China’s Ten Favorite Industries

You probably think it a bit strange for me to be writing at all optimistically about China’s economy today and I get that. But as someone who has lived through many economic downturns, I sort of look at “these things” as us not having any choice. I also think it important we all keep China’s economic downturn in perspective and as an example of that, take Japan.

I was in Tokyo and Osaka and Kyoto a few months ago and — just as is the case every time I go to Japan — I was struck by how wealthy that country is, especially Tokyo. You cannot be out in Tokyo for more than a minute without seeing an S-class Mercedes or a 7-series BMW. And yet Japan’s economy has essentially done little for decades. Assuming China’s economy flatlines (which is really quite a stretch because even the pessimists are talking about 3-5% yearly growth), China will still have tens of millions of extremely wealthy people and hundreds of millions (dare I say a billion+?) consumers. Maybe sales of $4000 handbags will go down, but people are still going to need handbags. And cars and food and clothing and. . . .

Not to mention the downturn will likely be a boon to most foreign companies that manufacture in China or are looking to do so. So unless I see something to indicate otherwise, I see slogging on as the way to go.

And in that spirit, I mention an excellent article I read by Gordon Orr, a Director and Chairman of McKinsey Asia, based in Shanghai. The article is China Is Betting Big on These 10 Industries, and it sets out — you guessed it — the ten industries China is favoring and explains why each of these should do well over the next ten years. As Orr so nicely puts it in describing what we can expect with these ten industries:

We can be certain that behind these priorities will be a wave of cash and incentives to manufacturers and to consumers. We can be sure that many Chinese companies, private and state-owned, are revising their strategies to align with the government’s priorities and that local capacity will rise exponentially.

And while experience reminds us that success will be elusive in some sectors, in several it is likely that Chinese companies will become much, much stronger global leaders by the end of this period as a result of very Darwinian competition.

Customers may be the biggest beneficiaries in the decade ahead as the government’s strategy drives companies down the experience curve much faster than would otherwise have been the case.

The following constitute Orr’s top ten:

  • Information technology. “Especially where Beijing has emphasized the need to wean China off foreign technology, and for China to become a “cyber power” in its own right.” Orr counsels us to expect more investment in semiconductors and acquisitions of international technology companies by Chinese companies. I 100% agree, based in large part on the rapidly increasing work our China lawyers are seeing in this sector over the last 2-3 years.
  • Numerical control tools and robotics. According to Orr, “China is already becoming a leader in low and mid-range numerical control machines. “
  • Aerospace equipment. According to Orr, “China seeks to become a leader in satellite technology and is hoping to move beyond its first domestically made passenger jet, which is heavily dependent on foreign technology.” I doubt anyone would dispute that and we are seeing the same thing via U.S. aerospace companies contacting us after having been contacted by Chinese companies wanting to buy or sell their products or seeking to form a China Joint Venture.
  • Ocean engineering equipment and high-tech ships. Though our firm has a long history of representing companies in the international maritime sector, we have not seen any uptick on this front. At least not yet.
  • Railway equipment. Make sense.
  • Energy saving and new energy vehicles. China definitely does want to improve its capabilities on this front, but this has proven to be a tough industry for foreigners.
  • Power equipment. “Smart grid and smart city technology are the central priorities.”
  • New materials According to Orr, if “China can become a leader in inventing and commercializing new materials we will have fewer conversations on ‘does China innovate.'”
  • Medicine and medical devices. We are certainly seeing growth in U.S. companies getting involved in these industries in and with China.
  • Agricultural machinery. “Yet another sector where China is looking to enhance efficiency and create a platform for exports. Yet as we have seen with the auto sector, it may not be easy.”

Please also check out China’s Best Business Opportunities, where I discuss some of these same industries, but more in the context of how foreign companies seeking to do business in China can benefit.

What are you seeing out there?

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