Friday, October 8, 2010

Long live Bruce Lee!

Why in heavens would I decide to write about China when everybody around has been harping on China almost day in and out. Because while everybody around has been simply comparing Chinese growth and India’s growth (and complimenting China to no ends about it), I find no economic commentator exhorting Indian firms to partake of Chinese growth by thinking about setting up companies in China, or by selling their products and services to Chinese consumers! Each day that passes with you as a CEO not thinking about setting up a business in the world’s fastest growing market – and the largest in a few years – is a day lost with criminal intent! The statistics are devastating – if you have even an iota of cash to spare, go the China way... immediately!

Just a few decades back, marketers would have ridiculed the very idea of setting-up shop in China, where per capita income stood at a sheepish 1% of USA’s. Not to say that during those days, the Chinese GDP was one that was consciously ignored during discussions in economic forums, more so due to the defiant communist regime, which was more intent on autocratic uplifting of masses than on blindly promoting capitalism. But China was growing because of that same upliftment of masses.

After having broken through the $100 billion ceiling in 1988, the foreign trade figure of China ran past the $500 billion-mark in 2001 and the trillion dollar mark in 2004. Today, it has touched $2.21 trillion (figure for 2009, as per WTO), and much water has fl own under the Shanghai bridge, bringing in a dramatic macroeconomic improvement. China is now arguably the second-largest economy in the world (having surpassed Japan’s GDP during Q2, 2010, though Japan still leads in terms of total GDP during H1, 2010), and is the world’s second largest trading nation, and its per capita income as a percentage of that of USA’s has increased to 14.2% (quite a rise from a value of $180 in 1990 to $6,567 in 2009; IMF data).

That China is turning into a huge consumption behemoth – one that Indian companies should most selfishly exploit to whatsoever extent – is supported by many economic indicators. The rise in per capita income (a jump of 3,548% over the past 19 years!) becomes an electrifying consumption increase jump when seen in the light of the fact that this growth happened for a gut wrenching 1.4 billion! China is also now the world’s second-largest importer of goods (the value of which stands at a no less handsome $1.01 trillion, as compared to USA’s $1.56 trillion during FY2009).

In support of China’s domestic consumption comes a September 2010 paper by McKinsey Consultants John Horn, Vivien Singer and Jonathan Woetzel, titled, A True Picture of China’s Export Machine, which shuns the age-old method used by the government to calculate the contribution of total exports to GDP growth. As per the paper, “Net exports have contributed to only between 10-20% of China’s annual 10% GDP growth in recent years,” while “domestic value-added exports” (DVAE; which is the net of total exports and those imports used in the production of goods & services exported), contributed to between 19-33% of the total GDP growth. This is much lower than what many agencies have claimed, including the Chinese government (according to them, exports contribute to almost 60% since 2000 till date). To sum up the discussion in favour of the Chinese domestic market, the report which uses the McKinsey Global Institute (MGI) China urbanization model, concludes, “The most common wisdom overestimates the role of exports while underestimating the role of domestic consumption for China’s growth. Any Chinese or MNC that currently manufactures goods in China and primarily exports them to other countries should ask itself whether it needs to scale up its domestic strategy to get a bigger piece of the pie.”

The truth, which the tallest of sceptics concede, is that China is the next powerhouse for the world’s sellers, across industries. Pulitzer Prizewinning Thomas L. Friedman wrote in an NYT column from Tokyo, “Those leaders of Japan, America, Australia, Taiwan, Malaysia, Russia, Thailand, Indonesia, Singapore, the Philippines, or the European Union, who are not going to bed each night saying a prayer for China are not paying attention.” The 2010 China Consumer Survey report by Credit Suisse explains how, “Chinese households are earning more but saving less.” Household income of the bottom 20% has risen by 50% since 2004, while the top 10% has grown 255% to around 34,000 yuan per month. The savings rate has dropped from 26% to 12% during the same period. Credit Suisse expects China’s share of global consumption “to increase from 5.2% at US$1.72 trillion in 2009 to 23.1% at US$15.94 trillion in 2020, overtaking US as the largest consumer market in the world!”

We take a look at specific industries and the lessons that corporations which have paid due respect to the Chinese domestic market have to impart. In 2009, China became the largest auto manufacturing nation in the world, with 13.79 million units rolled out, thereby surpassing Japan as the largest automobile maker in the world. No surprises there as most of these would be exported subsequently, right? Wrong. Of these manufactured cars, only 369,600 units were exported – which accounts for just 2.7% of the volumes produced. In simple mathematics: 97.3% of the cars manufactured in China are sold in China! And if the 100 km long traffic jam that made global headlines in August this year was some indication, China has also become the world’s largest auto market in terms of annual domestic sales, having overtaken US in this respect in 2009. The number of registered vehicles with Chinese number - plates are forecasted to grow from the present 62 million (as per China’s State Statistical Bureau) to 200 million by 2020 (as per China’s Ministry of Industry and Information Technology).

