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Zhan Su, Universit é Laval Quebec and Canadian firms faced with an emerging China Presentation at the C É RIUM s Summer School China Risen How it changes.

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Presentation on theme: "Zhan Su, Universit é Laval Quebec and Canadian firms faced with an emerging China Presentation at the C É RIUM s Summer School China Risen How it changes."— Presentation transcript:

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2 Zhan Su, Universit é Laval Quebec and Canadian firms faced with an emerging China Presentation at the C É RIUM s Summer School China Risen How it changes and changes us

3 Quebec and Canadian firms faced with an emerging China Dr. Zhan SU Professor of international management and business strategy Director of GÉRAC ( Research Group on Contemporary Asia) Université Laval July 2006

4 China is attracting attention from the whole world Chinese burden (Brown, 1994) Chinese illusion (Segal, 1999; …) Chinese manipulation (Rawski, 2001) Bankruptcy of China (Chang, 2001; …) Chinese miracle (..., 2002; …) Chinese opportunity (…, 2003; …) Chinese threat (…, 2003; …) Chinese jungle (…, 2005; …) Chinese shocks (Brown, 2005; …)

5 Part 1 China as a world factory: myth or reality? Part 2 Trade relationships between Canada/Quebec and China: a win/lose, lose/lose, or win/win relationship? Part 3 Quebec and Canadian firms faced with an emerging China: what position and which strategies to take?

6 Fundamental characteristics of China - An emerging key economic player - A developing country Still more than 100 million people living in poverty Current GDP / capita is equal to South Korea in 1982 and Japan in They need another 25 years to reach the current GDP / capita in Japan. - A country in transition One thing China is not lacking today are PROBLEMS. But, as long as there is growth…

7 The rise of Chinese economy is an undeniable fact Growth: 9.4% from 1978 to 2005, from 147 billion $US to 2,240 billion; 4th biggest GDP per capita: from 340 $US to more than 1,700 US$ in 2005; China quickly surpassed India Poverty reduction: from 500 million to less than 100 million; a record International trade: from 20 billion $US in 1978 to 1,422 billion in 2005; from less than 1% of world trade to 6%; currently 3rd biggest Foreign currency reserves: from 0.17 billion $US in 1978 to 854 billion in February 2006; 1st place

8 Part 1 China as a world factory: myth or reality?

9 Source: WTO Exceptional growth of exportations: China : % Malaysia : + 600% Mexico : + 600% Brazil : + 300%

10 China, a world factory 90% of DVDs 75% of toys 70% of tractors 65% of sports goods 60 % of bicycles 58% of telephones 50 % of cameras 45% of watches and clocks 40% of screens 40 % of micro-waves 36 % of television sets 30 % of air-conditionners 20 % of refrigerators …

11 Made in China myths (1) - China does not have a dominant place in world manufacturing industry. Although China is currently the first producer of more than one hundred products, it realizes only 5% of the world industrial production, far behind the United States (20%), Japan (15%) and Germany. China is particularly weak in industrial goods production where the added value is much more important (a share of 30% in the Chinese manufacturing industries against 42% in the United States, 44% in Japan and 46% in Germany). Currently, China does not have the necessary technological level to become a world manufacturing center, because it is very dependent on advanced technologies coming from abroad, and this, in most of its industries.

12 Made in China myths (2) - Products made in China are the result of a globally organized production system China is not the main master of the made in China products. China currently counts approximately companies with foreign capital. They contribute to more than 33.4% of the Chinese industrial production and to more than 60% of Chinese exports. A lot of countries participate in the production of made in China. Ex: of the 12 million lap-top computers sold by China to the United States in 2005: the majority of the key pieces (screens, software, sound cards, hard drives, etc.) were in fact imported from around the world to be assembled in China. The true contribution of China in this case represents less than 30% of the final value of the product.

