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Ming Mei, '02, delivered a keynote speech during the Kellogg Greater China Business Conference on May 19.

China in the fast lane

Academics, business leaders ‘navigate silk road’ at Kellogg Greater China Business Conference

By Kevin McKeough

5/22/2007 -

 Nobody said it would be easy.

“It’s the ultimate nightmare for competition,” Jose Sartarelli warned of doing business in China. “You will find competition nationally, [and] you will find competition that’s city-based.”

It was one of the many cautionary notes that speakers sounded during the Kellogg School of Management’s first Greater China Business Conference. The student-organized conference, “Navigating the Modern Silk Road: Strategies for Sustainability,” examined some of the challenges that face companies doing business in China and the practices that can help those companies succeed.

During his morning keynote address, Sartarelli — the pharmaceutical group chairman for Asia Pacific, Japan and Latin America, Johnson & Johnson — examined the healthcare marketplace in China, finding complexity, difficulty and opportunity.

The Chinese government is working to provide healthcare to the entire population of 1.3 billion in the face of disparities between economically booming cities and poor rural areas, Sartarelli explained, adding that the system is growing rapidly to combat rising rates of heart disease and cancer associated with the nation’s widespread adoption of the sedentary, fast-food-saturated Western lifestyle.

Sartarelli predicted that China’s pharmaceutical market would grow from $15 billion currently to $28 billion in 2010, making it about the size of Germany’s and the seventh-largest in the world. While healthcare financing and reimbursement and patent protections have been improving, pricing, bidding and government regulation in China all have become more difficult, Sartarelli said.

According to Sartarelli, companies also need to venture beyond big cities to sustain growth. “We’re going to have to go deeper and broader,” he said. Perhaps most challenging, he added, is locating and retaining top employees in a labor market where 25 to 30 percent turnover is not unusual.

“If you have the right people in place, you should do well,” Sartarelli said. “If you don’t have the right people, what a nightmare.”

In the first morning panel, “Attracting and Retaining Management Talent in China,” participants discussed the difficulty of developing and retaining these human resources. Guy Bouchet, an adjunct associate professor at Kellogg, moderated the discussion among panelists James Chia, a product manager for System i at IBM; Lucy Lu, a global employment practices manager at Eaton Corp.; and Carol Zhu, a human resources manager at AstraZeneca.

The economic boom is driving up salaries in China, which on average have increased by seven or eight percent annually, Zhu said. Top Chinese executives in multinational companies now are earning salaries almost the same as in Western companies, although engineers still earn one-sixth of their counterparts in the United States, she noted.

Still, companies shouldn’t make too much of rising labor costs, Chia argued. “When developing countries become well-to-do, your market size also should grow,” he said. “Even though your labor cost is a headache, that also implies growth in the future, because they can afford your product.”

Getting these newly affluent consumers to buy a company’s product was the topic of the second morning panel, “Marketing to the Chinese Consumer.” Phil Corse, an adjunct associate professor at the Kellogg School, moderated the conversation between Catherine Guthrie, the president of multinational accounts at Leo Burnett Worldwide; Bill Liu ’97, the vice president of the NaviAsia Consulting Group; and Massimo Magni, a principal at McKinsey and Company.

The panelists concurred that Chinese consumers tend to be sharply divided among affluent and poor — who are swayed by brand and price appeals, respectively — and those with traditional versus Western lifestyles. “Chinese care about appearance. What clothes you wear, car you drive, cell phone you use speak volumes,” Liu said of the affluent, Western-oriented consumers. “The only way to show you have arrived is through your brand.”

During his afternoon keynote address, Ming Mei ’02, president of the China division of ProLogis and a graduate of the Kellogg-HKUST Executive MBA Program, provided an overview of China’s economy and guidelines for companies doing business there. ProLogis owns, manages and leases distribution facilities and industrial space for clients worldwide and had 2006 revenues of $2.5 billion.

Mei noted that China’s 10.7 percent growth in 2006 and 11.1 percent growth in the first quarter of this year came even as the government was trying to slow the state-managed economy. With 100 million middle- and upper-income consumers (which in China means people with incomes of at least $7,000 a year), growing wages and low inflation all driving spending, Mei predicted that per capita gross domestic product may double in the next 15 years.

Still, said Mei, the nation faces a number of threats to its growth, including inadequate risk-control in its banking system, no capital markets aside from state banks, constraints on natural resources and poverty in rural areas, where 150 million people live on less than a dollar a day.

Mei said companies doing business in China need to understand the government’s macroeconomic policies and strategies. “Don’t go against the government,” he warned. He also recommended focusing on target markets rather than being distracted by multiple opportunities, developing three-to-six-month plans and revising them quarterly, and being prepared to walk away from any deal.