Prospects in China often look far more attractive to foreign executives looking at China from the West or making short visits to the country than they do to the business people living in China, writes Chris Torrens in ‘Doing Business in China: A guide to the risks and the rewards’ (www.vivagroupindia.com). “Even in the 1830s, British employees of the East India Company based in the southern city of Canton (modern-day Guangzhou) were in constant dispute with their British head office over the viability of much of their traded goods,” he notes.
Among the early examples of the lure of Chinese markets, cited in the book, is the observation of an English merchant in the mid-19th century that if every person in China could be persuaded to lengthen his shirttail by a foot, we could keep the mills of Lancashire working around the clock. Another example is of the US Farmers’ Association which, in the 1930s, dreamt of ‘selling an apple to every Chinese.’
Today, more than two-thirds of foreign firms operating in China are believed to be profitable, though tax records indicate that only one-third make a profit, the author reports. “This suggests that some companies may be concealing their profits.”
A section on ‘protecting intellectual property’ rues that within China well over half the consumer goods in daily use are believed to be counterfeit. The author explains that, despite a marked improvement in legislation in recent times, the enforcement bodies in China lack the funding, credibility and incentive to act against violators.
He describes how local entrepreneurs engaged in counterfeit production may protect their businesses by bringing counter suits in legal cases against them, or evade detection through just-in-time distribution models and sophisticated warehousing systems, by storing counterfeit inventory at numerous locations. “Entire villages and communities may be employed in the manufacture of certain counterfeit products, with the local area monitored by surveillance cameras and patrolled by guards, and local residents wary of any outsiders who might threaten the factory that is providing employment… It is not surprising, then, the local enforcement teams attempting to raid factories in such locations are forced to retreat in the face of hundreds of angry residents prepared for physical violence.”
Patchwork of markets
A chapter about ‘assessing the market’ portrays China as ‘a patchwork of markets with all the variety of the European Union’ in terms of culture, language, business practice, operating cost, and consumer income and behaviour, which can vary hugely from region to region.
Cities and their populations are changing at a bewildering speed, affecting all the market categories, observes Torrens. He adds that the surfacing of a middle class and China’s growing integration with global consumer trends have seen the emergence of a younger generation that shares more similarities with the Asian and global counterparts through popular culture than any other consumer segment in the country’s history. “Teenage students love fashion, music and consumer electronics, buying adidas shoes and Samsung phones; 20-something professionals eat at Pizza Hut and Häagen-Dazs (which has opened retail outlets in China) and make calls on iPhones; young families buy Volkswagen cars, Sony computers, Canon cameras and Pampers nappies.”
Successful foreign brands understand the local market and accordingly offer products, as evident from examples such as L’Oréal and KFC. “In 2008, L’Oréal started using the Asian expertise of its Japanese subsidiaries, Nihon L’Oréal and Shu Uemura Cosmetics, to localise its product range more effectively for Chinese consumers.”
In the case of KFC, the author mentions how the company localised by selling ‘youtiao, a typically Shanghainese breakfast dish made from deep-fried twisted dough, Beijing Duck-style chicken rolls, Cantonese-style pumpkin congee, and gongbao jiding, a spicy Sichuanese chicken dish.’
Retail sales data
To number-crunchers who are busy dissecting China’s retail sales data, the author’s advice is to take the data with particularly large grains of salt, because of two reasons. “First, in a hangover from the old Marxist accounting system, retail sales include non-consumer spending (notably government purchases and wholesale spending) but exclude spending on services. Second, retail sales data are typically estimated on a nominal, rather than a real, basis.”
Cautioning, therefore, multinational companies against overestimating the size and growth rate of the market, Torrens reminds that in 2008, for example, according to the data retail sales grew six percentage points faster than urban incomes. “The government’s explanation for this gap – that households were spending their savings on big-ticket items such as apartments and cars – was not supported by household survey data. The growth in retail sales was more easily attributed to unprecedented government spending in the second half of the year that bolstered the local economy.”