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Assessing China for business

Assessing China for business
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First Published: Mon, Mar 12 2007. 12 28 AM IST
Updated: Mon, Mar 12 2007. 12 28 AM IST
China is an increasingly important player in the world economy. However, in an online interview by The McKinsey Quarterly in January 2007 that received 253 responses from C-level executives in Asia, nearly 40% of respondents say their companies do no business in China today.
According to the survey, a third say that even if the country’s growth rate fell to zero, their company’s revenue would not be affected. Executives also see significant threats to China’s continued growth; these include a shortage of talent and weak enforcement of commercial laws and regulations.
But many respondents say that the country can address its challenges sufficiently. Just over a third of the survey’s respondents report that their companies have operations in China, and almost 30% trade with the country. Just over half say their companies earn some revenue from China. Two-thirds of larger companies—those with annual revenues of $1 billion or more—currently operate in China, and 81% generate revenues from the country.
At a time when many companies are assessing whether they have concentrated too much of their operations in China, perhaps the most interesting finding is that only 14% of all survey respondents say their companies own one or more manufacturing plants, service facilities, or retail stores there. Even among companies in the production sectors (as opposed to service firms), the figure is only 21%.
That relatively low presence won’t last long, executives say. Overall, 90% of respondents expect their companies to be doing business of some kind in China within five years.
Executives’ views on where their companies can grow in China focus on its huge market: only 7% say their companies currently sell goods or services there, yet 34% of all respondents—and 43% of those whose companies currently earn no revenue from China—expect to be selling there within five years.
Indeed, executives may think a presence in China is all but inevitable: 83% of respondents, who say it’s unlikely that China can sufficiently address the threats to its growth, still expect their companies to have some operations there within five years.
China as competitor
Companies based in China are seen as strong, but not overwhelming, competitors; a significant majority of respondents see the basis for that competition as the low- cost base that Chinese companies enjoy.
Their low production costs may help explain why 27% of respondents in production industries rate Chinese competitors as either overwhelmingly stronger or stronger than most, compared with only 11% of respondents in service industries. (Indeed, 27% of those in service industries say their China-based competitors are weaker than most—yet even they were far likelier to say the basis of competition is low costs rather than any other ­factor.)
Interestingly, 36% of executives in China rate China-based competitors as weaker than most, far more than respondents in any other country. Should the country’s growth rate fall to zero, say 13% of respondents in China, their company’s revenues would be unaffected.
Threats to growth
Executives see a variety of social, economic, and environmental threats to China’s continued growth and development. They indicate that economic and social issues are far more important than environmental ones. For instance, though 63% of respondents cite pollution as a threat to growth, when asked to weigh it against economic and social issues, 80% choose a threat other than pollution as the most significant.
Across all issues, pollution is the only health or environmental issue among the top five. The others are rising income inequality, poor enforcement of commercial laws and regulations, a shortage of qualified talent, and weak financial institutions. Some issues that are significant concerns in other regions—such as the renminbi’s exchange rate against the US dollar and rising energy prices—are, surprisingly, of very little concern to the executives in Asia who responded to this survey.
Assessing and addressing the threats
When asked to consider how quickly China should respond to the threats to its continued growth, more than 80% of the respondents say China must address those threats within five years. The majority (60%) say China is likely to be able to do so, although only 12% see it as “very likely”.
Respondents in China are the least likely to be optimistic; less than half say the country is very or somewhat likely to be able to address the problems sufficiently. Executives whose companies are currently generating revenue in China but whose offices are located elsewhere, are somewhat more optimistic: 69% see it as very or somewhat likely that China will sufficiently address the threats it faces.
What will happen to these companies if China fails to address these threats and growth slows or stops? Surprisingly little, given the executives’ view that China is quite influential economically. Just over half of all respondents say they would see no effect on the revenue of their companies if the growth rate of China’s GDP fell by half during the next five years; 47% of those currently generating revenue in the country say the same. Even if growth stopped entirely, a third of all respondents say their companies’ revenue would be unaffected, as do a quarter of executives whose companies are currently generating revenue in China.
When asked where China should invest to make itself a more attractive destination for corporations, executives do not focus their priorities solely on the biggest threats to the country’s growth.
Investments in infrastructure and logistics top executives’ wish lists, regardless of sector or company size; 72% of executives make this category their first, second, or third ­priority. Education is close ­behind.
Despite the deep concern about income inequality, investments in health care, social security, and rural development are the lowest priorities, even among respondents in China.
This article was originally published inThe McKinsey Quarterly, 2007 and can be found on the publication’s ­website, www.mckinseyquarterly.com
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First Published: Mon, Mar 12 2007. 12 28 AM IST
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