Grasping the Changing Chinese Market
By Ian Butcher
In this, the Year of the Snake, many well-established companies are finding the dramatic changes in China to be a serpent that is hard to grasp. Myriad rapid social, economic, and governmental evolutions in this turbulent economy have left many executives scratching their heads and, in some cases, feeling bitten. Multiple economic and industrial factors have changed in China, including the following:
- Government growth priorities are shifting towards a more domestic focus with greater environmental concerns
- The contrast between traditional values and modern habits is becoming more pronounced, between the graying China’s population – an estimated 40 percent will be over age 50 by 2020 – and the younger generation’s rapid adoption of the Internet, ecommerce, and social networking
- Increasing wealth and the emerging middle class are fueling greater mobility and urbanization, resulting in new housing and infrastructure in development for approximately 300 million new city dwellers
- Hourly wages have quadrupled over the past 10 years and movement in-land away from coastal mega-cities is stretching previously established supply-chain
- China’s 12th Five-Year plan targets 7 percent annual growth between 2011 and 2015 – a significant drop from the double-digit growth of only a few years ago—while sluggish growth in overseas economies has depressed Chinese exports
- Nearly 7 million college graduates will pour into the Chinese job market this year, a staggering number that may be hard to absorb in a slowing market
- The impact China’s estimated 29 billion tons of shale gas resources will have on the industry if the government moves forward in offering subsidies, with a production target of 12-24 million tons/year
As a result, some Western investors have been caught off-guard, wondering if they have the right infrastructure and business model to cope with the new reality. Once-certain profitable projects and formerly acceptable margins are now misaligned with the realities of the market. China is no longer the cheap labor, export-driven country that it was, but is now more consumption- and services- oriented, driven by the emerging middle class.
However, many multinational and Western companies are already deeply committed to their positions in China and depend on this still-unsettled dynasty as the growth engine for their business, especially given the sluggishness of other economies. For example, BASF already has 8,400+ employees in China, 21 major wholly-owned subsidiaries, 10 major joint ventures, sales of EUR 6.7 billion in 2012, and has invested billions of Euros in the Chinese market since 1990.
In spite of the changing market dynamics, there are still positive attributes and market opportunities. Industrial growth is still quite brisk across many sectors, with the automotive, construction, and consumer electronics industries all major contributors to the boom, each of which has been growing at a percentage rate in the mid-twenties for a number of years. Driven by the need to keep pace with raw material supply, China’s chemical sector has grown dramatically over the past 30 years and is forecast to soon represent 30 percent of chemical demand globally.
Additionally, China’s domestic producers (roughly 35,000 of them) are growing stronger and more sophisticated, and have begun to acquire properties outside China—China National Offshore Oil Company’s (CNOOC) $15 billion acquisition of Canadian oil and gas company Nexen Inc. is one notable example.
However, this growth and maturity has not been all positive for Western companies with Chinese market positions. Thanks to government support for domestic producers, Western companies are often forced to compete on a non-level playing field. However, while China’s chemical industry remains tightly regulated with some “strategic” sectors (mining, refineries, some petrochemicals, etc.) classified as “restricted,” specialty and fine chemicals are comparatively open.
As a result, the latent demand for specialty chemicals in China is huge, and Western producers have rushed to form major joint-ventures. Dow’s $8 billion to 10 billion coal-to-chemicals deal with the Shenhua Group, and DuPont’s venture with Chenguang Chemical Research Institute in fluoroelastomers are two examples in specialty chemicals.
Given these circumstances, Western companies are beginning to ask themselves key strategic questions:
- How do we modify or current business plans, models and forecasts to address the shift toward more domestic consumption?
- How might competitors change their focus in this new reality and how should we respond?
- Which new products and services are likely to appeal to this shifting demographic?
- Do production and emission standards in our facilities still satisfy the raised bar?
- Do we still have the right local partners to navigate us through these changes?
- How can we recruit and retain talent in an increasingly competitive market?
- Should we share our IP with our Chinese partners?
From a big picture perspective, the most important question weighs heavily on corporate strategic teams: As the rules continue to change, how can we grasp the snake and turn conditions to our advantage and profit without getting bitten ourselves? Indeed, many companies have already begun crafting thoughtful responses to these new challenges, including:
- Developing products tailored to local needs through specific R&D efforts aimed at the Chinese market, with leading companies establishing R&D centers in China
- Establishing world-scale production facilities in China to better serve demands in China and Asia, with increasing sites in strategic inland areas
- Taking a much more proactive approach to channel management, including assessing current partners’ offerings and effectiveness, and also putting in place programs to train and increase partners’ capabilities.
- Revisiting ways to partner with local companies to leverage their local knowledge and strengths, oftentimes establishing joint ventures
According to Chinese custom, the Year of the Snake symbolizes steady progress and attention to detail, with focus and discipline central to achievement. Those born in this year are purported to have the innate ability to understand complicated situations quickly, and act in a controlled manner — certainly good characteristics to have in business and these uncertain times. Companies that are able to embody these quintessential qualities are much more likely to succeed in taming the serpent in China.
Ian Butcher is the senior vice president and managing director of Kline & Co.’s European office in Brussels, Belgium. Kline is a worldwide consulting and research firm dedicated to providing the kind of insight and knowledge that helps companies find a clear path to success. Kline delivers syndicated and custom research solutions to support strategic planning for today and tomorrow’s global and local business environment.
Illustration by watcharaku at Free Digital Photos.net