Amid a sustaining decrease in the value of the housing market, several Chinese cities have abolished household registration restrictions on property investment. Chengdu, the hub of development in southwest China, has notably proposed and then revoked its offer of a 3-percent housing loan subsidy for first-time buyers. Amid fears of building modern "ghost towns," Chinese municipalities began to enact restrictions on property investment from as early as 2009.
The property market is considered one of the most profitable and stable investments, thus this policy was difficult for many hopeful homebuyers. However, Chinese policymakers are now afraid of the repercussions of the rapid decrease in activity in China's property development sector. The slump in the property market has been strong enough to bring the China Services Index to a record low. Some analysts suggest that this may indicate that the government's stimulus measures are failing to gain traction outside of manufacturing.
Meeting analyst expectations, China's consumer price index, a main indicator of inflation, increased by 2.3 percent year on year (yoy) in July. This increase, in part due to the increase in food prices, falls a comfortable distance from the government's targeted limit on inflation for the year - 3.5 percent. China's manufacturing purchasing managers' index, an indicator of the development of the manufacturing sector, increased to an 18-month high of 51.7, the fastest expansion in more than two years, which likely suggests that the government's stimulus plan is, indeed, making an impact on the manufacturing sector.
Export and retail figures steady
Trade and retail figures provide valuable insight into the status of the transition of China's economy from an export-oriented manufacturer to a service-oriented economy, whose growth is based on domestic consumption. Growth in exports from China has continued to increase, coming in at 14.5-percent yoy in July. Import growth, on the other hand, has been lackluster in recent months, dropping by 1.6 percent yoy in July. Retail growth has continued its steady development, falling slightly under estimates of 12.4 percent at 12.2-percent yoy growth in July.
Inadequacy in China’s intellectual property rights (IPR) protection regime is one of the key challenges faced by foreign firms operating in and considering entry into China’s market. The world’s second-largest economy has a “first to file” system and is notorious for protecting local firms over foreign ones in disputes.
However, recent developments - such as a deal with the Motion Picture Association of America (MPAA), the central government’s creation of a slew of IPR courts, and the emergence of intellectual property (IP) financing techniques - demonstrate China’s intentions to foster the innovation-oriented business environment it sees as leading future economic growth.
The MPAA, the key enforcer of film copyright issues in the US, signed a deal with Shenzhen Xunlei Networking Technologies, a Chinese video hosting website to “prevent unauthorized access” to MPAA member copyrighted works.
The two groups have a history of involvement. In 2008, MPAA sued Xunlei for supposedly providing illegal access to its members’ works. The CNY 7-million suit was later dropped.
This deal comes shortly after Chinese authorities cracked down on Xunlei competitor, QVOD, for copyright issues and after Xunlei applied to go public in the US for the second time. Its initial IPO application in 2011 was revoked due to copyright issues.
This unique deal represents an innovative response to the Chinese authorities’ recent crackdown on instances of copyright infringement. Chinese authorities have identified bolstering IPR protection as a priority issue in 2014. In fact, Chinese Premier Li Keqiang recently stated that, "protecting IPR is protecting innovation."
To provide for greater protection of IPR in China, Beijing is establishing new IPR courts. At a recent press conference, Tao Kaiyuan, Vice President of the Supreme People's Court, announced that China’s highest judicial body is currently reviewing IPR courts abroad. Following this research tour, judicial authorities will embark on the creation of China’s new IPR courts.
Analysts assert that other judicial reforms, from increasing the courts’ capacity to grant preliminary injunctions (a vital tool for the protection of trade secrets from defendants) to awarding larger damage awards and bringing simultaneous actions against infringers, are also helping plaintiffs protect their IP in China.
One reason Beijing is pushing for greater IPR protection is in the hopes of fostering the technological innovation seen propelling other economies with leading IPR protection regimes. The Party’s recent policy toward “indigenous innovation” has become one of the key drivers of the economy.
