China Business:Case for investing in China is still solid

Joanna Doolan and Florence Wong.

New Zealand businesses wanting to survive in China must focus on productivity gains and risk minimisation, write Joanna Doolan and Florence Wong.

New Zealand organisations wanting to be successful in China must improve their productivity. The message from the Chinese Government is clear: become more productive and receive government-funded incentives, or be penalised for unproductive and wasteful business practices.

This productivity imperative is consistent with the Chinese Government's 12th five-year plan, outlining its targets to lift average incomes and increase the efficiency of its resources. It is also driven from the reality that China's previous growth engines are running out of steam. Exports are declining and this, along with environment concerns, is slowing growth.

But the case for investing in China remains solid. China as we know is now the world's second biggest economy and, based on its forecasts of GDP, is expected to rank as number one in the next 10 to 15 years. The sheer size of China's domestic market alone is enough. It is predicted the middle class in mainland China will increase from 150 million to one billion by 2030, making it about 70 per cent of the population. And China is an ideal location for exporting to the rest of the world.

A recent EY survey of more than 1700 domestic and international companies in China found businesses are profitable, despite falling margins, though their revenue growth is slowing and they are experiencing a painful profit squeeze. Respondents said there was little or no scope for their customers to absorb cost increases. The consistent message across all industry sectors was that driving productivity improvements has never been more critical.

Statements like this can be nauseating and self-evident: if you cannot increase prices or reduce costs, the only options are boosting productivity or closing down.

Improving productivity in this context means changing the way business is done by building capabilities that address three key issues:

• Raising labour productivity. Labour costs are increasing, so companies must upgrade their technology and maximise the efficiency of their operations across their entire supply chain, and provide incentives to motivate their employees to be engaged.

• Improving the return on investment. Over-investment in China is a challenge and the use of low interest loans and foreign direct investments as an easy source of finance is reducing.

• Ensuring quality and safety. As Chinese consumers grow wealthier, they are demanding global standards of quality and safety.

No one area of operations is paramount; most profitable companies strike the right balance across a significant number of competencies such as effective strategic planning, organisational alignment, and in developing solid foundations to support business performance and growth in the areas of business process, internal controls, workforce planning and technology infrastructure.

Long-range strategic planning success is based on companies understanding the capabilities they must build to create a competitive advantage in their sector and the need to define the priorities and actions needed to translate this strategy into actual change.

Replacing multiple planning models, enabling direct linkages between long-range planning, annual planning, forecasting and management reporting, is just the start to all this. The more detailed areas to focus on include: strategic direction, customers, execution, people and organisation, risk and control and technology and data.

These factors are not unique to China. But in China it is imperative not only to understand your competitors but also to develop a deep insight into the government's objectives and the likely impact on the regulatory climate. Consider that issues like cultural risks, unequivocal co-operation and buy-in can be very challenging in China, where resistance is often more subtle than overt. The enforceability of contract provisions are often subject to cultural interpretation - it is not only the literal interpretation that is important, it is the intention - and this can vary according to local practices. China's judiciary system is steadily developing, however it is still a relatively protracted and unpredictable means for dispute resolution.

There is a trend towards greater openness and deregulation but that does not mean the environment is open-book. To succeed you must deal with those with the right links to the Government and ensure what you are doing continues to support the Government's objectives.

This may mean repositioning your business to providing technology, process know-how, capital or branding a favoured sector or region.

The official stance on intellectual property and corruption is improving but the culture may not yet have moved to fully recognising a corporation's right to own an idea (leading to patent or process theft).

China is experiencing an era of competitive upheaval, with the environment moving to potential overcapacity. New Zealand businesses wanting to survive must focus on productivity gains, risk minimisation and be responsive to the unique risk profile of China.

Joanna Doolan is the Chairperson and Florence Wong is the Leader of EY's New Zealand China Business Group.