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How international companies are adapting to China’s economic crisis

Over the last few weeks, we met over 25 business leaders, representing Fortune 1000 companies in China. In informal discussions, they shared some of their views on company performance, business and growth. The following article summarizes trends and provides examples of how companies are dealing with the current challenge.

The global economy is facing a severe downturn. Situation in the US and Europe is bleak and no one expects a fast change for the better. 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.

So, how is the current state of business in China?

Only three of all companies 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. Suppliers reported that their customers were prioritizing very short lead times over cheapest price.

How are China’s industries faring?

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, manufacturing of machinery, automotive supply and in general export depending businesses.
– The ugly: Logistics companies, ship building, hospitality/hotels

Some 670 billion USD have been earmarked for construction, coal, machinery and equipment manufacturing and a couple other key industries. Nevertheless, the stimulus is only reaching a few international companies, 4 of the 28 reported that they are feeling the impact.  Companies that either directly participate in government tenders for large investment projects or 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 the whole 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 exemption. 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 has 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.

How are employees reacting?

After some 20 years of fast and steady growth, this is the first economic crisis China’s younger generation is facing.  And the reaction is surprisingly rational – considering a generation of job hoppers used to fast promotions and regular salary increases. Employees recognize the economic crisis and are widely accepting temporary salary cuts.

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 employee to employer. Most drastic example is a company that permanently reduced salaries by 30+%

But not everyone is trying to hide before the storm – two companies mentioned their aggressive expansion strategy. Despite weak performance in their other key markets in Europe, Japan and the US, both companies have invested in planning and set aside significant budgets to grow their business and market position over the next two years.

“There are no real alternatives to Asia when looking for large growth markets. Companies that seized opportunities and positioned themselves well during the Asian financial crisis 1997, benefited from a decade of unparalleled growth. It will be interesting to see who wins this time”

Heiko Bugs – Director China

www.solidiance.com

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About Solidiance

Summary: Corporate strategist with extensive Asia-based management & operational experience. Manages the long-term strategic planning of the organization. Responsible for multi-country team management, PBIT and revenue growth, geographical expansion, business development, key staff recruitment, business unit strategy and processes. Speaks English, French, Vietnamese and "Survival" Japanese. In Asia Pacific for the past 21 years. Specialties: Disruptive innovation strategy & implementation, Expansion strategy, Benchmarking, Asia market entry strategy, Market research Asia, Market sizing, opportunity analysis & market feasibility, Sales & demand forecasting, Competitive intelligence and strategy, Customers acquisition & loyalty, New product development, Distribution & value-chain optimization, Industrial B2B branding, Partner evaluation & selection, M&A due diligence - valuation, Marketing & Corporate strategy, Emerging markets

2 comments on “How international companies are adapting to China’s economic crisis

  1. it consulting in asia
    August 14, 2009

    What I’m worried about is that companies start to use the global crisis as an excuse for closing down companies that have run into trouble. In some parts of China thousands of workers have been left stranded without pay when the outlook has dimmed just a bit and the co owners have bailed out. I think the worst is still to come.

  2. Khris
    August 30, 2009

    China looks to be driving up demand for some commodies such as pulp and paper, my question is where is this demand coming from? Some have said that the Chinese companies are replenishing their inventories. Second do you see Chinese demand driving world economic growth in the future?

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