What could happen in China in 2015?

Posted in Aktuellt, Allmänt, Thailand / Asia on December 20th, 2014 by admin

What do you get when you add slower economic growth, greater volatility, and rising competition to more international flights and genuine Chinese innovation? McKinsey director Gordon Orr’s annual predictions.

It seemed harder to prepare my “look ahead” this year. On reflection, I believe this is because political and economic leaders in China have clear plans and supporting policies that they are sticking to. You can debate the pace at which actions are being taken, but not really the direction in which the country is traveling. This means a number of the themes I highlighted for this year will remain relevant in 2015:

Improving productivity and efficiency will remain the key to maintaining profitability for many companies, given lower economic growth (overall and at a sector level) and the impact of producer price deflation on multiple sectors.
china 4The impact of technology as it eliminates jobs in services and manufacturing will become even greater (but still not in government).
As a result, the government will keep a sharper focus on net job creation and the quality of those new positions. Companies will hire even more information technologists to keep up in the race to exploit technology better than their competitors.
The push to lower pollution, and now carbon emissions, will lead to even greater investment in domestic solar and wind farms, boosting the global position of Chinese producers.
High-speed-rail construction will continue domestically and increasingly abroad, as Chinese companies become the builder of choice for high-speed rail globally.
Beyond these, there are several additional themes that will be important in 2015. I describe them below.

What else may happen in 2015?
China will be the focus of many, many boardroom discussions around the world next year. Unlike most previous years, the topic won’t be whether to double down on China—it will be whether to hold or even reduce exposure to a particular sector or the country overall. With China experiencing lower growth, greater competition, and more china 5volatility, it won’t only be multinational companies having these conversations. Similar questions will be asked by senior executives of many of China’s private-sector leaders, who are looking to sustain their historic growth rates by pivoting to new sectors within China and especially to international markets. Most companies will ultimately decide to stick with their current China strategy, but there will be real choices and trade-offs on the table.

What will be at the center of these conversations? I believe that it will be a debate about Chinese consumers and how they will behave in a slowing economy and, ultimately, the extent to which they will be the driver of economic growth over the next few years. Let me elaborate.

Next year will likely see the lowest annual income growth in China for at least a decade, with knock-on implications across the economy. Early signs are already there. Government data show urban disposable income rose in single digits year on year in the first nine months of 2014, a hint at the big shift that is under way. The vast majority of the economy has seen double-digit wage growth for the past decade, with the minimum wage in many citieschina 3 doubling in less than five years. This has created an expectation that this is simply the new normal for income growth. It is not. As a result, workers are pricing themselves out of the market: for example, International Monetary Fund research in China suggests that a 10 percent increase in the minimum wage leads to a 1 percent fall in employment.

The manufacturing sector provides a telling example. Manufacturing wages are up fourfold in dollar terms over the past decade. In recent years, private-sector enterprises have had to agree to annual wage increases three to four percentage points higher than state-owned enterprises in order to narrow the significant pay differential that had developed by 2010. The challenges for low-skill assemblers in Guangdong and Zhejiang are well documented. They are downsizing, as countries from Bangladesh to Kenya gain share. The cost of technology that substitutes for labor in factories has plummeted, displacing more and more workers. Chinese assembly lines today bear no resemblance to those of a decade ago. The best Chinese private companies are as capital intensive as an equivalent factory in the United States. Employers today are under enormous short-term pressure to reduce wage costs amid ongoing weakness in the Purchasing Managers Indexes and persistent deflation in producer prices.

Service industries will also be affected. For example, Chinese airlines use e-ticketing to substitute for desk agents at least as aggressively as any mature-market airline. Telecommunications, financial services, and retail are all being challenged by “people lite” Internet-based business models from new competitors, which have already led them to substantially reduce hiring. In 2015, they will need to quietly cut back further, whether they are in the private sector or a state-owned enterprise—it doesn’t matter. In some sectors, such as professional-services industries, entry salaries are actually falling. I believe 2015 will be seen as a tipping point for wages in China.

Job seekers next year will realize that the historical attractions of working in state-owned enterprises and government are not coming back—the job for life, opportunities for status, high pay, and other perks are gone for china 6good. Smaller state-owned enterprises are, in many cases, anyway destined for the more commercially demanding world of private ownership. Many larger state-owned enterprises are recruiting less and encouraging departures to improve efficiency. Lower growth means fewer promotion opportunities, and the upcoming regulatory limitations on the multiple of highest and lowest compensation in state-owned enterprises will increase wage compression.

The private sector has become the driver of job creation in China, with official statistics (likely understated) showing an increase of 50 percent or more in private-sector jobs over the past five years. However, many of these jobs are relatively low skill and low paying. In 2015, the service sector’s criticality to job creation will be called out even more by the government, with expanded policies to encourage service-sector hiring and additional focus on the quality of jobs created.

In the government sector, the official salaries of teachers, doctors, and civil servants remain low, and opportunities for side arrangements are shrinking. Eventually, the government is going to have to pay its employees more—but I don’t see that happening at scale in 2015, despite the growing number of cases of teachers striking for better pay. The number of students taking the central-government entry exam fell this year despite an increase in open positions. There has to be a connection.

The substitution by technology of certain categories of service jobs that have been at the heart of the growing middle class—call centers, shop assistants, bank tellers, insurance agents—will accelerate in 2015. Even those who retain their jobs will wonder if technology will displace them next. Critically, their confidence in their personal economic future will decline.

At the city level, we will start to see signs of the “Detroitization” (post-auto) or “Glasgowization” (post-shipbuilding) of some Chinese cities. Many cities are heavily dependent on a single industry, not just mining or steel but often a specific single manufactured good—lamps, socks, or automotive wheels. While great in times of fast growth, the reverse is also true. It’s not just that real-estate construction is no longer a driver of growth in those cities. Construction, even when it overshot true demand, was always driven off the back of the success of an industry creating jobs and incomes that enabled citizens to buy housing. That success will no longer be there. And with loans to business often guaranteed by other companies in the same industry in the same city, a single default can quickly cascade into other otherwise viable companies. In 2015, we will see the first of many “city transformation” programs as cities go through a Chinese version of restructuring and workout. Hopefully, cities at risk will see what may be coming and will act early to create new economic engines.

It’s all about consumer confidence
As a result, Chinese consumers will feel less financially secure in 2015. Fewer will feel they have a job for life, most will see wages rise more slowly, many of their real-estate investments will decline in value, and lower interest rates will make other investment products look less attractive. Overall, the momentum of their wealthchina 2 generation will slow dramatically after a decade of remarkable acceleration. And if they have children graduating from college in 2015, they will likely see them struggle to get a good job.