13 Made in China myths (3) - China only obtained a small percentage of the value added of the products made in China The development of the products made in China was very beneficial for China. There is today more than jobs in China directly involved in this activity. Thanks to the technological and managing learning, the competitiveness of Chinese companies is no more limited just to the low cost of Chinese labor. However, China just obtains a small percentage of the value added of products made in China. Ex: to purchase an Airbus A-380, China needs to export 800 million shirts. A Barbie doll, produced for 2 $US in China will be sold for 16 $US in the United-States.

14 Made in China myths China occupies today a very important place in the world economy. That is due as much to its relative economic weight as to the impacts generated by its fast rise. However, it is exaggerated to already qualify China as a world factory, the title that was given to empires of past and present (England, the United States, Japan, etc). China should rather be considered as a country which is today only an assembly workshop of world in industries of consumer goods, but aims at becoming a world industrial superpower.

15 What will be the future of the Made in China? According to many experts, in spite of innumerable problems, Chinese manufacturing industries will in the future still accentuate their place in international market, and will occupy, in addition, an increasingly important place in the field of high technologies. China is an atypical developing country, because it has at the same time the absolute advantages with regards to costs, the comparative advantages with regards to productivity and the competitive advantages in several high-tech sectors. According to a study by Mc Kinsey (2002), in several industrial sectors, the productivity of Chinese workers is already 20% greater than European countries. An increasingly complete and efficient industrial system, an important tank of rural human capital, little qualified but inclined to work for low wages, a political stability ensured by a totalitarian regime which however puts the economic growth at the center of its concern, an increasing domination of the private companies in Chinese economy, the existence of an important and relatively inexpensive infrastructure are as many factors that contributed and which likely seem to continue to contribute to the rise of the made in China products in international market.

16 China will remain the giant of the manufacturing products

17 China: a world laboratory? Results of a survey to American high-tech firms done by The Economist in 2005 Favoured countries for the implementation of R&D centers in the upcoming years : China (39%) United States (29%) India (28%) Determining factors : Fiscal advantages (70%) Current and future local market Labour costs Large supply of skilled workers

18 Part 2 Trade relationships between Canada/Quebec and China: a win/lose, lose/lose, or win/win relationship?

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21 Principal trade partners of China in 2005 Origin of import. in 2005 CountryPart (%) Japan15.2% South Korea11.6% ASEAN11.4% Taiwan11.3% EU11.1% United-States7.4% Australia2.5% Russia2.4% Saudi Arabia1.9% Hong Kong1.9% Destination of export. in 2005 CountryPart (%) United-States21.4% EU18.9% Hong Kong16.3% Japan11.0% ASEAN7.3% South Korea4.6% Taiwan2.2% Russia1.7% Canada1.5% Australia1.5% Source: Ministère du commerce de la Chine

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23 Punish Us, Please by Jim Stanford, Canadian Auto Workers, No 80, 25 avril 2004 Chinese officials have hinted darkly that if Canadian politicians express support for Tibetan independence in meetings with the Dalai Lama, there could be repercussions for our bilateral trade. We should take them up on that offer. Because the evidence is mounting that trade with China is doing us much more harm than good. A decade ago, we had a modest, balanced trading relationship. Since then, our exports to China have grown by $2 billion - but our imports have grown 8 times as much. That makes China our second-largest trading partner, and our $15 billion bilateral deficit is our largest anywhere. That imbalance represents at least 50,000 lost Canadian jobs. The bleeding is set to accelerate in the years to come, as Chinese exports become more diverse and technically sophisticated. Stop thinking about plastic toys from McDonald's; start thinking about cars, computers, and airplanes. Free-traders have a pat answer. China is a low-cost, labour-intensive country. It's good for us to import labour-intensive goods from them, in return for exports of knowledge-intensive goods and services from us. That's how "comparative advantage" works. Yet this standard free-trade model has never been more out to lunch than in explaining Canada-China trade. China's boom does not reflect a natural abundance of labour (which every poor country has). It reflects a deliberate, semi-planned strategy to construct advantage in increasingly sophisticated industries, with the help of powerful state interventions: subsidized capital, investments in infrastructure, a managed currency, and - of course - forcibly cheap and compliant labour.

