"ChinAmerica" (McGraw Hill, 2010, Hardcover, $27.95) Looks At Growing Interdependence Of World's Two Largest Economies#
Last week, Jing Daily sat down with Dr. Handel Jones, founder of the market and strategy consulting and analysis company International Business Strategies (Los Gatos, CA), to discuss his newest book "ChinAmerica: Why the Future of America is China" and the issues that are emerging for American and Chinese businesses as the two countries become further intertwined economically. In part one of our two-part interview, we discuss the business side of the increasing economic interdependence of China and the United States, looking at the gradual shift of Chinese companies moving further up the value chain and the opportunities presented by the growing Chinese middle class for American exporters.
Jing Daily (JD): In “ChinAmerica,” you write a great deal about the implications of the growing Chinese middle class for both Chinese and American businesses. What opportunities, specifically, do you foresee in China for American companies to directly target the middle class?#
Handel Jones:#
Since the drive for wealth leads to a demand for higher education, we see education as a significant growth opportunity for both American and European companies. Another area is health. People talk a lot about luxury goods, but actually health opportunities in China are quite significant. I think Chinese government's plan is to spend about 124 billion yuan (US$18.5 billion) on improving health. Part of that is building hospitals, and a lot of it is getting more physicians. But if you look at what China actually does, China doesn't take older technologies, it takes technologies that are going to be used in the next 10 years. They've done it with railroads and communications; they'll also do it with health. So companies involved in the health industry, like GE and Medtronics, have excellent opportunities in China.
In terms of consumer goods, Apple obviously has a major opportunity in China. Although the iPad isn't that big of a hit, the iPhone is. They're opening Apple stores, and they've created products with tremendous potential in China. But the Chinese will make something similar – China Mobile is building a tablet around Android. You have to move very, very fast to be successful in the China market.
The Internet is another area, particularly one where there's an opportunity to tap the younger market. Younger people in China are very different from what the government in some cases would like them to be. They're very cosmopolitan, they have fairly sophisticated tastes. So I think the Internet will present major opportunities for companies with innovative solutions. I think Apple, with its online content, will be a big winner in China. With its app store you've got a lot more flexibility, so I think Apple's diversified approach will be very effective.
JD: There are major issues facing Chinese companies, especially in terms of product quality and food safety. How do you think the consumption of domestically produced products will compare with imports in coming years?#
What in essence we're seeing is a transition among the middle class in China. If a product says it's something, then they really want it to be that—if the label says it’s Head & Shoulders shampoo, that’s what they want in the bottle. The level of awareness of quality is going up, though there's still tremendous pressure to make products as cheap as possible. But if we look at the growth of Taiwan and South Korea, they went through the same phase.
What's happened with the Internet is that if there's a problem, the problem becomes known. The press controls what's published, but the Internet is a lot more open, so that – thankfully – drives more focus on quality and making it clear what the real source of what the product is.
JD: So you think domestic Chinese microblogging platforms like Sina Weibo will push domestic quality up?#
Yes. It'll make complaints about quality and contamination more widespread, and the government will react. Even in the U.S., people tend to look at consumer feedback on Amazon or Facebook. The same phenomenon is occurring in China.
JD: How would you say the productivity of Chinese companies stacks up against competitors from South Korea or Japan?#
This year, Chinese companies will produce about 450 million handsets. Last year they produced somewhere around 320-350 million, 220 million the year before, and the year before that, 100 million or so. If you look at the handsets made by ZTE, Lenovo or Huawei, they're being sold outside of China, so they're bringing up quality standards [to compete with products in those markets].
In terms of televisions, Chinese manufacturers will produce around 50 million televisions this year. The total manufactured by Japanese companies this year will probably be less than 40 million, so they're outproducing the Japanese there, though Samsung is still the number one producer. But you can buy a 40 inch flat screen TV by TCL in the US for less than $500 with a two year warranty. It's not like what you'd get from the Japanese, but it's still something.
