China Economic Miracle Or Myth Bill Hicks April, 2010


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I recently returned from a trip to Asia with my Emory Goizueta Business School MBA class and have posted a paper that provides insights into China\’s current economic boom. Please feel free to offer an comments on your China trips, experiences and insights. Enjoy!

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China Economic Miracle Or Myth Bill Hicks April, 2010

  1. 1. China: Economic Miracle or Myth? C China’s national flag was adopted in 1949. It has five golden yellow stars in the upper left hand corner. The star on the left is larger than the other four and the red color symbolizes revolution. The large star symbolizes the Communist Party and the smaller stars represent the people of China. Bill Hicks Emory Goizueta Business School International Colloquium: Hong Kong and Shanghai 4/17-25/10
  2. 2. China: Economic Miracle or Myth? China- A Riddle Wrapped in a Paradox The China economy is forecasted to grow at 10% in 2010 compared to the World economies at 4.2% or the U.S. at 3.1%.i Everywhere you go in China there are construction projects; new office buildings, residential apartment buildings, commercial and public infrastructure building. The old is being transformed into the new. Hong Kong and Shanghai visits and in depth presentations and field trips to a variety of company and infrastructure locations gave a great insight into China’s economic renaissance. (Hong Kong and Shanghai are built around river deltas; Hong Kong on the Pearl River and Shanghai on the Yangtze. The populations of Hong Kong and Shanghai are approximately 7 and 14 million respectively. Shanghai is currently estimated to have the largest city population in the world) ii. The 24- 7 boat, ship and barge traffic on both rivers is indicative of and offers a metaphor for the Chinese economy- constantly moving and incredibly diverse. Traffic on both rivers provides a glimpse into China’s amazing growth story and offers a visual indicator that China is a country of the future. The current joke is that the national bird is the crane- the building crane that is. Clearly there is a massive economic boom happening in China where entire new cities are planned and populated in five years. There is an entrepreneurial energy in China being driven by the government’s desire to position itself on the world stage and become known for innovation and global productivity. The most populous country in the world is rapidly transforming itself into a market economy. Perhaps it should be considered an”authoritarian market” planned by the Peoples Republic of China government, but it is clearly an economy on the move with a national purpose. HOK Architects predicted that over the next five years that China commercial real estate projects square footage built would equal that of the entire United States current square footage! My God, how will the U.S. compete with this juggernaught!?iii The country is exploding and according to David Gossetiv over 500 million Chinese have been lifted out of poverty over the last decade. By 2020, “xiaokang” or “moderate prosperity” will characterize a more harmonious Chinese society, which is a national PRC goal to become more integrated with the modern world. In other words, China will be transformed over the next decade into a more mainstream consumer economy driven by the worlds’ largest middle class population and will move from a primarily industrial export driven economy to a more balanced GDP. The Chinese middle class entry into the 21st century consumer market will not only help China’s GDP to maintain potential double digit growth in the future but will also help many of the industrialized world economies grow as well. As of 2008 there are currently 1.3 billion people in China which is the most populated country in the world. 1.3 billion Chinese people are emerging as the dynamic that is driving the Chinese economy and yet China’s per capita income is only $3700 versus the U. S. at $46,400, still a very large gap.v 1.3 billion Chinese people are becoming consumers as they move from a largely agrarian driven economy to an industrial and service economy. The direct result is that the Chinese economy is forecasted to outpace the developed world economies in 2010 by 140% as measured by GDP with a current unemployment rate of And yet China is a communist country where one political party and central planning commands the economy and rules the country. This is the paradox of China. How can a centrally planned economy run by one party Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 2
