Belt and Road: Weighing the Risks and Choosing the Right Path

by Joe

Belt and Road:  Weighing the Risks and Choosing the Right Path

In Word4Asia’s March, 2018 blog, we presented an overview of China’s Belt and Road initiative.   We ended with an optimistic note stating that it’s China’s ability to look past political and economic differences between themselves and potential partnering nations that will ultimately define the success of this tremendous initiative.

This month, we continue our BRI discussion to include topics related to potential involvement by foreign (non-Chinese) firms.  These include risk identification, market related issues, risk mitigation and various methods of participating.

UNDERSTAND THE RISKS

As in any business opportunity, potential gains must always be measured along with attendant risks, and there are many potential risks associated with Belt and Road.

  • Geopolitical risk: Because BRI projects will span across many territories and nations, they are subject to changes in political regimes and bilateral relations.
  • Funding risk: BRI projects are high-costs, requiring significant loans to debtor nations.  Each of these nations have a varied ability to pay back these loans.
  • Operational risks: BRI projects will involve many different businesses and institutions.  Skill sets and competencies will vary among all these stakeholders and these differences open projects to completion delays and cost overruns.

CHOOSE THE BEST PATH

Conduct a commercial viability assessment prior to committing to any BRI project.   Such a study will include reviewing the maturity of the supporting ecosystem and confirming that the project complements the company’s other similar projects.  It includes completing a robust business case that firmly establishes sufficient market demand and a competitive situation that will allow the firm to achieve its profit objectives.

  • Confirm the maturity of the region’s infrastructure: Include the following issues in your analysis:
  • Will the firm’s investment be protected through stability in economic policies within the host nation(s)?
  • Does the region’s infrastructure include the stable, multi-modal distribution of supplies?
  • Are there sufficient supporting facilities in the region? These could include commercial banks, telecommunications systems, basic water and sanitation facilities etc.
  • Is the project under consideration a good fit for firm at this time? For example, should a company with one risky project in Kazakhstan undertake a concurrent, similar project in the same region?

RISK MITIGATION

Exit plans:  Along with having a clear-eyed view of the possible risks involved in a potential BRI project, the firm should also outline a clear exit strategy from the start of the project.

Local Authority alignment:  Cultivating strong, positive and respected relationships with local authorities is essential.

Trusted Partnerships:    Partnerships with companies having prior experience of working with the local government are critical in B&R projects.  Relationships with local companies can provide  insight into how things get done, assure sensitivities to unspoken realities will ensure that key individuals are included in planning and execution.  Failure in this area could easily cause avoidable delays and expenses and, in some cases, even derail projects.

MARKET ENTRY OPTIONS

There are at least six ways foreign companies can participate in BRI.

Investors:  Commercial banks are being invited to participate.  Companies can invest in bankable infrastructure projects, either by co-investing with Chinese players or by investing in partnership with existing Chinese instruments, such as the Silk Road Fund. The Chinese government has thus been seeking foreign investment, in part through its infrastructure bonds.

Suppliers:  Companies can supply advanced construction equipment, machinery, and cutting-edge solutions for infrastructure projects.

Consultants:  Firms with expertise in large-scale infrastructure projects could partner with firms from China by sharing their experiences in designing and developing infrastructure in less developed countries. Consulting can also open paths through Chinese companies to the Chinese domestic market.  Similar opportunities are also open to consultants working in international project management.

Management:  As operators of new facilities and managers of the newly constructed infrastructure,  Chinese company leaders are interested in management experience, especially within emerging economies.  A company can bring its operational experience in managing effectively, profitably, and sustainably to new settings.

 

Word 4 Asia is a consulting firm with a unique focus on China.  If your goals are leading you East, we’d like to talk with you.  Our experience, skills and expansive network may plan a pivotal part in your success!  Contact us at gene@word4asia.com

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A New Era of Consumerism in China

by Joe

A crowded market street in Hong Kong.

If you’re looking for the world’s largest consumer market, you’ll have to look across the Pacific, all the way to China.  While per capita consumer purchases still lag the US, based on the sheer difference in populations between the USA and China, China is the hands-down winner in this contest.  China’s ascendency to King of Consumer Mountain occurred in 2016.  In 2017, the nation’s consumer market will exceed our own by 10.5% ($500 billion).  There are many factors that contribute to this startlng change.

