China's economy is undergoing a transformation on many fronts. The country is entering a new era of global economic interdependence as more Chinese companies chase overseas markets, while more foreign interests seek entry or expansion in what is arguably the world's most lucrative market. All the while, this market is breeding a new class of Chinese entrepreneurs seeking a piece of the action. Inevitably, these trends are altering China's business dynamics and competitive landscape.
To understand China's changing business environment and to get a reading on what to expect in the future, CHINA ECONOMIC REVIEW spoke to Manoj Singh, Asia-Pacific CEO of the global consulting and financial services firm, Deloitte Touche Tohmatsu, which is undergoing a transformation of its own, having merged in September with Pan-China Schinda, one of the largest accounting firms in Shenzhen. Excerpts of the conversation:
Q: A centerpiece of China's economic reform is to bring the country in line with international standards in corporate governance, financial accounting and transparency. What are the hurdles making it difficult for China to get there?
A: China is in the process of transforming itself at a very rapid rate. Ultimately we expect in the next three to five years there will be 50 Chinese companies that are in the Fortune 500, and what that means is that these companies will have globalized very significantly. The implications of globalization are global standards, global know-how, global practices – and a very key part of that is corporate governance, which means independent boards, transparency and consistency in financial reporting. These are some of the things being embraced by the firms in China. China has 190 leading state-owned enterprises right now, and many of them are going through this global transformation journey. The focus areas are initially in financial services, telecom, energy and certain segments of manufacturing, such as steel. These are some of the areas where you will see corporate governance and transparency. The important thing here is that the Chinese government and the business leaders are very committed to corporate governance and transparency. It's not an option frankly, because if the Chinese are going to compete in the world's equity and debt markets, they have to follow the same standards as other global companies.
Q: What are the short-term hurdles here?
A: The hurdle is all about a change management journey [involving] people, processes and funding. So that means getting people who have global knowledge with the right kind of experience, good middle and upper management with sound business experience – and an adequate number of them. And second, modernizing the processes, bringing in outside knowledge. The third … is having adequate funding – the money needed to fund expansion and investments.
Q: To go global, China needs more recognizable brands. How can they create them?
A: The products the Chinese firms are making – they're being made not just because of their low cost but also because of their quality. They're competing in global markets and if you think about a continuum from being able to produce, to being able to package, to being able to build an identity around it and have distribution channels, the quality of the brand, building the image of the brand is very important because consumers associate that with quality. The better the awareness of the brand, the better price point you can command. China, for all its eminence today, does not have as many strong brands as it's capable of building. [China will need to take] the successes it has had with Haier, Lenovo and use those examples to build much stronger brands.
Q: How would you characterize China's business climate today? Is it getting harder or easier to do business?
A: In some ways it's harder, and in some ways it's easier. It's becoming easier in setting up organizations, getting permits and approvals – those processes have been streamlined quite a bit. The Chinese are getting better at dealing with foreigners in terms of understanding their needs, so it is becoming a more established practice for an MNC to come in, establish a beachhead and look for partners – those things are becoming easier. Where it's getting harder for MNCs coming in … they must understand the Chinese consumer and be able to meet their needs as opposed to selling a product that has been successful elsewhere, so tailoring their products to the local needs and understanding the local market is important. Having people in their organization who understand how to get business done in China is very important too. There's a short supply of those people.
Q: What are the human resources challenges facing China?
A: Human resources challenges are immense everywhere in Asia, and China is at the center of it. What it boils down to basically is when you have an economy growing at 7-8%, you'll have shortages at various times depending on what is hot. And your supply cannot be perfectly aligned with where the demand is, but there continues to be a need for – as I said before – experienced and proven middle-level managers and senior executives. In certain trades, there will be shortages. There's an extreme need in our business for qualified accountants and tax professionals. We're working with the universities in China to get the best students, to bring them in and give them training outside China before we bring them back.
Q: China's FDI inflow has seen some plateauing in recent times. Is China losing its luster? What's behind the trend?
A: China's FDI level is still very, very high, higher in orders of magnitude compared to any other country. I think what you're seeing is, a lot of the FDI has gone into infrastructure and foreign companies establishing plants. I think a lot of companies are trying to get returns on their investment. But a lot of growth in China is occurring through domestic companies as well; these companies are catering to global markets as well as domestic markets. I wouldn't read too much into the slowdown of the FDI. I think it's still at a very high level. Percentage growth could slow, but US$55 billion a year is a lot of money. I think where China is focused now is in developing its own domestic companies and its own domestic markets. The level of FDI might not be necessary. China still has strong fundamentals.
Q: What are those fundamentals?
A: Infrastructure is very important. That is a basic requirement to having a sound manufacturing industry. The other thing is that China is expanding its infrastructure westward from the Pearl River Delta and Yangtze River basin to access more labor at lower cost. They're also cleaning up the non-performing loans within the banks so that will position China with strong lenders with well-established, credit-worthiness policies as well as sound lending policies. There's also a focus in China on applied research and development so that they can be producing products not only very cost-effectively but also looking to add innovation as a component of future production, and that is catching on among established manufacturers. China is making improvements in education and labor, business schools and training – business schools are mushrooming in China; their focus is to address what I mentioned earlier, which is the shortage of mid-level, skilled business managers. Domestic demand is increasing, which is important, because you don't want to be an economy that is highly dependent on export-oriented growth, because you will be at the mercy of other countries.
Q: What are some trends we can expect to see?
A: Country markets are blending into regional markets. We're seeing inter-regional cooperation in cross-border investments and tariffs across these countries are declining or being eliminated. We see a lot of cross-border deals occurring where, for instance, Indian steel companies making acquisitions in Singapore and Korean automotive manufacturers making acquisitions in China. There are a lot of intra-region M&A deals [which] indicate there will be a fair amount of investment occurring among these countries as they figure out how to capture each others' strengths. For instance, Korea has a lot of expertise in supply chain management and manufacturing because of the 10-15 years of lead time they've had over China and India. And there's a lot to be learned there, so these countries are going to learn from each other to capture the expertise.
Q: What types of advisory services are your clients seeking?
A: The areas that we're getting a lot of request for help is in enterprise transformation – SOEs transforming themselves into global companies with sound governance, HR policies, financing and market strategies. We're seeing a need for gateway services for firms that don't have a footing in China; we help them establish a point of entry. Then, there's business optimization, looking at ways to help SOEs and MNCs be more competitive. And, mergers and acquisitions – looking at potential candidates, establishing synergies and structuring the deals and post-merger benefits.