Winning in China's changing economy: A strategy for managing complexity

John Jullens, Krishnan Narayanan, Keat Lai, Tong Zhang
December 16, 2015

Executive summary

In spite of the headlines about China’s slowing growth and the country’s efforts to reform and rebalance its economy — a set of conditions the government has termed the “new normal” — the Chinese economy is undergoing a profound shift away from any kind of investment and export-led GDP growth. In the past decade China had been rapidly evolving from export-led growth, a model it couldn’t sustain as the economy reached a more mature stage of development. The focus in recent years has been on upgrading its industries to higher-value-added activities and boosting its service sector and domestic consumption, as well as on building new urban centers in the inland provinces to spread the wealth that economic development has brought to the major cities and coastal provinces. Those measures, too, are proving hard to sustain. Yet throughout the country are pockets of great opportunity for both multinational and domestic companies to expand their markets.

The challenge is that China is no longer one vast emerging market. Demand for products and services, along with growth itself, varies greatly across sectors, populations, and geographic regions. The implications for companies are clear: increased competition, overcapacity, a decentralization of demand from China’s eastern Tier One markets, and increased heterogeneity in every market. Add to this scenario the rising cost of manufacturing in China, especially in the coastal provinces. Companies in China, both domestic and foreign, are facing a new era of complexity, in which they have to develop new markets and adapt to changing ones while also reevaluating the supply chain itself.

Still, China’s markets can continue to be highly rewarding for companies that manage complexity well. We believe every company needs to develop a complexity management strategy, one that by definition is highly customized to each participant. It begins with the recognition that much of what a company operating in China could take for granted 20 or even 10 years ago must be rethought. Few can rely, for example, on an untapped market to cultivate or on low-cost manufacturing. Every aspect of the business, from research and development to supply chain and distributor relationships, to pricing and point of purchase, must be carefully reexamined. Every choice can make a big difference.