Look out. It's on a different scale.

The global financial crisis changed everything. Almost overnight strategic planning turned to risk management, and business development looked to China. China, which was relatively unscathed, became a focus for sales growth. But with higher levels of risk awareness, and with less money to spend, a lot of people were nervous about addressing the opportunity. The risks were (and are) as much about internal and corporate issues as they are about China market ones. They are also a reflection of China’s size.

The sheer scale of China, plus its increasingly high degree of both supply chain and consumer market concentration, means that the potential fallout from a risk event may be amplified compared to the same event in another, smaller and less strategic market.

Notwithstanding the “new reality” of increased pressures on foreign firms (which I covered in my last post), China is on a par with its BRICs peers in terms of global rankings for business, corruption and risk, as seen in the examples below:

Transparency International ranks China at 80 in its 2013 global Corruption Perceptions Index, with Brazil at 72, India following at 94, and Russia at 127.

The World Bank’s 2014 Ease of Doing Business rankings puts China at 96. Russia is at 92, while Brazil is at 116, and India 132.

The un-ranked elephant in the room is China’s size. While the GDP figures have attracted a lot of critical attention over the years for their suspected inaccuracy, and as the debate over China’s emergence as the world’s “largest” economy (on a PPP basis) rages on, there is no denying its scale and importance. And unlike some of its BRICs peers it is usually considered too big a prize to be optional, and too big to get wrong. As I write in “Risky Business In China”:

“…the lure of the still-developing domestic Chinese market, combined with established supply-chain clusters and a very well-developed logistics infrastructure means that, for most, China sourcing and / or sales are a necessity that is here to stay. This reality is reflected in the figures and, according to the World Trade Organization (WTO), China was the largest trader of goods in the world in 2013, with a total of US$4.16 trillion (exports of US$2.21 trillion dollars and imports of US$1.95 trillion dollars). It is also the largest trading partner of 120 countries and regions and for those that are most tightly bound to China’s economy through trade and investment links, the risk increases with the degree of integration. As a result, risks in China may be even more important to manage that in other markets in which the same risks are present.”

Despite China’s importance, and as numerous headlines have shown (Caterpillar and GSK being recent examples), even big companies doing big business do get it wrong. And that is often down to a mis-match between the scale of the job and the level of senior management engagement, allocation of time and resource, and the required level of localised, strategic risk management that is invested at the outset and, critically, for the duration.

Size matters. And it makes China a special case that requires special risk management attention. So if it looks like business as usual, it looks wrong…and needs re-thinking if a corporate China crisis is to be avoided.

In my next post I will look at some of the key challenges, including rising risks and costs, that international companies face in China.

For more news and discussion on risk issues in China, join the Risky Business In China LinkedIn Group, and follow the @RiskyBizChina feed on Twitter.

Photo: Great Wall Watcher, Badaling, 2002. © Jeremy Gordon