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Executive Interviews: Interview with Kai-Alexander Schlevogt on The China Factor
January 2008
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By Dr. Nagendra V Chowdary
Dr.Kai Alexander Schlevogt Professor of international strategy leadership at the National University of Singapore Business School He serves as a Program Director of the Nestle Global Leadership Program delivered in association with London Business School. 
The Chinese government cannot
freely use monetary policy to combat
overheating, since it is largely
determined by the exchange rate
target. Thus, it needs to resort mainly
to cruder administrative intervention,
which makes it difficult to orchestrate
a soft landing. One soft social
engineering measure, which however
becomes effective only in the medium
term, is educating the ordinary
Chinese, who tend to focus
exclusively on potential gains, about
the risks of stock investments.One
key insight is that prices tend to
regress to their mean, or, put more
simply, what goes up is likely to go
down.Social housing projects similar
to the highly successful Singapore
model and rent subsidies for the poor
are ways to limit the pain from rising
real estate prices.
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It would be good if caps on energy
prices were removed. In this case,
prices would send the correct signals
and thus lead to an efficient allocation
of resources. If prices rise, the
government can provide income
support to the poor to soften the blow,
but everybody would have a strong
incentive to save energy. -
You mentioned that multinational
companies are investing in China for
various reasons, such as lowering
costs by shifting manufacturing there
and selling to Chinese consumers. Do
you foresee an overcrowded market?
Do you expect China's low-cost
advantage to persist in the long run?
Multinational companies in search of
large uncontested markets are often
disappointed by China. The Middle
Kingdom has already become one of
the most competitive business turfs
on earth. All major foreign companies
and strong Chinese companies are
battling for supremacy on this growth
frontier, often resulting in cut-throat
price competition and a squeeze in
profits. At the same time, costs are
rising rapidly, which depresses
margins further. To start with, we are witnessing a
total war for labor at all levels of the
organization. Low suitability rates and
fragmentation make the problem
worse. Less than 10% of the estimated
15.7 million Chinese university
graduates from 2003 to 2008 are
deemed suitable to work in
multinational companies. Out of the
resulting pool of 1.2 million
graduates, only 815,000 individuals
are accessible. No wonder, payrolls are increasing
dramatically even in times of low
inflation. From 1998 to 2003, when the
inflation rate was only 0.01%, the
average wage of employees in China
grew at a compound rate of 13.4%.
Wage levels were highest in the
rapidly growing coastal regions.
Besides, low retention rates lead to a
further increase in expenses, for
example, for recruiting and training.
To improve the social protection
network, the Chinese government is
likely to require higher contributions,
which will further increase labor cost.
The prices of advertising and real
estate are increasing significantly, too. The total costs of operating in the
Middle Kingdom are often even
higher than what is reflected in the
profit and loss accounts of the Chinese
units. Overheads, such as the time
committed by headquarters personnel
to coordinate and control operations
across a globally disaggregated value
chain, are not always fully allocated to
the activity centers. China usually
requires particularly high time
commitment from the top leaders of
the corporation and their support
staff. Besides, the opportunity costs of
foregone investment opportunities,
possibly even making neglected
operations elsewhere vulnerable to
attacks from China, are not calculated. In view of all these trends, the
leaders of multinational companies
should think twice before moving
operations to China, especially the
coastal regions, solely to reduce
expenses. To generate more options,
they should analyze the costs in the
Chinese hinterland, including
expenses resulting from the
underdeveloped infrastructure and
other disadvantages, as well as in
other emerging markets, such as
Vietnam or the Philippines. Besides,
given that the Chinese market
exchange rate is controlled by the
government and thus may be
distorted, it is necessary to use
Purchasing Power Parity (PPP)
exchange rates, for example, to
convert wages into foreign currencies.
To account for productivity, analysts
should use unit labor costs as a
benchmark in comparison instead of
just focusing on wages.
1.
Wal-Mart's Strategies in China Case Study
2. ICMR
Case Collection
3.
Case Study Volumes
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The Interview was conducted by Dr. Nagendra V Chowdary, Consulting Editor, Effective
Executive and Dean, IBSCDC, Hyderabad. This Interview was originally published in Effective Executive, IUP, January
2008. Copyright © January 2008, IBSCDC
No part of this publication may be copied, reproduced or distributed, stored in a retrieval
system, used in a spreadsheet, or transmitted in any form or medium electronic,
mechanical, photocopying, recording, or otherwise without the permission of IBSCDC. |
