Trace the Lights II: China’s 19 City Clusters by 2020

China Clusters Map by 2020

As outlined in China’s 11th five-year plan, the Chinese government has pushed for the development of regional city clusters, aiming to drive economic growth, strengthen transportation, and influence the pattern of migrants. For those less familiar, city clusters are comprised of one or two cities, considered the nucleus, and several neighboring cities with well-connected transportation facilities.  China already has several mature mega clusters such as the Yangtze River Delta centered in Shanghai and the Pearl River Delta anchored by Guangzhou, but new initiatives to continue city cluster development are underway.

Earlier this year, The Central Committee of the Communist Party of China together with the State Council released the New National Urbanization plan, a series of integrated, cooperative government initiatives to establish a more coherent city cluster plan.  According to the document, China will have 19 clusters by 2020 as illustrated in the map above. The government intends to break the constraints of administrative divisions of these city clusters, realize the integration and consolidation of social and economic activities within vast areas, greatly reduce the distance and space between people, and promote human movement and economic activities at regional and national levels.

The formations of these metropolitan areas and urban clusters are changing and will continue to fundamentally change the way we look at China’s cities. In my previous post, I discussed China’s urbanization as a major driver for the future consumption-led economy.  As China continues to urbanize, the inter- and intra-cluster’s connectivity and motilities, driven by the development of public transport infrastructure, city boundaries are increasingly blurring.

FSG has aligned the clusters’ definitions with the government’s plans. Of the 19 clusters, 3 super clusters have been targeted to become world-class economic zones. An additional 8 clusters are called emerging clusters, each composing as much as 3–9% of total GDP in 2013. The government aims to turn these clusters into national zones as key pillars of the Chinese economy. The remaining 8 frontier clusters are included in government’s 2020 cluster master plan but haven’t yet taken shape, each with equal to or less than 2% of total GDP. Apart from the well-known super clusters, 8 emerging clusters have already or will feature prominently in the national urbanization process. Among them, FSG has highlighted the Yangtze Mid-River cluster and the Chengdu-Chongqing cluster because we believe they are poised to be the upcoming super clusters.

This article is part two of a three-part blog series on China Urbanization called Trace the Lights. Check back next week  for part three.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Trace the Lights: 5 Key China Urbanization Stories for MNCs

nasa earth at night
Source: NASA Image

Take a look at this famous NASA image, a satellite photo of the Earth at night. This map shows the geographic pattern of night time electricity consumption, but it also clearly shows the geographic distribution of cities and population. Lights are bright in South Korea, but most places are in dark in North Korea; within the US, the east coast is brighter than the rest. Likewise, the lights are brightest around Paris and London in Europe. While there are still lots of dark places in China, we must ask ourselves, as urbanization continues in the country, what will this map look like for China in 2020, and where will the brightest lights be?

1. Strategic plan for China 2020 should incorporate future urbanization landscape—“go deep” vs. “go wide”

Every Western multinational needs to ensure they look at China’s urbanization as a major driver for the future consumption-led economy. FSG’s analysis is a starting point to assess the clusters in which multinationals already operate, and more importantly, what the best plan for the future should be—“going deep” vs. “going wide.” A clustering approach uncovers synergies, which are necessary given the scale in China and therefore an important input into the game plan for China 2020. My next blog will provide more details on which clusters I’m referring to.

2. Managing profitable growth in China

Concentrating resources on certain clusters brings the opportunity to exploit scale more quickly, because companies can leverage the synergies in sales force, distribution partners, supply chain, and marketing efforts across a wider geographical scope than by managing on a single city basis without sufficient regional scale.

3. Future organizational design is tilting toward decentralization

Multinationals will have to assess the possibility of decentralizing their Chinese sales headquarters by branching out sales centers to other hub cities to get closer to local business—for instance, using Beijing as the northern China headquarters, Guangzhou as the southern China headquarters, and Chongqing as the western China headquarters. MNCs can also consider breaking down functional responsibilities into different clusters by leveraging the clusters’ specializations—for instance, building a logistics center in Wuhan because of its favorable geographic location, establishing an e-commerce hub in Chengdu, and incubating R&D innovation in Suzhou.

