China, the keys to power
Julie Laulusa is Managing Partner of the French audit and consulting firm Mazars, in China. In this issue on emerging markets, she unravels the secrets of the Chinese miracle.
China is undeniably the leader of the emerging countries, thanks to its dazzling economic growth and its domestic market. How do you think China has taken this position? What are its future aspirations?
Chinese development was carried out in three phases:
- a boom period that began in 1978, with the economic opening driven by Deng Xiaoping. At the time, China was a social state which main role was to create jobs. But it did not have the famous know-how and technology that we know today. Therefore, the State started investing in foreign companies to develop skills transfer. To support this movement of opening up to the market economy, China relied on its coastal regions, particularly Shenzhen and Shanghai. Foreign companies started to establish there, attracted by fiscal attractiveness and the long-term use of industrial lands (companies could exploit lands for fifty years).
- From 2000 to the 2008 crisis: between 2000 and 2008, China was still an emerging country in the minds of many. It was known only as “the world’s factory” and a privileged field for foreign investments. But after the 2008 crisis, the world became aware of China's emerging power, as its economic growth reached new heights and the country hosted the Olympic Games for the first time. It was also during this period that China "benefited" from two important events: the attacks of 11 September 2001, which led the United States to focus on the Iraq war for more than nine years, allowing China to emerge, and the 2008 financial crisis, which revealed the resilience of the Chinese currency.
- After the financial crisis of 2008, and until today, China is entering a new era of cutting-edge technology and innovation. In 2013, the government publishes the "Made in China 2025" development plan, which aims to develop China's cutting-edge technology and drive design and innovation.
What are China's aspirations? A CEBR (Center for Economics and Business Research) report, published on 26 December 2017, gives us data that speaks for itself: China will be the world's leading power in 2032, and of the five future world powers, three will be in the Asia-Pacific region (China, India and Japan). In a few years' time, this part of the world will account for nearly 50% of the world's GDP.
What are the keys to China’s growth? I think the country has three assets:
- China is one of the few countries in the world that implements development plans (on a five or ten years basis) that are rigorously implemented, whatever the difficulties. These development plans are experimented at a local level, in order to correct their trajectories, and then expanded and implemented at the national level.
- The other asset is political stability, which is inherent in China's political system since there is only one party. This absence of political pluralism allows for greater political coherence in the implementation of the economic plans I mentioned above.
Apart from size, what are the main characteristics of the Chinese domestic market? What is the fundamental difference between Chinese and European consumers?
The main difference is that the Chinese consumer does not exist. Many investors do not realize that China is a continent with social, cultural and economic diversity similar to that of a continent like Europe: for example, southern China is very different from the north. This diversity is such that it is difficult to establish a picture of the average Chinese consumer. In addition, it exists at several levels:
- spatial diversity: China has giant megacities (like Chongqing, which has more than 32 million inhabitants), big cities (Shanghai, Beijing) and small towns (a few thousand people).
- Income Diversity: The largest incomes are concentrated in first-tier cities (Shanghai, Beijing, Shenzhen). The annual net revenues in these areas are around 8,000 euros: it is almost the minimum wage (excluding charges) in France. In second-tier cities, revenues drop to 4,000 euros per year. In smaller cities with less affluent populations, disposable income falls to less than 1,000 euros a year. It is a considerable gap.
- Ethnic diversity: more than 56 ethnic groups live together in China, with considerable differences in culture, lifestyles and even physiognomy.
- Generational diversity: given China's very rapid economic development, society has evolved in a singular way. Thus, young Chinese people (millenials) were born and have evolved in relative economic prosperity, while their elders (over 40 years of age) have experienced much more precarious economic conditions, and even misery. Given the diversity of their socio-economic experiences, these generations have different patterns of consumption. However, there is a common denominator between them: regardless of age, the Chinese love technology and adapt very quickly to novelty.
A very telling example is the use of the Internet: 20 years ago, Chinese people did not know the web. Today, 80% of the population (across generations) use it in daily life. WeChat, which represents 900 million active users per day, has brought about instantaneous transactions and communications. Thanks to this application, customer services are operational 24 hours a day. When I go to the restaurant, I don't bring any means of payment, WeChat on my mobile phone allows me to pay bills.
In terms of intercultural management, are European companies today better trained in the keys to understanding China? Is there still room for improvement?
Many foreign companies are beginning to understand that China is a market-continent with very specific requirements, and they are adapting their organization to meet these requirements: thus, in order to meet the needs of Chinese consumers, middle management positions are now held by Chinese people from the younger generation, and no longer by foreigners, as was the case in the past. However, very high responsibility functions are still monopolized by expatriates, often senior citizens.
Foreign companies must also learn to become familiar with the speed and instantaneity of the Chinese market. In the world of Chinese companies, people are already switching to cutting-edge technology without having mastered "old" technology. Because of this speed, the success or failure of a company established in China depends on the responsiveness of decision-making.
On the Chinese side, what efforts have been made by political leaders and economic actors to boost the country's attractiveness?
I have already talked about the Communist Party's plans. But the link between government and business goes even further: it is important to know that state-owned companies now account for more than 50% of China's GDP. About 20 years ago, this percentage was 70%. This decline is due to the gradual rise in private companies, and their large capitalization. After the 19th Congress of the Communist Party, a new law decided to privatize 15% of the capital of state companies, but also to open up the possibility for the State to acquire shares in private companies, in order to have a gateway to the private sector.
The Chinese government's strategy is thus to accompany the country's companies in transforming them into global champions, so that each Chinese company is one of the three world leaders in its sector, and it works! Within ten years, I think there will be a Chinese company in the three global giants in all sectors. This is already the case in the household appliances industry (Haier) or e-business (Ali Baba). In the Fortune 500 ranking, 110 Chinese companies were ranked among the top 500 companies, compared to 10 years ago when there were none.
But this economic boom is not only the result of public action, it is a multifactorial phenomenon: in China, companies agree to invest between 10 and 12% of their turnover in research and development, compared to barely 5% for European companies. The technological revolution and the emergence of the Chinese middle class are also among the many factors that explain this boom.
What is Mazars' strategy in China?
Mazars has just concluded very important alliances with two Chinese companies, which allow us to have more than 3500 staff and to cover 28 cities in the country. This new milestone reinforces our strategy of establishing a presence in a high-potential country such as China, as well as our ability to "be Chinese" and work with state-owned companies. Mazars is one of the few audit and consulting firms in the world to have china desks (liaison and coordination offices for Chinese companies wishing to set up abroad) in nearly 30 countries. We are strengthening our investments to better support Chinese companies abroad. I think we are going in the right direction.