Date
18 October 2017

Foreign consultants strike gold in China

Can a Western prescription resolve a Chinese problem?

Over the years, questions have been raised about the effectiveness and feasibility of proposals and recommendations put forward by foreign think tanks and consulting firms for their Chinese clients. Critics have argued that the hefty money paid to the consultants in exchange for some PowerPoint files is a big waste of money. The skeptics did have a point in many cases, given that it is not easy for outsiders to crack the complex Chinese business and regulatory environment. 

That said, the situation has changed significantly in recent years and the foreign consultants are now being viewed more favorably.

Almost all the leading global consultancies now have a China presence as it has become fashionable for ruling party cadres and managers to consult foreign firms for future development strategies and plans — a domain that was once dominated by government-run think tanks, mostly social sciences academies at various levels.

Foreign firms’ participation in government and corporate policy-making is more widespread than what a lay observer might reckon.

To give some examples, McKinsey & Co. was invited by the Sichuan government in 2010 to initiate research to help the southwestern province choose the right model of industrialization. The firm has also been maintaining sound ties with Shanghai municipal authorities for more than a decade. The Ministry of Health and the Ministry of Commerce are also McKinsey’s clients on issues like national healthcare reform and policies regarding trade in services.

Boston Consulting Group (BCG), meanwhile, has been advising Bank of China (BOC, 03988.HK, 601988.CN) on business development since the lender’s initial public offering. In other deals, Accenture’s expertise in the petrochemical sector attracted China Petroleum and Chemical Corp., while China Eastern Airlines (00670.HK, 600115.CN, CEA.US) is a long time patron of Roland Berger.

Yu Jin {余進}, McKinsey’s Beijing Office head, told the China Economic Weekly that her firm has already made a name for itself among many Chinese officials and businessmen who previously had almost no inkling of foreign management consulting firms. Now the business is apparently humming and many clients tend to invite McKinsey to conduct detailed annual or six-month reviews of business operations rather than a one-off deal for a vague five-year plan. The growing demand has prompted McKinsey to recruit more locals like Yu to take charge of the China business.

A senior Roland Berger China executive noted that medium-sized private enterprises and regional governmental agencies now contribute the bulk of his firm’s orders. And, rather than conceptual theories, clients now expect something more concrete and practical to address their individual problems.

The firms have a common business model that is truly enviable — sending a few experts to the client company for a month or two to compile reports on efficiency and performance, with a price tag that may well come at tens of millions of yuan.

The cost of seeking their advice is no doubt astronomical, but that has not prevented demand from growing. Even if one puts aside the notion of idolizing of foreign firms, there must be other virtues that appeal to clients and make them willing to splurge big money.

The first thing is perhaps confidentiality.

It is said that a leading Chinese cement producer once commissioned a domestic consulting firm for a five-year plan for its future capacity expansion, but the firm later indiscriminately sold the same plan to a number of smaller cement companies, potentially worsening the problem of sector overcapacity. Also, domestic advisory firms tend to toady to government officials and often include cadres’ personal preference and stance into their recommendations.

Leveraging on the foreign firms’ strong connections and networks is also a well-trodden approach to spur development.

Shanghai relied on McKinsey’s brainpower for the redevelopment of Nanjing Road, the city’s major shopping and pedestrian thoroughfare. After rebranding the street into a top-notch retailing location for international brands, McKinsey played a vital match-maker role and helped bring in a number of well-know tenants like Apple, the Southern Weekly noted.

Development roadmaps laid down by these firms also play a central role at some state-owned companies.

A BCG executive once remarked that without his firm’s suggestion for greater focus on the domestic market, BOC may have missed out on the country’s golden decade of burgeoning retail banking demand. The bank had planned to boost investments overseas following its IPO in 2006, but Boston suggested a paradigm shift for more resources into the domestic market.

Outsiders may never know how much money BOC paid to BCG over the years, but the outcome is definitely said to have been worth the price. The China Economic Weekly quoted the BCG executive as saying that had it not been for his firm’s advice, BOC’s revenue might be just “half of what it is today”.

– Contact the writer at [email protected]

RC

EJ Insight writer

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