China’s declining growth is a half a trillion dollar business opportunity

Although the headline growth rate is slowing, China’s economy still expanded by an incremental US$520 billion between 2014 and 2015

PUBLISHED : Friday, 07 October, 2016, 3:32pm
UPDATED : Friday, 07 October, 2016, 10:45pm

After three decades of double-digit growth, the world expects China to continue on its upward trend. With such high expectations, its 6.9 per cent growth in 2015 or US$520 billion in incremental growth was seen by many as the dawn of economic decline for its trading partners.

However, slower growth is an inevitable outcome of much needed structural reform for China to make a strategic shift away from investment and export dependency to domestic consumption and services. And China is asking the world to embrace this transformation towards sustainable growth as its new normal. I see this as an opportunity to realign one’s strategy to scale in the emerging industries that China seeks to leapfrog and dominate.

Let’s go back 25 years earlier. In 1992, China’s gross domestic product stood at US$425 billion. That was a significant year as several special economic zones were initiated to propel the Chinese economy towards capitalism. The resulting annual growth rate over the next decade was in excess of 12 per cent, effectively tripling its GDP.

Today, the richest man in China, Wang Jianlin, epitomises the required agility in the transformation of Wanda Group from a real estate empire to a leading player in entertainment media and theme park business

The rising income and real consumption gained traction as fast-moving consumer goods led the charge in national distribution coverage, followed by consumer electronics. The next boom was in personal computers, mobile phones, automobiles and real estate. Currently, interest in financial products, investment properties and start-ups leads the growth.

Compared to the dizzying double-digit growth of 1992 to 2012, the growth projection of 6.5 per cent for 2016 seems anaemic.

But there are several ways to see the opportunities underlying this seemingly slow growth. First, the incremental GDP growth of US$520 billion from 2014 to 2015 is larger than the absolute GDP of US$425 billion in 1992 when the economy began its trajectory.

Another perspective is to compare China’s incremental growth to the GDP of Asian countries. Based on information from the World Bank, the following table and chart show how various Asian countries have performed.

Despite its slowing economy, China’s year-on-year GDP dollar increment translates to an almost new Taiwan economy being produced each year (US$515 billion versus US$524 billion). Viewed from another perspective, its incremental growth is equivalent to two Asian economies combined – Hong Kong and Vietnam – one developed and another at the forefront of development respectively.

Which other single market or region offers this size of year-on-year growth that amounts to the size of two Asian economies per year?

Even the two other populous Asian economies often touted as powerhouses behind Asia’s growth – India and Indonesia – are not in the same economic league as China. South Korea, despite the wave of Korean popularity, is not seeing growth.

The nagging narrative that China’s slowing economy means less foreign investment should be viewed in perspective. Obsessing over a percentage point number can distract businesses from the direct impact that China’s growth has on business opportunities. Instead, businesses must be ready to capitalise on the half a trillion dollar of economic activities on top of the US$10.8 trillion economic base of China. Otherwise, they can potentially be missing out on the biggest economic pie in the neighbourhood.

Second, businesses must realise that it requires massive resources to cover the whole China market. Each of its top seven cities have GDPs higher than some Asian countries. For instance, in 2013, Chongqing, its seventh-largest city, had a GDP in excess of US$200 billion, higher than that of Vietnam. Very few businesses enter all of China.

Yet, we often hear executives remark “I have business deals in China”. What they mean is they have dealings in one or a few product categories in a few sectors or industries with exposure to some provinces or cities, and not the whole of China.

Therefore, businesses expand by entering a province or city that provides the most potential for their specific business. They can target and scale their investment with a fair degree of precision.

Third, because of its massive size, China invariably becomes the world’s largest single market for product categories driven by population size. Personal computers, mobile phones and the e-commerce sector are industries where China has become their largest market.

This has implications. A large market attracts tracking and research companies who furnish intelligence to businesses operating or potentially operating there. Data by product category and brand, dissected by geography, features, price points and competitive market share become available. When businesses are operating at this level of insight, a 6.5 per cent national GDP growth is generally irrelevant. Instead, category growth rate and competitive market share come into play.

While economists and financial analysts are keen on national GDP numbers, the same cannot be said for the average worker, professional or entrepreneur. To them, the more important question is which part of China is relevant to their skill set or business and what are the more meaningful growth opportunities to ride this unprecedented scale in market expansion.

Since the early period of market reform, professionals and businesses from Hong Kong and Taiwan have had the advantage of early market entry. While some were leading multi-national corporate joint ventures or spearheaded sales and distribution, others set up manufacturing operations in the coastal cities with a strategy of leveraging lower cost of production for export competitiveness.

With rising wages and cost, growth is now driven by domestic consumption and services. Astute business leaders who saw the signs and anticipated the change are those who have prepared the business to make the transition to the new growth areas of e-commerce, clean energy and entertainment media.

Today, the richest man in China, Wang Jianlin, epitomises the required agility in the transformation of Wanda Group from a real estate empire to a leading player in entertainment media and theme park business. Alibaba is leveraging its original B2B e-commerce platform into the leading consumer shopping site and then extending itself into consumer finance, cloud and the entertainment business.

With President Xi Jinping’s intercontinental trade initiative of One Belt, One Road as the new economic pillar, foreign enterprises that align business strategies with these themes will likely have the advantage to be more successful.

Chen Xueliang is an adjunct senior lecturer of marketing at the National University of Singapore (NUS) Business School