We launched "Operational Excellence in China" survey in cooperation with Dezan Shira Associates. This survey is intended for senior management executives of international companies operating in China. The main objective of the survey is to gather information about key factors affecting operational excellence of companies in China. Questions cover HR, Finance, Logistics, Operations, Legal and Tax issues.

To follow up this survey we will hold "Operational Excellence in China" seminars in Shanghai on June 7 and in Beijing on June 14 where we will analyze survey findings and provide practical solutions for better management and internal controls. If you would like to attend this event, email to Lily Li at This e-mail address is being protected from spambots. You need JavaScript enabled to view it. .

In the past three decades, the technological gap between foreign and local goods provided enough of a competitive advantage to cover a serious lack of operational management and infrastructure in China-based foreign-invested enterprises, but this is no longer the case. 

China is undergoing an “operational revival” of sorts, and excellence in operational management and infrastructure has become a top priority. Today, as China’s market is the business focus for many established players and new entrants.

One of the primary drivers for operational audits in China is that language and cultural barriers prevent China-based GMs from reporting accurate and comprehensive information about on-the-ground operations to a company’s headquarters. In fact, much of the information reported is not based on multiple sources, but rather a translation of the opinions of one local manager or partner.

Furthermore, developing internal “self improvement cycles” requires an openness to constructive criticism and multidisciplinary intervention that is uncommon among traditional Chinese managers.

An operational audit can help to fill the informational void and bridge cultural barriers in China to establish checks and balances and strengthen internal control. Pure financial or legal audits to assess internal control systems are insufficient, as these audits rely on data willingly submitted by the audited company. An operational audit is a key to the accuracy of such data in the first place. 

Operational audits can uncover a variety of behaviors that can dramatically affect a company and will likely not be otherwise uncovered, including:

• Employees who signed perfectly legal labor contracts but are not fulfilling their job description (or, even worse, labor contracts for employees who simply do not exist)
• Production losses visible in the factory but not recorded in the books
• Company resource usage recorded in the books that does not happen in real life

Additionally, improved interdepartmental communications and improved management confidence are all by-products of an effective operational audit.

In this article, we highlight five lessons (all gained from operational audits) for establishing effective internal controls:

1. Ensure an Active and Accountable Knowledge Transfer
2. Invest in Recruitment Screening
3. Systematize Internal Processes
4. Keep an Eye on Distribution Channels
5. Prioritize Loss Prevention

While China is on an accelerated path to become a consumer oriented market international companies face ever growing managerial challenges trying to keep up. Over two decades of attracting massive foreign investment and the creation of fast technology transfer mechanisms made China the world’s main manufacturing base. 2011 and the new 12th five year plan shifted the focus of the Chinese policy makers to the strengthening of China’s dynamic new homegrown companies both home and abroad. Domestic Private Enterprises (DPE) as they are called here contributed over 60% of the Chinese GDP in 2010. This is in striking contrast to 38% they contributed back in 2005. Adding to this the fact that the Chinese GDP is expected to quadruple itself (2007-2025) helps to draw a general perspective of the business threats and challenges facing Western companies in China as well as in home markets in the next few years.

The financial crisis since 2008 from one side, and the fast growing Chinese consumer market as well as the abundant wealth available for investment in China today, amplify even more the growing need to penetrate and operate in Chinese markets.

Turnaround & Transformation Triggers

China is well known for being a challenging management environment for foreign companies. There are many cultural and structural market reasons that create those unique difficulties. As the new year of the dragon begins it will be interesting to focus on two recent trends affecting manufacturing small and medium sized enterprises (SME). These are both good reasons for many European based companies to reconsider their approach towards opening a new operation in China; globalisation of supply chains and the increased threat of competition by Chinese DPE in China and within a few short years in Europe’s own backyard.

Offshoring and increasing labour costs

Every country with cheap labour eventually gets richer - the labour costs increase and alas, we nomadically relocate to another country. Generally, the key benefit of offshoring is lower labour costs. In light of China’s fast-increasing labour prices, companies are faced with a dilemma - to stick to one’s guns and remain in China, potentially losing that attractive profit margin, or to shift one’s industry to another developing market. This article sums up some key stats and argues for staying in China. The key tenet of this proposition is that a Yuan revaluation is inevitable, leading to an appreciation in buying power. The domestic market in China will experience a surge. This, coupled with China’s increasing investment in inbound SMEs and a superb infrastructure are but a few of the pillars of a competitive multinational in China.

The current labour problem

According to the IMF, China’s labour is now the third most expensive in emerging Asia, after Malaysia and Thailand. New labour laws arguably offer more job security to the detriment of employers and transport prices are rising with the cost of oil. All the while, there is the question of a Yuan revaluation and the resulting impact of an appreciation on the export Industry.

Boston Consulting Group listed a number of multinationals, which have already shifted production, including Caterpillar, Ford, Flextronics and toy manufacturers such as Wham-O. These have moved to other cheaper Asian countries or back to their home markets.

In 2009, thermal energy was the country's primary source of electricity production, representing 80% of electricity generation, followed by hydro-power at 16%, nuclear power at 1.8% and other non-hydro renewables at 1.24%.

The 12th 5 year plan is ground-breaking in its emphasis on the importance of sustainable growth and using renewable sources of energy. Water consumption in industrial processes is to be cut by 30%. Non-fossil fuels are to account for 11.4 % of primary energy consumption. GDP CO2 emissions are to be cut by 17%. Forest coverage is to rise by 21.66%. Companies, such as Nalco, which sees the potential in this shift, is adamant to get involved and aims to grow in China by 20% in the next 5 years.

Does the Plan Mark a Transition?

This new 5 year plan is by no means an eco-political tectonic shift. China treads a fine line between slowing growth and inflation. But, this plan marks the realisation that continued reliance upon foreign resources undermines its security. China’s heavy involvement in Africa, Afghanistan, Indonesia and South America belie an insatiable thirst for raw materials, from oil to rare earths, timber through to copper. This reliance upon foreign resources, particularly from areas of unrest, is not ideal. Coupled with the notion of defence is of course the problem of our environment. In a recent RUSI report (Royal United Services Institute), John Mabey remarked:

“Climate impacts will force us into a radical rethink of how we identify and secure our national interests. For example, our energy and climate security will increasingly depend on stronger alliances with other large energy consumers, such as China, to develop and deploy new energy technologies, and less on relations with oil producing states.”