McKiny director Gordon Orr goes behind the trends shaping the world’s cond-largest economy to explain what companies must do to operate effectively.China, a $10 trillion economy growing at 7 percent annually, is a never-before-en force reshaping our global economy. Over the past 30 years, the Chine government has at times opened the door wide for foreign companies to participate in its domestic economic growth. At other times, it has kept the door firmly clod. While some global leaders, such as automotive original-equipment manufacturers, have turned China into their single largest source of profits, others, especially in the rvice ctors, have been challenged to capture a meaningful share of revenue or profits.公交司机
This article summarizes some of the trends shaping the next pha of China’s economic growth, which industries might benefit the most, and what could potentially go wrong. It also lays out what I believe it takes to build a successful, large-scale, and profitable business in China today as a foreign company.
Trends shaping growth and creating new opportunities in China As the contribution of net exports and real estate to economic growth diminishes, the focus on infrastructure and domestic consumption—as traditional and new sources of growth for the economy, respectively—ris. Whether or not the current growth of the Chine economy is sustainable depends on the evolution of veral trends.
Government policy continues to be the critical shaping force. As the ministimulus delivered in the cond quarter of 2014 demonstrates, the government still posss levers to push GDP growth rates up and down quite rapidly. In other ongoing government initiatives, the “marketization” of prices for electricity, water, land, and capital is having a major impact on the behavior of business, leading to a new focus on productivity, even within state-owned enterpris. Progress in bringing more private capital into state-owned enterpris is slow at the national level, with few scale
黑白动漫图片A pocket guide to doing business in China Gordon Orr
O C T O B E R 2014
examples, such as the $30 billion partial privatization of Sinopec’s gas stations under way. At the city level, much more momentum is building, with local governments lling out of noncore activities such as hotels and many manufacturing business. The anticorruption campaign continues aggressively throughout state-owned enterpris, and government has itlf become a material brake on growth. Officials and executives are simply unwilling to make decisions that could possibly be held against them later. President Xi has pursued anticorruption as a theme for more than a decade; he is not going to back off.黑白天鹅
The Chine middle class—the people who are buying new homes, who today are buying 18 million cars a year (delivering a third of the global auto industry’s profits), and who are starting to spend more on rvices—are critical. Only if they remain confident in their personal economic future will they continue to increa their spending and become a larger driver of economic growth. By 2022, more than 50 percent of urban houholds should be in the middle class (in current US dollars, that means an annual houhold income of $20,000 to $40,000), an increa of more than 100 million houholds over the coming decade.
China is now more than 50 percent urban, but 10 million to 15 million people a year will still be moving to cities from the countryside. Rural migrants already in the cities need to be better integrated. City governments need to make their cities more livable, more efficient, and better able to integrate their migrants. “Smart cities” is a clichéd term, but China’s cities need everything from more efficient mass transit to better water usage. Investment to deliver this will be massive, indicating how the construction of China’s infrastructure is not yet complete.
Many business are coming under a new level of cost and margin pressure. Margins of industrial state-owned enterpris have fallen by a third over the past four years. Often the industries they compete in, from steel production to telecom-network equipment, are simply growing much more slo
wly. By the standards of China over the past 30 years, state-owned enterpris have become mature industries. This leads to three outcomes: initiatives on productivity, diversification, and globalization. The latter two are more often conducted on the basis that prior success in one industry in China will automatically lead to success in the next industry and country.燃放烟花爆竹温馨提示
Multinationals lling to Chine consumers often continue to perform extremely well, using their skills in consumer insights, branding, and pricing to differentiate from local companies that, while large, are still developing world-class functional capabilities. Multinationals lling to government, at the other end of the spectrum, find market access much more challenging.
China is home to some of the world’s largest, most successful, and innovative Internet-bad companies. The pace at which Chine consumers are embracing the Internet is at the cusp of causing major disruptions to many ctors in China. Perhaps becau consumers are still new to our traditional ways of shopping or banking (only having had modern shopping malls for a decade in many cities), consumers are very willing to switch to buying online. When the experience of going into a Chine bank branch is so poor, it’s not surprising that consumers would rather transact online.
Almost no consumer-facing business in China can succeed without an online and offline strategy today. Mall owners are struggling to find a new economic model. Retailers are trying to bring order to their nationwide distribution chains to exert control over the price at which their products are sold online. Online wealth-management products have been able to gather $100 billion dollars in less than 100 days, forcing traditional banks to increa rates on much of their deposit ba. The impact on employment is just starting to appear, but many millions of sought-after white-collar jobs will be eliminated in the next few years.
幸运草花语The risks
This growth is not risk free. Perhaps most critically, Chine consumers remain relatively unsophisticated. A loss of confidence as a result of a default in a wealth-management product, or a decline in housing prices in a specific city, could easily become a nationwide contagion creating a vicious cycle of consumers who withdraw from spending, thereby worning market conditions. One has to be over 40 to remember a recession in China.
