China's Challenges (Futures Perspective Series)

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Rapid GDP growth has made China stronger, but also made it vulnerable; environmental degradation, resource pressures, production capacity gluts, real estate spikes and inflation all threaten its future prosperity. The challenge facing the Politburo in the coming decade is to ensure that growth can be sustained.
In turn this means the
imbalances in the economy
need to be addressed.

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China's Challenges (Futures Perspective Series)

  1. 1. Future Perspectives China’s challenges From necessity to opportunity in the next phase of Chinese development 1 China’s challenges
  2. 2. Future Perspectives arethought-pieces with China’sconcise, focused insightsinto important issues challengesof interest to marketingand business strategists.For more information please visit In the 7th century A.D., Wei Zheng, adviser Rapid GDP growth has madewww.thefuturescompany.com China stronger, but also made to the Tang dynasty Emperor Taizong it vulnerable; environmental Concepts such as ‘circular economy’, degradation, resource warned the Emperor about the dangers pressures, production capacity which looks to decouple economic of squandering surpluses. He warned the gluts, real estate spikes and growth from resource use, are now inflation all threaten its future Emperor, “If a tree is to grow tall, it must prosperity. The challenge entrenched in Chinese thinking facing the Politburo in the secure its roots. If a stream is to flow far, it coming decade is to ensure that growth can be sustained. must secure its source.” In turn this means the imbalances in the economy The upside of these These are all problems created need to be addressed. imbalances, however, is by China’s long period of opportunity. There are a growth. But only by addressing The government is sensitive Rapid GDP growth has made to instability. Premier Wen’s number of industries or them can growth be sustained sectors which have potential at anything like the historical China stronger but has also made announcement early last year for growth over the coming levels we have seen. This is that the Chinese government’s decade, through a combination not just about structures, but it vulnerable growth target for the year had of government intervention also about building trust in been reduced from 7.5% to and consumer demand. These institutions. 7% was an explicit recognition will benefit from the Chinese of these imbalances, while This paper sets out to analyze governments attention to concepts such as circular the opportunities that will Chinese politics has a long memory, and economy, which seeks to addressing three significant emerge as China sets out gaps in the way its economy decouple economic growth on this path. It will do this his words still reverberate around the from resource use, have functions. by combining macro driver Great Hall of the People in Beijing. They become entrenched in These are: analysis and The Futures government thinking.2 Company’s Global MONITOR ■ quality control were quoted by Minister Zhou Shengxian 2011 China data. ■ sustainability, and in a recent article about environmental ■ logistics. protection.1 © 2012 The Futures Company. Some rights reserved. 2 © 2011 The Futures Company. All rights reserved. 3 China’s challenges
  3. 3. 1. Quality controlJust over two years ago, the The safety scandals have scandal swept China in 2, 3 and 6, and on six provincial These are investments that will positions. Such standardsChinese government launched led to gains for foreign early 2011, Yurun Food, one channels across China.5 pay for themselves, at least for can be promoted as a corea television advertisement manufacturers, which of China’s largest meat the companies which succeed. benefit to consumers.which was seen around the benefit from well-established manufacturers, invited 100 During the coming decade, theworld. The ad, called ‘Made reputations, at the expense consumers from Nanjing stage is set for an escalating marketing war. Many Chinese Quality control: ■ Margins: the primacy of safety and quality make thein China’, drew attention to of domestic producers. Many to visit its food productionthe high quality goods made use the safety message to plants and report back on brands are attempting to implications Chinese market ideal forby Chinese manufacturers, Chinese consumers as a core the standards it enforces. extend their product ranges ■ Transparency: radical extending brands upwards,including mp3 players, sports marketing platform. Amway, Each was given a copy of upwards to