Winning in China’s mass markets

The Largest Consumer Market

in the World
Presented by:
Shiraz S. Syed

Presented to:
Course Instructor:
Mr. Zunair Ahmed &
SCM Students of KASBIT
Karachi, Pakistan

2
 Past > Present > Future:

 The Nineteenth century belonged to British Because

of their ability to exploit their colonies throughout the
world.

 The twentieth century belonged to the Americans

because of their ability to innovate and produce
things the world had never seen.

 The Twenty first century, it is said, it will belong to

China with its ability to produce things at a price,
which no one around the world can seem to match.

Alexandra Harney

3
Index:
Page #

Intro Page 1
Past Present & Future 3
Index Page 4
Facts & Figure 5-7
Map 8
Why China? 9
China History 10
Industrial Reform 11-22
March to Profitability 23-25
7 Key factors
33-38
Challenges Opportunities
39-43
Risks 44
Future of China 45
4
Facts & Figures:

• Same size as Canada (9,596,960 sq km or3,705,406 sq

mi)

• Population 1.3 billion (21% of the world)

- 0.8 bn rural
- 0.5 bn urban

• Labor force:
- agriculture 49%
- industry 22%
- services 29%

5
Facts & Figures
(cont.):
 It is a socialist republic ruled by the Communist Party.

 China's importance in the world today is reflected through its role as

the world's 2nd largest economy.

 It is a nuclear state and has the world's largest standing army with the
second largest defence budget.

 Market based economic reforms were formed in 1978.

 World's second largest exporter and the third largest importer of

goods

 Rapid industrialization has reduced its poverty rate from 53% in 1981
to 8% in 2001.

 10% of the global revenues comes from 180 multi national

companies during 2006 from China.

6
Facts & Figures
(cont.):
 GDP (Nominal): (2007) $3.42 trillion (ranked 3rd)
 (2008) $4.33 trillion (official data)

 GDP per capita: (2008) $3,180 (ranked 104th)

 GDP growth rate: (2008) 9.0% (official data)

 GDP by components (2006):

 Private consumption (36.4)
Government consumption (13.7)
Gross fixed investment (40.9)
Exports of goods/services (39.7)
Imports of goods/services (-31.9)

 Unemployment rate (2006): 4.3% (official); 17% (unofficial)

 Industrial production growth rate (2006): 22.9%

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8
Why China:
• Welcome to the
“world’s biggest
Population market” with more
than a 1.3 billions
Fastest consumers.
Growing
Economy
•A technological
• China is now the stronghold in the
2nd largest Market country
economy Opportunity for future expanded
in the world and
the business
last grows have development.
been • A deep and gradual
at a 10% rate economic reform
Economic
annually. gives way to new
Reforms
business
aportunities.
9
China History
Glimps:
1911: Overthrow Manchu Dynasty, political turmoil
1925-49: Civil war, system separation from USSR
1945: Nationalists side with Communists to fight
Japanese invasion
1949: Mao Zedong (age 54) declares People's Republic
of China
1953: First "Five-Year Plan“, heavy industry
development
1958-60: “Great Leap Forward” policy
1960s: Conflict with USSR
1978-84: Agriculture Reform

1984-Now: Industry Reform (IR)

1996: Open door policy introduced, increased 10%
industrial output.
1989: Stock markets open
1992: Socialist Market Economy

10
Industrial Reform (1984 –
Present):

Foreign Direct Investment

increased from 0 to 60+ billion
dollers in 20 years (3 billon doller
/ year)

Export increased from 100 to

1,200 with in 15 years,

11
Industrial Reform (1984 –
Present) Cont.:

Poverty line droped to below 10% by year

2000

12
 Why Industrial Reform became
sussessful:
• China’s cost are
Human typically 20-30%
Resource Cost
Availability Advantage lower than India
and more
resistant
• The university system
to the kind of
in China is projected wage
to inflation and
produce 5m Vendor • Mantain more
employee
graduates Diversification control,. foster
turnover
by year (more than . competition and
doubled in the last spur performance
ten • Spreading offshore by working with
years). activities to more than one
Geo-Political
outsourcing vendor.
Diversifications different
countries helps
protect from
political
and business risk.
13
14
Economic Boom in China after
IR: has successively established around 50 industrial parks.
China

15
Tale of 3 Chinas:

16
Tale of 3 Chinas (Cont.):

17
Economic Boom
(Cont.):
• Fixed exchange rate:
– since 1994: $1= 8.28 Yuan, 2005: 8.11 Yuan

• Implicit subsidy to manufacturers

– Cheap exports
– 28% undervalued
– Government buys $ to keep Yuan from appreciating
– Foreign-exchange reserves largest in the world

18
Economic Boom
(Cont.):

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 Economic Boom (Cont.):
They have just arrived... more than 500.000

