Kellogg World Alumni Magazine, Spring 2004Kellogg School of Management
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At home in the global village
Chinese market presents great potential, challenge and rapid change for Kellogg School alums

By Ed Finkel

Kellogg School graduates who pursue the international side of the business world enjoy a panoply of opportunities in today's global age, but they also face an array of hurdles, including differences in language and culture, complex laws and regulations and rapidly emerging markets.

"Doing business in markets outside the U.S. requires very different approaches for many reasons, such as market maturity, different customer's needs, and different regulations and legal systems."
— David He EMP-51

As the world's largest and perhaps fastest-growing market, with GDP advancing an average of 7 percent during the last 15 years, China is arguably the poster child for the potential, challenges and change of early 21st century international business. Kellogg School graduates of the Executive Master's Program (EMP) now working in China say doors are continuing to open — and that what they're learning is transferable to other emerging markets such as India, South America and Eastern Europe.

"Doing business in markets outside the U.S. requires very different approaches for many reasons, such as market maturity, different customers' needs, and different regulations and legal systems. It is even more complex and challenging in China," says David He EMP-51, Shanghai-based general manager for GE Advanced Materials' Asia Pacific elastomer silicone business.

"Although China has enormous potential, it is still far less open and poorly regulated compared to more developed countries," He says. "To be successful commercially, one has to be patient yet dynamic enough to adapt to the constant changes, both in the market environments and in policies."

Global efficiencies married to local demand
Larry Smith EMP-51, manager of worldwide hay and forage equipment engineering for John Deere, says companies must look for commonalities among China and other emerging countries in order to achieve efficiencies and success.

"You can have the scale and efficiency of a global platform with the effectiveness of meeting local needs," Smith says, adding that one low-specification model might fit needs in several different markets, such as China, India and Mexico. "By being common on parts and components where it makes business sense, you have resources to focus on areas that must be different due to regulations or customer needs."

A key factor for Deere in producing different lines of components for agricultural and industrial vehicles has been varying emissions regulations, says Larry Bryce EMP-45, manager of worldwide sales for the company's power systems division.

"Governments are driving the platform strategies world-wide. This poses an interesting problem for all manufacturers because they have to build for all the different markets."
—Larry Bryce EMP-45

"The governments are driving the platform strategies worldwide," he says, with Europe, North America and Japan providing the strictest regulations, while Africa and South America are mostly nonregulated. "This poses an interesting problem for all manufacturers because they have to build for all the different markets," he says.

China's Open Door policies of the 1980s sparked rapid change, creating challenges for companies that do business there, David He says. Twenty years ago, more than 90 percent of the country's businesses were state-owned, the economy was centrally planned, and laws to protect the interests of private ownership were nonexistent.

Since then, private enterprise has evolved domestically but protectionist policies have limited multinational firms. For example, He says, when GE Medical Systems first entered China 10 years ago, government policy was especially complex and tightly regulated imports of medical diagnostic equipment. In a move typical of multinationals seeking to crack the Chinese market, GE formed a joint venture with a state-owned company to produce locally assembled CAT scanners, used to form images of soft tissue, bone and blood vessels.

"If you need to buy a scanner imported from abroad, you have to apply for quota approval," He says. "You have to go through a very long and tedious process. If the machine is manufactured in China, you don't have to go through that."

During the past decade, GE Medical Systems, where He worked for eight years before transferring to his current position with GE's advanced materials division, has built its Chinese operation into a full-scale research, development and manufacturing operation for diagnostic equipment, with more than $500 million in annual revenue, he says.

Constant change, constant adaptation
Since China's 2002 acceptance into the World Trade Organization, the country is becoming more accepting of foreign investment, which requires it to open its markets and ease import quotas while allowing more foreign investment in the service sector, David He says. "You have to constantly modify and adapt yourself to the new environment," he says. "The whole change in regulations and policies and legal protections, and importing-exporting requirements, that's all moving in a more positive direction. But it is a change, and the changes are very dynamic and very rapid."

He hopes those changes will prove beneficial for the advanced materials division, which, among other products, manufactures structural sealant used as an adhesive in mounting windows onto the frames of high-rise buildings. "They have strong regulations in place to protect the domestic industry," he says. "In order to really grow your business, you have to find partners domestically — or leverage their products and the channels they have — to expand your market presence."

Deere's hay and forage equipment operation in China is looking to component and parts manufacturing as its biggest market opportunity in the near term, Smith says. "In addition to the business we're generating over there, to make product for the local market, we're using that infrastructure to be a base to source components for our other operations in Europe and North America," he says. Furthermore, in the case of India, Deere is "sourcing not just products and components but also IT work, design work, that sort of thing."

Smith says Deere's long-term goal is to create common product platforms and processes across developing countries. "If you have a common design, you can have common manufacturing processes and common product support," he says. "You can make common repair parts available. That's a big deal in our business. We call it, 'design anywhere, build anywhere'"

"If you have a common design, you can have common manufacturing processes and common product support. That's a big deal in our business."
—Larry Smith EMP-51

Deere's power systems division, which markets tractor engines, axles and transmissions, sees more opportunity on the construction side than the agricultural side is China, says Bryce. "Part of the issue with the agricultural side are these big state-owned farms are now becoming privatized," he says. "They end up breaking into small plots for the local farmers. This will reduce some of the larger-tractor sales and increase the smaller- tractor sales made with smaller engines."

The trend toward urbanization presents an opportunity on the construction side, though, Bryce says. "People are moving to cities, which is requiring huge infrastructure build-up of roads, schools, hospitals and housing, as well as the industrial base," he says. "Additionally, developing countries like China, when they're having this kind of rapid growth, they're having increases in power generation needs, which means generator sales. Everyone needs reliable power."

David He, Smith and Bryce say the Kellogg School's EMP experience empowered them to build careers in international business. David He cites the program's curriculum in strategy development, management knowledge and financial tools, along with such global aspects as "International Live-In Week," Global Initiatives in Management field study, seminars by international business leaders and interactions with classmates who have cross-cultural backgrounds. "I have also been able to quickly build up a business network here in the Pacific using my Kellogg connections," He says.

Smith points to the program's many discussions about the value of diversity — "that obviously is very important when you're in the global arena" — as well as a general understanding that "what may work here may not work there. The broadening that you get from EMP is something that pays off when you get into an area where all the best practices you had in one place don't necessarily carry over into another place."

For Bryce, the academic rigor of the Kellogg School EMP curriculum was a source of inspiration.

"It provided an absolute injection of motivation and knowledge, and different ways to apply processes to understand and evaluate business opportunities," says Bryce. "We had small classes taught by great professors and, in addition, we were surrounded by very motivated classmates.

"These people already had professional experience, and nobody was there to waste anyone's time—their own, their families' or their companies' It was a very challenging and stimulating environment."

©2002 Kellogg School of Management, Northwestern University