Posted by Hulya Kaya
Hulya Kaya
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on Monday, 13 December 2010
in Business in China

Corporate Turnaround in China

Every company is unique in the face of crisis and will respond differently depending on the situation at hand. In light of China’s unique business culture, differences in recognizing corporate decline and approaching the associated processes in conducting a turnaround exist between China and the West.  Foreign firms will need to recognize these differences and tailor their actions at different stages of the turnaround process to suit.

Spotting a turnaround situation

Although corporate recovery discussions and articles often focus on the latter stages of the turnaround process such as restructuring, a vital step towards corporate recovery is first recognising and acknowledging signs of crisis and decline, and subsequently deciding to take action and make changes.

A corporate turnaround is the necessary response to problems resulting from financial distress – decreased sales and/or market share, consistent losses and falling share prices.  However, it is up to each management team to distinguish between problems arising from market fluctuations and those which signal corporate decline and crisis.

The first obvious indicator of potential decline is losses in company revenue and income. This suggests that the company may not be maximising efficiency, utilising all potential sales avenues or other underlying causes of underperformance.  Failing Chinese entities of foreign firms will noticeably suffer low or even negative profit as well as poor growth and sales.

Understanding Corporate Decline

Common reasons for foreign companies failing in China often stem from a lack of understanding. These include the incapacity to deal with dumping from overseas producers once tariffs are lifted, limited income generating ability being limited by a system of administered selling prices and changing government regulations.  Foreign companies new to China may also see their market share diminishing as a result of obsolete products, poor product quality or faulty pricing policies.

Commonly, unnecessary but substantial increases in personnel numbers in the local Chinese organization, facilities and equipment without the consent or knowledge of the mother company abroad may be absorbed. Furthermore, given that business in China may often be carried out via existing relationships, customers and clients in addition to employees may all turn out be to friends, family members and the like. This will see mismatches between employee skills and position demands, abnormally high salaries and sales commissions paid out. Relationships with distributors and other business partners may also be questionable. The foreign mother company may have no information regarding business relationships built by local employees. This is characteristic of a lack of understanding that prevents the company from expanding sales via different contacts and channels and identifying key partners from less important ones. Ultimately, the unwillingness of foreign enterprises to place a high level manager to oversee operations in China is a significant contributing factor. This leads to lack of transparency, understanding and asymmetrical information between the mother company and the Chinese subsidiary.

Managerial inadequacy is often considered to be a significant cause of company decline. Poor leadership may have committed other operation and managerial that jeopardise the health of the company. Replacing current managers is often one of the first steps in business restructuring. Whilst this is a straightforward and expected procedure in Western enterprises, replacement of incompetent managers must be approached carefully in China, especially if management are locals. As connections or ‘guanxi’ play a big role in Chinese business, foreign companies must take care to part on civil terms with local managers as to avoid completely severing business ties developed by them.

Roadmap to recovery

Successful turnarounds are often well planned turnarounds that clearly set out company goals and ambitions in the long and short run. The recovery strategy needs to be devised with both short and long term goals in mind

Foreign firms in China should make their long term objectives clear, and clearly define procedures with the mother company overseas, should they have one.

Gaining financial control is a significant part of the process, in terms of both the company’s financial health and demonstrating managerial competency.  This is especially true for China, where transparency in accounting and finances of local employees and partners must be secured to prevent the development of a “creative accounting” culture. Securing financial transparency is especially important to foreign companies with offices and staff in China.

It is imperative to gain financial control right at the start of the turnaround process as it reflects upon the competency of the interim or new management team in addition to preventing further financial damage. Gaining financial control and demonstrating effective and dedicated turnaround financial management is also vital in securing the support of important stakeholder, if the company has any.  This will establish the credibility of the interim management team.

Effective and Efficient Change Management

A noted barrier hindering successful turnarounds of distressed foreign entities in China is the lack of knowledge and business experience in China.  PTL Group’s services stand out from the offerings of other specialist turnaround firms. PTL Group approaches and addresses all existing problems of the firm in different key areas simultaneously and henceforth reduces the time taken to conduct turnaround operations.  PTL  Group will perform short yet fast audits to identify problem areas and develop a roadmap for growth and long term survival. PTL Group will also provide a top level interim manager who will take over and manage the company during restructuring, until its return to health and normal growth or until a new manager is found.


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