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Hao Zhao

Cheung Kong Graduate School of Business

March 2006

The Chinese Market Economy in the First Decade of the 21st Century:Opportunities and Challenges

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World Economic Shares, 2006World Economic Shares, 2006

North AmericaSouth America Europe Africa Asia Australia / N.Z.

35% 4% 28% 1.6% 30% 1.4%Source: U.S. Department of Agriculture

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World Economic Shares, 2030World Economic Shares, 2030

North AmericaSouth America Europe Africa Asia Australia / N.Z.

25% 3% 12.5% 0.7% 58% 0.8%

Source: U.S. Department of Agriculture

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China’s GDP• In 2005, ranked the third in the world, only behind the U.S. and

Japan.

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• China’s foreign currency reserve reached China’s foreign currency reserve reached $818.9 billion in 2005, and $853.7 billion by the $818.9 billion in 2005, and $853.7 billion by the end of February 2006, surpassing Japan to end of February 2006, surpassing Japan to become the largest in the world. (Goldman become the largest in the world. (Goldman Sachs)Sachs)

• China’s trade surplus reached $101.9 billion in China’s trade surplus reached $101.9 billion in 2005.2005.

The Big Picture

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Export Foreign Direct Investment GDP

China vs. IndiaChina vs. India

Business Week

India China U.S.

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The world’s first maglev (magnetic elevated) train in Shanghai （ can reach a top speed of 300 mph in theory. ）

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Very Unbalanced Development

In the western region, many farmers are among the poorest in the world.

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The Not-so-rosy Picture• The top 50 most respected companies in the world:

– 24 from Europe– 22 from the U.S.– 3 from Japan: Toyota (5th), Sony (6th), and Nissan (50th)– 1 from Korea: Samsung (42nd)

• The top 90 most respected companies in the world:– 2 from Brazil (Petrobras(63rd)/Votprantim(63rd)) – 2 from India (Infosys (85th) /Reliance Industries (87th))– 1 from Mexico (Cemex (66th))

--Source: FINANCIAL TIMES/PWC 2002 SURVEY

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Top Brands in the World• Coca Cola• Microsoft• IBM• GE• Intel• Nokia• Disney• McDonald’s• Toyota• Marlboro

• Not a single brand from China among top 100!

(Business Week and Interbrand)

Largest Companies in the U.S and China(Among the 100 largest in each country)

China U.S

Energy 16 11

Manufacturing 17 7

Technology 5 28

Healthcare 2 15

Finance 6 20

Source:Bloomberg 3/01/2006

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• 60 percent of our growth will come from developing countries in the next decade, compared to about 20 percent for the past decade.

-- GE 2004 Annual Report

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Opportunities for Multinationals in ChinaOpportunities for Multinationals in China

• GE’s procurement in China would reach $5 billion.

• Wal-Mart's procurement in China was $10 billion in 2001, $12 billion in 2002, exceeded $15 billion in 2003, and reached $18 billion in 2004.

（ Data Source ： Beijing Daily 2005 － 01 － 15 ）

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Number of Multinationals’ Research Centers Number of Multinationals’ Research Centers in Chinain China

跨国公司在华研发机构数量

6 10 12 2234 44

6585

107 110 119 121

0

50

100

150

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

年份

机构

数

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Basic Facts• Rapid growth of the economy and many markets:

– L’OREAL doubled its sales in 2004 in China.– Alcatel’s revenue grew by 140% in 2004 in China.

• Huge market, but highly segmented– A sizable affluent segment, concentrated in major cities, whose

purchasing power rivals its counterparts in developed countries.– A large and rapidly increase middle class, who aspires to

possess products compatible with their status: cars, latest gadgets, KFC, Starbucks.

– A huge mass segment, practical minded with respect to purchases.

– Rural residents, benefited the least from the economy reform in China.

