Three Myths About Business in China 21 comments
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This commentary originally appeared in Forbes China's gross domestic product grew 8.9% in the third quarter. The country has become key to growth for even the largest multinationals. Paul Otellini, the chief executive officer of Intel, recently said, "Thank God for China. They buoyed, certainly, our company through the depths." Yum! Brands, the fast-food conglomerate, generates a third of its business there, and brands like the Gap and Tiffany have announced expansion plans. As China becomes ever more crucial, here are three myths about business there that you should avoid falling for: Myth No. 1: China's economy is export-led. One of the main reasons China has withstood the financial crisis better than analysts like Gordon Chang, author of The Coming Collapse of China and a Forbes columnist, predicted is because the export sector accounts for far less of the economy than the approximately 40% figure that they believe. For a while after China entered the World Trade Organization, in 2001, exports did take up that much of the economy. The government was green-lighting practically every project proposed to it in a rush for economic development. That fast-growing capacity couldn't be used to make things to sell to Chinese consumers; they were still too poor. So companies just set up factories for export. That situation changed dramatically even before the financial crisis. My firm, the China Market Research Group, estimates that by 2008, exports accounted for just 20% of the economy. A combination of rising costs and new economic policies caused the decline. For one thing, the government stopped approving high-polluting, energy-intensive, low-intellectual-capital projects. Pollution was starting to cost the creaky state-run health care system too much, and the government wanted to reduce its reliance on foreign energy, so it pushed for a more service-led and less export-led economy. Scores of factories relocated to Vietnam, Sri Lanka and Mexico, where policies were more welcoming and labor and real estate costs were lower. Many factories shut, and larger manufacturers like Foxconn, the maker of Apple's iPhone, consolidated their market share. The shift away from tiny, soot-belching factories to larger ones partially explains why energy use has not risen as fast as GDP over the last several months. The economy is less reliant on energy-inefficient factories. The export sector is going to continue to play a diminishing role as domestic consumption increases, as I wrote in "Tap Into China's Swelling Consumer Base." We estimate that consumer-fueled domestic consumption will account for 50% of GDP within the next five years, up from 33% today. Myth No. 2: China has a limitless supply of cheap labor. People may think it does, but in fact recruiting and retaining talent has been difficult for companies even during the financial crisis. Many blue-collar workers are no longer willing to labor for low wages in manufacturing hubs like Guangdong, visiting their families only once a year. They've lost the fear of going hungry, so they've gotten more selective about employment. They have far more job opportunities closer to their homes, as China's $586 billion stimulus package has propped up the economy in the poorer regions that most construction and factory workers come from. At the white-collar level, most multinationals need to rethink their human resource strategies. Job-hopping is high, with many companies losing 20% of their employees a year. The overwhelming reason younger white-collar workers leave their jobs is not because their salaries are too low but because they see no career paths there. Nothing demoralizes young workers more than knowing that expatriates get out-sized pay packages at places where there are no mainland Chinese senior executives. They may have Taiwanese, Hong Kong and other Chinese-speaking executives, but those don't count. Mainlanders still see them as foreigners. Many mainlanders feel, why work for Google if you can get a job with its Chinese competitor Baidu and feel there's no glass ceiling above you? Companies need to make clear to young Chinese that they're dedicated to retaining them. They need training programs, overseas rotations and clear paths for advancement. Also, companies need to have homegrown leaders who are paid as much as foreigners. Rainmakers who are Chinese should be paid better still, because they are scarce and hard to hold onto. Myth No. 3: Connections are everything. If a potential business partner or employee leads off a conversation by saying he is well-connected, and that's what he brings to the table, run like Usain Bolt. Too many companies hire the offspring of well-connected elders and think those connections will guarantee success. Yes, who you know is important in China, as it is anywhere, but the economy is becoming more sophisticated. Regulations are more transparent than they were just five years ago, and in most situations you no longer need inside pull to get permits. Gone are the days when knowing the right people guaranteed riches. For most businesses, the four Ps of marketing--price, placement, product and promotion--are starting to prevail. Would you simply hire the son or daughter of a deputy mayor in a small town in California and assume certain success? I doubt it. So why would you in China? Connections can actually damage your business if a factional fight breaks out and your well-connected partner is on the wrong side. The winning side might take business away from those closely associated with the losers. I have seen many companies depend on one big connection and then lose everything after an official lost power or was rotated to another province or ministry. You do need to cultivate relationships with government officials, but do not base your whole business on them. As China emerges from the downturn relatively unscathed, companies need to understand it can no longer be relied on as a base for low-cost manufacturing. Workers and the government are both demanding change. The faster you can rid yourself of outdated myths about the country, the sooner you will be able to generate profits there. Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Forbes on leadership, marketing and China. For more from Shaun Rein, click here.
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This article has 21 comments:
And a relative reliance on service industries, in such an environment, is hardly security. We live in that house. It's drafty.
And how long will 'upity' labor prevail once economic growth drops below population growth?
The author has presented a perfect snapshot . . . of the Present. Not the future.
You say: "And how long will 'upity' labor prevail once economic growth drops below population growth?"
you are talking through your hat dude - the population growth rate of China is 0.66 % less than USA at 0.98% and almost 1/3 of India @ 1.5%. So I imagine that they will not have to worry too much about what you are saying for quite a while.
- as for "drafty house" I do agree with you there, but somehow I think they will avoid the extreme into which we have sunk.
Is it based on ignorance, or something else. Journalistic integrity has shifted far left from the days of Walter Winchell, no doubt, while political ideology has become a cornerstone in what filters thru to the American people.
