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Why China Matters

These are tough times. Really tough. We have avoided going from talking about the possibility of the “R” word –- recession -– right to the “D” word –- depression. The news cycle has been a bit schizophrenic lately, too, and understandably so. Bouncing between the macro-economic crisis in the U.S. to how it is impacting the average citizen (using the well-worn phrase “Wall Street to Main Street”) and then flipping to the international situation — how the U.S. meltdown affects global markets and the ongoing war in the Middle East. Its enough to make you want to crawl in a hole and wait until its over. And depending on who you talk to, that could be quite a wait.

But even though climbing in a hole to avoid the whole mess sounds like a good idea, it isn’t. We all know that. However, just peering out of the hole and staring at our immediate surroundings is not going to help either. In this dawning age of globalization, when trouble hits, we all tend to turn inward and stare at our economic navels, shutting out the rest of the world that looks even more scary than our own, already petrifying situation.

But again, this is not the way to do it. To deftly switch metaphors, the financial crisis is not going to be solved by only getting under the hood and messing with the engine (although I think we all admit that this engine is long overdue for an overhaul). We need to not only fix our engine but we also need to look for new roads to drive on — and many of these roads are going to be outside our home markets.

In this podcast, I will talk about some reasons why China matters in our current situation. In coming weeks, we will pick apart some of these issues and dive down into the specific challenges and opportunities of each one. But for now, the challenge will be to ignore our inner scaredy-cat, jump out of the hole and look around.

A warning: I am not going to talk about how important China is because of their foreign currency reserves, their ownership of massive amounts of U.S. T-bills or their potential military might. These are issues much too big for my little brain and are –- to steal a phrase –- way above my pay grade. I am not going to talk about why China is important for our economy. I am going to talk about why China is important for our companies. For your company. OK? Cool. Here we go…

In times of economic crisis, our natural tendency is to look for ways to cut costs and maintain what we’ve worked so hard to build. Everyone is assessing the situation according to indicators of mass firings, retrenchment in capital spending and diminished acquisition activity. When times are tough, we tighten the belt and learn to go without. Or so we think.

Over the years of these podcasts, you have heard me say many times that our mantra should be “growth” –- growth of revenues, profits, market share and influence. It’s about growth, stupid! But when economists use oxymoronic terms like “negative growth” to describe the current environment in North America and Europe, where can we find positive growth opportunities?

A neighbor of mine is the regional CEO of one of the biggest foreign companies working in China –- they have tens of thousands of employees, over 30 factories and are doing billions of dollars in business. I asked him what the current mood was in his company, and he said, “Well, the executives in the U.S. are ready to jump off a building, but here in China, we’re feeling pretty good. Sure, things are slowing down a bit from what they were a year or two ago, but we are still seeing 12 or 13 percent growth here. Where else are you going to find that?”

He’s right. Where else are you going to find that? The simple fact is that markets are growing here in China and they are not growing elsewhere. Isn’t that enough to make you just the least bit curious about what China could mean for your business?

One of the challenges that China is going to face in the coming years is to move from an export-oriented economy to one that consumes a greater amount of what it produces. As they make this transition, the demand for everything here is going to increase. The challenges are going to be great and competing with local companies will not be easy. But if you are looking for growing markets and rising demand, China is the place to be looking.

If you are listening to this podcast, chances are you are already finding sales growth opportunities in China. So my challenge to you would be to look for more opportunities. Don’t rest on the laurels of what you have already done. Sure, be proud of it. Revel in its success (if, indeed, you have found success), but find a way to go further.

One of the best ways to do this is to consider tier 2 and tier 3 cities in China, the “smaller” cities of only 1 to 8 million in population. Remember that China has over 200 cities with over a million population and we are seeing growing demand in all of them. If you are already selling in the bigger cities of Beijing, Shanghai and Guangzhou, you will likely need a different distribution strategy to reach the other tiers, but the opportunities could be very, very good.

The next reason China matters is that it still is a great source for lower-cost goods and services. Notice I did not say “low cost” -– the distinction is important. You hear a lot of people decrying the fact that China is no longer the lowest cost source in the world. We have covered this in other podcasts so I won’t go into detail here, but suffice it to say that while, yes, prices for labor, raw materials, logistics, etc., have gone up in China, it still might be one of the best places to source product in the world.

But what about Vietnam? India? Other places where prices might not be rising so much? Certainly check them out and compare, but don’t ignore China. I was chairing a panel of procurement leaders a month or so ago and the question was asked if China was no longer interesting as a source and shouldn’t everyone start considering other countries. The procurement leader of a consumer products company that sources about $2 billion from China was on the panel, and he said that he was not really considering other countries besides China. He said, “We have not explored other cities in China. Why would we want to explore other countries?”

