Is China Building a Wall to Repel Foreign Economic Interests?

Monday, July 12, 2010 7:18

China Great Walls

Over the last few weeks, a united front of sorts has begun to develop around the issue of whether or not China has erected a new wall, a wall meant to prevent the penetration of foreign economic interests within China’s domestic market.

Consisting of chambers of commerce (American and European), multilateral agencies (WTO and WB), and a few CEOs (GE’s Jeff Immelt being the most recent case), the essential line of thought being put forward is that through a combination of regulations, preferential domestic purchasing policies, and other subsidies, foreign firms are unable to compete in the local markets. In the words of Jeff Immelt “I am not sure that in the end they want any of us to win, or any of us to be successful.[...] and GE was encountering its toughest business conditions there in 25 years”

Or, more broadly, in the words of APCO’s James McGregor in the May 25th Sydney Morning Herald article Foreign firms ponder China future “The foreign business community for the first time is seeing future opportunities narrow even if they are doing well here,””

The stories, often playing up the potential political volatility of “China’s new environment”, have grown increasingly sophisticated as what were once emotionally charged reactions are now “backed” by data driven studies (see the 2010 World Bank/ IMF study Investing Across Borders or the EU Chamber’s 2009/2010 Position Paper) . Studies that are meant to show, in some way, that China is closing the window of opportunity available to foreign firms.

It is a front that I find quite interesting only because the last 8-10 years have been nothing short of the biggest boom in China’s history, and one that has largely involved foreign players at all stages.  Sure there were barriers that were kept in place to protect certain industries, but given the number of luxury brands on Nanjing Road there is little doubt that this market has seen a significant amount of foreign penetration in the market.  China is now the largest market for many of the US and Europe’s firms, luxury and middle market, and it was only a few months months ago that the American Chamber of Commerce’s Business Climate in China guide showed that American firms saw the China market growing for them.

Specifically:

  • 45% of responding companies say the business climate in China has improved over the past six months and 33% say it has stayed the same
  • 65% of respondents report improved business performance for their companies in China over the past six months; only 10% report a decline
  • 63% of respondents are proceeding in 2010 as planned. For those who have adjusted their strategies, more than 80% are increasing activities in China

So what is the real story?  Why is it that in the last 3-5 months everything has seemingly turned the China market on its head?  Is the market really closed for business, or are there other agendas that are being served through these announcements?  Are McGregor and Immelt right?  and if so.. should we all just pack it in?

In answering a few of these questions, it is important to remember two things (1) this is not a new debate and (2) China’s importance to the TOP line of many companies has dramatically changed over the last 12-18 months. At the same time, it is equally important to point out that locally a few trends have occurred over the last 10 years (1) China has been flooded with investment (2) China’s buyers – industrial and on the street – have refined their tastes for what they need and (3) domestic players have improved.

It is a picture that has multiple dimensions, and grows exponentially complicated when you remember that there is no 1 single China, and that the generalizations being presented as the basis for the new nationalism may only represent a small fraction of the “China market”.

So, with that, here is what I think is going on.

1) China’s market is maturing, its tastes are changing, and it does not need to accept anything and everything.

By the very fact that China is developing as fast as it is, prevailing logic should be that China is not going to continue allowing itself to accept the same sales pitches over and over.  Anyone who has spent the last 10-15 years during the recent China rush working in investments will tell you how things change, and how fast.  That being the 499th potential investor is different than being the 5th billion dollar investor, and everytime these bodies are approach… the proce goes up.  So, China is maturing, and some groups missed out, but the fact that it is maturing from Pudong being a fishing village into a major financial center means that there is a whole new economic opportunity

2) China’s market is more competitive.

Speak to executives in cleantech, automotive, construction equipment, or engineering services and you will come to understand that the domestic Chinese firms are growing in strength, capability, and have been getting closer and closer for a while now.  It is a trend that was unavoidable in many ways, especially with so many JV vehicles requiring technology transfer and skills training, and it is something that China only looks to develop further as it looks to move away from only being the low cost manufacturing center.

3) Nationalism is in play

A review of the recent Carnegie Indigenous Innovation document will highlight how national and local governments have been looking to “support their own”, but it does not stop there.  Consumer brands are at times preferred over foreign brands, and will continue to be so, by a certain segment of the consumer population.. and in a time where brand loyalty has yet to be set in stone, it makes the switch even more likely within middle and lower range product categories.

… and I would be remiss if I did not point out that any “nationalism” that does exist is not unique to China.

4) The anecdotes are driving the story

Part of the reason that Jeff Immelt’s comments seemed to hit the press in the way they did was that this was a MAJOR company who was coming out and saying their 5.3 billion USD market was not enough, but the majority of the stories that I have been seeing are macro issues, but are about specific industries … internet…  cleantech… without highlighting perhaps the industry specific drivers of any “nationalism” that exists, and more importantly, ignoring the progress that has been made in other industries like agriculture, luxury brands, financial services, insurance, and so on.

5) The downturn in the global market has altered the needs of China

On a much wider level, the fact that China is being heralded as “the”  market now has created a new pressure for firms.  That given China is the only market growing, and growing at 11% no less, executives are now in a position to where they HAVE TO returning a higher proportion of the global top line from their China bases.

.. or find a reason why they cannot.

6) Greed.

Thinking that China is here to serve the interests of the global markets, on a firm by firm basis, is nothing new to China, and the fact that there are so many willing to leave China once the price increases I think only supports any nationalism that exists.  Were firms more interested in being long term investors, rather than short term arbitragers, my guess is that some of the focus would shift towards supporting foreign investors in their effort to expand the China market.

Anyone have a 7th?

In the end, what I feel is happening here is not so much a nationalistic movement away from foreign investment or penetration, it is that China is now a more difficult market to compete in for different reasons related to domestic economic pressures, increased competition from domestic firms, and a maturing consumer who is starting to realize that the premium that they pay for a foreign brand may not be the best value for their money.

It is a complex issue, fueled by emotions and media, and I will revert to the late Randy Pausch to wrap this post up:

I believe brick walls are there for a reason. They’re not there to keep us out. They are there to give us a chance to show how badly we want something. [...] brick walls are there to stop the people who don’t want it badly enough. They are there to stop the other people!

You can leave a response, or trackback from your own site.