China: The Siren Song of Rapid Growth

In early 2013, Dean Sally Blount and Senior Associate Dean Thomas Hubbard, in partnership with Peking University’s Guanghua School of Management, arranged for ten Kellogg School faculty members to visit companies in China and meet with executives from both local and multinational companies.

In the first of four discussions emerging from these visits, our faculty members share their thoughts on the amazing speed of China’s expansion and the consequences of such rapid growth. Come back in subsequent weeks for discussions on tailoring goods to Chinese consumers, maintaining consumer trust, and the growth strategies of Chinese companies.

Alexander Chernev, Professor of Marketing: In China both the speed and the magnitude with which things evolve are incredible. In the past 20 years, the population of most major cities has grown dramatically. The industrial infrastructure has followed suit, making Beijing and Shanghai modern, cosmopolitan cities. The commercial growth has been accompanied by rapid urbanization, with the population from the countryside migrating to large cities, further fueling the commercial growth. This rapid development has put a strain on the transportation infrastructure to keep up with the rate of growth, as well as on the utilization of eco-friendly technologies to keep up with the pollution. The smog and traffic in Beijing make LA look like an environmental heaven and interstate 405 seem like a breezeway.

Eric Anderson, Professor of Marketing: It was somewhat shocking to realize that in the United States, our notion of scale is just completely off. Both Beijing and Shanghai claim to have populations of more than 20 million. In China, what are referred to as “tier-three” cities have populations of a few million people. These are not backwater towns, but large cities with much more limited infrastructure than we would see in the United States for cities of similar population. Companies such as General Mills and McDonald’s tend to follow major retailers, such as Walmart and Carrefour, as they expand. So they currently serve all tier-one cities and some tier-two cities, but are much less present in tier-three cities―despite the fact that tier-three cities are as large as Boston or San Francisco.

Within China, throngs of families continue to migrate from west to east. Of course the infrastructure of larger cities is strained—traffic is extremely congested and air and water quality are huge problems. There’s constant pressure for the Chinese government not only to serve the people who are already in these cities but also to accommodate the new households who are arriving. In the United States or Europe, we don’t have this massive mobility.

Jin Li, Assistant Professor of Management & Strategy: There are some similarities between China today and the United States and Western Europe in the past, however. Shanghai is very much like Chicago was 100 years ago but on a much larger scale, with perhaps double or triple the number of skyscrapers—and worse air quality.

When we visited the offices of Nike in China, an executive also noted that in China it’s not just the cityscapes that change so quickly, it’s also the culture. Every three years it’s like catering to a new generation in terms of styles and preferences. The Nike executive attributes this to technology, more widely available Western TV programming, and the fact that Chinese youth generally don’t have siblings. Without older brothers and sisters to share clothing, songs, games, and other cultural traditions, Chinese perceptions of the world don’t have the same continuity as they do for people in other countries. The end result is a sense that each new cadre of the young generation will be very different, and it’s impossible to predict what they’ll be like.

Martin Lariviere, Professor of Managerial Economics & Decision Sciences: When talking with executives at multinational companies in China, one of the things that struck me was the extent to which they emphasized the need to prioritize markets. General Mills, McDonald’s, and Nike all spoke of the need to pick one’s spots. In some cases, this seemed a lesson learned the hard way. Nike, for example, entered localities in which there were too few sufficiently affluent consumers to make it worth Nike’s time.

Craig Garthwaite, Assistant Professor of Management & Strategy: China’s fast-paced growth continues to seduce both foreign and domestic companies, and many have yet to learn the lesson that Nike and General Mills have taken to heart. The unending desire of companies to grow leads to what may be the most difficult dilemma for both practitioner and academic strategists: often growth “opportunities” push companies into areas where they are not well suited to earn profits. A setting such as China appears to magnify this effect, and businesses are tripping over themselves to get into markets with neither a clear first-mover advantage nor the economic opportunities to support their business strategy.

Nearly all of the executives we met pointed to the enormous opportunities emerging from the growing middle class across a wide range of Chinese cities. Even within major cities, China’s growth outpaces any we’ve seen in modern history. For example, Nike shared pictures of the Shanghai skyline in 1990 and 2010, basically showing the construction of an entire, enormous metropolis over a 20-year period.

Given this pace of growth, firms find it hard to resist getting caught up in the excitement and attempting to use this growing market to fuel their own operation’s growth. This is understandable, but not necessarily defensible. Too often in China, firms appear to be saying “yes” when quite frankly they should be saying “no.&rdquo

Editor’s Note: Come back next Thursday, June 13 for Part 2, China's Local Markets: To Adapt or Not to Adapt?

Photo Credit: Lyn Gateley