Beijing also aims to increase the perceived value of IPR through the country’s IP financing initiative. Earlier this year, Shandong-based Quanlin Paper reported to the State Intellectual Property Office that it had secured a $1.3-billion loan against a portfolio of 110 patents and 34 trademarks, most of which are based in China. This is one of the largest sums produced from an IP portfolio and may demonstrate confidence in China’s IPR regime.
China’s leaders have recognized that China’s future economic growth will be driven, not solely by heavy industry or manufacturing, but with private technology companies leading the way.
Beijing seeks to support these Chinese technology companies, which are heavily reliant on IPR protection and who have become increasingly relevant to China’s economic growth.
China is rapidly catching up to international high-tech leaders. Proper IPR protection is a prerequisite for attaining greater growth and not losing future competitiveness in this key area of the economy. Foreign firms will benefit from this development by minimizing the risk of losing their intellectual property to their competitors in this crucial market.
This editorial was produced by The Beijing Axis for Business Day by Kobus Van Der Wath.
In recent weeks, global automakers have announced their intentions to increase their focus on China. For example, General Motors stated that it would invest USD 12 billion from 2014 to 2017, and VW recently announced plans to invest USD 25 billion from 2014 to 2018. These statements are unsurprising when one looks at the progress China’s auto market has made up to now, and the room it still has to grow into.
Since 2000, when 1.8 million automobiles were sold in China, until 2013, when 21.98 million units were sold, sales growth reached a compound annual growth rate of over 20 percent. China’s auto market exceeded 25 percent of the global automobile market by 2013 and is expected to become nearly a third of the world’s total auto sales by 2020 with roughly 34.7 million units. Furthermore, taking into account the fact that China’s projected car ownership rate (number of cars owned per 100 of the driving population) of 16% in 2020 will be well below that of the US at 99%, the potential for automakers is difficult to overestimate.
However, due to the size of the opportunity, competition among foreign and local automakers will continue to be high. Additionally, with some import tariffs as high as 25%, it is easy to see why so many of the foreign automakers are looking to undergo a very aggressive and rapid localization strategy. Without tariffs and with less expensive locally-made parts, Chinese consumers can expect better priced vehicles. In addition, due to the wide variety in tastes throughout China, automakers are looking to expand their portfolio of models. In 2008, there were less than a dozen luxury car models sold in China under five brands, while today, there are ninety models offered by twenty five brands according to research firm TNS.
One segment of the market to look out for is the hybrid vehicle. Because of China’s air pollution crisis and increasing manufacturing capabilities, it may not be long before China represents the world’s largest market for hybrids. The government is planning to have 5 million hybrids on the road by 2020 and has already begun a subsidy program to help achieve this goal. Depending on the city, individuals who purchase hybrids will receive benefits ranging from a USD 19,500 handout and a free license plate (which costs a minimum of USD 1,600 in large cities) to exemption from travel restrictions that owners of petrol-driven cars face.
Toyota is already on schedule to manufacture the entire hybrid version of the Corolla and Levin sedans in China by the end of 2015. Daimler is also looking to dramatically increase sales of its DENZA brand through its joint venture with Chinese partner BYD. Even Tesla, the Silicon Valley manufacturer of electric vehicles, is looking to manufacture them in China within four years. However, while the future may look promising, large capital expenditure on charging infrastructure will have to be made to make owning an electrical car convenient for drivers in China’s cities.
In the meantime, there is little stopping the overall positive growth in demand for petrol-driven cars. Although China’s major cities currently offer the largest demand currently, the competition there is also at its highest. Certain automakers are already seeking to get ahead of this trend and looking to frontier markets where competition is lower but growth prospects are still high. VW and General Motors, the two most successful foreign automakers in China by sales, are such examples. VW opened factories in Chengdu (central China) and Urumqi (northwest China) in 2013 to tap these inland opportunities, while GM has announced that it will also open five plants across inland China and less developed cities in eastern China. Expect other foreign automakers to follow suit.