compete with transparency will be with smaller format sizes atshoes, and jet engines. for example, deliberately Yurun’s 400-page manual, multinationals, and Chinese a highly persuasive higher price points. sells its cleaning products in covering every check built consumers are willing to marketing tool. If a into the production process. pay for reassurance, so company has nothing to Yurun officials taught the perceptions of quality and hide, it shouldn’t hide it. safety will be vital. Western businesses are using the visitors about pig certification, Give consumers a window slaughtering hygiene, In order to reinforce looking onto the farm, safety message as a core marketing liquid chromatography, confidence in Chinese the production line, or platform microbial sampling and hand products, domestic brands the supply chain. When it disinfection4. The company’s will have to invest heavily in comes to product safety, forensic attention to detail independent certification, there’s no such thing as too received positive write-ups scientific analysis, quality much detail. in the press and online, and control and public relations.By the time it was screened, ■ Training: during the smaller volume at a premium reinforced the company’s Transparency will be highlydelayed by repeated next five year there will price in China to emphasize reputation for quality. influential. Foreign brands,manufacturing scandals, it be rapid growth of the quality; it also takes generous meanwhile, can sustain anappeared as if the government Similarly, in 2009, the Chinese market for training to meet margins by reducing the unit advantage over local rivalswas on the defensive.3 Each company American Dairy the hygiene and safety size. L’Oréal uses its own brand by emphasizing reputation,scandal had led to a sharp (ADY) grew rapidly following standards introduced in name for hair care products in resisting price pressure, anddrop in exports, and as a result the melamine milk crisis, 2009. China is likely to China, rather than the Elsève – potentially – by workingthe government introduced because it had emerged from import knowledge. tag that’s used elsewhere, to together to develop, define,in 2009 the death penalty for it with an unimpeachable emphasize reputation. and promote independent ■ Certification: althoughfood safety violators, passed record for quality. The quality standards. government certificationa sweeping new food safety Some domestic brands, company had highlighted this is important, there is alsolaw and inaugurated a risk however, have responded with an aggressive advertising scope to go beyond thisevaluation system capable well to the consumer need campaign in early 2009, by creating independentof monitoring 500,000 for reassurance. For example, running on Chinese Central quality standards, tocompanies. after the clenbuterol pork Television (CCTV) channels 1, improve competitive© 2012 The Futures Company. Some rights reserved. 4 5 China’s challenges
  4. 4. Making the most of quality control 2. Logistics safe farming methods. "The process of growing More than 30 of the up has no shortcuts." On farms that the company the campaign’s microsite, works with in China have a wooden door opens now reached EU quality slowly to show how http://www.tetrapak.com/about_ standards, strengthening McDonalds chickens are The Chinese government 176 million people in 2009 to The Singles Day problems tetra_pak/press_room/news/Pages/ has, for a long time, taken a 370 million in 2010, becoming were a chastening reminder ProductDevelopmentCentre.aspx the relationship the treated.8 The microsite particular interest in improving China’s largest online retailer. of the weaknesses of China’s company has with these also features videos of infrastructure. It is aware But late in 2010, the company transport and logistics TETRA PAK: customers.7 young reporters traveling that an inefficient logistics was taught a hard lesson about infrastructure. Jack Ma, the In 2008, the Chinese to McDonalds’ farms to sector will be a bottleneck its logistical limitations. Chairman and CEO of Taobao’s dairy industry was in report on the conditions that constrains development. parent company, Alibaba In November of that year, they find there, and even The eleventh five year plan Group, has since announced a crisis after the melamine Taobao Mall ran its inaugural (2006-10) prioritized transport plan to spend US$4.6 billion to milk scandal. Consumers eating the feed used to ‘Singles Day’ promotion, infrastructure, with provision build a network of warehouses were migrating to foreign rear the chickens. offering 50% discounts to for new roads and railways, across