You have been working as an interim manager and consultant in China since 2013. How has your work changed since then?
The main thing that has changed is the freedom of movement, which was severely restricted during the coronavirus pandemic. It was almost a throwback to the old days: I was in China for the first time in 1993. Back then, you were still picked up from your hotel for meetings with officials and then you drove along the highway with a police escort - very slowly because of the potholes, tractors and cows on the road. by 2013, people had unrestricted freedom to travel, at least in eastern China. Foreigners were only not allowed to book cheap hotels, but that wasn't too bad. The rooms were smoky, there were cockroaches and there was no breakfast.
But that was all over again because of Covid 19. The government's corona policy had a major impact. But 30 years ago, only foreigners were affected. In the coronavirus era, freedom of movement was restricted for everyone, not just foreigners.
For example, everyone had to be able to prove that they were not a risk of infection at all times using an app on their smartphone - at the airport, cab ranks and so on, but also in front of facilities such as hospitals. I personally experienced how the gate guard at the hospital refused to let a woman with a child through because the QR code on her cell phone was not up to date. You also needed a current test result. And you had to pass the temperature check. The problem was that each province generated its own codes back then. And the rules and regulations could also differ. This made travel very, very difficult.
"The zero Covid policy is tough."
And how did German or European expats take these restrictions?
Not well: the number of European expats in the country had roughly halved since the outbreak of the pandemic. There's nothing to be surprised about.
And the companies?
75 percent of European companies in China reported that the strict containment measures were affecting their operations. And almost all of them complained about supply chain problems caused by port closures and rising freight costs.
European companies therefore suffered from the measures. What did this mean for the Chinese economy?
It was difficult to say at the time. Developments depended on how the strict coronavirus measures would continue. Supply chains were a particular problem: and it became dangerous because 23% of the companies surveyed were considering putting new investments on hold. So it could quickly backfire if the customer had to wait in vain for the promised parts.
But the strict coronavirus measures are one thing.
There's also the war scenario: after Nancy Pelosi's visit to Taiwan in August 2022, every cab driver told you that China would soon be going to war with the USA and that Taiwan was fearing a nuclear strike. That's nonsense, of course, because China would have a lot to lose in the event of an attack. But politics has become more unpredictable, to the detriment of the Chinese economy.
How was the Chinese economy doing back then?
The Purchasing Manager Index fell to 45.9 at the time, which means that there was much less purchasing in the manufacturing sector than a few months previously. The economy was no longer buzzing. How could it: the zero Covid policy was tough. In addition, the measures were often contradictory, especially when they came from local municipal administrations. The measures could differ greatly from one another. Unfortunately! Because the zero-covid strategy overshadowed the many positive developments of recent years.
Can you give some examples?
One positive development was the fight against corruption. It only affected individual politicians. But the decline was noticeable, a lot had been done. Environmental protection has also developed positively: pollution has steadily decreased in recent years. For example, filter systems had to be installed on the machines in production. This was closely monitored. Of course, more can always be done. And the complex requirements from Beijing were often misinterpreted by the local authorities. This led to contradictions: Where there was no pollution, we had to go to the trouble of installing an expensive exhaust system, and where there were sparks, we didn't need to do anything. But the trend was positive. Then came the zero Covid policy, which I don't think was sustainable because the system has a lot of loopholes. I think that's pretty obvious.
"German politics also makes mistakes."
How do you think China's economy will develop further?
Politically, nothing will change in the next few years. Xi Jinping was re-elected. And experience shows: The longer heads of government are in office, the more entrenched they are in their attitudes. But as I said, the biggest threat at the time was the adherence to the zero Covid policy. It was not only the industry that suffered a severe slump as a result, but also the real estate sector, which had been booming for decades. What China needed? An effective vaccination campaign. But unfortunately, many Chinese also believed in conspiracy theories. Older people in particular refused to be vaccinated.
How do you view German economic policy towards China?
