China’s infrastructure investments will be huge

China’s Twelfth Five-Year Plan has 62 chapters that cover the country’s economic, social and political goals. As I said before, if you intend to do business in China, you need to be familiar with it and understand what it is and is not.

The plan is a set of goals which have been developed by internal working groups and passed by the nation’s legislative process. Like most legislation, it has a big title, lofty goals and very little about how anything will be accomplished.

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It is not a detailed blueprint but more of a broad strategic statement. Think of it more along the lines of a directive by the board of directors to the management and the shareholders.

Unfortunately, facts and realities do not prevent people from reading what they want into the document. For business purposes, it might be more useful to skip to what the initiatives identified in the plan could mean for your company.

For example: China intends to continue its massive infrastructure investment programs building roads, bridges, rail, ports, pipelines, power plants and housing. If you have products or services that are not currently available in China, which can create a positive return on the investment within three years, you should be getting your ducks in a row before others beat you to the market.

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How do you start?

First get to know the market to see if you have something of value to offer. Keep in mind opportunities to use second-tier products and solutions, as in many cases these are a better match for the existing industries in China.

Remember, China is big. Just because your product or service is offered in one place does not mean it is available in others. Go beyond Beijing and Shanghai. There are more than 500 cities with populations of more than 500,000, and each one represents a major market for those who can unlock them.

Because China’s development has been asymmetrical, its eastern parts have developed rapidly, while its western parts have languished. Going where the new opportunities are is going to be more rewarding than following the crowd.

Second, figure out your strategy, China has markets and cheap labor, but protecting yourself is going to be a challenge. Your failures will be your own, but unfortunately, your success will be a beacon for local and international competition.

If you manufacture goods, have a plan that keeps your manufacturing processes and products out of reach of the competition. One way, which has become popular, is to segment your manufacturing process so that only parts of the process are done in any one location and final assembly is tightly controlled.

GE Medical has perfected this approach, but it can be used effectively by a company of any size. Another strategy is to tag-along with existing relationships as they go into China, but you need to do your own research and make sure you agree with their strategy. Once you are in China, look for opportunities to diversify your customer base. If it’s going to be a true relationship, the company you are going with should be willing to share some of their market research and assumptions after you have signed a confidentiality agreement.

There are many sad stories about companies who followed clients into China blindly relying on their partner’s research and knowledge only to discover that it was fatally flawed.

Third, work the numbers. You should plan to recover your investment and profits within three years. Beyond that, your risk goes up exponentially, especially the smaller you are.

Localize where possible to save money, but keep important information such as product intellectual property, costs, customer lists, supplier names and supply chain information in safe trusted hands.

Have an exit strategy and know how you will repatriate your profits. Each year you are in China, assuming things are going well, you should do an updated three-year plan. Make sure you get all the benefits you can. If your competitor is getting free land, subsidized construction, help with recruitment and/or tax breaks, you need to be competitive. Location decisions are crucial and should be researched and negotiated carefully.

Get everything in writing and keep everything legal. Do not cut corners because you heard someone else did. There are a large number of sad foreign businessmen who were asked to leave China on a few days notice and a few who have ended up as guests of the government. A prison bed in China is two stripes on a cold hard floor. Do not think you can rely on the U.S. Embassy. They can and will do little more than give you a list of lawyers to call.

In terms of areas to look at, Chapters 10 and 12 of the China Plan list the strategic new industries and transportation projects the country will be promoting over the foreseeable future.

Those priorities in Chapter 10 include:

  • Energy saving and environmental protection (clean energy technology).
  • Next generation IT.
  • Bio-technology (pharmaceutical and vaccine production).
  • High-tech equipment for manufacturing airplanes, satellites, high-speed rail, next generation power plants and manufacturing.
  • New energy (nuclear, wind, solar).
  • New materials development, including rare earths, nanotech and carbon fiber.
  • Energy-efficient autos and related systems including new energy storage devices and efficient electric motors and recovery systems.

The government has indicated that this type of development will be encouraged by using direct grants, loans, and tax incentives.

The transportation Infrastructure projects listed in Chapter 12 include:

  1. Highways – Adding about 9,000 km to the national highway system (this will make China’s national highway system larger than the U.S. system.
  2. Rail – China is building a complete national high-speed rail system, cost of 300 billion RMB. China will expand the passenger rail system to 45,000 km. China will complete lines linking Tibet and Xinjiang to the eastern regions of China and extend coal transport lines from Shanxi and Inner Mongolia
  3. Light-rail in cities – China will complete light rail systems in 21 urban metropolitan areas
  4. Ports – China will create six new heavy material ports, adding 440 new 10,000-ton shipping berths.
  5. Civil Aviation – China will create a second Beijing airport and 11 new regional airports.
  6. Electric transmission and related infrastructure – China will create five ultra-high-voltage lines from western and southwestern China to transport electricity from on-site coal-fired and hydro power plants. China will create new coal fired power plants sufficient to increase current capacity by at least 70 percent.

Keep in mind, although the sources have not been identified, the amount of funds necessary to pay for this ambitious plan will be in the trillions of U.S. dollars. So, maybe it is time to put your thinking cap on and see what you have to offer and what China’s growing market will need. (Information courtesy of Xinhua News Agency.)

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