SHA 315Business and Economy in ChinaChina’s Cities and Regions

Interview with Edward Tsehttp://www.youtube.com/watch?v=KQ8qJVw3dlY

What does it mean to describe Shenzhen as having “one of the biggest pools of procurement talent in the world”? Or that “massive supply networks develop in the Pearl River Delta”?

Is this useful knowledge for someone doing business in China? Isn’t the only reason for having a facility in China the cheap labor?

Explain why IBM located a major, even critical, facility in China, but specifically in Shenzhen?

“Chinese government invest in business-friendly infrastructure: economic zones, industrial parks, high- ways and container ports, universities and training colleges. By locating its global procurement headquarters in Shenzhen, IBM was not only strengthening its own supply base, but better positioning one of its core businesses: helping clients strengthen their supply chains.”

What do you know about Zhongguancun Software Park, next to Beijing’s main university district?

What kind of consulting business does IBM operate from Shanghai? IBM runs all its global growth businesses from Shanghai. This includes its businesses in Asia, Latin America, Russia, eastern Europe, the Middle East, and Africa. Like a growing number of other companies — Coca-Cola, Honeywell, KFC, and Goodyear among the most prominent — IBM has a “one world”–oriented strategy for its operations in China. In addition to sourcing products in China and seeking out Chinese markets, it is investing dramatically in operations there and integrating them with the rest of IBM’s global enterprise.

What does this mean? A 2009 study by the American Chamber of Commerce in Beijing noted that in 1999, only 13 percent of companies reported margins in China that were higher than their worldwide averages; in mid-2008 (before the onset of the global financial crisis),

this figure reached 50 per- cent.

The future in China will not be like the past: the growing complexity of the Chinese market, the new sophistication of Chinese competitors, the evolving interests of the Chinese government, and their own entrenched assumptions about global business.

The variety of brands on products is greater in China than anywhere else in the world. Chinese consumer markets are far more complex and dynamic than most realize.

The expansion of Chinese markets is accompanied by phenomenal competition, as well as abrupt rises and falls in market share for both new and established products. Most importantly, although China’s markets are open to global products, they are also extraordinarily local, rooted in traditional customs and tastes, with extreme variations from one region to the next.

People who were living in frugal, company- assigned, company-owned apartments a decade ago now have their own homes, an array of possessions, and possibly a car. With little or no history of consumption, these consumers tend to be difficult for marketers to reach: They are fickle and demanding, often shopping on price alone. Brand loyalty is a new notion to them. At the same time, a rapidly growing group of people at the high end are very brand conscious and interested in showing off their wealth as they acquire known products. With markets and tastes continuing to change, it is difficult to predict what kind of path China’s consumers will follow. They cannot be taken for granted.

The KFC model for China

The rising competitive capabilities of Chinese firms: Home field advantage in China; the capacity for global expansion; and the money to purchase foreign firms.

New business models by Chinese firms: away from a dependence on rapid, low-cost production and copycat R&D, and toward effective long-term management

There is an equally complex and dynamic set of relationships between the Chinese

government, economic markets and foreign firms

Compare consumer goods and the telecom industry (such as Alcatel-Lucent) and financial firms. What options for ownership and new financial products. What options and restrictions in autos?

How must global companies change in order to succeed in China? Must embed their global operations, R&D and products development much more deeply into China.

Great diversity across Chinese cities even as the number of megalopolises increases.

Global dynamic cities of 2025

http://www.foreignpolicy.com/articles/2012/08/13/the_most_dynamic_cities_of_2025

These areas have a population of 10 million

2000ShanghaiBeijingGreater Shandong

2010 addGreater Guangzhou (Guangzhou, Foshan, Zhaoqing), Shenzhen and greater Shenyang

2020 addChangsha, Zhuzhou, XiangtanChengduChongqingXi’an – XianyangZhengzhou – KaifengHefei – Lu’an – Huainan – ChauhuWuhan

Many of the most recent big cities are a result of intra-provincial migration

Each of these areas has a different mix of strengths, weaknesses, opportunities and problems

The policies devoted to raising incomes in western and rural China have begun to succeed:

in 2007 growth in the west surpassed that of the east for the first time in decades. Western provinces far outperformed the rest of the country in 2011 as aggregate GDP growth reached 14.1%, compared with the average on the eastern seaboard of 10.5%. Central provinces, notably those through which the Yangtze River runs, have benefited from large infrastructure investments

and preferential central government policies aimed at attracting businesses. Urban centres in the interior now offer economic opportunities to rival those found in China’s established megacities, and their populations have boomed as the labour force increasingly opts for local alternatives to migrating east.

Ageing and Income

Will China get old before it gets rich?

How big is China’s middle Class?

In income terms, using the baseline of 30.000 RMB per year:

Chart describes the changing proportions of Chinese in different cities earning over 30,000 RMB per year

This data ignores grey income:

In 2000, only Shenzhen at 25% and Beijing at 5.3% had any significant part of the population earning this much. All cities in Chart 4 had negligible proportions at this level of income.

The issue of grey incomes and accurate data on Chinese earnings:

In 2010, an academic from the China Reform Foundation, Wang Xiaolou, published an influential report on the extent of the unreported—or “grey”— income of China’s households. The report was controversial, as it suggested that the discrepancy between officially reported income and the actual wealth held by Chinese households was equivalent to nearly 30% of China’s GDP in 2008—a staggering amount. It also claimed that the under-reporting of income was most flagrant among China’s wealthier households, suggesting that levels of wealth inequality were much wider than officially recognised. Income tends to be understated in official household surveys, as individuals are concerned that the information they disclose might be passed to the authorities (tax evasion is rife in China).

The Economist Intelligence Unit consulted with specialists to build its own estimates of the actual wealth held by Chinese households. It has developed a forecasting framework, combining its own macroeconomic data with relevant academic studies on grey income and income inequality, to generate provincial-level estimates of actual household incomes in different income bands. The megalopolis income forecasts in this paper do not include grey income, as it

focuses on city-level data.

The differences between the income projections based on official data and those factoring in grey- income estimates are stark. For example, in 2010 only 6% of households in Chongqing earned above a cumulative Rmb80,000 after adjusting for inflation. When factoring in grey income, however, the EIU found that this proportion rises nearly fourfold to 27%. At the national level, 12% of households earned above a cumulative real Rmb 80,000 that year. After adjusting for grey income, however, this proportion nearly triples to 32%. The under-reporting of real income levels indicates that our forecasts for the expansion of China’s urban middle classes are likely to be conservative.

The China market is much bigger that has been estimated by official data.

AS incomes rise, we must adjust our estimates of the income elasticities of demand for many products skewed toward the middle and upper income level products. Demand for healthcare, education and environmental protection will also rise more quickly than previously thought.

Chengdu as a case study

How has Chengdu changed its hukou policies to deal with the massive growth of migrant workers into the area? In particular, how have policies relating to rural hukou holders who become urban migrants changed?

Business opportunities