China There are a number of key opportunities in the Chinese market. McFarlan (2008) notes that China is in the midst of a profound long-run change, opening its economy gradually in an attempt to lift its entire population out of poverty. The central government has spearheaded this process, and retains a strong guiding role in the methods by which the economy will be opened. The Chinese market is huge, so any access to this market is a good thing. It is the largest market by population in the world. But just as important is that China has not simply opened its market, but embarked on strategies that have improved the country's standard of living. This means that not only are there 1.3 billion Chinese, but that they have experienced a strong, steady long-run increase in their economic output, their buying power and their access to and desire for consumer goods (McFarlan, 2008). So China still represents the biggest consumer market opportunity in the world today, because this process is still ongoing.

There are other opportunities in China, however. For example, China has become the leading manufacturer in the world today. This reality sees China having built tremendous manufacturing capacity, such that many suppliers are already located in the country. For any MNC, China is an opportunity for lowering production costs, but to also do so with a fairly high degree of competency. While China is still capable of producing very low cost work, the reality is that the Chinese economy has evolved to a point where it also has strong technological capabilities, and improvements in the education system are helping it to further be able to manufacture more complex goods. Thus, Chinese factories have a range of different capabilities with respect to manufacturing. They have a large and capable workforce, they have an entrepreneurial culture and this has combined with low land costs, strong government control and a large influx of foreign capital to position China as a manufacturer of choice for the foreseeable future in this world, even as it begins to lose its cost competitive advantage to less-developed nations.

With both of these opportunities, China is basically the world leader, and that is why China represents such a tremendous opportunity for MNCs. The country is still in a sweet spot of having a large and growing middle class but still having costs that are much lower than might be experienced in the West. The problem for companies is that there is some risk associated with the Chinese market. The central government remains a threat. Strong central authority has long been a hallmark of Chinese culture. The People's Republic is a totalitarian regime and while they are motivated to provide opportunity for foreign companies to invest in China, they also control access to the market. Capital outflows in particular are restricted, and the laws are oriented to the benefit of the Chinese. An MNC entering China for the first time will do well to study the legal and political environments in particular, as that is where the greatest risk is located. This is double true if a company wants to manufacture is China and will be putting its intellectual property at risk, as while China's IP laws on strong on paper in practice they are almost worthless, something that has long been a bone of contention for foreign firms in China (Feldman, 2013).

Another threat in China is currency. China's currency has been artificially held low to support its export businesses. This has caused significant inflation, itself a risk, but it also must be pointed out that such a policy is not sustainable in the long run. Moreover, China has broader ambitions for its currency on the world stage, but any move to make the yuan more important will rely on it becoming freely traded. Under such a scenario, China will lose much of its cost advantage, which is a significant risk for a company that builds a factory there in particular, if the basis for that decision was the cost advantage. This is probably the biggest source of economic risk associated with the Chinese market right now.

2. / 3. Second Home?

I do not necessarily take the view that a company that currently does not operate in China should view it is a potential "second home." That view is rather naive. This is a massive market, but it is very complex, and a company will want to have a positive track record of dealing there...

One company that has determined China to be a second home of sorts is Starbucks, which went on record with that ambition (Law, 2014). At the time, China was nowhere near the 2nd-largest market for the company, but Starbucks had been operating in China for several years with strong growth, and the larger markets (UK, Canada, Japan) were much closer to saturation. That is the sort of situation where China can be made a second home, after a company has been in the market a while and established both its brand and its operational competency. Even then, many companies with very strong interests in China have yet to make it a proverbial "second home" -- even Walmart recognizes that it is much bigger in Mexico, the UK and Canada than it is in China, despite the massive amount of business that it does there.
So a multinational corporation can only make China its second home by entering the market, using whatever market entry strategy that it sees fit, and then building gradually from there. The "second home" thing needs to occur organically, as a result of China legitimately being a great market for a company. And even then, there are caveats. A second home culturally will not happen, unless the company is from Taiwan or Hong Kong. The reality is that China is vastly different, and most MNCs seek to have a somewhat generic version of Western culture as their corporate culture. A company cannot simultaneously have a Western culture of any type and a Chinese one -- they are incompatible. So again, the second home analogy is not great because it does not represent an accurate reflection of how MNCs do business, and in particular how most approach the Chinese market. There is not a single MNC that can say to have fully made China a second home -- not even among the companies where China is a top two market.

The McKinsey article argues that companies need to commit more resources to the Chinese market, under the presumption that success in that market will determine global winners and losers. A company can build economies of scale in China by dominating that market but the way that they frame their argument does not support a "second home" analogy. Their point makes sense, but the analogy does not. Yes, building competency and share in China will be beneficial to any company and may result in global competitive advantages. These can be leveraged by any company -- Chinese or otherwise -- and this creates an imperative for foreign companies to take the Chinese market more seriously. Arguably, this is the case with Starbucks.

In the McKinsey article (Galvin, Hexter and Hirt, 2010) the authors use a narrative about pianos, but that is highly selective, choosing a commodity that the Chinese love. Starbucks is a better example, because the Chinese had never demonstrated any affinity for coffee prior to Starbucks entering the country. Instead of China as a focal point where it will obviously be one, this is a company making China a focal point where it made no outward sense to do so. The McKinsey article thus could have worked with a more compelling narrative.

They make an interesting argument that companies will need to win China in the future, and that is not entirely wrong. But they miss on a few key points that will constrain the importance of the Chinese market. First, this isn't 1.3 billion rich people; most Chinese are not really in the market for Western-quality goods at Western prices. Second, branding is not related to, say, production. In their piano example, the authors talk about brands of piano as if China has ever been able to create and export a brand. Even very large consumer brands that when you're in China look strong enough to be exported -- something like athletic apparel make 361 comes to mind -- such brands have never gained traction in export markets. Lenovo might be the only one. Furthermore, a Western company can gain economies of scale just be using Chinese factories to manufacture their goods, and where those goods are sold is not actually that important. The Chinese market is often fractured, and the lack of brand loyalty remains a key issue in that market. So there is a certain ethnocentrism in treating domestic Chinese producers and Western firms as equivalent, and suggesting that they should compete with each other in China on equivalent bases. The reason this hasn't happened yet is not, as the authors intimate,…