The Consulting Market in China Will Never be Owned by McKinsey
McKinsey and BCG’s primary competitive advantage does not work in the Chinese consulting market for the most important clients today, the government and state-owned-enterprises (SOE), nor will it work in the future in a more open market led by non-state companies.
This series examines the process to leverage the unique competitive advantages of a boutique consulting firm to build a market entry approach which outflanks the competitive advantages of elite consulting firms in Chinese consulting market. This article is part 2 in this series. Part 1 is available here.
Some of the details in this series have been modified for confidentiality reasons.
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China is a very unusual consulting market compared to other countries. In fact, it is the single most distinctive consulting market in the world for one reason: both BCG and McKinsey’s competitive advantages cannot work in this market.
I want to make a crucial distinction here.
McKinsey’s brand cachet works phenomenally well for smaller companies, large non-state companies and the subsidiaries of Fortune 1,000 companies. Yet, neither BCG nor McKinsey can reach the levels of advising the highest levels of the Chinese government and the highest levels of their SOEs on a consistent basis. This latter group of companies is most influential in China, for now, and western consulting firms have no influence here.
This is a competitive disadvantage unique to China.
For example, when McKinsey arrived in Germany in the 1960s they pretty much swept across the country bringing in US best practices. They entirely dominated the business conversation and set the agenda at the highest levels of business decision making. McKinsey did well since Germany, and Japan, Italy, Japan, France etc, all wanted to learn US best-practices and desperately wanted/needed to plug into a global commerce system led by the US.
China does not want to plug into anything. It is not a Tesla. China wants to be the economic system others plug into. That difference has a significant ripple effect.
That means, as a boutique consulting firm, you can position yourself to exploit those weaknesses. So, lets examine some of the unusual things about the Chinese consulting market which makes it very hard for BCG and McKinsey to compete successfully for the most influential clients.
Consumer vs. Business vs. State
Chinese consumers and students love everything American. They love the business schools, they love the brands, they love the music, they love the culture, they love the food and they love the freedom. You can find many passionate and patriot Chinese espousing their patriotism for China in US. The fact that those patriots are being patriotic in the US and not China should tell you that Chinese consumers and students, even professionals, are almost all pro-USA.
Sadly, for McKinsey and BCG, these USA-adoring young professionals do not have any control over the hiring of elite consulting firms for influential SOEs or government work.
Chinese businesses by and large are also pro-USA. And this cuts across the spectrum of businesses from tiny stores to medium sized companies to very large conglomerates not owned by the state.
We can ignore tiny stores to medium sized companies since they usually cannot afford to hire elite consulting firms. That leaves large businesses. That group can be split into privately owned and state controlled / influenced businesses. The big, critical decisions impacting China are made by the state businesses / bodies. They do not and are unlikely to ever hire McKinsey or BCG for the most important policy work. Of course, there will be some outliers but in general this rule of thumb will apply.
They will only hire a foreign entity when they can clearly extract a best practice without giving away too much of their own confidential data.
So if you work in McKinsey China versus, say, McKinsey Sao Paulo, your experience will be very different. McKinsey China is not going to be hired to restructure the power, banking and healthcare sectors. The state will never trust foreign institutions with this role. In other words, the work that makes BCG and McKinsey famous, the work that gives them influence, cannot and will not be done in China any time soon.
In fact, it will never be done by them in China.
McKinsey Sao Paulo on the other hand is all over the place fixing the most critical problems impacting that country. The same goes for McKinsey and BCG in just about any other major emerging economy: South Africa, Nigeria, Indonesia, Turkey, Mexico etc. If you ever find yourself with little wiggle space on South African Airways, paying crazy prices at a Nigerian state gas station, marveling at the efficiency of Moscow’s transit system or eating good food on Emirates, you can almost always find McKinsey or BCG’s fingerprints somewhere.
Private businesses in China tend to be different. McKinsey and BCG do a lot of work there. They would either be helping Fortune 1,000 companies enter China, operate within China or expand from China. McKinsey and BCG would also help Chinese-owned non-state conglomerates who either value foreign know-how or have owners, or the owners children, who are the graduates of the Ivy-League schools where McKinsey would be famous.
The bottom line is that where it counts, in the state businesses / structures, neither McKinsey nor BCG currently have influence, nor will they likely have influence in the near future.
Limits of Ivy league Prestige
The prestige of the Ivy leagues has a limit. It is called the Chinese Politburo. While many senior party officials send their children to study in the West, that should not be confused with the willingness to expose the nations core policy making to foreigners.
For those who think the power and prestige of Harvard will last forever, Oxford and Cambridge provide sobering case studies. The influence of a school is directly correlated to the power of the country where it is located. When the country is overtaken, the school is also overtaken.
It is really that simple.
Think about the world before the US began its growth from the early 1800’s. That was a world dominated by the British Empire. The elite of the British empire studied in Oxford, Cambridge and Sandhurst Military Academy.
As the global economy slowly shifted to the US, American businessmen needed to be trained in the US to be closer to the US consumer, which is why Harvard, Wharton, Yale, Princeton, Cornell etc., all rose to prominence.