Talking more about cars, here are some interesting facts. In the first half of 2010, GM sold more cars in China (1.21 million units) than even in its largest market so far – US (1.08 million), making it the first time that any overseas market outsold GM’s domestic market in its 102-year-old history. The company plans to touch 3 million in annual sales count in China by 2015. Moving on to its Detroit cousin, Ford, the company also set a new record in half yearly new car sales in China this year (301,524 units, up 53% y-o-y). German Audi is also geared up to set a new annual sales record this year, boosted by deliveries in China, where it presently sells more vehicles than it does in Germany. In fact, as per a Deutsche Bank report, by 2016, China will become the largest export market for German automakers, surpassing France. Going forward, given by the fact that 44.3% of cars sold in China are local brands, including names like BYD, Chery, Geely, Hafei, Jianghuai, Chang’an, Great Wall, Roewe, et al, there lies great opportunity for global auto makers to make the most of their Chinese odyssey.

New research by the McKinsey Global Institute also throws light on the emergence of the Chinese urban middle class, whose consumption power will soon redefine the Chinese market. The report claims that, “These consumers earn more than $12,500 a year and command nearly 10% of urban disposable income – despite accounting for just 1% of the total population. They consume globally branded luxury goods voraciously, allowing many companies to succeed in China without significantly modifying their product offerings or the business systems behind them.” This strong 1% of the population may be just the tip of the iceberg, and that’s the most likely possibility. While describing her confidence on the Chinese consumer at a Leadership dinner held recently in New York, Andrea Jung, CEO & Chairman of Avon Products Inc., said, “We’ve been on the front lines of this market for a little over a decade. We’ve identified it as probably the fastest-growth market. From a consumer point of view, I hope that we have proved, and are still proving, that China’s growth is a domestic story. Our focus has been not so much on the manufacturing side, although we have a wonderful plant there, but on the consumer side.”

There are many other names whose walk in the dragon’s den tell you why China is the next place to bet on and sell. The Fortune 500 #4 and the largest conglomerate in the world, GE’s revenues from emerging economies are set to increase from the current 22% to 30% by 2014. And in its attempt to make China count, the company plans to increase this market’s contribution to its topline from the current 4% to about 25%. P&G, the world’s largest producer of household and personal care products, which is increasingly focusing on the Chinese market, has now got China as the #2 contributor to its sales volumes and #4 in terms of toplines for the company. Today, the company commands 50% of the shampoo market and 40% of the personal hygiene market in China, a market which accounts for 25% of the 4 billion customers that P&G has globally.

The world’s second-largest manufacturer of aircraft, Airbus, which expects 20% of its revenues to come from China during FY2010 (as compared to Boeing’s 4%) also has big plans for China. The European manufacturer, which expects a total of $349.3 billion to be spent by the Chinese airline companies on acquisition of new aircraft over the next 15 years (second highest after US airlines, which is expected to spend $538.1 billion; by 2030, as per its competitor Boeing’s forecasts, China is expected to spend $400 billion in acquisition of 3,770 new planes), is smiling at the moment. Reason: Though Chinese airline companies at present operate 766 Boeing aircraft as compared to 547 Airbus planes, the orders received so far are in favour of Airbus – 418 as compared to Boeing’s 284.

From engines in the air to air waves – Nokia. If you thought that India was all that Nokia had left to hinge its hopes on, rotate your globe a little to the left. The world’s #1 seller of handsets today commands a 35% market share in China (FY2009), a geographical market which contributes to 16% of its annual revenues ($8.6 billion in 2009), even bigger than India’s 7.4%; surely, anything that happens in the Chinese mobile market would trouble the Finn doubly than it would if its Indian elephant ride goes awry! The dozens of steel-making companies to the chipmakers and software producers of the world, from fast-food chains to the biggest of retailers and toy-makers, from far-away America to close neighbours, marketers across companies and continents are fast realising that one big learning of their career remains the Chinese consumer tale, and if they lose out on it, they’ll have little left to survive on later. Two decades back, the Chinese low-cost manufacturing prowess took the world by storm. It’s the Chinese consumers who are on fi re today. Sadly, there are not many Indian case studies to write home about – and that is what I call criminal.

Till the time every Indian firm’s CEO believes passionately in having the vision of tapping the Chinese market, India can in no way think of beating the Chinese bandwagon. Learn to read Chinese, learn to write Chinese, learn to speak Chinese, go on and watch cheesy Bruce Lee movies in Chinese for whatever it’s worth – just do it!

Long live China! Long live Bruce Lee!

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