Western firms need new strategy to crack China
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Western firms need new strategy to crack China

Foreign firms with ambitions in China need a smarter strategy to crack the country as the old certainties of double-digit growth, untrammelled markets and low-cost production are replaced by a more complex growth picture, says Ben Simpfendorfer, founder of Silk Road Associates.

They may have not have noticed but unprecedented numbers of their Chinese rivals are heading the other way – looking for friendlier markets where competition is gentler and costs cheaper. China’s long-term growth is undoubtedly on a lower trajectory compared with the booming first decade of this century. Yet China remains the world’s most exciting consumer frontier. Opportunities have become more difficult to grab here but investors with a smart approach can still enjoy huge rewards.

First, China’s middle class is already large and rapidly expanding. Eight Chinese cities are home to more than 1 million households who earn over USD15,000 a year. Dozens more cities are approaching that mark. Second, China’s interior provinces – home to 720 million people – are catching up after 20 years of relative economic obscurity in the shadow of their compatriots in the fast-growing coastal regions.

Those inland markets are low-yielding, costly to run and highly-fragmented, while in richer cities the fight for fatter middle class wallets has become intense. To penetrate both markets a clear commercial plan is more vital than ever.

Store location is a good example where foreign multinationals need to smarten up. In 2000, a retailer might have set up shops in Beijing, Shanghai and Guangdzou. Today, the same company would have to target at least 12 cities to avoid surrendering its intellectual property to copy cats who could swiftly roll out a rival offering.

Foreign firms can easily be dazzled by the lure of such a huge market but they should understand that unless they are prepared to commit to building a meaningful presence, they might do better targeting smaller growth markets such as Indonesia or the Philippines.

Those companies which do take the plunge in this new, more complex phase of China’s growth story will also have to be far savvier about specific local conditions than earlier arrivals. They will need strong partners to help them navigate the cultural tastes and customs of new, inland markets. They will also have to recognise the need to educate consumers about the value of their brands in more far-flung corners of the country and be prepared to invest accordingly.

Such extra complexities and costs might discourage some from considering a move into China. That would be a mistake. More farsighted Western firms are beginning to understand they can no longer opt out of the world’s second biggest economy. Chinese multinationals and others from this fastdeveloping region are quickly innovating and quietly gaining an edge over Western competitors in important areas such as e-commerce.

It won’t be long before more are looking to exploit that advantage overseas.

China’s state-owned corporations went global some time ago in an effort to secure resources for continued growth. But today, as China’s economy slows, local competition hots up and costs rise, a new wave of more nimble private corporations are looking overseas.

They are likely to act a lot more like Western multinationals – partnering local companies in emerging markets and increasingly in Europe and the US, and with far more interest in the services sector.

As a result, there are good defensive reasons why Western firms should get into China. Familiarisation with Chinese business practice and gaining new thinking on technology, cost structures and economies of scale may help when those Chinese competitors start to target their home markets.

Some are hesitating however. Heightened tensions between China and Japan over the disputed Senkaku Islands – or Diaoyu as China calls them - has impacted the way multinationals think about the region. Japanese firms in particular are looking at their exposure to China and a growing number of are looking to diversify their manufacturing across the region.

China’s rising cost base and ageing population feed into the same story: China will never again be the outsourcing destination it was. That does not mean we will see China’s manufacturing base shrinking significantly.

China is already importing vast quantities of low-value goods from its South East Asian neighbours. Countries like Vietnam and Cambodia are showing competitors can take on China in sectors like clothing and electronics, and win.

That does not mean South East Asia will mount a serious challenge to China’s status as Asia’s factory – its neighbours simply aren’t big enough to replace it. Chinese clothing exports for example, are six times greater than those from the rest of the region combined. The size of Cambodia’s whole economy is equivalent to that of Guangzhou’s.

But a marginal shift for China’s economy represents a massive boon for the rest of South East Asia. No other region has the capacity to supply its vast markets. And anyway, why would manufacturers base themselves elsewhere when Asian factories are increasingly producing for newly-wealthy Asian customers?

Manufacturing used to constantly reallocate around the globe, in the search for efficient, low-cost labour close to markets. That is why the world’s factory is now stuck in Asia for good.

Ben Simpfendorfer is founder and Managing Director of Silk Road Associates, the Hong Kong based consultancy. Mr Simpfendorfer was previously Chief China Economist at RBS.


The statements and opinions expressed in this article are solely the views of Ben Simpfendorfer speaking at an RBS Insight event in London on June 4, 2013 and do not necessarily represent the views of the Royal Bank of Scotland.

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