Chanel Michelin Acushnet Harley-Davidson 3Com

Chrysler NBA Properties Inc. Apple Hasbro 3M
Coach NEC Corporation BASF Henkel ABB
Coca-Cola Nissan Motor BAT Hermes Abbot Laboratories
CommScope Novartis Beiersdorf AG Hindustan Pencils Adidas
Continental Panasonic Bosch Hitachi Alcatel
Creative Technol. Panduit Cisco Systems Honeywell AMD
Cummins Pernord Ricard Dahon IBM Amway
Daimler Peugeot Eli Lilly ICI Anheuser-Busch
Danfoss Pfizer Emerson John Deere Applied Materials
Degussa Philip Morris General Motors JT International Armstrong
Dell Prada SA Hewlett-Packard Karsten Manufact. AstraZeneca
Delphi Puma Intel Kodak Bacardi
Denso Roche Johnson & Johnson Konika Minolta Baxter
Diageo Rohm and Haas LVMH Fashion Gro. Lafarge Bayer
Disney Microsoft Legrand Beaufour Ipsen
S.C. Johnson
DuPont Motorola Lexmark BIC
Samsonite
Eaton Nike Logitech BMW
SanDisk
Energizer Nokia Lutron Bose
Sanofi-Aventis
Epson Philips L'Óreal BP
Sanyo
Estée Lauder Procter & Gamble Makita Bridgestone
Sara Lee
Fendi Qualcomm Mars Brother
Schneider Electric
Ferrero Samsung Mary Kay Burberry
Servier
Ford SAP Mahle Callaway
Sony Ericsson
General Mills Siemens Mattel Calvin Klein
Tiffany and Co.
Glaxo Smithkline Sony Corporation McCormick Canon
Time Warner
Gore Underwriters Merck Casio
Unilever
Gucci Zippo MGM Caterpillar
Xerox

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 Economic Boom
(Cont.):
Number
Brand Country of stores
in China
Carrefour France 95
Wal-Mart United States 71
Lotus Supercenter
Thailand 75
Metro Germany 33
B&Q United Kingdom 58
Auchan France 16
Parkson Malaysia 40
Jusco Japan 11
Ikea Sweden 4

Source: Ch i n a Store & Fran ch ise Associati on (2007)

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Economic Boom (Cont.):
U.S. Companies Profit/Risk in China -
2005
 72% U.S. firms increased product offering in China
 86% increased revenue substantially
 63% increased profitability
 34% have higher margins than global averages
 92% are optimistic
 64% of the companies were profitable higher then any other country.

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...long march to
profitability:

23
...long march to profitability
(Cont.):
Market entry:

From 1979 to 1992, most

pioneering companies invested to simply establish
themselves in China; often, profits were not a near-
term priority. Industries were heavily regulated and
business was carried out through intermediaries
and joint
ventures

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...long march to profitability
(Cont.):
Market skimming:
From 1992 to 2001, some MNCs recognized the emerging potential
of China’s consumer class, but most chose a conservative strategy.
Using
primarily imported goods or global designs incorporating little local
content, they began to target the premium end of the domestic
market. As industries deregulated, prospects for certain MNCs
improved, such as General Motors which turned profitable in China
after
a decade of losses

Market penetration:
China’s entry into the WTO ushered in an era of improved market
access and transparency across most industries. Foreign companies
began to enjoy unprecedented levels of operational flexibility.

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Business Model & Operational
Innovation:
Expanding into mass markets will require MNCs to adjust
their business models and operations, while maintaining
leadership in
premium-end segments. Lower cost structures will typically
be needed to support profitability.

Key Business Model Changes:

There are three key models that need changes, and they
are;

1- Sales & Distribution

2- R&D and Procurement
3- Human Recourse

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Business Model Chart

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1) Sales and distribution channels –

Companies must transform inefficient, multi-layered sales and

distribution channels suffering from limited collaboration
and visibility into far reaching, cost-effective channels that provide
valuable information about end customers. According to one study
logistics cost in China is twice as high compare to global benchmark.

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2) R&D and Procurement –

Developing products tailored to the needs and price points of the

China market is critical for success. New approaches are needed to
find, qualify and develop deeper collaboration with cost-effective
local suppliers. In 2006, their were about 750 MNC with R&D
operations in China with over 4 billon USD in investment, most made
after 2001.

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30
3) Human resources –

 New approaches are needed to alleviate talent shortages and

develop a large pool of cost-effective, scalable talent with the
right skills for mass markets. Companies should consider
partnering strategies to transform these operations instead of
making fixed-cost investments that may limit future flexibility in
China’s rapidly changing environment.

 In 2006, China produced 4.13 million new university graduates

that excelled in academic disciplines, such as mathematics,
sciences and engineering. However; many of these graduates are
not well-suited to join multinational companies.

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 A recent study by the McKinsey Global Institute
estimated
that less than 10 percent of fresh Chinese university
graduates
are suitable for employment in foreign firms. Indeed, at
the entry
level, hiring managers we surveyed cited soft skills and
English-speaking abilities as their top two limiting
requirements.

Strategies fro HR Development:

1- “Build” instead of “Buy”

2- Localize Talent

Diversity can be a competitive advantage in China’s

mass markets.

