taiyuan city

Why should I take my company into the backblocks of China?

Bruce Ross Shanxi Province 2 Comments

The world’s most populous country has been achieving remarkable growth and transformation since Deng Xiaoping began the process of opening up and liberalising the Chinese economy more than three decades ago. Unlike Japan, Taiwan and South Korea whose hyper-growth was largely a result of their status as client states of America during the Cold War period, China’s emergence has been the product of its own initiatives and gradually evolving policies. One consequence of this has been massive foreign investment into China, a flow which shows no sign of abating.

There are numerous reasons why enterprising Australian companies, whether new or long-established, should seriously consider participating in this process by setting up business operations in China or actively selling their products or services into that market:

Two decades of uninterrupted extraordinary economic growth in China – The growth rate of China’s Gross Domestic Product (GDP) has not fallen below 7.6% per annum in the past 22 years and government authorities are pursuing policies aimed at sustaining this level of performance.

Chinese income per head 17 times as high as 20 years earlier – By comparison in Australia, a significant outperformer among developed nations, income per head in 2012 was just 3.6 times that of 1992. In those 20 years Chinese GDP per capita surged from US$363 to US$6091, an annual rate of increase of 14.4%. Over the same period Australia’s GDP per head rose from US$18,610 to US$67,036, increasing 6.1% per annum.

Australia and China – a small advanced economy versus an emerging economy whose population is sixty times greater – The opportunities for enterprise tend to be much greater in fast growing, transitioning economies. For those companies with global ambitions the Australian market is limited and geographically remote. China obviously has much greater potential and even though there are considerable challenges in establishing there, these may be more than compensated for by labour costs which might be a tenth of those in Australia, plus generous government incentives in land cost, tax free periods and loan interest subsidisation, etc.

Lack of local investment opportunity due to unchecked predatory behaviour of giant monopolising retailers – There has been a massive crowding-out and destruction of small and medium sized enterprises (SMEs) in Australia as Coles and Woolworths cannibalise traditional areas of small scale retailing such as service stations, bottle shops and pubs, butcher shops, fruit and vegetable shops, hardware stores, etc. In addition the bloated duo have used their overwhelming market power to destroy the profit margins and businesses of orchardists, farmers, winemakers and other manufacturers of food and beverage goods. Governments appear unwilling or powerless to challenge their insatiable greed, severely restricting avenues of enterprise in Australia.

Lack of government incentives or support in Australia for SMEs – Australian government bodies offer little incentive or encouragement to smaller companies setting up or trying to expand. By contrast, the central, provincial, city and county levels of government in China all offer significant preferential policies for new and expanding enterprises, both foreign and local.

Australian investments in China likely to benefit from exchange rate movements – It is generally recognised that the Australian dollar is overvalued and the Chinese renminbi is undervalued. As these currencies move toward more appropriate values, assets held in China and the cash flows they generate will be worth more to their Australian owners.

Looking beyond the obvious – When considering entry into China it is important to recognise that the country is not just one monolithic entity but rather a collection of provinces and autonomous regions which are at very different stages of development and have quite divergent development policies. Foreign companies have flocked into China attempting to take advantage of its growth and the possibility of access to its 1.3 billion consumers, but almost without exception they have crowded into the Tier 1 cities like Shanghai and Beijing or the Tier 1 coastal provinces.

Going where the others aren’t – Rather than joining the herd in the overcrowded and overly competitive major cities and provinces, Australian companies would do well to consider an alternative strategy of entering into a region where competition from other Western-owned businesses is extremely limited and where they can obtain first mover advantages. A good example is Shanxi Province where Bruce Ross Consulting focusses its attention. Until very recently it has been virtually ignored by Western companies and consequently has attracted very limited foreign investment.

The Tier 1 cities and provinces have by now experienced a flood of investment from virtually all of the world’s most advanced economies and with it access to Western technological expertise. They have no pressing need for additional foreign involvement. By contrast provinces like Shanxi are very much aware of the benefits they would derive from Australian technology and expertise and their counties are prepared to compete vigorously with one another to attract Australian companies to locate in their districts. They need to provide greater employment opportunities for their rural workforce, many of whom subsist on very meagre incomes and also need to be able to provide career pathways for their young graduates.

Shanxi has 75 institutions of higher learning, catering for graduate, undergraduate and vocational technical students. There is therefore a constant flow of new graduates looking for opportunities to make use of their skills. Unlike in Australia these young people cannot simply move to the cities where salaries and opportunities are greatest and where there would be strong demand for their services. In line with other Asian nations China operates a hukou or household registration system which identifies a person as a resident of a particular area. People can lose substantial permanent residency entitlements if they move outside their hukou area. As a result in a province like Shanxi there is a ready pool of keen young graduates who would be eager to work for an Australian company and who are less likely to be lured away by rival firms than their counterparts in the major cities.
Provincial GDP map
Provincial GDP table
Reducing regional disparities – In an effort to maintain social harmony and reduce the flow of internal migration toward the wealthy coastal areas, the Central Government has been actively pursuing policies designed at reducing the income and wealth disparity between its various regions. The map at left shows the location of three of China’s most important cities plus coastal provinces adjacent to them. It also shows Shanxi Province’s geographical position in relation to them. The table below the map makes clear that in general the GDP per capita in these coastal areas is very much greater than that of Shanxi Province. However, what is particularly interesting is that Shanxi’s per capita GDP is growing much faster than that of its wealthier near neighbours, especially so in the case of Shanghai where it is growing three times as fast. What this suggests is that over time there will be a tendency towards convergence in income and wealth levels between the various Chinese provinces.

