UK: Investing In The UK – A Guide For Chinese Businesses

Last Updated: 27 March 2009
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017

Preface

China's large and medium-sized State Owned Enterprises (SOEs) have made significant gains in economic strength over the past 30 years, and have been a major driving force of the country's economic growth. Some SOEs have made it to the ranks of global top 500 and have even become leaders in their respective industries worldwide.

For SOEs in semi-regulated or deregulated industries, not only do foreign-invested and privately owned companies present tough competition, some SOEs also suffer from talent and skills constraints, capital deficiency, limited and outdated products, and lack of financial control.

Since China introduced its reform and open-door policies, independent innovation, an initiative encouraged by the Central Government, has played an increasingly important role in the transformation and development of China's SOEs.

As an Intellectual Supporting Partner of the Boao Forum for Asia Annual Conference 2006, Deloitte produced a special report on the role of management innovation in supporting enterprise development. The following is an extract from the Report which discusses the importance of management innovation in China's economic progress, and outlines the major implementation issues that require attention.

1. The importance of innovation for enterprise development

Only the strongest players will survive the ever-changing market environment. Past success does not guarantee future performance. Companies need to be able to respond effectively to changes in order to maintain competitiveness or create new market advantages. The ability to innovate is a core competency that companies must cultivate.

The Chinese Government is well aware of the critical role of innovation in the development of SOEs. If reforms move too fast and too far, SOEs could crumble completely and fail in their ability to provide for the Chinese people.

Given China's current development, the focus on 'innovation' should be on enhancing SOEs' capabilities to survive and continue to grow, by adopting international management standards. Innovations of SOEs fall mainly into three categories:

Corporate structure innovation

Corporate structure innovation refers to reforms in company ownership, governance and legal entity structure. Since the 1980s, SOEs globally have been going through transformations such as privatisation, corporatisation and the introduction of contracting. Although there is no single approach, the objectives have generally been achieved, thus improving SOEs' competitiveness and therefore alleviating the burden on government.

Technology innovation

Technology innovation is the basis for gaining productivity. According to the World Intellectual Property Organisation (WIPO), the number of patent applications worldwide hit a record high in 2005. The United States accounted for 34 per cent, followed by Japan, Germany, France and the United Kingdom, with China being number ten on the list. Interestingly – and importantly – this list almost mirrors the 2005 GDP ranking.

Management innovation

Having a strategic objective and corporate vision is a prerequisite for successful management innovation. Management innovation refers to the creation of value through continuous improvements in business models, organisation structure, processes, and human resource management. An innovative business model will support new market exploration and profit maximisation; an innovative culture focusing on empowering employees will encourage timely and effective management decisions; and an innovative organisation structure and processes will facilitate co-operation and communication among staff, thus improving operational efficiency.

2. Management innovation needs to be a focus for SOEs

China's SOEs have achieved remarkable interim results from their reforms. By 2007, 20 Chinese companies made it to the Fortune 500 list.

An enterprise's development life-cycle can generally be categorised into four phases: start-up, growth, sustained development and consolidation. Nearly all SOEs under SASAC supervision, and some small and medium-sized SOEs, have entered the sustained development phase. Nevertheless, others are struggling to survive, are being acquired, or are on the brink of bankruptcy.

The reform of the past 20 years was directed and driven by the Chinese Government and inevitably focused on corporate structure innovation. There have been significant achievements in many aspects of corporate structure innovation.

With respect to technology innovation, many Chinese SOEs have adopted a 'market for technology' strategy and many have continued with this business model to the present. Results thus far suggest that China's SOEs have achieved significant corporate structure and technology innovations; but the need for management innovation, a critical factor in the next stage of reform and development of SOEs, has received relatively little attention. Since accession to WTO in 2000, China's SOEs are facing increasing competition from international players.

3. Areas where SOEs in China can foster management innovation

Taking into consideration the current business environment, SOEs in China should focus their efforts on encouraging management innovations in the following areas:

Strategy innovation

Strategy innovation refers to innovations around strategic direction and long-term development of the enterprise. With continuing globalisation, competition is becoming more intense while investors and consumers are becoming more demanding.

Effective strategy innovation needs to be embedded throughout the value chain, from strategy formulation, research and technology development, production, sales and marketing, to the commercialisation of products. Successful innovation requires an integrated effort of all the business units involved.