Lower consumer confidence may then translate into lower growth in discretionary spending. Fortunately for many in the middle class, they have already bought their home, car, and other core trappings of middle-class life. Many Chinese consumers could easily postpone further big-ticket-consumption items and, at the same time, cut back on daily consumption spending. Price deflation reduces the perceived opportunity cost of waiting to spend. Already there are signs of this. Recent Nielsen numbers showed only a 3 percent increase in annual purchases of fast-moving consumer goods. More specifically, food and beverage company Tingyi reported a 13 percent decline in turnover in the third quarter of 2014, while beer volume sold by brewing and beverage group SABMiller fell in its most recent reporting period. And remember: very few in the current Chinese middle class were in the middle class the last time there was an economic slowdown. They could well overreact to a small slowdown and turn it into a larger one as a result.

With fewer attractive investment options in China, the opportunity to invest in Hong Kong–listed companies through the Shanghai–Hong Kong stock-exchange connection will look more attractive in 2015. Currently, a lack of awareness about the available stocks and a high minimum investment are holding people back, and the fund flows are way below daily limits. In 2015, that will change.

Where will growth come from?
The result of all of this is that drivers of economic growth will be harder to find in 2015. Increasing consumption has accounted for more than 50 percent of GDP growth for the past couple years. Its share, for reasons laid out above, will likely be smaller next year. Infrastructure investment is directly under government control and will likely remain at current levels and contribute to growth as it did this year. However, property investment—historically, the driver of around 15 percent of GDP—will probably have another weak year. Residential supply has exceeded demand in many cities, and investor interest has diminished as prices have stagnated. While the picture is city specific, significant unsold inventory exists in many cities, and new building is only adding to it. Policy support will have some impact in growing demand, but it would take much lower real interest rates to make a meaningful difference. Could growth be driven by exports? Not since 2007 have net exports contributed more than a percentage point to China’s growth. Recovery in the United States has not led to a growth in net exports, and a big boost from demand in Europe in 2015 seems unlikely, even with lower oil prices.

Students reinvent themselves for the jobs of 2015
It will be another year of frustration for students, both those graduating and those still in school considering their prospects. A substantial proportion of new graduates will not find jobs that require a degree. Indeed, many will find what they learned and how they learned at university has done little to prepare them for the 2015 job market in China. Other than for an elite minority, starting salaries will be flat yet again, at levels less than the income level of a full-time taxi driver (student starting salaries have only increased 1 to 2 percent annually over the past five years, one of the few categories in the economy where wages have not risen). The consequences will become increasingly obvious—graduates will be unable to pay off their education debts, let alone save to buy a home or a car or to become meaningful middle-class consumers.

The way forward for most is finding employment in the private sector, services, or small and midsize enterprises, or becoming an individual entrepreneur—none of which average students have been prepared for by their education or their family. Growth in vocational schools is being boosted by many newly graduated students who realize they need to gain more work-relevant skills. Those students still in school will become more vocal in demanding change in what and how they are taught.

Individuals going global
Governments around the world will compete harder to capture a greater share of China’s international tourism and outbound-investment boom. The new US ten-year multientry visa sets a bar for other countries to follow. The United Kingdom’s guaranteed 24-hour turnaround on visas for premium business travelers sets a bar for speed, although the $1,000-plus price is eye watering. Beyond visas, many countries also offer popular investment paths to a passport or permanent residency. The majority of those using these schemes in most countries are Chinese. In the most popular countries, limited supply is allowing governments to push up the required investment dramatically. We might hear about a $10 million passport this year.

Airlines are also big beneficiaries of this growth in international travel, with a new wave of growth in direct flight connections to key global cities from second- and third-tier Chinese cities (two recent examples are Wuhan to San Francisco and Changsha to Frankfurt). While these routes have been subsidized initially by local Chinese governments, the subsidies won’t be needed for long. The big Middle Eastern airlines are also expanding beyond Beijing, Guangzhou, and Shanghai, for example, with Qatar Airways now flying into Hangzhou. Next year will see the launch of dozens more direct flights to non-Asian destinations from second- and third-tier Chinese cities.

Chinese innovation—seriously
Does China innovate? Next year, we will finally stop asking that question and focus on the global impact of the china 6innovation that is clearly taking place. The number of Silicon Valley–based investors visiting China to learn from Internet-enabled business is now remarkable. These folks don’t waste their time on sight-seeing trips.

Beyond the Internet, hundreds of midsize companies in the Chinese industrial sector are creating their own version of the German Mittelstand, providing ever-more-serious competition to Fortune 1000 competitors. No longer focused simply on cheap, they deliver great value, listen to what customers want, and develop products in response. Only this month, on a visit to India, I noticed a tipping point. No longer were there complaints about the low quality of Chinese industrial goods; instead, there were compliments about their remarkably high quality. Biotech, pharmaceutical, consumer electronics, medical tech, drones, graphene, and telecommunications equipment are just some of the sectors where aggressive Chinese midsize companies lead the way in their field, often privately owned by a founding chairman or CEO who has a true passion to become a global leader.

Rule of law increases its impact in 2015
A comment you’ll hear less in 2015: I can do this—it’s China. Businesses will more fully recognize that anticorruption initiatives and rule of law with Chinese characteristics are long-term foundational elements of this leadership’s platform—they’re not optional, and they’re not going away. Companies will need to become clear aboutchina 1 how recent statements—such as President Xi declaring that the objective of advancing the rule of law is conducive not only to updating state governance but also to deepening reform—apply to them.1
We will see the government standardize more of its approaches to decision making on business and regulatory issues, using the precedent of cases heard. For example, reviews of acquisitions should be faster, with clearer conclusions. We will also see the government leveraging technology more to monitor, audit, and impose sanctions on bad behavior, from tax avoidance to overly aggressive entertainment of government officials. Where could anticorruption investigations bite in 2015?

In an Internet company where a senior executive gets investigated for begging forgiveness, rather than asking permission, once too often in local government, where rapid asset sales made it possible for some sales to be made to favored individuals at below-market prices in companies that have yet to fully get their sales forces under control.

