China. Its Complexities and Challenges
- The third economy in GDP terms.
- The second economy in trade terms.
- The first economy in terms of reception of foreign investment. Average 60 billion per year.
- The fourth economy in terms of out-flow of foreign direct investment.
- 6% of World GDP (45% in 2050)
- Internal savings rate of 30%
- The core of the Asian regional integration.
- 100 million of middle class consumers (600 million in 2025)
- Generational leaps in infrastructure
- Generational leaps in IT growth (Over USD150B in R&D centers)
- IT, High Tech Trends
- Growing private sector
- East Asia/Asean is moving towards a common market
- Intertwined political, economic and legal systems.
- 56 ethnic groups, 32 provinces and more than 200 languages.
- Geographic concentration of industrial clusters;
- Economic development plans based on political planning and public financing;
- Business management that may include social considerations beyond “efficiency”;
- Financial system driven by social-political considerations;
- Government interference on business decisions;
- Asymmetries on economic incentives and tax benefits, per region, per sector;
- High foreign direct investment;
- Growing mixed economy, growing private sector;
- Complex patterns for mixed companies;
- Strong regulatory framework in strategic markets;
- Complex, fragmented and changing legal system.
- Complex arrangement of actors and alliances;
- Complex arrangement of manufacturers, traders and agents.
- Understand. Success in the China = Success in the World Market
- Understand. Take distance from western paradigms
- Be able to recognize that “I may know nothing” or “What I know may not be useful this time”
- Be willing to invest in a learning process, exploration, observations
- Be willing to create “real relationships”, not only “business relationships”
- Search for true “innovation”
- Duly design, develop, test, refine, revise, plan and duly execute your entrance strategy
- Focus on competitive advantages from increased profits, lower costs, access to new markets, increased exports and sales
- Companies that do not have a China strategy, do not have a global strategy, and therefore do not have a local strategy either.
- Waiting means risking the future of your companies and your communities
- Look for the best available experience, judgment and contacts of China experts.
Foreign Direct Investment. In-Flows
- An average 26% of all the FDI received by developing countries and 11% of FDI world flows. 71% manufacturing and 21% services (i.e. 2005-2006 FDI US$167.600 mill, UNCTAD 2004).
Chinese Foreign Investment. Out-Flows
- One of the main foreign investors in the world. “China has taken the fourth position in the ranking of foreign investors, according to a poll among foreign investment agencies.., after the U.S.A., U.K. and France” (CEPAL 2005).
- Chinese authorities informed of approximately 9.000 Chinese companies investing out of China, in 170 countries.
- Japan, U.K., U.S.A. Germany, Denmark, Sweden, Spain, France, Singapore, Korea, Canada, Australia, and several others have established institutions to attract foreign investment from China.
- Catalogue for Foreign Investment Recommended Areas (Ministries of Commerce and Foreign Affairs). 67 countries.
- National policies to promote foreign investment (Guangdong y Shanghai);
(a) tax incentives;
(b) soft loans;
(c) Import guarantees.
- Approaching natural resources.
- Increasing scarcity.
- China, HK, Japan, Taiwan, Singapore, Korea and Malasia, are taking strategic positions.
- The increasing prices of natural resources is generating;
Elimination of intermediaries;
Incentives to strategic alliances and M&A;
- The places to be chosen shall be those with qualities to become platforms. (CEPAL 2005).
Types of Foreign Investment. Out-Flows
Type I. Greenland investment
(Haier, TCL, Gree).
Type II M&A (4 categories)
One. Natural Resources (China National Off Shore Oil Company Ltd, China Huaneng, CITIC, Yanguang Group, Jilin Kichkel, Sinopec, China Minmetals, Baosteel, Baoshan, etc).