JD: How about in the high-tech field – how do you think Chinese companies will be able to convince more Chinese consumers to buy their products over South Korean or Japanese companies?#
If you look at these consumer products, what you've got is the very high end, which is bought by a very small percentage of people, then you've got stuff that's “good enough” for the mass market. This is where the Chinese are focused. I think Chinese companies will get out of the very low end within the next five to 10 years. We've seen how far Samsung has come so fast, and now we're seeing how fast Chinese companies are catching up.
JD: How do you think Chinese companies will gain acceptance overseas?#
Well, they already have, in a way. Again, if you look at the television industry, the reason it took 20-30 years for Japanese companies to really catch on in overseas markets was because [the technology] was analog. When it switched to digital, companies could buy all of the components from outside and acceptance moved much faster. In the auto industry, Chinese automakers manufactured something like 1.6 million cars in the first nine months of this year, and their goal is to produce 25 million annually by 2020 and export 20-25% of them by that time, so that means they'd be exporting five to seven million cars per year by 2020. That's significant.
Chinese automakers are initially [exporting to] developing countries, but also focusing on the US. So they're doing more joint ventures. Most of the technology for Chinese cars has come through joint ventures, with Volkswagen, GM and so forth. They're basically supplying technology and management and ensuring the quality of the product goes up. Then there's the electric car initiative, high-efficiency car initiative the Chinese government just started and is supplying with some pretty significant grants.
With joint ventures, they insist the Chinese company control 51%, but the amazing thing to me is that the US government doesn't actively protest this. To me, this kind of policy is actually much more important than trying to increase the value of the yuan, because if you have a level playing field then companies from the US and elsewhere will actually be able to compete.
JD: What tactics do you think Chinese car companies will use when looking to expand into the US market? Will they take the JV route?#
Well I know Geely well, and they'll probably use the Volvo brand, but BYD is going to be BYD. Shanghai Automotive (SAIC) will probably be General Motors. GM is looking at manufacturing more and more of its cars in China, possibly with some of the final assembly being done in the US, even though it's not that publicized. So that, I think is a key trend for General Motors right now.
JD: China has had significant PR setbacks not only in the high-tech field but also the automotive field. What kind of timeframe do you see safety and health perceptions about Chinese brands and products changing?#
We're actually buying quite a lot of food products from China [in the US], but again it depends what part of the supply chain you're in. Contamination is still a huge problem over there and there's incredible pressure to improve this. But although the Chinese are very conscious of food, it may be one of the lagging levels there. With things like automobiles there are tests you can perform that are much more accurate, but food is another issue.
As you probably know, because of world issues and changing diets in China, food is one of their biggest imports. The US is exporting a lot in terms of grain and soy, and a lot of food is coming in from Brazil. Brazil and South America are very good food partners to China. [China's] planning in that respect is good.
JD: At the very high end, do you see things like clean, organic food produced domestically in China as an opportunity for foreign companies?
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Again, from what I can see in China, there are similarities between the Chinese and the French – if it's fresh and locally grown, there's more confidence. I think at the very high end they may buy specialty foods, but it's still going to be an emphasis on locally grown, home-grown products, fresh rather than frozen.
JD: What do you think about the prospect for luxury brands created in China?#
In spending time in some of China's big cities, you do see the incredible importance of brands there. But even though brands are being built in China, they're being built mainly in terms of the mass market. So at the very high end, I think it's going to take them a long time, frankly. I think the emphasis will be on importing French, Italian and maybe some American brands, and it'll take 10-20 years before there's a high-end Chinese brand that can command any respect in the global market.
JD: What areas could Chinese luxury brands possibly target?#
It's hard to say, because if we look at the latest five-year plan, there's really nothing on luxury goods or handcrafting. Chinese craftsmen are very good, but getting any recognition outside of China is extremely difficult. I've bought a bit of jade, and we've seen prices for jade rise 50-60% in the recent months. Some of it is very good but getting the brand recognition is very difficult.
I think China is going to be a consumer more than a producer, at least for the next 10 years.
JD: Do you think this will change, from a government perspective?#
From a government perspective, right now I don't see it as being a big issue. Frankly, if they do grow the middle class, the one thing the government will focus on will be imports and the balance of trade. So as the middle class grows and the balance of trade becomes more negative, I think they will start focusing on it.