China’s Future, Your Strategy
The Asian Development Bank has forecast that China could be the world’s largest economy as soon as 2025. Given an event horizon of less than 20 years, how should we be responding?
Could 2006 be the year when companies, individuals and governments across the planet will start to embrace the likely breadth, depth and style of long-term impact China could have on everything from investment flows through to scientific research and voting models for the United Nations?
I am currently writing a book on China’s future and thought I’d take the opportunity to draw on the interviews and research to date to share some of the key views emerging. In the thought piece below I’ve tried to outline some of the key perspectives emerging on China’s future and pose a series of critical starter questions for those charged with developing strategies on China for their organisations.
A Nation on the Move
The question should not really be “why take notice now?” – but rather “Why have you taken so long?” Wherever you look, the evidence is inescapable that China is a country developing rapidly. When reviewing official statistics, investment commitments, government plans, analyst projections and company forecasts, three key macro drivers emerge:
1 Development of domestic consumption
2 An increasing capacity for innovation.
3 A number of key trends and long term plans underpin these macro drivers, for example:
- China has experienced a period of sustained GDP growth – reaching 9.9% in 2005. In 2000 China set a goal of raising GDP from one trillion (US dollars) to four trillion by 2020. Current estimates suggest this could be achieved as early as 2015
- Continued economic growth is estimated to have taken over 200 million Chinese people out of poverty during the last 20 years
- In 2004, per capital income in China was $1,290 – compared to $41,400 in the USA
- A goal has been set of achieving self-sufficiency in technology within 15 years
- China plans to spend $17.4bn constructing airports in the next five years and predicts that its fleet of aircraft will rise from 863 today to 1580 by 2010 and 4000 by 2020
- China’s share of world exports is expected to rise from 6% to 10% by 2010
- China’s luxury goods market is expected to grow 10%-20% annually until 2015 – overtaking the USA to become either the largest market (Goldman Sachs) or second largest (Ernst & Young) after Japan, with 29% of total world luxury sales
- By 2020 the Chinese middle class is forecast to double to over 40% of the 1.3bn population i.e. 520m people – almost twice the size of the USA
Clearly, it would be misleading to focus only on the positive indicators and assume that China’s path to progress will face few obstacles. In practice the next twenty years are likely to be the most challenging for China’s leaders. The way in which they plot and navigate the course will have profound implications across the globe.
So what might the next 20 years look like? In researching China’s possible trajectory, there are three dominant stories that prevail on China’s future – the government view, the doomsayers’ perspective and the business pragmatists’ outlook. These positions are summarised below.
The Government View
The line adopted by most government officials is that whilst the pace of change may not slacken, the focus is likely to shift. Many, particularly in central government, recognise that a more sustainable approach is required and this is a key pillar of the latest national five-year plan. Priorities include reducing environmental damage, addressing the social concerns that led to over 87,000 incidents of unrest in 2005 and tackling the growing income gap between rich and poor.
At the same time, they argue that a pace of change that delivers around 8% GDP growth will be critical to driving domestic demand and taking more people out of poverty. Around 25% of all China’s exports are sent to the US and the threat of punitive import tariffs is a growing cause for concern. Hence a policy priority is to reduce China’s reliance on exports. This year will see the start of a concerted set of initiatives to sustainably grow domestic demand over the next 10-15 years.
Should China give in to US pressure to revalue the Reminbi, most believe that this would have a significant impact on demand for Chinese goods and services. However, they also feel it would also create inflationary pressures in the US. Furthermore, a relatively cheaper dollar and Euro could accelerate the rate at which Chinese companies acquire foreign assts.
The Doomsayers perspective argues that, in the worse case scenario, China is heading for a collapse far longer and deeper than that which affected Japan in the 1990’s and early 2000’s. Critical concerns are social unrest and the sheer scale of environmental degradation – encompassing deforestation, air pollution, acid rain and large-scale river contamination. From a political perspective, they argue that concerns over human rights, censorship and limited democracy will prevent the economy from realising anything like its full potential. Operationally, the concern is that bureaucracy, inefficiency, corruption, poor resource utilisation and general underperformance of the State-Owned Enterprises represent a time-bomb which - when it goes off - will act as a long term drag on China’s performance.
Economically, the view is that historically, no country has been able to sustain such growth on a long-term basis, and eventually China’s bubble will burst. Concerns are also raised about the robustness of China’s financial infrastructure and the relative volatility and immaturity of its financial markets. For example, the Financial Times recently offered a relatively bleak outlook on China as an investment market: “…China is still a market for the brave. It still has underdeveloped capital markets. There remain concerns about the banking systems. Corporate governance worries persist. And there is the ever-present concern about a flare-up in relations with Taiwan.”
Most of the business people I have interviewed, whether Chinese or expatriate, expressed a mixture of disappointment and surprise at quite how negative some of the China commentary has been - particularly from the US. A common perception was that, while all of the issues raised are very real, the Chinese government is aware and talking quite openly about most of them. Indeed, many expressed a high level of faith in the ability of the current government to deliver. There is also a growing perception that the analysis models and assumptions being applied by western economists may be inappropriate for China and may need to be reworked.
Very few expected a smooth journey and most expected one or more short but fairly severe recessionary periods over the next twenty years. Energy supply was seen as a major potential hurdle along with rising traffic congestion and air pollution. Strong concerns also exist about rising labour costs and a shortage of well-trained Chinese senior and middle managers. However, the general sense was one of real optimism, based both on their own business outlook and that of those around them. A number of people raised the point that over $170bn of foreign direct investment (FDI) has gone into China in the last three years and that this is starting to pay significant dividends. Most expected the annual level of FDI to remain at $50m or more for at least the next decade.
On a twenty-year timescale, despite rising income levels, most expect China to remain a relative low cost economy with average earnings at least 50% lower than those in the USA. The opening up of the domestic market and the growth of the innovation and knowledge economy were seen as major opportunities and growth drivers. All sectors of the economy are expected to experience significant growth with areas such as education, leisure, healthcare, transportation, energy, environmental technologies and personal financial services seeing particularly strong growth.
Most believed that for those not already active in China, there was a relatively limited window of opportunity to start learning about and acting on the China opportunity. Those who delay were expected to find increasingly strong Chinese competitors and face much higher costs of entry and more significant survival risks.
Faced with these different perspectives, for those responsible for China, the priority should be to focus on accelerating the internal learning process, with the aim of answering at least the following five questions:
- What is the size, shape and outlook for our sector in China?
- What are the relevant government plans and policies that apply to this sector?
- What are the broader ‘environmental’ factors that could influence our business and our ability to operate in future?
- What have we learned from our own experience in China? And who do we know with experience of the China market that we can learn from?
- How do we create a learning dialogue on China inside our own organisation?
There may be an understandable temptation to start with an analysis of competitor activity in China. However, a broader analysis of the market and operating environment may provide a useful lens through which to assess competitor actions.
Entering the Chinese market may be like trying to mount a moving train while blindfolded. Developing early insight may just free up one eye!