Doing Business in China: Where Are We Headed?


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Blue Canyon Partners’ China Practice Director David G. Hartman on October 1 spoke about where business in China is headed during a Journal of Commerce webcast on “Doing Business in a Changing China.” David dissected the daily headlines about China’s economy with a look forward and discussed where China has been as a market and as a global competitor, and where it is headed.

The webcast focused primarily on the challenges and opportunities for importers and exporters, and transportation and logistics companies in China, where a combination of slowing growth, a more inward-looking economic strategy, rising costs and new regulations are changing the business dynamics in Asia’s largest market.

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Doing Business in China: Where Are We Headed?

  1. 1. Doing Business in China: Where Are We Headed? Journal of Commerce Forum David G. Hartman October 1, 2013
  2. 2. ©2013 Blue Canyon Partners, Inc. 2©2013 Blue Canyon Partners, Inc. 2 1. Dissecting the Daily Headlines About China’s Economy, and a Look Forward 2. Where China Has Been As a Market and As a Global Competitor, and Where It Is Headed
  3. 3. ©2013 Blue Canyon Partners, Inc. 3©2013 Blue Canyon Partners, Inc. 3 China’s Growth Slowdown Makes for Shocking Headlines • Global concern over China’s economic slowdown is overdone • China’s policymakers are determined to build a more balanced economy • “Slowdown” scenarios must be seen in context of less than 2.5% growth in the US and Europe (solid blue line) Sources: World Bank, WDI, Blue Canyon analysis China’s Real Annual GDP Growth
  4. 4. ©2013 Blue Canyon Partners, Inc. 4 Government Infrastructure Spending Has Given China A Vast Highway System, Built Largely in 15 Years • Expressways have been a large part of the construction boom in China • China has been pushing the highway network west, allowing for delivery to ports and major cities of products produced outside the most developed coastal rim. • The same building boom has similarly expanded rail and air infrastructure. Source: National Bureau of Statistics of China, Wikipedia user ASDFGH for Map translation/presentation China’s Expressway Development China’s Expressways: Operational (Blue) and Planned (Red)
  5. 5. ©2013 Blue Canyon Partners, Inc. 5©2013 Blue Canyon Partners, Inc. 5 This Transportation Infrastructure Will Support the Planned Westward Shift in Centers of Growth • Long China’s laggards, the interior regions of China have per capital incomes a fraction of the most developed provinces along the coast. • But now the former leaders Beijing, Shanghai, and Guangdong have fallen to the bottom of the growth chart. Sources: China National Bureau of Statistics, Blue Canyon analysis
  6. 6. ©2013 Blue Canyon Partners, Inc. 6©2013 Blue Canyon Partners, Inc. 6 Safety and Reliability Are Front-Page Issues in China • Food scares have hit China in waves since babies died from milk mixed with melamine in 2008. • Government TV reports focus on how to identify fake and dangerous food items. Internet rumors cause overnight shifts in consumer behavior. • When Wal-Mart was accused of selling regular pork labeled as organic, customers blogged that Wal-Mart shouldn’t be blamed for a national supply chain problem. • Shunfeng Express is capitalizing on these concerns with “direct from the farm” internet buying.
  7. 7. ©2013 Blue Canyon Partners, Inc. 7©2013 Blue Canyon Partners, Inc. 7 What Do All These Dynamics Mean for Logistics? Trend What It Means China’s overall growth rate slows Still-growing demand for transportation, but growing more slowly than some had anticipated Consumer demand replaces government infrastructure spending Manufacturing for some of the most fashion-conscious consumers in the world presents logistics challenges different from supporting construction A significant population moves from subsistence agriculture to new cities As peasants become city-dwellers, dependencies (and logistics requirements) increase dramatically Industry moves from the Coastal areas to regions farther and farther West Instead of moving (migrant) workers from the West to factories in the East, the logistics system will move goods from factories in the West to markets, often in the East but also in the West. Truck transportation probably takes on a significant part of the load. Domestic demand and higher-value exports replace exports of low-priced labor-intensive goods Changes in pattern of goods movement within China is coupled with an increase in demand for imported products. Export volumes fall over time. Food safety is a daily topic of conversation and shapes people’s dining habits More reliable and well-monitored supply chains, as well as inspections at source, can start to calm fears.
