AllianceBernstein White Paper on China
March 9th, 2006
Please read the AllianceBernstein White Paper on China contained in the “Documents” section of the blog (you can actually get through it fairly quickly).
According to this report what types of non-Chinese companies are likely to benefit most from China’s growth? What types are most likely to be disrupted by competition from China? Most importantly, what are some of the nuggets in this report that, if true, are most likely to impact YOU on a personal level and/or cause you to rethink where you might go with your own business career?
Entry Filed under: Pre-Departure, China
12 Comments Add your own
1. Sean Martin | March 10th, 2006 at 2:31 pm
The Alliance Bernstien White Pages are incredibly impressive and telling about China’s great potential in the years to come. Still, it seems that they make some misleading statements as to how the Chinese economy is progressing. I think that China’s capacity for growth is immense; but at the same time I think we as Americans need to fight our cultural tendency toward hiperbole. Remember that when the article states the China is the seventh largest economy in the world, that is impressive, but California alone is the fifth with less than a 35million person population. When they show that China has a larger middle class than Canada, I say great, but don’t forget to show the middle class as a percentage of the population as I am sure that would tell a different story.
My point is, China is truly a phenomenal country. THey are going through one of their most exciting times historically. They will be a world power which every country will be forced to recognize. But let us not lose sight of reality. From the outside looking in, there is still a LOOOOOOOOOOOOOONG way to go before they realize their potential. That said, I can’t wait to see them do it.
2. Azad Sadri | March 13th, 2006 at 1:30 am
It is hard to predict what companies will gain or lose in the long run do to China’s huge impact on the global economy. However it seems that the authors of AllianceBernstein’s White Paper on China have some good ideas about what this trend may be. According to the article, non-Chinese firms that supply Chinese consumers and companies will likely benefit. These include but are not limited to high-tech components manufacturers, raw material providers, and financial service providers. These types of companies all feed the needs of the growing Chinese economy. However for some of these companies it can be a double edged sword. For instance Caterpillar, the world’s largest construction equipment manufacturer, benefited greatly from the construction boom in China. At the same time they suffered due to price hikes in steel and other materials that they used in manufacturing their products. These price hikes were due to the massive demand hike caused by China’s need for raw materials. On the other hand many non-Chinese companies will likely be negatively affected due to fierce competition from Chinese firms. These include but are not limited to consumer durable manufacturers, communications equipment manufactures, and technology firms. Chinese firms in these industries are becoming increasingly competitive not only in China but also internationally. On a personal level I am most concerned when I see the figures for raw material and energy consumption in China. For example in 2003 China accounted for 37% of cement, 27% crude steel, and 8% of the world’s oil consumption. These numbers continue to grow and more and more articles are written about the environmental impact of this uncontrolled consumption. Without enough stringent environmental laws to keep pollution in check, China is now home to some of the most polluted cities in the world. I just hope that the government and the international community act quickly to address these environmental problems, however I am not very hopeful.
3. Peter Begley | March 13th, 2006 at 8:57 am
I have yet to read the AllianceBernstein paper but wanted to offer an interesting resource I came across yesterday in response to Azad’s comment regarding China’s use of natural resources.
I also find the massive use of natural resources quite troubling and have long wondered what kind of curbs the Chinese government, or businesses (Chinese or multinational), are putting on the consumption. More importantly, and in line with Azad’s final comments, I have been concerned with the long-term environmental effects of this consumption (pollution, sustainability, etc.).
Yesterday, while being directed to an online copy of the Constitution of the People’s Republic of China, I checked out the main website that was hosting the document (People’s Daily Online) and subsequently found a fairly deep section on Sustainable Development in China. There are a ton of articles listed in the section on topics ranging from energy and consumption to biodiversity to corporate social responsibility.
I’ve only read a few so far but was surprised to find any resources of this nature given the overall perception we have been presented regarding China’s environmental priorities. Whether these articles represent the majority of what is taking place in China’s economy, or are simply a roundup that represent the select few chosen for a positive PR campaign is a very important question that I am not sure can be answered without first-hand experience and research.
4. Mike McSweeney | March 13th, 2006 at 3:18 pm
The AllianceBernstein White Paper on China presents many issues that have become more and more obvious as the global economy has continued to evolve and grow. The paper discusses in detail many different aspects of the Chinese economy and the direction that it is heading and the eventual affects it will have on foreign companies. It lists many different industries that will either profit from China’s emergence or suffer from the increased level of competition. The sectors that are projected to gain the most are the medical, energy, financial services, and distribution and retailing sectors. While the consumer durables, communications equipment, and technology sectors stand to lose market share in the years to come.
While many people have many different theories on what ultimate affect China will have on the global economy, one thing is definitely true. China is a player and their role and level of importance in this game will continue to increase as time progresses. With their immense cheap and skilled labor pool, they will continue to attract foreign outsourcing and new technologies through these partnerships. One question that remains is that as these Chinese companies produce more sophisticated technologies and gain brand awareness internationally through those partnerships, what measures do these foreign companies have in place to prevent China from completely taking over these segments?
