Such growth has a peculiar ability to conceal challenges, mistakes and inefficiencies. For companies operating in China, the mantras during this period were “think big”, “copy and paste” and “winner takes all”. They were straightforward.
First, the sheer size of China’s market meant that businesses that set the biggest and boldest goals were often the ones that reaped the biggest rewards. The market, as well as investors, rewarded these trailblazers. There are many examples of companies who by the sheer might of capital and investment (and risk-taking) made it to the top of their industry.
Second, China’s ability to facilitate rapid scaling, owing to its vast number of cities and a relatively homogenous consumer base (with some regional differences, of course), encouraged businesses to replicate successful models across the nation. In fact, for some local companies, the ability to scale quickly across second- and third-tier cities was their most important weapon against more sophisticated foreign competition.
However, like all good things, this era has come to an end. The old playbook no longer works. We need to move forward. Gone are the days when size and growth immunised companies against failure.
It’s not just domestic companies that are feeling the heat. So are multinational corporations. In fact, multinationals’ share of all revenues earned in China declined from 16 per cent to 10 per cent from 2006 to 2020. (Although it is important to note that the size of the market grew significantly during this period.) Local brands of goods from portable electronics to groceries have gained 20 to 40 percentage points of market share over the past decade.
While a reassessment of the risks is sensible, China still offers multinationals a unique market. To begin with, China’s sheer size ensures multinationals’ attention. Its GDP is now 18 per cent of the global total, a share greater than the European Union’s and second only to that of the United States (with 25 per cent).
China’s real GDP may grow between 2 and 5 per cent per year over the coming decade, depending on which of various scenarios proves accurate. Even if it grows at just 2 per cent, the additional GDP over the 2021–30 period alone will be larger than India’s total GDP in 2021. At 5 per cent growth, the additional GDP will be as large as the 2021 GDP of India, Indonesia and Japan combined.
Even if China does land at the lower end of projected growth rates this year, China may still account for nearly 30 per cent of global growth. There simply is no replacement for the Chinese market.
What’s the new winning formula in this next era? Domestic companies as well as multinationals will need a much more nuanced understanding of Chinese demand and how to address the needs of different segments.
Size matters, but distinctiveness will matter more. Organisational agility and front-line capabilities will be much more critical in the next era. Success will no longer hinge on having a brilliant founder or a top-selling product, but instead will be about continuous innovation.
The quality and health of businesses will also take centre stage. In re-evaluating the composition of their businesses, many companies will likely find a significant portion are low-quality and money-losing. They will need to make the adjustments necessary to transition to a healthier portfolio mix.
This may sound painful, but it may not be all bad news. More rational and sustainable corporate behaviour will ensure higher-quality companies and bigger shareholder returns. This transition period will throw up new winners in the Chinese economy – among both domestic and multinational companies – which will be stronger, more resilient and more agile.
It’s evident that the narrative surrounding China’s economy is shifting. It’s crucial to adapt and prepare for the “Next China”. The opportunities are vast, but only for those willing to evolve.
Joe Ngai is the chairman of McKinsey & Company’s Greater China region
The news is published by EMEA Tribune & SCMP