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Thursday February 16, 2006

Things concerning China

A year on from spending a large part of last year in China, I'm going to spend some time reflecting on the impressions my experiences there have left on me and a little of what I see of China now that I'm no longer there.

The first thing nearly everyone thinks of when it comes to business and China is "1 billion people, even a small percentage of that is a huge market! I've got to get into that!". There are a few problems with this thought. First and foremost, a large percentage of the Chinese population lives in poverty. I don't think anyone from a western country can appreciate this until they visit there and spend some time travelling away from the tourist havens. For those that are not in poverty, their life is predominately hand-to-mouth - i.e. whatever money they earn is sucked up by food, housing, etc. There's no space for luxury items. Roughly what % of the population is in poverty? Well, if you were to take their mobile market (stated as about 300 million), that's the maximum number of people who have a disposable income. How many people in China? 1,300 million - or 1.3 billion (roughly.) So as a fraction, at most, currently 23% of the people can afford luxury items. The market there is not much larger than that of the USA. But it will grow, you say, and it has capacity to grow to well in excess of the USA. Indeed. I would however caution that as in South America, the mobile phone is an atypical luxury item and thus the real percentage of people with a disposable income is likely to be much lower. So the correct mode of thinking, when looking at China as a marketplace is not "1 billion people" but "population around that of the USA". I'm also wary of people who draw graphs of current behaviour and extrapolate it to make predictions of when their economy will overtake the USA as this likely doesn't take into account the recognition (by Chinese leaders as well as others) that their economy is growing too fast. A more sensible outlook is presented here - Will China Overtake the USA?. I'm also reminded of an often used quote - "the star that burns twice as bright burns half as long."

I believe that the Chinese are well aware of how big their market has the potential to be and are intent on trying to keep as much of it for themselves. Witness them defining their own 3G mobile phone standard so that they don't have to pay royalties to foreign companies and also their own DVD format. With a market of the size they have internally, they're in a good position to ignore the rest of the world and even take up a position of dictating what technology is used elsewhere, simply because they are the 500lb gorilla. The DVD position is amusing. The level of DVD piracy in China is huge and you could be forgiven for thinking that in part, its primary audience is western tourists or expatriats. Finding a pirate version of a western movie, in Beijing, is easier than finding a legitimate copy. Lets not get into the debate about how you can't play your DVDs from the USA in China because of regional encoding. So what does this mean?

If you're a western country doing business with or in China, beware. They appear to be very much into copying what western countries develop and fabricating their own goods for their local economy, in effect reducing the size of the market available to foreign companies. One example of this, in the IT industry is Cisco's fight with Huawei. There's a lot of press about China doing this and that about IP - my advice, don't believe anything you read on a web site published from within China. Any news that comes from within the country and is propogated in English to the outside world is more than likely propoganda or written with such a slant and bias that it can be hard to treat it as real "news". In China, if you watch the English CCTV channel's news you will quickly gain an appreciation for how biased their internal reporting of news is. CCTV is a state run TV network. I also avoid reading any website in "com.cn" for news about China.

Externally, it is hard to know what's just propoganda and what isn't. Locally, in Australia, news stories vary:

Beijing Muzzles Popular Media Critics

Australian Entrepreneurs Lured By China

The Men Who Would Conquer China

Adaptation Key To Success In China

New China Rises On The Backs Of Unpaid Migrant Workers

To tie some of this together, a recent story I read on world labor pointed out that with labor markets such as China entering the world arena, it was hard to continue justifying the relatively high cost of labor in the USA, UK, Australia, etc. This leads to governments of nations such as the USA and Australia subsidising some industries that they consider important (car manufacturing, farming, etc) to ensure that some form of labor market remains

For luxury goods manufacturers, one of two things needs to happen for their China market to expand. The first is that the price tag on items needs to be at a level that can be afforded by Chinese. The second is for the average Chinese wage to increase. A wildcard that may impact this is China becoming less flippant about diligence, responsibility and care. I say this because things like safe work place laws do not appear to exist in China but do elsewhere and contribute to the cost of goods in an indirect fashion. So if the cost to manufacture goes up, cost of exported goods also goes up. I've no ability to predict if or when this will happen, but maybe a few more mining accidents might trigger something.

For those that have been around long enough, I've heard the comment that China is a repeat of Japan, only on a larger scale - i.e. given enough time they will become a large influence on the world economy but will not end up destroying anyone's life or livelihood.

( Feb 16 2006, 09:39:11 AM PST ) Permalink Comments [2]