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