These developments will no doubt please government officials looking to boost consumption and wean the country off its dependence on exports for growth. Similarly, the larger the role China plays in the global auto market, the more technological expertise will likely emerge and develop in China. In the near future, we might see vehicles that are fully designed in China become global best sellers and play a role towards lowering global greenhouse gas emissions.
Kobus Van der Wath is group MD of The Beijing Axis. He can be reached at firstname.lastname@example.org
Despite continued distortion in trade data evaluation due to the propensity for fraudulent “over-invoicing” in the first half of last year, trade figures surprised analysts by rising in April.
Trade growth focused on the U.S. and EU
Largely as a result of trade with developed markets, both exports and imports increased in April. Exports increased from $170 billion in March to $188 billion in April, a 9-percent year-on-year increase. Imports, on the other hand, experienced 8-percent growth from $162 to $170 billion.
Much of the growth in exports was directed toward developed countries. Exports registered to the United States, for example, jumped 12 percent in April from the previous year, a significant development considering the 11.3-percent decrease year-on-year in February and the 1.2-percent increase in February. An impressive 15.1-percent increase in shipments to the European Union occurred in April, compared to the same period in 2013. Exports to ASEAN, on the other hand, fell to 3.8-percent growth from double-digit growth earlier in the year. Some analysts contend that the lackluster demand in emerging economies suggests that this trade growth does not mean that exports are necessarily en route to recovery.
The simultaneous decrease of CPI and PPI over April is a sign of weak demand for consumption and investment and slowing economic growth. Food prices, a key contributor to the decrease in consumer and producer prices, increased by only 2.3 percent in April, falling under the 4.1-percent increase in March. The price of pork and fresh vegetables, for example, fell by 7.2 percent and 7.9 percent, respectively. Analysts suggest that there is downward pressure on property prices, and that there will be room for policy intervention, such as cutting the reserve-requirement ratio, if real estate prices continue to fall.
Sign of stabilization in future growth
Some analysts suggest that trade figures will continue to increase in May and that this sustained growth will encourage Chinese policymakers to reverse the recent depreciation of the yuan. Over the first four months of 2014, fixed-asset investment growth had fallen to 17.3 percent, which demonstrates a potential for lower future economic growth, despite the encouraging signs from trade data.
In our sourcing projects, TBA has come across repeating infractions of corporate social responsibility (CSR) standards in Asian factories. TBA recently conducted a series of audits at factories in Southern China and Southeast Asia.
- Safety issues
- Do factories post emergency evacuation plans in the correct locations?
- Do factories put warning labels on chemical containers?
- Do factories conduct trainings with relevant employees for the handling of toxic substances?
- Are secondary containers used for chemicals stored in the chemical material warehouse and transfer area?
- Do factories keep the emergency doors unlocked all the time?
- Are smoke detectors located throughout the factory?
- Health and hygiene
- Is there an accident and injury log available for reference?
- Is there emergency equipment, such as first aid kits, available in the factory?
- Does the factory have access to medical services? (It is recommended that the factory sign a medical service contract with the nearest hospital.)
- Working hours
- Do employees exceed the daily (60 hours per week) and weekly (six days per week) limits for working time?
- Child labour, forced and compulsory labour
- In China, it is illegal to employ workers under the age of 16.
- Any form of forced labour, such as forced prison labour, is also forbidden.
- Remuneration and compensation
- Do employees’ wages meet local requirements?
- Labour unions, discrimination and disciplinary practices
- Are employees free to join labour unions and participate in collective bargaining?
- Do the managers engage in any kind of workplace discrimination?
- Photo credit: psit (Flickr)
The Beijing Axis has extensive experience in servicing the procurement needs of multinational companies and established platform and networks in China and Asia. CIPS expertise lies in developing the procurement and supply management profession through specially-designed training, qualifications, products and services. The combined team will have the ability to better serve the mainland China and Hong Kong markets through a focused programme that synthesises global best practices with local delivery.
