All roads lead to China

  • Business
  • Saturday, 05 Dec 2009

China, with its rapid economic development and a growing middle-income segment, stands to become the biggest consumer in the world. Multinational companies strive to gain a share of the China market.

CHINA is the world’s most populous country (1.3 billion people) and has the biggest foreign exchange reserves (US$2.3 trillion). On those two counts alone, it has sufficient heft to sway the global economy. It already replaced Germany last year as the third largest economy, and is set to take Japan’s No. 2 spot soon.

But the China story is as much about appetite, attitude and strategy, as it is about sheer size.

This mighty combination is reshaping how the rest of the world conducts business. In dealing with the Chinese authorities, businesses and consumers, we have to make adjustments, and it will continue to be that way for a while, with the Asian juggernaut yet to show signs of fatigue.

When China kick-started its economic ascent with the introduction of a market-oriented reform programme in the tail-end of the 1970s, it quickly became clear that the country could be turned into a low-cost manufacturing base, and that it had the makings of a rich market for goods and services.

Lured by visions of a billion consumers and of factories churning out cheap goods, businesses from all over the world began to flock to China. At the same time, the Chinese government worked hard to persuade investors to come.

Recalls LBS Bina Group Bhd managing director Datuk Lim Hock San, “Some 20 years ago, China rolled out the red carpet to attract foreign investments and that paved the way for the country to become a leading exporter to the rest of the world.”

Spotting the potential of China is not difficult; converting the promise into reality often is. The early days of China’s embrace of capitalism was littered with the wreckage of commercial flops, largely the result of careless optimism, culture clash and steep learning curves.

Beijing Jeep, a 1989 book about the stormy experience of a Sino-American venture to make Jeeps for the Chinese market, is widely regarded as a must-read for anybody seriously thinking about going into China.

The lessons within the pages are still important, but much has changed since the 1990s. For one thing, operating in China has become more orderly and predictable, particularly when it comes to legal matters.

Says an executive director of a listed company that branched out to China in 2003: “Although still a long way from the situation in the United States and Europe, the application of the law in China is more transparent and consistent these days.

And through their dealings with foreigners, the Chinese have better understood the importance of the sanctity of contracts.”

An all-consuming agenda

These are fundamental matters to most people, but it has to be remembered that before the reforms, China had spent decades under central planning. After enjoying close to 30 years of economic success, the country and its people, particularly in the larger cities, now know more about doing business with the outside world.

Developments in this decade clearly indicate that the economic centre of the planet has shifted towards Beijing. China is now regarded as the workshop of the world – although it is not a label the country wears proudly – and any business that considers itself a global player has to be in China.

The republic’s importance is reflected by the fact that its government’s policies and actions are closely watched, as are the manoeuvres of China’s largest corporations.

Green Packet Bhd chief executive officer Puan Chan Cheong, who first invested in China more than 16 years ago, points out that the economic policies of the Chinese government have a strong influence on the world financial markets.

Foreign companies have long identified the huge population as a fantastic customer base, but in recent times, the appeal has gone up significantly. Buoyed by widening prosperity and government stimulus, consumption is on the rise. Domestic tourism, for example, has more than doubled between 2002 and 2007.

That is comforting for any company looking to expand its market. “Though the United States is still the world’s largest consumer, the world now has China as a viable alternative,” says Top Glove Corp Bhd chairman Tan Sri Lim Wee-Chai.

“China’s rise has brought about a more informed and empowered population. As their consumption power continues to rise, various opportunities are created for businesses around the world to sell to these consumers.”

In Top Glove’s case, China’s growing influence complements the manufacturer’s target of capturing 30% of the global market for gloves.

Adds Puan of Green Packet: “China, with its rapid economic development and a growing middle-income segment, stands to become the biggest consumer in the world. Multinational companies strive to gain a share of the China market.”

Although it already benefits a lot from China’s thirst for commodities, Sime Darby Bhd sees additional opportunities for its consumer-based core businesses. “As China shifts into consumption, we are well-positioned. We have the BMW business and we want to have a property presence there,” says a spokesman.

Manufacturing growth

China’s large population is also a deep pool of labour, a critical element that has allowed the country to become the world’s sweet spot for the production of goods.

Countries that were previously favoured manufacturing locations saw the relocation of their plants to China, which offered a more attractive cost structure, primarily because of the lower wages, cheaper land cost and better tax breaks.

For many factory operators, the choice before them is to move to China or suffer a cost disadvantage.