On a more personal note, I plan on focusing my career in the heavy civil construction industry. As far as I can see, this industry is relatively well shielded from Chinese competition, at least domestically. However, the article spoke about the relative explosion in Chinese companies that manufacture construction equipment in the not too distant past. Given the nature of the industry, it is hard to imagine a Chinese company posing much of a threat to the likes of Caterpillar or Case in the U.S., but one also has to be realistic. If one of these companies is able to produce equipment that is as reliable or more, at a much cheaper cost, even the most entrenched and stable companies will feel the global economic squeeze of China in the years to come.
5. Peter Begley | March 13th, 2006 at 4:22 pm
“Given the nature of the industry, it is hard to imagine a Chinese company posing much of a threat to the likes of Caterpillar or Case in the U.S., but one also has to be realistic. If one of these companies is able to produce equipment that is as reliable or more, at a much cheaper cost, even the most entrenched and stable companies will feel the global economic squeeze of China in the years to come.”
I think many would have said the same about the computer industry prior to the Lenovo-IBM deal. The way things are unfolding, the auto industry is next.
6. Peter Begley | March 13th, 2006 at 6:18 pm
I have had an opportunity to read the AllianceBernstein white paper and found it both very informative and quite frustrating. As others have noted and summarized, the paper provides an excellent overview of China’s economic climate (past, present and future potential in most cases), and the supporting data was informative and to the point. Though I do not think I learned any new general concepts regarding China’s economic potential, I certainly picked up a number of new specific facts throughout the paper.
I found the overall tone of the paper to be somewhat unnerving. In particular, the passages that touched on the environment, cheap labor, and other like issues, seemed a bit too business-like. I’m aware of the scope of the document (and of white papers in general), but think that such passages would benefit from an additional paragraph on social responsibility or some other qualifier to indicate that the authors are in fact human.
The “Low-Cost Labor” section that spans pages 12 and 13 is particularly devoid of emotion:
The above statement precedes the following by a few paragraphs:
While the paper, as noted, effectively provides answers for anyone wishing to understand the nature and future opportunities that can be found in China, I would have appreciated more information on the current downsides of expansion. The massive use of natural resources, both as an environmental concern as well as ‘cost of resources’ concern for multinationals (e.g. the increasing cost of cement), was covered, but only lightly. The social effect of labor exploitation was pretty much ignored, though the paper does provide a few specific statistics that should give an observant reader a sense of the overwhelming size of China’s poor.
Only in combining the positive and negative sides of China’s opportunities can businesses and individuals truly make sound decisions. I would hope that anyone, whether as an executive in a multinational, an entrepreneur hoping to capitalize on the growing market, or any other combination of possibilities, would take the time to consider all of China’s realities. If a healthy majority chose to do so, China would still experience astronomical growth, yet perhaps so would her achievement of progressive reform.
7. Mike McSweeney | March 14th, 2006 at 10:25 pm
“I think many would have said the same about the computer industry prior to the Lenovo-IBM deal. The way things are unfolding, the auto industry is next.”
In response to Peter’s comment, I have to say that I completely agree with what he had to say, especially about the auto industry given the financial situation that GM finds itself. However, regarding the Lenovo-IBM deal, I feel that you have to take into account the fact that IBM shifted its primary business focus away from personal computers and into severs and consulting some years ago. That being said, I have a hard time believing that an established company like Caterpillar would allow one of their designs to bear any other name on the product that the company is based upon. Nevertheless, the advantages of manufacturing in China are clear and I would not be surprised to see “Made in China” under the Caterpillar name in the future.
8. David Cross | March 21st, 2006 at 9:54 am
There’s a famous quote that Friedeman uses in “The World is Flat” that I think applies to this study as well.
“Every morning in Africa a gazelle wakes up. It knows it must run faster than the lion or it will not survive. Every morning a lion wakes up and it knows it must run faster than the slowest gazelle or it will starve. It doesn’t matter if you are the lion or the gazelle, when the sun comes up, you better be running.”
For a long time foreign entities (including the U.S.) have been looking at China as the gazelle, and considering themselves the lions, meaning that China has been thought of as one billion customers, rather than a tremendous producing force to be reckoned with. What they have not been counting on are China’s brilliant strategies to make the country more competitive, including investing in education, infrastructure, and technology. The techniques employed help protect Chinese interests and secure their competitiveness. At the same time, the Chinese are leveraging their attractive markets to draw out technological advances, intellectual property, and company ownership from foreign firms wishing to do business there.
The evolution seems to be that as more affluent classes are created and expanded from within the Chinese population, rather than simply become worldwide consumers, the Chinese threaten to become global leaders in innovative and commercial practices.
If you’ve read my other comments, you know that I believe that globalization will be a rocky, but overall positive event in the history of mankind. It will lead to greater wealth, knowledge, and higher standards of living across the board. However, if the U.S. and other countries fail to recognize that China’s strategies are quickly making them the “lion” in the metaphor, they may find themselves waking up to a new day in which they are the gazelles. Or, at the very least, that there is a swift new lion out there with greater ability to catch the gazelles.
