Published on July 3, 2009
Different shades of gray How international companies are adapting to China’s economic crisis July 2009
Different Shades of Gray How international companies are adapting to China’s economic crisis “ In recent weeks, Solidiance met over 30 business The current international financial leaders, representing Fortune 1000 companies in China. During informal discussions, they shared some of their crisis, despite its severe impact on views on company performance, business and growth. China's economy, also brings The following article summarizes trends and provides examples of how companies are dealing with the opportunities for small and large current challenge. corporations. ” The global economy is facing a severe downturn. The situation in the US and Europe is bleak and no one Chinese President, Hu Jintao expects a fast recovery. Everyone seems to agree that the turnaround will happen first in Asia and since Japan is not looking any better than its Western counter parts, pressure is mounting on China. 2
Different Shades of Gray How international companies are adapting to China’s economic crisis So, how is business? Only three companies we spoke with mentioned that their turnover is growing or that they expected to grow this year. A few companies were maintaining their figures and the large majority of businesses were contracting up to 50% year-on-year. Most companies reduced stock levels and stopped buying for several months. Companies are ordering again, but priorities for some customers have shifted. “ It is challenging for me to compete on lead time, when some of my materials need to be imported. My customers would rather get their material within a week and pay a 3 - 5% premium than to commit to a 6 to 8 week delivery time. Suppliers reported that their customers were prioritizing very short lead times over getting the lowest price. They fear the market could have crashed by then… Which industries*? - the good: Healthcare and food are leading the pack, as well as companies directly benefiting from the government spending plan i.e. telecom with 3G standard and ” infrastructure construction - the bad Chemicals, raw materials such as coal and steel, service companies, manufacturers of machinery, automotive supply and in general export dependent businesses - the ugly Logistics companies, ship building, hospitality/hotels (*The list represents industries we covered in our discussions) 3
Different Shades of Gray How international companies are adapting to China’s economic crisis Is the government stimulus plan helping you? “ Roughly 670 billion USD has been earmarked for construction, coal, machinery and equipment manufacturing and some other key industries. As much as 45 % of my current revenue ” Nevertheless, the stimulus is only reaching a few is from such projects.. international companies: only 4 of the 28 companies we spoke with reported that they are feeling the impact. “ Companies that either directly participate in In two weeks I sold more than in the last government tenders for large investment projects or four months… ” supply equipment for these projects are seeing a significant impact. A good example is a heavy machinery company supplying Chinese construction material manufacturers. The model works well: Chinese construction companies are winning government contracts and use these contracts as guarantees for bank loans. The current liberal lending policy allows Chinese companies now to buy on credit previously unaffordable international equipment. But not all of the construction industry is booming again – spending and credits are limited to government projects and companies depending on the private construction sector are left out. How is that impacting employment? One growing company mentioned a special “China deal” where they negotiated with HQ to give staff a moderate salary increase while the rest of global salaries remain frozen. This is a rare exception. Most companies trimmed bonus schemes and at best kept their old salaries. A widely used measure to curb cost has been salary reductions across the board, ranging from 10% to 50% (!). International companies have critically reviewed expat packages and sent staff packing - in one case from 30+ to under 10 expats within a few weeks. At the same time, though, few office staff have been laid off. Companies rather reduce working hours and payments, in some cases sending people on unpaid leave. There is a great deal of uncertainty on when business will pick up again and everyone still remembers shortages of qualified staff just a few months ago. 4
Different Shades of Gray How international companies are adapting to China’s economic crisis How are employees reacting? “ After some 20 years of fast and steady growth, this is One of our best performers left the the first economic crisis China’s younger generation is facing. And the reaction is surprisingly rational - company half a year ago but has now considering a generation of job hoppers used to fast asked to come back to their old position promotions and regular salary increases. Employees recognize the economic crisis and are widely accepting and salary…we are very happy to have temporary salary cuts. her back Which strategy to fight the crisis? ” Most companies have frozen their overall expansion plans and introduced cost cutting measures, i.e. no hiring of new staff, reduced salaries and expense budgets. Several companies mentioned that they are using the crisis to critically review staff performance especially since bargaining power has switched from “ Now is the time to reduce our high salaries. When business improves again, we will offer significant increases but then coming from a lower, competitive ” employee to employer. The most drastic example is a base company that permanently reduced salaries by 30+% “ But not everyone is trying to hide before the storm - two companies mentioned their aggressive expansion We have a green light. Distribution is the strategy. Despite weak performance in their other key markets in Europe, Japan and the US, both companies bottleneck for our domestic growth and have invested in planning and set aside significant now is the time to win over some of our budgets to grow their business and market position over the next two years. key distributors. We are also currently ” reviewing M&A options 5
Different Shades of Gray How international companies are adapting to China’s economic crisis Solidiance is a marketing and innovation strategy consulting firm with focus on growth in Asia Pacific. We are devoted to working side-by-side with our clients to outpace the competition, close gaps in growth and deliver breakthroughs in performance and profitability. Our Asia focus provides our clients with a better understanding of intrinsic regional issues. To subscribe to further white papers and to learn more about Solidiance please visit: www.solidiance.com Heiko Bugs - Director “ Heiko is responsible for Solidiance’s China operation and has spent his last nine years in Greater China, participating in the There are no real alternatives to Asia country’s rapid development as an economic powerhouse. Heiko started his career in Asia working for a manufacturing when looking for large growth markets. joint-venture in South Korea before moving back to Companies that seized opportunities and Germany. He then spent time in a German consulting firm focusing on organizational restructuring. Prior to Solidiance, positioned themselves well during the he led the China operation of an international management Asian financial crisis 1997, benefited consulting company with four offices in China where he advised international companies on market entry and growth from a decade of unparalleled growth. strategies. Heiko has presented China topics at more than 25 international conferences and has been focusing for the last five years on the rapidly developing economic relationship It will be interesting to see who wins this ” between India and China and its global strategic impact. time Heiko studied Economics and Information Technology in Germany and holds a MBA (Honors) from Rutgers, The State University of New Jersey. Heiko Bugs - Solidiance China Singapore Thailand Suite 801 Suite 17-01 Suite 32-05 Hong Kong Plaza High Street Center Interchange 21 283 Huaihai Road Central 1 North Bridge Road 399 Sukhumvit Road Shanghai 200021 Singapore 179094 Bangkok 10110 Tel: +86 21 5168 8905 Tel: +65 6408 8208 Tel: +66 (0)2 660 3638 email@example.com 6
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