Established in 1932, CIPS is the dynamic champion driving the global procurement and supply management profession and promotes licensing the profession, which encourages the advancement of best practice in the profession. As the world’s largest institute of its kind, CIPS was awarded a Royal Charter in 1992 and is a not-for-profit body with offices in the UK, Africa, Australia, Middle East and North Africa (MENA), and Singapore, while expanding its presence in China. CIPS clients include China Light & Power (CLP), Caterpillar and American Express.
The Beijing Axis is a leading, China-focused global procurement house that offers a comprehensive range of intelligent global sourcing solutions across the supply chain that balances total cost, delivery time and quality, while minimising risk. With more than 11 years of delivering procurement solutions for international companies, TBA’s clients include global mining, energy, manufacturing, construction, engineering, technology, insurance, FMCG, and retail companies.
CIPS has worked in the region for over 10 years with its education partner, China Communications and Transportation Association (CCTA), and has recently signed a new contract for five years, delivering its own qualifications in English and Mandarin. CIPS has also developed two degree programmes in conjunction with the National Education Examinations Authority (NEAA) and CCTA which are available entirely in Mandarin across China.
David Noble, Group CEO, CIPS, said of the partnership: “China and Hong Kong play a significant role in the development of the global economy, and China is a prominent power in the East.”
“We have already developed strong relationships with CIPS members in the region and with the education authority but would like to do more. This partnership will cement the goodwill and activity already undertaken by CIPS and strengthen procurement and supply management throughout the business community.”
“The partnership with CIPS comes at an opportune time when training and certification in the procurement and supply sector is gaining ground in mainland China and Hong Kong,” explains Kobus van der Wath, Founder and Group Managing Director of The Beijing Axis. “CIPS high-level training and certification offerings complement our comprehensive and practical global procurement and supply chain outsourced services.”
TBA will initially offer CIPS corporate award and certification targeting businesses and public sector organisations, and will be present at a number of events in the next few months. David Noble will be visiting China in July 2014 to formally launch the partnership and jointly meet branch members, partners and industry players with The Beijing Axis.
For more information, please visit the CIPS China website.
The Chartered Institute of Purchasing & Supply (CIPS) is the world’s largest procurement and supply professional organisation. It is the worldwide centre of excellence on purchasing and supply management issues. CIPS has a global community of over 106,000 in 150 different countries, including senior business people, high-ranking civil servants and leading academics. The activities of purchasing and supply chain professionals have a major impact on the profitability and efficiency of all types of organisation and CIPS offers corporate solutions packages to improve business profitability.
About The Beijing Axis
The Beijing Axis (TBA) is an international advisory and procurement firm. Combining extensive experience and comprehensive capabilities, we collaborate with clients across their value chain through strategy and management consulting, outsourced procurement services, commodity trading, and capital advisory to raise their performance and profitability. With more than eleven years of delivering international advisory and procurement solutions, we have offices in Beijing, Singapore, Perth and Johannesburg, with Mumbai and Latin America currently being rolled out.
For more information, please contact:
Barbie H. Co
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The world that witnessed a decade of impressive growth is now a distant memory. The global financial crisis intervened and put a halt to it. Demand in developed markets plummeted before levelling out and the knock-on effects have been felt around the world. China, along with a few other countries, temporarily bucked the trend but most are seeing relatively slower growth and it seems as if this pace is set to remain in place for the foreseeable future.
Unfortunately, not only are growth prospects bleak, but for numerous countries and sectors, costs are rising faster than revenues. This is not only the case for some developed economies, such as Australia, where labour costs have grown at twice the pace of other OECD countries over the past decade, but also that of a number of so-called low cost countries (LCCs).
Of the numerous ways to counter the effects of slowing revenues and rising costs, companies are attempting to increase their productivity and efficiency as well as run cost-cutting initiatives. By targeting one’s cost base, companies are searching for innovative ways to deliver the same products and services as before from a more cost-effective position.