First, economists point to the emergence of a new generation.  These consumers were born between the 1980’s and into the current  century and are collectively referred to as the “Youth Generation”.  Among this segment, consumption is growing at an annual 14% rate—twice the pace of consumers older than 35.   The Youth Generation will exceed 53% of total Chinese consumption by 2020.

Boston Consulting Group recently polled members of this market segment on their agreement with the  following statement: “I feel I have enough things and feel less the need to buy new ones.”  Forty-two percent of Chinese aged 18 to 25 disagreed with the statement, By comparison, 36% of U.S. and EU respondents of that age-group, 32% of Japanese, and only 26% of Brazilians also disagreed with the statement.

Young-generation Chinese also tend to be more sophisticated consumers than those older than 35. They are eight times more likely to be college graduates. They travel overseas twice as much. And they are more brand conscious than older Chinese and U.S. consumers of the same age.  The following products are included in China’s top 20 consumer items list.

  • US fashions
  • Skincare
  • Trendy snacks (kale chips, super foods)
  • Maternity Wear
  • Designer sneakers
  • Beauty accessories
  • Juice
  • Baby accessories
  • Jewelry
  • Fresh produce
  • Wine
  • Natural cleaning products
  • Jewelry
  • Seafood
  • Baby Food
  • Sporting goods
  • Make up
  • Packaged health foods
  • Breast feeding products
  • Gadgets

As in the US, Chinese brands are being sold using a variety of psychographic positioning strategies that build strong emotional connections between consumers and brands.  For example, a top priority of 18- to 25-year-old Chinese consumers buying skin care products is that the brands should “fit their personality” and convey that they are “young and energetic.”

The rise of e-commerce retailing is an incredibly important component in all this consumer activity.  This is attributed in part to the success of Alibaba, Tmall and JD.com, which took advantage of the country’s undeveloped traditional retail infrastructure. “Alibaba, Tmall and JD.com positioned themselves well to capitalize on growing consumer demand by creating their own payment systems (e.g., Alibaba’s Alipay) and logistical services (e.g., JD.com operates a self-owned logistics network).  In 2017, China will comprise almost 51% of total ecommerce sales; the United States is a distant second, making up 19% of total global ecommerce sales.

In addition to offering better prices and wider selections, e-commerce actually stimulates new demand in China by filling many needs that aren’t being met at brick-and-mortar stores. For example, according to Taobao, spending by the average e-shopper on organic and imported food and beverages has expanded eightfold over the past three years. Many popular online offerings, such as organic baby foods, rice, and tea, aren’t carried in local stores.

Chinese consumers also buy higher-priced products online. Our research found that overall consumption of home care products, packaged foods, and personal-care items increases only moderately as Chinese households become more affluent. But according to Taobao sample data, online purchases in these categories increase by around 150% when Chinese households enter the upper-middle class. Online purchases nearly double again among affluent households. In large part, that’s because these consumers can find more distinctive, premium-priced products online.

E-commerce drives consumption growth by helping companies overcome distribution challenges associated with reaching a national market and by dramatically expanding the reach of their brands. We analyzed Taobao sales of several leading premium skin-care brands that already have fairly wide coverage in department stores. We found that only 55% of Taobao’s online sales originated in cities that have those goods physically available in stores; 45% of sales were from the thousands of cities that don’t have those goods in stores. The trend was similar for fashion apparel and baby education products.

Home page of the leading Chinese e-commerce site, Taobao.

An important element in the success of ecommerce, is market penetration of smartphone technology.  There are now 550 million smartphones in use in China.  This is more than twice the number of cellphones used in the US, where smartphones have been adopted by 84% of all mobile phone users.  In contrast, smartphones are in use with 56% of China’s mobile phone users.  Mobile e-commerce, which already accounts for 51% of all online sales in China, compared with a global average of 35%, will grow even faster. On Taobao, a Chinese e-commerce marketplace founded by Alibaba, the share of sales transacted though mobile devices rather than PCs rose from 51% to 62% within the first three quarters of 2015 and reached 68% on the year’s Singles Day (November 11, 2015), one of China’s biggest shopping days because retailers offer special promotions. By 2020, mobile e-commerce is projected to account for 74% of all online sales in China.