4. Western multinationals need to monitor the industry clusters very closely

The government is and will continue building numerous industry clusters across the country that will help build the ecosystem around them. High-skilled and high-tech industry value chains are gradually taking shape. For example, a few biotechnology companies set up their administrative operations and R&D centers in Shanghai, while locating manufacturing in neighboring cities such as Suzhou or economic zones such as Kunshan or Zhanjiang Industrial Park. MNCs can leverage the formation of mature industry clusters to screen out horizontal suppliers and customers, as well as monitor the vertical competitive environment.

5. Multinationals need to keep an eye out for key signposts that will evolve over time; everything may not be rosy

China’s urbanization program will cost approximately US$ 6.8 trillion. From 2015 to 2020, more than US$ 100 billion of new, related professional services and biddable infrastructure contracts are estimated to be available every year. However, local governments are already deeply debt-ridden, given that China’s total local government debt in mid-2013 ballooned to 17.9 trillion RMB. The gap between the urbanization rate and urban “hukou” rate has widened over time. The high levels of local government debt will make it difficult to provide provisions for adequate public services, including healthcare and education, to new migrants.

This article is part one of a three-part blog series on China Urbanization called Trace the Lights. Check back next week for part two.

For a full report on evolving consumer base and urbanization in China, FSG clients can visit the client portal.  Not a client? Contact us for more information.

Rising Competition from ASEAN-based Corporations

As the ASEAN region begins to mature, the power, reach and influence of its indigenous companies have begun to increase dramatically.  We’ve witnessed similar rises of local and regional companies in other parts of the world — East Asian companies in the 1980s-1990s, Multi-Latinas over the last decade and mostly recently we are seeing increasing competition from Chinese firms.

ASEAN’s resilient performance over the past decade has allowed many of its local companies to rapidly expand across the region and beyond, giving birth to numerous ASEAN-based corporations.

Asean Local Competition

Under the Radar

Companies from ASEAN often do not receive much attention from Western analysts who instead focus on China and India. However, ASEAN firms are a force to be reckoned with; keeping pace with the region’s growth, the number of ASEAN companies on Forbes’ list of Global 2000 companies has more than doubled in the past seven years. Moreover, ASEAN has more companies on the Forbes’ Global 2000 list than India, Brazil, or Russia. The region is also home to 227 companies with more than $1 billion in revenues, making it the seventh-largest host for such companies, or 3% of the global total.

ASEAN countries and companies have continued to invest within the region at a steadily growing pace, with 2012 seeing twice the amount of intra-ASEAN FDI, in dollar terms, compared to 2008 (pre-crisis). The strengthening of intra-ASEAN investment can be attributed to a number of factors, including (a) the maturity of a growing number of companies in ASEAN who are venturing abroad, (b) regional integration, which provides future opportunities to scale, (c) improved financial capacities of ASEAN companies, and (d) home-country measures that encourage overseas FDI through institutional and informational support.

Western MNCs Should Monitor the Business Climate

Hailing from a new group of countries and leveraging competitive advantages that Western firms have not seen before, emerging-market multinationals have shaken up many stagnant, mature industries in developed countries. While not mature enough to rock Western markets, the rise of ASEAN corporations is going to lead to an increased fight for resources (both natural and human), heightened competition for several fast-growing segments, and the reduction of prices alongside faster innovation in ASEAN. 

MNCs should explore all potential partnerships with regional firms; ASEAN-based companies understand the market better, tend to have deeper distribution networks, and lower-cost operations. Emerging-market multinationals are born in a new world, one that is highly globalized and integrated, where internationalization will happen much faster than experienced by MNCs, making them much more of a threat to long-established businesses.

For more information on the rising competition of ASEAN-based corporations, FSG clients can access the full report on the client portal.

Emerging Market View: What Our Analysts Are Reading

EM View

On Thursday, EU diplomats will consider increased Russian sanctions. The sanctions include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to the Financial Times, and FSG’s Head of Research for EMEA says it’s time for multinationals to make contingency plans.

“If some or all of the proposed measures are approved by the EU, MNCs operating in Russia will be significantly affected. Executives should build a targeted contingency plan for their Russia operations to prepare. Read FSG’s report Protecting Your Russia Business for analysis and suggested actions for building a contingency plan in the case of further sanctions against Russia.” – Martina Bozadzhieva

In Southeast Asia, a rising middle class and strong demand for more expensive foods has led to increased investment by Japanese food companies, mirroring FSG predictions on the rising competition from multi-ASEAN corporations.