China's SOEs face a number of challenges in embedding strategic innovation through the value chain. Some examples include:

  • Research and development resources in China are not efficiently co-ordinated. Hundreds of scientific research institutes are sponsored by universities, technology funds or government initiatives, but there is limited co-operation between these organisations to conduct market and enterprise-driven R&D.
  • The research and development process lacks strategic vision and it is neither a top-down nor bottom-up approach.

Organisation and corporate culture innovation

Senior executives of China's SOEs tend to view organisation innovation from a political perspective. In the Eleventh Five-year Guidelines, the Central Government has emphasised the development of proprietary technology. , Therefore SOE leaders have responded and complied with the directives by aggressively establishing research and development business units.

Employees view innovation typically from a purely technical or academic angle. They lack a holistic view, and do not have an appreciation for operational aspects or requirements of the entire innovation process.

Leaders need to instil a new culture and bring about changes in the way employees think about their roles and responsibilities, expanding their understanding of the inter-relation and interdependency with other departments in the organisation. This will eventually create the impetus for innovation in organisation structure.

Business process innovation

Business process innovation refers to the enhancement in enterprise value through process reengineering. In consideration of the current development of China's SOEs, business process innovation should emphasise the collaboration and allocation of enterprise resources such as people, finance and infrastructure.

Innovation in performance and incentive management

Performance and incentive management is the most direct way to influence the actions and behaviours of employees. At the same time, any innovation in this area could have a significant impact within an organisation. In contrast, China's SOEs still have room for improvement in the following areas:

  • There is a need to design a comprehensive performance management framework which encourages employees to become innovative. Reasonable key performance indicators should also be customised for employees of different business units.
  • There is a need to launch incentives that motivate employees to undertake reasonable levels of risk to support innovation.
  • There is a need to revisit the tenure system of SOE leadership. The typical three-year term does not encourage leaders to support the long-term continuous efforts necessary for innovation.

Management information technology innovation

Management information technology (IT) innovation enables process management and business efficiency. Although China's SOEs have realised significant efforts in IT innovation in the past two decades, some problems still persist:

  • A substantial number of China's SOEs do not have IT systems or are still using relatively primitive technology. Standards are below current norms of industrialised countries.
  • New information technology is not well integrated with business processes and activities. In some cases, information technology has not supported the business but creates a new bottleneck.

4. Related suggestions

As mentioned above, management innovation should be a focus for China's SOEs in the current business environment. Where and how to focus the improvement efforts will depend on the development stage of the individual SOE; whether it is in start-up, growth, sustained development or consolidation mode.

  • Strategic planning
    Through strategic planning, senior management make fundamental decisions and actions that shape and guide an organisation to perform under future market conditions. The goal is to achieve a balance in meeting customer needs, maintaining competitiveness and utilising the resources available to an organisation. A strategic plan typically includes: overall business strategy, market strategy, brand strategy, pricing strategy, and individual business unit functional strategy.
  • Enterprise governance
    Proper enterprise governance improves efficiency and reduces risks. The objective is to establish reasonable and effective measures to manage and control decision making processes and operations. Enterprise governance should include organisational structure design with clear definition of roles and responsibilities, and implementation of internal management and control processes to ensure systematic and standardised execution of daily operations.
  • Customer segmentation
    A business can only survive if it is delivering value to its customers. Customer segmentation is the in-depth analysis of customer needs, and the provision of products and services, to maximise customer satisfaction. Companies need to progress from basic customer management to in-depth, refined strategic customer management. The benefit of customer segmentation is particularly obvious in the highly competitive sustained development stage.
  • Integrated performance management
    An integrated performance management system with the proper incentives in place will help direct and align business activities with the company's goals, and will serve to attract, retain and motivate talent. To encourage innovation, SOEs need to establish performance assessment systems that are aligned with the objective of encouraging and rewarding innovation. In addition, there need. to be incentives and mechanisms to encourage a certain amount of risk-taking that is inevitable in innovation. At the same time, SOEs need a systematic way to assess, calculate and balance the trade-off of risk and reward in innovation initiatives.
  • Integrated process management
    For companies undergoing the stages of growth, sustained development or consolidation, standardising business process flows, especially across the different departments involved in innovation, will be vital. Standardised processes will be instrumental in changing the management of business operation from one based on individual experience, to one based on systematic, scientific management policies and procedures.
  • Integration of business and technology innovation
    The common understanding of technology innovation is often confined to technology transfer and R&D. For China's SOEs, however, it is more important to integrate technology innovation with business requirements so that technology innovation delivers additional value with cost and efficiency improvements. This is especially crucial in light of the trends of globalisation and personalisation.
  • Change management
    The introduction of new systems and processes brought about by management innovation needs to proceed with buy-in and consensus from the organisation. Change management involves setting achievable change objectives, implementing change programmes, and evaluating change results. The crux of change management is in increasing the transparency of management policies, ensuring full involvement of all employees, and perfecting communication mechanisms.

