CHINA: Land of Opportunity, with Some Changes

George Koo, special advisor with Deloitte, believes that with all the doom and gloom of the current global economic situation, “China remains one of the most optimistic markets.”

Foreign companies have been doing business in China long enough to have built up some expertise and instead of talking about getting into the country, they are now talking about “how to maximize their presence,” he said.

The U.S. has become the fifth largest direct investor in the country after Hong Kong, the Virgin Islands, Japan and South Korea, Koo noted. He said China’s economy is becoming more like the U.S., though it’s presently only about a quarter the size of the U.S. economy, and about 1/16 of where the U.S. is in terms of GDP per capita. And while the U.S. is still the world’s leading manufacturer, accounting for 22% of global activity, China accounts for 8%.

“China has been recognized as the world’s factory,” Koo acknowledged, “but more and more as a significant global investor, and lastly, an important consumer market.” By the end of 2007, China’s aggregate overseas investment reached $128 billion, up from just $29 billion in 2002.

Currently, what’s going on within the country is investment in its own interior—building up its infrastructure to bring strength to pockets of activity. For example, a bridge is under construction that will cut the commute from Hong Kong and the mainland from six hours to 45 minutes.

Koo said that while people used to talk mainly about three regions in China, “it now makes sense to look at finer distinctions”—more defined areas. Different areas have different clusters of specialties, he explained, which is advantageous to suppliers because it allows them to source parts more specifically. Koo said many of the valve customers are located in the Yangtze area.

The main challenges to business in China today are the increasing cost of raw materials; new worker protection regulations, which will increase labor costs; and new environmental protection sensitivities that will likely net new requirements. Also challenging for those doing business within China are the war for skilled management, protectionism in certain areas, land availability and currency volatility.

In general, business concerns within China need to be aware that “margins are reducing, some consolidation is being made for economies of scale, and prices will have to increase,” he said.

Koo quoted sources that said China’s economy will rise to second (in terms of nominal GDP) behind the U.S. by 2025 and surpass the U.S. by 2050. It is now the world’s fourth largest economy with its GDP doubling since 2002.