Return of the DVD store
Shops offering pirated DVDs will make a comeback in 2015 as the rule of law extends to what can and cannot be shown online, pushing very popular international series off the Internet. US series including The Big Bang Theory and The Good Wife have already been blocked, and rules announced in September by the State Administration of Press, Publication, Radio, Film and Television require unapproved shows to be removed from websites by the new year. Perhaps only in China will the selection of available online content be more tightly controlled than the availability of physical content. Or maybe the international providers of virtual private networks will learn to accept payment from UnionPay cards, and demand for their services will skyrocket. Cinemas will likely also benefit, as good-quality online sources for newly released movies have almost entirely disappeared.

A footnote: be careful with national-level statistics from China in 2015. In times of slower growth, they are historically less reliable.

Source: McKinsey.com, 20 December 2014
By: Gordon Orr
About the author: Gordon Orr is a director in McKinsey’s Shanghai office. For more from him on issues of relevance to business leaders in Asia, visit his blog, Gordon’s View, at McKinsey’s Greater China office website.

China’s digital transformation

Posted in Aktuellt, Allmänt, Thailand / Asia on August 6th, 2014 by admin

As individual companies adopt web technologies, they gain the ability to streamline everything from product development and supply-chain management to sales, marketing, and customer interactions. For China’s small enterprises, greater digitization provides an opportunity to boost their labor productivity, collaborate in new ways, and expand their reach via e-commerce. In fact, new applications of the Internet could account for up to 22 percent of China’s labor-productivity growth by 2025.

Yet the Internet is not merely a tool for automation and efficiency; it also expands markets rapidly. Greater adoption of web technologies in China could lead to the introduction of entirely new products and services if government and industry take the right steps to maximize the potential (exhibit). A new report from the McKinsey Global Institute (MGI), China’s digital transformation: The Internet’s impact on productivity and growth, projects that new Internet applications could fuel some 7 to 22 percent of China’s incremental GDP growth through 2025, depending on the rate of adoption. That translates into 4 trillion to 14 trillion renminbi in annual GDP in 2025.

chinaThat 10 trillion renminbi gap between the two numbers represents the economic growth at stake. The low end of the projection assumes that the country’s current trajectory continues, with adoption of Internet applications increasing at a moderate pace, under existing constraints. The upper end assumes that China builds a supportive policy environment, individual companies move decisively, and workers adapt to the demands of a more digitized economy.

The MGI report focuses on a set of Internet applications that could penetrate more deeply across key sectors of the country’s economy, including big data; improved demand forecasting, online sourcing, and marketing; Internet banking and payment systems; the Internet of Things; and e-commerce. The six sectors analyzed in the report are already beginning to undergo sweeping changes.

In consumer electronics, for example, the critical factors will be growth in connected devices (such as smart home appliances and Internet TVs) and online media content. China’s fledgling used-car market has enormous room for growth if powered by e-commerce. Chemical companies can use the Internet to enhance their R&D capabilities, enabling collaboration with customers and external experts. In financial services, online money-market funds, discount brokerages, and third-party online marketplaces have already begun to emerge. Chinese home buyers and renters increasingly search online to find the property that’s right for them. More broadly, the Internet is reshaping the market for commercial real estate as e-tailing decreases the need for retail space and increases demand for modern warehousing. And in healthcare, web-based tools such as electronic health records and clinical decision-support systems can elevate the quality of care and play a critical role in making the system more efficient and cost effective.

Increasing digitization is forcing companies across all industries to rethink their operations and become more customer-centric. Owners and CEOs will have to be deeply engaged as they make decisions that can radically affect how their companies do business. Industries will face increasing talent shortages, and larger companies may respond by making targeted acquisitions of tech firms.

From a policy perspective, China’s government faces multiple challenges in harnessing the Internet for economic growth. Building out networks is crucial to bringing more of the population online and facilitating the adoption of new Internet applications, while a balanced set of regulations for data sharing could remove constraints on the adoption of big data. Increased business usage of new Internet applications is likely to have a neutral or slightly positive impact on the total number of jobs—but a more striking effect on the composition of the labor market. The economy will need fewer workers for routine activities that can move online, while demand will increase for workers with digital skills. Government and industry can ease this dislocation by ensuring that training programs are available to help workers continually refresh their skills. China can also adapt school curricula to build digital literacy and create a true education-to-employment pipeline.

Beyond creating economic momentum for China, the Internet will enable growth based on productivity, innovation, and consumption. It will sharply intensify competition, allowing the most efficient enterprises to win out more quickly. The impending shift toward the Internet across key sectors of the economy will pose some risks and disruptions, but it can ultimately support China’s goal of creating a more sustainable model for growth.

Source: McKinsey.com, July 2014
About the authors: Jonathan Woetzel is a director of the McKinsey Global Institute, where Yougang Chen is a principal, Michael Chui is a partner, and Elsie Chang and Jeongmin Seong are senior fellows; Gordon Orr is a director in McKinsey’s Shanghai office; Alan Lau is a director in the Hong Kong office; and Autumn Qiu is a consultant in the Beijing office.

What could happen in China in 2014?

Posted in Aktuellt, Allmänt, Thailand / Asia on January 7th, 2014 by admin

The year ahead could see companies focus on driving productivity, CIOs becoming a hot commodity, shopping malls going bankrupt, and European soccer clubs finally investing in Chinese ones. McKinsey director Gordon Orr makes his annual predictions.

1. Two phrases will be important for 2014: ‘productivity growth’ and ‘technological disruption’
China’s labor costs continue to rise by more than 10 percent a year, land costs are pricing offices out of city centers, the cost of energy and water is growing so much that they may be rationed in some geographies, and the cost of capital is higher, especially for state-owned enterprises. Basically, all major input costs are growing, while intense competition and, often, overcapacity make it incredibly hard to pass price increases onto customers. China’s solution? Higher productivity. Companies will adopt global best practices from wherever they can be found, which explains why recent international field trips of Chinese executives have taken on a much more serious, substantive tone.

china 4This productivity focus will extend beyond manufacturing. In agriculture, the pace at which larger farms emerge should accelerate, spurring mechanization and more efficient irrigation and giving farmers the ability to finance the purchase of higher-quality seeds. Services will also be affected: for companies where labor is now the fastest-growing cost, a sustained edge in productivity may make all the difference. And in industry after industry, companies will feel the disruptive impact of technology, which will help them generate more from less and potentially spawn entirely new business models. Consider China’s banking sector, where bricks-and-mortar scale has been a critical differentiator for the past two decades. If private bank start-ups were allowed, could we see a digital-only model, offering comprehensive services without high physical costs? Will Chinese consumers be willing to bank online? Absolutely—if their willingness to shop online is any guide.

