China's economy: More chance than threat

The Jakarta Post, Jakarta

In dealing with the challenge presented by China's rapid economic rise, Indonesian companies should take a look at specific industries in China, for there are ample business opportunities to be found, either in cooperation with, or in competition against, Chinese companies, a consultant with McKinsey & Company says.

For Indonesia, the opportunities can be found in the agricultural and mining sectors, according to Stephen M. Shaw, a director with the consultancy company's Hong Kong office.

Shaw, who has studied the impact of China's economic rise after its accession to the World Trade Organization (WTO), says the Association of Southeast Asian Nations (ASEAN) should strive to fully implement the ASEAN Free Trade Area (AFTA), to minimize the negative impact from the threat China poses.

PT McKinsey Indonesia and the Harvard Club of Indonesia on Tuesday organized a seminar titled "China's Emergence: Implications and Opportunities for Indonesian Businesses". Besides Shaw, other panelists were Hartanto Reksodiputro of the Ministry of Trade and Industry, Sumer Jiaravanon, the CEO of Thailand's Charoen Pokphand group, and Will Angove, the president of Ford Motor Indonesia.

Shaw talked to The Jakarta Post afterward about the issue. Herewith excerpts:

Question: In what way does China's accession to the WTO constitute a threat to Indonesia and Southeast Asian countries?

Answer: The biggest threat is one of diverting investment that otherwise would come to Southeast Asia, because even if countries in this region were able to integrate their economies, the total size of their population is still only a fraction of China's.

Although China has its own risks, many foreign companies remain unconvinced that Southeast Asian countries can fully coordinate how they trade and how they do business. In that respect, it is really an issue of relative economic development, which nations will get the foreign capital and the know-how to really do that.

Q: And as an opportunity?

A: The challenge of many Southeast Asian companies in developing their businesses is that their home markets are of insufficient scale to get the economies to do the business successfully. China is such a large place; even one province of China has as much population as an entire Thailand. In the 1990s, we explained to Korean companies that if they simply repeat their business in one province across the border in China, they would already double their market. That's a very similar analogy to what Southeast Asian countries faced.

Q: What about the planned ASEAN-China free trade?

A: That's a very positive sign. For these economies will integrate more and they will jointly architect how industry activities will be done. It is a win-win situation. It goes back to the fundamental economic theory of comparative advantages of nations. Furthermore, many of the Southeast Asian countries have at least some segment of the populations who are of ethnic Chinese origin that would make the working together even easier.

Q: There are concerns ASEAN countries will simply become satellites to China, supplying food, agricultural products and raw materials, but not manufacturing...

A: One can have those fears, but these issues will be actually sorted out industry by industry. Countries which are the most adept at adopting global best practices to make industries efficient, are the ones who will have value added.

At political and macroeconomic levels, there may be concerns, but being a business consultant, I see it at industry specific levels.

Take the relationship between Taiwan and China for example. China is going to take a lot of the labor intensive production of electronic goods, but Taiwan is still far ahead in terms of being able to design and engineer the products.

Q: Which sectors should Indonesian companies be looking out for in doing business with China?

A: Being so resource-rich, from resource-extraction to agriculture industries, Indonesia will have more of an advantage, or at least a historical advantage, in being efficient in these industries. China is well known for having an extremely backward agricultural sector. In some of the metal, mining, energy and agricultural areas, Indonesia can begin to build not just an extraction position, but also processing positions.

Q: What about in manufacturing?

A: There are opportunities in aluminum, steel and petrochemical sectors. One may not think in terms of labor-intensive assembly industries, but Indonesia with its sizable population can compete, while Malaysia and Thailand will have a harder time to compete based on labor costs.

Q: Is Southeast Asia doing enough to meet the threat China poses?

A: What's being done now, to create a really working AFTA, is a big step in the right direction. The question is: Will there be staying power? The concept on the drawing board is absolutely correct, and but these things are implemented over a period of five, 10 or 15 years, and it's going to be the ability to attract the investments that will be productive during that period that's going to make the difference.

Q: Are we understating or overstating the threat China poses?

A: At the macro level, there would and should be a cause of alarm, but the key to understanding what would really be the impact is how will specific industries shape themselves: Will these industries be in competition mode or cooperation mode?

One tends to look at the "sexy" industries like the silicon chips and financial services being the industries of the future, but there's a lot of technological content in agribusiness. Some of the greatest companies in the world are in agribusiness and there's huge technology and value-added possibilities. Indonesia should not overlook those areas where there can be tremendous cooperation and relative advantage to be gained.

Solve it at the industry-level. Don't worry about the macro level. The whole theory of comparative advantage and of the deployment of technology and investment, is that it is industry- specific, and I think that's where the solution lies.

Q: Is China's growth sustainable given the emergence of problems in the financial sector?

A: China will likely sustain its growth. I don't think it will dramatically fall off the path. Its export industries are already strong enough to generate significant foreign exchange. There's enough of underlying economic structure of small, medium and large companies to build the pathways to this entrepreneurship. There are obviously issues, such as the solvency of the financial system, but this is the magic of having what was previously a centrally controlled government: They can regulate the pace at which these issues are resolved. Basically, on the industry and financial sides, they can digest without indigestion.