By Gong Li Outlook Journal, May 2006 Download this article [PDF, 167K]
PDF Help   With a huge landmass, a population of 1.3 billion and a red-hot economy, China can inspire extreme reactions, especially among multinationals contemplating doing business there. At one end of the spectrum is the "drop-everything-and-come-to-China" attitude; at the other is a bleak pessimism about market access and local business conditions. Neither view accurately reflects the economic realities and market dynamics at work in China today.
For a better understanding of both the challenges and enormous opportunities this market represents for Chinese and non-Chinese companies alike, this Special Report seeks to place China's remarkable economic story in the larger context of the country's recent history and current ambitions. It also looks at two critical issues that are helping to define those economic realities and reshape the market landscape: China's membership in the World Trade Organization, and efforts to modernize Chinese companies through information technology. The lighting of the Olympic flame at the opening ceremonies of the 2008 Beijing Summer Games will reveal to the world not only a boldly refashioned city but an entire country reinvented. The process began with the introduction of the first government-driven reforms of the late 1970s and continues in ways that are both obvious and less so. It is hard to miss the construction cranes hovering over any big Chinese metropolis, the shiny new glass skyscrapers rising beside old traditional neighborhoods, the busy airports bustling with local and international businesspeople. This and other economic activity has translated into a better than tenfold increase in China's gross domestic product during the past two decades. And while most parts of China will remain in the developing world for the time being, some sections of the country have already achieved advanced-nation standards and status, from the standpoint of purchasing-power parity. That China has achieved so much and overcome so many obstacles in such a short time strongly suggests that this momentum and progress will continue.  In addition to the government's reform policies, a major catalyst in China's recent emergence on the global stage was its admission into the World Trade Organization in 2001. Since then, there has been phenomenal growth in investments by Chinese corporations going global, as well as by foreign companies expanding on the mainland.
According to the latest published estimates, China received more than $60 billion in foreign direct investment in 2004, 10 times the amount that flowed into India. One of China's main advantages has been the effort by the central government to liberalize trade, encourage a more market-oriented economy and improve infrastructure. To be sure, much remains to be done—in areas such as education, for example. Simply put, however, China has created an environment in which foreign capital is welcome and foreign companies can make money. In the latest annual survey by the American Chamber of Commerce—China, US member companies report easier access to local markets, more options for doing business and an improved regulatory environment. For the past three years, three-quarters of companies polled were making a profit in China. Moreover, about 83 percent of respondents in 2005, compared with 60 percent in 1999, listed producing goods and services for the local market among their top three reasons for entering China. Indeed, there has been an important shift in the nature of foreign direct investment in China. Instead of seeing the country as primarily an export base—a source of cheap labor and low-cost manufacturing—the smart players today are investing in China to serve the domestic market.  The fundamental underlying lesson here goes to the heart of the gradual emergence of China's market economy, especially during the past 10 years. For the foreign investor who asks, "How can I secure a position in this market? How can I sell my goods and services in China? How can I make money?" the answer is simple: the same way you do in any other market economy—with the right products, the right price point and the right cost base.
Investment capital has flowed in both directions, of course. But many observers have underestimated the effect of Chinese companies going abroad and the challenges they face. The issue is no longer simply about China opening its doors to foreign companies but also about how other countries are dealing with Chinese goods and services. Since 2001, China has invested more than $50 billion overseas. Even as major trade restrictions have disappeared, however, mainland firms must still deal with non-tariff barriers like anti-dumping legislation and lawsuits. For Beijing, perhaps the most critical consideration today is how to sustain this economic success. At the individual organization level, one important and effective solution has been to upgrade technology, an effort actively pursued by both the government and the private sector. The results have been the envy of many countries. In pursuit of this strategy, China isn't weighed down by the legacy of older IT investments. China bypassed the VCR and jumped to DVD, and it abandoned the traditional film camera for digital cameras, mainframe computers for client-server technology, and fixed-line telephones for wireless. In other words, it is positioned to leapfrog the rest of the world in terms of using technology. China's WTO membership, as well as efforts by its companies to upgrade their IT capabilities, are, of course, only two pieces in the vast, complex and shifting mosaic that is the Chinese market. However, if Beijing continues to leverage its WTO commitments to introduce more reforms, China will only become an even more attractive place to do business. Meanwhile, if the country's chief information officers succeed in transforming their organizations through technology, Chinese companies will turn into even more formidable competitors. For any company serious about developing a global business strategy, China clearly looks set to continue playing a critical role. About the Author
Gong Li is the chairman of Accenture—Greater China, leading a team of more than 2,100 people. With more than 20 years of cross-industry management consulting experience, Mr. Li's work includes organizational strategy and design, business process reengineering, financial management and IT infrastructure development. He has collaborated with clients in a variety of industries, including government, electronics, high tech, energy, petrochemicals, financial services and consumer products. Based in Shanghai, Mr. Li also has extensive experience working with state-owned Chinese enterprises on various programs, including corporate restructuring, process transformation and commercialization. Back to Contents
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