2. CIOs become a hot commodity
There is a paradox when it comes to technology in China. On the one hand, the country excels in consumer-oriented tech services and products, and it boasts the world’s largest e-commerce market and a very vibrant Internet and social-media ecosystem. On the other hand, it has been a laggard in applying business technology in an effective way. As one of our surveys recently showed, Chinese companies widely regard the IT function as strong at helping to run the business, not at helping it to grow. Indeed, simply trying to find the CIO in many Chinese state-owned enterprises is akin to hunting for a needle in a haystack.

Yet the CIOs’ day is coming. The productivity imperative is making technology a top-team priority for the first time in many enterprises. Everything is on the table: digitizing existing processes and eliminating labor, reaching consumers directly through the Internet, transforming the supply chain, reinventing the business model. The problem is that China sorely lacks the business-savvy, technology-capable talent to lead this effort. Strong CIOs should expect large compensation increases—they are the key executives in everything from aligning IT and business strategies to building stronger internal IT teams and adopting new technologies, such as cloud computing or big data.

3. The government focuses on jobs, not growth
Expect the Chinese government’s rhetoric and focus to shift from economic growth to job creation. The paradox of rising input costs (including wages), the productivity push, and technological disruption is that they collectively undermine job growth, at the very time China needs more jobs. Millions and millions of them. While few companies are shifting manufacturing operations out of the country, they are putting incremental production capacity elsewhere and investing heavily in automation.

china 2For example, Foxconn usually hires the bulk of its workers for a given 12-month span just after the Chinese New Year. Yet at the beginning of last year, the company announced that it wouldn’t hire any entry-level workers, as automation and better employee retention had reduced its needs. Although upswings in the company’s hiring still occur (as with last year’s iPhone 5S and 5C release), the gradual rollout of robots will probably reduce demand for factory workers going forward. In short, many manufacturers—both multinational and Chinese—are producing more with less.

So as technology enables massive disruptions in service industries and sales forces, what happens to millions of retail jobs when sales move online? To millions of insurance sales agents? Millions of bank clerks? Even business-to-business sales folks may find themselves partially disintermediated by technology, and rising numbers of graduates will have fewer and fewer jobs that meet their expectations. They will not be happy about this and may not be passive. Finally, while state-owned enterprises will feel pressure to improve their performance, to use capital more efficiently, and to deal with market forces, they are likely, at the same time, to face pressure to hire and retain staff they may not really need. The government and the leaders of these enterprises have long argued that such jobs are among the most secure. They will find it very hard to declare them expendable.

4. There will be more M&A in logistics
As everyone pushes for greater productivity, logistics is a rich source of potential gains. State-owned enterprises dominate in capital expenditure–intensive logistics, such as shipping, ports, toll roads, rail, and airports; small mom-and-pop entrepreneurs are the norm in segments such as road transportation. This sector costs businesses in China way more than it should. With upward of $500 billion in annual revenues, logistics is an industry ripe for massive infusions of capital, operational best practices, and consolidation. Driven by the pressure to increase productivity, that’s already happening at a rapid pace in areas such as express delivery, warehousing, and cold chain. Private and foreign participation is increasingly encouraged in many parts of the sector, and its competitive intensity is likely to rise.

5. Crumbling buildings get much-needed attention
china 5While China’s flagship buildings are architectural wonders built to the highest global standards of quality and energy efficiency, they are unfortunately the exception, not the rule. Much of the residential and office construction in China over the past 30 years used low-quality methods, as well as materials that are aging badly. Some cities are reaching a tipping point: clusters of buildings barely 20 years old are visibly decaying. Many will need to be renovated thoroughly, others to be knocked down and rebuilt. Who will pay for this? What will happen if residential buildings filled with private owners who sank their life savings into an apartment now find it declining in value and, perhaps, unsellable? Alongside a wave of reconstruction, prepare for a wave of local protests against developers and, in some cases, local governments too.

6. The country doubles down on high-speed rail

When China inaugurated its high-speed rail lines, seven years ago, many observers declared them another infrastructure boondoggle that would never be used at capacity. How wrong they were: daily ridership soared from 250,000 in 2007 to 1.3 million last year, fuelled partly by aggressive ticket prices. Demand was simply underestimated. Now that trains run as often as every 15 minutes on the Shanghai–Nanjing line, business and retail clusters are merging and people are making weekly day-trips rather than monthly two-day visits. The turnaround of ideas is faster; market visibility is better; and many people come to Shanghai for the day to browse and shop. There are already more than 9,000 kilometers (5,592 miles) of operational lines—and that’s set to double by 2015. If the “market decides” framing of China’s Third Plenum applies here, much of the investment should switch from building brand-new lines to increasing capacity on routes that are already proven successes.

7. Solar industry survivors flourish

Many solar stocks, while nowhere near their all-time highs, more than tripled in value in 2013. For the entire industry, and specifically for Chinese players, it was a year of much-needed relief. By November, ten of the Chinese solar-panel manufacturers that lost money in 2012 reported third-quarter profits, driven by demand from Japan in the wake of the Fukushima disaster. (Japan’s installed capacity quadrupled, from 1.7 gigawatts in 2012 to more than 6 gigawatts by the end of 2013.) Domestic demand also picked up as the State Grid Corporation of China allowed some small-scale distributed solar-power plants to be connected to the grid, while a State Council subsidy program even prompted panel manufacturers to invest in building and operating solar farms—an initiative that will ramp up further.

This year is likely to see even stronger demand. Aided by international organizations, including the World Bank, an increasing number of developing countries (such as India) regard scaling up distributed power as a way of improving access to electricity. In addition, solar-energy prices continue to fall rapidly, driven down by technological innovations and a focus on operational efficiency. While I’m on green topics, I’ll point out that the coming months are also likely to see another effort to create a real Chinese electric-vehicle market. The push will be centered on the launch of the first vehicle from Shenzhen BYD Daimler New Technology.

8. Mall developers go bankrupt—especially state-owned ones
Shopping malls are losing ground to the online marketplace. While overall retail sales are growing, e-retail sales jumped by 50 percent in 2013. Although the rate of growth may slow in 2014, it will be significant. Yet developers have already announced plans to increase China’s shopping-mall capacity by 50 percent during the next three years. For an industry that generates a significant portion of its returns from a percentage of the sales of retailers in its malls, this looks rash indeed. If clothing and electronics stores are pulling back on the number of outlets, what will fill these malls? Certainly, more restaurants, cinemas, health clinics, and dental and optical providers. But banks and financial-service advisers are moving online, as are tutorial and other education services.