In an evolving, demanding market, enterprises must be agile, and develop the ability to constantly innovate. The issues discussed above are not independent of each other. Once the company's development, direction and vision is established through the strategic planning process, enterprise governance provides the guidance framework for control of operations and assures proper execution. Performance management systems and incentives motivate employees to carry out their responsibilities and duties in line with corporate objectives. Business process innovation helps to integrate business and technology, which will improve the company's ability to respond to changes and enhance its competitiveness in the market.

Change management leads to the creation of an environment which fosters innovation. All these work together to increase shareholder value. Using the Deloitte Enterprise Value Map" concept, Figure 1 illustrates how they are related to each other.

5. Conclusion

For China's SOEs, management innovation is a well recognised modern management concept. However the actual implementation and results have not been as strong as expected and can be attributed to two prevailing problems. Firstly, there is a lack of holistic planning in management innovation. China's SOEs do not appear to realise that the different types of management innovation are inter-related. A comprehensive way of thinking and a co-ordinated supporting infrastructure are required to enable seamless integration along the value chain. Secondly, leaders of China's SOEs focus heavily on tangible management innovation activities, but overlook the intangible human factors. As a result, leaders and employees do not have a common understanding of innovation. Without consensus and buy-in, it will be difficult for China's SOEs to achieve the desired outcome.

There are five areas where SOEs should focus their efforts in order to foster management innovation. These include continuous improvements in strategy, organisation and corporate culture, business processes, performance and incentive management, and IT. Even though there are still many challenges, management innovation has started to demonstrate its positive impact on SOE reforms and will be an integral part of future SOE development.

6. Use of advisors

China's interest in achieving industry best practice can be seen as the next stage in the nation's industrial development since China opened to world trade more than 20 years ago.

During the 1980s, there was an interest in developing the right hardware – the right machines, equipment, and computers. The late 1980s and early 1990s saw heightened interest in technology transfer and the acquisition of technology. Now, the next phase is about the acquisition of 'soft skills' to achieve tangible benefits. Industry best practice and strengthened management skills make for operational efficiency and profitability, and help create thriving opportunities that the modern Chinese economy needs. But it is also vital to remember that other, invaluable key to success, the intelligent use of advisors. Obtaining good advice allows companies to concentrate on running a profitable business without being distracted by the cost and reputational risk of non-compliance with the local regulatory environment.

Deloitte

Deloitte Touche Tohmatsu is an organisation of member firms devoted to excellence in providing professional services and advice. We are focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, our member firms, including their affiliates, deliver services in four professional areas: audit, tax, consulting, and financial advisory. Our member firms serve more than one-half of the world's largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global companies. For regulatory and other reasons, certain member firms do not provide services in all four professional areas.

Global Chinese Services Group

Our Global Chinese Services Group (GCSG) of Deloitte Touche Tohmatsu has coverage in nearly 40 locations spanning 4 continents.

The GCSG assists companies investing and operating in China as well as working closely with Chinese companies seeking overseas expansion opportunities. The GCSG, in collaboration with our China firm, assists Chinese companies seeking to access overseas markets – expanding operations, raising capital from public or private sources and/or acquiring overseas assets. Our global network of bilingual professionals works with colleagues in China and in the local market to deliver seamless service to globalising Chinese companies. Simply put, the GCSG network positions its practitioners in the local market to allow highly effective service to our Chinese clients on all overseas investment-related issues.

Our Chinese Services Group in the UK

The UK Chinese Services Group is part of our Global Chinese Services Group network. It draws together multi-disciplinary teams to help Chinese companies with all aspects of European crossborder investment. We offer a convenient "one-stop" advisory service to Chinese firms setting up for the first time in the UK or expanding existing operations. We can provide:

  • mergers & acquisitions services;
  • corporate finance services including IPOs;
  • strategic investment and location planning;
  • government grants and incentives services;
  • accounting, audit, tax planning and compliance services;
  • business incorporation services; and
  • visa and work permit application services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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