China remains an attractive business opportunity destination - but where and how to focus your investment wisely and what are the obstacles?
As China continues to grow economically and despite the recent fear mongering, its attractiveness as a source of business opportunities expands as well.
Consumer purchasing power and desire for quality products is growing as is the middle class. The financial crisis has alleviated, for the short term at least, shortages in skilled, experienced labour especially in management disciplines, and rising pay rates (by contrast see Chinwags October 2007 issue for the war on talent). Marketing to the Chinese as consumers, in particular, has its unique challenges – especially in its demographics, as we will explore shortly.
The Chinese Government is keen to push investment into inland areas. Cities like Chongqing with 12 million in the immediate city and 30 million taking in nearby counties; across the Yangtze River 7 million in Wuhan; Chengdu with 5 million and a huge post-earthquake rebuilding process, and the list goes on. There are many great opportunities for Australian businesses in these areas and Australian companies are already paving the way in infrastructure, architecture, environmental design and construction and even wine exports.
What does China’s population mix in the decades to come mean for business and where are opportunities likely to lie – read on.
What GFC?
The number of Chinese in Mainland China is estimated at 1.3 billion or one-fifth of the world’s population.
On the surface, demographics mirror other locations in the world with an ageing population. Magnified, mostly as the result of the Chinese government mandate of one child per family enforced since the 1980s, coupled with Chairman Mao’s baby boom during the 50s and 60s, people are also living longer due to improved health care. This has caused some alarm because of a shrinking base of workers upon which businesses can depend to help move China ahead as a world economic power let alone provide social security. Moreover, this shift gives us cause to consider a future change in marketing strategy from those who are under the age of 40 to those who will soon be over the age of 50.
Middle-class citizens (there are various definitions of income level, but the ability to purchase cars and houses and go on holidays are good indicators) is the segment of population that is a key driver of product growth – aspiring to the luxury market for both the premium quality and status they afford. Some estimates put it at 100-150 million, others as high as 300 million.
In 2003, three million Chinese had credit cards; in 2008 it was 150 million with 50 million signing up in 2008 alone. They are found spread throughout China, but with a thirty percent concentration in the largest cities: Beijing, Shanghai, Guangzhou, and Shenzhen. Of this group in these cities, 80 percent are under the age of 40. McKinsey estimates that by 2025, 500 million citizens will belong to the middle class.
China is second to the United States in the number of billionnaires (over 100) and rising numbers of millionnaires (approaching one million in US Dollar terms – not really surprising given the huge population base. Bain & Co estimates that China’s stake of the global luxury market will grow from 3 to 7 percent this year.
The very rich in China, indeed, appear unaffected by the financial crisis and are in the categories of private entrepreneurs, corporate executives, real estate speculators, and share traders. They like to travel, play golf and swim and have brands like Louis Vuitton, BMW and Mercedes in their portfolio. The Rolls Royce Phantom is the car of aspiration.
Automotive, housing, tourism, education, food and entertainment are areas that will benefit from the growing middle class as private consumption has a long way to grow.
The traditional Chinese family is turning upside down - a pyramid of 4 grandparents, two parents supported by one child. Car makers are jumping on this – not only will China make and buy more cars than anywhere else on earth in 2009 – but the market is ripe for a luxury car to seat all 7 family members. Even rural residents are buying up cards with a bevy of tax incentives to get them on those crowded roads.
Overall though there is a distinct difference between those who live in rural areas vs those in the cities. Attitudes reflect a resistance to change among rural folk and limited discretionary spending, while those in cities are more willing to embrace change and opportunities to advance.
Crisis or Opportunity in the Ageing Society
Economic growth is driven by the number of workers and their productivity and both have grown substantially over the last decades – however this may be coming to an end – estimates have the working population declining 1% annually over the next 30 or 40 years which will flow on to output. The scary thing about China’s ageing population is that other countries generally become affluent before they age (for example Japan, which had 3 times the per capita income at the same stage), but in China’s case it will be around the other way.
China will be the fastest ageing country in the world. Population experts say that the percentage of people over 65 will treble between now and 2050 to make up 25% or maybe a quarter of a billion of the population – an elderly society. The younger age groups (say under 45) will drop dramatically. Also geographically, the poorest regions will have the oldest residents – the pressing problem for the government will be how to care for an ageing population many of whom will be only children. China in the future could be a boon for health services and aged care.
The Draw of Doing Business in China
On the surface, looking at China as a ripe, fertile market for placing a business appears to be the norm. The sheer numbers of people suggest that there is money to be made with little or no effort. Some numbers that support this view are that China has 100 cities with populations of one million or more people. In 2005 there was a total of USD$6 trillion in retail spending alone and that rate is growing at a rate of 15% per year.