A changing competitive landscape
Globalisation has created opportunities for companies to exploit cost arbitrage between geographies, with the so-called LCC phenomenon enabling constant shifts of foreign direct investment flows in manufacturing and export activities from developed to developing countries that possess a more favourable manufacturing cost profile. None is this more evident than in China, the world’s largest exporter and a preferred sourcing destination for procurement managers across the globe.
However, China’s rising factors of production is leading companies to identify alternative sources of supply, especially in the case of some apparel and other low-value products, where the location of factories has partially moved from China to Thailand, Indonesia, Vietnam, Bangladesh and Myanmar. There has been literature published that deals exclusively with which countries will be able to, and are challenging, China’s dominance as the world’s factory. In George Friedman’s work “The CP16: Identifying China’s Successors”, he explains how several countries are already manufacturing certain categories (typically low-value and labour-intensive) more competitively than China.
This has raised some pertinent questions: Will China’s higher cost profile threaten its competitive position as a low-cost sourcing destination? Is it time for global manufacturing to go somewhere else?
Assessing China’s competitiveness
As reflected in the chart above, China is moving away from its position as simply a LCC into a sourcing destination which enjoys the same world-class infrastructure facilities, access to highly skilled labour force and technological innovation capabilities as the most advanced economies in the world. While labour costs are definitely lower in many other destinations, a wider set of factors must be considered when choosing an alternative location. Ease of doing business, availability of raw materials, reliability of supply, good quality products and scale are some of the competitive advantages China still enjoys that ‘cheaper’ alternatives do not. Companies considering alternative sources of supply may face infrastructure challenges, shortages of skills or political instability. China will continue to hold certain key advantages – robust infrastructure, advanced technology/R&D and a skilled labour force – compared to its manufacturing competitors. While China is becoming a more expensive sourcing destination, it is also more comprehensive, flexible, and more reliable than many of its counterparts. The quality/cost ratio is also rising for many manufacturers. In the meantime, smaller supply bases in LCCs may eat a part of the cake (e.g. countries specialising in one single product).
A second factor to consider when assessing China’s overall competitiveness is the attractiveness of inland China. While average wages have almost doubled in China since 2007, those in central and western China are still comparable to other LCCs. Land costs show a similar picture. Hewlett-Packard for instance, recently set up factories in central and western China due to its costs advantages for exporting to Europe on express freight trains via the ancient Silk Road. They can now deliver goods to Western Europe in around three weeks (slower but cheaper than ship and air) which will also lower inventory costs and lead times. Many other companies have followed. The Chinese government is currently upgrading existing infrastructure networks to counterbalance increased inbound logistics costs. It has also announced the creation of a fourth economic hub (as it did in coastal China in the 1980s) in central China to foster further investment in manufacturing. If this initiative proves successful, China will simply become its own alternative to low cost manufacturing, or at least part of it. This advantage will not last forever but provide a solid enough case for many to make the move inland and compete.
Thirdly, as China’s labour costs have increased over the last decade, so has its investment in R&D. Today, more than half of the world’s Fortune 500 companies are operating factories and R&D centres in China and many aspire their China operations to become new global centres of excellence. High-tech zones with IP-designated courts in cities such as Chengdu are creating an investment environment suitable for more technologically-advanced manufacturing.
Therefore, while China might be losing a competitive edge in labour-intensive products, it is gaining new competitive advantages in high value-added products. This has huge implications for companies looking to outsource not only the manufacturing process, but also the engineering and design elements of a product or project.
China’s competitive edge is not coming to an end, it is just transforming. China’s higher cost profile is accelerating the pace of a transformation characterised by greater levels of value added and innovation. China has taken a new direction towards quality rather than quantity at the cheap, margins rather than volumes, and productivity rather than low labour costs.
