News from the second largest economy - the WTO-column

(later also at Chinabiz)

Now the amount of information passing my computer screen keeps on going up dramatically, I increasingly use some tricks to scan the headlines and divide them up in categories. I look whether a headline appeals to my interests of the day, how trustworthy the source might be and of course whether the article is not too long. Very long interesting-looking articles I put aside for later and then I mostly forget about them

There is a special category, where I save articles for my own entertainment. There are two descriptions of China that qualifies a article right-away for my ‘fun’ category: when they call China ‘communist’ or when they add it is ‘the second largest market in the world’.

We all know China has very little to do with communism, unless you have to put an official label on it. But the qualification ‘second largest market’ is more interesting. Especially US investment bankers have been pushing their companies into impossible positions, even caused them to forfeit their mission statements, to enter what they perceive as the ‘second largest’ market in the world.

I will limit myself to the IT-market, especially the recent adventures of Yahoo, Microsoft and Google, since they have been most telling. But the argument works for more industries. And I expect that the investment bankers on the background are really the most important factor is driving the current hype.

When you look at the superficial figures the IT-market in China looks indeed rather impressive. In ten years time it got 110 million citizens online, more than 350 million now have a mobile phone and some of staggering growth figures is very realistic.

But when you look at it from financial terms, there is not that much reason for foreign companies to be very enthusiastic at this stage. China might have millions of citizens online, but they tend to spend much less than those in the largest economy of the world, the US. And even Japan and Europe outrun China as an economy still in gigantic terms.

As for example Billsdue pointed out, the maximum revenue Google could earn on the Chinese market would equal about two days of its current revenue at best. You must wonder whether that possible gain would justify way this company has been damaging its key image: ‘do no evil’, by offering to clean up its search engine services according to governmental requirements.

Asiapundit followed that same line. Google earned in 2005 3.75 billion US dollar in the US. Yahoo Japan earned 1.48 billion US dollar in 2005. Baidu.com, the largest search engine in China, expects a revenue stream of 13 million US dollar for the fourth quarter in 2005. Very tiny compared to the global revenue streams.

The telecom industry in China earned in 2005 about 115 billion US dollar and it is for good reason that China has kept that industry up to now pretty closed for foreign involvement. That is going to change, and gains might be possible together with Chinese telecom companies. In all terms the internet industry has caused massive changes in China, but remains pretty tiny in financial terms.

Old-timers in China like Unilever and P&G have learned in the past decades the hard way how tough the market for the average Chinese consumers is to enter and still make a profit. Entering this consumer market only to gain market share might not outweigh the possible gains a foreign company (or a Chinese) can make.

Depending on the industry, the competitive situation and the relations with the government, foreign companies can also work and make a profit in China. But getting enough money out of the Chinese consumers might need some very special talents.

Local competition, rigid government regulations, an unequal playing field and a relative low average income might be in the way of making a profit. Profits are possible, but whether they outweigh jeopardizing a global corporate image, like happened in the case of Yahoo, Google and Microsoft, seems less than smart.

Fons Tuinstra

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