In the next posting I will provide an update on the China business dynamics in the last couple of years and near future. There are many analysts that consider China’s economics to be primarily dependent on the political climate in the country. I believe that is not the case. All you have to do is spent time in the country and you will recognize the fact that China’s middle class is I believe the primary driver in the country’s market.
Last month I posted a brief summary of changes in minimum wages in China — something not many in the West realize is a significant trend in the country. In my experience in discussions with professionals in the US and Europe, the prevailing opinion is that China is still the "low-cost" country where you can find everything CHEAP… The reality is that nowadays, this is far from being true.
With that in mind, in this posting I wanted to share my views on what is coming next (in 2015) across the various aspects on doing business in China. What are the specific areas you need to pay attention and understand next:
- China is driving focus on efficiencies in many business sectors. You are seeing greater adoption of technologies in the transportation industries. Airlines, taxi services, trains are all adopting impressive new tools to streamline various aspects of booking tickets / rides and improving via those tools the companies' profitability.
- Many jobs in various industries are disappearing or will disappear. In the late 1980s and early 1990s, I remember observing hotels in various big Chinese cities installing automatic opening front doors (by deploying sensors) — those actions at the time did not eliminate the doorman jobs. Today e-ticketing and similar technologies are eliminating jobs across companies
- China is undergoing tremendous change in its rail system. High-speed trains are linking more and more cities. As a result, all of us will benefit from more convenient travel — I have been taking interchangeably train and plane between Beijing and Nanjing for example over the last 2 years – the train is ultimately a winner in my opinion given its convenience. In parallel, the boom in high-speed rail, will create new business opportunities as Chinese companies develop as major global players in train related technologies and products.
- Consumer confidence in China will most likely decrease. Why? Beause of lower job growth and lower wage growth going forward. As mentioned earlier, wages are already high in China and given the slow down in its economy we should expect further decrease in job growth — therefore higher level of anxiety across the Chinese consumer. This in turn will be a factor in adjustments across many consumer segments.
- However, expect ever increasing stream of Chinese tourists to the US. One may ask, Why? If consumer confidence is going lower, why would outbound tourism increase? The reasons are several:
- The Chinese consumer continues to look (as always) for great deals! Prices for a large number of easily transportable consumer goods are just much lower in the US. No matter whether shoping for ultra luxury brands or well known labels – the US retail offers great deals for the Chinese consumer.
- The Chinese consumer continues to trust the international brands a lot more when it comes to quality, safety, and value.
Given the trends above, it is up to you to figure out how to leverage, but that leverage is out there — you can capture it and bring new opportunities for your business. Eventhough, China is becoming a more challenging market to advance into, it is still a huge market and big opportunity, so dive in (if you have not done so already) and look for business opportunities on both sides of the ocean – States-side as well as in China.
I have been stating in several blog posts over time that the cost of doing business in China is steadliy going up. I am sure this is no news to you anyway. The process of cost increase has been expected and has been underway for a number of years. So in this posting I wanted to highlight some 2014 statistics – as we are getting closer to the end of the year, it is good to take inventory of that data and make up conclusions important for your business.
Here we go…
- Earlier in 2014, the Chinese government announced increases in the minimum wage across multiple Chinese cities. Here is a tabe summary for several big metro areas
The table above shows seven Chinese cities with Shanghai being the city with the highest minimum wage at 1820RMB per month (approximately US$292/month); The cities included in order on the table are Shanghai, Shenzhen, Tianjin, Beijing, Shandong, Shaanxi, Chongqing. It is important to note that the annual increase (from 2013 to 2014 is approximately 12.5% — a big figure)
Also VERY important to note that the Shanghai and Beijing shown wages are NET — i.e. they exclude the contributions to pensions, unemployment insurance, medical insurance, social insurance, housing funds. Hence the overall wage costs are significantly higher when those are accounted for.
- Another data point – gathered through collection of information, the labor costs in mannufacturing cities like Dongguan and Shenzhen is on the rise even for basic labor – ie. workers with only elementary education. In those cases the wages are still in the range of the 1800 RMB plus on top of that employers provide food and dorm housing
Thus when you are planning your next venture or business expansion in China consider these data points and if you feel please reach out to gain some additional insight into the current business climate
Pollution is really a problem in China – especially in Beijing. Throughout the last 10-years or so there have been constant articles and efforts by the Beijing Gov't to enforce tough rules in an effort to limit the sources of pollution in and around the city. The results are mixed…! You can see here…
However, I think the development work by companies like BYD and Daimler are providing a potential resolution to the problem. Enters the new electric vehicle – DENZA
Why am I excited about this new vehicle ? Well, I think it can be a solution to one very big problem – it could address both local (in China) and global pollution challenges
China's development and growth has reached sort of a plateu — which requires new action from the government in this still relatively centrally managed economy. Over the last 15 years the Chinese government has used successfully real estate as the main driver for regulating Money Supply. In the West the banking and money supply policies are driven and managed by a central bank (in most cases) — in China it looks like the real estate market is the main pressure valve. Why? Well think about it this way:
China's econnomy has been growing steadily with high percentage rates over these last 15-20 years. As a result, so have been the incomes across the population of the country. Admitedly, the number of wealthy (really wealthy) Chinese has been growing and the individual wealth of those Chinese has been growing much faster — but a middle class has emerged nevertheless. That middle class has started consumption — fancy food, cars, motorcycles, electronics, high fashion!!! Really – over the years it looks like the world's fashion labels have all opened shop in Beijing, Shanghai, Shenzhen….on and on…
So the question is how, does China control inflation? There is certainly a very rapid growth in the spending power of the Chinese consumer…
The answer is (in my opinion) real estate. During the period of our discussion, real estate has experienced a huge growth in base prices. It has become the storage of value and the pressure valve of capturing the disposable income of the middle class and taking cash from the economy — as a result the real estate value growth and its strong pull of cash has taken that same cash away from chasing commodities like food, clothing, etc.
