To reduce security risks associated with operating in China, a U.S.-based consulting firm is separating its China operations from the rest of its global operations, a practice popular among multinational companies, according to people familiar with the matter. It is said to be becoming more and more popular.
Western companies with decades of experience in China (both McKinsey & Co. and the companies it advises) are facing their toughest times due to geopolitical tensions and a slowing Chinese economy. McKinsey & Co. faces intense scrutiny in Washington over its work with the Chinese government, but some Chinese clients have shifted to local rivals.
Over the past two years, McKinsey has lost hundreds of employees in Greater China, including Hong Kong and Taiwan, the people said. McKinsey noted on its Greater China website in June 2023 that it had approximately 1,500 employees in the region. Joe Ngai, head of McKinsey’s China operations, said the company’s turnover rate in the country has historically averaged about 20%, but hiring has slowed. He said McKinsey still has more than 1,000 employees in Greater China.
The company stopped working with Chinese local government customers and cut back on state-related projects, which used to make up a significant portion of its projects. Ngai said the company’s latest strategy calls for helping multinationals navigate changes in China, advising Chinese companies looking to expand overseas and working with Chinese companies undergoing executive changes. said.
“All of our clients face challenges, and we have to help them meet these challenges,” Ngai said in an interview. In a difficult, slow-growing market, “many of McKinsey’s core skills and competencies are actually more important than ever,” he said.
McKinsey’s reorganization of its China operations comes as rival consulting firms continue to take on large-scale work for government agencies and state-owned enterprises.
shrinking presence
McKinsey was first established in mainland China in 1993, has Chinese and multinational clients, and has grown rapidly along with the Chinese economy. Dominic Barton, who served as global managing partner from 2009 to 2018, previously worked in Shanghai, and his successor, Kevin Sneader, worked in Hong Kong.
McKinsey was known for winning business from China’s largest state-owned companies, which play a central role in the economy. These include China Construction Bank and China Telecom, where McKinsey advised on digitalization and operations management projects. Another major customer was the private insurance company Heian.
Ngai told Chinese news site Sohu Financial in 2020 that at the time, about 80% of the clients in McKinsey’s China business were domestic companies, half of which were state-owned enterprises. The remaining 20% are multinational companies. Mr. Ngai and McKinsey officials declined to provide a breakdown of their clients over the past few years or today.
Consulting fees in China tend to be lower than in the U.S., and the issue has caused tension within McKinsey, according to people familiar with the company’s strategy, but the company has generally been willing to ignore it in the pursuit of growth. It is said that it was shown.
That strategy has changed.
In Washington, U.S. lawmakers have criticized McKinsey for advising the U.S. government, including on defense-related projects, while also advising the Chinese government and related organizations. Bob Sternfels, the firm’s global managing partner, came under intense scrutiny in Congress this year over the matter.
Under intense scrutiny over conflicts of interest, McKinsey is reviewing its client list and cutting back on certain projects in China. A McKinsey representative said the Chinese central government is not, and to the firm’s knowledge, never has been a client of the company.
Asked about McKinsey’s current work with Chinese state-owned enterprises, Ngai said the management consulting firm is selective about its clients and follows strict procedures to prevent conflicts of interest.
China’s biggest domestic challenges include economic stagnation and the Chinese government’s crackdown on due diligence and information gathering by foreign consulting firms. Last year, police visited Bain’s Shanghai office and separately searched the offices of CapVision, a consulting firm that connects investors with individual experts who provide industry information.
McKinsey also faces price competition. Some Chinese companies in the market for advice are turning to cheaper domestic alternatives to U.S. brands.
Little-known names abroad such as Allpku Management Consulting, China Stone Management Consulting and StratOp Group have won clients, while local technology giants such as Alibaba Group and Huawei Technologies have also won clients for digitalization-related projects. I’m getting it.
According to Shenxing, a Chinese consulting market research firm, foreign consulting firms’ revenue in China fell by 6.3% last year, while local consultants’ revenue increased slightly. Shensixing said foreign companies had about a 40% share of the $7.7 billion market.
McKinsey’s global sales in 2023 are expected to be approximately $16 billion, but the company has not disclosed sales or profitability in China. The company has approximately 45,000 employees worldwide.
separation system
This summer, some of McKinsey’s senior consultants gathered in Singapore, where Mr. Ngai outlined McKinsey’s three-year China strategy through 2026, people familiar with the event said.
According to people familiar with the matter, McKinsey & Co. has been advising on projects aimed at selling Chinese-made electric vehicles overseas, particularly in Southeast Asia, in cooperation with Chinese companies looking to expand overseas.
Meanwhile, McKinsey has taken several steps to separate its China operations from the rest of the world. The company’s global computer systems have been fragmented, and employees based in mainland China have already or will be cut off from access to certain internal knowledge databases and documents, according to people familiar with the matter. That’s what it means.
The idea of siloing China operations has become widespread among multinational companies in order to maintain continuity of operations while dealing with geopolitical tensions, China’s stricter national security regulations, and stricter data security requirements. are.
Over the past year, McKinsey job interviews in the Asia-Pacific region have included questions that probe candidates’ understanding of the risks of doing business in China, as well as case studies about Chinese companies looking to expand or acquire operations overseas. . people said.
Senior executives have also been told to be careful when working with state-linked clients or on projects involving areas China considers sensitive, such as semiconductors.
Please email Yoko Kubota (yoko.kubota@wsj.com) and Raffaele Huang (raffaele.huang@wsj.com).