China, with the ultimate unmarried adults, causing brands in the belief airport expansion, and almost aim of delivering products to a surge of activity on the that they were safer. US $2 billion to dredge the anywhere in the country within site during which 21 million mouth of the Yangtze River eight hours. Although Tetra Pak was shoppers spent US$147 for shipping.9 But growth has not responsible for the million.12 Retailers hosted by Similarly, 360buy.com, not been complemented by scandal, declining sales Taobao Mall were surprised a consumer electronics improved efficiency.10 And so http://www.myrelaxplace. by their own sales figures and specialist, plans to spend of Chinese milk brands com/2007/07/29/lawyer-sued- - as well as making logistics a mcdonald-for-not-displaying-chinese- found themselves unable to US$1.2 billion on improving meant that sales suffered. on-receipts/ priority of the twelfth five year service orders in time, because its in-house operations over Actual growth for Tetra plan - the government is now of a lack of staff in their the next five years. More than Pak was 5% in China in McDONALDS: drafting a long-term plan for warehouses and couriers on two-thirds of the US$500 infrastructure investment to 2008, against a projected At the start of 2011, the road. million development finance 2020.11 figure of 16%.6 recently raised from investors McDonalds released an Nevertheless the costs of will be allocated to logistics Recognizing that many advertising campaign logistics remain high. Local development.12 Alibaba and Chinese dairy farmers highlighting the protectionism, industry lacked the expertise or conditions at its chicken fragmentation and rising oil technology to meet strict farms in China. Making prices have contributed to this, Rising disposable income in further exacerbated by the quality control directives, a play on the Chinese scale and complexity of the lower tier cities means that the term for Wikileaks, Tetra Pak now offers Chinese market. One of the commercial opportunities inland training for Chinese the ‘Chickileaks’ TV sectors that loses most from farmers, and produces campaign features a this constraint is e-commerce. are becoming sizable voiceover with the words, Taobao.com, for example, saw DVDs and books about its user base increase from© 2012 The Futures Company. Some rights reserved. 6 7 China’s challenges
  5. 5. Making the most of Logistics http://www.wal-martchina.com/ english/index.htm http://www.liqungroup.com/intro2. html360buy aren’t just spendingto protect themselves. They’ve Second, it means that foreign companies may increasingly Logistics: ■ Sustainability: Sustainability needs to be WAL-MART: LIQUN GROUP:learnt the hard way that find themselves in competition implications built in to all logistics plans, In May 2011, Wal-Mart Liqun Group is athere’s a massive opportunity with local rivals for distribution because environmental announced that it had conglomerate in ■ Think locally: even asin logistics in China, and the resources. Foreign companies protection is at the heart purchased a minority Shandong province that cross-country networkscountry’s infrastructural gaps could find themselves at a of the twelfth five year improve, distribution stake in Chinese controls 800 conveniencehave presented substantial disadvantage in new markets plan and green taxes were from a small number of e-commerce company stores, more than 60scope for diversification. within China if they fail introduced at the beginning warehouses on the east Yihaodian. Yihaodian chain drugstores, 34 to match the distribution of 2011.How does the growth coast will be insufficient. has its own logistics investment of local rivals. office buildings, 9 luxuryof logistics investment Companies looking to operations in Shanghai, hotels, and over 100affect foreign retailers and Third, it promises to put a capture lower-tier marketsmanufacturers? First, it rocket under the Chinese must invest in local Beijing and Guangzhou, subsidiaries and branchopens up opportunities for e-commerce market. infrastructure, through offering overnight companies. Since 2001,them in lower tier cities. According to The Futures acquisition or partnerships. delivery services to the company has beenThe received wisdom is that Company’s Global MONITOR customers in these three moving towards building ■ E-commerce: ambitiousforeign companies should (GM) 2011 data, currently only companies such as Alibaba cities. This purchase up its own logisticsstart on the east coast, and 21% of Chinese consumersspread to the provincial cities shop online once a week or Group are driving down confirmed Wal-Mart’s operations. It