“The increasing sophistication of regional firms and growing demand is attracting several global players to partner/acquire ASEAN firms. MNCs should explore all types of partnerships with such regional firms; they understand the market better, tend to have deeper distribution networks, and lower-cost operations.” – Shishir Sinha, FSG’s Senior Analyst for Asia Pacific after reading this WSJ article.

Good news for Argentina this week. Last Friday, the Latin American country struck a deal to borrow $7.5 billion from China for power and rail projects, according to Reuters.

“Argentina has reached a deal with China to borrow US$ 7.5 billion to finance energy and railway projects, and the two countries have also signed a three year, US$ 11 billion currency swap, in which Argentina will receive Chinese yuan that it can then use to finance Chinese imports or exchange to USD to bolster reserves. This news is welcome given Argentina’s balance of payment concerns.” – Christine Herlihy, FSG’s Senior Analyst for Latin America.

FSG clients can keep up to date with the latest emerging markets headlines and exclusive analyst commentary on the client portal.

China’s Rapid Pulse: Thoughts from the Road

I am standing amid the hustle and bustle of the main street of Shanghai, unable to hail a taxi and scrambling to open Google on my phone. I’ve forgotten it’s recently been banned in mainland China and that drivers now prefer passengers who book through WeChat, a mobile app that awards taxis an additional service fee. I’ve lived in this country for most of my life, but I still have trouble keeping up with the pace of China’s evolution.

During the 12 days I spent in Shanghai, I spoke at length with clients, experts, local think tanks, and consulting analysts all focusing on one thing: how businesses can adjust to a developing China. A few of the on-the-ground insights I picked up are highlighted below.

Buildings in Shanghai
Older Shanghai-style “Shikumen” architecture is found adjacent to newer modern facilities.

From the business operations standpoint, local competition is happening at the provincial level rather than the national level. Many strong, regional-based Chinese brands are emerging and ramping up their capabilities in order to become “national” brands. Echoing the findings detailed in my past report on Managing Local Competition in China, the biggest challenge multinationals are facing is how to localize their strategy in an increasingly sophisticated China. Opening up a developed-market “toolbox” is not sufficient enough to solve China-specific issues.

The crux of this problem is that, in a sense, China is not really a single country—it is a series of distinct regions. A standardized strategy cannot work well in China because of the cultural diversities, wide range of local dialects, and large wealth gap. Some clients are beginning to reconsider their city tier-based model, questioning whether it is an effective way to segment customer needs. Even within one tier, the divergence will be daunting. However, you cannot create 200 business models for one country because it will not be profitable. In my upcoming report on Evolving Consumer Base and Urbanization, which will be released in a few weeks, I will provide detailed analysis of FSG’s cluster model and its implications for MNCs’ go-to-market strategies.

The idea to develop city clusters is central to the government’s plans to smartly urbanize people and cities in order to better allocate resources and boost small and mid-sized cities by leveraging the agglomeration effect from big cities. In the future, China will have three world-class super clusters that will radiate around 16 regional clusters. Logistical corridors will be built to strengthen the linkages between the northwest Chinese city of Urumqi and Russia, as well as the southwest city of Chengdu and European countries through the Pan Europe-Asia Bridge.

One pitfall that MNCs run into easily is making overambitious investments in backend facilities before the business strategy has been proven successful and the front end starts to generate revenue. Another pitfall is applying a swing strategy between the premier and middle markets. As the middle class booms, successful MNCs will create high-margin products to serve the massive middle market instead of the super premier market, which has very limited scale. (One client used the metaphor, “We don’t want only to skim a slide of fat from a big soup.”)

The O2O (Online-to-offline) model is poised to be the future of e-commerce in China. An e-commerce solution provider I talked to has already seen its O2O revenue contributions to their overall portfolio increase from 0% to 30% within one year. Target clients include lots of big-name retailer/FMCG/luxury products. Many MNC clients will be looking into this option in the coming years.

