What Does 2012 Have in Store for Foreign Business in China?

Tuesday, January 3, 2012 12:12

Will 2011 behind us, and the 2012 campaign election (in the U.S.) and leadership transition (in China) under full steam, I thought it would be a good time to write a post about what I see coming up this year.  It is in part catalyzed by some discussions I have been having with friends, posts I have seen on other sites, and a recent discussion hosted by FCC… and as far as I can tell, 2012 will be perhaps one of the most interesting (and important) politically, economically, environmentally, and socially in China.

It will be a year where foreign firms, and individuals, will have to pay attention, and while there is bound to be more than a few tussles over global solar pricing, the RMB, or organic pork pricing, I do see a number of areas where foreign firms are going to find themselves having more access than they were originally planning on.

1) Politically
Politically speaking, 2012 is going to be a massive year that will potentially lead to transitions of power in the U.S, China, Taiwan, Korea, and a number of the E.U. member countries, and as such, it is safe to say that this will only serve to open up a regular stream of rhetoric.

Rhetoric that may have little real value to voters (or protestors), but will allow candidates the ability to stake out their positions on China (qualified and otherwise) which can then be completely abandoned once said politician has taken power. China for its part will be the focus for Western politicians, but with their own transition in the planning, one can expect some choice quotes from China leadership as well.

There will likely be the same conversations of stolen jobs, currency manipulation, and China’s military budget, but additional rhetoric will likely include China’s race to surpass the west in economic size and green prowess, as well as the lean that certain candidates will have to Chinese investors.

It will largely be one sided, but as China has been through similar experiences before, I do not expect that the campaign season will have a huge impact until after the votes have been cast.  Although, that also means that one should not expect China to move forward on contested issues either, like the RMB or domestic innovation policies, which could in itself be a problem for foreign businesses.

2) Economics
Domestically, inflation (natural and manufactured) are going to continue to be the main story for China, and regardless of whether the source is from greedy investor or the materials needed to support the greatest movement of people from farm to city, prices are going to go up in the form of increased raw material pricing, higher labor costs, higher energy costs, high food costs, etc, etc, etc,.

At the street level, this will hurt China’s lower/ middle classes the most as their income levels will fall in real terms and their investable assets will deflate a bit.  For foreigners, this simply means that things are going to get even more expensive as prices go up as a result of inflation, with the double whammy coming to those foreigners still being paid offshore in foreign currencies.

For foreign business is going to be a mixed bag depending on what side of the economy one is on.  If the firm is still largely exporting their goods from China, then it could potentially be a very painful year.  Particularly if their goods have a high labor cost (per unit) and are exporting to markets that were already weak.  On the other hand, firms who are importing into China, this could be another banner year. Particularly in the luxury, cleantech, and food sectors (and there are surely more)

Internationally, the economics will work a bit differently, and there will be more than a few countries who continue to appreciate the fact that China has both spare cash and is resource starved.  Afghanistan was the most recent beneficiary of this confluence, but Australia, S.E. Asia, and parts of Africa will continue to enjoy the economic fruits of the greatest resource acquisition the world has ever seen. Although China will have, as part of these deals, be asked to use a bit lighter touch environmentally and socially.

Chinese tourism (historic and economic) will continue to grow substantially, which will be a boon for some cities who have invested into the requisite Chinese restaurants that have become staple hubs for Chinese tours (my wife’s family jokes they cannot go 2 days without a panda on the menu).

The big question in my mind is whether or not the Chinese will be able to land the big one.  Be able to win a round in the global game of capture the brand.  Jack Ma has been the most recent entrant into this foray with his efforts to push forward with a Yahoo deal, and if it passes it could lead to more high profile deals to be cut.  Or, if it is shot down by the U.S. Gov, it could lead to more cries that the U.S. (and other countries) are still not open to Chinese investment.

Either way, the Chinese will still continue to buy up prime real estate in global cities.

3) Environmental/ Social Fissures
2012 for China’s environment and social pressures will likely increase in size, frequency, and impact, and as we have seen in the new rules over Weibo, the Chinese government is preparing to “manage” the situation the best way they know how… do what can be done to keep a lid on it.

However, if there were a year where I myself see the potential for foreign firms to make big investments (and secure large government projects), it is this year.  There is already a large body of evidence to support this as firms like Nalco, GE, and IBM are selling large amounts of equipment into key area of the water sector, but some very interesting investments in pilot programs have also begun, as have continued investments in rail upgrades, high voltage power lines, smart grid, food security.

Socially, the picture is even more interesting in some regard as large numbers of elderly are now beginning to become a government problem at the city level (Shanghai’s 90-7-3 plan is not quite working out as planned), and at the provider level (hospitals, elderly care centers, and community centers) where the government has put a lot of money into building out infrastructure but still has a long way to go with building out a standard of service that many are expecting.

For anyone who is selling products to families (particularly with newborns), the two issues above are going to put you in a good place for a stellar 2012!

Which leaves me with the following conclusions…
2012 is a year that I think will be a very interesting one to watch, and that while there will be plenty more political rhetoric and some counter suits to match, this year could end up being a banner year for foreign firms who have invested in, planned for, and readied themselves for the long term. That’s not to say that it will be an easy year for firms looking to enter China (or expand their bases), or that it won’t cost more to hire and retain the people needed to make the gains, but for those firms that have a long term view of China, this year seems to be one that will be critical in either gaining that first foothold.. or taking the next significant step forward.

For those with a short term view though, my feeling is that you will need to have a strong gut.  While the trend will move up, it may be a year that is similar to last year’s S&P where you may question whether or not the percentage won was worth the effort/ stress.  There are going to be more scandals like the one Focus Media went through, and the government is going to continue acting in their best interest (regardless of how big your fund is), and that is going to leave funds exposed to the elements… which is a space that I myself would not be comfortable  with given the political undercurrents that are going to surely precede the October handover to the next administration.

With that, I wish everyone the best for 2012.

Let the games begin!

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