doing business in china: where are we headed?

Doing Business in China:

Where Are We Headed?

Journal of Commerce Forum David G. Hartman

October 1, 2013

©2013 Blue Canyon Partners, Inc. 2 ©2013 Blue Canyon Partners, Inc. 2

1. Dissecting the Daily Headlines About China’s

Economy, and a Look Forward

2. Where China Has Been As a Market and As a

Global Competitor, and Where It Is Headed


China’s Growth Slowdown Makes for

Shocking Headlines

• Global concern over China’s economic slowdown is overdone

• China’s policymakers are determined to build a more balanced economy

• “Slowdown” scenarios must be seen in context of less than 2.5% growth in the US and Europe (solid blue line)

Sources: World Bank, WDI, Blue Canyon analysis

China’s Real Annual GDP Growth

©2013 Blue Canyon Partners, Inc. 4

Government Infrastructure Spending Has Given China

A Vast Highway System, Built Largely in 15 Years

• Expressways have been a large part

of the construction boom in China

• China has been pushing the highway

network west, allowing for delivery to

ports and major cities of products

produced outside the most

developed coastal rim.

• The same building boom has

similarly expanded rail and air

infrastructure.

Source: National Bureau of Statistics of China, Wikipedia user ASDFGH for Map translation/presentation

China’s Expressway Development

China’s Expressways:

Operational (Blue) and Planned (Red)


This Transportation Infrastructure Will Support the

Planned Westward Shift in Centers of Growth

• Long China’s laggards, the interior

regions of China have per capital

incomes a fraction of the most

developed provinces along the coast.

• But now the former leaders Beijing,

Shanghai, and Guangdong have fallen

to the bottom of the growth chart.

Sources: China National Bureau of Statistics, Blue Canyon analysis


Safety and Reliability Are Front-Page Issues in China

• Food scares have hit China in waves since babies

died from milk mixed with melamine in 2008.

• Government TV reports focus on how to identify fake

and dangerous food items. Internet rumors cause

overnight shifts in consumer behavior.

• When Wal-Mart was accused of selling regular pork

labeled as organic, customers blogged that Wal-Mart

shouldn’t be blamed for a national supply chain

problem.

• Shunfeng Express is capitalizing on these concerns

with “direct from the farm” internet buying.


What Do All These Dynamics Mean for Logistics?

Trend What It Means

China’s overall growth rate slows Still-growing demand for transportation, but growing

more slowly than some had anticipated

Consumer demand replaces government

infrastructure spending

Manufacturing for some of the most fashion-conscious

consumers in the world presents logistics challenges

different from supporting construction

A significant population moves from

subsistence agriculture to new cities

As peasants become city-dwellers, dependencies

(and logistics requirements) increase dramatically

Industry moves from the Coastal areas to

regions farther and farther West

Instead of moving (migrant) workers from the West to

factories in the East, the logistics system will move

goods from factories in the West to markets, often in

the East but also in the West. Truck transportation

probably takes on a significant part of the load.

Domestic demand and higher-value exports

replace exports of low-priced labor-intensive

goods

Changes in pattern of goods movement within China

is coupled with an increase in demand for imported

products. Export volumes fall over time.

Food safety is a daily topic of conversation and

shapes people’s dining habits

More reliable and well-monitored supply chains, as

well as inspections at source, can start to calm fears.


Taking stock of Where China has

Been and Where China is Headed

as a Global Competitor

1. Remarkable change in not much more than

20 years: command and control to largely

market-driven

2. A “must-win” market for most global

manufacturers who intend to achieve growth

and continue being global leaders, needing

partners to support them

3. Having created a formidable set of Chinese

competitors who are large, well-funded and

tend to follow a different business model,

creating challenges across the globe

The Market in Which Second Mice Have Prospered


• Incomes have soared, but most of China is

still a poor country

– Labor is still relatively cheap

– Consumer products are sold in volume in the

middle market where price is critical

• Most Chinese companies know of only one

way to compete: “Almost as good as ____

(Motorola, Nike, Ericsson, Apple, Siemens)

at a fraction of the price.”

How the Second Mice Succeed In That Market

• Manufacturing and sourcing capabilities, including ones learned from western firms

• “China economics”

– Substituting labor for supplies and equipment

– Moving to lower-cost geographies

– Redefining relationships with customers around service

• Fast learner and fast follower competencies – Copying what works elsewhere

– Thinking “outside the stadium”

– Moving at “China speed” to be Second

– Using close customer relationships to engineer features out

• A focus on China’s “middle market” – where the products of western companies are too expensive


Source: George F. Brown, Jr. and David G. Hartman, Are You Ready to Take

on China’s Next Generation Competitors?, Chief Executive, September 2011.


Coming to a Market Near You:

The “Going Out” Strategy

• Before China joined WTO in 2001, most Chinese

“exporters” had little idea what happened to their

products after they left the factory.

• The government began a policy of actively

supporting firms to invest abroad. There was even

a list of resources and technologies for companies

to target.

• Through acquisition, Chinese companies are

becoming major players on the world stage. Not all

will succeed and not all will change the companies

they acquire, but some will do both.

• Chinese resource and engineering companies are

doing projects across the world, moving large

volumes of Chinese products with them.


What Western Customers of Logistics Services

Need to Do to Win Against Chinese Competitors

• To sustain global leadership, most western firms will

need to win in China’s mid-market: to bring what the

Chinese do so well into their own firm’s cultures,

most likely through acquisition and a new

perspective on integration.

• The task of competing with Chinese companies, in

China and at home, is monumental, but China is a

“must win” for western firms aspiring to sustained

global leadership.

• While ensuring reliability of supply chains, the

western firms must keep the primary focus on cost

in order to compete.


• Adjusting to the major changes in patterns of growth

in China, supporting manufacturing in new

geographies and new centers of consumer buying

power.

• Becoming part of the solution to product reliability

and safety challenges.

• Supporting western manufacturers in competing on

cost against Chinese “Second Mouse” companies, in

China’s middle market and increasingly around the

world.


Contact Information

David G. Hartman

[email protected]

Please email David if you’d like to be included on the distribution

list for future publications on the topic of the changing competitive

environment or with any questions that haven’t been answered

during this webcast.

doing business in china: where are we headed?

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