China, an opportunity and a challenge<\/p>\n
The Jakarta Post
\nJakarta<\/p>\n
China's rapid economic rise of the last 10 years presents an
\nopportunity for global companies. But while it can be a lucrative
\nmarket, it is also a fiercely competitive market, according to
\nJonathan R. Woetzel, author of the newly published book
\nCapitalist China -- Strategies for a Revolutionized Economy
\n(2003, John Wiley & Sons Pts Ltd). The director of McKinsey &
\nCo's China office visited Jakarta recently as part of his book
\npromotion tour. He talked to The Jakarta Post's Endy M. Bayuni
\nabout investing in China.<\/p>\n
Q: Is China's economic growth sustainable?<\/p>\n
A: Growth rates of 6 percent to 8 percent GDP seem sustainable
\nfor the next five to seven years. China has a track record of
\nhigh investment, high savings and high productivity growth. China
\nis moving towards a market model. In operation and in funding,
\nChinese companies are increasingly driven by market expectations
\nas opposed to state planning. And China has a very productive and
\nrelatively educated quality of workforce.<\/p>\n
Are there no limits to how far China can pursue reforms, which
\nas you said in your book, drove the rapid growth?<\/p>\n
China's reforms have been in place for 25 years. Nobody should
\nquestion the seriousness of the government in accelerating
\ngrowth. Whether or not China is continuing to grow is no longer a
\nquestion about government policy, but more about the
\ncompetitiveness of Chinese companies and how well they can stack
\nup against international competition.<\/p>\n
You argued in the book that foreign investors have a three-to-
\nfive-year window of opportunity in China. Can you explain?<\/p>\n
China is now deregulating its economy, allowing entry into
\nmany sectors, particularly in the services sector, retail and
\nfinancial services. If you're not amongst the early movers, you
\nare likely not to have an opportunity to build up a leading share
\nin that industry. In China, the economics of every industry tends
\nto be \"winner-take-all\". In other words, the first one or two
\npeople make money, and the next three, four or five either break
\neven, or lose. If you were not amongst the first movers, you'd
\nhave to hope that the first movers make a mistake.<\/p>\n
What do you say to prospective investors about how to approach
\nChina?<\/p>\n
First, it is necessary not to think only about the most
\naffluent markets, but to think about the whole Chinese market.
\nMost markets are typically in two or three cities, but there is
\nalso the rural area. That means you need to have a product range
\nwhich is cost-competitive. You cannot just go in with an
\nexpensive product and expect it to be the market leader. You have
\nto meet the expectations and needs of all the markets<\/p>\n
Secondly, your business model needs to be adapted to China.
\nChina's strength is the low cost productive labor. If you're
\ngoing in with a capital-intensive model, that is unlikely to be
\nsuccessful, especially if you are competing against manufacturers
\nthat have relatively cheap labor-intensive production lines.<\/p>\n
You need to tailor your business model to China's reality, and
\ntake advantage of the opportunities. Don't just assume that the
\nway you do business in other countries is applicable. And you
\nhave to do this yourself. Nobody is going to do business for you
\nin China. You have to take control of your own destiny.<\/p>\n
How different is doing business in China compared to other
\ncountries, say, in Asia?<\/p>\n
One is scale. It's a lot bigger. So the requirement for being
\nlocal is greater. In China, if you don't have a strong local
\npresence, local staff, local understanding and capability, it
\nwill be very difficult to be successful.<\/p>\n
Another is that China is a communist state in which the
\ngovernment has a large influence. Understanding the role of
\ngovernment, how it operates, what it does and does not do, what
\nits policies are, is another part of the China equation. The good
\nthing is China's government is relatively well organized, so that
\nonce you have started to understand, it becomes pretty logical.<\/p>\n
Every part of China is somewhat different. The Chinese
\ncountryside is very different from the Chinese cities; the
\nChinese coast is different from the Chinese interior; they differ
\nin terms of income level, infrastructure, language and the way
\nyou do business. So, having an understanding of differences
\nwithin China is something that is very important, and in that
\nway, it is not dissimilar from Indonesia.<\/p>\n
What about corruption and legal uncertainty?<\/p>\n
The rule of law is one major issue because 25 years ago China
\nhad no legal code. Slowly, they are building one up, with more
\ncodes, more laws, more precedents and more courts. But still
\nChina doesn't have a very developed or established rule of law.
\nThere are lots of gaps, lots of gray areas, often one has to rely
\non administrative judgment as opposed to legal precedents.<\/p>\n
Corruption is something that is seen as part of daily life.
\nChina has signed most every international convention that exists
\naround corruption, intellectual property and other norms in doing
\nbusiness. The challenge is enforcement.<\/p>\n
That said, China has a relatively good record on (fighting)
\ncorruption. Most international observers do not view China as a
\ndifficult place to do business, at least on that account.<\/p>\n
Is there room for small and medium companies in China, or are
\nthese opportunities available only for big companies?<\/p>\n
In most cases, small companies can be faster and big companies
\nare often affected by bureaucracy or lack of desire. In many
\nsectors, small companies initiated the opening up; for example in
\nexport processing, textile, plastics, even real estate and
\nconsumer goods. Companies from Taiwan and the Philippines are
\nrelatively small, but they have built up billion dollar
\nbusinesses, producing stuff like instant noodles and vegetable
\ncrackers. And they are making good money.<\/p>\n
What do you tell Southeast Asian companies in dealing with the
\nemergence of China as a regional economic power?<\/p>\n
There is a many similarities between China and Southeast Asia,
\nparticularly Indonesia. China is a poor resource-based economy,
\nand Indonesia is resource-rich. There is a clear opportunity
\nthere.<\/p>\n
Southeast Asian companies could take advantage of the new
\nregional supply chain. China has forced Japanese companies to
\nrestructure. Before, Japanese companies might have had a plant in
\nevery country, not just serving their country. With China
\nbecoming such a huge factor, both in terms of the market and in
\nterms of the competitiveness, they now set up a world scale plant
\nin China and shut down the ones in Japan. To fill that world
\nscale plant in China, they have to think about how they are going
\nto create a regional supply chain. In many cases, China is not
\nthe right place to manufacture all of the parts. You can take
\nadvantage of that and fit yourself into that supply chain.<\/p>",
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