If you look back in the period you will see that food prices have not risen as much as the other parts of the economy like salarries , disposable income and prices for apartments and vilas. So there you go — thanks to the desire of the Chinese consumer to own real estate, the economy has naturally regulated itself and kept inflation in relative check.
New Leadership in China
Well folks – it is time to get more information on the new leaders in China — after all they are going to be presiding over one fo the largest economies in the world and hold the power to really impact the world economy based on their actions. With that in mind I turned to the Chinese Internet resources and tried to find as many possible articles and background information on Mr. Xi Jinping — with a great article from OffBeatChina.com
Alia | December 26th, 2012 – 5:10 pm
In the past few days, Xinhua News, the official voice of the Chinese government, has published a series of profile reports of the members of China’s new Politburo, the highest decision-making body in the country. The move is seen by many as another indication that Xi and China’s new leadership may have a very different management style from their predecessors: the robotic Hu and the “grandpa” Wen who almost never appeared in public with his wife.
Xi, his father in wheelchair, his daughter and his celebrity singer wife
These reports are very similar in formality – they playback the life stories of the Politburo members to showcase that they, too, like any other ordinary Chinese people, went through hardship, made sacrifices and worked hard for their dreams. This is not the first time when the Chinese media tried to give the country’s officials a human touch. But seldom before did China’s official media openly discuss the “human side” of its leaders – photos of top officials in work settings are everywhere but ones in family settings are rare, if any at all. The personal lives of China’s top leaders, especially after they take power, have always been hidden behind a veil of secrecy. The recent reports of Xinhua , however, made many people believe that a new era has come. The difference? A handful photos of Xi Jinping, China’s new leader, in his early years, solo and with family, including his celebrity singer wife Peng Liyuan. In a Weibo post titled “The Xi Jinping that you don’t know,” People’s Daily thus summarized the life of the country’s new boss:
Following special profile reports take a similar route and present “the Li Keqiang (new Politburo member) that you don’t know,” “the Liu Yunshan (new Politburo member) that you don’t know,” and so on so forth. But those reports failed to make waves as big as the first one on Xi. After all, what can possibly beat a picture of young Xi riding a bike with his daughter sitting on the back, or a smiling Xi posing with his celebrity singer wife in front of a tourist site.
Xi: a husband and father
If the objective was to tell the Chinese people that their new leaders are “from the people and for the people,” these reports are no doubt successful. Judging from netizens’ responses, the release of Xi’s family-life photos is definitely a smart move. 五岳散人, popular liberal intellectual and social critic in China, commented: “To be honest, the latest special reports from the official media on the new Politburo must be planned by public relation experts, from idea to execution. Of course, such reports won’t be possible without the cooperation of these officials. The human touch is precious.”
Many others even went further and concluded that such special profile reports may be the start of a new era in China’s political life. Netizen 青衣刀笔吏 commented: “No more blind worship, officials are back on earth. This is an indication that China is shifting from one-man rule to elite rule.” 幽嗅迷迭香 was even more optimistic: “I see the dawn of China’s freedom and democracy.”
Of course, it’s not all rosy. 车海刚, vice chief editor of China Ecomonic Times, saw the move as a start and a start only: “For China to transform into a modern nation-state, China’s officials have to evolve, from Gods, to saints, to human beings, and then to human beings with constraints. These special profile reports have positive effects by making the images of officials transparent. But this is far from enough. We are still at the first two stages and the transition is still top-down. We need to allow free bottom-up discussions.” 中青报曹林 from China Youth Daily shared similar thoughts: “On the surface, Xinhua is singing a song of praise by presenting Xi’s personal life. But it is also to disclose the situations of his family and his child to the public. It’s a noteworthy sign of reform. China’s top decision makers are taking actions [to reform].” 王冉, CEO of China eCapital, pointed out the key next step: “A reform is not a true reform until it is built into the system.”
