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A survey of MNCs successfully committed to China shows that they have progressed far beyond the cautious experimental stage As the senior managers of many North American, European, and Asian MNCs realize that the forces working to open up China's economy have become irreversible, they are hastening to expand the scale, scope, and structure of their involvements. To understand these changes in more detail, McKinsey recently carried out a survey of MNCs that have a significant presence in China that are regarded by their peers as China extremely well. These companies -- both industrial- and consumer-focused -- are not in China just to take temporary advantage of its low labor costs before hopscotching to another country when faster development inexorably drives those costs up. They are there for the long haul, have already figured out how to make profits and sustain them over time, and are working hard to lock out slower-moving competitors. In particular, they are focusing on managing local partners, keeping their business systems as simple as possible, and laying the organizational foundations for a China-wide presence. CHINA IS -- and will long remain -- a difficult and uncertain operating environment for MNCs. No economic sage, and certainly no responsible observer of the political scene, would disagree. But the long-term economic opportunities China offers are so remarkable that senior managers will find it prudent to pay attention to what the most active companies have been doing -- and learning. In fact, thanks to such learning, many of these pioneers are now moving, purposefully and aggressively, into a distinct second generation of involvement in China. Recent economic developments are, indeed, extraordinary.(*) In the urban locations where much of the country's growth is centered -- Shanghai and Guangzhou, for example -- consumer demand for a wide range of big-ticket items shows the continuing effects of soaring purchasing power. For more and more Chinese consumers, the issue is no longer whether they are able to afford, say, a $2 bottle of branded shampoo. They have already established themselves as purchasers of goods that require substantial savings and discretionary income. The changes afoot, however, are not confined to the resources or aspirations of local consumers. Over the past few years, Chinese government officials at all levels have clearly signaled their intention of leading the country toward a market-oriented economy far more open than before to the rest of the world. This is not mere rhetoric: * Price controls on 90 percent of consumer products have been lifted. * Centralized, volume-based planning for manufactured goods now applies to less than 20 percent of industrial output, compared with 95 percent in 1979. * Vice-Premier Zhu Rongji's much-publicized 16-point plan has genuinely begun to curb official corruption, excessive speculation in real estate, and unwarranted expansion of the money supply through uneconomic loans made by state banks. Current estimates are that 60 percent of these loans have been retrieved. * Efforts to undo the iron rice bowl working conditions for employees of state-owned enterprises have begun to pay off. Today, many workers operate under explicit labor contracts that -- at least in theory -- allow them to be transferred or even fired. Moreover, their salaries have largely been severed from the traditional accompanying package of housing, educational, and medical benefits. Companies are being encouraged to buy these benefits from competing service providers in the open market. * Industry sectors that had long been closed, de jure or de facto, to extensive foreign participation -- banking, insurance, retailing, petroleum refining, and infrastructure development among them -- are now beginning to open up. Hopewell Holdings, for example, has joined forces with Guangdong Provincial Highway Company to build and operate a US$1. …
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