ENG
ESP
FR
DE
IT
Dec. 18 – The China exposure to the global economic crisis is limited in nature and is not affecting all industry sectors. As we exclusively handle investments from foreign clients in China, Dezan Shira & Associates is in a good position to gauge FDI trends in China.
We are seeing closures of some operations in China, but we are also seeing patterns emerging in the types of businesses affected by the economic downturn and those who are not. Businesses involved in low end manufacturing with high labor pools and large export markets have been hit twice – once by an increase in overheads attributable to the impact of the new labor law, and again to the shrinking of overseas markets for their goods. These businesses are at risk and we are seeing closures and layoffs, mostly in Guangdong but also to a lesser extent in Shanghai and the Yangtze River Delta. However, these are mainly SME style operations and are not significant financial investors in the PRC, although they do possess sizable labor pools.
Businesses in China that are manufacturing here and selling to the domestic market appear to be buoyant, despite initial concerns over the extent of the credit crunch and whether or not China would be affected by it. Retail sales in China were up 22 percent last month, the highest in nine years, and many are reporting growth expectations for 2009. However, industries such as auto and property do appear to be slowing down and they may face 2009 with little or no growth. Conversely, the luxury goods market appears buoyant. The Chinese are still buying LV, Prada and Gucci and businesses in this sector appear optimistic over 2009 performances.
When looking at an optimum business model for success next year, companies with existing consumer brands having already achieved local market penetration with a local perception of superior quality will do well, even if they are sold at a premium above local produce. The domestic market is fed up with poor quality and tainted local products, and now is the time to get more stock or the perceived superior quality and consistency of international brands, altered for local market sensitivities, onto the shelves. These companies will do well during 2009, and some are privately expressing anticipated growth next year of 30-40 percent in revenues.
That said, now is a time to be prudent as it is possible from what we hear in other markets that China FDI could dry up. At present however, there is no signal from our industry that things will get significantly worse. We note that KPMG and PWC announced yesterday that despite laying off transactional personnel last week – related to a downturn in mergers and acquisitions – they have also seen an increase in graduate intake from January. The FDI market into China still looks healthy, albeit slightly battered, and MNC’s concerned about slow and negative growth in the United States and Europe still see China as an opportunity.
So although the economic downturn in China may be painful for some, it appears that across the board, the crisis is not having the effect that many in the news media have predicted. In many sectors, investment remains strong and businesses committed, and with China’s economic stimulus package focusing attention on the country’s infrastructure, many will be in a prime position to benefit as China ramps up construction.
A friend of mine has a construction business. He had a portfolio of 16 factories that were going to be build. All of them have been shelved in the past month. Another friend is importing wastepaper to the tune of 20,000 40ft containers a year. Confirmed orders have dropped from normally 10,000 for the first 6 months of 2009 to 1500 today. Most of that paper will become packaging material for export products.
Some of the industries you mentioned form a major part of the economy. SME manufacturers form the backbone of the employment pool, car industries and their supplier are a major force to be reckoned with, real estate is the single biggest economic activity in the economy and this sector is going down very fast now.
Luxury items form a minuscule part of the overall economy and most are imported from abroad. In my opinion we are facing a very tough 2009 in line with your earlier prediction on massive unemployment in China for the next year. Consumers will do what they have done most of the time. Once things really get scary they start saving more and this 20% consumer spending growth will diminish fast. Also keep in mind that a lot of spending is now happening in the 2nd and 3rd tier cities. We are dealing with a different basket of consumer goods in these areas and thus less sales of more sophisticated products that offer higher margins.
I’d agree with Gary, although I’d also suggest that auto sales are not as large or as important to China as they are in the US. So having that slow down isn’t going to impact much. More appropriate is to look at trucks and HGV as these are linked to infrastructure projects. Luxury goods indicate more a state of mind of higher value consumers, which is interesting, but I think reading between the lines of what both of us said it’s China retail that is where the money is and where opportunities are for 2009. That is a massive industry and one little understood by western perceptions of supply chains – you need to factor in everything from the rail, roads and ports to coolies delivering product on bicycle. I tend to side on the more optimistic bent on this one – deliveries to China shops seem buoyant. The figures to watch are the retail sales for December.