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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.
Citation preview
Doing Business in China:
Where Are We Headed?
Journal of Commerce Forum David G. Hartman
October 1, 2013
©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
©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
©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)
©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
©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.
©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.
©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
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.”
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.
©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.
©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.
©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.
©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.