China’s manufacturing slowdown has been an almost daily fixture in the business news media for the past few years. Somewhat less bruised is the services sector, which the Chinese government hopes will take up some of the slack as the country continues its economic transition. One sub-sector that is doing well is consulting, and if China follows the U.S. model, there should be plenty of room for growth.
“The [consulting] industry continues to be a dynamic, vibrant market, and I think the outlook is very promising,” says Carol Liao, senior partner and managing director of Greater China for Boston Consulting Group (BCG).
There is evidence to back up Liao’s statement. The market research firm Source Global Research estimated that China’s consulting market grew 7% over 2015, reaching a total market value of US$4 billion. IBISWorld’s 2016 report on management consulting in China, meanwhile, estimated total revenue for the industry to be $23 billion with a workforce of 458,000 employees. Despite differences in definitions and data sets (for instance as to which companies are categorized as management consultants), both reports reflect an industry that is on the upswing.
But from the same sources, it is also clear that the consulting industry in China is still in a nascent phase compared to more mature Western markets, especially that of the United States. The U.S. consulting industry, the world’s largest, saw growth of 7.7% in 2015 to reach a market value of $54.7 billion, according to Source Global Research. IBISWorld had management consulting in the U.S. sitting at $253 billion in revenue with an estimated 1.7 million employees working in the industry.
There is also the question of consulting’s geographic reach in China compared with developed markets, with most consulting firms here concentrated in the economically prosperous eastern regions and first-tier cities. According to Chinese brokerage Founder Securities, the consulting industry accounts for only 0.18% of GDP in China compared to 1.2% of GDP in the United States.
While China’s economic growth is slowing to its weakest in 25 years, the consulting industry is unlikely to follow suit. An economy in transition facing a range of issues such as industrial overcapacity, heavy debt burdens, weak export numbers, a cooling property market and rising labor costs all contribute to uncertainty in the business environment. Some companies are responding with budget tightening, but others are seeking “brains-for-hire” to help them navigate through difficult times. Consulting companies that position themselves effectively can gain an advantage.
Meanwhile, countercyclical companies, such as those in the private health, energy and education sectors, will continue to hire consultants as they look to compete more effectively within their hyper-competitive sectors, to expand in size and diversify their businesses. Many of these industries, such as pharmaceuticals, also face increased government scrutiny and regulation, creating even more advisory opportunities for consultancies and other related professional services.
“Demand for consulting is more correlated with our clients’ willingness and determination to make change,” says Liao. “This happens regardless of whether they’re in a high growth industry or an industry facing significant challenges.” Demand, she adds, is not linked with GDP or industry cycles.
A rise in Chinese clients
Carol Liao, who has worked with BCG since 1995, reports a rise in recent years in the number of Chinese companies seeking professional consulting services. Historically, BCG’s primary focus was on helping foreign multinationals to enter and grow in the Chinese market. But today, Chinese companies, both private and state-owned, represent over half of BCG’s client base.
This change in client demographics has led to a more diverse range of requirements, ones driven by clients’ specific business challenges. Looking ahead, Liao believes there are three key factors shaping the market for management consulting services. “One is transformation under the ‘new normal,’ meaning not just growth-driven, but also how to have a more efficient and lower-cost supply chain operation, how to adapt and change the organization, as well as the governance of a company.”
“The second is digitalization across all businesses and all processes,” and “Lastly, primarily for Chinese companies, there’s a big theme on going global, in how to expand overseas.”
China’s Ministry of Commerce calculates the country’s outbound direct investment to have increased 53.3% year-on-year, reaching US$146 billion in the January-October period of 2016. In 2015, the country became a net capital exporter for the first time. From exporting consumer goods to acquiring foreign big-name brands, more and more Chinese companies are internationalizing, and there is plenty of opportunity for consultancies to get involved in the process. That includes, Liao says, helping companies form their globalization strategy, choosing which countries to invest in, setting up a global governance structure and having a proper integration roadmap.
Views on consulting may differ
The way in which consultancies work with Western companies versus Chinese companies can be distinctly different, often depending on whether the client is headquartered in China and on how well a company is developed within its industry. Consulting projects for multinationals headquartered elsewhere but with a strong presence in China are often led by a global consulting team with participation from the China office. Such consultation projects tend to be clearly-defined and targeted because they are driven by the corporate sales and marketing departments, Liao says.
Chinese companies, on the other hand, generally demand a broader range of consultation. “For example, given the changing market environment, the company wants to drive a whole transformation journey. Then we need to work with the client to actually identify supply chain, sales, even diversification into other markets, and of course, globalization,” says Liao.
