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In new economy, consumption and capital play key roles

By David Michael (China Daily)
Updated: 2009-09-28 08:59

Domestic companies

Many domestic companies are rapidly acquiring the scale, capital, expertise and market savvy needed to compete in domestic and foreign markets. Previously obscure companies are now giants.

Aluminum Corp of China, known as Chinalco, China's largest aluminum producer, recently sought to invest $19 billion in Rio Tinto, the Anglo-Australian mining company. Ultimately unsuccessful, the bid nonetheless reflects both China's ambition and its ready access to capital.

Tencent, the Internet giant that is publicly traded on the Hong Kong Stock Exchange, has been relatively unscathed by the crisis. It has several hundred million customers, a $20 billion market capitalization, and - this year - an estimated annual growth rate of 33 percent and operating margin of 44 percent. It is barely 10 years old.

Chinalco and Tencent represent the ambitions of the new China, the competitive zeal unleashed in recent decades and the great diversity of China's companies - from traditional State-owned giants to dynamic private-sector players.

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A new generation of companies will benefit from growth in their home market, while companies in other markets struggle to tread water. Many will receive government assistance and gain access to ready capital that they can deploy to buy Western assets at attractive prices.

The new Chinese economy will be less trade dependent, but it will be more competitive in global markets than ever before.

What next?

For global companies, these changes bring opportunities and challenges.

Most have geared their China businesses to the old standards. They have targeted growth in export-oriented regions and banked on strong GDP growth. They have counted on the government gradually stepping back from its role in shaping industries.

With a new era dawning, most companies are unprepared for - or, even worse, unaware of - the shifts that are occurring. China's new growth will likely be oriented toward regions less dependent on foreign trade and will take place in industries benefiting from government support and domestic demand.

Each industry will undergo a unique pattern of growth that will be different from what it experienced in the past.

In light of these new realities, all companies should take stock of China in several specific ways:

Understand the new Chinese stimulus programs, industrial policy, and reforms and their market implications.

The government will be a primary actor on the economic stage for the foreseeable future.

Global companies need to understand the ways in which Chinese competitors will benefit from the new industrial policy - and how they themselves could benefit. There might be opportunities for nimble Western companies.

Adapt go-to-market models.

Rather than the export-oriented regions, rural and government markets are likely to be sources of future growth. A healthcare company, for example, recently reorganized to serve new types of hospitals that are being set up as part of China's healthcare reform. Similar opportunities are arising in many sectors.

Pursue mergers and acquisitions in China.

The economic crisis is driving down valuations of leading companies and creating opportunities for local acquisitions. Crisis-stricken Western companies, too, are selling their assets in China at fire sale prices.

Telstra, SK Group, GIC Group and others have made major investments in China in recent months. Conversely, big, cash-rich Chinese companies are starting to acquire assets abroad. Raw materials, industrial goods, and technology companies are likely targets.

Global companies need to pay attention to their home markets during these times, but they ignore developments in China at their peril. While most of the rest of the world slumbers, China is once again on the move.

The author is head of The Boston Consulting Group Greater China practice. The views expressed here are his own.

 

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