From the macroeconomic perspective, the recent shift in manufacturing is a result of the Chinese government’s policies. Although the current manufacturing outflow is an irreversible trend for China, the question here is about its timing. On one hand, this change is happening before the economy is fully ready. That’s why this transition is creating some problems. Some enterprises in the coastal region cannot afford the increasing labor/land cost because the government has implemented a land quota, and they will eventually move to ASEAN. On the other hand, the government is encouraging investment in west/central China by increasing the land supply and subsidiaries. However, the infrastructure-driven model makes inland China more prone to debt issues, the “ghost city” phenomenon, and heavy pollution.

Government always follows the path of creating supply first and then waiting for demand to materialize the supply. When the pace of “city-urbanization” outpaces “people-urbanization,” ghost cities are created. When highly polluting manufacturers move to inland cities, polluted water then flows along the Yangtze River from inland to east regions. Two types of manufacturing shifts are taking place. First, higher labor-intensive manufacturing is moving to ASEAN (as we mentioned in our latest ASEAN manufacturing piece), and possibly to Africa in the next 20 years. Second, lower labor-intensive manufacturing is moving to Shanghai’s satellite cities, such as Hefei or inland/west cities, based on the analysis of overall transportation costs and whether the business nature is more export-driven or more domestic market-driven.

Last but not least, China’s growth model dictates that it MUST grow. If growth is under 5%, all of the problems—shadow banking, local debt, and the real estate bubble—will explode. The internationalization of RMB and the financial market will feel consequences overnight and then will impact global markets too. If the country manages to maintain current levels of growth, all of the issues can be resolved by themselves. China’s current challenge is similar to the European debt crisis—one country, one currency. In addition, people cannot move freely because of the “hukou” restriction (the local registration system in China), and governance administrations are managed separately (different provincial governments work differently and lack integration). However, the future of China’s growth is promising. China is different from Japan. The advantage of having a centrally manipulated economy is also having well-planned fiscal/monetary policy from a government that can achieve highly effective results.

Finally in a taxi on my way to the airport, I noticed something interesting. Old Shanghai-style architecture is being replaced by modern facilities. It’s a result of the rapid pace of China’s urbanization, and the sharp contrast is visible on every corner. Differing styles must coexist as the society transitions, proof that everything moves at an astonishing pace in this market.

Beijing Travel Notes: 4 Perspectives on Chinese Outbound Investment

China Goes West Banner

I am currently in Asia promoting my new book, China Goes West: Everything You Need to Know about Chinese Companies Going Global. It was certainly an interesting week to be on the ground given Putin’s visit and the United States’ charging five Chinese officials with cyber espionage on Monday. I kicked off my tour in Beijing – and it was a busy week. In addition to several client visits across the city, I spoke in front of more than 200 people in my first week at organizations such as the American Chamber of Commerce, the European Union Chamber of Commerce and the Carnegie Endowment’s center at Tsinghua University. One of the greatest parts of the trip so far has been interacting with attendees at each of these events to hear their perspectives on Chinese outbound investment. Not surprisingly, much of what I’m hearing echoes the sentiment of individuals I interviewed over the course of conducting research for my book.

JB China picture

The following are four perspectives on Chinese outbound investment from week one:

1. Chinese Competition: The Western Multinational Executive

In addition to events, I met with many senior executive clients at their Beijing offices to discuss the topic of intensifying Chinese competition. At a workshop FSG organized in Shanghai last month 41% of the 40 executives in attendance attributed Chinese competition as having the greatest impact on their ability to hit 2014 targets. Increasingly though, this competition is occurring not just within China, but in other emerging markets and in developed markets like the United States and European Union. Based on the level of interest during these client conversation in Beijing, it’s clear to me that theme of “Chinese firms as both local and global competitors” will be top of mind for Western multinational executive for the foreseeable future.

2. Investment Recruitment: The European Ambassador

After my speech at the Carnegie Tsinghua Center, Ireland’s ambassador to China came up to me to discuss the topic of investment recruitment. While American and European executives are building plans to fend off Chinese competition, government officials are in the process of opening the doors for more and more investment from Chinese firms to add jobs, increase tax revenues and improve infrastructure. These are all very tangible economic benefits for the recipient nations of Chinese outbound investment; however, in my book I remind readers of a famous quote by Chinese economic reformer, Deng Xiaoping: “when you open the window, fresh air will come in, but so will some flies” – i.e. increased foreign direct investment will certainly lead to benefits, but negative “flies” can come in as well. Top concerns related to Chinese outbound investment include national security, cyber-security, anti-competitiveness, among others.

