We Must Talk

Increasing China expertise in European headquarters to improve communication with Chinese subsidiaries

Many Chinese subsidiaries of European companies encounter difficulties in communication with their European headquarters (HQ). ‘Communication’ in this context is less a question of how to use online tools and write emails efficiently, but instead one of how to build up China expertise in HQ as a basis for mutual understanding. Volker Müller, senior business manager at the European Chamber, previously spent more than two decades working in Chinese subsidiaries of European companies, both small and medium-sized enterprises (SMEs) and multinational companies (MNCs). In this article, he gives recommendations on how to build and maintain China expertise, as well as a case study on how lack of basic China know-how may lead to costly mistakes.

A lot of academic research has been done on headquarters–subsidiary (HQS) relations, much of it with a focus on China.[1] Poor HQS relations have long been known to be a key factor in the failure of MNCs in China.[2] As a result, European companies increased their investment in training staff members of Chinese subsidiaries, and awareness of cultural differences has grown. However, in many companies, communication is still asymmetrical; there is a constant flow of information and directives from HQ to the subsidiary, but little communication back ‘upstream’.

Case study: why China knowledge should be built up before establishing a subsidiary

A European SME, a manufacturer of high-end medical devices, decides to set up their first subsidiary worldwide in China. The SME already sells their products there through a distributor; now they plan to manufacture devices in China for China and other emerging markets, and take local sales and service into their own hands.

As no one in the SME has any significant China know-how, the management entrust a European China-consulting company to set up the subsidiary. While the consulting company has a good reputation, it has no experience in China’s medical device industry. They rent a very cheap factory floor and process all the formalities to register the subsidiary. Once registered, the SME employs an ‘old China hand’ as a general manager (GM) in China.

On the first day on the job, the new GM discovers that the company is registered in an export-processing zone in a bonded area. This means that its business licence allows manufacture for export only, not for sales in China. After some intense advocacy efforts, the China subsidiary manages to get special permission from the Chinese authorities to sell their locally manufactured devices in China.

The SME plans to start selling their devices within six months of company registration. A severe miscalculation: the company’s medical device registration licences issued by the National Medical Products Administration (NMPA) are valid for imported devices only. In China, registration of locally-manufactured devices is completely separate from that of imported ones. The SME must re-register each type of device they plan to manufacture in China. It takes more than a year to obtain these additional registration licences.

To bridge this gap, the SME continues to sell imported devices manufactured in Europe. The issue is, as the subsidiary is registered in the export-processing zone, it cannot apply for the medical device trading licence required to do sales in China. The only feasible workaround is to set up an additional second subsidiary as a medical device trading company.

Conclusion: mistakes in the early stages of a project are often the costliest ones. It may be a good approach to employ a consulting company, but some industries have very special requirements that general consultants are not aware of. Therefore, it is necessary to build up in-house China expertise before deciding on a strategy to establish a subsidiary in the country. In this case, it would have been favourable to employ the GM first and develop the China strategy together.

Better communication tools and harmonisation of business practices versus increasing requirements

Improved communication tools may give company heads the wrong impression that all their employees worldwide are working in one large virtual office. Indeed, 30 years ago, much of the communication between European headquarters and Chinese subsidiaries was done by fax; to send a few megabytes of data, a computer disk was burnt and sent to China by express mail. In comparison, modern tools make communication much easier. On the other hand, products have become incredibly complex, safety and efficacy requirements (particularly in the case of medical devices) are constantly increasing and regulatory requirements are becoming stricter worldwide. Moreover, time-to-market is much more important than in the past, and China’s consumers have become accustomed to top-class customer service.

The development over time in the ways European headquarters and Chinese subsidiaries communicate can be depicted as a neck-and-neck race between better tools and increasing requirements. The communication style has changed completely, but the stress levels have remained the same.

Good practices: diversity is difficult, but enlightening

For some companies, especially SMEs located in smaller towns in Europe, founding a subsidiary overseas may result in culture shock: a transformation from uniformity to diversity. A rather typical scene in the initial stages: a female Chinese engineer travels to the European HQ on a business trip, and finds herself in an all-white, all-male European factory. Individuals and organisations may resist change when introduced but, if handled well, the cultural shock will be a healthy one. Below are suggestions on a few ways to improve HQS communication..

When a subsidiary is established in China, knowledge transfer will initially be a one-way street: the Chinese subsidiary must grasp the technology developed in the headquarters. But, over time, both sides should be willing to learn from each other. For example, Chinese dedication to work, aggressive sales tactics, less confrontational ways to handle conflicts, to name just a few – there are quite a lot of strengths that the Chinese subsidiary can contribute to headquarters. Employees in HQ for their part may be proud to see their company go international, with potential business trips to China of course being a great incentive.

Modern communication tools still can’t fully replace face-to-face meetings. Judging from experience, online communication becomes much more efficient and the number of misunderstandings decrease if the employees on both sides know each other well. Therefore, it is good practice to let China and Europe-based team members work together at one location for some time, either in China or at HQ, to become acquainted with each other’s personality and communication style.

In larger companies, it is important to have a ‘Mr or Ms China’ at HQ, an employee who is responsible for solving problems on behalf of the Chinese subsidiary, whatever department may be involved.  

China is developing fast, with the consequence that China expertise will just as quickly become obsolete, making its maintenance essential. For example, when business travel becomes normalised again, the Chinese subsidiary should regularly send an employee to HQ to brief the decision-makers on new regulatory developments and market trends.

When a new product is being developed, the Chinese subsidiary should be involved from the very beginning in defining the specification. Any significant related Chinese standards and local customer preferences should be taken into account to ensure that the new product fits both the European and the Chinese market.

Most international companies have trainee programmes for employees from China at their HQ. However, what is often missing are trainee programmes for junior employees and middle management from HQ at the Chinese subsidiary. Such programmes would allow companies to build up their China know-how. When the trainees return to the headquarters, they can act as ‘ambassadors’ for the Chinese subsidiaries.

Working on HQS communication is a challenging job, and snags can never be avoided. However, this fact should not discourage those trying to get started. If communication with the Chinese subsidiary is balanced in terms of knowledge flow, it will not only drive sales but may also inspire the company’s headquarters.

[1] A quite comprehensive overview of related literature is given in the bibliography of Wolters, M: Headquarters–Subsidiary Relationship: Issues and Challenges, Amsterdam Business School, 2014, <https://scripties.uba.uva.nl/document/605221>

[2] Bolchover, D., Competing across borders, The Economist, 2012