what we think

Our firm recently received many queries from business contacts in Europe and the US: is the Chinese miracle over? China’s stock-market has crashed, and the whole world is now concerned about economic growth in China. What kind of impact are we noticing? Does China still offer sufficient opportunity for foreign investors to develop their business? Or are we starting to see foreign investors closing shop to focus on other markets?

China’s stock-market woes are certainly having an impact. For more than a year, the stock-market was a favorite topic for dinner-table conversations, but since June China’s middle classes have shifted focus. Many retail investors stepped in late and saw some of their capital base dissolve, however perhaps surprisingly, this seems not to have led to much pessimism. The explanation may be simple: compared to just a few years back most Chinese are still much better-off, and they have more freedom than ever before to spend their money on things they care about, whether it is online fresh fruit, a new I-Phone or international travel.

So what about the Chinese economy? Whether it grows with 7%, 6% or less, the key point to understand is that the Chinese economic is currently in the midst of a shift from construction-, manufacturing- and export-led growth to a more balanced economy based more on consumer-spending and services. This shift can only be gradual, which is tempering the growth rate. But the developments noticeable all around us, and this gives a lot of confidence.

As such, that there are plenty of opportunities for a foreign business that can create for itself a niche in China’s new economic structure. A look at the business of some of our clients illustrates some of the challenges that foreign investors are facing, as well as their ambitions for the near future.

1. Projections for car sales have taken a nose-dive over the past 6 months, which is leading to decreased orders for our clients in the automotive industry. One client in particular is currently under pressure to cut costs and terminate redundant workers. On the other hand, China’s car market is among the biggest in the world, with continued demand for internationally-branded cars. The current re-organization should ready the company for the years to come.

2. A client in the furniture industry has decided to continue operating its main workshop in Beijing, but political meddling, stricter environmental rules and increasing costs are pushing the company to concurrently seek new models. For example, an increasing amount of low-skilled work is outsourced to suppliers in Vietnam. Another client in the same industry is reducing a traditional reliance on (decreasing) sales orders from Europe by setting up a local sales team to target multinationals in China.

3. Organized care for the elderly is still in its infancy in China, but three factors combine for a bright future: a culture of filial piety, a wish of children to become more independent of their ageing parents, and plenty of money to spend. One of our clients is partnering with Chinese real-estate companies and insurers to build and operate senior care projects all over the country. On the other end of the spectrum, babies and infants (child) education is a fast-growing market as well: one client has responded to demand by offering international-curriculum education to Chinese kindergartens and elementary schools, while yet another is helping the Chinese Society of Education to develop a Montessori curriculum with Chinese characteristics.

4. The demand for internationally-branded goods remains very high among China’s middle-class consumers. A client in the fast-fashion business is on route to establish fifty new branches this year alone. It is important to cover first- and second-tier markets across the country, but in many tertiary markets it is benefiting considerably from a first-mover advantage.

5. The shift from a manufacturing base to a full-grown sales market has forced many companies to change their business models. Several clients are currently building factories to produce goods in China for sales in the Chinese domestic market. Transportation fees, import duties as well as long delivery times are accelerating the shift of manufacturing high-quality products and machinery in China as opposed to the Western home base.

6. Increased labor costs and the economic slowdown are also pressuring foreign and domestic companies alike to become more distinctive compared to their competitors. International niche players in multimedia marketing for example are investing in China in response to a growing demand for existing clients to come up with integrated marketing solutions that are not yet available from domestic companies.

7. Amidst daily food scandals and with a growing middle class, the demand for high quality international brands in F&B is rising exponentially. Several of our clients are active in the beverage industry in China, where the sales potential is enormous and so far few foreign players have made much of an impact.

A look at our firm’s business is illustrative as well. Over the past decade, we have supported many international businesses to establish manufacturing bases for export to Europe, the United States, Canada and Australia, or to organize the sourcing of products from China. In recent years however, we have seen a strong shift towards manufacturing, trade and services for the Chinese market.

Already in 2013 China became the world’s largest luxury market and largest e-commerce market. With continuing urbanization and urban incomes poised to rise by 15% per year, one international consultancy expects the number of China’s middle class consumers to reach 630 million by 2022, and 1.4 billion by 2030. This goes a long way to explain the optimism among many foreign investors despite the current economic downturn.