There are several explanations for this difference between Chinese and non-Chinese company requirements. Modern consulting has been around in the West for nearly a century, but it only began in China in the 1990s when consulting firms followed multinationals into the country as they set up operations and began to invest and expand. Now, with an increasing number of Chinese clients, many consultancy firms are facing a gap in perception and understanding among Chinese companies in terms of how to best use consultancy to support their business needs.
According to Helen Chen, a managing director and partner at L.E.K. Consulting and head of L.E.K.’s China practice, there is a perception that strategy consulting in particular is less mature in China, especially when compared to legal or accounting services which have been seen as providing more concrete services. “China still has a ‘hard goods’ mentality, and concepts around soft services in the professional services industry are still developing,” she says. “China’s probably more familiar with intermediary services, such as the zhongjie [agent] in real estate, or brokerages, where someone is selling you something and as a result they get a commission.”
As a result, these clients may only use consultancies for specific roles rather than taking full advantage of the breadth of services and insights their consultants can provide. One example Chen gives is of Chinese companies planning to expand internationally. A Chinese company may be willing to pay a brokerage fee to acquire a company overseas, but may not be asking themselves important strategic questions such as, “Should I be international? Which countries should I go into? Do I have the wherewithal to be in a developed country, or should I go to an emerging country? Which countries are my products most suited for? Where can I be the most competitive? Do I want to have infrastructure of my own, or do I work with a local partner?”
In contrast to U.S. clients who tend to choose consultancies based on a set of targeted business needs and the type of consulting expertise needed for their sector, Chinese clients less familiar with the consulting industry may not have a complete understanding of what they want. In such cases, Chinese clients often invite a wide range of consultancies to pitch for a particular project, ranging from established international firms to small startup boutiques, regardless of whether they are the right fit.
Where Chinese consultancies stand
Along with the upsurge in Chinese companies as clients, the nature of the consultancies has also changed. In recent years, a crop of homegrown Chinese consultancies has established themselves as competitors in the market. Most are still relatively small in operation, but they are growing quickly. Hejun Consulting Group, one of the largest Chinese consultancies, now has over 1,000 employees. In an interview with China Daily, Hejun’s vice president Xu Dichang said in 2014 that the company’s revenues increased 22.6% year-on-year and that his company aims to be operating internationally by 2020.
“Some of these [Chinese consultancies] are from people who were at international consulting firms who have gone out and created their own boutique firms,” says Chen. “We also see Chinese academics, for example, hanging out a sign and becoming independent consultants or providing research services, so it’s a very wide range of consulting being offered.”
Edward Tse is one such entrepreneur. After building and leading the Greater China operations of BCG and Booz & Company for 20 years, he left to start his own consultancy Gao Feng Advisory Company. Given that China has become “a major epicenter in the world for business innovations” and the speed at which it is changing, Tse believes that it’s increasingly important for consultants to be rooted in China and be globally minded and resourced. That means being able to fully understand the China context and China’s role in the world, both of which are needed to help clients make the correct business decisions.
“When you’re rooted in China, the DNA of your firm is a China-based kind of DNA. Therefore, the way you look at how the world’s businesses are changing, you look at it from a China perspective along with the world’s perspective, and by putting China at the core of global strategies,” says Tse.
He adds that while global consultancy firms may have established offices in China, they are susceptible to influence and direction from the people back at their global headquarters. “Take one example. When we look at the innovations that come from China, many people from the West will still think that China is still a copycat nation. In reality, if you take a China perspective, you know that today, while there are still many copycat companies, there are an increasingly larger number of innovative and entrepreneurial ones, and some of these companies are becoming very powerful…not only within China but also with the rest of the world. So if you’re not rooted here in China, you will not have that full perspective.”
A challenging place to operate
According to Tse, consulting in China is additionally challenging due to the complexity of its business environment. Doing business in the West can also be complicated, but the environment here is more multi-dimensional than in many other countries.
There are several reasons for this. China is still transitioning from a planned economy to a market economy. The vastness of the country with its regional inequalities, rapid social changes, rising income levels and emerging middle class has made product market segmentation much more complex. At the same time, many different kinds of enterprises are in the market, and market dynamics vary widely depending on whether or not a sector is closed (e.g. oil and gas) or open (e.g. consumer goods).
L.E.K.’s Chen also notes that “investment versus return has always been a question [foreign multinationals] have to answer for China. The regulatory changes and acceleration of regulatory changes have made it very difficult for companies to know their footing.” She argues that these companies need to keep pressing home the message to headquarters on the long-term potential of the China market in order to ensure continued commitment, adding that “China can seem very hard for the people back home.”
Operating a business in China can be more challenging than most other places. “All this creates a higher requirement for management consultants to really help their clients to be successful. And, in return, China is training the best minds in management consulting,” says Tse.