domestic demand key to China growth

What links General Electric, Philips and IBM? Perhaps surprisingly, they have all moved the global headquarters of significant company functions to China. While China has long been a destination for companies looking for a plentiful supply of skilled and cheap labor, this newer development shows how important China has become as a market for multinationals.

The draw for them and countless other multinationals, is the massive market demand generated by Chinese consumers. For example, China is already the world’s third-largest luxury good market according to Euromonitor, accounting for 7% of total sales of $318 billion. Its share will rise to $17 billion over the next five years – representing 26% of total global sales. In fact overall retail growth is strong in China according to its National Bureau of Statistics (NBS), with a 12.5% increase in 1H 2013 compared to a year earlier.

It’s not only luxury goods that are popular in China, a wide range of industries will see massive growth in China over the next few years and international companies hope to play a key role. For example, there is enormous potential in the food industry as Chinese tastes evolve. The owner of Pizza Hut and KFC already makes over 42% of its money in China! Healthcare is also vital as China’s population ages, and private education is on the up as parents look to give their kids additional help.

prime investment destination

A recent survey from PwC and the China Development Research Foundation found that 56% of CEOs chose to invest in China above other economies including Brazil, India, Russia and the US. “A major factor in China's economic success has been its ability to attract foreign investment,” says Dennis Nally, Chairman, PricewaterhouseCoopers International. “In 2012, China attracted US$111.7 billion of global FDI. And we predict that China will overtake the US as the world's largest economy in purchasing parity terms in four years’ time.”

So where is this investment headed? Well, companies headquartered in Beijing generate 46% of China’s global revenues according to figures from McKinsey. But this concentration of companies is largely state-owned and consequently close to the seat of political power. Interestingly, China is not quite as centralized as some other countries, the most is France, where companies headquartered in Paris make up a staggering 91% of the nation’s global business revenues.

Close proximity to the seat of political power is not quite as important for foreign firms moving into China. Shanghai is now probably the most popular location for international businesses, and it will be boosted by its recently-inaugurated free trade zone. Nearly 20 different sectors will have their regulations relaxed and currency controls will be eased in the zone. Other cities in China are also bidding for either new free-trade zones or extending existing ones. They include ports of Nansha (Guangdong), Tianjin and Xiamen.

driving innovation

One of the foundations of China’s recent growth has been innovation across a wide range of sectors. Consultant McKinsey offers some interesting insights in this across a number of different sectors. It found that companies in China were very focused on doing innovation by commercialization. In other words bringing products to market quickly and testing them in the marketplace. This allows them to refine their ideas and deliver what consumers want. In essence this innovation is much closer to Google, compared to say Apple.

One of the areas where China is hoping to lead is in machine-to-machine (M2M). It has already grabbed the crown from the US for having the most M2M connections, with an additional 5.5 million connections in 2H 2012 alone (the same as the total number of connections in the UK!). Areas where it is particularly strong include smart metering, connected vehicles and smart security systems.

The GSMA and Machina Research says that the automotive industry in China is looking at M2M to help drivers locate shared vehicles and charging points for electric vehicles, along with enabling the connected car. They estimate that these two areas will be worth $198 billion alone for China’s automotive business.

communications networks

A key part of China’s economic growth has been the transformation of its infrastructure, including roads, railways, power supply and communications networks. Even today, the country continues to pump staggering quantities of money into these areas. In September, the China Government announced that it planned to invest a further $325 billion to improve both fixed and wireless broadband infrastructure in the country through to 2020.

Its “Broadband China” strategy has ambitious goals. By 2020, overall fixed broadband coverage should reach 70% by 2020, with fiber-to-the-home (FTTH) networks reaching 300 million homes, up from 130 million in 2013. Additional coverage is provided by 3G and 4G wireless which should cover 85% of homes by 2020. Target access speeds are 20Mbps for 80% of broadband homes by 2013, rising to 50Mbps by 2020, with  users in some developed cities able to access up to 1Gbps by 2020!

Rural broadband is well represented in the strategy and will play a central part in boosting domestic demand. Key amongst this is driving ecommerce among the wider population. Although China’s Internet users spent $210 billion online in 2012, this only accounted for around 7% of total retail sales. Already rural Internet users are proving themselves very keen to use ecommerce to sell their wares across the country, as is witnessed by the massive growth of the ecommerce platform Alibaba.

Ultimately, using the Internet to bridge the wealth gap between the urban elite and the rural poor will help drive domestic demand in China, and help the country continue its impressive growth track record.

How do you think China will develop between now and 2020? And will the Internet be instrumental in empowering the rural poor?

Anthony

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