What to expect from transitioning China?
It’s often said that the moment you think you know China, it changes again. While this may ring true, there are still ways to help businesses navigate and prosper in the next new China.
Since China began opening up to the global market 40 years ago, the country has rapidly developed from an impoverished backwater to the world’s second-largest economy and is often dubbed “the world’s factory.” However, China’s story doesn’t end there, as the country transitions from being an export-oriented manufacturing hub to a more -balanced economy that’s defined by a booming consumer market and a cutting-edge tech sector. Welcome to China version 4.0.
A number of factors have made it clear that China’s previous economic development models have run their course. Last year, the country’s economy grew at 6.6%, its slowest pace since 1990. The days of cheap labor are also over, and both domestic and foreign manufacturers are fleeing to other countries in search of cheaper production costs. Strict environmental regulations have come into effect, limiting the usage of cheap but dirty energy sources like coal and forcing companies to seek out sometimes costly alternatives. President Xi Jinping’s crackdown on corruption sacrificed economic growth so as to stifle the black market and informal institutions. On top of this, other global powers like the U.S. are now viewing China as a worthy competitor and have initiated what amounts to a trade war.
China is now classified by the World Bank as an upper-middle-income country, and is currently in the process of devising the political, social and economic strategies needed to reflect this new-found status. The road that China is now walking is very different than the one it previously traveled – in other words, the “Wild East” has been tamed.
While China’s year-on-year GDP growth rate is in decline, it is important to keep in mind that the size of the economy that this number deviates from is getting vastly larger each year. So 6.6% growth in 2018, when China’s nominal GDP was over $13 trillion, cannot be compared tit-for-tat with the 12% growth of 2010, when nominal GDP was around $6 trillion. In other words, the additional economic output required to produce one percentage point of GDP growth today is significantly larger than when the country’s GDP was skyrocketing at a double-digit clip, even when adjusted for inflation. China’s economy is still expanding fast – roughly the size of Sweden each year. However, this doesn’t mean that Beijing has been complacent about this decline, and Premier Li has announced a series of moves designed to boost economic development, including $300 billion in tax and fee cuts for companies and the creation of more than 11 million new jobs, while cutting employers’ social security fees.
“Following decades of high-speed growth, quality rather than just the quantity of China’s economic growth is now high on the agenda, with more focus on innovation, sustainability and eco-friendliness,” says Wu Dongming, CEO, DHL Express China.
A new society
With 430 million people now classified as middle class, China currently has more people in this social bracket than the entire population of the U.S. What’s more, this number is expected to rise to 780 million by the mid-2020s. With this newfound purchasing power, China has rapidly been upgraded to a country where things are not only made but bought as well.
Many members of this new middle class have shown that they are model early adapters, and are comfortable jumping headfirst into new technologies and new ways of shopping and living. Internet penetration topped 829 million at the end of last year, and the Chinese spend an average of 27.6 hours per week online, consuming 71.1 billion gigs of mobile data per year. Usage of ride-hailing apps has become ubiquitous, and the $30 billion industry is worth more than it is in the rest of the world combined. This comfort with smartphones has made mobile payments standard fare – topping $17 trillion in transactions in 2017 – and has put China on pace to become the world’s first cashless society.
“E-money is already such a big thing in China that it’s the norm,” explains Kelvin Leung, CEO AP, DHL Global Forwarding. “If I go to a convenience store in China and pull out an RMB note they know I’m a tourist because nobody uses cash.
Tech firms like Alibaba, Tmall and JD.com have blazed the way for China to have one of the most modern consumer landscapes in the world today. The number of people buying things online in the country jumped to 610 million last year – amounting to $1.53 trillion in payments, roughly a third of all retail sales in the country. For perspective as to how fast this has happened, China now commands over 40% of the world’s e-commerce transactions, which is up from around 1% just 10 years ago.
However, e-commerce in China isn’t killing off brick-and-mortar shopping as it is in the U.S. and other Western countries. No, shopping malls are still the social and commercial heart of the Chinese city, although they are undergoing rapid transformations, experimenting with something called New Retail: an innovative amalgamation of online shopping and in-store experience. Rather than fighting against the future, malls in China have embraced the digital age with open arms, focusing on selling experiences rather than things.
“As a result of living in a very digital society, Chinese brands are also very digital-centric, often to a much deeper level than Western companies, and are connecting with consumers this way,” says Mark Tanner, founder of Shanghai-based consumer research firm China Skinny.
The country’s new middle class is also actively molding consumer offerings to meet their rapidly evolving tastes and preferences – and in a country with 400 million millennials, staying ahead of the curve is imperative in order for a company to succeed.
