By Seth Peterson

To operate at their best, global cross-border companies require clear and effective regional-reporting lines for senior leaders. This is particularly true for multinational companies (MNCs) operating in China given the country’s size and complexity as a market, as well as its importance as a source of revenues and future growth.

Yet determining the best reporting-relationship structure is tricky. A Heidrick & Struggles survey finds that companies in the region choose a range of reporting structures for their China heads. Although respondents are largely satisfied with their current chains of command, those who see a need for change overwhelmingly request structures that give the China leader a more direct line of sight to global leadership and the CEO.

The survey consists of 100 senior executives in the Asia Pacific region who oversee, or are deeply involved, in their company’s operations in China. The survey, part of an ongoing research project to study the China market, examined the various reporting-line models employed by MNCs and how well these function. Roughly 90 percent of our respondents were from American, European, or Asian MNCs headquartered outside China. Respondents hailed predominantly from companies in the industrial, consumer, technology, and healthcare sectors, with nearly half providing goods or services to both China and overseas markets.

In terms of scale, 70 percent of the respondents’ companies reported worldwide revenues last year of more than $3 billion, and 80 percent of the organizations have been established in China as either wholly foreign-owned or joint-venture entities for more than 10 years.

How significant is China?

Close to 40 percent of the respondents reported that China revenues represent 10 percent to 30 percent of their company’s total global earnings, while nearly six in ten said China contributes more than 40 percent of their Asia Pacific income (Figure 1).

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This importance is underlined by the fact that 42 percent of respondents say that their company’s China leader sits on the global executive committee, or its equivalent.

Who reports to whom?

As Figures 2 and 3 show, while half of China heads report to the head of Asia/APAC, 26 percent of the companies surveyed have flipped this structure— their China leadership also oversees Asia/APAC operations. However, nearly 30 percent of respondents said their company’s China boss reports directly to global leadership (either the CEO or the global head of a business unit).

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Tough choices

The Heidrick & Struggles survey indicates a variety of reasons why some MNCs do not give their China heads oversight of operations in the Asia/APAC region. The most commonly cited—by 65 percent of respondents—was the desire to avoid diluting the focus of the company’s China leadership.

While 44 percent of respondents said that the company’s China leadership may not be the best qualified to lead the entire region, 26 percent said the proportion of regional revenue generated by China is not large enough to justify such a reporting structure.

Of those companies that placed their China leader in the regional driving seat, 57 percent noted the fact that China makes up the majority of their Asia/APAC revenues; just over 28 percent said it was because of the effectiveness of their China heads in this role.

Will reporting structures change?

Although 44 percent of the respondents surveyed said their reporting structures had been in place from the start of their company’s involvement in China, 69 percent said it was unlikely these would be changed in the next two to three years.  Among the 17 percent of respondents who indicated a change is likely, every one was  an organization where the China head currently reports to the Asia/APAC head. They also reported that their company plans to switch its reporting line to a more direct connection to global leadership.

The reasons for this change are:  the need to acknowledge China’s status as a strategic market, the belief that direct communication between China and global headquarters will be more effective, and the fact that it is time consuming and cumbersome to package the needs of China and the rest of the region together.

Sorting out the challenges

Despite only 17 percent of respondents anticipating changes in their company’s reporting lines in the short term, 29 percent of those questioned aren’t satisfied with their company’s existing structure. In other words, 12 percent of respondents think they have suboptimal reporting lines, yet report no plans to amend them.

There are a range of factors driving decisions on whether or not companies plan to change or retain reporting lines. For instance, issues of cost, communication, and organizational efficiency are often cited by respondents as disincentives to establishing direct reporting lines between China and headquarters.

Moreover, some respondents said their companies want to avoid duplicating costs in their finance and product-design departments, for example. Other respondents indicated that China revenues will not reach sufficient scale to justify such independent status within the next two to three years. (Figure 4 shows how surveyed executives characterized their company’s China revenues as a proportion of overall Asia Pacific revenues.) Still other respondents observed that their global headquarters have too little understanding of China to add value through direct input.

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Conservative corporate culture was another factor

A shortage of local talent capable of taking up leadership roles for China and Asia/APAC was frequently cited as a factor inhibiting change. This is consistent with our experience in the region, where expats still fill many top MNC executive roles in Asia and the localization of senior leadership remains a challenge. The reliance on expats and localization for senior leadership is partly due to the high turnover rate of talent in Asia, and partly because of some local executives’ weaker communications skills. Such executives often don’t have enough “global savvy” or an expansive enough perspective to interface with headquarters effectively.

Still, after more than two decades of development, there is a pool of qualified local MNC leaders in China, and the best companies have implemented development programs for some time. These programs often recruit or integrate employees overseas before reassignment to Asia and require periodic overseas rotations to help burgeoning leaders develop their internal networks.

In the longer term, these issues can be addressed with training and opportunities to gain a broader range of experiences. In fact, for leaders who have spent their careers operating only within the specific demands of the Chinese market, the opportunity to work abroad can be particularly eye-opening. Those multinationals who prioritize cross-cultural training and exposure will reap the benefits of having a local Chinese leadership that is more prepared to engage with the global CEO in terms of strategic thinking.

 

About the author: Seth Peterson ([email protected]) is a partner in Heidrick & Struggles’ Hong Kong office.

 

Posted by Seth Peterson