I expect malls in weaker locations to suffer disproportionately. These are often owned by smaller developers that can’t afford better locations or bychina 3 city-sponsored state-owned developers that are expanding into new cities. The weak will get weaker, and while they may be able to consolidate, it’s more likely they will go out of business.

9. The Shanghai Free Trade Zone will be fairly quiet
In early October, there was much speculation about the size of the opportunity after the State Council issued the Overall Plan for the China (Shanghai) Pilot Free Trade Zone (FTZ), and the Shanghai municipality issued its “negative list” of restricted and prohibited projects just a few days later at the end of September. For the FTZ, the only change so far appears to be that companies allowed to invest in it will not have to go through an approval process. As for the negative list, while there’s a possibility that Shanghai will ease the limitations, for the moment the list very much matches the categories for restricted and prohibited projects in the government’s fifth Catalog of Industries for Guiding Foreign Investment. This ambiguous situation gives the authorities, as usual, full freedom to maintain the status quo or to pursue bolder liberalization in the FTZ in 2014 if they see a need for a stimulus of some kind. On balance, I’d say this is relatively unlikely to happen.

10. European soccer teams invest in the Chinese Super League
I know, I know—I’m making exactly the same prediction I did a year ago. True, Chinese football has battled both corruption and a lack of long-term vision. It’s also true that the Chinese Super League still trails Spain’s La Liga and the English Premier League in television ratings. That’s in spite of roping in stars such as Nicolas Anelka and Didier Drogba (who both returned to Europe this year) and even David Beckham (as an “ambassador”).

At least this year some things started to improve. After all, Guangzhou Evergrande just won Asia’s premier club competition—the AFC Champions League—a year after hiring Italy’s seasoned coach Marcelo Lippi. This international success could be temporary, but there is a shared sense in China that something has to change because there is so much underleveraged potential. Maybe Rupert Murdoch’s decision to invest in the Indian football league will precipitate more openness among Chinese football administrators? Perhaps the catalyst will be the news that the Qatari investors in Manchester City also invested in a New York City soccer franchise? An era of cross-border synergies from the development and branding of sister soccer teams is coming closer.

Finally, something that’s less a prediction than a request. Can we declare the end of the “BRICs”? When the acronym came into common use, a decade ago, the BRIC countries—Brazil, Russia, India, and China—contributed roughly 20 percent of global economic growth. Although China was already the heavyweight, it did not yet dominate: in 2004, the country contributed 13 percent of global growth in gross domestic product, while Brazil, Russia, and India combined contributed 9 percent, with similar growth rates. Compare that with the experience of the past two years. China accounted for 26 percent of global economic growth in 2012 and for 29 percent in 2013. The collective share of Brazil, Russia, and India has shrunk to just 7 percent. It’s time to let BRIC sink.

Source: McKinsey, Insights & Publications, January 2014
By: Gordon Orr
About the author: Gordon Orr is a director in McKinsey’s Shanghai office. For more from him on issues of relevance to business leaders in Asia, visit his blog, Gordon’s View, at McKinsey’s Greater China office website.

Meetings and / or seminars in Bangkok

Posted in Aktuellt, Thailand / Asia on December 2nd, 2013 by admin

MLP-0706   PSJohan in Bangkok!

I will be available in for meetings and / or seminars 17-19 December and 13-15 January in Bangkok.
Please don´t hesitate to get in touch for a discussion.

Ten forces forging China’s future

Posted in Aktuellt, Allmänt, Thailand / Asia on August 4th, 2013 by admin

In this executive briefing, read highlights and takeaways from the 2013 McKinsey Quarterly special edition on China.

In early June 2013, several hundred of the world’s leading CEOs gathered in Chengdu, China, and discussed that country’s rapidly evolving business environment: growth is slowing and wages are climbing just as a new upper middle class emerges, a new wave of innovation rises, and a new generation of leaders steps to the fore. Executives at this year’s Fortune Global Forum, in Chengdu, were reading “China’s next chapter,” a special edition of McKinsey Quarterly, now available in digital form. What follows here is a snapshot of highlights and takeaways: ten critical issues that will be facing China during the years ahead and what they mean for you. Read it on its own. Or follow the links to delve deeper on individual topics.

1. The great rebalancing
China’s number-one economic question is how to increase consumption while reducing reliance on exports and investment. Chinese household consumption as a share of GDP is barely half that of the United States. Some see promising signs of progress in government plans to raise the dividend payouts of state-owned enterprises, a proposed carbon tax, and the planned removal of energy subsidies.

Winners and losers
Others warn that there will be winners and losers. Peking University’s Michael Pettis expects a sharp drop in commodity prices over the next few years and a fall in the growth of spending on construction equipment and heavy manufacturing. The consumer-goods sector and other low-cost countries should benefit.

2. Infrastructure advances
Over the past 20 years, an incredible 8.5 percent of China’s GDP has been plowed into infrastructure—twice the level of India and more than four times that of Latin America. China’s stock of infrastructure as a percentage of GDP is well above the global average, but still ranks only 48th in a survey of factors contributing to global competitiveness. Some 70 new airports, 43,000 kilometers1 of new expressways, and a major expansion of port facilities are planned to be ready by 2020, as well as 22,000 kilometers of additional rail track by 2015. Not surprisingly, five of the top ten global construction and engineering companies (by 2010 revenues) are Chinese.

Filling the roads
China’s not just building roads, of course—it’s populating them, too. Thanks to the new upper-middle-class spenders, McKinsey predicts, the country will overtake the United States as the world’s largest market for premium cars by 2016. Research comparing the preferences of consumers in China and Germany (whose carmakers hold about 80 percent of the Chinese premium-auto market) suggests that advanced power trains are much more important for high-end buyers in China than for their German counterparts. Fuel efficiency looms large for affluent Chinese consumers hesitant to step up.

3. The green challenge
A thick and severe smog overwhelmed almost all of China’s east coast earlier this year, demonstrating the urgent need to address environmental issues and green the economy. By 2020, an additional 300 million Chinese will become urban residents, who consume as much as four times more energy and two-and-a-half times more water per capita than rural Chinese do. While environmental challenges create demand for green products and services, they don’t guarantee profits. For example, 2012 saw a boom in solar installations—about 5,000 megawatts of new solar capacity. But it proved to be a terrible year for solar-module manufacturers, given lower selling prices, weakening European demand, industry overcapacity, and rising trade barriers.