24 What's more, our puny stake in China's phenomenal growth - $5 billion annual exports to a country with GDP approaching $10 trillion - does not mostly reflect our "brains." It is our traditional commodity industries (minerals, agriculture, and other resources) that will capture most of the crumbs coming our way from China's economic miracle. Believe it or not, trade with China is reinforcing our historical status as an exporter of staples, even as they work consciously to escape their role as a supplier of cheap labour. Standard responses to the Chinese trade threat won't even slow the coming explosion of our jobs-destroying bilateral deficit. Investing in education for Canadian workers is no panacea: workers in China, India, and elsewhere are just as capable of learning high-tech skills as Canadians are. Easing interest rates won't help much, either - beyond undoing some of the damage of last year's run-up in the loonie. Pressing China to float its currency (the current U.S. tactic) will make hardly any difference: the yuan could double tomorrow, and companies would still be flocking there. Ultimately, it will require direct measures to limit trade imbalances and force Chinese planners to buy as much from us as we buy from them. Fortunately, by threatening their own retaliation for our hospitality to the Dalai Lama, the Chinese have made it easy. We'll let them disrupt this one-sided relationship, instead of us. Applying my well-known diplomacy and tact, I therefore propose an escalating 8-point strategy to disrupt our trade. It's sure to get a rise out of China's touchy apparatchiks, and provoke the punishment we so richly deserve: Appoint Iona Campagnolo as our new ambassador to Beijing - after she takes an assertiveness-training course. Make the Dalai Lama an honorary citizen of Canada (his purchases of incense can stay GST-exempt). Keep Canada's team home from the 2008 summer Olympics in Beijing. (The only risk is that no-one might notice.) Lend Don Cherry to provide commentary for Tibetan hockey games (since his days at CBC are numbered anyway). Invite Tibet to join NAFTA - with appropriate dispensation for their softwood lumber exports. Pay $100 million to several ad agencies to sponsor patriotic Tibetan festivities. Organize an official bilateral cultural exchange. Tibet would send us a traveling exhibit of artifacts from Lhosa, and we would send them DVDs of the Trailer Park Boys. Send MP Dennis Mills to shout "Vive le Tibet libre!" from a balcony of the Imperial Palace. If all else fails, we could always just get down on our knees and plead for sanctions. I know it sounds kinky to beg for punishment. But in this case, the facts are clear: it's gonna hurt them far more than it hurts us. Jim Stanford is economist with the Canadian Auto Workers. He owns no handcuffs, whips, or leather straps.

25 Hidden impacts for Canada (1) An economy of several billion per year for consumers According to several recent American studies, the imports of made in China products would have made it possible to the American consumers to save about 60 billion US$ per year in the nineties. Since the value of trade sino-Canadian represents nearly 1/10 of that of the sino-American exchanges, we can estimate that, thanks to the consumption of the cheap products made in China, there are several billion dollars which can be saved or consumed for other goods by the Canadians each year. For families with moderate incomes, this means an increase of purchasing power by 5 to 10% Increasing revenues from Canadian firms operating in China

26 Hidden impacts for Canada (2) Improvement of Canadian firm s international competitiveness. Since several years, Canada has imported more industrial goods than consumer goods from China. Quebec and Canadian companies tend more and more to take advantage of the strengths of China to be modernized and to reinforce our international competitiveness The trade with China constitutes an engine of growth for the Canadian economy, given the increasing importance of Canadian exports towards China.

27 Canadian imports from China million Canadian dollars ProductValueVariation (%) Machines Electric materials Toys and sports equipments House furniture Woven clothing Shoes Knitted clothing Steel and iron products Plastic Optical and medical equipments Sources: World Trade Atlas

28 Canadian exports bound for China 2004 – Million Canadian dollars ProductValueVariation (%) Wood pulp Organic chemicals Cereals Machines Fish and sea food Manure Electric material Nickel Ores, slags and ashes Grease and oil Sources: World Trade Atlas

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30 Part 3 Quebec and Canadian firms faced with an emerging China: what position and which strategies to take?

