Opportunities abound in China

My last Dispatch gave you some information about China’s direction. This time, the idea is to talk about what opportunities there may be for Wisconsin businesses in China.
Before I outline these opportunities, a word of caution about scams. The trend is getting worse as businesses, especially those involved in exports, are hit by declining orders, rising labor costs and a difficult banking environment. Large numbers of companies are going out of business. I have been contacted a number of times recently by people who have been hit by scams, mostly involving orders which were paid for and either never received or contained junk.

It is strongly suggested that, for the foreseeable future, you independently verify all contents before payment, regardless of how long you have had a relationship with your supplier. As a side note, if you get scammed, the chances of collecting are slim; you may want to consider chalking it up to experience rather than sending good money after bad.

That being said, here are some golden areas of opportunities for American businesses in China.

Water

Parts of the south, west and north of China are experiencing severe droughts. The Yellow River is contaminated to the point it cannot be used for fresh water. Low underground aquifers in Beijing and Tianjin, coupled with contaminated groundwater throughout the east of China, have created a critical drinking water situation. The South North Water Diversion Project will be coming on line next year at a cost of $62 billion and 350 thousand resettled people.

The project has three separate diversion segments. The longest will divert water 800 miles north from the Yangtze to Beijing. It will cross 205 rivers which run through China’s industrial heartland. The most difficult diversion will bring water to Tianjin from the Yangtze. It will require 426 sewage treatment plants along the way to clean the water. Tianjin is covering its bets with a $1.3 billion desalination plant.

If you have water technology which can clean or desalinate water effectively, you should be thinking about your China strategy, because things are going to get worse before they get better.

Food safety

It’s in the news again, as more scams are uncovered, everything from cooking oil processed from waste oils and trash and noodles colored with ink to pork that glows in the dark. Chinese consumers are flocking to buy baby formula, vitamins and medicine from abroad. If you have a food product that you can get into China now, is a great time to get started.

Income

The newest report indicates that the grey market income of most households is at 90 percent of real income. It means that China’s GDP is actually much higher than reported and explains how China has become the luxury market. If you make high-quality consumer goods (bling is good), figure out how you can bring your brand to China.

Energy

Coal prices and energy costs are up. China is importing more coal every year, despite increased domestic production. Car sales continue. GDP is rising at over 9 percent, but energy consumption is rising at 12 percent. Some feel there is a looming energy shortage brewing. They point to a number of blackouts over the last couple of years as an indication of the trend. Mining equipment, electrical transmission equipment and anything that can save energy, which has less than a three-year payback, is a good bet.

Human resources

The demographic dividend, which has kept labor rates low, will likely disappear in five to six years. Meanwhile, China has a shortage of skilled trade workers and professionals. Chinese companies are looking for help to improve productivity and solve their staffing needs.

Material resources

China continues to scour the earth for materials and energy. If you have them, you need to study the feasibility of selling them to China. You may want to consider selling proven reserves and letting the Chinese do the extraction.

Manufacturing

Manufacturing growth in China, due to a number of factors, has switched from export to domestic. New, larger and more modern factories are pushing less efficient and poorly capitalized companies out of the market. China is also changing its production mix and is able to build more complex and technically sophisticated machines. This is also increasing the range of its suppliers who can now produce higher quality metals and electronics each year. If you have production technology and systems, the market in China will continue to be good.

Service sector

Services are booming, with many sectors experiencing 40-percent year-over-year gains. Rising disposable income is the key. Getting a part of this growth may be difficult and time-consuming, but the rewards will be worth it, as Yum’s KFC can attest too.

Logistics

China continues to invest in improving its transportation system, including train lines and stations, airplanes and airports, cars, trucks, buses and roads. They are looking for technologies and products that will extend the life cycle of their investments, improve safety and be more efficient.

Environment

The environment is increasingly taking center stage. If you have cost-effective solutions, you should bring them to China. Make sure they do not become Chinese property without your consent. Ironically, some of the initiatives which are supposed to be solving the problem, such as eclectic cars and solar panels, are now in the spotlight for damaging the environment, e.g. lead from battery production plants which are poisoning people and fluoride spills from solar chip making factories which are poisoning the land and groundwater.

Education

Many Chinese have lost faith in an education system which they see as an inflexible test preparation machine that erases creativity and initiative. Each year, fewer students are taking the national university entrance exam and those that can are flocking to overseas schools. Unfortunately their language levels are not often at a level which will allow them to benefit fully from their expensive overseas education. Providing better English language programs and getting them to come to Wisconsin for their education is a huge opportunity. Each student represents a minimum of $140,000 direct investment if they stay four years. Imagine what 10,000 students could do.

Finance

Currently, due to monetary policy which is restricting the ability of banks to lend, 22 percent of all new financing is done by a shadow banking system which provides off balance sheet loans. Rates vary between 25 percent to 50 percent, but still require guarantees and assets. Need I say more?

Real estate

China builds the equivalent of Rome every two weeks. Over the last 15 years, China has built the equivalent of Europe’s entire real estate stock. It is probably overdue for a correction. This may come soon, as cash-strapped developers take what they can. The silver lining will be that the government will probably loosen up foreign ownership rules allowing savvy investors to buy cheap.

Taxes

Taxes will continue to climb as the government finance model switches to a more tax-based revenue system, away from real estate leasing system which has been the main support of local governments. Already foreigners are being charged an extra 10 percent for social welfare. I would expect taxes and tax collection efforts to be a big part of the future. Accounting services and lawyers will once again be given a prime spot at the table as companies and individuals seek to minimize their tax exposure.

Regulations

Government regulations are becoming more specific as the machinery of government gets used to the levers of control. There is still a significant lag time between policies and regulations, but the gap is closing. Increased reliance on lawyers and specialists to change, interpret and/or solve problems is a definite trend.

Maintenance

This in a nutshell is one of China’s most pressing issues. While there is an ability to put together a range of machines and processes, there is an acute shortage of people who have the knowledge and experience to maintain them. This results in lower productivity and costly disruptions. Those who have the experience can either offer services or teach.

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