Implications for global supply chains
How companies react to this changing competitive environment is of critical importance. While this is not an easy task, there are some aspects supply chain executives must consider when facing these
challenges, such as:
- Fine-tune China procurement. For most procurement managers, China will remain central to their strategies for reasons such as scale, variety and reliability among others. However, its transformation requires a re-thinking of current category strategies. What capacity is moving out and what capabilities are being built? How are our existing suppliers adapting? In China, there are increasingly sophisticated production capabilities across mature product categories; a move towards the manufacturing of very complex components with solid in-house product design; and an emerging set of engineering capabilities serving international markets among other trends. Partnering or establishing strategic long-term relationships with large-scale, service-oriented and design-capable Chinese suppliers are some of the initiatives foreign companies are taking in order to take advantage of the increase in Chinese companies’ capabilities. However, Chinese companies still have certain gaps in skills and capabilities, but what is important is how to bridge those gaps, manage the risks and play the game well.
- Follow a portfolio approach. Most strategic and prudent sourcing executives are adopting a portfolio approach. This does not imply moving away from China but rather building capabilities in emerging sourcing destinations that can complement an existing Chinese supplier base. China dominates in most but not all categories. Understanding the manufacturing competitiveness and associated risks of low cost countries on a relative basis becomes essential. Specific factors such as poor infrastructure, social non-compliance or political risks may negate an otherwise appropriate portfolio. Sourcing executives are strategically matching countries with the categories and even sub categories that they are competitive in. While the right mix can increase a supply chain’s complexity, it can also lower its overall cost structure and diversify its potential risks. However, with the world constantly changing, executives should try to anticipate the future direction of their chosen portfolio and be prepared for numerous possibilities.
- Revisit risk management. As companies become more dependent on cost-cutting initiatives to maintain or increase their margins, managing supply chain risks becomes critical. This is especially important when those initiatives involve new (and usually riskier) sources of supply. Extended supply chains add complexity to the work of procurement managers. Enlarging one’s pool of pre-qualified vendors requires more visibility. Depending on volumes and associated risks, some sort of local risk management thinking and presence is required. More frequent travelling, strategically partnering with service providers who are on the ground, making better use of technology and establishing a local presence (or a combination of the above) are some of the available options.
Cutting costs while compromising quality is not an option Finding alternatives to China is possible, but you will have to manage the risks better and probably work harder.
- Develop innovative strategies. Supply chain managers are realising that exploiting cost arbitrage opportunities between geographies is becoming increasingly difficult. The fast shifting landscape of LCCs means that finding a one-stop sourcing solution is unlikely. Although China is as close as one can achieve to a one-stop sourcing location, more and more supply chains are involving a larger number of geographies. It is within this context that other costs such as inbound logistics, outbound logistics and storage are playing a greater role in the cost cutting strategies of procurement managers. This reality requires innovative supply chain organisational structures, strategies, skills and technologies in order to facilitate cost reductions and improve efficiencies across the entire supply chain.
We are entering an era where the ability of managing complexity and volatility across different stages of the supply chain and sourcing destinations will become a differentiator. New competitive forces are appearing and supply chains are being adapted to capture the advantages on offer. While companies with an existing LCC agenda are revisiting and optimising their strategies with a portfolio approach, companies with minimal exposure to LCCs will feel the pressure of rising costs more than ever and have little alternative but to begin incorporating low cost sourcing strategies.
Although China is not necessarily the right answer for all companies or product categories, it is still a focal point for most global supply chain strategies. China has preserved and is continuously creating a set of competitive sourcing factors that attract companies seeking to compete on scale, quality, technological innovation and even service delivery. Facing tight cost pressures, Chinese companies are learning the value of optimising management and processes to boost productivity, further boosting China’s gradual move up the value chain.
The speed and manner in which China transforms itself will directly affect the sourcing potential of numerous countries around the world. China will not only prove to be more attractive than other countries for certain products higher up the value chain, but it will also continue to lose competitiveness to countries in lower value products. Supply chain managers able to anticipate such shifts will cope with the complexities that emerge and adapt quickly enough to create unique competitive advantages.
This article is an abbreviated version of a forthcoming white paper by The Beijing Axis, to be released in mid-October 2013. For a copy of the white paper, please contact Barbie Co at email@example.com.