China’s Market. Too Hot? Too Cold? or Juuuust Right?Wednesday, April 7, 2010 0:45
Over the last couple of weeks, I have written a few posts that looked how firms considering China may not always be making their decisions on the best available data, or the best analysis of that data. That, in a rush to please an executive, investor, or to solidify a China base, managers will often overlook or overreach in an effort to just get the deal done. On some level, the process that I described in those posts offer up generalizations that do not give full credit to the the dynamics of China, and particularly to the fact that there are things that simply cannot be planned for, or avoided.
That, in a country whose pace of economic development outstrips capacity to deliver raw materials, and will result in imbalances across many areas of the economy, actions will be taken by the host market. Actions that can at times be seen as an opening of a market, while at other times, it can be seen as measures meant to protect the domestic market. The later of which has recently been of focus of many as reports in the media of heightened tensions between the US and China have increased in number, size, and scope, and were the focus of a recent AMCHAM member Business Climate survey that found:
More than three-quarters of American companies polled in a survey released today by the American Chamber of Commerce in Shanghai (AMCHAM Shanghai) say that the business environment in China has either improved or stayed the same over the past six months, calling into question recent media reports of a worsening business climate in China.
Findings that were supported with President Brenda Foster’s statement:
“Is China a challenging place to do business? Yes. It always has been and we will continue to work with the national government to develop a more competitive, open market in China. But our member companies remain committed to the China market and we’re seeing many of them expand their operations here.”
The report comes at an interesting time to say the least as you have Senators’ Schumer and Graham pairing up to try and once again push forward a bill that will realign the RMB, you have the soon to be released reports that will address the level by which China manipulates its currency, and then you have a whole host of reports on the various industries that have seemingly tightened up.
Yet, as you can clearly see in the chart above, and in the three below, US firms who participated in the survey are overwhelmingly positive on China. Even in the face of regulations promoting indigenous innovation. What gives?
I have my theories about some of the underlying dynamics, but I must admit, they do not capture everything either:
Protectionism does exist – to say that protectionism does not exist in China would be a lie. It does, and in the case of one discussion I recently had with a logistics executive, they have all known that it exists.. and planned for it. There are simply going to be certain key industries that China wants to either excel in (logistics) or protect (energy), and that will bring barriers to foreign firms who enter the space. Unless of course, they were able to beat the odds by entering the market early, were able built real value, and do so in a way that as the domestic players in the market built their national brands were able to continue to compete. For some industries, automotive, this has been easier at the higher value ends of the market (consumer facing), but for 3rd and 4th tier suppliers, this was more difficult. Competing on costs was impossible in a time when subsidies (in many forms) were being handed out, but there were some exceptions.
China Has Seen it All – When I first arrived in China, and more specifically when I began working in Shanghai, I remember hearing the stories of red carpets being rolled out for foreigners on visits to what are now China’s 2nd tier cities. Police escorts from the airport, banquet after banquet, meetings with the mayor, etc were all signs of hunger for FDI contract signatures. But, as I noticed in one dinner 4 years back, things were changing. That, where I would have once been seated next to the mayor, I was now sitting next to a Vice Mayor.. and the mayor was himself on the move between 3-4 groups who would have once garnered a meal. On another trip, the modest investment I was representing only garnered midlevel zone officials and a buffet like lunch between site visits. Critical Mass had been achieved, and all this signs of saturation were beginning to show themselves.
Domestic Competition is improving their offering- Going back about 6 months, I had a conversation with an executive from a cleantech firm who had been in China for more than 10 years and built a successful business in China long before cleantech was hot. It was a time when the products and services his firm were providing simply had no local presence, and his firm was left with 2-3 other international players to fight it out. However, like in other industries I have studied, the domestic competition now not only has a legitimate presence on the equipment side of the market, but has also developed competitive technical capacity and customer service competencies that have made the industry far more difficult for them.
The China Price is disappearing, and FAST – A trend that has long been in the making, China’s pools of cheap labor, resources, and zones are simply reaching exhaustion and the costs for everyone are going up. Domestic and foreign alike. Interestingly enough, one would have thought that the recession would have provided firms with the opportunity to recapture costs from the 2007/ 2008 general rise in costs, however for many those costs did not come down. China is, even in the midst of a recession where exports have been hammered, still short on resources (human, raw, and otherwise), and costs are rising. Rising to the point that there are firms who have begun to once again consider moving operations away from China.
The Domestic Market is Booming – Where the vast majority of these concerns gets wiped out is simply the allure of China’s domestic market. A market that for many categories has grown significantly in the past several years, but more importantly, continued to grow when all other markets were imploding. Which provides firms with a renewed sense of optimism. That, regardless of the rising costs of the market, or the fact that the market is tightening up, many still see China as “the” market to be in. And with that story, they are able to continue justifying to corporate executives and investors the need to continue investing in the market.