Will economic disincentives make the difference in stemming Chinese savings rates? At 50%, China leads all nations in consumer savings. Increasing Chinese consumption could spur economic growth to new heights.

Make no mistake about it, though.  Even with the big increase in consumer purchases, Chinese consumers continue to lead the rest of the world.  The Chinese are great savers; the nation’s savings rate is 50%.  Contrast that with the savings rate in the USA, which is about 2-3%.  France, Germany, Belgium and Spain, all save somewhere in the ballpark of 12 – 16%.  In an effort to further spur the growth of China’s economy, its leaders are encouraging more consumption.  One way of doing this is to create dis-incentives to save by making property investment more difficult and less attractive by assessing property taxes on second properties.  Increasing consumption though, will require improving the way Chinese consumers perceive their nation’s future.  This is a critical shift that must be made in order to break China’s unhealthy dependence on foreign imports.

All of this growth comes at a cost.  Industrial and biological pollution has contaminated almost 90 percent of the underground water in China’s major cities. The World Health Organization (WHO) estimates that one out of four (300 million) Chinese do not have daily access to clean water, and that one out of two (700 million) are forced to consume water below WHO standards.  In addition, China is home to 20 percent of the world’s population, yet only holds six percent of the world’s water resources. China’s water demand is expected to reach 818 billion cubic meters, but there is only 616 billion cubic meters available. Beijing has about 100 cubic meters of water available per person, well below the U.N. standard of 1,000 cubic meters per person, a threshold used to measure chronic water shortage.

Air quality is bad across the country, and lung cancer and cardiovascular illnesses are already rising and could get worse in the future due to factory emissions, vehicle exhausts and cigarette smoke.  Increased industrial output is going to increase the pressure on the environment.  China has been public about their desire to stem their carbon footprint and remain members of the Paris Treaty, a statement that the US cannot make at this point.  Can China accomplish both economic growth and sustainability objectives?

Small and medium-sized enterprises (SMEs) account for a major portion of job growth in any country, including China. Yet, China’s SMEs have found it particularly difficult to access capital. In response, “underground finance” and a shadow banking system have developed as a way to supply credit to private companies, although at exorbitant interest rates. Despite being an illegal activity — until March that is — underground finance has become a big business in China.  Private lending,  the term used for the informal networks of money lenders that have developed outside of China’s banking system, currently funds between two trillion yuan ($317 billion) and four trillion yuan ($634 billion) in loans to SMEs annually.  In March, 2012, China announced reforms in the coastal city of Wenzhou that would legitimize underground finance. These reforms are now spreading to other parts of China as many new “micro finance” companies are being granted licenses to provide much needed capital to China’s SMEs.

Look for more of the same over the next 10 years.  Further reform of China’s banking system and the development of China’s capital markets will fuel a new round of growth and wealth accumulation and will be one of the major new trends affecting the country.

Economic growth from China’s upper and middle classes has helped the nation achieve a leadership position among global economies.

  • An online presence with the key ecommerce retailers such as Taobao will be an important element in your strategy.
  • US Domestic brand strength is important since the Chinese are attracted to well known and recognized western brands.
  • Having a mobile marketing strategy is vital to reach consumers who mostly shop online via their smartphones.
  • Understanding the culture, beliefs, attitudes and opinions of the ‘youth generation’ shopper is important to your brand’s success with these consumers.
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The Architectural Marvels of China

by Joe

Visiting some of the world’s greatest architectural achievements is yet another reason to visit China and being an ancient culture, visitors can enjoy a wide variety of ancient, recent and even modern examples of incredible artistry and engineering.
If what you’re after is a trip into the past, there are many fascinating places to visit including the Great Wall, Forbidden City and the Mausoleum of the First Qin Emperor. Hallmarks of this old style architecture include timberwork combining stone carving, rammed earth construction, bucket arch buildings and many other techniques. Imperial architecture, traditional Chinese residences, Chinese garden architecture and religious architecture. Imperial Palaces were originally built to showcase the extravagant lifestyles of the emperors, as well as to provide a centralized location for demonstrating imperial political control. The imperial palaces were built on a grand scale, sparing no expense to display the majesty and dignity of the imperial power of the time.
The Imperial Palace in Beijing, also known as the Forbidden City, is located in the center of the city of Beijing. The largest ancient palatial architecture in the world is now home to the Palace Museum. Built between 1406 to 1420, the Imperial Palace is a complex composed of 980 preserved ancient wood and stone buildings. The Palace Museum houses and displays artwork, treasures and collectibles from the Ming (1368–1644) and Qing (1644–1911) Dynasties.