now delivery times, and driving intention to build up its has a large network ofafter they have consolidated more, but we expect this up consumer expectations.there. In the past, this has to grow strongly. Improved multi-channel operations warehouses, distribution The convenience andbeen sensible, precisely distribution will create abecause poor distribution more democratic consumer reliability offered by “Within ten in China, and may be centers and refrigerated improved logistics will be a followed by further trucks. John Zhang,has meant that brands can economy in which people will years, anyone acquisitions.15be well-known in one part of remain limited by price but boon to e-commerce. General Manager ofthe country, but unknown to need not be limited by access. ■ Pragmatism: there is placing an order Liquid Logistics Division,consumers elsewhere.14 But The next eight years will scope for marriages of online anywhere Liqun says that althoughrising disposable income in convenience in the logistics third party logisticslower tier cities means that see furious activity in the sector. Both foreign in China will logistics sector, supported providers have improvedthe opportunities inland are by government policy, during retailers and third-party receive their their service since 2001,becoming sizable. For example, logistics companies shouldfor Taobao, second and third which a small number of look to invest in local rivals goods in eight he still favors in-house forward-thinking companies logistics because ittier cities make up eight out will build a platform for their in exchange for access to hours”of the top ten fastest growing distribution networks. allows for tailor-made long-term future.cities, in terms of sales. solutions.16© 2012 The Futures Company. Some rights reserved. 8 9 China’s challenges
  6. 6. 3. Sustainability and environment"In Chinas thousands of China’s environmental for a 5 trillion RMB (US$760 the influence of strong centralyears of civilization, the record gets a bad press, but billion) investment in new planning, the government (andconflict between humanity the government is taking energy to help to reduce China moved ahead of the US in to a lesser extent business) isand nature has never been aggressive steps to improve its carbon intensity by 17% 2010 to top Ernst and Young’s index seen as having responsibilityas serious as it is today. The key environmental indicators to 2015. It has also set an for both the sickness anddepletion, deterioration and through binding targets18. In ambitious target of reducing of the most attractive countries for the cure. This may change,exhaustion of resources particular, China now leads water intensity by 30% to renewable energy projects. but only slowly, as China’sand the deterioration of the world in clean energy 2015.19 environmental policy movesthe environment have technologies. In 2010, China’s on from shuttering coal The government is bettingbecome serious bottlenecks total clean energy investment plants to influencing everyday that improving efficiency will and high-end equipment the way energy and resourcesconstraining economic and was more than one fifth of the behaviors. be as important as restraining manufacturing. The growth of are used in supply chains,social development.” 17 world’s total of US$243 billion. growth, and that two-fifths of these industries will be a boon factories, offices and Finally, sustainability and the energy savings targeted to component manufacturers, apartment blocks. This will environmental protection during the 12th five year plan energy service companies, lead to heightened awareness have an emotive link to health. can come from technological The Global MONITOR data Foreign business need to assume changes alone. If it succeeds, solar cell manufacturers and a of environmental impact. reveals that 77% of Chinese host of other B2B suppliers. Even now, according to The that their sustainability standards in the bet will also create Futures Company’s Global consumers say that concern sustained advantage for China What do these targets about their own and their the Chinese market are as high as across a range of sustainability mean for consumer goods MONITOR 2011 survey, 78% family’s health motivates them of Chinese people agree with in their home markets sector industries, including companies? the statement: “I expect the ‘a great deal’ to live a more renewable energy, smart grid, There’s an immediate impact companies whose products environmentally conscious I.T. efficiency, and LED lighting, on operations. Foreign I buy to take steps to avoid lifestyle. Air pollution remains in which China already leads