A new frontier – An area such as Shanxi basically constitutes a new frontier, a place where there is very limited competition for those Australian companies with new products and ideas which want access to a greatly expanded market. Shanxi’s strategic location provides ready access to a huge potential market, not just Shanxi’s own 36 million people but also the adjoining Tier 3 provinces of Inner Mongolia, Shaanxi and Henan; a combined population of almost 200 million. so that once having established a beach head in Shanxi Province the prospects for further expansion are virtually limitless. It is clear from the map that goods produced in Shanxi can be quickly and cheaply delivered to a large proportion of the Country’s most affluent consumers.

In addition the fact that its capital city is situated about four hours inland by road from Beijing and from Tianjin’s seaport of Xingang gives convenient access for export and import.

Shanxi Province is relatively compact occupying just 1.63% of the national land mass. It has 11 cities ranging in population from 1.4 million to 5.2 million. It also has 119 counties and districts. This third tier of government is of particular importance to foreign companies because they compete vigorously with one another to try to attract new investment into their areas.

The pillar of Shanxi’s economic structure is the energy industry, and in particular coal mining. But in 2010 it was designated as China’s “comprehensive transformation pilot area of resource-dependent economy”, with the result that its focus shifted to building a base in new type energy, modern manufacturing industry and logistics, and becoming an important service provider for central and western China. By achieving all these targets, Shanxi intends to become an economic and cultural giant in central China.

There are already other indications of Shanxi emerging from relative backwardness and transforming itself economically. The Province has 78 scientific research institutes, employing 680,000 people, which have made breakthroughs in such areas as information, biological science, new materials, advanced manufacturing, and clean coal technology. There are numerous industrial parks distributed throughout the Province offering high quality infrastructure and support services.

The capital city Taiyuan has recently been announced as one of nine pilot cities for China’s Smart City program. In an effort to promote urbanisation and boost the national economy China is looking to transform cities by combining government investments, modern infrastructure and information technology to make them more competitive. Almost all of the other successful applicants are much wealthier and more developed regions, with five being located in provinces ranked in the Top Ten in terms of GDP per capita. The Smart City status means that companies at the more advanced end of the technological spectrum may now be much more inclined to consider locating in Taiyuan.

For enterprising Australian small and medium sized enterprises prepared to move out of their comfort zone Shanxi Province presents as a new frontier of extraordinary potential offering the prospect of securing first mover advantage in a region with a huge population which is rapidly becoming more affluent.

Bruce Ross Consulting can offer introductions, support and guidance for companies wishing to take advantage of the abundant opportunities in Shanxi Province.

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Comments 2

  1. Great points indicated Bruce, and all straight to the core issues indeed.

    There surely exist some considerable government incentives to western migrators. According to the Washington Post, China is ranked very high for favorable policies to western immigrants. We can infer how welcoming the country is to western investments and businesses as well.

    China is also indeed a huge market, foreign investment throughout all diversified industries across the globe are seeking for opportunities in China. The most familiar examples would be more Hollywood movie stars are now filmed in Chinese movies and all the apple computers and iPhones the Chinese had consumed. Apple launched its iPhone 5s news press in Beijing earlier this year. Maybe it is really the time Australian businesses should consider to dig in deep to some other regional areas of China for more business investment. China nowadays is a pool of business potentials, whoever discovers more of it almost always wins.

    indeed Australia has quite a big of oligopoly competitions across all industries. But China has more local businesses supporting its communities, although there are also monopolistic retailers which significantly suppresses perfect market competition, there are still quite a number of micro-businesses that build long-lasting business relationships with the locals and deliver a fairer market competition status.

  2. There is considerable longings of the Chinese businessmen for more feasible mining industry experiences and more advanced mining technologies since the national reform of the coal-mining industry, both private and centrally-owned mining companies. I have recently read a media report expressing the voices of Shanxi miner’s hardship in terms of a complete brand new strategy to react to the rapidly changing mining business environment, especially the dropping coal prices which had exploited miners profit margins more than ever. Most coal-miners (including the centrally-owned) have experienced severe profit deficit already for a prolonged period, however, in order to save their businesses back from the edge of bankruptcy, their debt-leverage ratio had increased to a ridiculous manner where the banks and the wider economies suffers along with mining industry as well. According to the report, because coal-mining is still the pillar of the province’s economy (more than 60% of the province’s exports are coal-related products), the downturn of the industry is no doubt a devastating impact to the entire province. Nevertheless, the government had tried several policies to save the industry, still futile moves disappoints the businessmen and no sign of recovery had shown. Overall the province has the most precious resources awaiting but somehow the government and businessmen are simply incompetent in coming up with a productive treatment due to lack of sufficient experiences and skills. That is why the province will be absolutely grateful if Australian companies may provide some helpful suggestions. After all, the mining industry in Australia has been long regulated and modernised, China is still on its progress seeking for improvements. The western intelligence had never been so valued and appreciated until now.

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