by George Hu

After 30 years of open-door policy, China has become the 2nd largest economic body in the world. Following the change, it is very normal that the government policy and needs to Foreign Invested Enterprise (FIEs) have undergone some reasonable change, but China still lacks innovative technology and an advanced management system. The German Ambassador in China, Mr. Michael Clauss when visiting “The First Financial and Economic Newspaper” on April 28th, 2015, emphasised that the Chinese Government needs to accelerate the opening speed of entrance into China. He said that the German government hopes that his Chinese counterparts create necessary framework conditions to attract more small and medium size German enterprises with their strong innovative capability to China.

Any successful business model can be adopted in China, but it can’t be 100% copied in China although Chinese government will listen to the opinion from foreign companies experts and make the relevant new policy fit into their needs. 

In order to understand how to integrate a successful business model into China’s market, it is necessary to review several successful and failed business cases in China: 

GlaxoSmithKline (GSK) as an representative case to reflect the core competency change of FIEs in China: Besides the bribery scandals involving pharmaceutical firms GSK, Sanofi S.A. and Novartis AG, as well as French food and consumer products manufacturer Groupe Danone, multinational companies (MNCs) and FIEs know they must take more direct action to protect themselves from further criminal indictments by Chinese authorities. At the same time, they must also strive to comply with the demands, and in some cases, the terms of past criminal settlements arising out of the United Kingdom's 2010 Bribery Act (UK Bribery Act) and the United States' Foreign Corrupt Practices Act (FCPA). Many times, what companies have in writing relative to internal compliance standards is not the problem. There are likely areas where GSK's China compliance rules needed to be tightened; but the violations that got GSK into trouble more than likely were at odds with what the company already had as internal standards for practice. The issue for GSK - and for any life science company working in China - is what happens when management's drive to achieve revenue growth and a sales force incentivized to do the same, look past the rule book. McKinsey estimates the top 10 pharmaceutical MNCs have added almost 20,000 new sales reps in China over the last five years alone. The compliance issues brought on by this pace of hiring are numerous and extreme. Given the massive growth in China's pharmaceutical sales force, the potential for misunderstanding, misapplication, and misuse of internal compliance controls is both more likely and more risky than ever. 

The success of Volkswagen Group in China stems from respect for the Chinese domestic market and always insists on localization as a philosophical concept. Volkswagen has set a precedent for the localization of multinational companies in China, and has built a Chinese auto parts system, laying a solid foundation for the Chinese auto industry. Volkswagen's biggest contribution to the Chinese automotive industry is localization. It is an honor for the public to be able to experience the 40-year history of China's automobile industry along with reform and opening up and to contribute to it. This is actually a philosophy of the public. Everyone spoke about globalization in the past two years, but now globalization has encountered a resurgence. In fact, for large multinational companies, there is always a strategic choice. Is it to choose localization or globalization in different markets around the world. Some companies are happy to produce a uniform standard vehicle around the world, which is what some companies call the "world car". However, some companies are more inclined to localize and produce models suitable for local conditions in the region. The public always has a philosophy: China is a country with a large population, a long history, and its own unique cultural tradition. It is impossible to reach real achievements by relying on imported cars. Only by taking root in this country and becoming part of this country can we truly understand Your customers, understand Your market Based on the understanding of Chinese FIEs and the results, the following suggestions for a successful business model transformation will be addressed as follow:

 “Made in China” is being changed to Designed and R&D in China, FIEs have to move their R&D centre to China, at least their R&D centre for China’s market to compete with their strong local competition.  

The success of FIEs in China stems from respect for the Chinese domestic market and always insists on localization as a philosophical concept for a business model transformation. 

 FIEs should adjust their business strategy and give up “China as exception” thinking, and enhance their internal management. The GSK case gave us a good warning, after their receiving RMB 3 billion fine from China’s government. They had to give up their “sales representative”business model,but the negative effect appearedthe next year, they have tolay off employees becausetheir sales dropped more than30% in China and the prognosiswas that this drop will becontiunously.

FIEs need to take their governance,compliance and CSR as their strategic questions toconsider and drive down to really integrate into Chinese societyin order to realizewin-win.Under the impact of the globalization,the knowledge economyand the information technology revolution, managershave to face a new pictureof an increasingly complex,fast-changing, fuzzy and uncertain“VUCA world” - more andmore elements and their nonlinear associations. “Provocative”looks at managers'cognitive abilities, and rapidchanges not only exacerbate cognitive difficulties, but alsoreduce the likelihood of predicting the future. Organization management is facing unprecedented challenges, and thisis the fate of future managers in the process of exploration.

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