DiligenceChina

What can go wrong in China?

I’m not being a prophet of doom, but it’s a good question to ask before you start or increase your involvement in the China market.

It’s precisely when people are feeling confident that things fall apart. The view from Shanghai is DAMNED confident, and NY is actually worried about losing the top spot (though the people I know in NY seem to worry a bit). The die is already cast for a China correction, even if it’s just a bump. So what are some possibilities?

So let’s hear ‘em? What can go wrong in China?

I’m going to start the ball rolling with a few easy ones.

1) Inflation. Coastal cities will be priced out of any cost-sensitive manufacturing and processing as rising fuel, water, raw materials and HR start to skyrocket. Central and western China investing is less attractive. FDI cycle unwinds.

2) Global recession sets the China train off its track. Global economy recovers in 18 – 36 months. China finds it difficult to get the wheels turning again. Demand drops.

3) Cheaper competition. China wasn’t the first to muscle onto the stage through cheap, subsidized production, and it won’t be the last. High oil prices make Mexico, LatAm and East Europe look more interesting. And then there’s India. And Indonesia. More are on the way.

4) MNCs are too successful. It’s fun to watch Baidu slug it out with Google, but in many key sectors that’s not the way it played out. Right now, everyone is fine with multinationals owning big chunks of the Chinese economy. How much are you willing to bet that the situationa will stay the same for the next 5 or 15 or 20 years? Because for some businesses, that’s exactly what the owners are doing.

Analysts used to explain that our local hosts felt MNCs were valuable as a training tool to prepare the Chinese managerial class to set up a Chinese industry. It was interesting trivia when your cash flow was steadilly negative. Now that some foreign names are the brand of choice for tens of millions of Chinese domestic consumers, it is something worth thinking about.

Any other pot-holes out there?