MULTINATIONALS: GSK, Tesla Cut Jobs In Nod To Market Realities

Bottom line: China job cuts at GSK and Tesla reflect broader adjustments that major multinationals are making as Beijing cleans up its business climate and fails to meet many of its aggressive targets for new sectors.

Two high-profile multinationals are slimming down in China, with word that British drug giant GlaxoSmithKline (London: GSK) and US electric car superstar Tesla (Nasdaq: TSLA) have both made major job cuts to their local operations. Both cases acknowledge the difficulties of navigating the tricky China market, which superficially looks quite large and full of potential but in reality is quite fraught with obstacles.

Despite their differences, these 2 cases actually share some fundamental similarities based on unrealistic expectations many foreign firms have when they come to China. GSK’s woes stem from a bribery scandal that dates back almost 2 years, in which Beijing exposed and later punished the company for systematically bribing doctors and other medical professionals to purchase its drugs. Such practice is common in China, but Beijing is trying to clean up the business landscape.

The case with Tesla also involves inflated hopes for the China market, fueled by Beijing’s aggressive targets for rapidly building up the new energy vehicle sector. Anyone who has worked in China knows that government-set targets are often impractical and unrealistic, and are more an indicator of Beijing’s priorities than any reflection of how things will really develop.

Let’s begin with GSK, which last year was fined a record 3 billion yuan ($480 million) after a regulator exposed the company for its bribery program that paid medical professionals to buy its drugs. (previous post) That fine has more recently been eclipsed by an even bigger one of nearly $1 billion levied last month against US chip giant Qualcomm (Nasdaq: QCOM) for anti-competitive behavior, though that’s a different story.

Moving back to GSK, the latest reports say the company has been laying off staff, mostly from its sales division, since last June, with cuts in Shanghai, Shandong and Hubei provinces and the northern city of Harbin. (Chinese article) The company confirmed it was cutting staff, but declined to be more specific. But it looks like the numbers are probably in the hundreds, and possibly even more than 1,000.

The cuts are a direct result of GSK’s recent changes to its pay scheme, which has ended the practice of linking pay directly to an individual person’s sales. Of course the bottom line is that employees are no longer allowed to give money or gifts to health professionals who buy GSK drugs. That means the company’s China sales are probably taking a sizable hit, dipping by perhaps up to 15-20 percent, as doctors and other health professionals no longer buy unnecessary medicine or purchase better rival products.

The old gift-giving system used by GSK is quite common in China, and results in major inefficiencies since buying decisions are frequently based more on benefits to individuals rather than actual commercial need. I expect that GSK probably isn’t the only major multinational cutting staff as it cuts out bribery as a “sales tool”, and rival drug makers and other firms that sell to big state-owned entities may be making similar moves.

The cuts at Tesla are much smaller than GSK’s, but are still quite large compared with the company’s total China workforce. Media reports say Tesla has recently laid off about 180 workers, accounting for about 30 percent of its previous China headcount of about 600 people. (English article)

Like GSK, Tesla had overinflated hopes for the China market, lulled by Beijing’s aggressive targets to quickly put more cleaner new-energy vehicles on the road. Tesla roared into the market on a wave of positive publicity last year, capitalizing on the government’s eagerness to promote the technology. But the air quickly deflated from Tesla’s China drive, and its country head left in December after just a year on the job after the company failed to come even close to meeting its aggressive sales targets. (previous post)

The latest reports say the job cuts are part of a broader overhaul for Tesla’s China operations, which reflect more realistic expectations for the market. Previous reports said the company sold just 120 cars in China in January, translating to an annual sales rate of 1,440 this year. (previous post) That’s a far cry from the company’s earlier hopes of selling anywhere from 4,000 to as many as 8,000 vehicles in the market this year.

There’s really not too much more to say about Tesla’s job cuts, other than that the move was probably inevitable and the new sales force better reflects its reduced expectations. Using the scale of the job cuts as a rough indicator, perhaps it’s safe to say that Tesla has reduced its sales target by about 30 percent, meaning it’s still hoping to sell as many 3,000 of its EVs in China this year. That goal looks achievable, but will still be challenging based on its January performance.

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