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7 Key Factors: How China keep it
Cheap:
1. Low-wage, high-quality work by a highly disciplined,
educated, and non-union work force.
• The average hourly earnings is well below a dollar.
What is stunning about China is that for the first time we have a huge, poor
country that can compete both with very low wages and in high tech. Combine
the two, and America has a problem.
—Professor Richard Friedman, Harvard University
2. Lax Health, Safety, and Environmental Regulations.
• The Chinese government imposes few health and safety or environmental regulations on its
corporations or remaining state-run enterprises. What rules do exist are only weakly enforced,
evaded, or simply ignored.
Nationally, 140,000 people died in work-related accidents last year—up
from about 109,000 in 2000, according to the State Administration of
Work Safety. Hundreds of thousands more were injured.
—The New York Times

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7 Key Factors
(Cont.):

34
7 Key Factors
(Cont.):
4. Network Industrial Clustering in China’s Ultimate Pin
Factory
The famous toy cluster in Guangdong Province

National and regional economies tend to develop, not in the isolated industries, but in clusters of
industries related by buyer-supplier links, common technologies, common channels or common
customers. The economies of the Pearl River Delta region are no exceptions. The region has
developed a broad range of clusters in garments and textiles, footwear, plastic products, electrical
goods, electronics, printing, transportation, logistics, and financial services. The Pearl River Delta
region’s electronics and electrical cluster is particularly strong and accounts for the vast majority of
Chinese production in a wide range of industries.
—Regional Powerhouse

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7 Key Factors
(Cont.):
5. Rampant Piracy and Counterfeiting
• The breathtaking scope of China’s government-sanctioned counterfeiting and piracy.
However, two brief points related to the China Price are worth noting here.

 Counterfeit or pirated factors of production are able to cut significantly

their costs relative to countries where intellectual property rights are
respected.
 The piracy and counterfeiting that exists in China is largely the result of
a tacit government policy to allow such practices to flourish.

• The reason for China’s tacit sanctioning of widespread counterfeiting and piracy is that
the Chinese government is well aware of two things. Counterfeit and pirated goods sold
domestically help keep inflation low, and selling these goods internationally creates jobs
and export revenues.

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7 Key Factors
(Cont.):
6. Beggaring Thy Neighbours with a Chronically
Undervalued Currency.

China’s “beggar thy neighbor” currency policy is an important engine of its

export-driven growth.
China has adopted a “fixed exchange rate system” in which it pegs the value of

its currency, the Yuan, to the value of the U.S. dollar.

China’s “fixed-peg” system means that no matter how big a trade deficit the

United States runs with China, the dollar cannot fall relative to the Yuan.

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7 Key Factors
(Cont.):
7. Massive Subsidies and the Great Protectionist Walls of
China.
• China has constructed a “Great Wall of Protectionism” around both its agricultural and industrial
sectors.
• Energy and water are heavily subsidized.
• state-owned enterprises, which still control key sectors of the economy such as oil and steel,
benefit from free land.
• China’s state-run banks provide heavily subsidized capital and credit to Chinese enterprises
without any expectation of repayment.

Under state control, many Chinese state-owned manufacturers are operating

with the benefit of state-sponsored subsidies, including: rent, utilities, raw
materials, transportation, and telecommunications services. That is not how we
define a level playing field.
—U.S. Department of Commerce Secretary Donald Evans

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Challenges & Opportunities -
Macro
 Intellectual Property Rights
 Patent - Trade Secrets
 Copyright - Trade Mark
 Industrial Standards and Certification Problems
 Transparency/Corruption/Counterfeiting
 Payment issues
 Dispute Resolution
 Price Competition

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Challenges & Opportunities -
Micro
 Management-level human resources

 Bureaucracy

 Unclear Regulations

 Lack of Transparency

 Inconsistent Regulatory interpretation

 Corruption

 Contract Enforcement

 Local protectionism

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Challenges & Opportunities
(Cont.):
 Counterfeiting and Intellectual
Property compliance are recognized
as problems and the government is
trying to enforce these laws.

 Controlling pollution vs. economic

development. Citizens are starting to
demand a safe and clean
environment.

41
Challenges & Opportunities
(Cont.):
 The one-child policy will make it difficult to
support an aging population.

 Language – the first and biggest barrier for

foreign companies to enter to China.

 Privatization of the healthcare system has

made it difficult for some persons to obtain
good healthcare.

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Challenges & Opportunities
(Cont.):
 China has an 80% rate of
literacy. Citizens are
employable.

 Development of Western
China will create new
economic opportunities.

 Pension reform may

“break the bank” as the
population ages.

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Risks:

 Toxic spills
 Hydropower dams diminish river flows
 Number of cars up from 4m in 2000 to projected 130m by 2020
 Air pollution causes 427,000 extra deaths a year

44
Future of China:
Some predictions about China
China will become a
power of the size and
influence of the US in
the next few decades.

The sophistication of China’s

economy is advancing at even
faster pace than its economic
growth.

The rapid acceleration of

urbanisation will be continue,
around 1 billion Chinese will live
in cities by 2030.

China will probably be biggest

world economy before 2015.

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