Curbing energy consumption starts at the top
Manufacturers who become more efficient can help reduce emissions while boosting their own bottom lines. To convey the seriousness of an energy-efficiency drive, one company’s CEO paid a secret midnight visit to his flagship factory. He was dismayed to find no one working in a key unit where employees should have been making energy-saving temperature adjustments. A week later, the CEO announced a wholesale replacement of the plant’s leadership. The company also created a new organization, headed by a group vice president, responsible for reducing energy consumption, which has since fallen by 12 percent.

4. Manufacturing’s makeover
Besides playing a part in helping to solve China’s environmental troubles, manufacturing faces a range of new challenges: rising wages and other factor costs, growing consumer sophistication, more complex value chains, and heightened volatility. Many of the barriers to operational improvement are organizational, not technical: too many managers still lack the experience to identify root causes of inefficiency. Chinese companies have to get beyond the “faster, cheaper” fixation that’s characterized their approach to R&D in recent decades, adapt supply chains to a new consumer reality, and build logistics hubs closer to the opportunity-laden cities of China’s interior.

Competing through collaboration
An automotive joint venture recently began working with 60 of its suppliers to address 30 pressing quality problems. It fixed them in only six months and put in place a new performance-management system ensuring that both the automaker and its suppliers would keep up their ends of the bargain. Collaboration was also important when a multinational lighting manufacturer was pushing its Chinese and global R&D units to join forces. For ten weeks, a mixed R&D team worked with representatives from the marketing, procurement, supply-chain, and quality groups. This approach helped spark improvement in unusual areas, including product packaging.

5. Rise of the upper middle class
By 2022, McKinsey research suggests, more than 75 percent of China’s urban consumers will earn 60,000 to 229,000 renminbi ($9,000 to $34,000) a year—in purchasing-power-parity terms, somewhere between the average income of Brazil and Italy. A mere 4 percent of urban Chinese households were in this range in 2000. Of particular importance is a wealthier upper-middle-class group that in less than ten years’ time will account for more than half of urban households and of urban private consumption. Also on the rise: confident and independent-minded Generation-2 (G2) consumers, comprising teenagers and people in their early 20s, who are set to shape consumption much as their baby-boomer counterparts in the United States did (though by 2022, G2 will be almost three times as numerous).

In practice
Companies such as Wrigley Asia Pacific and Bayer Consumer Care are consciously pursuing a dual marketing strategy to ensure that they don’t neglect their more established mass-market business while pursuing the upper middle class. Another multinational consumer-packaged-goods company is continuing to emphasize its traditional bar-soap products in northern China, a relatively low-income region with a large mass market. But it’s also preparing to convert customers to higher-margin liquid soap as they transition into the new upper middle class. And in southern China, where consumers already prefer liquid soap, the company is focusing on persuading customers to upgrade from cheaper, local brands as they become more affluent.

6. E-tailing extraordinaire
Almost overnight, China has become the world’s second-largest e-tail market, a development that is accelerating the broader shift from an investment- to a consumption-led economy. Estimates for 2012 e-tail revenues have been as high as $210 billion, reflecting a compound annual growth rate of 120 percent since 2003. In 2012, e-tailing commanded about 5 to 6 percent of total retail sales, roughly the same proportion as in the United States. McKinsey research suggests a dollar of online consumption in China replaces roughly 60 cents of sales in offline stores and generates around 40 cents of incremental consumption. E-tailing’s impact is even more pronounced in the country’s small and midsize cities. Online prices are on average 6 to 16 percent lower than prices in China’s stores. Apparel, household products, and recreation and education (the three largest online-retail segments) typically offer the biggest price discounts.

Big contrasts with developed markets

Whereas the dominant model in the United States, Europe, and Japan involves brick-and-mortar retailers or pure-play online merchants (such as Amazon.com), around 90 percent of Chinese electronic retailing occurs on sprawling virtual marketplaces. These megasites, which include PaiPai, Taobao, and Tmall, in turn are owned by bigger e-commerce groups, such as Alibaba. National brick-and-mortar retailers of the kind seen in the retail markets of most developed countries have yet to emerge in China. As e-tailing continues to grow, however, the sector may leapfrog straight from domination by strong regional players to multichannel competition.

7. Innovation’s new spark
The e-commerce revolution has helped rev up China’s surprisingly well-oiled innovation engine. Long perceived as the imitator, copier, and fast follower of other countries’ fashions, China is starting to show real innovation leadership. Chinese universities are playing a growing role in the local innovation ecosystem; globally recognized scientific journals are increasingly filled with publications from leading Chinese researchers. Also significant is the emergence of a new generation of young Chinese graduates. Tao-Sang Tong, president of Tencent’s Social Network Group, says his company prefers pulling talented prospects directly from college, “before they are exposed to less innovative Chinese company cultures.”

Protecting intellectual property
Although the Chinese government handled almost 40 percent more “violation” cases last year, IP issues remain a concern for global and domestic innovators alike in China. Some are compartmentalizing knowledge so that only a few individuals have a complete understanding of complex systems. It’s increasingly common to require that camera-enabled devices be stored under lock and key before their owners can enter R&D facilities. Many companies have banned portable hard drives and USB thumb drives, which can be used to transfer media electronically. Finally, a number of companies are trying to make intellectual-property protection a core part of corporate culture, sometimes demanding an annual review of conduct codes and a formal sign-off process by employees.

8. Financier to the world?
As the world’s largest saver, China is playing a major role in the shifting postcrisis global financial landscape. The value of the country’s domestic financial assets—including equities, bonds, and loans—has reached $17.4 trillion and now trails only that of the United States and Japan. In cross-border capital flows, China has defied global trends: foreign direct investment (FDI), cross-border loans and deposits, and foreign portfolio investments in equities and bonds are up 44 percent over their 2007 level. Since 2009, Chinese loans to Latin America have exceeded those of both the Inter-American Development Bank and the World Bank. Total foreign investment into China reached $477 billion at the end of 2011, exceeding the 2007 peak of $331 billion.

Unfinished business
For China to become a true global financial hub and establish the renminbi as a major international currency, the country’s new economic team would need to pick up the pace of reform. Job one: developing deep and liquid domestic capital markets for renminbi-denominated financial assets. Also critical is progress toward capital-account liberalization and other reforms to enable full renminbi convertibility.

9. Investor confidence
China may be flexing its own financial muscles, but the country’s entrepreneurs also depend on outside capital to finance their growth and expansion. That’s why the precipitous 2011 and 2012 fall of the stock-market capitalization of Chinese companies listed in the United States—in response to allegations of fraud and lack of transparency—was such a cause for concern. Many corporate and private-equity investors, reinventing their due diligence, are developing trust by looking beyond the usual statutory and regulatory disclosures. There is a new interest in forensic equity research, by analysts who specialize in looking for potential fraud in listed companies.