  3. 3. China: Economic Miracle or Myth? and a massive bureaucracy actually be productive and act like a capitalist system? How can a country with 22 provinces, five autonomous regions, four municipalities and two special administrative regions (Hong Kong and Macau) be considered a major world economic engine? The riddle of China is enigmatic and seems to be something mysterious; an unknown factor or hidden key to China’s rapid growth in the 21st century. What is it? It would seem that the combination of the Chinese government taking a very aggressive and active role in central economic planning and execution combined with pent up demand by Chinese consumers, a largely export driven economy, low interest rates and an undervalued renminbi has helped China boom as the rest of the world slowly recovers from the current recession. Currently China holds approximately 1.2 trillion dollars of U.S. debtvii and has effectively become the lender of last resort as the United States continues to issue new debt and tries to inflate the economy with stimulus. The Chinese economy is booming with major infrastructure projects and U.S. taxpayers are contributing significantly to China’s phenomenal growth. It seems that China is about 30 years behind the U.S. in infrastructure development but the magnitude due to the population is driving significant opportunities for the world’s dynamic companies that have the desire, long term time horizon and capital to invest in the Chinese market. China Themes Risk versus Reward-there are many risks when doing business in China, but rewards and return on investment are potentially high if companies are willing to commit to a long term strategy, build the necessary infrastructure, make significant investments and stay the course. Some of the risks that companies face in China are uncertainty due to arbitrary rules and regulation, a fixed and high renminbi currency valuation, higher costs, accounting, tax and legal requirements, regulations that can be added or changed, government bureaucracy, talent acquisition, lax management practices and human resource challenges. Speed of Change- China is changing and growing so rapidly that it is hard to predict accurate outcomes and forecast growth. This can put substantial stress on companies when planning budgets and forecasting capital allocation. Corporate executives will need to be nimble, flexible and have the ability to make decisions in the absence of complete information and analysis. Relationships- doing business in China is very dependent on building trusted relationships with government officials and business partners over time. To be successful corporate executives need to be very careful about who is responsible for business development in China. This is a critical role and will have a substantial impact on whether a company is successful or not. Although relationship building is critical, particularly in China where most foreign multinational companies are required to have a Joint Venture Chinese counterpart, partner, vendor, distributor and customer relationships are critical to any successful company anywhere in the world. This skill set is particularly important to companies setting up shop in China. Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 3
  4. 4. China: Economic Miracle or Myth? Role of Government- the PRC is responsible for “managing the economy” and plans in detail which sectors it wants to invest in, which ones are protected from outside competition and which are not. Dealing with government officials is a fact of life in China. Successful government relationships can make or break a company and provide substantial advantage in the marketplace. Entire industries can be affected by the governments’ decisions positively effecting future investment or negatively by onerous regulations or new laws. While we were in China, the government had substantially increased regulations on the residential mortgage industry in an effort to cool down home sales and property valuations. GOMES, China’s largest electronic retailer was undergoing significant uncertainty and stress due to the recent arrest and prosecution of the company’s CEO and founder under allegations of stock manipulation and fraud. Also, we learned that the Minka light factory that we visited in Shenzhen was mandated to move the entire factory at their expense, to a new location due to the local government’s decision to create a retail zone at their current location. The government can have a very heavy hand that poses significant risks to operating in China. Patience- this one is hard for most major corporations that are used to managing their business based on a quarterly earnings basis. However, if companies want to be successful in China, they will need to commit to a long term strategy and substantial resource allocation. If a company is just beginning to invest in China they need to treat the strategy like a start up that needs to be nurtured and committed to for the long term. Kentucky Fried Chicken’s success in China has been primarily driven by getting their strategy right, determining the best product to offer for the Chinese palate and strong human capital. This was accomplished over the first ten years in operation which is now driving significant profits for KFC’s parent company, YUM Brands and is the largest and fastest growing restaurant operator in China. China Facts, Figures, Notes and Anecdotes In 2009 China’s became the world’s largest auto producer, out producing the U.S. for the first time. For every 1000 people in China, 30 own a car compared to 700-800 per thousand in the U.S. In 2009 Geely Automotive, a Chinese auto company purchased Volvo from Ford and plans to invest $1b in operating capital and build a 300,000 unit assembly plant in Bejing. China’s retail sales in 2008 were $1.6 trillion. By 2020 China’s urban population is expected to grow from 600 to 800 million people. Coke has invested more than $1.3b since coming to China, mostly in bottler infrastructure (Joint Venture companies and 36 bottling plants, including an $80m headquarters building, R&D Center and Coke University in Shanghai). Between 2009-2012 Coke is expected to invest an additional $2b in China. Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 4