3. Global Brand Building: The American Public Relations Director

One of the attendees of my talk at the American Chamber of Commerce works as a director at a large multinational public relations firm. His firm just started a “China Global” practice focused on securing Chinese clients to help with the international expansion efforts. He asked how his and other professional services firms in the marketing and branding space could win business as a result of Chinese companies going overseas.  I told him about a joke a China PR expert told me during my research, “for many Chinese companies ‘branding’ means getting a new logo, ‘advertising’ means buying ads on China Central Television, and ‘P.R.’ stands for…pay the reporter.” While the joke is obviously a generalization it does illustrate the general lack of emphasis most Chinese firms place on investing in brands as a long-term strategic asset – this is why his firm is having a difficult time winning business.

4. Post-Merger Integration: The Chinese Global Executive

My last speech in Beijing was at the Cheung Kong eMBA program which highlighted the Chinese side of outbound investment. The vast majority of the 80 attendees were C-level executives from top Chinese firms pursuing their MBA primarily to learn how to globalize their businesses. After a keynote speech to open up the session, I was joined on stage by a senior vice president from the Chinese firm TCL, a consumer electronics firm. We discussed the topic of outbound M&A and the many challenges that Chinese companies tend to face in the process. My counterpart from TCL described many of the challenges I wrote about in my book based on his own experience buying firms in the US and France. He expressed concerns about over-paying for acquisition targets, challenges along the management visit stage and difficulties incorporating global executives into his Chinese organization.

I look forward to sharing more perspectives with you next week after I conclude my trip – a busy six days across Shanghai, Shenzhen and Hong Kong. Find out more about China Goes West.

How Can MNCs ‘Partner’ with Governments in China?

It only has been one month since my last blog titled, “Why MNCs Need a Better Government Engagement Strategy for China.” However, since then, the dynamics have changed drastically. Foreign multinationals have been publicly investigated for illegal business practices and have been exposed to cyber security risks and intellectual property infringement. The paradox of an uncertain regulatory environment existing alongside a relatively attractive market suggests MNCs must have found an effective way to manage relationships with Chinese governments.

After extensive conversations with our clients, industrial experts, and business associations, I realized that the biggest challenge MNCs face is how to build a strong advocacy message to governments.

Naturally, the rapidly evolving government structure makes it difficult for multinationals to identify the right stakeholders. To make matters worse, the opaque environment hinders companies from having a proactive reaction before a negative policy rollout. The crux of problem is that most foreign companies lack a deep understanding of Chinese government agendas and are unable to deliver their values to governments by facilitating their political objectives.

Below is a snapshot of the most pressing challenges for the Chinese government. To better work with the Chinese government, multinationals should change from being regulation “destructors” to “instructors,” who can demonstrate knowledge about policy and provide valuable industry input—areas in which the central government is most interested. For example, multinationals can match their companies’ capabilities with the Chinese government’s publicly stated objectives to develop cutting-edge technology in strategic industries or promote innovation among China’s youth.

5 most pressing challenges for the Chinese Government

Nowadays, think tanks are playing an increasingly important role, and the policymaking process is no longer a “black box” in China. Companies can work on participating in the decision-making process to lobby think tanks and shape policy, thereby preparing for any policy “surprise” before it is too late to make changes. In some cases, a company’s government affairs team can engage the right opinion leaders and then recommend them for the policy development process. By doing so, they help the government select true experts, who can provide professional suggestions, and also help themselves influence policy making.

Policy Development Process

Why MNCs need a better government engagement strategy for China

Continuing from my last blog post around the workshop I led in Shanghai, I realized that across the board all MNCs need to build/re-think their strategy around Government Engagement. There are three fundamental themes that have changed in China and are leading companies to revisit their GA (government affairs) strategies.