Private equity
Generally speaking, however, the private-equity sector is upbeat if realistic. Four leading players from Bain Capital, the Canada Pension Plan Investment Board, Hony Capital, and TPG point out that the investment climate is tougher than it was in the last decade. Gone are the days of above-average returns powered by a strong macro tailwind. In this new era, there are still great opportunities, but they require greater “hands on” private-equity support to help entrepreneurs and executives add value, find exit options, and make acquisitions outside China.

10. Cultivating human capital
China’s potential—and the billions spent on its physical infrastructure—will remain underexploited without efforts to develop its human infrastructure. Yingyi Qian, dean of Tsinghua University’s School of Economics and Management, says demand is growing for better teamwork, communications, and presentation skills. Chinese executives must be more ambitious and think more creatively (not always easy in a traditionally hierarchical society). Western managers need to master China’s hidden rules and understand its local sensitivities, such as the importance of “face.” One telling tale: US participants in a cross-cultural psychology study, when shown “a picture of a group of fish with one fish out in front of the others,” were more likely to think the fish was leading. Chinese participants thought it was an outlier.

Tea, not coffee
As companies in China step up corporate-capability building, they too need to acknowledge China’s unique culture. Teaching managers how a “lean” perspective can address different types of waste didn’t work well at a Chinese state-owned enterprise, because the example intended to bring it all to life involved coffee making. But none of the managers had ever used a coffee machine. Focusing instead on tea making has proved much more sensible.

Source. McKinsey Quaterly, July 2013

Beach front condo in Naklua, Pattaya, Thailand.

Posted in Thailand / Asia on June 17th, 2013 by admin

Interested? Just drop me an email at mathson@swipnet.se

– 70 minutes from the airport.
– Very calm area with no bars or traffic.
– Private beach.
– Boutique building with large pool with beach view, gym and tennis.
– Two bedrooms and two bathrooms.
– Totally renovated, European style.

What’s next for China?

Posted in Aktuellt, Allmänt, Thailand / Asia on February 3rd, 2013 by admin

As China gradually shifts to a more consumer-driven economy, companies must adapt their offerings and ways of doing business.

China’s economy is starting its historic shift to a more consumption- and service-driven model that should help sustain the country’s growth, albeit at a slower rate, over the next decade and beyond. As November’s 18th congress of the Chinese Communist Party showed, new government policies are helping to move the economy in this direction, even though investment—the historical motor of China’s growth—will still command the lion’s share of the economy in the near term.

These new policies will favor household income growth, improve the social safety net, and support the expansion of the service sector and private enterprises, especially small and midsize businesses. Two markers of a more economically developed society will be the higher productivity of its workers and higher productivity and greater efficiency on the part of government. These trends will create more and better-paid jobs and thus raise the share of the national income in the hands of consumers—the key determinant of China’s future economic profile.

China’s expanding cities will play a major role in these trends. In particular, the accelerated rise of smaller cities will make a key contribution to growth: during the next two decades, the dozens of cities with current populations of less than 1.5 million will contribute 40 percent of the total increase in urban GDP. Cities with 1.5 million to 5.0 million inhabitants will contribute about 25 percent and existing megacities the balance.

A new report from McKinsey’s China office, What’s next for China?, identifies key areas companies should focus on to thrive there.

1. Embrace the new trends in urban development.
Companies should design city-specific solutions—products, marketing approaches, and operating models—that meet the quite varied needs of the smaller cities that are expanding rapidly and underpinning China’s long-term growth. In addition, they should optimize their resources across the hub-and-spoke city clusters emerging throughout China. Hub cities will increasingly service the needs of the spoke cities, where most manufacturing takes place.

2. Focus on the growing demand for services and consumer goods.
As disposable incomes rise, consumers will be able to buy more services and goods. That should spur the expansion of new service businesses ranging from catering to financial services, as well as the further expansion of demand for consumer products, across China’s immense and growing market. At the same time, business services will grow more quickly as the country’s economy continues to develop.

3. Foster new skills and innovation capabilities.
The growth of the urban labor pool is slowing as the country’s population ages. Companies will have to increase their productivity through training, automation, more flexible production, and enhanced employee loyalty. They will also need to foster new skills, from strategic planning to the maintenance of high-tech equipment. At the same time, in parallel with the shift to an increasingly service- and consumption-led economy, China’s innovation capabilities can be expected to improve rapidly. Companies there should nurture them to develop products that meet the demands of this important and growing market and of other markets around the world.

Source: McKinsey Quaterly, January 2013

Report from Thailand

Posted in Aktuellt, Allmänt, Thailand / Asia on December 31st, 2012 by admin

Bangkok Post (Thailand’s largest English-language newspaper) summarizes the fashion year 2012 with this statement (which means that you as a Swede feel a little proud):
It´s the last piece of the high street jigsaw puzzle and the most highly-anticipated arrival of the year. The Swedish retail giant´s arrival shook the structural floor plan of Siam Paragon – a few luxury automobile showrooms had to make way for H&M´s duplex store.
The opening was the talk of the town, with the most stellar social personalities, A-list showbiz stars and magazine editors lining up at the tills with baskets full of clothes.

Sverige i Thailand

Posted in Aktuellt, Thailand / Asia on November 3rd, 2012 by admin

Det är inte utan en viss stolthet jag kan konstatera de svenska framgångarna här i Thailand.

IKEA har tagit Bangkok med storm. Man är förtjusta i möblerna och prylarna och älskar den svenska maten. Jag åt själv lax och kokt potatis på jättevaruhuset (det tredje största i världen) i Bangna häromdagen. Och ja visst, det smakar “som hemma”. IKEA flyter vidare på framgångsvågen här och har redan börjat bygga varuhus nummer två i denna 12-miljonersstad. Bäva månde Index och SB Furniture (de två lokala aktörerna som tidigare dominerat den ganska trendiga heminredningsmarknaden här i Bangkok).

I eftermiddags passade jag också på att besöka H&Ms första butik här i Bangkok. Den öppnade för en månad sedan i det trendiga Paragon (“Bangkoks NK”). Som om läget inte var nog har man dessutom den största butiksytan i hela komplexet, vilket inte säger lite med tanke på att i stort sett alla märkesvaror finns representerade här (allt från Ferrari till Louis Vitton). Stackars Zara ligger mitt emot i en butik som känns som en bakfick i jämförelse med vårt svenska H&M.

