China's economy: More chance than threat

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.