This book will give you a good background into China. China has really grown into one of the biggest economies in the world. China is getting more prominent now. Both the writers are professors. There are 6 trends that shape China. These are macro-economic trends that have an impact on businesses. The six trends are 1) urbanization; 2) manufacturing scale; 3) rising Chinese consumers; 4) the brainpower behemoth; 5) money – and lots of it; 6) the Chinese internet. All of these trends are a source of potential revenue. There are many academics who have studied these topics.
Urbanization. Many have moved from the countryside to city. An average of 18.5 million move to cities each year. It’s a natural development to an industrial landscape. This is a cultural phenomenon. This is for many, the hope of a new life. There will soon be 1 billion city dwellers in China. The urbanization rate is about 50% now. The number of cities increasing will rise. There are currently 14 cities with more than 5 million people. Mega cities will form in future. Shenzhen was a village in the 1980s. However, it has emerged into one of the most cosmopolitan cities around. It is necessary to build a thriving city. Ordos in Inner Mongolia is also a well-built city now. However, it was built too quickly and is a ‘ghost’ city now. Xian is also a growing city with a huge population. Urbanization means wealth. Disposable income and spending power is increasing. China Vanke is the world’s biggest real estate developer. It engages in middle class residential property. The founder of the company is Wang Shi. It was a real rags-to-riches story. Guangdong was one of the first few cities to be developed in the 1980s. Shenzhen was designed as a Special Economic Zone around 1983. It was gold. Shenzhen was a boom-town for all sort of products. The movement of people in Shenzhen created demand for his real estate projects. In 1991, the company went listed on the Shenzhen stock exchange. In 2012, their revenue exceeded $16 billion and employ over 16000 people and have presence in over 54 cities. Now, he is the Chairman and also a philanthropist and environmentalist. Vanke was in the right place at the right time. It was cost efficient and extremely fast. China is a series of clusters, not a continent. Qingdao, Beijing/Tianjin are example of clusters. There are over 20 clusters in China. Infrastructure, like high-speed rail, has facilitated trade and transport within each cluster. Massive inflows of people will present problems like infrastructure/pollution etc. Water is a big issue in China. The water supply cannot keep up with the development. Water quality is bad due to heavy discharge into sewers/rivers. Supply is only 1 issue. Water conservation and treatment is another. Construction is a very big industry in China. It is still going to play a huge factor today. Pre-fabrication is where factories build part of the real estate and then these parts are transported to site and assembled. This greatly speeds up the construction process. The Chinese urbanization is a great social experiment. However, other issues like income disparity etc will start to emerge.
Vanke has a business model it calls “5-9-8-6”. Start construction within 5 months of land purchase. Kick-off sales in the ninth month. Achieve 80% of the target in the first month. And sell out 60% once the project has opened up for sales. This enables the company to retrieve cash faster than its competitors. – Jonathan Woetzel/Jeffrey Towson
Huge manufacturing scale. Nowadays, most things are ‘Made in China’. Export is a big thing in China. They have competitive advantage because of their immense size. It contributes over 40% to the GDP. The manufacturing scale is incredible in China. They have low labour costs and benefit from economies of scale. There has been a move towards high-tech manufacturing. Most of the manufacturing is now tech-related. Huawei Technologies is one of the most global Chinese company now. It was founded in 1987 by Ren Zhengfei. In 2012, they achieved a revenue of $36 billion. They have over 150,000 employees globally. The founder was also a rags-to-riches story in Shenzhen. There was a huge focus on trying to improve technology. Initially, to avoid stiff competition from Ericsson etc, Huawei targeted third tier cities where there was less competition. Their plan worked. In the early days, they made money from selling telecommunication equipment to hotels and small enterprises. In 1997, they expanded globally and also focussed on less developed cities. They use a ‘low-cost + customization’ strategy to knock out competitors. More than two-third of their revenue is outside China. Huawei is one of China’s most renowned brands. They rode on the manufacturing mega-trend. They invest 10% of their income in R&D and invest heavily in human capital. Lastly, they cultivated the ‘wolf’ spirit in employees. They were smart to only focus on telecommunications. They managed to retain employees by issuing stock options. To win in China, you must go low-cost. Although some of the Chinese companies might lack branding, they win on political and cost advantages. China managed to dominate the hi-tech sector like ultrasound scanners etc. Selling and distribution costs are also kept low by the Chinese companies. Watch out for the fight in the middle areas. Going global is normal for Chinese companies, but are they going to win the long run? The Chinese are ambitious.
