Exploring the Opportunities and Challenges of Doing Business with ChinaPublished: October 15, 2010 in Knowledge@Emory
As companies strategize the potential opportunities in emerging-market economies, China’s booming economy—which maintained double-digit year-over-year growth during the turbulent first half of 2010—and its rapidly growing middle class offers a crucial counterpoint to the currently stalled U.S. economy. Unlike the early days of the China trade, when restrictive trade barriers and slow, expensive communication modes limited participation to large multinational companies, small and medium-sized companies can today tap into the lucrative trade opportunities offered by the China market.
“China recently became the largest exporter of goods in the world, and its economy is the second largest in the world,” says Jeff Rosensweig, an associate professor of international business and finance at Emory University’s Goizueta Business School.
“Companies can’t afford to ignore it,” continues Rosensweig, who will moderate a panel discussion on November 1 when the National Association of Chinese-Americans (NACA), Emory University, and other sponsors host a U.S.-China Business Conference in Atlanta entitled “Catalyst for Growth.”
With China’s consumer market of 1.3 billion people, and 15 million more born each year, it’s more than just a slogan, say conference organizers and Emory faculty.
The November program will lead off with a close look at China’s growing economy, to be followed by a global executives forum that examines ways companies can build an integrated China-global strategy.
“A successful China strategy needs to be a one-world strategy that incorporates a strategic global plan for doing business in which China is a central and integrated component,” explains Steven Gu, a senior associate in the mergers and acquisitions tax practice at the Big Four accounting firm KPMG and one of the conference coordinators. “During this first session, top executives like The Coca-Cola Company senior vice president Clyde C. Tuggle will share their insights.”
The U.S., which currently fields the largest economy in the world, “is the largest exporter of services and, because of our substantial lead in services, is still the leader in total exports of goods and services,” says Rosensweig, who also serves as director of Goizueta’s Global Perspectives Program. “China will join the U.S. as the world's only economic and trade superpowers, and our growing business linkages could be a fulcrum for the 21st century. Forums like the upcoming U.S.-China Business Conference are vital to forging these important business and commercial links.”China’s ‘Green Energy’ programs—will open up numerous opportunities for engineering services, parts suppliers, and other firms in the U.S. and elsewhere.”
Contrary to what some people may think, “the opportunities in the China trade are not limited to large firms,” observes Gu, who is also senior vice president of NACA. “That’s demonstrated by the growing demand for consumer products in China, like a recent online sale conducted by taobao.com—China’s version of eBay—in which 205 brand new Mercedes Benz Smart cars were sold in less than eight hours.”
Opportunities also exist, Gu adds, as China embarks on several huge infrastructure projects and continues to invest heavily in advanced transportation technology, recognizing its importance in driving economic growth.
“One such project is a high-speed railroad from central China to Hong Kong [comparable to traveling from Chicago to New York in four hours or less] that is being sourced through international as well as domestic providers,” Gu says. “This and other initiatives—including
But he warns that many multinationals already have a strong foothold in China, “so now is the time for smaller firms to get in too, while the opportunities are still there and the market entry barrier is still relatively low.”
Turning to other opportunities, Rosensweig notes that China’s appetite for growth will be spurred in part by its huge labor force.
“China will continue to have the world's largest labor force for many years,” he says. “Amplify that by the rise in educational standards, and the sheer demographic force of China's labor force will continue to reshape global business.”
Meanwhile, he adds, although the U.S. labor force may be much smaller than China’s, it’s still the largest among developed economies.
“That may come as a surprise to many people,” he notes. “But the U.S. labor force is projected to grow every year for the foreseeable future and will help to maintain the U.S.’s relatively strong global economic position. It will also place the U.S. in a good position to be both a consumer of China’s goods and a supplier to the Asian nation’s growing consumer market.”
Gu notes that although China has long been seen as a low-cost competitor to the U.S. and is currently involved in a dustup with the U.S. over the yuan’s currency valuation, China’s demographics point to an increasingly valuable market for American companies.
But as the U.S. approaches midterm elections, the combination of political heat and a soft economy are helping to generate a significant level of acrimony surrounding Sino-American relations, Rosensweig notes.
“The level of discourse regarding restricting trade, primarily through various forms of protectionism, is on the rise,” Rosensweig says. “I do not think it will come to anything, because the relationship is too important to each side to jeopardize, but there is a lot of anger in the U.S. regarding the Chinese policy of intervention to keep the yuan cheap, effectively reducing the world price of Chinese goods and spurring that nation’s exports. That, combined with its low-wage workforce, is driving an increasing number of U.S. companies to reduce their domestic workforce and outsource more activity to China.”
But the situation is actually more complex than it appears, he continues.
“There can be little argument over the impact of China’s low costs and relatively low wages,” explains Rosensweig. “And even though China's wages are rising, they are not climbing fast enough to make U.S. workers price-competitive with Chinese ones. Thus the pressure from the U.S. for China to raise the relative price in dollar terms of its labor by allowing its exchange rate to strengthen.”
Nonetheless, some industries still retain a “comparative advantage” by being based in the U.S., he says.
“These segments, such as agricultural products, are enjoying heavy export growth, albeit from a low base. Furthermore, China is a big importer of certain commodity products.”
While he’s optimistic about the future of trade with China, Rosensweig points out that U.S. companies should carefully explore the China market before they commit significant levels of resources to it.
“Some U.S. firms set up operations in China years ago and have yet to realize a profit,” he cautions. “They find that the market, although teeming with people, may not yet be teeming with consumers for their products. U.S. companies may also find that the lack of respect for their intellectual property rights can jeopardize profits.”
But these concerns don’t mean that firms should not expand to China, Rosensweig adds.
“Many have done it successfully,” he says. “It just means being wary, exercising patience and staying power, and resisting the hype of ‘selling to 1.3 billion consumers.’"
U.S. companies that engage in due diligence and proceed with caution may see a jump in exports to China “as its citizens become wealthier and their demand for consumer staples and luxury goods increases,” Rosensweig observes. “As China’s middle class expands, individuals will likely demand more from service industries where the U.S. already leads, like tourism and MBA education. The upcoming conference is a good place to get a foot in the door to prepare for this potential wave of opportunities.”
Conference panel topics will address opportunities and challenges in green energy industry, venture capital, the debt/equity market, taxation and intellectual property protection, future trends in energy technology and policy, and various methods for building marketing strategies targeted at Chinese consumers and for enhancing the marketing techniques of Chinese companies abroad. Panelists will include top business leaders like Ed Cunningham, managing partner of US Renewable Energy Group; Peng “Jeffrey” Zhao, president of Mingyang’s Wind Power Technology Company; and Andrew Ng, senior director of Wal-Mart Stores Inc.’s international M&A tax group.