Increasingly Decentralized Landscape Invites New Challenges
Local governments in China are rapidly becoming more important and have greater roles in economic development and commercial investment issues; the governments are becoming economically liberalized and politically centralized. The rise of second-tier cities are encouraging the development of government relationship strategies from the national level to local levels. For example, MOFCOM delegated its approval authority for the establishment of FIEs (foreign-invested entities) within “encouraged” industries to its provincial counterparts.

However, this is not to say that MNCs can shift focus from the national level to the local level. Because the central government still plays a decisive role in important policymaking, MNCs have to engage multiple sets of government authorities.

Change of Barometer: “Guanxi” is Still Necessary But No Longer Sufficient
Guanxi (relationships) are less valuable now than they were in the past. By contrast, creating and maintaining positive relationships with the Chinese government is more about developing a deep understanding of policies and building a reliable public image than purely relationship building with government officials.

Shift of Chinese Government MotivationsWe’ve witnessed that MNCs that use their knowledge to engage with the governments are more likely to succeed more in China

GA Function is Prone to Expectation Conflicts and Functional Disconnection
Increasingly, we see a lot of MNCs considering merging GA and public affairs teams in China. This is due to two issues:

  1. Expectation Conflicts: Misaligned expectations complicate the balancing of business units’ short-term commercial needs with headquarters’ long-term policy studies as well as the application of global government affairs standards to the unique China context.
  2. Functional Disconnection: The Chinese media is censored by the government. Separate GA and external communication functions may cause the misalignment of key messages and delay prompt and proactive reactions from GAs

Expectation Conflicts

Policy Understanding Differs
Through industry associations and local relationships with NGOs, MNCs can play a very active role in ensuring that central policies are interpreted appropriately by the local government (another big issue). Having the right advocacy through independent research, NGOs, etc. will work in a company’s favor. Many MNCs report that local governments are taking much longer to make decisions, because the central government’s view on their long-term role isn’t clear.

Leverage Distributors to Build Local Relationships
MNCs are piggybacking on their distributors’ connections with local officials to build their own relationships with lower level governments. The conversations may be tough, but the outcomes are often profitable, because having a local face on your company is a big part of building an effective strategy

We are finalizing our report on Government Engagement tactics in China in the next couple of weeks, and I would encourage our clients to download the report and review the best practices in detail when it is available.


Preparing for China 2020: Effective Distribution Management

I’m writing this blog post with great enthusiasm because the inputs came from more than 40 client meetings I did during my trip to Shanghai in April. In addition to my meetings, I also had the privilege of hosting a workshop for a group of FSG clients, mostly comprised of Heads of Asia-Pacific or GMs of China.

During the workshop, we discussed in detail the implications of the macro environment for MNCs along with break-out sessions on distribution management and government engagement in China.

I have listed some of the key learnings regarding distribution management from my trip below:

1)  Distribution Consolidation—Good or Bad?

MNCs view distributor consolidation as both good and bad. Companies that have been in China for decades want to drive efficiency by consolidating distributors (at times driven by government policies). In some cases, MNCs have more than 350 distributors. A lack of hunger continues to be the biggest inhibitor to convincing distributors to go beyond their respective cities and further expand.

MNCs that have been in China for less than five years aren’t in favor of consolidation, because it would undermine their bargaining power. Some of the late entrants to the market prefer to work with tier 2 distributors, as they are more eager and hungry to grow the business.

2) Breaking the Myths on E-commerce 

It is becoming increasingly difficult for MNCs to strike the right balance between brick-and-mortar and e-commerce operations. Pricing conflicts are on the rise, because country/provincial policies at times tax goods sold via traditional channels but not via e-commerce.

Conflicts with distributors are also increasing, as some smart distributors are opening their own e-commerce platforms at the local level (and selling low-end products).

E-commerce is 2–3 times more costly than traditional channels, because it’s very expensive to drive demand online. Educating consumers on the products is both costly and time-consuming.

3) Distributors as a Threat

It seems to be increasingly important in China for MNCs to reach out to end users directly and own their customer relationships. In the medical devices space, for example, distributors are copying the devices from MNCs and then selling them to clients as a cheaper option.

In many cases, it is the distributor who has developed a close relationship with the buyer (e.g., a hospital or doctor). Because of this relationship, they will be invited into the operating room to help operate the device. As a result, the original manufacturer loses control over its sales and marketing process as well as its brand image.