Om Du har vägarna förbi Bangkok i jul / nyår kan jag rekommendera ett besök!

Nu rusar jag till take off …

Understanding social media in China

Posted in Aktuellt, Thailand / Asia on April 26th, 2012 by admin

The world’s largest social-media market is vastly different from its counterpart in the West. Yet the ingredients of a winning strategy are familiar.

No Facebook. No Twitter. No YouTube
Listing the companies that don’t have access to China’s exploding social-media space underscores just how different it is from those of many Western markets. Understanding that space is vitally important for anyone trying to engage Chinese consumers: social media is a larger phenomenon in the world’sa second-biggest economy than it is in other countries, including the United States. And it’s not indecipherable. Chinese consumers follow the same decision-making journey as their peers in other countries, and the basic rules for engaging with them effectively are reassuringly familiar.

Surveying the scene
In addition to having the world’s biggest Internet user base—513 million people, more than double the 245 million users in the United States1—China also has the world’s most active environment for social media. More than 300 million people use it, from blogs to social-networking sites to microblogs and other online communities.2 That’s roughly equivalent to the combined population of France, Germany, Italy, Spain, and the United Kingdom. In addition, China’s online users spend more than 40 percent of their time online on social media, a figure that continues to rise rapidly.

This appetite for all things social has spawned a dizzying array of companies, many with tools more advanced than those in the West: for example, Chinese users were able to embed multimedia content in social media more than 18 months before Twitter users could do so in the United States. Social media began in China in 1994 with online forums and communities and migrated to instant messaging in 1999. User review sites such as Dianping emerged around 2003. Blogging took off in 2004, followed a year later by social-networking sites with chatting capabilities such as Renren. Sina Weibo launched in 2009, offering microblogging with multimedia. Location-based player Jiepang appeared in 2010, offering services similar to foursquare’s.

This explosive growth shows few signs of abating, a trend that’s at least partially attributable to the fact that it’s harder for the government to censor social media than other information channels. That’s one critical way the Chinese market is unique. As you shape your own social-media strategy, it’s important to fully understand some other nuances of the country’s consumers, content, and platforms.

China’s social-media users not only are more active than those of any other country but also, in more than 80 percent of all cases, have multiple social-media accounts, primarily with local players (compared with just 39 percent in Japan).3 The use of mobile technologies to access social media is also increasingly popular in China: there were more than 100 million mobile social users in 2010, a number that is forecast to grow by about 30 percent annually.4 Finally, because many Chinese are somewhat skeptical of formal institutions and authority, users disproportionately value the advice of opinion leaders in social networks. An independent survey of moisturizer purchasers, for example, observed that 66 percent of Chinese consumers relied on recommendations from friends and family, compared with 38 percent of their US counterparts.

The competition for consumers is fierce in China’s social-media space. Many companies regularly employ “artificial writers” to seed positive content about themselves online and attack competitors with negative news they hope will go viral. In several instances, negative publicity about companies—such as allegations of product contamination—has prompted waves of microblog posts from competitors and disguised users. Businesses trying to manage social-media crises should carefully identify the source of negative posts and base countermeasures on whether they came from competitors or real consumers. Companies must also factor in the impact of artificial writers when mining for social-media consumer insights and comparing the performance of their brands against that of competitors. Otherwise, they risk drawing the wrong conclusions about consumer behavior and brand preferences.

China’s social-media sector is very fragmented and local. Each social-media and e-commerce platform has at least two major local players: in microblogging (or weibo), for example, Sina Weibo and Tencent Weibo; in social networking, a number of companies, including Renren and Kaixin001. These players have different strengths, areas of focus, and, often, geographic priorities. For marketers, this fragmentation increases the complexity of the social-media landscape in China and requires significant resources and expertise, including a network of partners to help guide the way. Competition is evolving quickly—marketers looking for partners should closely monitor development of the sector’s platforms and players.

Crafting a winning strategy
While these unique Chinese market characteristics often create challenging wrinkles for marketers to contend with, they don’t invalidate the principles that underpin effective social-media strategy elsewhere (for more, see “Demystifying social media”). The following few examples illustrate how companies are applying some widespread social-media tenets in China.

Make content authentic and user oriented. Estée Lauder’s Clinique brand launched a drama series, Sufei’s Diary, with 40 episodes broadcast daily on a dedicated Web site. (Viewers also could watch segments on monitors located on buses, trains, and airplanes.) While skin care was part of the story line and products were prominently featured, Sufei’s Diary was seen as entertainment—not a Clinique advertisement—and has been viewed online more than 21 million times. Clinique’s online brand awareness is now 27 percent higher than that of its competitors, although social-media content costs significantly less than a traditional advertising campaign.

Adopt a test-and-learn approach. When Dove China first imported the Real Beauty social-media campaign to promote beauty among women of all looks and body types, Chinese consumers viewed the real women as overweight and unattractive. Dove switched tack and partnered with Ugly Wudi, the Chinese adaptation of the US television show Ugly Betty, to weave the Real Beauty message into story lines and mount a number of initiatives, including a blog by Wudi and live online chats. The effort generated millions of searches and blog entries, increased uptake of Dove body wash by 21 percent year over year after the show’s first season, and increased unaided awareness of Dove’s Real Beauty by 44 percent among target consumers. The estimated return on investment from this social-media campaign was four times that of a traditional TV media investment.

Support overarching brand goals with sustained social-media efforts. Starbucks China promotes the same message of quality, social responsibility, and community building across all of its social-media efforts, as well as in its stores. And Durex didn’t just establish a corporate account on Sina Weibo: it built a marketing team that both monitors online comments around the clock and collaborates closely with agency partners to create original, funny content. The company’s approach is designed to interact meaningfully with fans, generate buzz, and deepen customer engagement with the brand.

The sheer number of the more than 300 million social-media users in China creates unique challenges for effective consumer engagement. People expect responses to each and every post, for example, so companies must develop new models and processes for effectively engaging individuals in a way that communicates brand identity and values, satisfies consumer concerns, and doesn’t lead to a negative viral spiral. Another problem is the difficulty of developing and tracking reliable metrics to gauge a social-media strategy’s performance, given the size of the user base, a lack of analytical tools (such as those offered by Facebook and Google in other markets), and limited transparency into leading platforms. Yet these challenges should not deter companies. The similarity between the ingredients of success in China and in other markets makes it easier—and well worth the trouble—to cope with the country’s many peculiarities.

Source: McKinsey Quaterly, Cindy Chiu, 26 April 2012