in China also come under scrutiny for their profit-recognition practices. According to Chinese tax authorities, two-thirds of the MNCs that claim to be losing money on their China operations use transfer pricing mechanisms to take profits out of the country. A recent estimate by the tax authorities puts the profits taken out by transfer pricing (on which no taxes are paid) at RMB30 billion (about US$3.85 billion at press time). At the same time, other reports question the credibility of MNCs’ reported operating losses in China. For example, manufacturers in China reported average profit increases of 15.6% from January 2005 to April 2005, but MNCs reported an average 3.5% drop in earnings for the same period.22

Don’t Use China As a Lab

Sohu.com Inc., a popular Internet service provider in China, ran an online survey of its users in June 2005.23 Half of the participants felt that MNCs had been changing in a negative way. No specific companies were named, but two views were common. One was that MNCs had been undermining their credibility and public image with their practices and behavior. The other view was that many MNCs treated the Chinese marketplace as a lab. This is supported by arguments that new technologies are tested in China because it is cheap to do so, but very little of that technology is transferred to China or integrated into the nation’s developing industrial base.

What Managers Must Do

Whether, as has been argued by some, the Chinese media are irresponsible and consumers are overreacting and oversensitive, the fact is that MNCs can find themselves rapidly cast in a negative light if they are not aware of, and do not avoid, behavioral pitfalls.

The question is whether local managers understand the need for behavioral standards and, indeed, whether they know what those standards are. Localization naturally implies that managers and management should move away from a global posture and perspective. Although local managers have an intuitive feel for the local market and know how to get things done in China, they might be less familiar with what a global company really is and, more important, what is expected of those companies at this stage of China’s development. Local managers might not be the best at understanding and appreciating how important it is for MNCs to act global rather than trying to appear Chinese. Furthermore, “acting global” might conflict with what they feel needs to be done to get results on the ground. Local ad agencies and other service providers also might not be familiar with what is required. In essence, MNCs are being held to a behavioral standard that changes as China evolves.

The “think local, act global” strategy implies a need for seemingly contradictory management skills. Managers do need to be local in their understanding, but they also must be global in their behavior. They must have real global experience and a mature understanding of (and appreciation for) MNCs’ global business conduct. Such managerial talent is in very short supply in China, and unfortunately it is not nurtured by the MNCs’ current localization drive.

For its part, the Chinese government is concerned most about the gap it sees between MNCs’ expected behavior and how they behave in practice. Beijing has been looking to MNCs to set global standards in China — a particularly important contribution at this stage in the development of the country’s economy. Interestingly, guanxi with high government officials — viewed by many MNCs as the best way to protect their interests — is an unreliable tool. Although guanxi does play a role, it is a very poor protector against some MNC’s localization practices. Since so many MNCs have fallen short of expectations so frequently, the government has felt it necessary to crack down, monitoring the behavior of foreign companies more actively.

Multinational corporations in China can succeed over the long term only if they show they have acute awareness of and sensitivity to local laws and cultural imperatives and demonstrate that they deeply understand the concept of face. They must demonstrate they understand their exemplar roles and can police their own behavior effectively. If they do not, they can surely expect Beijing and the provincial governments to do it for them. In China, one gets prestige from who one is, but one easily can lose it from what one does.