In the beginning, there was growth. Ever since China opened its economy in the 1980s, both international investors and domestic firms have engaged in a headlong charge toward market share on the mainland. Mistakes were ignored, excess and waste written off in the long-term strategy column.
The recent phenomena of declining exports and eroded profit margins have prompted many of these once ambitious firms to slam on the brakes. They are rushing to slash costs in order to shore up their cash positions. It isn’t easy given the limited range of loan options and a regulatory environment that complicates the process of shifting assets between onshore subsidiaries.
So while cash is king everywhere, in China, cash is emperor. Nevertheless, some are concerned about cash dictatorships. An over-hasty retreat toward liquidity can be just as risky as a blind charge forward – especially since it appears that some relatively healthy firms are jumping on the slash-and-burn bandwagon. In doing so, they risk damaging morale, alienating suppliers and eroding the long-term viability of their brands.
"Once you’ve seriously damaged your brand reputation or your internal reputation – the ‘employee promise’ – that damage is very difficult to recover from," said Doug Ross, managing director of Square Peg, an international strategy consultancy.
As Peter Buytaert, CEO of China Global Leaders Management Consulting, notes, there is a profound difference between cost reduction and waste reduction. "Cost cutting is very random," he explained. Buytaert has noticed some patterns among firms in a hurry. Once obvious expenses like stationery, travel and entertainment budgets are slashed, companies in a panic instinctively cut headcount, starting out with the highest-paid and moving downwards.
Robert Vettoretti, an associate director at PricewaterhouseCoopers who specializes in helping firms manage their costs, believes this is counterproductive: "Once growth picks up, you have to add those people back in. So your cost management program is not sustainable."
Unsurprisingly, well-paid expatriate heads tend to roll first.
"If you are forced to cut costs, that half-a-million dollar salary really sticks out," said Jan Borgonjon, president of InterChina Consulting. "You really have to cut a lot to justify that kind of payment. Even if the expatriates still have relevant capabilities, in this environment I think it makes sense to reduce to the minimum and make the best of the Chinese managers."
On the other hand, expatriates are more than a salary figure. Buytaert argues that in the absence of an absolute cash flow crisis, decisions about expatriate managers should be guided by strategic considerations, not in simple reaction to diminishing profits.
"What is the value this expat creates in your organization, regardless of the crisis?" Buytaert asked. "Some expats are crisis managers who can drive change that local staff cannot. But if you can replace an expatriate with a local person who can do just as well, the question is, why do you still have the expat in the first place?"
There are other ways to keep solvent, but some bring their own problems. A recent popular phrase is "lean supply chain." While making supply chains more efficient is indisputably advantageous, it can also be overdone. PwC’s Vetoretti cites delaying payments to suppliers for so long that they go out of business as a potential risk. Vetoretti claims he has yet to see much evidence of this happening in China, but warned that it could eventually rise as a delayed reaction to the economic troubles.
Although some firms are taking advantage of the slowdown in commercial activity to focus on their processes with a view to improvement, many others are missing out on the opportunity.
"The point is not about cost cutting," said Square Peg’s Ross. "Cost cutting is the easy part. The point is the recovery strategy from that cost cutting."