China: POEs take the spotlight

As China’s economy gradually settles into its “new normal” of more moderate growth, some of the big, foreign-based multinational corporations in the market—the very ones that global consulting firms followed here—have become a bit skittish about making further investments. With MNCs no longer looking like fonts of perpetual high growth, consultants are increasingly turning to the growing and maturing domestic market to fill the gaps in their spreadsheets.

This in itself isn’t very surprising; global firms that enjoy any level of success in a new market will start fishing among the locals sooner or later. But what is surprising is that the domestic businesses proving most attractive to consultants in China right now are not of the sort they would have imagined chasing just a few years ago. For in the world of the slower growth, it’s the privately owned enterprises—not their state-owned cousins—that are looking like the bigger bet.

When global firms first started courting the domestic Chinese market, state-owned enterprises (SOEs) seemed the way to go. They were big, they were flush, and they were desperate to institute the types of efficiency measures that the big Western firms build their names (and their fortunes) selling. Privately owned enterprises (POEs) on the other hand tended to be small and a bit more parochial. They were often run by prickly founders who preferred to steer the ship single-handed. Without government backing, they often had less money to spend. All of these factors taken together hardly made POEs seem like the kinds of clients on whom you’d want to hang your domestic hopes.

So how did POEs suddenly become so appealing? Well, for one thing, they seem to be doing a much better job of adapting to the new normal; less beholden to government control, they’ve been able to take the steps necessary to continue thriving in a lower-growth environment. And they’re eager to keep the momentum—with growth, professionalization, and globalisation all high on their to-do list, big firms have a lot to offer them. Furthermore, as many of those insular original founders head off to retirement, savvy new business leaders who are more willing to accept outside advice are often taking the helm.

And all of this happened just as SOEs have begun to lose a bit of their shine. They’ve always been opaque and labyrinthine, but now they also have less money to throw around: they haven’t been as quick to adapt to the new normal as their privately held counterparts, and the government—keen to see them more subject to market forces—isn’t bankrolling them the way it used to. Add in the fact that President Xi’s dogged anti-corruption campaign has scared a lot of them in to a state of paralysis, and it’s easy to see why POEs might be taking over their spot in consultants’ hearts and minds.

So it seems conditions are right for China’s ambitious POEs to become the domestic clients of choice in China’s consulting market—the perfect panacea for firms feeling down about all those newly nervous MNCs. Now all they have to do is figure out how to get local clients (which are largely new to management consulting) to consistently pay them what they’re worth and on time.

You did understand that would be an issue, didn’t you?