Other risks to growth include geopolitics, especially China’s relationship with Japan, where the government’s credibility depends on being en to do the right thing by the Internet class. A final a
nd rising risk is the underemployment of graduates. Of the ven million graduates each year, maybe only three million find jobs that require a degree. The remainder discovers that their aspiration of joining the middle class and owning a home and a car is possibly out of reach permanently. They are a large, dissatisfied, and growing gment of society.
Industries with potential for faster growth in the next decade
Many of the industries with the highest growth potential in China over the next decade are in the rvices ctor, but not all. For example, energy and agriculture will have gments with very rapid growth. Below is a very brief snapshot of where we e opportunities.
E-tailing. The online share of retail in China, at 8 percent in 2014, is higher than it is in the United States and is not clo to reaching saturation. Increasingly, this is conducted through mobile devices. The payments system is in place, logistics are improving, and online providers are
trusted. Many retailers will adapt, often with far fewer physical locations. Malls will have to become destinations for rvices beyond retail.
Logistics. Modernization of supply chains is a key enabler of increasing productivity in many ctors i
n China today. Until recently, most goods were carried by individual truck owner–operators. As express parcels become a $100 billion industry on the back of e-tailing,
e-commerce companies themlves are investing billions in modern warehous and trucks. Alibaba alone is committed to spending billions of dollars on its own logistics. Third-party carriers such as SF Express are rapidly becoming regional leaders on the back of growth in China. Even in agriculture, massive investment is under way in cold storage and cold carriage to reduce waste and provide higher-quality food products to China’s middle class.
Education. Nearly two-thirds of registered kindergartens in China are privately owned. Private universities are expanding. Traditional and online vocational learning schools are publicly listed multibillion-dollar business. Niche business, such as preparing children to apply to US, UK, and Australian high schools and universities, are also flourishing. The amount the Chine are willing to spend on tutoring and support for their children is almost unlimited. As the middle class becomes wealthier, the incread ability to spend will drive market growth.
Healthcare. More than 1,500 new private hospitals opened in China in 2013, a number of which are 100 percent foreign owned. The shortcomings of the mainstream public healthcare system in China
匈奴未灭无以家为are not likely to be overcome quickly. Patients are looking for solutions where both cost and quality are more certain, and private and foreign companies are being encouraged to deliver. There is a related boom in supplying equipment to the new facilities.
Tourism. Available hotel rooms in China have tripled over the last decade. Four million mainland Chine visited South Korea in 2013; four million visited Thailand. China’s middle class expects to take three to four weeks of vacation each year and no longer accepts visiting the overcrowded, overexploited traditional domestic destinations. Disneyland’s opening in Shanghai in 2015 could trigger a new wave of investment to create higher-caliber resorts.
Wealth management. China reprents more than 50 percent of Asia ex-Japan growth, with high-net-worth asts expected to reach $16 trillion by 2016. The more than one million high-net-worth individuals in China remain generally unsophisticated as investors, eking advice on how to broaden their investment portfolio both onshore and offshore.
Entertainment. China is the cond-largest movie box office market in the world, despite the fact that tickets cost upward of $10 and DVDs are still available for $1. In 2013, more than 1,000 new theaters opened, yet admissions per capita are less than one-fifth of South Korea’s.
IT Services. Finding the chief information officer in a Chine company is often hard, especially in a state-owned enterpri. Historically regarded as simply a support role for the business, CIOs were pushed three to four levels down in the organization and attracted little talent (which instead went to Internet start-ups). A typical Chine company spends only 2 percent of revenue on IT versus international benchmarks of around 4 percent. As the companies struggle to bring technology into the core of their operations, they need massive amounts of help to do so. The cost of good IT talent is already soaring. Most Chine companies will be unable to solve their technology challenges for themlves.
Clean energy. China already produces 60 percent of solar panels and wind turbines. Increasingly, it is consuming this output domestically. For example, 11 gigawatts was installed
in large-scale solar farms in 2013, and this will grow an additional 30 percent in 2014. China is also investing heavily to exploit its shale-gas asts and develop cleaner coal technologies.
Agriculture. China does not feed itlf today—certainly not with the kind of quality and
value-added products that the middle class eks—but it will be challenged to do so in the future. Continual food-safety cris illustrate the challenge. For many successful technology investors, such
as Legend Holdings, agriculture is the new Internet. Chine companies are investing
in agriculture outside of China at scale, from Chile to the Ukraine, for China. They also invest
in China, especially in value-added products—such as fruit and the production of frozen
ready meals.
Doing business effectively in China
Often in China, the fundamental barrier to success is less about identifying the opportunity and more about the inability to execute the plan more effectively than others. One’s own management team, the team’s relationship with corporate headquarters, the role of and relationship with joint-venture partners—all play a key role. Joint ventures have been part of doing business in China for more than 30 years. In many ctors, they remain the only way to participate, often in a mandatory minority position. But there are a number of clear lessons:
Establish the right strategic positioning.
同心结图片• I f regulations require you to have a joint-venture partner and a minority position today, assume it
will be that way forever in the core business activities. From automotive to financial rvices, the lesson is that it won’t change. If that model is not attractive today, do not invest
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in the hope that it will change.
