The Manchurian MBA Candidate

I spent last week on a study trip in China along with my colleagues on the UCD Michael Smurfit Graduate Business School’s MBA programmes. During the visit we held a large number of meetings with business, community and academic leaders to gain valuable insights into the factors underpinning China’s recent success, and the opportunities and challenges facing the country over the coming years. Due to the relatively informal nature of these meetings, a lot of the information we were given was more qualitative than quantitative, but nonetheless I got a lot of value from these discussions. In this blog I present a number of key takeaways, some of which serve to reinforce a number of the preconceptions I had about the country (and which I have written about extensively on this site), and some which challenge my previous convictions. This is not an exhaustive list, of course, but I hope you will find them as valuable as I did.

 

China is more free than many Westerners think

 

One of the most interesting aspects of the trip was the emphasis many speakers placed on rights. I admit that going to China my views on this topic were coloured by its government’s egregious human rights record. While not diminishing the regime’s many abuses, it is fair to say that China has made considerable strides in recent years. As one of the academics we met noted, its citizens today enjoy “free travel, free trade, freedom to establish companies and freedom to study abroad”. On top of that, the recent election in Wukan is a highly significant development. Elsewhere, many speakers openly criticised the regime. One of them concluded by saying: “10 years ago if I had criticised the government to you, you wouldn’t have seen me again”. While much work remains to be done, this progress should not be ignored.

 

More modern does not necessarily mean more Western

 

This was another constant theme of the trip. One of the academics we met noted how many Chinese people residing in Western countries have retained a distinct identity and culture. Similarly, despite the economic progress China has made over the past quarter of a century, the country retains a distinct identity. This may be due to its long history of tension with many of its 14 neighbours. One speaker argued that the world may become as ‘Sinosised’ this century as it became Americanised in the last one. I disagree with that, believing that the widespread use of English in much of the developed world and the challenges faced by post-war Europe played a key role in America becoming a dominant ‘cultural power’, but it will be interesting nonetheless to see how this theme plays out.

 

China’s housing market represents a near-term clear and present danger

 

Before embarking on the trip, China’s housing bubble was an area that I was particularly keen to learn more about. I found the discussions with a real estate executive particularly helpful in this regard. While insights such as: (i) the 40% year-on-year increase in unsold housing units in China’s 10 largest cities (including Beijing, Shanghai, Shenzhen and Guangzhou); (ii) news that 48 of China’s 70 largest cities experienced year-on-year house price declines in January, with the other 22 all reporting no change; and (iii) his view that house prices will fall 10-20% this year, and will decline 30% before levelling out were not particularly surprising to me, they nonetheless serve as a sober reminder of what is the principal near-term headwind for the Chinese economy. Another valued insight was an estimate by a Western advertising executive that house prices in Beijing are at circa 30,000 yuan (€3,750) per square metre. Considering that the median household income in China is circa $5,000 per annum, the housing market does look particularly frothy. A Western newspaper correspondent based in China also made the point that due to restrictions on overseas investment many Chinese investors have little option but to park their savings into the housing market. He also made the interesting observation that the bubble appeared to be concentrated in the Tier 1 and Tier 2 cities, which means that the fallout from the bubble is likely to be concentrated in China’s wealthier regions.

 

The economy is increasingly opening up to foreign ownership

 

Before going to China, one frequent complaint I had heard from Western businesspeople was that they were dissatisfied with ownership rules that compelled Westerners to partner with local firms in a range of industries. However, as a management consultant we met illustrated, there has been a steady rising trend in the proportion of companies that Western firms can own across virtually all industries, with only politically sensitive areas such as the media remaining off-limits. This relaxation of ownership rules across the majority of the economy will presumably prove to be a pull factor for FDI into China.

China is not just a manufacturing location

 

Another constant theme during the trip was that China has moved up the value chain significantly, to the point where it is unfair to categorise it simply as a low-cost outsourced manufacturing location. Seeing R&D facilities established by Western multinationals at first hand underlined how rapidly China is evolving.

 

There is more than one China

 

Another key theme from the trip was that China should not be approached as a single entity. With 56 different nationalities and significant regional variances in terms of GDP per capita, Western companies will have to adopt a flexible strategy when entering the country. This was particularly illustrated by comments from a senior executive at a Western retailer operating in China about how it doesn’t have a overall market share target for the country as such, rather it has different objectives in each of the provinces it has a presence in. On top of all that, it is also interesting to note the management consultant’s observation that regional variances in GDP could see some manufacturing move from the more prosperous eastern provinces to the lower-cost western areas of China.

 

Don’t ignore the emerging middle class

 

A presentation by an advertising agency provided many insights into China’s emerging middle class. Some 60% of Chinese households now enjoy an income of $3,000-6,000 per annum, a platform which provides significant opportunities for consumer facing companies. Several speakers during the trip noted Chinese consumers’ preference for conspicuous consumption. What’s interesting on that note is that Chinese people generally don’t like to entertain at home, leading to this conspicuous consumption being directed towards more ‘mobile’ or ‘portable’ goods such as luxury goods, cars and so on. On this point, it was interesting to hear one local guide admit that he had only driven his car ten times in nine years. What was also interesting was the advertising agency’s view that, as Chinese people become more affluent, demand for counterfeit goods is declining in favour of the genuine article. This challenges a perception many in the West have that Chinese consumers are indifferent about the authenticity of a product. On that note, in our meeting with a Western telephone company it was interesting to hear the presenter say that they were seeing fewer incidences of fake mobile phones in the market on the grounds that “a more prosperous China wants to buy the real deal”.

Government relations are key

 

This was another consistent theme during our week in China. Having harmonious relations with public officials was seen as critical to a successful experience in the Chinese economy, particularly due to what one executive noted were “inconsistently applied rules and vague laws”. While the subject of corruption was not explicitly mentioned, I got the distinct impression that this is a significant problem, particularly in light of the recent high profile sacking of a number of senior Communist Party officials.

 

The role of the media is evolving

 

Due to the rise of China’s version of Twitter, Weibo, government officials are finding it increasingly difficult to control the media. This was particularly illustrated by the unprecedented levels of criticism heaped on public officials following the high speed rail crash, a point highlighted by one media executive we met. As many leading Chinese firms have established a strong social media presence on Weibo, censoring it is becoming a more sensitive issue for the regime. This could lead to growing tensions over the coming years.

 

Environmental issues are a major challenge

 

There was no more vivid illustration of this than the pall of smog that hung over Beijing during our visit. Aside from air quality, other problems that China faces include water quality – despite the countless billions invested in infrastructure it was interesting to see that tap water in Beijing and Shanghai was unfit even for brushing teeth – and sustainable development. Given that incoming premier Xi Jinping has pledged to make sustainability and green development key themes of his term in office, it will be interesting to see how much progress will be made over the coming years in overcoming these significant pressures.