Become Local, Act Global

31 March 2009

Are multinationals operating in emerging markets really only in competition with one another? Phin Foster meets Honeywell China and India CEO Shane Tedjarati to discuss the company’s radical ‘east-to-west’ strategy, why one can no longer afford to ignore the mid-market and the importance of developing local DNA.

Traditionally, the Western multinational entering a developing market did so for reasons of cost reduction rather than revenue generation. Some business might be conducted while one was there, but only with markets and clients similar to those from one’s home turf: people who spoke the language of the dollar and euro, not the rupee or yuan. Start competing with the natives, however, and you ran the risk of becoming one yourself.

The same has been true of budding business leaders who find themselves deployed to Beijing or Bangalore. Such postings have been seen as a means to an end, a necessary step on the corporate ladder in preparation for a return to the major league in the west where the real work begins.

For generations, the movement of capital, talent and ideas has travelled along a strictly west-to-east trajectory. However, questions are being asked about the sustainability of such practices, particularly in the context of the economic downturn in the West and growth patterns within the Chinese and Indian economies, and new business models are beginning to emerge.

At the forefront of this cultural shift is Honeywell International. The US technology and manufacturing giant employs 120,000 people across more than 100 countries. Just over half of its workforce (53%) operates outside of the US, with 45% of its sales generated overseas. Over the past four years, the company has worked on developing an east-to-west model, building China and India into its central innovation hub and a launch pad for growth around the world.

"If you could bottle India’s enthusiasm, you’d conquer the world."

The man overseeing this seismic shift is Shane Tedjarati. CEO for Honeywell China since 2001, he took on the expanded role of CEO for Honeywell China and India in March 2008, with responsibility for driving growth across the emerging markets.

Despite seeing Honeywell’s Chinese operations increase by three times in value over his first three years with the company, the affable Canadian acknowledges that he was not the likeliest of contenders for the job. Having previously worked as Deloitte’s regional managing director for Greater China, his was not the typical industry background.

"I was certainly an outsider," Tedjarati chuckles. "What [Honeywell chairman and CEO] Dave Cote wanted was a guy who could apply a new perspective and possibly upset the apple cart a little. I’d seen the good, the bad and ugly sides of multinationals trying to enter the Chinese market and knew I had his support when it came to going against the status quo."

If Cote was after somebody capable of creating a little constructive tension, he’d found the right man. Tedjarati was not shy in asking questions of his new charges and some felt uncomfortable about the direction that this dialogue was taking. "They were measuring their share of demand by only looking at the high-end of the market where other multinationals were competing," he recalls. "In that context they were looking good. I came in and demanded to know about the mid-market and the low-end. I later realised that they were calling up the global headquarters in those first few weeks and warning their presidents that I wanted to drag the company down the path of zero profits and competing with locals. They thought we were at risk of going native and that our quality would suffer. This was not the Honeywell they knew. It wasn’t necessarily active resistance; more a fear of the unknown."

Tedjarati describes the transition that followed as "six-to-six" shifting focus from 600 million potential consumers to six billion. He meets my eye and beams proudly when describing Honeywell China and India as having become "a mid-market company" and is clearly proud of its ability to "take on Chinese DNA". This is not, he insists, a question of compromising on quality, but an imperative for long-term survival.

"If we ignore the mid-market we’ve lost the game," Tedjarati declares. "Native companies already know how to serve the low end and from there it’s only a small jump to the middle ground. Once they’re flexing their muscles and challenging you in that area, they’ll soon be ready to make that next transition. Multinationals in developing economies concentrating solely on the top end of the market pay little attention to local developments. They don’t feel the need to innovate so much and their muscles are only built for a market that looks no different from what you would find in the West. Continue along that route and you’re in for a nasty surprise."

Eastern growth

Tedjarati is currently working on a book studying the social and cultural ramifications of the sweeping changes taking place in Chinese society. "It took China 30 years to go from 1% to 29% non-poor," he explains. "Do you know how long it’ll take to get up to 71%? Ten years. People aren’t interested in travelling along the same path of progression we did in the West."

For Honeywell to fully benefit from such developments, Tedjarati has gone to great lengths to manage the way in which the emerging markets are seen within other parts of the company. "China is fast becoming the end game," Tedjarati explains. "Getting posted here needs to be seen as the promotion, not a means towards achieving it. Fully capitalising on these opportunities will require a renaissance leader like no other, not a guy who merely shows promise. We’ve put a 27-year veteran of Honeywell Aerospace in charge of overseeing the Chinese operation. He knows that this is the top job. Crack this challenge and you’ve done it all."

