I am a glass half full kind of guy, which means that when I am reading and hearing all the bad news and pessimistic (and often well-researched) opinions coming out of the media, Twitter, academia, and the blogosphere (including this blog), I still think there must be a viable and a better path forward in doing business with China (and not just because I love doing business with China; I love doing business with the rest of the international community, as well, especially Africa (see here)). My heart goes out to those affected by the coronavirus, to those in China’s western provinces and rural areas that are in a very real sense second class citizens or worse, and to those small and medium sized U.S. business owners in the East and the West and the North and the South that are in dire straits for one reason or another – often because of an over-dependence on China.
When I say there is a good path forward in doing business with China, I am not saying it will be an easy path forward – only that doing business in and with China is a viable path forward and though it will certainly have its ascents and descents (as it always has) that path has an upward trajectory.
I always like to look at demographics as my initial analysis lens. For at least the next decade, China will continue to be the world’s manufacturing hub with its working class of about 800 million workers, compared to India’s 487 million workers, the U.S.’ 157 million workers, Indonesia’s 129 million workers, Nigeria’s 71 million workers, Pakistan’s 57 million workers, Mexico’s 56 million workers, Vietnam’s 54 million workers, The Philippines’ 38 million workers, and Thailand’s 37 million workers.
Next we should look at market potential for the sale of goods and services in China. For the next several decades, China’s economy will continue to provide a middle class with an appetite for consuming quality foreign goods. China’s middle class is approximately 40% (560MM) of its 1.4B population. China’s populace is comprised of a large number of people who enjoy success in business and who want to enjoy the good things in life, many of which will come to them as a result of China being one of the world’s biggest consumers (market demand) and the world’s biggest manufacturer (without stable employment they could not afford to be heavy consumers).
Why am I generally optimistic about China’s economic rebound? First, China has to rebound because the CCP needs China to rebound to stay in power, and keeping the people’s bellies full and their minds busy with labor (and some “wholesome” entertainment) are the foundation of any good communist playbook. There are so many reasons China must get back to work and so many good reasons for why China can get back to work, both of which will benefit companies doing business with China, given below in no particular order:
- Signing of the Phase One trade deal provided a brief respite from the U.S. government’s continuing pressure campaign against the way China does business, and China is anxious to move on. Regardless of whether the U.S. and Chinese governments continue to Phase Two this year, both countries recognize that we cannot simply separate yin from yang and that the U.S. and China can never completely decouple in all aspects of business. A total decoupling would not fly economically or politically in either country.
- Chinese people who are busy working are not at home brooding about the way the CCP has botched its stewardship over the people. The Chinese internet censors have been working overtime during the coronavirus crisis to cull anything seemingly negative about the CCP (see here), but they are learning how difficult that task is when half the country is sitting at home with a (somewhat) viable internet connection and nothing on their minds but improving their country with or without the CCP in charge.
- China has great infrastructure, especially when compared to alternative manufacturing countries. China has spent the last 30 years improving its infrastructure, building ports, airports, power generation projects, roads, and rail lines. And it has spent the last seven years starting to improve infrastructure in third world countries through its Belt and Road Initiative (BRI), many of which are the most populous nations in the world. China has the willpower, the labor, and the growing military might to continue to execute on its plan to stay near the top of the global empires through domestic and international infrastructure projects. To that end, China is taking huge strides to fulfill its energy needs by enhancing in-country power sources and establishing stable inland and sea-route energy supply corridors from Russia and the Middle East. Once Saudia Arabia and Russia have finished fighting over their race to the bottom with oil prices, China will buy energy from both of them and Iran and any other country that wants a stable customer, which China is, as compared to other emerging economies.
- China needs foreign hard currency. Massaging and printing more RMB only gets China so far. China needs foreign hard currency coming to China again to pay for raw material inputs, to continue its ambitious BRI projects, and to pay talented foreigners working in China. If China exhausts its foreign currency reserves (see here), it will have to severely rein in its BRI projects (which is already occurring) and allow the RMB to depreciate, which will make all of the above more expensive on an RMB per dollar scale.
- China’s SMEs can’t last much longer without cash. The Chinese government can extend tax breaks, tax credits, and loans with ridiculously low interest rates to unqualified (sub-prime!) borrowers to address the needs of its SMEs that are running out of cash (see here). But China’s already overextended private credit market is second to none, and China desperately needs real money flowing into the country as it seeks to rein in its debt-fueled economy.
- China’s huge consumer market. As I mentioned above, China’s massive consumer market is attractive for many reasons and will continue to be profitable for many years to come. In the past two months, more Chinese than ever have been engaging with e-commerce platforms like Alibaba, Taobao, and JD.com, which means foreign companies that can navigate those platforms, offer timely fulfillment, quality products, customer engagement, and customer-centric policies will be able to capitalize on the best of both worlds, something we call a “China Light” strategy, where you keep a light footprint in China for as long as it makes sense to do so. And where possible, foreign companies can co-locate their manufacturing and their consumer market.
- Chinese companies are more desperate than ever to find good, stable customers. We have seen this in both the manufacturing context, in manufacturers offering very favorable terms to their their best customers and to woo new customers, as well as in increased support from Tmall and JD to help sellers raise their profiles on their platforms. As one person described it, “Things we’ve seen so far: more free traffic resources, automatic rank advancements, optimal positioning and subsidies (funding) for strategic brands and product categories.” Desperation often leads to profitable negotiation.
- Chinese companies are more willing to collaborate with partners in real ways and have global ambitions. I have been involved in several deals recently where Chinese parties have proposed some type of joint venture structure in order to capitalize on the best of what the East and the West can offer. These joint ventures were global in scale and were negotiated on relatively equal footing. I think we will continue to see more creative business ventures that have a China component but are not primarily dependent on Chinese resources or markets. Our international lawyers are seeing “joint venture” like deals between foreign and Chinese companies to set up manufacturing operations in the United States, in Latin America and in Central and Eastern Europe.
- The rest of the world wants to get back to the good old days of doing business with China. Nearly every company that did business with China through the last several decades continues to pine for the past, on at least some level. They are optimistic that their long business relationships with their Chinese counter-party will eventually win out (at least in part) over politics and government policies. And because they want to continue doing business with China, they will continue to do business with China as long as it makes economic sense. They (and I) realize we will not exactly return to the way things were, but there are many good reasons for continuing to do business with China.
- Chinese government incentives for foreign companies are just too good to pass up. China continues to incentivize foreign companies in unprecedented ways to set up shop in China. This is such a timely and large component that I am saving it for a future blog post. So stay tuned.
This list is not exhaustive, but I hope it reminds you that China is not going away any time soon. Even if the CCP crumbled this year and China descended into chaos, those 1.4 billion people will not disappear overnight. The smartest play is to continue engaging with China where it makes sense while always being mindful to mitigate the risks. On this, nothing has changed. Conduct due diligence, use good contracts to manage your relationships, protect your IP, and constantly evaluate your business situation.