4) Go beyond “Volume” to “Value-Based” KPIs for Distributors

MNCs are experimenting with new ways of incentivizing distributors; many of these methods utilize KPIs based more on value than on volume. Companies see quarterly reviews with their China leadership as critical to success.

During the workshop, I asked our clients on how their 2014 targets comparison with 2013. Their responses were quite interesting:

China 2020 Polling Graph

■     Extreme views are emerging on China’s 2014 MNC business outlook; 37% of respondents expect growth in 2014 to be less than 5% higher than 2013 or slower than growth in 2013

■     On the other hand, 55% of the respondents expect their business to grow by more than 10% this year, and a staggering 26% expect their business to grow by more than 21%

In FSG’s recent report on distribution management in China, we a) explore in-depth issues around distributor consolidation and how government policies are impacting the business landscape, (b) provide a robust and pressure tested framework for MNCs to consider as they evolve in their game plan to go direct or indirect from tier 1-5 cities in China; and c) provide tactics around what other multinationals have done in China (with inspiration at times taken from local companies in China).

FSG clients may click here to access to report.

Decoding China’s Third Plenum Reforms for MNCs

There has been much talk about China’s Third Plenum, and with good reason because China’s Third Plenum is one of most important meetings for Chinese economic and social policy.  Deng Xiaoping, China’s paramount leader following the death of Mao, inaugurated the meetings in 1978 to implement economic reform within China, which effectively opened up China’s economy to increased foreign direct investment (FDI) and laid the foundation for China’s golden 30 years.

Not only is the Third Plenum considered a crucial moment for China because of its global economic impact, it is also the stage for China’s new 5th generation of leadership, Xi Jinping’s administration to unveil a new agenda for key political, economic, and social policies.  These policies will effectively decide China’s growth trajectory over the next 5–10 years, which not only has an obvious impact on China but also the global economy. The Third Plenum comes as China faces unprecedented economic and social challenges from local government debt, shadow banking, and staggering GPD figures. The Chinese government is expected to take the opportunity to address all of these challenges and to plot the course for the coming years.

China's Third Plenum

How will the Third Plenum affect Multinationals doing business in China?

The Third Plenum will certainly affect the competitive landscape within China.  As part of the plenary process, the Chinese government will identify relationships between SOEs, private owned companies, and multinationals. Private enterprises are to obtain more freedom, but SOEs will still remain dominant players in the market. The Chinese government will also emphasize the role of market forces, albeit a double edged sword for multinationals.  Allowing market forces to direct investment will give private domestic companies in China reduced barriers of entry and easier access to capital.

The Chinese government will also deregulate the price for energy which will affect the cost of doing business. Though this will increase the cost of doing business in short-term, the government will also enact interest rate liberalization leading to the lower borrowing cost for companies in the future.  Any company currently doing business in China knows that government engagement is necessary, even if cumbersome.  This will remain the case for MNCs since purchasing decisions will remain consolidated at the central level, including food, drug, healthcare, and construction. MCNs need to consider crafting a centralized government engagement strategy to navigate the political field.

The Plenum will also affect consumer bases, namely those in the early childhood sector can expect a large increase in the consumer base. After the relaxation of one child policy, urban families are allowed to have two children if one of the parents is an only child, which is expected to lead to 2–3 million new babies born each year. Baby-related consumer products, such as in food, diapers, infant milk powder, automotive, toy and clothing industry, will boom in the short term. However, since newly born babies won’t enter the workforce within the next 20 years and parents need to reduce working hours to care for additional babies, a smaller supply of workers will push up labor prices in the middle term.

Lastly, and certainly not least, foreign investors will see significantly lower regulation barriers.  Mixed ownership structures will be allowed and investors will be encouraged to for private sector partnerships in key strategic industries. MNCs will enjoy the improved regulatory transparency and stability for foreign investments in the Shanghai Free Trade Zone. Unfortunately, China will also continue to intensify indigenous innovation, resulting in a “techno-nationalism” and promulgating China’s IP protection, or lack thereof.  China is typically deemed one of the great economic powers of the 21st century, and it seems the Third Plenum is attempting to continue that trend. For further reading on China’s Third Plenum, Frontier Strategy Group clients can click here to access the full report.