THE BEIJING AXIS China Business in Perfect Strokes

China has been able to weather the global economic storm better than most. China’s dramatic slowdown halted during March-April 2009, and further consolidation looks likely in the near future. But risks remain and unrealistic expectations should be avoided. At the very least, we must look out for regional, sectoral and value chain variability in the economy. Simply put, navigating in the Chinese landscape has just become even harder. But the long term prize is still unparalleled: China, the world’s third-largest market, is set to maintain its solid lead on developed and developing economies.

During the latter part of Q1 2009, China’s economy emerged from a period of rapid slowdown that had ensued in Q3 2008. With 6.1% y-o-y GDP growth in Q1 2009, and with many indicators pointing to a mild recovery in activity, the scene is now set for China to hover near 6-7% growth over the next few months before entering into a somewhat higher pace of growth towards the end of 2009 and into 2010. With a consolidating global environment—albeit only a tentative consolidation based on a reduction in negative news, somewhat stabilized financial markets, the edge coming off the credit crunch and a more unified G20 voice — there is scope for optimism. Confidence in the global economy is a key requirement for an eventual broad-based recovery.

Indeed, in recent months some Chinese economic sectors (such as auto, selected property segments and credit growth, etc) have recorded a markedly ‘better’ performance compared with the period of spontaneous destruction between August 2008 and February 2009. But some sectors remain weak and are unlikely to return to their previous lofty levels. Herein lies the management challenge. It is now both more difficult and more important than ever to analyse the multitude of volatile indicators and divergent trends that characterize the Chinese landscape. In short, the one-way-bet scenario of recent years, when most indicators trended higher, have come to an end and managers with a China agenda must now manage in a more complex environment. China has become a country where some sectors (perhaps most) far outpace global averages, but others are now below the waterline. This new environment is in fact only an inevitable shift towards normalcy and is likely to be with us over the long term.

In order to mitigate risks that arise in this new era it is necessary to manage information well. That implies having the right people, processes, methodologies and systems in place. Below we identify a number of focus areas for those who manage China ventures:

• Regional disparities are likely to become more distinct. Expect changes in the relative and absolute attractiveness of certain areas based on their share of exports in GDP, share of FDI, the cost of doing business, government incentives, infrastructure, etc. These regional discrepancies will be felt in the urban-rural divide, between eastern and western China, and between provinces in the east, i.e. those that form a contiguous belt on the coast. Location studies now become more important and it is necessary to think about the opportunity in second tier, third tier and fourth tier cities and areas

• Sectoral disparities are also emerging. Gone are the days when almost all sub-sectors exhibit super-fast growth. It will become far more difficult to identify sectors and sub-sectors that will be the sustained drivers of overall growth

• Not all areas of the value chain within a particular industry will enjoy the same prospects. It is now more essential to identify which industries will see differences between the upstream and downstream segments. This has widespread implications, i.e. for regulatory changes, for input and gate price changes and for fluctuating inter-dependencies between various industries

• The past 6-9 months have shown that economic reform in China is as unpredictable as ever and policy levers can be used aggressively in order to stimulate or constrain target areas, sectors and sub-sectors

The list goes on, but it is clear that a more uncertain environment spells a new strategic landscape where strategies will have to be more finely calibrated. The ability (or inability) to manage information and more sophisticated, forward-looking planning processes will determine the winners and losers in China.

Yet this more complicated planning environment does not mean that the overall risks outweigh the rewards. On the contrary, China’s Q1 2009 performance clearly showed its continued dominance as the world’s most robust large market. It leads global growth and continues to outperform developing and developed markets alike. And nothing suggests that this is about to change. As such, while it is necessary to carefully navigate the immediate challenges in a changing landscape, we must not lose sight of, or be deflected from, the opportunity to capture full long-term advantage in the world’s third-largest economy. 

Kobus van der Wath

Founder & Group Managing Director

THE BEIJING AXIS

China Business Solutions

kobus@thebeijingaxis.com