 

 

After China’s communist revolution in 1949, the country’s architecture began to take on more of a Soviet-era look with “Stalinist” architecture becoming the common approach to new building projects.  Many buildings acquired a sparse look. Solid grey blocks and simple designs characterized many structures of this period.

The New Socialist Buildings Period is exemplified by the Big Ten Buildings, ten monumental buildings constructed in 1959 to celebrate the anniversary of the founding of the PRC.  These buildings combine Stalinist architecture with traditional elements of Chinese architecture. structures combine Stalinist architecture, traditional Chinese architecture and modern architecture.  A great place to see this type style of building is at the village of Nanjiecun.  Visiting is like going back in time to China of the 1960’s and 70’s.  This village shows what living in a fully-functioning communal village micro-economy (collective wages and labor units) would have been like.  One can see sweeping concrete plazas and broad, empty streets.  Giant portraits of Mao, Stalin, Lenin, Marx loom over the empty plaza where the principle feature is a large ivory-colored Mao statue in the center.

After China’s communist revolution in 1949, the country’s architecture began to take on more of a Soviet-era look with “Stalinist” architecture becoming the common approach to new building projects.  Many buildings acquired a sparse look. Solid grey blocks and simple designs characterized many structures of this period.

The New Socialist Buildings Period is exemplified by the Big Ten Buildings, ten monumental buildings constructed in 1959 to celebrate the anniversary of the founding of the PRC.  These buildings combine Stalinist architecture with traditional elements of Chinese architecture. structures combine Stalinist architecture, traditional Chinese architecture and modern architecture.  A great place to see this type style of building is at the village of Nanjiecun.  Visiting is like going back in time to China of the 1960’s and 70’s.  This village shows what living in a fully-functioning communal village micro-economy (collective wages and labor units) would have been like.  One can see sweeping concrete plazas and broad, empty streets.  Giant portraits of Mao, Stalin, Lenin, Marx loom over the empty plaza where the principle feature is a large ivory-colored Mao statue in the center. Examples of this thrilling style of architecture include the Jin Mao Building and the Oriental Pearl Tower in Shanghai and the National Stadium (the Bird’s Nest), in Beijing.  Some of these buildings have generated considerable controversy, but their status as architectural showpieces familiar to people worldwide is well established.

 

 

In the modern era, China has moved away from its original socialist market orientation and has embraced the market economy.  As China opened up to the world in the 1980s, new architectural styles began to develop that combined elements of all of the older styles while also inventing new elements. The construction of these thoroughly modern and creative structures accelerated during the run-up to the 2008 Olympics in Beijing and the 2010 Expo in Shanghai as China sought to present a modern face to the world.  Part of this ‘new China’ aesthetic was demonstrated in a world-class architectural showcase of buildings unlike any seen elsewhere.

Modern icons include buildings such as the Jin Mao Building and the Oriental Pearl Tower in Shanghai and the National Grand Theater and the National Stadium, also known as the Bird’s Nest, in Beijing. Some of these buildings have generated considerable controversy, but their status as architectural showpieces familiar to people worldwide is well established.

China’s National Stadium, or the Bird’s Nest, as it has become known, is the world’s largest steel structure and the most complex stadium ever constructed. It is “one of the key engineering marvels in the world today.”  The stadium was designed by Swiss Architects, Herzog & de Meuron, and a Chinese Architect, Li Xinggang.  The requirements for its design were that it had to be inspiring and be able to withstand an earthquake.  In order to make the structure ‘light weight’ but earthquake-proof, the strength in 110 000 tons of a new grade of steel, the purest ever developed in China, including 36km of steel struts, was combined with an ingenious design.  The design came from the idea of a single thread wrapped round a ball. Layers of logical geometry give the appearance of randomness and an organic shape. Multiple pentagrams in the interlocking fabric of the elliptical structure are like the stars of the Chinese flag.