Think back to the time when the US was rising but had not yet eclipsed the British Empire. Imagine it was the 1850s. The dons (professors, lecturers or Fellows) of UK educational institutions would be having this same debate. Would Oxford still be relevant if the country where it was located was irrelevant? I am not trying to belittle our UK readers in the least. Irrelevant is purely a relative term when compared against the surging US influence.
Many of the dons would have said yes. How could Oxford possibly lose its stature to some piddly school called Harvard?
Yet, the real answer is no. It would be irrelevant, relatively speaking, but you could not tell dons that. They would blow a fuse!
The allure of Ivy Leagues is neutralized in the highest levels of Chinese corporate power simply because the Ivy Leagues are not in China. Graduates who matriculate from the party Chinese schools set economic policy in China. You could be the Chinese-national Baker Scholar at Harvard and that would not change anything.
This is partially a trust and relevance issue. Would we elect someone to be an American president or governor of the US Federal Reserve Bank if they attended the elite British schools but not the best US schools? The answer is most likely no.
So why would the Chinese do the same? Why would China behave differently from the US as it grows? China is already incredibly significant right now and as it rises in stature are we really expecting that all of China’s most influential leaders and consultants will be trained in the USA or by a US firm like McKinsey? That makes no sense.
The Ivy League degree works extremely well where the US system of influence dominates: either where countries allow the system to dominate (like Singapore) or have no choice but to allow it to dominate (like Germany, South Korea & Japan: it’s hard to say no to the US when 100,000 US marines are protecting your freedom to have this very debate with the US).
China believes it will challenge the US and is unwilling, with good reason, to expose its key decisions to problem solvers who were trained in the West and may take those ideas back to the West.
There are, of course, some Chinese party satellite graduate programs run in the West. However, that is like going from the US to the UK for a Rhodes scholarship. It does not change the fact that the basis of power and trust has shifted east.
BCG and McKinsey have built their entire business models around the allure of the Ivy Leagues. They have not built their business models around the allure of the Chinese party schools. You can only excel at one thing and sadly for McKinsey and BCG they cannot change the basis of their value overnight.
Actually, no Western consulting firm can achieve this. Some may try. Yet, they will all likely fail because they are Western.
Competitive strategy teaches us that success comes from perfectly organizing a company around one advantage. McKinsey and BCG are hooked into the spine of capitalism by their incredible domination of the elite schools in the US.
The market is now shifting. Can they be hooked into the spine of Chinese decision-making, while doing the same in the US? Michael Porter would likely say no because no company can perfectly arrange itself around two competitive advantages.
What does this mean?
It is admittedly difficult to imagine a future where China is the dominant economic power. It seems so unstable. It helps to remember that the US overtook China and the UK around the period of the Civil War. So, instability is not such a bad thing since it fosters innovation, which drives forward productivity.
However, when China overtakes the US McKinsey and BCG will be likely only marginal players in the Chinese consulting market.
And this leads to a stunning statistic many fail to realize. The greatest economic success story of the last 30 years was not Steve Job selling trinkets to drive up Apple’s share price. It was the phenomenal increase in Chinese per capita GDP. And the stunning part is they did it with zero help from McKinsey or BCG. Not just a little help, but zero help. Zero as in nothing.
Think about that for a second. The greatest management and business success story of the last 100 years did not involve consultants from the major consulting firms. They were mere observers. They are still mere observers.
A group of party leaders groomed at schools we never heard of, being taught by professors who probably where not that great and who ended up working in cities and companies we cannot easily recall developed an economic plan that changed the world’s largest nation. Chairman Xi’s home at one point was a cave.
They did what many said was impossible. Dominic Barton calls McKinsey a CEO factory (which we disproved).
Well, if you count the number of CEO’s created by the Communist Party of China, and the wealth they have created, then the Communist Party of China is the ultimate CEO and leadership factory.
And this must annoy McKinsey and BCG. They are not involved and will not be involved.
Many have asked which firm can topple McKinsey or BCG? The better question is which Chinese consulting firm will rise with China, because that is the firm which will topple McKinsey. It will happen for the very same reason British firms do not currently dominate the US market after the US passed the British as the dominant economic and military power.
Obviously, when the US was a young nation and Harvard was a backwater, the British schools, their alumni and the employers of those alumni were superior to their US counterparts. Why did those superior British firms not move in and dominate US business like McKinsey thinks it can do in China? The Americans gradually locked out the superior British banks, law firms and other advisors to build their own capabilities.
If it happened to Britain, what makes the US consulting firms think it will not happen to them?
Entering China to dominate the market is not like any old Asian market entry strategy. All those other strategies relied on “western prestige” to gain favor from the local governments who did not mind US influence provided the country benefited. China does mind. This is a country that wants to set the global agenda for the long-term.
Major economic powers trust their own people, and neither McKinsey nor BCG are Chinese. Having Chinese partners does not make a consulting firm Chinese nor does it change the firm’s loyalties. If you want to be the most influential consulting firm in China, build a true Chinese firm which is not a subsidiary of a Western firm.
If you want to be a marginal consulting firm in China, build a Chinese consulting practice which is a subsidiary of a Western firm.
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