Two. Production Extension and Marketing. (Shanghai Haixing-Glenoit Corp-Specialty Fabrics, Shanghai GM-Daewo, TCL-Schneider, Alibaba-Yahoo China, Lenovo-IBM)
Tres. Reverse contracting. (Wanxiang Group-UAI securing the suplí of spare parts)
Cuarto. Technologies. (Shanghai Electric Group-Akiyama Japan, China Telecom-Excelcomindo, Huawei-British Telecom, ZTE-Ericsson, BOE Tecnology-TPB, BenQ a Siemens, etc)
Type III. Strategic Integration
(TCL con Thompson, 8 biotech Biotecnología; Huawei con Siemens-NEC-Matsushita-Infineon; China Mobil con MTV, China Telecom-NEC)
Type IV. R&D Investment
(Huawei Technologies, BOE Technology-Nynix Semiconductors, China Telecom, Konka Electronics, Guangdong Glanz Group, Haier, etc)
China Sovereign Wealth Funds ("SWF")
China Investment Corporation
- Amount : 1.47 trillion yuan (£100 billion)
- History :
- One of the youngest of the major sovereign wealth funds.
- CIC is in charge of investing China’s vast foreign exchange reserves and is thought to have about $200 billion at its disposal.
- Major investment : Blackstone ($3 billion)
- In late December 2007, it emerged that CIC would inject USD5 billion into Morgan Stanley in return for a 9.9 per cent stake. It will receive 9% interest instead of a dividend.
- Amount: 929.2 billion yuan (Dec. 2006).
- It was founded in 1979.
- The state-controlled bank floated in April for USD5.9 billion and, like its compatriots, has been branching out into the West.
- Major investments : Late 2007 bought 6% stake in Bear Stearns for USD1 billion.
- Specifically, it pumped USD1 billion into Bear Stearns, the struggling Wall Street investment bank, after the high-profile collapse of two hedge funds.
China Development Bank
- Amount: 2,314 billion yuan (USD320) (Dec. 2006).
- History :
The China Development Bank was founded in 1994 under the strict jurisdiction of the country’s Government.
- Major investments : Bought 3.1% in Barclays for £1.6 billion.
Given the bank’s strong state links, it has been instrumental in financing the construction of China’s infrastructure, including the huge Three Gorges Dam project
Trends and Paradigms 2008-2009
- Migration of traditional industries –machinery, tools, consumer products, pharmaceuticals, food, retail industry- into strategic zones of the China market
- Contract manufacturing -processing- migration into “processing zones”
- IT, High Tech R&D centers migration into “high-tech zones”. Patent filings skyrocketing
- Supply chain transfer –design and innovation-. Before, company by company, and now entire supply chains invest together (auto, IT, telecom). Also co-production assembly for export worldwide.
- Logistics transfer –third party logistics- . Management of stocks at FOB price and other factors.
- Domestic service industry increasing capacity and quality –value chain-. This includes investment banking- mutual funds- finance – media – consultancy –technology and systems – human resources
- Large growth. Small companies with exponential growth (Wen Wen cookies)
- Two-tier JVs –business in and out of China- production and distribution
- Reverse JVs –investment out-flow- (Yanjing/Taisun, etc)
- Regional competitors become global cooperators (Haier/Sampo)
- Private equity and funds clubs create financial pipelines from or through Greater China to the World.
- State Owned Enterprises changing approach towards private investment patterns. Global approach for China focused growth.
- Increased human capital management –managerial and technical support entering the center of the projects-
- Chinese companies becoming more competitive locally. Massive domestic consumption –industrial and household-
- Chinese companies becoming more competitive globally. However, more and more being Global requires being Local. Relevance of the Chinese local market.
- Chinese companies are forming strategic alliances that are and will change the balance in many industries, and these alliances will take place across industries and markets.
- Regional integration (ASEAN) –value chain integration-. Export and manufacturing prowess will take larger market share from neighbors in their home and export markets.
- China is integrating with the World, in a broad and large scale, across industries and markets.
- R&D expenditure has an average growth rate of 20%, R&D-to-GDP ratio grew from 0.8% to 1.23% (From 1998 to 2004).
- The 11th 5-Year Program aims at raising R&D-to-GDP ratio to 2% by 2010 (Japan 3.1%, USA 2.7%, South Korea 3.0%, OECD average 2.2%).
- Average 30% annual increase of domestic invention patent application (i.e. grew from 13,726 to 65,786, an AGR of 29.8% (1998-2004)