Archive for the ‘China’ Category
China is a phenomenally important player in the world’s economy. The country does, of course, have a reputation as home to much of the world’s low-cost manufacturing, but this is not such an accurate reflection of its economic standing today; increasingly China is moving up the pecking order and shedding its reputation as the world’s workshop.
All of which does perhaps beg the question, where will low-value manufacturing go next?
Indonesia is one country creating a lot of interest in this regard. With a significant population, growing middle class and relatively stable government, it certainly ticks some of the required boxes, but some concerns persist, such as onerous labour regulations and weak infrastructure.
Indeed, one trend that has been noted is for certain countries to carve out certain niches. Bangladesh and Cambodia, for example, are very much establishing themselves in the textile industry.
Elsewhere, Vietnam is tipped by some to be the next stop for global supply chains, but others feel it is not living up to its potential for a number of reasons, among them a poor transportation infrastructure, political instability and high inflation.
Meanwhile, manufacturing industries in countries such as Thailand and Malaysia, both of which produce a bigger share of sophisticated goods than China (particularly electronics and car parts) could actually find themselves threatened by Chinese manufacturers moving up the value chain – and therefore into their turf.
With complex supply chains predicted to continue to fragment across multiple countries, specific industries are expected to gravitate towards countries with comparative advantages in that area.
In summary, there is no one clear successor to China, but all Southeast Asian countries together might just stand a chance.
This blog is based on an article first appearing in China Economic Review. To read the article in full, please click here or to learn more about the potential of the Asia Pacific region for your business, visit our website.
China, one of the Four Great Ancient Civilisations, with over 5000 years’ history, has tacitly regained its prestige and proficiency, standing as the second biggest economic power in the current world.
Over the past three decades, thanks to the Reform and Opening-up initiated and enacted by Chairman Deng in 1978, China has grown its economy at a significant and stampeding pace (see Figure 1).
Figure 1 China GDP 1978-2011
Figure 1 China GDP 1978-2011
China is renowned for its incomparable labour cost and unrivalled manufacturing capacity, which easily leads to scales of economy and thus cheaper prices. In addition, China has a controversially high tariff as the entry barrier for importation from other countries. Therefore, a great many people in the world still believe that it is extremely difficult to export goods, particularly those manufactured in the Western world, into China. However, the situation is gradually changing.
From a macro-economic perspective, China has seen its importation having a nominal increase of almost 2.5 times over the past 6 years (see Figure 2). Even after taking into consideration the Chinese currency appreciation of around 28% (see Figure 3), China still managed to double its imports between 2006 and 2012. Therefore, it is not bold to make an assumption that this trend will not change and the peak of China’s imports is yet to come.
Figure 2 China imports 2006 – 2012
Figure 3 Appreciation of Chinese Yuan 2006 – 2012
1) The Expanding Middle Class in Mainland China
Only as far back as 1970, the middle class in mainland China was a stable minority. Once again, thanks to the Reform and Opening-up policies, the middle class emerged and grew steadily in numbers post 1978. According to Euromonitor International, driven by a continued strong economic growth, China’s middle class expanded from 65.5 million in January 2005 to 80 million in January 2007 and is forecast to reach 700 million by 2020 (see Figure 4). According to the Research Report on the National Population Development Strategy, in 2020, China’s population is to reach 1.45 billion. Thus, in ten years, China’s middle class will account for 48 percent of the whole social hierarchy. Needless to say, this group of people are no longer just concerned about having “adequate food and clothing” and, in contrast, would rather pay a bit extra for a better quality of life. Therefore, they represent an unparalleled and growing purchasing power, the likes of which one would never be able to find anywhere in the world.
Figure 4 Number of middle class in mainland China by 2020
2) Inflation and Currency Appreciation Making Western Goods More Affordable
On the one hand, although China has a relatively high inflation rate (especially recently), China’s GDP annual growth rate has been outperforming its annual inflation rate over the past 10 years (see Figure 5). Thus, generally speaking, the purchasing power of people from mainland China has not visibly been affected by inflation. On the other hand, a continuous increase in inflation has resulted in more expensive goods in China than ever before, which can be partly reflected by the rising Consumer Price Index (CPI). From Figure 6 we can see that since 2010, the CPI of Beijing has increased by 26%, whilst London has not seen any significant change, thus closing the gap between these two cities.
Figure 5 Real GDP Growth Rates vs. Inflation Rates
Figure 6 Consumer Price Index Beijing and London
In addition, as mentioned before, the Chinese currency has appreciated by almost 30% over the past ten years, making goods produced in China increasingly more expensive, which, along with the impact from inflation, leads to commodities from Western countries becoming more affordable to Chinese citizens than ever before.
3) The Desire for Goods of Quality and Reliability
Although having a strong prospect for further economic development, China still has some urgent issues to resolve, particularly with regards to ensuring the quality and reliability of its commodities. Take food and medical safety as an example. Recently, the world was shocked to learn about the inferior quality of infant milk powder that was produced and sold in China, which not only caused irreversible damage to the health of many babies but also resulted in several deaths. Recent news of a shocking affair involving the production of medical capsules’ gelatinous coatings from industrial material or more literally, “old shoes and leather”, served to further fuel a common distrust amongst Chinese citizens for the commercial interests of the government’s standards authorities. Such a lack of trust within Chinese society has driven many to have a much stronger aspiration and desire for goods of a higher quality and reliability or, as in many cases, ones that are not made in China.
