China in Focus

Observations of Business, Economic and Social Perspectives in China

 

Importance of China to Western Multi-Nationals

5 Years ago, Now, and Going Forward
Just How Important is China to Western MNCs?

Just how important is China to western multi-nationals? For years we have been hearing talk of how important China is going to be to western business, and how China as well as other BRIC and developing countries would drive growth for these companies. One of the best ways to measure this is to look at the total contribution of China to the total revenues of leading multi-nationals in China- now compared to several years ago. So is this potential now being realized?

The short answer is, with exceptions, yes. The average China revenue of 20 large multinational corporates increased from USD 2.8 Bn in 2006 to USD 6.1 Bn in 2011- thus more than doubling in this five year period. Just as important, for this sample of 20 MNCs China now accounts for nearly 11% of their global revenues as of 2011.

One big reason for this is that China's market itself has increased substantially, both in absolute terms as well as a percent of the world economy. In 2006 China accounted for 5.6% of the world economy (nominal), and last year this was 10.4%- an increase of nearly 90%. At the same time, for these MNCs, sales to China increased by 88%- almost an exact correlation- as noted in the table. So at an important level, MNCs sales to China have increased less because they are gaining market share, and more to the fact that China has grown so fast.

Figure 1: Importance of China to Western MNCs- an Overview

Source: Company Info, Secondary Sources, GCiS *Nominal

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Chinese Companies Coming to Your Shore

Americans buy hundreds of Chinese-made products from Wal-Mart and other stores, from towels to radios to glasses, though most would be hard pressed to name a single Chinese brand. Maybe some now know that Haier is Chinese, as is BYD, following Warren Buffet's investment in this car company. Mr. Buffet has driven a BYD, though the average American could not take one for a ride as BYD cars are not widely available in the US, and will not be in the near future.

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Outside the System in China

Does Private Enterprise Have a Chance in Today's China?

China is in the midst of testing economic theory. By current estimates more than 70% of China's economic output is controlled by the government. Yet China's economy has prospered in recent years while other economies have floundered, leading some to say that China offers an alternative economic model. Thus the question: Can a country prosper if its government-backed enterprises are allowed to control the lion‘s share of its economy and its private enterprises are stifled? Some might rephrase the question. How long can China's savings be used as the cushion for massive state controlled inefficiency and political patronage? While policy wonks, politicians and economists debate, the conditions on the ground for China's private enterprises are bad and getting worse.

Most debate regarding State control of the economy has focused on the role of China's SOEs (State Owned Enterprises) and strategic sectors such as finance & banking, telecommunications, transport, and energy. The reality is that these companies and sectors represent only the most visible components of state and SOE control. Like the visible part of the iceberg, thereunder hides the really dangerous part.

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Understanding the US China Trade Imbalance: What is Really Driving Chinese Exports?

A Snapshot of Imbalance

The China-US trade imbalance is as contentious as ever. In previous years this would come into the spotlight and then fade, come back and fade again. Now however this issue seems likely to remain in the spotlight continually, as the imbalance keeps growing larger, US unemployment remains high, and there is a presidential election underway in the US. In fact the leading Republican candidate, Mitt Romney, has made it his position to slap import tariffs on Chinese goods if China does not allow the Yuan to appreciate. From his point of view and that of many in America, US-China trade is very imbalanced, in China’s favor, and the Chinese government directly enables this through an artificially low exchange rate, among other measures. The rhetoric and potential consequences are getting serious.

And yes, this deficit is large: $234 Bn in 2011, through October, and set to surpass the record of $273 Bn in 2010, with China now accounting for over 40% of the total US trade deficit- up from only about 20% ten years ago. With four dollars in imports from China for every one dollar of exports to China, it is a lopsided relationship, as measured by ex-im figures. As long as the difference is so large, this issue is not going away.

When trying to put a finger on the causes and remedies to the China-US current trade imbalance it would be useful to gain an understanding of what is really driving these exports, and who is exporting. Before this, let’s first have a quick look at the trade numbers in the China-US context:

Figure 1: Snapshot of US-China Trade Imbalance (2001-2010)

US China trade balance 2001-2010 - GCiS China Market Research

Source: US Census Bureau      Figures are Nominal, non-adjusted

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Populations and Pre-school

Great Expectations

A long time ago in rural Thailand a friend of mine was surprised the fact that I did not yet have any children, already being over 25 years old. He was 24, and had three. I countered with the usual western reasoning that having kids is a big decision, one needs to have a good job, be married, etc. He could not understand this though, as no one in his village had a good job. I told him that I did not even know if and when I would have children, and in disbelief he then asked, “but who will carry your water?” This was meant literally, as the well was some distance from his hut, and up a hill.

I’ve never been asked this question in my years in China, but would not be surprised if some farmers out in China’s poorer provinces think the same way. Kids are a good source of chores, which includes water-carrying, and can provide support later in one’s life. Move closer to the Eastern Seaboard and larger cities, though, and I doubt that you will get meet with the same attitude. The fact is that in larger cities like Shanghai, or Nanjing or Ningbo children are now seen more of a net expense than value added.

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