German politicians also make mistakes. Angela Merkel, whose engagement policy has significantly shaped the EU's strategy towards Beijing, visited China at least once a year. However, her successor Olaf Scholz skipped China on his first trip to Asia in April 2022 and visited Japan instead. And under pressure from the US, Germany is now also threatening Chinese companies like Huawei with sanctions. What political and economic damage! Not only for Germany, but also for the many German companies in China.
But politicians cannot be guided by economic considerations alone. There are the human rights violations in Xinjiang, the territorial conflicts with Taiwan and Japan.
Yes, of course. But from my point of view, people here are burying their heads in the sand and hoping that all these differences will pass quickly - on both sides, in Germany and in China. But this situation will not simply disappear, it will continue for several years. I think exchange is still important. Why do we even send people to other countries if Zoom meetings are enough? We do this because we can build relationships, because we can make friends. We need to communicate directly and talk to each other to overcome the many difficulties.
"The solution is to only produce in China for the Chinese market."
What advice would you give to German SMEs in China?
Corporations that operate internationally and are dependent on imports and exports have already developed approaches that enable them to overcome the restrictions mentioned. SMEs can also use this as a guide. The solution is to only produce in China for the Chinese market.
In concrete terms, this means:
- shifting the HQ to other Asian countries. This allowed managers and their families to escape the hard lockdowns - which kept them in the companies.
- The company streamlines its local offices by using service providers such as Interim Manager as required. This is possible in practically all parts of the company - management, finance, HR, sales and marketing, IT. This also minimizes the often ineffective trips to and from China, which are usually too short to acquire new customers, for example. This requires a longer professional commitment on site.
The following measures make sense for products destined for the Chinese market:
- Production takes place at local sites close to the customer. This reduces transportation to a minimum.
- The company relies on lean, semi-automated and fully automated production, which reduces personnel costs.
- Research and development takes place in China in order to adapt products to Chinese needs. Germans sometimes tend to over-engineer products that Chinese customers don't need.
And for products that are not destined for China, the following is recommended:
- You don't produce in China for the world, but elsewhere. For example, if you need workers rather than machines, Indonesia is certainly a good place to look. If the degree of automation is high and you need well-trained employees, Malaysia, Thailand or India are very good options.
Here you will need to carry out and compare a robust total cost calculation and benefit analysis in order to find the best business and strategic solution.
How do you currently rate the chances of entering the Chinese market?
If the organization is agile: still good. In rapidly changing environments, it is vital to adapt quickly to new conditions. Despite great uncertainty, this requires confidence, a positive focus on strengths and the courage to experiment. If the lockdown had anything positive, it was progress in digitalization. New tools offer the opportunity not just to replace previous processes in a makeshift manner, but to open up a wide range of innovative opportunities. Organizations should still seize the opportunity today,
- to further develop their online offerings,
- target new customer groups and
- optimize dusty processes through targeted automation.
The coronavirus crisis also showed how risky it can be to build a business model on individual products and global logistics chains. You therefore need broad risk diversification and regional networking. That is more robust. This means tapping into new business areas and investing in the future, including in China.
What advice would you give to German companies that want to become active in China?
The truth is: doing business in China is more complex and more expensive than it was in the past. And you have to realize that China is still a developing country in many respects when it comes to corruption and bureaucratic hurdles. You therefore need to know the local processes and dynamics well in order to be able to negotiate effectively with authorities and local business partners: Anyone preparing to enter the Chinese market needs local managers who can set up and manage a company. And you need salespeople with product and language skills.
Long story short: I would advise compiling a list of the key figures you want to achieve: degree of automation, number of customers, turnover and so on. Also define the time frame for this. And think about which location you want to produce at. You can then discuss these KPIs with an Interim Manager who knows the local conditions very well. They will be able to assess the project. You can then continue working on this basis.
The next steps
Would you like to take advantage of market opportunities in China? Or need support with your Chinese activities? Our China specialist is available to you as an interim manager and consultant.
