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.

The Chinese labour market is a paradox of talent. Despite a large workforce there is a shortage of skills. The resulting excess demand for talent has created a seller’s market. Skilled locals have more employments options and are more likely to leave current employers if they feel dissatisfied. These employees seek career advancement, new challenges and opportunities. Employee retention poses a challenge to firms, with high turnover rate of around 20.8% and 21.8% in 2009 according to Hewitt China.

One Man’s Trash:  China’s Growing Waste Problem

No nation has witnessed a growth in waste at the rate that China has seen in the past two decades. Industrialisation and an urban population explosion have propelled China to overtake the USA in waste generation in 2004. Urban areas alone generate 1.5 billion tons annually or 1kg per capita daily.

China’s Waste Management systems have failed to develop to manage the increasing amounts of waste. The domestic industry does not have the necessary infrastructures or expertise in efficient collection, treatment, disposal of waste nor designing and operating facilities.

PTL Group was highly fortunate to have an opportunity to talk with Ilan Maimon, CEO of Sigma Group, an experienced industrial entrepreneur and multiple business owner in China. He is also a partner in PTL Group Industrial Project Management initiative. Ilan describes himself as a businessman, who is a mechanical and electrical engineer by profession.

What brought you to China?

Ilan: I am originally from Israel, where I was a partner in a software company. With the Dot-Com crisis in 2002, I decided to quit my current position and make a major change in my life. So I came to China.  I worked as a General Manager for a few companies while starting my own in parallel.

What are the areas/current projects you are working on? Tell me more about your business and what you do?

PTL Group: What brings you nowadays to China?

Jan Molenkamp, Turnaround Specialist, Owner of ABC Turnaround This e-mail address is being protected from spambots. You need JavaScript enabled to view it.

Jan Molenkamp: Many international companies have ventured into China without taking into account the necessary preparation and analysis steps. Consequently they inevitably run into trouble some way or another. During the time that the domestic markets of these companies were on a “high”, underperformance or even loss making of their Chinese entities was accepted as a “part of the business development process.”

Now the domestic markets are less than favorable due to the global economic crisis. Due to this, more focus is put on the individual contribution of the various international ventures. After all, these were set up over the past couple of years to contribute to the enterprise’s overall bottom line. The attention to these contribution factors quickly (and in some cases finally) exposes to some unlucky international enterprises that the Chinese venture is underperforming at best.

Due to enormous pressures on profitability and cost saving a culture of decision making emerges in corporations, which previously was deemed unnecessary. Quickly the companies scramble their own analysts, reorganization- or liquidation experts, who are immediately sent to China to see what can be saved, improved or shut down.