China goes global – the WTO column

(Soon also in Chinabiz)

The acquisition for US$ 1.25 billion of the PC-division of IBM by Beijing-based Lenovo could not have come at a more appropriate moment, three years after China entered the World Trade Organization.
“All is going fine,” summarized Chen Bingcai, deputy director of the department of capital account of the State Administration of Foreign Affairs (SAFE) the atmosphere at the annual WTO forum organized by the Konrad Adenauer Foundations and the Shanghai Institute for Foreign Trade on Tuesday.
He was asked whether Chinese companies could just go out and buy companies abroad, since capital control in China is otherwise rather strict. Chen did not see a problem, without mentioning Lenova or any other the other large Chinese conglomerates with global aspirations. “We have abundant financial reserves,” Chen said. “We encourage Chinese companies to go global.”

Do you remember the atmosphere three years ago when China entered the WTO? Foreign companies were jubilant, since they would get unprecedented access to the Chinese market. In the agriculture especially US companies said they would wipe away the Chinese competition and conquer the mainland with their cheap quality products. In many other industries representatives did not say it that loudly, but were at least thinking it.
In the automotive industry developments followed the optimistic scenario as the sales expanded for two years with more than 60 percent annually. But in de rollercoaster movement that is typical for China that stellar growth has now come to a standstill and some of the gloomy predictions for domestic car sales expect a decline in 2005. An export market is still very far away.
In some markets foreign companies are doing quite ok, but the picture is very mixed at best.

Some of the foreign industries represented at the WTO forum on Tuesday did much worse than expected, for example in banking, insurance and logistics. The market share of foreign banks shrank to about one percent of all the loans being issued, and in insurance foreign companies are still in the phase of expanding. All blamed restrictive government regulations, but while listening to their complaints I kept on wondering whether they were not fighting for markets they cannot conquer anyway.
Foreign banks and logistical companies claim they can offer a much higher quality of service and can reduce their costs by MBA-driven management skills, when the Chinese government allows them. Most Chinese companies do survive by not making too much cost in the first place and they seem to survive very well at the bottom end of the markets, the place to be in much of China and maybe elsewhere too.
A representative of China Life invited his foreign counterparts kindly to make some money in the insurances industry at the country-side. His company, he claimed, gets 65 percent of their business from the country-side.
Now, China Life still has to prove it can make a profit in the insurance anyway, but other Chinese industries are proving they can do so, at the expense of foreign competition. China’s agricultural products are not wiped away, but – also helped by a bumper harvest – are doing exactly the opposite. Because the China pie is growing fast, the undermining effect of Chinese competition is not yet felt in many other industries, but I see Chinese competition coming up everywhere, not only in IT and agriculture, also in more unlikely areas as legal services and financial newswire services.
Three years after China’s accession into the WTO it is not only time for foreign firms to rethink the euphoria of three years ago and wonder how well equipped they are in conquering the China market. They should also see whether they have covered their back well enough back home.

Fons Tuinstra