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?
Probably both. The above points are hard to discount. Growth is slower, domestic firms have seen stronger growth than foreign firms, and a policy of systematic favoritism to local companies can be discerned at several levels.
But it also pays to take a look at the numbers, which is what we do in this article. This article looks at seven specific industrial markets that GCiS has published reports on over a 5 year period. The scope here is narrow, and deals with only select industrial markets in a large and diverse economy, though the results are interesting and at times counterintuitive.
The main finding is that there are opportunities, though these are shifting. In some markets opportunities are much less, while in others these have really grown. Another finding is that while foreign firms may have smaller share of their markets now, the markets in China have grown to the extent that foreign firms still grow- with a smaller share of a much larger market.
These will both be explored, but first a look at the data is needed. The definitions of these markets are noted here.
Foreign Suppliers (FS)- mainly refers to western firms. The only market that prominently features other Asian firms is Inks, with leaders such as DIC and Toyo.
Timing- A 5 year gap between the data; in some cases first year is 2009, in others 2010
Shifting but Still Tangible Opportunities
This first chart shows how foreign suppliers have fared in these 7 target markets over a period of 5 years. These are more or less the same group of companies, so the comparison is valid. In two markets foreign companies have increased their share of the market- in one case by over 100%, there are two cases of little change, and in three markets have lost share to domestic competition. For example, in the hot melt adhesives market foreign suppliers had about 50% of the market in 2010, and down to about 40% in 2015. So foreign firms have not demonstrably declined in these markets; and furthermore most of these markets are traditional, so domestic firms have had time to catch up.
It is also very notable that the share of foreign suppliers here is substantial for each market, with a minimum of 25% share (FRC), and over 50% in three of these seven markets- in spite of strong competition by Chinese firms. Just in this sample of industrial/chemicals markets, foreign firms have more than held their own in these markets, though the markets- and the opportunities therein- have changed.
Share of Foreign Suppliers (FS) in Select Chinese Industrial Markets- Base Year + 5 Years
The reasons behind the increase or decline of opportunities and performance in these markets for foreign firms are tied to the specific market, though there are a few common factors that run through this. The largest single factor is that in some cases leading domestic firms have closed the technology gap, particularly in more traditional markets and those with more basic requirements. The printing inks market certainly fits this description. While there are some new advances in inks, like flexographic inks, the bulk of the market is comprised of traditional categories such as lithographic, whose technology has changed little recently. Also in this market local firms such as Shensaier and Yips have improved their game, and gained significant share- both in China and export markets. These firms have taken most advantage of a fast growing market.
But not every market has taken this route, and growth of the water treatment chemicals market tells a contrasting story. This market grew by nearly 100% over a 5 year period, and foreign suppliers led by firms like SNF and Nalco have made big games. The main growth driver in this market though was China’s increasingly serious effort to control pollution, and among a large segment of customers higher end products meet their needs. While over-capacity and commoditization are prevalent in most industrial markets in China, there is also a real counter-trend to require and pay for higher quality products. This is seen in WTC, as well as other markets including personal protection equipment and food packaging- just to name a couple.
The market with the slowest growth over this time is anti-corrosive coatings, whose products are used in traditional industrial and infrastructure applications, such as ship building, oil pipelines, and various steel structures. These industries are going through a down cycle - and while some Chinese firms such as Jiangsu Lanling have improved, this has not been enough to take share away from firms such as Jotun and PPG- especially in higher-end applications such as oil & gas.
Outside these particular markets China’s shifting industrial landscape is also evident. The geographic focal point of the economy is moving westward, to central China and SW China in particular. The provinces of Chongqing and Guizhou had the highest growth rates in the country in the past 5 years, and Central China now accounts for the largest regional GDP. Tier 3-4 cities are growing faster than Tier 1-2 cities. In terms of industries, companies that mainly service heavy industries have seen slower growth in their customer markets, whereas those able to focus on the logistics, ecommerce infrastructure, warehousing markets have experienced a faster growth in the past 5 years.
Of course total GDP has slowed, and likely to slow further, outside a few notable industries (healthcare, logistics, tourism). However compared to 15 years ago the markets are so much larger that smaller increases will yield significant revenues, as we look at next.
A Smaller Share of a Much Larger Market
Even with a slower economy, in the past 5 years (approx.) these markets have grown by over 50%. Just as important these markets are all sizable, with a total exceeding 200 Bn RMB, and the smallest market at nearly RMB 7 Bn. So even if growth in these markets is halved in the next 5 years, the amounts are large enough to be compelling to a company that is able to successfully compete.
And an important point is that while foreign suppliers gained share in some markets and lost in others, on an absolute (nominal) basis they gained in every market, as noted in the most right column. And the minimal gain, albeit over a 5 year period, was 13%. Even if one takes out the water treatment chemicals market, the aggregate gain was 39% weighted.
Market Size of Foreign Suppliers (FS) in Select Chinese Industrial Markets- Base Year + 5 Years
This indicates that foreign firms can still compete on both a relative and absolute basis. Even if relative share declines, having a smaller share of a much larger market is an acceptable alternative. Just looking at the industries downstream from these seven markets, most area already No. 1 or No. 2 in the world. A few other points on this data:
Pricing. Looking at a selection of key products in these markets (not all products), prices have risen in some markets- such as screw SAC- and declined in others. These are caused by different factors, and not especially from total market growth. For example. And furthermore there is no empirical correlation between market concentration and price trends.
Market Concentration. This is defined as percent of the market controlled by top 10 firms. With one big exception, market concentration has increased little in these markets, and in some cases had decreased. This finding is counter-intuitive, as given over-capacity in Chinese industrial markets greater concentration is expected. This could be smaller companies leaving the market, M&A, or both. However in the inks and SAC markets, concentration has actually decreased by as much as 20%, as a range of medium size firms have taken market share from leaders.
Trend to Quality. Several trends are stimulating a general trend to quality in many of these markets. In Eastern China in a particular, provincial governments are being much stricter with enforcement of environmental regulations compared to before. This also extends to food safety, is receiving strong attention from the national government. At a practical level regarding these markets, this means that packaging, inks and other food related products need to be water based and safe for consumers. And in many cases Chiense firms have become more active in export markets, requiring higher quality and certified components and materials.
Prices Changes of Select Products: 2010 to 2014
Growth in Market Concentration, Market
Just based upon examination of this small set of markets, there continue to be opportunities for foreign firms in Chinese industrial markets, though the opportunities of today are likely to be different from those of previous years. And even if growth has slowed, the market is likely to be large enough that markets are still attractive.
If opportunities exist but are shifting, then the first task for foreign firms is to understand how this shift is taking place in their respective markets: such as by customer market, Tier 2 v. Tier 3 or 4 cities, region, application, etc. Shifts may also occur in technical or purchase demands, and also in government policy and enforcement. For example, in one recent study we found that whereas previously there was no demand for a certain type of flame retardant chemical, in the past 2 years demand has accelerated and now the market is entering a growth phase- with much of the business going to foreign firms, as only a couple domestic firms offer relevant products.
Follow-up actions could include introducing different products into the market, or even designing products for China based upon updated requirements. Or these may entail recalibrating which customer markets to focus on, or emphasis on different regions, etc. Changes in sales structure and channels may also be needed to best take advantage of new markets. Whatever the action, western firms should be able to go forward in this market with the knowledge that in most of their markets there are still gains to make.