DiligenceChina

A question I get asked a lot is, “what’s the next big development to affect the Chinese economy?” There are a lot of trends and evolutionary changes underway — like an increase in the level of competition in the service industry, solidification of MNCs’ market leadership, and the continued lack of branding ability among domestic firms, but those aren’t really exciting compared to China’s recent economic gymnastics. The biggest single change facing the Chinese economy is that for the first time in 30 years, we have a status quo.

The Chinese economy will continue to grow and develop – but for the first time since Deng began China’s experiment with economic reform, we are able to predict the course of this market. The Chinese bureaucracy is as transparent as it gets, the SOEs (State Owned Enterprises) are looking more rational and market driven than ever, and the MNCs have hit their stride. Sure, the countryside is being neglected and there is a widening disparity between rich and poor – but discomfiting and unfortunate as that may be, it is fairly normal in China.

China Inc. is looking more stable than it has since the Qing days. (At the risk of sounding like the Granite Studio guy– that long period of stability was also largely facilitated through large-scale foreign influence, but I digress.) Now, in a system as large and diverse as China, stability is a relative thing and the economy is still dynamic and prone to dislocations. A market correction is overdue and Chinese industry is heavily geared to export-oriented manufacturing, which tends to be inherently cyclical. But I’ve been involved in the Chinese economy since 1991, and this is the first time that there is widespread consensus about the economic path forward.

So what does this mean to international investors and managers? The news is generally good – especially for existing brands that want to enter the Chinese market. Chinese companies have never been under LESS pressure to develop independent brands, and that is creating some interesting market opportunities for overseas companies.

Branding is expensive, risky, time-consuming and Chinese managers tend to not have much experience doing it. The day will come when local business owners and managers feel pressure to develop their own consumer or B2B brands, but for now demand is high enough for local companies to focus on cost-cutting and incremental moves up the value chain. Organizations that can feed the existing supply chain are busy enough to occupy the imagination of top managers & bureaucrats, while those that can’t operate profitably are either cutting costs or getting squeezed out of business.

Don’t look for big innovations from the giant MNCs, either. They have just finished making the mold for their China expansion plans, and they will be busy churning out new branches and opening offices for the next few years. They have developed the machine that will build new machines, and they are going to continue to act as a stabilizing force in Chinese society for the near future.

The calm won’t last forever, and before long the rapidly-expanding MNCs will start to step on the toes of State Enterprises or will educate and train enough savvy local managers to develop a new generation of ambitious entrepreneurs — and competitive pressures will yield new forms of creative destruction.

But right here, right now – this is as stable and predictable as China gets. We have attained status quo. Make good use of it while it lasts.