China, like many other emerging countries in the region, has developed very rapidly over the past 10-15 years. The infrastructure was poor and access to goods and services was limited.

In just a few years the society has changed drastically and many cities have become modern megacities. There is endless access to goods and services, which previously was only available in the developed economies and to the extremely wealthy. In the past, people lived in small houses and rode bicycles, today they live in modern 40-50 storey buildings and drive sports cars and SUVs. Having an understanding and respect for this change is important. It has changed the society and the culture drastically. This is a change that not everyone has an understanding of when doing business in China and the region.

 

The importance of a management team with an understanding of the Chinese business environment

International companies often strive to have local management. Many think it is natural that there should be a Chinese CEO. They know the local business environment and have an understanding of how the society and culture have evolved in recent decades.
Still it is important to ensure that the company’s culture is preserved. So ask yourself the question, is it a Swedish or Chinese company that we are going to build, when hiring the management team.

International companies have experienced complications with regional politicians, outside the larger cities, who have difficulties to understanding what a foreign company is when they established themselves in China. The justice system is not working as we are used to, even if laws and regulations are in place.

For Chinese people, it is the result that counts and not the way there. Shortcuts are often taken since the risk of being caught is often small and the consequences minor. In Sweden we trust people and are not as used to follow up. We delegate our control and monitoring responsibility. This will result in problems. Trying to find creative solutions to problems should be avoided.

A good option is to have a mixed management teams based on the cultural problems.

 

Internet – A growth and change engine

Internet was an entertainment source 5 years ago, today it is a platform for efficiency, profitability, production and trade. Today, China has very good IT infrastructure in the cities, and there is much research in the field. Today there are many advanced enterprises that manage to go from idea to finished prototype on the same day and then can start production within two days. The productivity level is about 25% of US manufacturing.

Digital developments driving the structural change

There is a huge pressure to change as a result of the global market and structural changes of the control functions and public institutions etc. The use of digital tools and productivity solutions is increasing. It will increase the competitive pressures on international companies. Swedish companies are relatively late in obtaining knowledge of the change that is happening in China.

Increased productivity drives up wages

There is considerable pressure on wage increase in China as a result of the increasing productivity. Today salaries are relatively low, which is partly the result of political and economic uncertainty in the short term.

 

Is China’s growth forecasts to trust?

China began in 1995 to use the same method to calculate GDP as Western countries. This is a very complicated process. These figures are the numbers that Chinese policy makers base their strategic decisions. Thus, it is relatively unlikely that these figures are manipulated deliberately given the amount of resources required to produce them.

Figures or other indicators

What is interesting is not what the aggregate growth figures show, but where the growth is ie which industries and regions. Today, the southern and southwestern parts of China stands for the majority of the growth. Still it is important to understand that public investment accounts for much of the growth. Growth is regionalised, thus creating problems of integration between different regions because of the increasing economic differences.

 

Concern in the society

There is great concern in the society. That investments that were done weak political grounds will be lost. The informal economy is very large and therefore there is great risk to allow market conditions to fully respond. The risk is that the financial system and stability is drastically weaken.

Shadow banking is very big in China. The pressure to change the informal economy is large. There are new regulations to be expected in the long term to increase transparency.

 

Export dependence and geopolitical concerns

Some regions on mainland and western part of China are 100% dependent on exports to Central Asia. The goods have little added value, since the industry in these regions is at a low level of development. This is partly the result of the modest educational level of the population. There are very high levels of crime, unemployment and economic exclusion in these regions. It constitutes a national security risk for China. This is the reason the Chinese government finances investments to drive development and improve stability in these regions.

 

Foreign investment as a security measure

China invests in countries along the Silk Road and other politically important countries in Africa and the Middle East. The economic interests go hand in hand with the security policy interests.
Increasing the demand for Chinese products also increases the opportunity for growth and development in the regions that China has problems with.

Communication problems between authorities

A major problem is that the authorities and actors dealing with security policy issues is not communicating with each other. They compete to be the authority that “owns the question”. Thus it is not an issue with multi-stakeholder ownership, with common objectives regarding the stability and economic growth both in and outside China.

 

China’s industrial engine is experiencing negative growth

China’s coal consumption has gone from 50 million tonnes per month in 1990 to about 330 tonnes per month in 2015. From 2000, it has risen from about 100-330. In one year, China went from being a net exporter to a net importer of coal. This is because of the tremendous growth and investment in heavy industry and infrastructure.

WTO membership also made it possible to easily export excess capacity. It is important to understand that much of the investment in heavy industry has been driven by subsidies. It has resulted in the construction of infrastructure, heavy industrial, residential areas etc. that there is demand for.

The last 10 years’ average growth in China’s key industries, which together represent 1/3 of China’s economy:

  • Cement 11%
  • Iron Ore 19%
  • Steel 13%
  • Pig iron 12%

The past 12 months, these industries had negative growth. The question is how it is possible to maintain a growth rate of around 7% when the economic engine runs at low speed, ie unprofitable enterprises in the heavy industries. Thus, there is great uncertainty in today’s growth figures and other related information. Overcapacity in China’s heavy industry can not be shipped out on the international trade routes, since it is too bulky materials. The goal is rather to find new opportunities to invest and utilize excess capacity nationally and locally.

 

The party increased its power and grip on China

Much of what is done is a way for the CCP to strengthen its power and grip on China. The demonstrations that take place are against the regional governments and not against the central Xi Jinping and the central part of the party.

Corrupt elements in the economy, that is not on the Party’s side, are caught and used to make an example of. Intimidation Tactics used in a completely different way against foreign companies. This places great demands on enterprises to work with their compliance issues very carefully. This increase the pressure on companies to thoroughly work with regulations and compliance questions.