Corporate Strategies for a Slowing China, Part 2

China's growth will slow to 6-7 percent
Proctor and Gamble's Olay counter in a store in Wuhu, east China's Anhui province. Photograph by Imaginechina via AP Images

In our previous column (“Corporate Strategies for A Slowing China, Part 1”), we argued that the slowdown in the Chinese economy is structural, not cyclical. The era of 10 percent annual growth in gross domestic product and 13 percent annual growth in fixed-asset investments is over. Similarly, growth in exports will slow dramatically—from twice the pace of growth in world exports to staying on par with it. Domestic consumption, however, is likely to keep growing at its current annual rate of 8 percent. The net result will be annual GDP growth in the 6 percent to 7 percent range, with domestic consumption accounting for a steadily growing share of it.

In this column, we look at what these structural shifts mean for multinational companies’ strategies in China. We focus not on the upcoming 12 months but on the next five to 10 years, the relevant time frame for major strategic decisions.

One: Keep China as core to your global strategy. Even at 6 percent annual growth in GDP, China will become the world’s largest economy by 2025. It will also become the world’s largest market for most products and services. Whether you are a Honeywell, a P&G, or a PPG, it will be difficult to remain a global leader in your industry without a viable position in China. The country will also remain important as a hub for global research and development—a source of capital and home base for some of your global competitors and potential partners.

Two: Prepare for a long-term growth slowdown. If your industry’s fortunes are driven by infrastructure and real estate investments, anticipate significantly slower growth, not just temporarily but on an extended basis. Feeder industries such as steel, cement, and construction machinery currently suffer from huge overcapacity—according to some estimates, as much as 25 percent to 50 percent. Even after the capacity overhang gets absorbed, these will remain relatively slower-growing industries. We also anticipate relatively slower growth in home appliances, an industry directly connected to housing construction.

Three: Focus on improving manufacturing productivity. Starting around 2015, China will begin to see a decline in the total labor pool. As labor availability becomes tighter and wages keep rising, manufacturers will start to substitute technology for manual labor at an even faster pace than today. As an accompanying development, manufacturers will also face increasing requirements to become more energy-efficient and to reduce their impact on the environment. All these trends should benefit industrial machinery suppliers, as well as companies that specialize in industrial automation.

Four: Expect strong demand for services. With a rapidly aging population, China will need to spend a much larger share of GDP on health care. Aside from doctors and hospitals, this will also mean rapid growth in demand for drugs as well as medical equipment. As the population becomes older and more affluent, demand for financial services (insurance, mutual funds, retirement products) will also grow rapidly. Further, given widespread ownership of homes and cars, urban Chinese will spend a growing proportion of their incomes on home and child-care services, children’s education, personal and professional development, and travel and entertainment. Chinese companies that are bigger and more global will also face an urgent need to become more professional, thereby fueling the demand for IT,  management consulting, and marketing services.

Five: Look beyond Beijing and Shanghai. Unless you’re a high-end niche player, plan to double your commitment to smaller cities and rural markets. We expect Chinese citizens in these markets to be the primary beneficiaries of future investments in infrastructure, the movement of factories away from coastal provinces, and reforms in areas such as health care, education, pensions and banking. Incomes in these markets, while currently very low, are likely to grow faster than in larger cities.

Six: Keep costs down. Expect competition within China to become even fiercer than it has been so far—a direct outcome of slower growth and capacity overhang in the economy. However, as increasingly affluent Chinese consumers become even more quality- and brand-conscious, Western multinationals are likely to maintain their competitive advantage. Nonetheless, tougher competition will impose downward pressure on prices and margins. As a result, companies will need to pursue cost innovation even more vigorously than in the past.

Seven: Manage talent differently. Given a slower-growing economy, turnover in professional staff will decline from the recent astronomical rates. At the same time, white-collar employees are likely to exhibit growing frustration as promotions and salary increases occur at a notably slower pace than expectations or past history might imply. Also, as marketplace competition becomes intense, skills such as creativity, innovation, marketing, and people management will become more critical. Thus, companies will need to increase their relative emphasis on tasks such as talent development and engagement.

Eight: Maintain realistic expectations. We fully expect China to become the world’s largest economy by 2025. However, it is unlikely we’ll see the global economy pivot from one dominated by the U.S. to one dominated by China. Instead, what we’ll see is the emergence of a more multi-polar world economy. If you’re looking for growth, you’ll need to pursue deeply committed strategies,  not just in China but also in such places as India, Southeast Asia, Latin America, the Middle East, and Africa. The imperative to look across the entire globe will become far stronger than it has ever been.

Anil K. Gupta is the Michel D. Dingman Chair in Strategy at the Smith School of Business, the University of Maryland, and a Visiting Professor of Strategy at INSEAD. His most recent book is Global Strategies for Emerging Asia (Wiley, 2012). Haiyan Wang is managing partner of the China India Institute, a Washington-based research and consulting organization. Gupta and Wang are also the co-authors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).

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