Rising Chinese consumers. Customer behaviour is influenced by psychology, culture etc. The future of the world will be China and Asia. The wealth lies in China. Chinese consumers are still over value-the-money things. Their economy is opening up and becoming less protectionist. Master Kong sells cup noodles and they are a big success. It has about 56% market share in China and worth about $16 billion. The founders are billionaires. Now, they expanded into the drinks segment. Their product is standardized and at low-cost. Now, customers are becoming more brand-conscious as spending increases. There is also better brand loyalty. Spending patterns have changed and are similar to Westerners now. The Wang Brothers founded the firm, Huayi Brothers, that does advertising and film production. They are known as the ‘Warner Brothers’ of China. The Chinese cinema scene is starting to take flight. Rising consumer wealth has weird effects. The meat consumption in China is increasing with more wealth. Tyson Foods is one of the largest meat processors who have entered China. Consumer demands are sky-rocketing. The value chain has to adapt to ensure that it can meet customer demand. Farming is an up-and-coming sector. COFCO is the largest supplier of products and services related to Agriculture in China. It is a state-owned company. It is a massive company. They oversee the entire supply chain. GDP growth has slowed to about 6 or 7%. The Chinese middle class are the future
Money – and Lots of It. China practises market capitalism. Their foreign reserves, deposits, trade surpluses are huge. Shanghai is now a massive financial district. It was largely fields and small houses in the 1990. Shenzhen opened up in 1979. In 1990, the Pudong region in Shanghai was re-developed. Now, there is a robust financial system that works well. Ownership and control of certain financial institutions might not be so clear. Ping An Chairman, Peter Ma, runs a huge insurance and financial services company that is bigger than Prudential, AIG, Metlife combined. The firm offers a wide range of services, other than just insurance. It is truly a success story. They are also have trust, brokerage, banking services. There are 4 huge local banks in China. They are ABC, CCB, BoC and ICBC. All of them are state-owned entities. ICBC is usually the world’s biggest bank by market capitalization. Most of the lending goes to state-owned enterprises and other local government. Shadow banking has emerged in recent times. However, it is not safe in nature and should be avoided. Non-bank FIs have stepped up lending. However, some of these are not being tightly regulated. The wealth management market is growing rapidly in China. WMP lending is also largely off-balance sheet. Shadow banking is risky in China. Chinese debt has increased rapidly in the past few years.
The Brainpower Behemoth. The Chinese are fast and flexible in their processes. They are able to adapt really quickly. There are also many able engineers in the field. In 2012, there were 7.5 million graduates from China. Their education output and numbers are huge. Suntech Power is a tech company who is in the solar industry. They are also known for their rapid innovation. They have over $3.4 billion in revenue. Suntech has both brainpower and low-cost manufacturing. Dr Shi Zhengrong is from WuXi. He came from humble beginnings and worked his way up the ranks. Wuxi had sufficient infrastructure and he used it as a base for his company. They also compete with Western brands in the same industry by selling globally. The company also received much government support along the way. Cost innovation is very common in China. They make increment improvement to existing products. Getting cheaper is the way to go. R&D expenditure in China has surged dramatically. Some of the big MNCs have their R&D centres in China. Employees will work on product development and research etc. Manufacturing + R&D will give you success in the long run. Many of their tech giants have huge cash pools. Huawei is investing a lot into technology. There is a mismatch between University education and employment. There are simply too many graduates but not enough jobs. IP Theft is an issue as well. The patent filing growth rate in recent times have signalled the quality of brainpower that China has.
The Chinese Internet. The Internet is moving very rapidly and the Chinese are quick to adopt it. E-Commerce is a huge thing nowadays. Some of them are addicted to the Internet and spend too much time on it. Tencent Holdings is one of the top 10 Internet companies in the world. They are known for the messaging service, QQ. It started in Shenzhen by the founders Pony and Tony. It was like MSN. There are more than 700 million QQ users now. They also invented WeChat, which is the next big thing. It has a market capitalization of over $100 billion. There are many offering other than chat, such as internet storage, dating services, gaming etc. The business model is very scalable and can cross borders very easily. They also tie up with many famous European gaming companies. Chinese are very big on instant messaging and online music. A lot of the youth like to watch online videos. The Chinese spend a lot more time online than Americans. Internet addiction might be a potential problem in China. The Chinese are also very active online and have a big presence. Word-of-mouth is a great way to market your ideas and push your products. E-Commerce is the next big thing in China. Baidu and Alibaba are huge in China.