However every chinese household in tier 1 cities has all the gadgets nd necessities that westerns have in the west as well as jewlery, cars. Most if not all eat out in restaurants, enjoy hobbies such as bowling and indulge by going out at night. If the Chinese manage to hold the price of property/stock market basically stable then we can expect consumption to continue increasing. It is too small currently and needs to increase if exports do not recover.
I am not sure we will see 50% of GDP being domestically generated through service industry in 5 years as asset price bubbles could inflate further or burst. Unless of course the economy is re-balanced. However a genuine 40%-45% is all that China needs if it is spread between enough people. Not juts the upper middle and upper class buying huge ticket items and asset speculation being counted in the figures.
chinadaily.com.cn/...
1- It is important, &
2- it requires dedicated work all throughout school - beginning to end.
Most Americans do not understand this. They are way too lazy. I work in software/hardware industry. Why do we NEED to import so many engineers? (who are very well paid) Are indians and chinese, etc really so much smarter than Americans? Not really. It is just that they are willing to work at their education, while Americans just cruise and whine and the parents let them do it.The society has what I call a "culture of mediocrity" when it comes to education. This in spite of the fact that most teachers work very very hard at trying to provide a stimulating lesson.
Unfortunately, the Bush administration sold America out to the Chinese and OPEC countries with his enormous deficits and pro-oil politics.
But the current economic catastrophe will sharpen American's minds pretty quickly. When life is no longer easy, you get pretty serious about improving it.
I don't think Americans are lazy. I think we work as hard or harder than any people on the globe (the Protestant work ethic is a very real thing, sometimes it is stifling to creativity in fact). We ARE spoiled. We have everything. There really isn't much incentive to discipline yourself and work hard when you already have everything.
Asians are very good at math -- a field of learning that requires discipline, and Asians have plenty of discipline -- and that's why they are being hired by software firms in America. A lot of Asians study in America and don't want to go home -- and the education in Asia is strongest in practical fields also, math, science, technology.
I don't believe Aemrica's future is hopeless. But it will be hopeless if we don't give equal time to the idea of self-discipline and sacrifice as we do to the idea of self-indulgence and personal pleasure. That's why economic depression is built in to the cycle of Nature: so that you can't remain self-indulgent for ever. A hungry belly will make you serious, diligent, and make you strive to make a better life. This won't happen over night, as we still need to descend the mountain again, before we start climbing with a new state of mind.
On Oct 28 11:29 AM jmmx wrote:
> China will undoubtedly take over from the USA as the world leader
> economically. This is due not only to the fact that they are the
> most populous country, but also that they are more disciplined both
> nationally and individually, and - very important - they understand
> rwo things about education:
> 1- It is important, &
> 2- it requires dedicated work all throughout school - beginning to
> end.
>
> Most Americans do not understand this. They are way too lazy. I work
> in software/hardware industry. Why do we NEED to import so many engineers?
> (who are very well paid) Are indians and chinese, etc really so much
> smarter than Americans? Not really. It is just that they are willing
> to work at their education, while Americans just cruise and whine
> and the parents let them do it.The society has what I call a "culture
> of mediocrity" when it comes to education. This in spite of the fact
> that most teachers work very very hard at trying to provide a stimulating
> lesson.
>
> Unfortunately, the Bush administration sold America out to the Chinese
> and OPEC countries with his enormous deficits and pro-oil politics.
I'm living in Vietnam; so I'm interested in comparing what I'm seeing here with what you are saying is going on in China.
Just as the dollar is going to get nibbled away at the edges through increasing bipolar deals without it in the world, then fall, just as GM went from the longtime pinnacle to a well-deserved fall, the US will fall absent a return to reality.
It's sad that we have the best foundation ever, in the Constitution, and are, so far, willing to throw that away for bread, circuses and lies.
> you are talking through your hat dude - the population growth rate
> of China is 0.66 % less than USA at 0.98% and almost 1/3 of
> India @ 1.5%. So I imagine that they will not have to worry too
> much about what you are saying for quite a while.
Note the assumption.
I was not addressing a possibility of Low growth. I was addressing a possibility of Negative growth. If their economy is 20% export, and half of that goes away, how do they make up that difference? THEY think they need +8%/year. Are they wrong?
And their consequences of failure are vastly worse than the US's.
Understand that a disciplined citizenry is Not enough to deal with economic catastrophe. Germany and the Soviet Union were chock Full of discipline in the 30's - didn't save them. And the Chinese were disciplined as well in those times, the discipline of those at imminent risk of starvation. What emerged from all that discipline? Three horrific social experiments: one that had to be put down, at horrific expense to all concerned, and a couple of militarized basket cases, one of which has choked itself out, and another that Seems reformed.
Take away the general prosperity, and I fear for China's future.
China is NOT reliant on exports and on the US, yet the media and most investors look at only a few coastal cities in China, which are export-oriented, and ignore the remaining 95% of the country which could care less what the US economy does.
Perhaps the point is that the extent to which these points are no longer wholly dominating is significant. If that is the case, I can subscribe to that point of view.
Finally:
"Gone are the days when knowing the right people guaranteed riches."
Those days are never gone. The right people will always guarantee success. That's what makes them the right people.
www.pivotcapital.com/r...
Yes, the Chinese aren't as export orientated as the media had portrayed, but I would like to see evidences that it is only merely 20% of their company. But if that is the case, when where does the rest of the growth comes from?
And MORE IMPORTANTLY, is that growth truly sustainable? Again, read the report and you will find it may not be as sustainable as first believed.
The growth in domestic spending is also out-stated given the state of their labour market and other factors. (consumer sentiments, etc)