“They’re consuming more, and they’re consuming higher-end products – imports of high-end salmon from Scandinavia, high-end beef from Australia, Japan, Wagyu beef, you name it: All of these are showing ever increasing, significant growth,” Leung points out.
“The growing and booming middle class of China do represent huge business potentials for foreign companies,” says Dongming. “However, as China is unique in many ways, no matter which audience group you target the most important strategy for global companies wanting to do business in China is to be globally local, meaning they should make great efforts to understand and respect the Chinese market, consumers, culture and macroenvironment.”
Like most upper-middle-income economies, China’s economic progress has created a new generation of educated workers who demand higher wages and better conditions. The days of being “the world’s factory” – a dystopian industrial leviathan for labor-intensive, cheap products – are on their way out, as it is now vastly cheaper to manufacture these types of products in places like Vietnam, Bangladesh and Sri Lanka.
“Over the last 10 years the cost of production and the cost of conducting business in China have gone up,” Leung explains. “So regardless of whether there was the trade dispute or not, several types of manufacturing have been migrating out of China. It’s not just non-Chinese companies, even Chinese companies are shifting production to even lower-cost countries.”
While it isn’t cutting the tether on T-shirt and sneaker manufacturing completely, the country should no longer be pigeonholed as a place for such low-level production. China is rapidly climbing the industrial value chain and has become a new global epicenter for the high-tech industry, designing and producing some of the most innovative products in the world. The game has changed and our connotations with the phrase “Made in China” need to be updated.
While China certainly does transition quickly, it also plants the seeds of paradigm-shifting policies many years in advance of when they are intended to bear fruit. The first national-level high-tech zone in China was created in 1988, and over the next 30 years China steadily spread a blanket of them over the country. From the booming metropolises of the eastern seaboard to emerging inland cities like Chongqing and Chengdu, new high-tech zones were seemingly going up everywhere. Today, there are 169 of them in operation; they are home to 40% of China’s tech firms and in 2017 were responsible for $1.38 trillion of GDP – 11.5% of the country’s total.
New markets are still opening
The “Go West” policy of the 2000s sought to spread the economic miracle of the booming cities of China’s east coast inland. A new national grid of transportation infrastructure – new highways, high-speed rail lines and airports – was laid over the country, and new urban developments, industrial zones and education clusters filled in the blanks. Suddenly, relatively little-known cities like Chongqing, Zhengzhou, Wuhan, Guiyang, Kunming and Chengdu emerged from their existence as archaic backwaters to become the booming cultural and economic hubs that they are today. This type of paradigm-shifting development is still at work, as the “Go West” policy has merged seamlessly into the Belt and Road Initiative. Far western cities like Lanzhou, Xi’an, Urumqi, Kashgar and Horgos are now getting their chance to be injected with large amounts of development dollars as they become new outposts of progress and hubs for overland trade between China and Europe.
“Now, if you’re producing in the middle of the country, in the hinterland, with the railway infrastructure, with the highway infrastructure, with the river barge infrastructure, you can have more options to ship out your products and not necessarily pay more in logistics costs,” Leung says. “So if you’re a manufacturer and you manufacture somewhere in China, you have far more options than before.”
In addition, Beijing and a handful of emergent Chinese companies – like Alibaba, JD.com, and SF Express – have been pumping massive amounts of resources into linking in the rural areas of China in a bid to get half a billion more people onto the dominant economic grid. Vast arrays of fulfillment centers and logistics centers are being built out in the proverbial middle of nowhere, as e-commerce is seen as the optimal way to reach this population segment. Because as Mark Tanner put it in a recent China Skinny newsletter: “… They can’t just pop down to the local IKEA to purchase a new sofa.” Today, 222 million of China’s rural dwellers are online, and while the percentage is much lower than in urban areas it’s still a vast market that was more or less untapped. This is likely to change in the future.
“Perfect is not fast enough” is a common slogan explaining the phenomenon of how quickly Chinese companies are able to change with the rapid ebbs and flows of modern China – a place where 180-degree changes in policy are to be expected. This is a country that completely built a new version of itself infrastructurally, economically, and socially within a generation and a half, and always keeping one ear to the ground and being ready to ride the next big change is simply a part of doing business here.
“You’d be really surprised if you were in China a few decades ago you just couldn’t imagine what you see in China today,” Leung says. “So that’s the context of what people look in terms of what is happening now and what might happen in the future. Then, of course, the pace of change is only accelerating, so we can expect that its magnitude can only increase in the coming decade.” — Wade Shepard
Published: June 2019
Images: Xinhua/imago images; Adobe Stock; Zhang haiyan/Imaginechina/laif; AFP/Getty Images; Xinhua/ddp