Yes, in Many Markets- But these are Shifting

When a few years back markets in China were growing by 10-20% per year or more, and a large number of MNCs were making double digit growth, most would say that opportunities in this market were strong.

Now the situation has changed noticeably, with slower growth in the economy as a whole, and much slower growth in the industries that were driving this growth. This comprises the construction market as well as heavy industries such as chemicals, machinery, cement, etc. This is compounded by real or perceived unfairness by the Chinese government in market access and subsidies to local companies, and lastly the fact that leading local firms have demonstrably improved their product and have closed the product/technology gap in a range of markets.

These combination of factors, along with the normal operating headaches, have led many foreign firms to conclude that their opportunities in China have taken a strong negative turn. Internal surveys by Amcham and EuroCham both echo this sentiment. Is this an accurate statement, or more a matter of perception?

MNC’s To Get a Smaller Share of a Much Bigger Market

Again the organizing concept for MNC’s in China is shifting. Whereas once the focus was on setting up, and quick expansion, now this should move to standard business development. The “land rush” is over, and now to borrow agricultural imagery its time to till the soil and produce good crops. Of course land rushes are far more exiting than farming, so there are complaints that growth is much slower than it used to be, and that some government practices and policies are unfair. At the same time, growth is slower than it was in the boom years around 2004-2010, with current official GDP growth rates at about 7%, and true growth likely even slower than this, in the range of 3-5%. In sum, for some of the shine has some off the China market.

While there may be some reason to complain, the fact is that the most recent 10-15 years represented an ideal period for foreign businesses in China: very fast development combined with relatively open access, and an under-developed set of domestic competitors, depending on the market. In the past several years though, these have all begun to change, with greater focus on compliance, stronger domestic players, and slowing growth. As a result MNCs are in effect being squeezed, with many losing market share in their target industries. Much of this though comes down to the natural progression of China’s development, rather than actions by the Chinese government.

Weakness in One Sector in Particular Provides Part of the Answer

A recent finding from the GCiS Research Data Set shows that over the past 4 years, starting in 2008, domestic Chinese companies have grown significantly faster than foreign-invested companies. This includes both private as well as state owned Chinese firms (SOEs). Heading into 2012, FEI’s (foreign invested companies, including WOFE and JV) were growing significantly slower than Chinese companies.

One reads almost daily how much this or that MNC is having record sales in China, though it bears keeping in mind that in many cases this is not because the company has gained market share in China, but because the economy has grown so fast over the past 10-15 years. Just since the year 2000, China has added over RMB 40 trn in GDP (nominal), or nearly USD 7 trillion at current exchange rates. Certainly some foreign companies have had great success in China above and beyond GDP growth- GM and Apple come to mind. Though in many cases this has been momentum growth, with growth actually below GDP or sector rates. The chart shows that at the start of the period FEI’s were growing at about average (for industrial markets), though this has slowed by 2%, while the rate of Chinese firms has increased.

Or $100 Million? Or $100,000?

Most who deal with China strategically have long ago moved past the mindset of “if I could only sell a product to every Chinese person, then I’d have it made…,” realizing that penetrating this market and making sales is not so simple. Unfortunately some still look at China from afar and see a much rosier picture than exists here on the ground- a big market, fast growth rates, low hanging fruit, and with these come expectations that are just as high. Such as for one’s company:

• To triple sales in China within 5 years
• To gain 20% market share within 3 years
• To do $1 billion or $100 min in China within 3-5 years

In some cases these are possible, though in many cases not, especially with a slower market at present. So if your company can’t meet these goals, what’s the problem? We outline here the top factors that will limit growth of your company in China: