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Change your China view now!
Kobus van der Wath

There is a lot of emphasis on China's exploitative behaviour in Africa, unfair competitive forces behind its 'made in China' brand, poor quality of some of its exports and of course its poor human rights record. Not to add its harmful impact on certain of our manufacturing sectors and South Africa's ballooning trade deficit with China that reached R 32 billion in 2006 and around R 17 billion for the first 8 months of 2007. These issues are undoubtedly important and deserve attention. But while the views that illuminate these issues often find the truth, they do not portray all the truth.

It is time for South African executives to take a more comprehensive view of China; to change, or challenge, their world view - or perhaps more pertinently their China view - as the two are becoming more closely intertwined anyway. After all, a view of the world, that does not take due cognizance of China, is increasingly irrelevant.

As such, South African board room discussions, their focus and energy must shift in order to factor in China. This is true for large SA blue chips, listed on the JSX, and for small or medium sized businesses. Whether you are a one-product business, or a conglomerate, whether you are a local business or a regional or international player, China must be viewed with realism – unemotionally and objectively - for what it is. Ignore the hype, identify the unfair stereotypes and avoid the myth that is being perpetuated. Strip out the essence of what it really means for your business. Do it soon. Moreover, adopt a dynamic rolling view of what it will hold for your business in five or ten years from now. A few facts drive home the need to reassess China:

China is the world's third largest economy

With a GDP of USD2.7 trillion in 2006 and 11.5% growth in 2007 China is set to overtake Germany (which had a USD 2.9 trillion economy in 2006) sometime in late 2007 or early 2008 to become the world's third largest economy. On a purchasing power parity basis China has already long overtaken Japan for the number two position after only the US. (India is already chasing Japan for the number three spot) China's economic strength, diversity, scale and scope will drive its firms to new levels of achievement. Its industrial and consumer market consumption will continue to explode. (SA's GDP of USD 254 billion, at 27th place, represents less than one tenth of the Chinese economy.)

China is becoming a truly global player

China's outward investment amounted to less than USD 1 billion in 2001. Last year its outward investment was around USD 20 bn, and this year it will top USD 25 billion. Africa is on the map in terms of China Inc's expansion plans. As such, the ICBC Standard Bank deal, the Angolan, Zambian and DRC investment and lending programmes and China's participation in (South) African infrastructure projects must be viewed as only the beginning. In fact, competition from acquisitive Chinese firms will rise dramatically, especially in some sectors, i.e. energy and resources. As a result, over say the next ten years, developed and developing countries will have to get used to an unprecedented influx of (competing) Chinese capital. This implies a redefinition of who is the hunter and who is the hunted.

China's exports of high tech products is rising sharply

China's exports of high and medium high technology exports grew by 24% per year between 1996 and 2006. Measured by global share of technology exports China ranked 4th in 2005 with 10.5% market share of total OECD technology exports after Germany (16.4%), US (15.6%) and Japan (11.8%). Interestingly, 38% of China's total exports of USD 969 billion in 2006 was made up of top end high technology exports while the figure for the US is only 37%. It is clear that China is no longer a producer of low end, low quality or inferior products. In fact, it has taken significant market share in the discerning US market from top-end producers like Japan and Canada over the last 5 years. Yet, so many producers and consumers in SA still cling to the dated stereotype that China exports represents necessarily poor quality low-end goods. In fact, recent media coverage about made-in-China quality problems will only serve to further mislead people to underestimate China's true capability.

China's imports in 2007 will be close to USD 1 trillion

China is often talked about as an exporter of note, a threat, or even a predator. With exports in 2006 of USD 969 billion this is understandable, but China also recorded imports of USD 792 billion last year. This year imports will be close to USD 1 trillion, with countries like New Zealand having gained significant market share in diary products and meat; Chile having significant market share in wine; and South American countries successfully selling fruit or juice. Australia successfully exports not only iron ore but animation video, architectural skills (the Olympic swimming pool, the 'cube', a useful case in point) and restaurants. The list of successful China export stories goes on. But the point is that these countries' governments, chambers, industry associations and firms have done what it takes to break into the Chinese market. Suffice it to say that USD 1 trillion of Chinese imports implies a lot of SA export opportunity in areas such as resources, high value added manufacturing, technology, services, and so on. But the opportunity must be seized.

China is so large that it offers everything: rich, poor, advanced, backward, innovation, replication and so on. It is crucial not to base your China view on China's 'low end' or even its 'averages'. Rather, the China that matters increasingly in boardrooms around the world has abundant capital, sophisticated technology, global reach and large consumer market segments. It is transforming itself, can innovate and is incredibly ambitious. This China is soon coming to a place near you!

But how to take the game to the Chinese? How to transform the abstract notion of 'China is important' into practical top line revenue growth, second line cost savings, or some kind of strategic advantage? Leading research; surveys and cases; and the latest China experience suggest that there are some elements that must form part of your strategy and approach to be defensible. Below a number of emerging strategic imperatives – in three spheres - are briefly highlighted:

Information sphere

Understand the importance of using the right information. Put resources in place that can capture all relevant information, including all Chinese language sources.Drill down and leverage all information assets from basic data to the finest nuance. A very rigorous approach and a highly systematic methodology are needed to turn information into an advantage in China. There is an information 'threshold' that needs to be breeched in order to ramp up understanding and know how. Move all the way from analysis, to synthesis, to judgement in developing your China wisdom.

Planning sphere

Use good advisors or go it alone. Develop flexible strategies that can cope with changing circumstances such as regulations that continuously shift. Develop a China venture that learns from its mistakes – a so-called learning system. In your scenario's anticipate a comprehensive set of potential risks; develop contingencies. Think about China as many sub-systems or sub-regions, market segments and forget about superficial, broad-brush conclusions. Determine which China you are engaging – are you entering China, working with Chinese partners in your home market in SA, or competing and partnering in third markets, say in Africa. These different situations would require entirely different approaches.

Implementation sphere

Choose the best people you have to manage your China ventures and support these initiatives from the top. Fully leverage all potential support structures and networks, i.e. the SA government, SA chambers of commerce, industry associations and value chain partners. Actively invest in relationships and develop deep and wide networks around your target segments. Do significant internal and external due diligence on your potential partners. No one works alone in China – partnering will make or break you. Move forward with your partner only once you have done a complete review of all the different business models, legal structures and exit strategies. Finally, adapt your approach, product or services to the local context where needed.

The above admittedly only present a limited answer to the daunting China challenge but it is nevertheless a useful point of departure. Too many SA businesses get it wrong in these basic areas and then set off on a long, expensive journey that never really stand a chance of success. Instead, if businesses develop a more informed view, based on rigorous analysis of the right information, do proper planning and roll out a sound implementation plan, the opportunities and risks will become clearer.

China may not be for everyone, but what is sure is that China will continue to influence our extractive, manufacturing and services sectors over the long term. This influence will rise and will be felt by SA Inc on home soil, across Africa and everywhere else where we are trying to compete. For most businesses it implies the need for some kind of a China view – a China view that is current and relevant.

Kobus van der Wath is the Group Managing Director of THE BEIJING AXIS, a firm that provides China strategy, sourcing and investment solutions. He has lived and worked in Asia for 14 years now and is based in Beijing where he has been elected as the Vice President of the Asia Pacific South Africa Chamber of Commerce. He can be reached on kobus@thebeijingaxis.com.