Mon, 07 Jul 2003

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.