I don’t know if I’ll ever go to China to do business, but I do know that in the financial industry, where I frequently browse career openings, there have been an increasing number of listings in both Beijing and Shanghai. One thing I do know is that the changes felt in the Chinese economy will resonate around the world. So the goal for me and anyone else wishing to be successful should be to keep a close eye on the competition, and focus on continuous self-improvement to prepare for the new global economy that we have only just begun to observe.
9. Nic Tigner | March 22nd, 2006 at 8:34 pm
I found the report very informative. I didn’t really consider the idea of the Chinese growing to consume primarily Chinese products and then expanding these Chinese products into the markets outside of China until I read the report. The Chinese are a huge low cost labor force that is gaining wealth. We expect them to eventually start to demand more modern products as they move up in affluence. I just always assumed they’d go from being our low cost labor to a our huge potential market.
It actually makes much more sense that Chinese would gravitate towards Chinese produced products since we were the ones exploiting their low cost labor. Why wouldn’t they tap that resource themselves and start selling products in external markets?
I agree with Peter that the report is a bit insensitive to the human and ecological impact of exploiting this cheap source of production. Maybe the reprisal will be in the form of stiff international competition for the firms that at one time exploited China.
10. David Lotierzo | March 23rd, 2006 at 1:53 pm
What I enjoyed about this paper was the directness of is analysis of Chinese labor. Most discussions I have read have still focused on the massive population and the inexpensive labor as China’s greatest attraction. While it shouldn’t be ignored, I think it is also important to always keep in mind how swiftly China is growing. While production is still comparably inexpensive in China, the rate at which their middle class and GDP is growing makes me wonder if China will be outsourcing it’s labor a couple decades down the road. While it is certainly important to appreciate the potential for labor in China, I think we will see more and more focus on their buying power as a hugely expanding market in the years to come.
11. Darren Deedon | March 26th, 2006 at 12:44 am
This article is interesting in the fact that it partly is in conflict with the book I just read by Tom Fieldman The World is Flat. Fieldman set a tone of more urgency for the US to get wise to countries like India’s (and especially) China’s rapid progress to becoming a eminent player in the global market place. While we all can agree that China is going to achieve an economy that soon rivals our own, there seems to be constant wavering upon when this is to occur. I have seen estimates as soon as the year 2020, and as late as 2100.
According to the article, China’s GDP per capita, Average Income of middle class citizens, number of middle class citizens, investment in R&D as a percentage of GDP, is really quite a ways back from our own. As stated by another posting, California’s GDP is greater than China’s GDP. And China’s population is approximately 34 times bigger than California’s! This leads me to believe that our dominance as the world’s economic super power is safer than what Tom Fieldman is leads us to believe. Yet, I must agree with Fieldman on his concern with the huge gap in the number of Engineers and Scientist that China is turning out verses our own. Our countries “bread and butter” has primarily been technology driven. We better step it up if we plan on maintaining our leadership in this area. Also, it seems as if more recent statistics show that the articles future predictions under predicted China’s ability and progress for growth.
I am personally concerned to see that our technology sectors future seems to be in trouble (according to the article). This is disturbing because this is where I and most all of my fellow Industrial Techs are heading. Yet after considering how long it has taken us to get where we are today, and the current progress of China, opportunities look extremely bright for our generation.
12. Brian Cronin | March 27th, 2006 at 12:26 am
China has become the obvious choice for outsourcing. China’s offers those in need minimized manufacturing and labor costs. In return, Chinese firms as well as its government have been making strides towards maximizing the value of those elements while keeping the benefits within Chinese borders.
Foreign companies that have been enjoying (some might say exploiting) the Chinese supply of labor will be surprised to find that in the near future, both the human and material capital that are so abundant in China will be taken advantage of by Chinese firms. Chinese firms will grow increasingly powerful as they utilize both the manpower and the brainpower of Chinese citizens. More and more profit will remain inside China.
Why is this happening? China as a nation has recently grown intelligent enough to encourage both education and enterprising in order to capitalize on the value their citizens provide and at the price they are willing to do so. This is huge.
The billion or so consumers that have attracted American and other foreign firms to China’s markets have not been ignored by Chinese production and service firms. Those firms, also recently freed from Communism, are just as poised as the market for a great deal of activity and productivity as the markets themselves. Foreign firms hoping to capitalize on the Chinese consumer market may be disappointed to find that Chinese firms have greater ability to take advantage of production, marketing, and distribution channels already in place in China.
We’ve seen from the Alliance Bernstein White Paper that, for example, consumer goods penetration among Chinese markets is the lowest among any of the countries compared. And so what type of foreign firms will most benefit from China’s growth and which will be most disrupted? And what Chinese companies will be able to disrupt foreign firms in other markets? The real answer to this question is highly unpredictable. However, it is safe to assume that the Chinese will recognize the magnitude of their own core competencies as high-tech components manufacturers, raw material providers, and financial service providers. It will be interesting to watch it all shift as the Chinese develop increasingly efficient distribution channels to reach these markets.
Leave a Comment
Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Trackback this post | Subscribe to the comments via RSS Feed