China 2.0

It must have been an exciting time for Andreas Schmitz leading up to world’s largest truck show in Germany, and not just because the event marked the first true post-crisis milestone for Europe’s trucking community.

In mid-2013, the young executive had permanently moved to China to oversee the build of a new trailer manufacturing plant in Wuhan, a 10-million people city some 800km west of Shanghai. Last month, just before the Who’s Who of transport equipment reconvened in Hanover, the €100-million project finally commenced production.

“We are exactly on schedule,” he reported back to the inquisitive Schmitz Cargobull Board, which he himself is part of. “There have been no delays and the collaboration with the Dongfeng Motor Group is proving fruitful.”

According to Schmitz, the company’s team in Wuhan will grow from 40 people in 2013 to about 250 at the end of 2014, including some 20 employees from Germany – but they will face a different China than the one we’ve come to know through mainstream media.

The new China is fiercely contested as local businesses compete head-on with the once overpowering multinational competition, consumers are spoilt for choice by the rapid growth of e-commerce, and regional differences mean having multiple partners and commercial strategies is mandatory.

Once fully operational, Schmitz Cargobull Wuhan – a collaboration of the German parent company with Chinese powerhouse Dongfeng – will compete with some 400 registered OEMs and more than 2000 unlicensed small manufacturers for a slice of a massive 200,000-unit pie.

With a capacity of 40,000 units per year, the distinguished European brand will aim at a conservative 10 per cent share of the market, with room to improve over time. But it’s not so much the foray into China itself that stood out against the flood of news in September – it’s the fact that the Chinese economy has changed and that Schmitz is one of the first European OEMs to forge ahead and explore the opportunities that come with it.

According to a new report by the Cheung Kong Graduate School of Business (CKGSB), an independent business school based in Beijing, a slowing economy, rising costs, lethal competition and increased government scrutiny have changed China as a marketplace.

Neelima Mahajan and Major Tian, who co-authored the report, say multinational companies trying to get a foothold in the market now face a cooling economy and a maturing consumer base, making for a very different business dynamic than the one we’ve come to know during the last boom. “Things can change quickly in China,” they say. “Rising labour costs and competition from local players are slicing already thin margins and new uncertainties in the regulatory environment are keeping [those at the helm of multinational businesses] awake at night.”

Accounting for 32 per cent of the global economy, China is still an economic powerhouse that can excite boardrooms across the globe, and no annual report is complete without an ‘Asia story’ to rally shareholders, but as the region’s commercial opportunities are growing, they are also growing in complexity.

The question is, how to approach business in such a multi-dimensional environment? According to Ben Simpfendorfer, Founder & Managing Director of Silk Road Associate, a Hong Kong-based consultancy, “old assumptions” must be ditched in favour of a more developed commercial strategy to find success in the new China.

“Consider how Linfox, the Australian trucking firm, has patiently developed its operations in China, India, Malaysia, and Thailand. Today the company generates one quarter of its revenues in the region, adding scale in a way that wouldn’t have been possible by remaining at home.”

Simpfendorfer says the key to success in modern-day China is true commitment to the marketplace – something Andreas Schmitz’ prominently displayed when moving to Shanghai to oversee the new prestige project. But it was his more recent announcement to employ and train local staff that will make all the difference in the long run.

Just before the Wuhan plant opened for business, Schmitz praised the city’s supply of highly trained personnel and said he would attempt to tap into that local talent pool going forward. He also emphasised that Cargobull employees in China would receive “similar training” to their colleagues in Europe – showcasing just how important the new location truly is to the European juggernaut.

“Before the start of production … there will be intensive training covering the entire value chain from sales to development and order processing to production,” he said. “In the process, Chinese employees have received several weeks of training in Germany. In addition, the core German team underwent several phases of intercultural training.”

In a time where doing business in China is becoming increasingly complex, Schmitz’ considerate foray into the market is widely seen as a positive example for adapting to the region’s new business reality. After all, the opportunities to build scale in the region are still far too compelling to ignore – it’s just the framework that is shifting.

According to Mahajan and Tian, the first lesson to be learnt in that context is that the gold rush we’ve seen over the past decade or so is history. They argue that China is not just taking orders anymore, but has developed its own sense for quality and customer service.

“If competition gets tougher and the days of easy money are gone, for companies, aside from investment implications, it has significant implications for the types of sales and marketing people that you have,” they say. “Now you need people who know how to market, who can talk [about] value proposition, who can talk about why this product or service is better than the competition’s, and give reasons for the customers to believe what you are saying.”

Despite that added level of complexity, China still is the ‘promised land’ for many a European manufacturing business. German brand Kögel, for instance, has staked out a claim in Asia too. Co-operating with Chinese company Weichai, it is highly motivated to slug out the old German rivalry with Schmitz Cargobull on Chinese soil and see who can best adjust to the new business environment in the Middle Kingdom.

If you believe Mahajan and Tian, who consulted Anil K Gupta, a renowned globalisation and strategy expert from the University of Maryland, for their most recent report, the winning party will have to be extremely smart to survive and thrive. To set a solid base, they recommend not to bank on a two-digit per cent growth rate, but plan on a more conservative figure around six or seven per cent. Secondly, they advise Schmitz Cargobull, Kögel and those who might follow to look at China as a marketing game. “If you do that, it will be a bigger market.”

Business consultant Ben Simpfendorfer adds that senior management should  actively take responsibility for an Asia strategy instead of delegating responsibility to less empowered staff. “For mid-sized firms, there is a consistent pattern among the most successful firms of business owners or CEOs actually moving to the region,” he says, praising Andreas Schmitz’ work but warning over-excited executives not to jump in at the deep end.

“There’s no need to jump into Asia overnight. In fact, slow and steady is a good philosophy. But it is critical to have a long-term plan to both tap new customers and defend against new competitors.”