"The growth of Honeywell in China and India is adding shareholder value in the US and success is not at the expense of growth elsewhere."

Providing its Primus Apex integrated avionics system to Harbin Aircraft Corporation for use in its upgraded Y12 model is a prime example of how Honeywell both addresses local leads and uses China and India as a springboard for operations throughout the developed world.

"The system was developed in India," Tedjarati explains. "We found the market in China, but the actual sales are in Africa. The aircraft was developed in China for its developing market, but that’s not necessarily where the market is. There’s a trickle-down effect and we’re starting to see more of that."

Some innovations created in the east do not stay there long. The AV8OR GPS system, which "flew off the shelves" at last year’s EAA AirVenture show, was developed and produced in China, but can be used only in the US. Elsewhere, innovations can travel west with little need for translation. "Look at environmental combustion control," Tedjarati declares. "We found that by serving the Chinese market we automatically had the price, the velocity and the features for the Middle East and African countries. For alternative energies, these economies need solutions, but cannot afford Western prices. Deliver that and traditional markets will soon be demanding a slice of the action."

Indian and Chinese operations working in tandem goes against much of the perceived wisdom espoused by certain economists and political scientists, but Tedjarati is far more concerned with accentuating the similarities between the two markets than he is dwelling on any cultural differences. "Look at the mega-trends," he exclaims.

"A vast population, shortage of natural resources and arable land, energy efficiency and the environment a big concern, a requirement for increased security and safety measures, the need for developing key anchor industries. For China it’s about regaining past glory; India is looking for a rightful place in the world. They’re aspects of the same truth and both reject the idea of merely being on the receiving end of something Western."

Beijing to Bangalore

Even the differences between the two giants create potential for cooperation, such as China’s strength in hardware versus India’s software capabilities. "If you could bottle India’s enthusiasm, you’d conquer the world," says Tedjarati.

"Our guys come in and want to attack a problem within Indian society, but it doesn’t make sense to invest the money. Add China into the mix, however, where the same problem exists, and suddenly you have a market."

These synergies are key to the manner in which Honeywell directs its manpower across multiple platforms. Tedjarati cites the fact that 40% of energy performance contracts in Indian power plants are carried out by the Chinese.

"If you’re trying to sell solutions to the Indian market you’re too late," he explains. "Instead, we’ve got Indian salesmen on our payroll in China, working with Chinese customers and outlining how we are uniquely positioned to operate seamlessly between the two countries. This is not just about innovation; the same people can be with you from Beijing to Bangalore. That’s powerful."

"If we ignore the mid-market we’ve lost the game."

The importance of populating each division with people who have grown up within the local market is invaluable and Tedjarati continually stresses the need to develop local DNA. "As soon as you think you know the playing field better than the local competition, you’ve lost," he stresses. "There’s a limit to how much you can delve into the psyche of a market without local expertise. We have a massive marketing upgrade underway, getting native entrepreneurs onboard. Having that capability allows us to operate far closer to the ground."

But this should not be confused with an ambition to become completely localised. Underpinning the east-to-west dogma is a steely ambition to have the best of both worlds. "One must be wary of going too native," Tedjarati explains. "Why are we better than the average Chinese company? We’ve learnt to flex our muscles in their field, but we have the backing of a global giant. That’s something the competition would pay an arm and a leg for."

The example set by Honeywell for any multinational looking to seriously crack the emerging markets is irrefutable. However, as the downturn starts to bite, protectionist rhetoric is ratcheted up and globalisation becomes a dirty word, could there be a flip-side to this success? Decisions such as the relocating of Honeywell Specialty Materials, from Morristown, New Jersey, to Shanghai in late 2007 do little to assuage public fears that western multinationals, particularly in the manufacturing sector, are shipping jobs east at the expense of traditional workforces.

"This isn’t a zero-sum game," Tedjarati counters. "The growth of Honeywell in China and India is adding shareholder value in the US and success is not at the expense of growth elsewhere. Failing to do this would harm US jobs. This is a global company and its story is being written around the world."

Listening to Honeywell’s CEO for China and India, one gets the distinct impression that there are still many chapters left to write.