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By Liu Wen (China Daily)
Updated: 2007-10-24 10:12

The author Liu Wen is a researcher with Samsung Economic Research Institute.

In July, LG Electronics China started to lay off a number of employees, who have worked for five to nine years in the company. Nam K. Woo, president and CEO of LG Electronics China, said his company laid off over 10 percent of employees in last year's structural adjustment. Oracle and Wal-Mart also reportedly retrenched workers to save costs.

This is a price many multinationals have had to pay for blind expansion. To grab opportunities and expand business in China, many MNCs elevated the position of the Chinese market and consolidated resources such as moving regional or global functions to China.

In 2003, Wal-Mart decided to relocate its Asia-Pacific headquarters in Hong Kong and the global procurement center to Shenzhen. In August 2005, Intel established its global channel platforms group headquarters in Shanghai.

Some multinationals set up China headquarters to facilitate their reporting to the corporate headquarters. In November 2005, LG Group built a twin-tower building in Beijing as the location for LG's operations in China. Intel also made China a separate region together with the US, Europe, Eastern Europe, the Middle East, Africa and the Asia-Pacific.

Multinationals also establish research and development organizations in China, as represented by Google's move to set up a China R&D headquarters.

Yet, many companies face situations like rising costs and fast-expanding organizations and are forced to lay off employees or adjust organizational structures. In June, Oracle cut research jobs in Shenzhen, Shanghai and Beijing.

With the increasingly important role of the Chinese market, MNCs are determined to expand quickly to get the first-mover advantage, but side effects like organizational and cost control also emerge.

Fundamentally, the efficiency of expansion in China depends on two important factors: the status of expansion and strategic planning.

The status of expansion refers to the urgency of expansion of MNCs, including tentative expansion or full-scale expansion. Tentative expansion means a step-by-step development while in full-scale investment, companies pour resources into opening regional headquarters or business units.

One recent trend is companies turning to blind expansion. They move many key functions to China to demonstrate their focus on the market, but do not prepare adequately or lack knowledge about the market.

Global headquarters often want to set up key functions in China but positioning is blurred and corporate headquarters often don't have trust in the operation, which easily leads to blind expansion.

One example is Yahoo. When its domestic rivals like Sina and Sohu were focusing on content, Yahoo stuck to its directory business in the US, which did not fit the need of Chinese consumers. Furthermore, due to lack of trust of its corporate headquarters, Yahoo China's homepages changed frequently, damaging its brand image.

MNCs are so anxious to streamline their business in China to meet changes that they form new functions quickly, but the moves usually lack good planning. In 2005, Intel formed five business groups but there was no clear definition about the group, which led to low efficiency. They were finally merged in 2006.

Some companies recruit more than they need. In Wal-Mart stores, 30 out of 300 employees were managers, so in 2007, the retailer laid off at least 10 managers from each store.

Laying off people or streamlining functions are usually ways to cope with the consequences of blind expansion, but they hurt operations. Lay-offs hurt the productivity and loyalty of employees. If not properly handled, labor disputes also emerge and damage corporate image.

Streamlining organizations can also raise public doubts about a company's operation and reduce the confidence of suppliers and customers.

Thus multinationals should gradually elevate the position of the Chinese market, balancing its expansion and preparation, and expanding in a rational or mature way.