In the Jan/Feb 2008 issue of Far Eastern Economic Review, I reviewed a new book by Jimmy Hexter and Jonathan Woetzel, “Operation China: From Strategy to Execution.”

The authors are both McKinsey partners who have spent many years in China. Operation China, published by Harvard Business School Press, draws on their own extensive experiences in this country; in-depth interviews with the executives responsible for China operations at over 40 multinational corporations; and thousands of interviews conducted by McKinsey staff in 30 cities throughout China.

In the FEER review, I list what I consider to be the three main messages of the book:

1. China is changing and is now turning the corner from an emerging market, where local context drives strategic and operating decisions, to a maturing one where top-quality execution is a cornerstone for success.
2. Despite the tens of thousands of foreign and multinational companies already in China, MNCs are here in varying degrees. Some are committed and positioning themselves to be market leaders; others are only beginning to make China a significant part of their global operations; and still others aren’t so sure, only have a toe in the water, and are waiting to see how things go.
3. It’s time for MNCs to get off the fence and get serious about integrating China into their global operations. The stakes of not doing so are enormous.

To reinforce this last message, the authors issue a stark warning: “We believe global companies that cannot succeed in China will cease to be global companies at all.” Due to the sheer scale of the China market, the warning they sound is not a matter of crying wolf and should be taken seriously by every company, large or small. If it is not already, China will soon be the largest market for nearly every product. Companies that take a large share in China will by definition have a large share of the global market.

In addition to being the world’s largest market, however, China is also its most competitive. In product after product, all of the major players from around the globe have now set up shop in the country, and competition is fierce among them for a share of this large and growing market. Also fighting for their fair share, though, is a steady stream of new companies, spawned in China, which tend to establish their competitive positions initially through low price, and then improve their quality and technology levels and grow larger as the China market develops.

In automobiles, for example, all of the global assemblers already have plants in China— General Motors, Ford, PSA, Toyota, Nissan, Honda, Hyundai, you name it—–but so do new market entrants such as Chery, Geely, Great Wall and BYD (the list goes on). Once these local companies utilize their low cost structures to gain scale in China, their next stop is the international market. (China’s local car companies already have 30 percent of the domestic market, and vehicle exports increased by 78 percent to over 600,000 units in 2007).

That is why good execution in China is so critical. Global companies will ultimately have to compete not only with traditional competitors in their home markets, but also with this new breed of Chinese companies.

In Operation China, the authors cite the chilling story of Galanz, a Chinese company that is now the world’s largest maker of microwave ovens, as an example of what can happen and of just how critical success in China is for today’s market leaders. Attracted by the large potential for microwave ovens, Galanz entered the market in 1991. It soon matched the foreign brands on performance, but then began hammering them on price. By 1998, Galanz held over 61.4 percent of the China market. The inevitable next stop was the vast non-China market. By 2002, Galanz had slashed prices by 80 percent, and the company held a 40 percent share of the global market. In 10 years, Galanz had gone from a new entry in its own market to the global leader, defeating its foreign competitors in China as well as in their own home markets along the way.

As a result of their own extensive experiences in China and the wealth of research material available at McKinsey, real life examples of what works and what doesn’t in China abound in Operation China. The book is well done and well researched. I enjoyed reading it and recommend it to anyone interested in benchmarking operational best practices here.