Heading to Shanghai?  Be sure to visit the World Financial Center.  It is the world’s tenth tallest building, and the fifth tallest in Mainland China.  Built at a cost of $1.2 billion USD, it stands 101 floors above ground and also includes 3 floors below ground.  The 100th floor features 100th floor observation deck.  This landmark to China’s recent arrival on the world’s economic stage, was actually an Amereican firm, Kohn Pedersen Fox, is managed by the Mori Building Corporation of Japan and was funded by multinational corporations.

Nearby, you’ll also find the 88 story Jin Mao Tower and the Shanghai Tower that towers 400 feet higher than the Shanghai World Financial Center.  These three buildings form a grouping along the Pudong River in the Lujiazui financial district.

One additional example of modern the world’s tallest and longest glass bridge which connects two mountain cliffs in what are known as the “Avatar” mountains (the film was shot here) in Zhangjiajie, Hunan province.  The 6-meter-wide bridge stretches 430 meters over a 300-meter-deep valley between two cliffs in the stunning Zhangjiajie Park.  This bridge was designed by Haim Dotan, an Israeli architectural firm. Gene actually met Mr. Dotan, the creative architect who designed the glass bridge. During their conversation, he shared many creative plans for future projects which incorporate structure into natural landscape.

 

With a history as long as China has, a world of discovery awaits the traveler with an interest in architecture.  If you’re planning a trip there soon, we hope you’ll reach out to Word 4 Asia.  Our vast experience in China travel makes us a resource you will want to explore as you prepare!  Visit us online at word4asia.com for more information.

 

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Chinese Students in American Universities

by Joe

Chinese students attending US higher education institutions have increased dramatically over the last dozen years. Starting in 2004, when Chinese student populations across all US universities was slightly over 60,000, attendance has exploded with a 530% increase. In the 2015/16 academic year, Chinese nationals attending American colleges and universities exceeded 330,000! With growth like this, it is not surprising to learn that China leads all other nations in terms of sending their students to our institutions of higher learning. India and Saudia Arabia follow in numbers. In addition, Chinese nationals now represent a little more than half of the total number of foreign students in the US.
Studies on this trend have revealed a number of important contributing factors.

Many Chinese students are attracted to the American system which is based on an open avenue to academic pursuit. Students are free to select any major they desire. The same cannot be said for China where academic test results decide which career paths are open to each student. Another important, contributing factor is China’s economic growth as the nation has adopted more of a market economy. Improvements in relative affluence have made it possible for China’s wealthier families to educate their youth in our nation.

As attractive as Chinese students do find our education system, the experience is still a struggle in many ways for these foreign learners. The research shows that there are five factors that have the most impact on a Chinese student’s success in US colleges and universities. The first factor is ‘personal dynamic’ – this is another term for internal motivation. Elements include a desire to study abroad, career goals and social status aspirations. ‘Reverse motivation’ includes parental influence, international experience and demographics. ‘Globalization’ is a measure of a student’s relative degree of Westernization prior to starting the college experience or the desire to adopt Western culture once residing in the US. ‘Outlying factors’ include status of relationships and knowledge of study abroad opportunities.

Language also plays a major role in a Chinese student’s success in our country. Many Chinese students have difficulty adapting because language education in China is focused on written not oral communication. Even with the focus on the written word, the sheer volume of reading and writing required in US programs makes education here a daunting prospect for any non-native speaker, not just limited to the Chinese! Finally, there is a very wide cultural divide between China’s millennia old culture, steeped in tradition and Confucianism and our western traditions, values and way of life here in the USA.

As a new academic year begins, Word 4 Asia welcomes all Chinese students to our nation and our colleges and universities.  Next to actually traveling to China, we suggest there may be no better way to learn about Chinese culture than to open your home to a Chinese student.  Your family can play a role in helping a Chinese student learn about our way of life too.  We know you’ll enjoy and prosper from the experience!

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