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32 Is the worst still to come ?

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34 Quebec/Canada faced with the emergence of China The emergence of China is both a threat and an opportunity. Above all, it represents a challenge. If China were not the major supplier of consumer goods for Western countries, another developing country would be. The most important is to be able to take advantage of the competitive factors of China that are in our favour, and not try to beat China at any cost To be successful in global competition, firms must put emphasis on the development of new and distinct competencies, instead of simply trying to keep all what we have. We need to know how to do things differently than our principal competitors instead of contenting ourselves to passively follow their lead.

35 Quebec and Canadian companies should reconsider their business strategies Produce by ourselves? Excel in the domains where we posses distinctive advantages, or where there are strategic importance for our future. Have them produced? Delocalise in a selective manner the activities that represent the least amount of competitive advantage in order to take advantage of the strengths of China to reinforce our international competitiveness and even to halt the disappearance of certain industrial sectors. Produce together? Exploit complementarities and synergy through partnerships. Dont produce, or stop producing? Be capable of bring about the radical changes necessary to ensure the survivability of our firms.

36 Possible competitive strategies faced with Chinese competition In industries that are labour and capital intensive Integration by specialisation (outsourcing) Confrontation by differentiation Avoidance by focalisation (niche) In knowledge intensive industries Exploitation by penetration Integration through collaboration Positioning! Positioning!! Positioning!!!

37 The business opportunities in China are too attractive for us let them pass by Poverty is ever present Still more than 100 million people living in poverty Current GDP / capita is equal to South Korea in 1982 and Japan in 1961 Wealth / capita is currently only 2% of the American figure They need another 25 years to reach the current GDP / capita in Japan and more than 30 years to reach the South Korea But, a huge potential consumer market The middle class represents 20% of the population Annual growth of 20% in luxury goods; China will be the second largest market in marriages celebrated each day 7 th market in 2004 (3%), but 2 nd in 2014 (11%)

38 New Chinese development strategy More value added More efficiency More socially responsible More environmental More diplomatic Objectives: - Growth: by 2010 double the GDP per capita of Efficiency (consumption of energy resources for each unit of GDP): 20% less in 2010 than in Innovation capacity: In the top 20 by Standard of living: a developed country by 2050

39 Factors for future Chinese growth - Growth in local consumption (especially by the rural population) - Urbanisation (40% vs. 60% in Asia) - Growth in service sectors (40.7% vs. 70% and more) - Improving the competitiveness of Chinese products on the international market (labour costs, productivity and quality) - Development of high technology domains

40 u more proactive u more reflective u more adapted u more concerted in our efforts u in it for the long haul u better supported The Chinese market is too complicated for us to treat it lightly To succeed in doing business in China, our companies must be:

41 Chair of global business strategies and emerging Asian markets Mission : Raising awareness of the new reality of the Asian competition; Competitive intelligence of emerging Asian markets evolution; Developing expertise and decision-making tools; Training experts on the matter; Providing assistance to Quebec and Canadian companies and organizations. Chair: Dr. Zhan Su Faculté des sciences de ladministration, Université Laval

42 We are not so far behind, and China is not so far ahead. But, we still need to do better! We do need to make changes. If not, the worst is still to come. It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change. - Charles Darwin

43 Part 4 China since 1978: whats happened and why?

44 The determining factors of Chinese growth Introduction of a market system (private firms: 61% in 2004; foreign capital: 8.7% of total assets) Governments power to mobilise and to control Investments (44.2% in 2004) International markets (69.8%) Internal consumption (53%)

45 Two fundamental policy changes adopted in 1978 Reform to the economic system Reform of economic decision making mechanisms Reform of motivation mechanisms Openness to the world Introduction of capital, technologies and modern management methods from the rest of the world