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L’oreal Sales in ChinaYear 1997 1998 1999 2000 2001 2002 2003 2004

Sales (millions)

182 296 419 448 547 886 1500 3000

Annual Increase

NA 62.6% 41.6% 6.9% 22.1% 62% 69.3% 100%

Resource: L’oreal Group

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Ritz-Carlton• Opened in Hong Kong in 1993 (still a British colony then).• Opened in Shanghai in 1998.• Ritz-Carlton Beijing Financial Street will be open in 2006.• Ritz-Carlton Beijing and Ritz-Carlton Guangzhou will be

open in 2007.• Another one in Hong Kong will be open in 2009.• Intention to open another one in Shanghai has been

signed.• China accounts for half of planed new openings in the

next few years.

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Sony • In 1990s, Sony’s situation in China:

– You either can’t afford it or it is not available.– Sales in 2001, Panasonic $2 billion, Samsung $4 billion, Sony

less than $1 billion.• Perceptions among Chinese consumers: High end• But in 2004,

– Sony’s sales in China reached $3 billion, an 80% increase.– Market share in digital camera and DV: 30% and 50%,

respectively.– Sales are expected to double in 2005.

• In 2008, the Chinese market will overtake the home market of Japan, only behind the American market.

• Key strategic change: reposition to be a mass-oriented company providing a full product line, both horizontally and vertically.– That is, more like its positions in Japan and the U.S.

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Microsoft• Bill Gates visited China seven times in the last four years.• Most comprehensive organizational structure outside the

headquarters:– Microsoft China– Asian Research Institute– Asian Engineering Institute– China Research Center– Global Technical Support Center– China Technical Center

• But, after eight years, sales in China account for a very small fraction of Microsoft’s total sales.– Microsoft has gone through five CEOs in China.

• Piracy has been a serious problem.• Relationship with Government is crucial.

– The image of an aggressive company won’t work in China.• Rely more on institutional customers who can afford Microsoft’s

products.

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Honda• Honda entered China in November 1997.

– Capacity increased to 240,000 in 2004 from 30,000 at the beginning. Its planed capacity was 50,000 by 2005!

– Sales increased by 73% in 2004, compared to the industry average of 15%.

– Profit margin is No. 1.• Targeting decision for a later comer:

– Private owners, (in contrast to institutional owners, which is dominated by Audi).

• Pricing strategy:– Just below competitors’ prices, keep the price steady.– Customers have to be put on a waiting list.

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To Enter or Not?• Except in very special occasions, the answer should be a

resounding YES!• But the market is getting more competitive, even at the high

end.– Audi has been around for a long time;– BMW has just introduced its China-made 3 and 5 series;– Mercedes will be launched soon (made in Beijing);– So will be Cadillac (in Shanghai);– Lexus just started an ambitious advertising campaign and will be

locally made.– Volvo has been at it (advertising campaign) for some time.

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Entry Strategies: Wal-Mart vs. Carrefour• Chinese retail market:

– Has been growing at a 15% annual rate over the past two decades.– Total retail reached $240 billion in 2004, just behind the U.S. and Japan.

• Carrefour: more aggressive– Sales in 2003 reached $1.8 billion, first among foreign retailers, fifth overall.– Open 15 new stores, bringing the total to over 60.– More international experience: operations in 29 countries over 35 years,

compared to Wal-Mart’s 10 and 13 years.– More localized.

• Wal-Mart: more conservative– Open 10 to 15 new stores in 2005, bringing the total to over 50.– Caved to the government’s pressure by allowing unionization.– Less localized.

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Summary• Advantages:

– Branding: P&G, L’OREAL, – Technology: Motorola, Nokia,– Marketing: McDonald’s, Coca Cola, Luis Vuitton– Organizational structure: run by professional managers.

• Challenges:– Localization strategy: Motorola, KFC, Volkswagen, Philips– Positioning: Wal-Mart– Distribution channel: Dell, HP– Guanxi: relationship with government and other parties.– Cost disadvantage– Intense competition in many markets– Market volatility

• Opportunities:– Red hot economy, lifting people’s purchase power.– Huge market: a gold mine for both Mercedes and Hyundai. – Expansion possibilities beyond a few key cities.– More markets open to foreign companies (WTO): Insurance industry, banking,

investment banking

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Thank YouThank You ！！