businesses will have to damaging the environment.” a particular hazard: 53% the world. assume that the sustainability We expect this figure to rise. of Chinese people describeThese are the words of China’s This level of investment is not standards they need to plan air pollution as ‘one of In addition, seven key Crucially, however, mostMinister for Environmental sentimental. The government for in their Chinese operations their greatest concerns for ‘strategic emerging industries’ Chinese consumers do notProtection, Zhou Shengxian, sees the environment as part are as high – or higher – than the future.’20 If consumer are to be given favorable believe that, as individuals,published on his Ministry’s of a system, with inevitable those in their home markets. goods companies can forge treatment by the government, they are responsible forwebsite in February 2011. influence on manufacturing, a link between their own with tax cuts and subsidies. Second, these ambitious environmental protection.These words were unusual for agriculture, social stability environmental protection These are energy efficiency, targets will inevitably lead Only 34% (versus a GM 21their explicit reference to the and defense. The concept of programs and improved health alternative energy vehicles, to raised expectations of country average of 59%)economic limitations imposed ‘circular economy’, referenced outcomes for their customers, next generation information responsibility. China is agree that individuals areby environmental degradation. earlier, reflects this. During the they will benefit. technology, biotechnology, attempting a bold retrofit of most responsible for tackling next ten years, the Chinese new energy, new materials, the economy, transforming climate change. Because of government has budgeted© 2012 The Futures Company. Some rights reserved. 10 11 China’s challenges
  7. 7. Sustainability: Making the most of Sustainability Conclusion:implications■ Surrogacy: Because most Chinese consumers do not see environmental protection as within their control, they will respond well to brands that take on the burden for them and http://inhabitat.com/coke-and-world- http://www.haier.com/cn/ There is, clearly, much more wildlife-fund-turn-classic-red-soda- make commitments to cans-white-in-honor-of-endangered- that could be said about polar-bears// opportunities in the Chinese offset the impact of using economy to 2020. This paper The Government’s decision to their products. COCA COLA HAIER: COMPANY CHINA: has focused on the three prioritize these three areas is a■ Health: air pollution is In January 2011, the structural and institutional the hated consequence factors which we believe recognition that they are barriers Recognizing that water building management of suburban industrial security is a pillar of its company Honeywell will have the most impact, to growth development. Brands and therefore offer the most which can contribute to future survival, Coca Cola signed a memorandum opportunity. Quality control, alleviating this problem China has entered into of understanding with logistics, and sustainability (automobile, white goods, a partnership with the Haier, the Chinese white are all areas where the scale The Futures Company will new energy) should make of the challenge is larger. They WWF to improve water goods manufacturer, to be tracking attitudes and their efforts explicit. are all problems created by the quality in the western work together to develop behaviors related to these■ Supporting industries: sustained growth over the last areas through our annual stretches of the Yangtze energy efficient solutions although the US three decades of disposable Global MONITOR survey, and River. Amongst the to everything from income, manufacturing, government has been the other analysis and insight complaining that the partnership’s projects household appliances to e-commerce, and heavy in the MONITOR program. The market for components in are schemes that involve home construction. The industry, and the government’s body of data that we collect hardware such as turbines, working with farmers to deal, signed in Chicago decision to prioritize them is offers a way to track these photovoltaic cells and recognition that they are all attitudes and behaviors over prevent pig waste running during the 2011 US-China smart meters is being barriers to continuing growth. time. into fresh water, and Trade and Economic informally protected by China’s central planning helping Chinese farmers Cooperation Forum, gives Currently, our data shows that the Chinese government, model means that these to harvest sugar cane Honeywell a footing in the 51% of