Western eyes in the past have not gone much past Beijing, Shanghai and Guangzhou, but you’ve got to remember there is a whole world out there doing exactly the same thing and it’s getting harder and more expensive to set up shop in these cities. Estimates put set up costs at between 40 and 60% higher than inland.
While it is true that China offers the largest market for goods and services and the largest population from which to build a manufacturing presence, it is equally true that building a business in China is a difficult and treacherous process. Many failed businesses are strewn along the road to success.
Without a proper focus and business model, success is far from guaranteed. The old mind-set in such a rapidly changing and competitive market greatly hinders the chances for being successful. Any business that attempts to break into this market must embrace patience and a long-term outlook towards success.
Lessons Learned - Sheer population numbers do not translate easily into business success. You cannot look at the number of people and put it into an equation that guarantees sales volume. There are too many other important factors. The disparity between those who live in rural areas and those in the large cities and the changing age base of the population to name a couple. The best strategy is to use a two part approach and embrace the culture and then the people in the various sectors and regions.
It could well be that rural citizens might never become a good target market for a given product or service. They have to be factored out of the numbers and the focus needs to be placed on the urban dwellers. Those with more open minds to new products and services will become the market to pursue.
Chongqing and Chengdu have had over 144 Australian companies invest USD$174 million in recent years including in IT, food and beverages, and consumer products. Adjoining Wuhan was the leading centre attracting foreign direct investment – in 2007 it amounted to USD$2.25 billion and attracted 73 of the world’s top 500 companies.
McKinsey’s research suggests that three-quarters of future growth in the wealthy consumer segment will come from consumers outside the four biggest cities.
Obstacles to Doing Business in China:
Culture and language barriers - Technological advances in language and communications tends to make companies considering a move into a foreign market disregard the importance of this barrier. Many mis-queues in handling cultural expectations and simple language protocols have caused great harm to those who wish to do business in a country like China.
Misunderstandings must not force a withdrawal of interest on the part of either entity. That’s why good translators and cultural guides are essential. This is the first step in showing a Chinese business that you are interested in not just starting up a business on their soil, but truly in understanding the market and being willing to make adjustments as needed in order to pave the way to success.
Respect for the people and their societal norms and mores plays a central role in beginning to understand how to market to them as well.
Those businesses that do not make judgements and take the time to learn and adapt are those that have a better chance of success.
Manufacturing challenges - Less technology means more manual labour. Quality concerns ramp up and must be addressed as consistency becomes more difficult to manage. Also demands for cheaper and cheaper prices from the West mean savings have to be found. The Chinese learn rapidly and are able to emulate the best of processes as much as they are able.
Government issues - As we have seen recently, government in China is all-powerful and changes in laws and regulations must be dealt with constantly. While there are people and bodies that can help, there is no guarantee that changes will not be made that will have a direct and maybe even devastating impact on doing business with China. This must be considered as a risk to doing business in this nation.
Competition from Chinese Companies - Now that foreign businesses have established themselves in China and have forged the trail to success, other Chinese companies have taken the models that have been successful and are now starting their own similar operations but with homegrown advantages. Simple competition has forced those who might otherwise establish a company within the borders to re-think their plans for expansion into China.
Protecting Yourself and Your Business in China
Regardless of the type of products or services you offer or make within China as a western business, it is necessary that you protect yourself with a high-quality interpreting and translating service. The cultural gap between China and the western world is extremely complex – and if you are not aware of these cultural differences you can easily cause offence, not to mention miss an opportunity. Even with Chinese language skills, it is highly risky to negotiate business without enlisting the services of an interpreting and translating company to ensure you do not misunderstand or are misunderstood, to read between the lines and to protect your interests and that all important face.
Conclusion
One can see that doing business in China can be viewed as both a positive experience and a challenge with sometimes seemingly insurmountable odds. One thing is clear: you must go into it with realistic expectations and homework done. You cannot be successful without becoming truly engulfed in the culture and society of the Chinese. You will be at a disadvantage by pursuing only superficial business particulars and being seen as not really engaged.
Without a true central purpose of providing products and services that are needed and in the right cultural framework, you will find it difficult to succeed. If on the other hand you can see the inter-marrying of Chinese culture and benefits of your products and services and have done extensive research, then your chances for success are greatly enhanced.
It is necessary to look ahead to what China’s population shape is going to be like in the future too in planning what will be needed, who wants to buy and where to go.
In our next issue, you’ll read some case studies of companies that are achieving good success in China and how they did it.