More pictures of younger Xi
I decided to post on some really significant events in China – events that have had or are having an impact on a huge number of people – i.e. on most Chinese. So what are those events you would ask? Well, here we go
Number 1: The famous Volkswagen SANTANA that all of us China hands have seen on the streets of various Chinese cities and villages, ridden in by ways of a taxi ride, is having a new look – after 29 years of production !!! Can you imagine this? a car model that has survived as a selling vehicle for 29 YEARS!
I looked hard through my photo database and could not find an image — big surprise — sometimes I feel the ubiquitous taxi is in each of my photos from Beijing or Shanghai….. At any rate, since I could not find one quickly I found an image of an old one on the web, and here it is:
And here it is (below) the new look of the next generation SANTANA:
Number 2: China and the US are in trade talks again. Now that the new Chinese leadership is in power, one can wonder what impact that will have on the next iteration of China-US trade relations…
Here are some commentaries from the BBC:
These talks are happening at the same time that China is searching for ways to reduce its reliance on exports for the foundation of its economic growth and the country's focus on propping up the middle class — the growing set of people capable of becoming solid consumers and drivers of economic growth for the country.
This is also a time when China is focusing increasing effort on improving its urban planning — based on statistics I have seen in the Chinese media, the urban population of the country is finally exceeding the rural one — with this change over occuring in 2012. By some predictions China will have 70% of its population living in major urban areas by year 2030 — this is a very big deal as the country has to figure out how to build cities with stable and functioning infrastructre (think about the floods and drownings that happened in Beijing just a few months ago) to support such urban growth.
Oh, well, I think the Chinese government will come up with a solution — not sure it will be the most "elegant" one but it will be there… Thoughts?
Well folks Austin, a town my family and I have called home for over 10 years (apart from living in Asia and Europe) is now the official site of a FORMULA 1 UNITED STATES GRAND PRIX™ races. The races are certainly bringing another set of exciting events to Austin, but even more importantly, they are adding significant economic activity to the city. Here are some stats (from CoTA's own estimates / documents):
"…CoTA-hosted events are projected to generate an annual economic impact of $400 million to $500 million, equating to $4 billion to $5 billion over 10 years for Texas. The CoTA-hosted FORMULA 1 UNITED STATES GRAND PRIX™ will attract as many as 300,000 people each Grand Prix weekend, with an estimated 80 percent of attendees coming from outside Texas." (Source: http://circuitoftheamericas.com/economic-impact)
The venue is pretty amazing — here are links to information you may need (from CoTA's web site):
And here are some pretty good videos to give you a view of CoTA
Amazingly the F1 race in Austin over this weekend was broadcasted to a huge number of worldwide viewers. Here is a YouTube video from one of those international viewers:
Well, if you are interested in more info, drop us a line — will give you the insider view — the Austinite view of the topic
Earlier in August this new smartphone — the Xiaomi — was launched in China. Why is this news? Well because the Xiaomi is built as a competitor to the Apple iPhone! The Xiaomi's new model is the MI2 (which comes after a successful Mi1 which has been on sale since October 2011)
In speaking with friends of mine in Shanghai, the Xiaomi has certainly caught attention – even among the expat community. This smartphone is going to be sold at RMB1999 which is about one half of the price of the iPhone!
Here is a link to the company and phone
There have been a number of reports in the last several months about the fact that 2012 will be a record year for China's Overseas Direct Investment. Per Zhang Yansheng, secretary-general of the Academic Committee of China's National Development and Reform Commission, China's overseas direct investment (ODI) has grown at a rate of 40+% annually between 2006 and 2010. Here are some of the main points that Xinhua News agency summarized from recent Chinese Government directives:
|Overseas investment from Chinese companies will see "explosive growth" over the next decade, as the government has reaffirmed a strategy to encourage enterprises to invest overseas, experts said.|
The strategy to grow ODI was reiterated in the country's official 12th Five-year Plan (2011-2015), which was endorsed by China's top legislature in March 2011.
|In Q1'2012 China invested $16.55B overseas (as non-financial investments) with $6.2B being M&A activities per report from China's Ministry of Commerce; The Q1'12 results represented a growth of 95% in comparison to Q1'2011;|
At the same time there are reports showing that the ODI is not all smooth sailing for the Chinese investors. Per report published by People's Daily, "By the end of last year, China suffered a net loss of $26.8 billion in overseas investments," said Zhou Zhongshu, vice president of the China International Council for the Promotion of Multinational Corporations, at a Beijing conference in late June 2012.
One example of this is the investment Geely Automotive made in Manganese Bronze – the manufacturer of London's well known taxi cab vehicles…..Now you can see those on the streets of Beijing…Here is one (courtesy of Shanghai List)
Now, the key question is "Why the strong growth of investments?" In my view this is very heavily driven by the strategy of the Chinese companies and Chinese Government to build up its Intellectual Property (IP) portfolio — no better way to do so. The ODI and M&A activites are adding significant access for the Chinese entities to both European market and IP rights which in the future will provide nice platform for expansion into the global market.