Chinese respondents the US is likely to benefit industries will receive support agree that they ‘like to enjoy from the growth of a host while using less water. Chinese market for energy through a combination of life and don’t worry about the of supporting sectors, efficiency, while offering favorable legislation, taxation future’ The challenge for the . including clean coal, water Haier the opportunity to and investment. It is harder, government is to ensure that treatment and energy however, to identify how the improve the efficiency of China’s people can maintain service companies. growth of industries such as its own products. this confidence over the next logistics and renewable energy five year plan and beyond. will affect broader consumer Unlike Western governments, attitudes and behaviors. however, it has already shown Over the period of the twelfth a huge capacity to plan, and five year plan, and beyond, act, for the long-term.© 2012 The Futures Company. Some rights reserved. 12 13 China’s challenges
  8. 8. Endnotes:1. http://www.gov.cn/gzdt/2011-02/28/con- with just 4% in Nanjing and 9% in Guangzhou. About The Futures Companytent_1812533.htm. Wei’s proverbial stream, for ‘The power of word of mouth in China’, Harvardexample, makes for an appropriate metaphor; Business Review, May 2010.more than half of China’s 660 cities suffer fromwater shortages. In the industrial city of Tianjin, 15. After the Walton family invested in a $1 billion The Futures Company is the leading global foresight venture capital fund to build up Chinese online and futures consultancy. We are a team of consultants,residents have access to one tenth of the globalaverage per capita water supply. retailer 360buy’s logistics operations, 360buy Chairman and CEO Richard Liu expressed an2. China and a Sustainable Future: Towards aLow Carbon Economy and Society. China Human interest in working with Wal-Mart on logistics operations in the future. researchers and futures experts who apply a foresight andDevelopment Report 2009/10. United NationsDevelopment Program, Beijing. 16. ‘Taking control,’ Supply Chain Times, 14th July 2011. futures approach to unlock new sources of growth for our clients. We offer a range of subscription services and research3. Including several recalls of lead-coated toys,exported to the US in 2007, the notorious 17. http://www.gov.cn/gzdt/2011-02/28/con-melamine milk scandal of 2008, and an incidence tent_1812533.htmof dumplings contaminated with insecticide thatmade 10 people ill in Japan in 2008. 18. In this context, ‘binding targets’ means targets and consulting solutions. We have teams in the UK, US, which the government use criteria for the promo-4. http://post.news.tom.com/DB001D44519.html tion of provincial officials. Mexico, Brazil and Argentina and partnerships in China, India 19. Carbon intensity is carbon emission per unit5. Seeking Alpha, ‘American Dairy: Finally Some-thing Positive about Chinese Baby Milk’, 22nd of GDP. Water intensity is water consumed per unit of value-added industrial output. and Poland. We are a Kantar company within WPP.January 2009. 20. Economist Intelligence Unit, “A better life? The6. University of Exeter Business School, Morgan wants and worries of China’s consumers”, 2010.Witzel, ‘A case of collaboration and sharing’, 25thAugust 2011.7. Ibid. China’s Challenges was written by Tom Richardson.8. ‘McDonald’s Exposes ‘Chickileaks’ in China’, Design was by Augustus Newsam. Tom Richardson is a former Futures CompanyJerry Clode, AdAge Global, 31st March 2011. analyst who now works for Ogilvy in Shanghai.9 ‘China’s Key Transport Infrastructure Projectsfor 2006-10’, www.gov.cn, 6th March 2006.10. The ratio of total logistics cost to GDP onlydecreased by 0.5 percentage points between2006 and 2010, from 18.3 per cent to 17.8 percent. The USA, by comparison, had a ratio of 7.7% Will Galgey, Global CEOin 2010. ‘China Logistics Industry Update 2011’, Li& Fung Research Centre, May 2011. T: +44 (0)20 7955 1818 will.galgey@thefuturescompany.com11. http://big5.xinhuanet.com/gate/big5/www.cs.com.cn/ssgs/16/201107/t20110729_2986119.html www.thefuturescompany.com12. ‘Discount craze tests Taobao’s online mall’, www. twitter.com/futurescoCaixin Online, 30th November 2010. www.facebook.com/futuresco13. ‘Walmart invests in 360buy.com’, Supply ChainTimes, 12th January 2011. http://www.linkedin.com/company/the-futures-company14. According to McKinsey & Co., for example,97% of consumers in Chengdu and 87% in Hefeihave heard of the beer brand ‘SNOW’, compared© 2012 The Futures Company. Some rights reserved. 14 15 China’s challenges

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