  5. 5. China: Economic Miracle or Myth? Shanghai will see between 450,000 and 500,000 square feet of new retail space added to the market every year until 2012. In 2009, China produced 560 million tons of steel, 40 % of the world’s total. Tesco, based in the UK and the worlds’ third largest retailer is planning to develop more retail and leisure space in China over the next five years than it currently operates in the UK. The retailer is planning to open 80 new shopping malls amounting to 40m square feet of space by 2016 and will invest £2b. City Populations Shanghai- 14m Shenzhen- 10m Hong Kong- 7m Chinese outbound investment 2004- $5b 2007- $27b 2008- $58b Foreign Direct Investment in China 1998- $46b 2008- $93b Exports from foreign companies in China 1998- $81b 2008- $791b Highway miles Start of 1990’s- 400 Start of 2000’s- 40,000 Kentucky Fried Chicken Restaurants 2900 in 450 cities Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 5
  6. 6. China: Economic Miracle or Myth? Conclusion and Wrap-Up The opportunity to spend time in two of the three largest economic zones in China, Hong Kong and Shanghai, listen to multiple and varied speakers deliver informative and enlightening presentations on their perspectives and experience in China was an invaluable learning experience. Of course, when you get back from a trip like this everyone wants to hear about your experiences. I have been talking about China nonstop since our arrival back in Atlanta. As well, the country’s economy has a constant presence in the media and I now read with great interest and new perspective China’s daily news. One question that I was asked by a friend was, “Do you think that China will become a “superpower”? Wikipedia’s definition of a country with superpower status is “a state with a leading position in the international community which has the ability to influence events and its own interests and project power on a worldwide scale to protect those interests.” By that definition, which may be a little outdated, I now view China as very much a “superpower”. Its economic engine, currency strength and government determination to become a formidable global competitor in multiple industries with growing influence around the world, particularly in the U.S., has significant impact on our policies and economy. The question cannot be answered definitively and many will continue to ask whether China is a threat or whether it will help save the world economically. China currently has the third largest economy in the world behind the U.S. and Japan and will very soon surpass Japan. Already known as the “factory of the world” with over 100,000 manufacturing plants, predictions are indicating that by 2020 China will become the world’s largest economy and will out produce the United States. Only time will tell but the one thing that I am certain of is that the next ten years will be an exciting time to be engaged in business and watch economic events unfold in China and around the world. Peter Drucker, the prolific management consultant from Austria said, “One cannot manage change, one can only be ahead of it.” This quote would seem to be a perfect metaphor for the rate of change and velocity of economic growth in China. Edward Tse, in his new book, The China Strategyviii aptly points out that there is no other country like China and that no other country has so many opportunities and challenges. He also concludes that there is no better time to be doing business there. Further that,” the paradoxical truth, is that a China strategy is not a strategy for entering China. It is a strategy for creating a global business, in a way that prepares for something that may be happening for the first time in history: the knitting together of worldwide enterprise into a coherent whole.” China is truly a country with an amazing future; one that like Janus, the Roman God with two faces, looks back to its ancient history and at the same time gazes forward into the future. It will be fascinating to watch! Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 6
  7. 7. China: Economic Miracle or Myth? China Picture Gallery i International Monetary Fund World Economic Report 2010 ii Wikipedia iii Toby Bath- Managing Director-HOK Architects- April 20, 2010 iv David Gosset- Professor China Europe International Business School- April 22, 2010 v IMF 2009 vi IMF World economic Report 2010 vii International Monetary Fund 2009 viii The China Strategy- Edward Tse- Published by Basic Books 2010 Emory Goizueta Business School International Colloquium- Hong Kong and Shanghai- April/17-25/2010 Page 7