GE’s Finds China (too) Hard. Should Everyone Give Up?

Thursday, May 17, 2012 0:24

Whether it is the costs of doing business in China, or the impact of domestic innovation purchasing schemes, many firms are beginning to take a look at their business model in China and find that it is hard(er) to make money in China than originally thought.

In my mind, this has been a long time coming as the post-2008 China craze kicked into full steam with semi-solvent firms entering China’s market looking for a profit center to keep them alive.  But, then there are others like GE who have invested billions into China, built a large presence that included R&D, tech support, and sales, who are now beginning to see that the long term ,ay not have been as rosy as once hoped.

As shown through the recent WSJ article GE Says China Is ‘Hard,’ Aims at Resource Hubs - an article originally titled “Frustrated with China, General Electric Turns its Eye to Australia:

The shift stems in part from Chief Executive Jeff Immelt‘s shuffling of the company’s business lines to emphasize energy. But it also reflects a significant rethinking of China’s value for GE, which, after years of missed targets and slow growth in the country, has turned its attention to resource-rich locations that have friendlier rules for investing and fewer national champions as rivals.

GE isn’t giving up on China, where its annual sales have hovered at around $5 billion for much of the past half-decade.

[...] And while senior GE executives say they remain bullish on China over the long term, they also have voiced frustration about conducting business where state-owned companies are rivals rather than partners. Mr. Immelt caused a stir two years ago when he made comments suggesting that Beijing didn’t want foreign companies to succeed.

Vice Chairman John Rice who oversees global growth for GE and is based in Hong Kong, says the business model in China of 50-50 joint ventures means GE operations “take longer to put together and longer to mature” than they would if the company had full ownership.

How could this happen to GE?

1) Business Model – While the average American may know GE for its light bulbs and refrigerators, in China they are predominately an industrial business selling to various government agencies and state owned enterprises.  Energy, transportation, aviation, and security solutions are all high revenue big project based sales, and for them to succeed they need to be able to maintain those big sales.  A tough task in this environment, particularly after the thousands of hospitals, stadiums, and airports have already been built, China”s largest airlines have already upgraded their fleets, and China has already purchased 200 locomotives.  All markets that GE was successful in, but there are only so many projects a year that come online.

2) Policies – this is perhaps the black hole for GE’s sales team.  Knowing whether or not an agency has been told to buy local or not, and if so, there is little that GE could do about it.  However in looking at the energy sector alone, GE has been performing well in various areas.  At one point they had a backlog of wind turbine work, while others were struggling to get a foothold, and while they may not be given access to the projects where wind turbines were built and then left idle, there were plenty of projects where their energy division was leading others.

3) Competition – Behind the dwindling market for large government projects, this is perhaps the biggest obstacle that GE will face going forward.  Looking at GE’s success in selling transportation related products and services, one cannot help to think about the pressure they must be facing from the likes of CSR, who are rapidly gaining ground domestically and internationally in some of the same areas that GE was. This is not something that is unique to GE’s products, as I have mentioned before, and in areas of large project equipment and services the Chinese competition has certainly grown more competitive and competent over the last 10 years.

Is China too hard for others as well?

Simply put, no…. And the recent American Chamber of Commerce study on doing business in China offers some insights into that.

That while China is getting harder to operate in, and competition is growing, many still feel that China offers an attractive market.   Firms, like those in luxury, F&B, and electronics products,  are going to exceed their projections, while there are others whose industries are cooling off who need to review and assess their situation.

Which is the ultimate lesson that GE should serve.

That, a firm needs to constantly look at their projections and make revisions to ensure that the investment in time, money, and people is warranted.

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