As a rubber glove manufacturer, Top Glove does not have the option of having its rubber glove plants in China because latex, its chief raw material, has to be sourced close to home. Nevertheless, it has two plants in China that make non-latex gloves.

Says Lim, its chairman: “We have ventured and expanded into China to tap into their huge consumer base and labour force. In addition, we have been able to establish strong marketing channels in China.”

Those who chose not to relocate have to find ways to overcome their cost handicap. “You can’t compete with a China-based manufacture on pricing. You have to find a competitive niche, perhaps in quality and technology, for example,” says a senior executive of a plantation company with downstream operations in China.

John Master International Bhd (JMI), which recently disposed of its garment business, chose to outsource its manufacturing, and focused instead on brand-building and design.

Says executive director Jackson Ho: “We exited from manufacturing because we could not compete. It became more cost-effective to purchase our products from China rather than to manufacture them ourselves. It was inevitable. Our costs had kept going up.”

He adds that the switch had worked well for JMI, but because the business was highly competitive, the management had opted to sell the business and make a capital repayment. Interestingly, a Chinese textile player is set to undertake a reverse takeover of JMI.

Many others have also taken the outsourcing route, which has helped transform China into a manufacturing powerhouse.

But the sector’s explosion has also led the perception that the Chinese producers are less focused on quality and are likely to cut corners. Scandals such as the use of melamine in dairy products and the recall of products have not helped.

Says Lim of Top Glove: “Lower-cost China products (not necessarily accompanied by good quality) have been flooding the global market. This has made going forward difficult for many businesses that cannot compete on cost alone due to the nature of their products.

“However, this will ease as China continues to grow and its standard of living rises.”

Cornering commodities?

China’s manufacturing spurt is often identified as a leading factor behind the commodity boom that ended with the global financial crisis. During the run in which prices climbed continuously for more than six year; mines, oil wells, plantations and farms around the world were worked feverishly to feed China’s appetite for raw materials and energy.

Sime Darby was among those that fared well in that period. For the year ended June 2008, the conglomerate posted a record profit of RM3.5bil.

The fact that its plantation division was a beneficiary of the commodity craze, is obvious. But Sime Darby also gained because it sold heavy machinery to mines in Australia and won fabrication contracts for the oil and gas industry.

Says the spokesman: “Sime Darby is essentially a commodity play and a China play. China definitely features prominently in our strategy.”

Such is China’s demand for raw materials that it has transformed the way commodities are traded, says Dorab Mistry, the London-based director of Godrej International Ltd.

“The China-based commodity exchanges do huge turnovers and exercise a massive influence on world prices. They also enjoy a time zone advantage because they start and finish first, and so set the tone for the day.

“Secondly, Chinese enterprises tend to be big and buy in large volumes each time. They also tend to come into the market at the same time. It is almost as if a massive wave is coming at you. Knowledge of China-driven activity is critical in the commodity markets.”

This apparently limitless demand for commodities has led to another trend – the acquisition of foreign assets and alliances with resource-rich countries to ensure security of supply to China. In recent years, many state-owned China companies have gone on buying sprees, particularly for equity in mining and oil companies.

On occasions, China has been accused of playing hardball in its efforts to secure its position in the commodity markets. One example is the prolonged iron ore price talks between Chinese steelmakers and the top three iron ore suppliers.

Then, there was China’s allegation that Australian mining giant Rio Tinto had committed industrial espionage against China for six years. Also, human rights and environmental activists have been critical of China’s expansion in Africa, saying it tacitly supports the transgressions in those African nations.

Beijing has mostly shrugged off these brickbats, and the Chinese economy continues to hum.

It is a mistake, of course, to think that China is contented being the world’s factory floor, and that it is happy just selling to its own people.

In fact, many of the largest Chinese corporations view the whole world as their playground, and believe that they can strongly compete with the established Western, Japanese and Korean players. The China businesses do have a distinct edge – a home market that helps them reach critical mass.

Green Packet’s Puan is convinced that there will be international made-in-China successes.

He says Chinese superbrands will generate sales that will eventually propel them past their US counterparts, even in high-technology businesses. He cites ZTE Corp and Huawei Corp, which Green Packet works with.

If he is right, he has chosen his partners well, and has read correctly the influence of China on global business. If he is wrong, he will not be the only one. Whatever it is, no businessman can afford to ignore how China is changing the face of the world.

Related Stories: China’s rise as a world power Chinese companies invested US$56bil overseas in 2008

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