a new environment a small consumer market 0 500 1000 1500 2000 2500 chinabrazil australia south...
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A new environment
A small consumer market
0
500
1000
1500
2000
2500
China
Brazil
Australi
a
South
Kor
eaIta
ly UK
0
50
100
150
200Cars, ‘000 units, left axisLife insurance, US$m, right axis1998
Source: EIU, Swiss Re
A significant consumer market
0500
10001500200025003000
China
Brazil
Australi
a
South
Kor
eaIta
ly UK
0
50
100
150
200
250Cars, ‘000 units, left axisLife insurance, US$m, right axis2003
Source: EIU, Swiss Re
A large industrial market
0
100
200
300
400
500
600
700
800
Ge
rma
ny
US
Ja
pa
n
Ch
ina
Fra
nc
e
UK
Ne
the
rla
nd
s
Ita
ly
Ca
na
da
Ex
po
rts
, US
$b
n
1993 2003
Source: WTO
An accessible market
Much better hard infrastructure• Sophisticated telecoms network• Improved transport network• Both internal and external
Improved soft infrastructure• Improved international connectivity• Domestic economic reform• WTO entry
MNCs go deeper
0
10
20
30
40
50
60
19
86
19
89
19
92
19
95
19
98
20
01
FD
I, U
S$
bn
Different FDI
IT-related•More than 60%of Taiwan’s IT production is made in China
Capital-intensive industries•Petrochemicals, semiconductor
Service sectors•Financial services, retail
More FDI
Source: EIU
MNCs are important to China
0
50
100
150
200
250
300
350
400
450
500
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Ex
po
rts
fro
m C
hin
a, U
S$
bn
Foreign-invested Domestic
Source: EIU
China is important to MNCs
0
5
10
15
2025
30
35
40
45
50
VW
Da
no
ne
No
kia
Pro
cte
r &
Ga
mb
le
No
vart
is
HS
BC
% o
f sa
les/
ma
rke
t
% of global sales in China % of China market
Source: EIU, Euromonitor, company reports, estimates.
MNC attitudes to China
Reporting lines• 55% have direct access to the global board
China is…..• …..“critical to global strategy” - 50%• …..“strategically important” - 41%
CEO visits in last year• 80% said global CEO had visited at least once
The question of profitability
MNCs are making money in China• Car companies• Amcham members
But they are making more money from China• Export base• Global sourcing centre
Addressing the market
The competition
Guanxi
+
Operating in grey areas
+
Official and unofficial protection
+
Access to cheap bank capital
+
Lack of corporate governance
=
PRICE!!
MNCs - brand and marketing
0
50
100
150
200
250
300
350
400
P&
G O
il o
f Ola
y
Na
ob
aiji
n
Arc
he
Ga
i Zh
on
g G
ai
Hu
an
gjin
da
da
ng
Pu
xue
Ch
ina
Mo
bile
Ao
qili
P&
G R
ejo
ice
Jiu
xin
Dia
op
ai
P&
G C
rest
La
fan
g
Sa
njin
g
P&
G P
an
ten
e
So
ftto
P&
G H
&S
Ta
ita
Jia
ng
zho
ng
Wa
ha
ha
Ad
sp
en
d, U
S$
m
Source: Nielsen Media Research
Going local
Financing
• Borrowing from domestic banks
Production
• Moving to cheaper areas inland
Sales
• Increasing volumes to lower average costs
Research and development
• Lower costs and local tastes
Mergers and acquisitions
Buying out joint venture partners
Traditional M&A• Basic market access and expansion• Stealing a march on foreign competition• Eliminating local competition• Acquiring new abilities
Not mainstream yet• Regulations, • Corporate governance • Price
Persistent headaches
China’s business environment
0
1
2
3
4
5
6
7
8
9
10
Ca
na
da
US
A
Ho
ng
Ko
ng
Ta
iwa
n
So
uth
Ko
rea
Jap
an
Hu
ng
ary
Ma
lays
ia
Th
aila
nd
Me
xico
Bra
zil
Ch
ina
Ind
ia
Ru
ssia
Vie
tna
m
Nig
eria
Bu
sin
ess
en
viro
nm
en
t sco
re
Source: EIU
Infrastructure and distribution
Over-burdened physical infrastructure• Transport congestion• Electricity shortages
Lack of sophistication• Poor integration of different transport modes• Regulations on distribution
The way forward• The east coast is better• Work around regulations• Piggyback on chain stores
Regulation and corruption
Regulation
• Central government restrictions
• Local government protectionism
• Red tape
Corruption
• Serious problem for foreign businesses
The way forward
• WTO opening
• Lobbying
Skills shortages
0
10
20
30
40
50
60
70
80
90
Ch
ina
Ind
ia
Th
aila
nd
Ko
rea
UK
Ja
pa
n
Ter
tiar
y g
ross
en
roll
men
t ra
tio
, %
1980 2000
Source: World Bank
Serious wage inflation
-2
0
2
4
6
8
10
2001 2002 2003 2004
% c
han
ge,
yo
yWages, professional staff Consumer prices
Source: EIU, Hewitt Associates
Intellectual property theft
Improving laws and regulations
Inadequate enforcement
An unavoidable cost
Survival strategy: self-preservation
Corruption causes most concern
05
1015202530354045
Co
rru
ptio
n
IPR
Ca
pita
l flo
ws
Ski
lled
sta
ff
Pro
tect
ion
ism
Ele
ctri
city
Su
pp
ort
serv
ice
s
Re
nm
inb
i
Eco
no
mic
po
licy
Infr
ast
ruct
ure
La
ng
ua
ge
skill
s
Po
litic
al
sta
bili
ty
% c
laim
ing
detr
imen
tal Now Five years
v
Source: EIU
Conclusions
China is coming of age for MNCs
MNCs can build real business in China
Operating issues are no longer decisive
The biggest challenges are strategic
There is a real need to think about China