x Abu Dhabi, UAETuesday 25 July 2017

Invest in China for the long haul

Companies should consider the substantial risks before investing in the fiercely competitive market in China.

An employee works at the production line of an edible oil company in Sanhe, China. Reuters
An employee works at the production line of an edible oil company in Sanhe, China. Reuters

Why invest in China? Many managers ask. The neat answer is: don't, unless you have a great business proposition that stands out as more promising than, say, a project in Brazil or Turkey. The reason is that doing business in China is an art that must be learnt.

In a nutshell, the country's transformation drives corporate policies. China is constructing what the communist party calls a "socialist market economy", and at breakneck speed. In just over 30 years, China has gone from number 32 on the world exporters' league to number one, and more than 400 million people have been lifted out of poverty. The party-state's current "Go West" strategy to develop the hinterland of the northern and western provinces only accentuates this trend.

Provision of public welfare is minimal, which makes achieving 10 per cent annual growth an imperative. Rapid development of infrastructure makes pan-national market access easier and accelerates the pace of social change in rural and urban areas. Labour productivity gains of about 10 per cent per annum ensure China's salience as number one world trader, while a managed exchange rate jacks up inflation at home, promotes Chinese competitiveness on world markets, and helps to pile up vast foreign exchange reserves.

China's party-state dominates the market process. It owns the land, issues and revokes leases, controls where people live, regulates raw material exploration and pricing, influences the economic conditions that prevail in each location, sets and revokes taxes, runs the whole financial system as a policy tool, and draws up its own, sometimes skewed statistics.

Procurement contracts go to insiders, and the party-state has a monopoly on the political system, runs the official trade union, makes appointments to corporate boards, appoints the judges, and is determined to maintain control over the media and the internet. Hence the question: why go to China in the first place?

The prime reason is China's growth potential. With per capita incomes still 14 per cent of the US, China remains a low-income country, and therefore is in a good position to achieve a rapid catch-up. Going to China also enables companies to profit from its new role as a regional manufacturing hub for the production of consumer goods in the wider Asia Pacific region. But China should not be considered by investors as simply a country with cheap labour.

Admittedly, unit labour costs can be up to 30 times lower than those in Europe or the US, but total operational costs are more telling. They include: the time spent searching for an appropriate location; learning to deal with the party-state; hiring, training and retaining the right people; and the need to regularly audit suppliers to ensure that quality and regulatory requirements are met.

China is not the place for a quick-buck artist. If a major commitment is made to the market, a decision must be made on whether the aim is long-run profits, growth in sales or increased market share. Ultimately, the reason you want to go to China is that the Chinese people, in the last resort, are running China, and they want to get rich.

But go there because you have a clear idea of what you wish to achieve, because China has great potential, and because you know you'll need to learn about operating there in any case.

Jonathan Story is emeritus professor of international political economy at Insead, and the author of China Uncovered: What You Need to Know to do Business in China. The Arabic-language translation is being published by Librairie du Liban