All in all, we can expect to see an expanding group of customers with a growing purchasing power, amongst whom there would be a rising preference for better quality goods and more reliable commodities, living in an increasingly expensive China, where Western goods are comparably becoming more affordable. Therefore, in the face of such prime commercial opportunities, it seems an obvious question to ask those Western companies who have not yet traded to China – why the wait?
However, doing business in China is far more complicated than what can be imagined. International enterprises must take various aspects into account, such as tackling the legal issues, sourcing suppliers, distributors and partners, all of which would be clearer with the assistance from a professional research and consulting firm. B2B International, as an experienced research and consulting agency with an established operation in China, would like to support companies willing to grasp this “Golden Time for Exporting to China”. To find out more about how we may be able to help, please visit www.b2binternational.com/china
Last week, B2B International CEO Matthew Harrison was a guest speaker on the panel of Insider’s International Trade Breakfast in Manchester. Matt, along with the other panellists, discussed all things China, offering advice to companies interested in the opportunities this vast country has to offer, as well as answering any specific questions or concerns put to them by members of the audience.
Matt, who set up B2B International’s first office in China back in 2006 and who has also helped scores of other companies across a whole host of sectors to establish or expand operations in the Middle Kingdom, was perfectly placed to share his insights. Insider’s review of the event can be found by clicking here.
If you are interested in doing [more] business in China, why not visit our China website to find out how we may be able to help you.
In this week’s Business Surgery, Stephanie Teow assesses whether the appeal of China is on the wane or as strong as ever
I read with interest recently an article in The Economist which questioned the extent to which China can continue its position as a low-cost base of manufacturing in an era of rapid social and economic change:
According to the article, many experts suggested that the cost to manufacture in China could soar twofold or even threefold by 2020, when it may be just as cheap to manufacture things in North America as in China. Our experience carrying out research across different markets in China indicates that costs in China have been rising for some time now, and the era of ‘cheap China’ has actually been at an end for a while. Rising labour costs and the growing costs of key raw materials, means that China’s previous competitive advantages as a location for manufacturing are gradually being eroded.
However, although it is likely that the future will see a growing proportion of China’s low cost manufacturing moving to other developing economies in the region (or even back to Western countries), it does not necessarily follow that most B2B manufacturing will suddenly up sticks and leave China in the immediate future. As this article notes, China has a number of key advantages as a manufacturing base which other countries in the region find very difficult to emulate, such as:
It is clear that China will remain the manufacturing location of choice for some time to come for manufacturers in most business-to-business markets. While rising costs in China will clearly make exporting from China more prohibitive in the future, it is increasingly the lure of the large Chinese domestic market that is attracting the attention of manufacturers.
Equally, the manufacturing complexity and technical expertise required for many b2b manufacturers, along with the importance of reliable supply chain infrastructure, means that for many companies China still represents the most viable manufacturing location. A growing cohort of business-to-business companies are now demanding market intelligence to better understand China less as a manufacturing base for export, and more as a dynamic marketplace of the future.
This week, Mark Hedley takes a timely look at the issue of employee satisfaction
With rising unemployment figures, reduced income levels of the majority of workers and the contentious issue of bankers’ bonuses continuing to provoke strong public feeling in the UK, it seems the issue of how to keep employees satisfied and motivated has never been more relevant. In China too, the issue of worker treatment has started to receive much greater attention in the media. Most recently, Apple’s decision to investigate reports of poor working conditions and low pay at the Foxconn plant in southern China, following a spate of accidents and worker suicides, reflects a growing public mood in China for improved treatment of workers by both multinational and local Chinese companies.
While very few companies have employee problems on the scale that Apple currently faces in China, it is nevertheless true that many foreign companies in China often fail to invest sufficient time and resources in measuring and looking to improve satisfaction levels amongst their employees. Although this is particularly due to a failure of will on behalf of Western managers, this is also due to cultural differences in the way that companies are organized and operated in China. Nowadays, many Western firms have a localized management team in place, which means Eastern cultural values often remain entrenched in how these companies operate within China.
Chinese companies tend to be structured along more hierarchical lines than Western firms, where flatter management structures allow for greater interaction between senior managers and employees. While managers of Western corporations often look to engage employees from all levels of the business in the decision-making process, frequently gathering feedback from employees, Chinese managers are often less active engaging with employees in this way. It can be argued that Western society is conducive to an environment in which employees are more willing to give voice to their views in an open and often critical manner than is the case in hierarchical societies such as China. Conversely, senior managers in China are normally expected to take decisions without broad consultation from junior stakeholders, while junior staff may be disinclined to voice their opinions in an open and honest fashion.
Effective employee research arguably has a more important role to play in hierarchical management cultures such as China than in Western markets. Not only does effective employee research lead directly to improvements in staff, but it also enables senior managers to tap into a rich knowledge resource within the organisation. Employee research can also help to improve organisational performance, generate new ideas to drive business success and as an additional way of ‘sense-checking’ important managerial decisions. It gives workers opportunity to feed views upward, remain well-informed about what is happening within the organization, and to gain reassurance that managers are fully committed to the organisation.
As companies in China fight to retain their most talented employees and make the best use out of their existing human resources, there is likely to be a growing future demand for research that accurately captures the attitudes and needs of employees. Assembling a more satisfied workforce is a major competitive advantage in an increasingly competitive environment. Findings from employee research can be used to develop a strategy for building a committed workforce who will contribute to the well-being and future prosperity of the company.