For those of you already sourcing in China, this could be some good advice. As you are looking at other countries, look at the tier 2 & 3 cities in China as well. Many of them have been improving their manufacturing capabilities and infrastructures at an amazing rate, and if you’ve already established an operation in China to support your current business, going deeper in China is just incremental.

The third area in which China matters is in its very early stages and so is a bit tougher to pin down, but it should be on everyone’s radar screens, and that is China as an “investor.” For a couple of years now, the Chinese government has been quietly encouraging Chinese companies to look outward, to find markets and investment opportunities outside of China. Well, that quiet approach is now over, and the government is making their encouragement in very loud tones and is providing support to help them do so, organizing research delegations and providing cash grants and loans for overseas investments.

The path is similar to how the West looked at China many years ago. The first companies to do so were the larger ones with the money and vision to go global. Then, as time went on, the smaller companies started investing in China as well. Same with Chinese companies — the larger, state-owned firm have been going global first. Lenovo bought IBM’s laptop division; Haier is selling their appliances aggressively into North America and is reportedly looking at buying GE’s appliance division; and the Chinese oil and gas giant CNOOC was blocked in their attempts to purchase assets in the U.S. but is still looking for opportunities.

But it is the smaller Chinese companies going global –- privately owned in the $50 to $100 million range –- that could really spark growth in this area. One of the practical ways we see this developing is in doing M&A deals here in China, where one of the primary motivations for the deal is to help the Chinese company go international at the same time that the Western company is coming into China. Chinese companies have the products and investment appetite and Western companies often have the channels. The combination is a very powerful one.

My last reason that China matters is pretty loose, I will admit, but I really believe that China should be on everyone’s radar screen because of the potentially new things that could come out of China. Now, that might sound a bit contradictory give what everyone (including me in the past) has been saying about China -– that they are great at copying ideas but not very good at inventing them. And historically, that has been true: Give an engineer here a blueprint or even a sample, and you’ll have a very good copy in a very short period of time (and at a pretty low price, too). But bring a Chinese engineer a problem and ask them to design a solution, well, you might have to wait around awhile.

This is changing, but maybe not for the reason that you might think — that engineers are getting better. While it certainly is true that technical and business education is growing exponentially in both quantity and quality, it’s the context of China that is going to motivate creativity. By context I mean it is the business, social, technical and environmental situation in China that is going to spawn creativity by necessity.

Take the environment: No where on earth is the environment more of an issue than in China. And it’s not just because there are incredibly polluted waters and skies here. Look at any developing country -– and some developed ones -– and you’ll find the same thing. No, it’s because the rate of development is so fast, and the expectations of the Chinese population to succeed are so high, that new ways are going to be found to overcome these challenges. Time and again, I have seen the creativity and entrepreneurial drive that seems resident in the Chinese cultural DNA rise to the surface.

In the 80s when things were just beginning to take off, I saw farmers in the countryside where I lived literally create markets out of nothing in an attempt to sell their extra produce. They had to skirt some very restrictive rules to do this, but they did it. Look at the annoying DVD sellers, the impromptu street markets, the guys on the side of the road with a bucket of warm water and a screwdriver, marketing themselves in “Car Repair and Beautification”!

Sure, there is a vast difference between selling fake DVDs and inventing a new solar energy technology, but the creative and entrepreneurial underpinnings in China are the same. There is a vast amount of creative energy here that is looking for new outlets, and now that the core technology here is improving, I think we are going to see some explosive growth in this area.

To see where a market is going, follow the money. And there is a lot of money changing hands here these days –- a lot of people are looking around for interesting things to invest in. We are working with several local investment funds to sniff out new opportunities. They are all small and in their very early stages, but they all have big dreams and a big field to play in. And they are going to matter some day.

So as you are struggling with your own investment portfolio and your company’s bottom line, resist the urge to stare at your navel and block out the outside world. There are some incredible opportunities still available in China –- and, in some ways, are even MORE attractive given the depressive nature of the rest of the world.

None of this is low-hanging fruit and exacting due diligence here is still the watchword. But new top-line growth opportunities and bottom line cost savings are real opportunities here. And China is looking to invest outward and seems to have the cash to do so. Also, there is a legacy of creativity here and a strong motivation to do something new.

One of my early mentors emphasized the old saw about “keeping your head when others about you are losing theirs.” At no other time in recent history do we need to dust this off and begin to apply it –- and if we do, we will find that China matters a great deal.

“Great Wall of China” courtesy of SmokingPermitted on Flickr

This entry was posted on Tuesday, October 21st, 2008 at 12:08 pm and is filed under China, economy, podcast. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.