46 The processes of economic modernisation in the Mao era Predominance of ideological movements Monopoly of public property in the national economy Creation of a a centrally planned economy Practises of equal distribution of riches

47 Failure of the Maoist ideology in the economic sphere Large fluctuations and discontinuities in the evolution of the national economy An economy of shortage Poor performance of state run firms: Eating from the same pot Lack of motivation on the part of workers, each with an iron rice bowl

48 Principal characteristics of Chinese reform No precise objective (model): a trial/error approach: We cross the river by looking for the stone bridge in the water Gradual approach : progressive elimination of the elements of the planned system and the progressive introduction of market elements Development based on inequality : We must allow a small number of people and regions to get rich firstly Fundamental condition : political stability assured by the domination of the Communist Party of China Motivation of the Party: Only economic development will allow the Chinese Communist Party to remain in power

49 The transformation of the Chinese State From a State that produces, programs and protects to a State that firstly promotes, and also programs, protects and produces China today is remarkably open. But this is not due to the fact that it is very liberal, rather because it is not. China today combines all the most negative aspects of the two worlds: a capitalist culture introduced by Deng, superimposed on a traditional Maoist bureaucracy.

50 Index of corruption perception Source : Transparency International 2003 RankCountryScore 1Finland9,7 11Canada8,7 11United Kingdom8,7 14Hong Kong8,0 16Germany7,7 18United States7,5 20Chile7,4 23France6,9 30Taïwan5,7 40Hungary4,8 54Brazil3,9 54Czech Republic3,9 64Mexico3,6 64Poland3,6 66China3,4 83India2,8 86Russia2,7

51 The determining factors of Chinese growth Introduction of a market system (private firms: 61% in 2004; foreign capital: 8.7% of total assets) Power to mobilise and Government control Investments (44.2% in 2004) International markets (69.8%) Internal consumption (53%)

52 Investments in China Year Total sum of the investments (100 million $US) Volume of foreign capital (100 million $US) % of foreign capital / sum of investments

53 Weight of foreign investments in Chinas industrial production (in millions of yuan)

54 The determining factors of Chinese growth Introduction of a market system (private firms: 61% in 2004; foreign capital: 8.7% of total assets) Governments power to mobilise and to control Investments (44.2% in 2004) International markets (69.8%) Internal consumption (53%)

55 Degree of opening Canada69,2770,5873,7970,1567,18 USA18,6519,0220,9019,0618,26 Argentina19,3517,2318,1617,4733,65 Bolivia36,3333,8736,4737,3139,48 Brasil14,1818,8318,8922,9324,33 Chili49,5545,3849,9554,6055,23 Mexico59,0058,7959,5653,1352,38 Paraguay45,4934,1939,6846,3250,84 Uruguay29,4226,7528,6827,4331,54 Venezuela34,4433,1639,6036,0041,05 China34,2336,3843,8943,3549,03 70 Indonesia79,8251,9163,6861,9151,13 Japan16,9416,3518,0318,0218,8824 Malaisia182,37188,79199,86183,99182,44 Vietnam76,6781,1796,5295,15101,27

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57 Middle school and university studies Korea100% 60% Singapore74% 39% Philippines78% 29% Thaïland59% 22% Malaisia64% 12% Indonesia56% 11% China70% 5%

58 Students in science and engineering China53% Korea34% Indonesia28% Malaisia28% Philippines23% Thaïland20%

59 Attractiveness of the Chinese business environment - Productive and inexpensive workforce: –Average hourly wage : $ 0.50 US/h –Very large pool of skilled and unskilled workers (20 millions enter workforce each year; 300 million too many in rural areas) -Current and future importance of the Chinese market -Political stability - Competitive advantages: - Favourable fiscal conditions (competition between local governments) - Low exchange rate - Complete industrial system - Low infrastructure and real estate costs - Relatively abundant and inexpensive supply of natural resources and raw materials