  8. 8. ©2013 Blue Canyon Partners, Inc. 8©2013 Blue Canyon Partners, Inc. 8 Taking stock of Where China has Been and Where China is Headed as a Global Competitor 1. Remarkable change in not much more than 20 years: command and control to largely market-driven 2. A “must-win” market for most global manufacturers who intend to achieve growth and continue being global leaders, needing partners to support them 3. Having created a formidable set of Chinese competitors who are large, well-funded and tend to follow a different business model, creating challenges across the globe
  9. 9. The Market in Which Second Mice Have Prospered ©2013 Blue Canyon Partners, Inc. 9 • Incomes have soared, but most of China is still a poor country – Labor is still relatively cheap – Consumer products are sold in volume in the middle market where price is critical • Most Chinese companies know of only one way to compete: “Almost as good as ____ (Motorola, Nike, Ericsson, Apple, Siemens) at a fraction of the price.”
  10. 10. How the Second Mice Succeed In That Market • Manufacturing and sourcing capabilities, including ones learned from western firms • “China economics” – Substituting labor for supplies and equipment – Moving to lower-cost geographies – Redefining relationships with customers around service • Fast learner and fast follower competencies – Copying what works elsewhere – Thinking “outside the stadium” – Moving at “China speed” to be Second – Using close customer relationships to engineer features out • A focus on China’s “middle market” – where the products of western companies are too expensive ©2013 Blue Canyon Partners, Inc. 10 Source: George F. Brown, Jr. and David G. Hartman, Are You Ready to Take on China’s Next Generation Competitors?, Chief Executive, September 2011.
  11. 11. ©2013 Blue Canyon Partners, Inc. 11©2013 Blue Canyon Partners, Inc. 11 Coming to a Market Near You: The “Going Out” Strategy • Before China joined WTO in 2001, most Chinese “exporters” had little idea what happened to their products after they left the factory. • The government began a policy of actively supporting firms to invest abroad. There was even a list of resources and technologies for companies to target. • Through acquisition, Chinese companies are becoming major players on the world stage. Not all will succeed and not all will change the companies they acquire, but some will do both. • Chinese resource and engineering companies are doing projects across the world, moving large volumes of Chinese products with them.
  12. 12. ©2013 Blue Canyon Partners, Inc. 12©2013 Blue Canyon Partners, Inc. 12 What Western Customers of Logistics Services Need to Do to Win Against Chinese Competitors • To sustain global leadership, most western firms will need to win in China’s mid-market: to bring what the Chinese do so well into their own firm’s cultures, most likely through acquisition and a new perspective on integration. • The task of competing with Chinese companies, in China and at home, is monumental, but China is a “must win” for western firms aspiring to sustained global leadership. • While ensuring reliability of supply chains, the western firms must keep the primary focus on cost in order to compete.
  13. 13. ©2013 Blue Canyon Partners, Inc. 13©2013 Blue Canyon Partners, Inc. 13 • Adjusting to the major changes in patterns of growth in China, supporting manufacturing in new geographies and new centers of consumer buying power. • Becoming part of the solution to product reliability and safety challenges. • Supporting western manufacturers in competing on cost against Chinese “Second Mouse” companies, in China’s middle market and increasingly around the world.
  14. 14. ©2013 Blue Canyon Partners, Inc. 14©2013 Blue Canyon Partners, Inc. 14 Contact Information David G. Hartman Please email David if you’d like to be included on the distribution list for future publications on the topic of the changing competitive environment or with any questions that haven’t been answered during this webcast.
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