60 The Chinese model of development is put into question … Growth vs. real gains Growth vs. efficient economy Growth vs. social justice Growth vs. resource constraints Growth vs. sustainable development Growth vs. outside resistance One thing China is not lacking today are PROBLEMS. But, as long as there is growth…

61 China: the blue collar workers for the world 6% of global industrial production (Japan: 15%, United States: 20%) 40 to 100 B$ annual surplus jobs ( direct jobs) Technological and managerial learning curves However: 60% is done by foreign firms operating in China 85% is for foreign brands 40% of exported products have very little value-added : 800 million shirts for 1 Airbus A-380; Barbie doll: $2 vs. $16; average price per textile product: $4; … Competitiveness to the detriment of the well-being of Chinese workers High procurement costs (annual bill for imported oil: 2% of GDP and more) Disastrous environmental consequences (15% of GDP)

62 The determining factors of Chinese growth Introduction of a market system (private firms: 61% in 2004; foreign capital: 8.7% of total assets) Governments power to mobilise and to control Investments (44.2% in 2004) International markets (69.8%) Internal consumption (53%)

63 China is subsidizing foreign countries Product prices Fiscal incentives Resource prices Cost of capital Harmful industrial projects accepted Social conditions of workers Financial losses (foreign bad credits: 5% vs %)

64 Inefficiency of the Chinese economy Two thirds of financing for one third of the production (State run) An inefficient and incomplete financial system : bad debt, 30 to 50% of GDP 40% more energy resource consumption needed by iron and steel firms; 30% more in the electricity sector; 5 the consumption of water and 3 three times more energy needed for each Yuan of GDP produced; 80% of fatal accidents for 35% of the global coal production … Coexistence of penury and overproduction (86% of products implicated) Investments for political interests Speculative investments (real estate,…)

65 Social injustice Growing divide in cities GINI coefficient (inequality of distribution): in 1996, in 1998, in 1999, in % of the population hold more than 50% riches, 4.7% for the poorest 20% 50% des urbanites and 90% of the rural population have no medical insurance Growing divide between urban and rural populations More than 6 times difference in revenue levels and buying power 300 to 400 million rural workers too many

66 China faced with a lack of resources Relative poverty of resources: 7% of the cultivable land in the world, 6% of potable water, 4% of forests, 1.8% of oil reserves, 0,7% of natural gas In 2004, China already consumed 20% of global aluminium production, 35% of steel production, 35% of coal production, 45% of cement production, 8% of oil production, … Self-sufficiency in energy in 2004: 94% Coal remains the most important energy resource in China (70% of the total). 40% of oil is imported (Saudi Arabia, Iran, Oman, …) By 2020, the consumption of coal and oil will have doubled An increase in the price of oil by $10 reduces the GDP by 0.5%

67 China is severely touched by pollution and acid rains (a loss of 15% of the GDP per year) Source: Economic images of the world 2005

68 China faced with trade conflicts Target of anti-dumping charges (15% globally, 60 cases in 2002 and 49 in 2003) Conflicts related to problems concerning prices, norms, working conditions, IP infringement, exchange rates, etc. Complaints from developed countries but also from developing ones Occidental countries refuse to recognise the Chinese economy as a market economy

69 Source: lObservateur Économique Canadien, juin 2005

70 The rise of the BRICs Tiré de Goldman Sachs, Octobre 2003

71 Evolution of the world economy Source: Keystone India

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73 China is not a homogeneous country Two worlds: urban vs. rural 31 (34) administrative regions Three parts: East vs. Centre vs. West Three pole of growth: Delta of the Pearl River vs. Delta of the Yangzi vs. Bohai Close to 700 cities Favoured areas of development Segmentation ! Segmentation !! Segmentation !!!

74 A few cultural traits in todays China Materialism Voluntarism Conformism Pragmatism Collectivism Attachment to family Confucianism, Capitalism and Communism are the sources of Chinese culture today

75 China quickly surpasses India Source: Banque Mondiale, Global Insight Inc.


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