Thinking About China Going into 2011

China has been on the minds of western business executives for several decades. The upcoming change of the calendar shouldn’t bring about any dramatic changes in their thinking, but we believe there are some subtle aspects to the evolution taking place that should be recognized going into 2011.

The first of these changes is going to generate anti-China sentiment. The second is going to require firms to rethink what globalization means and how their firms get beyond just being able to arbitrage low cost country advantages. And the third change will reward the firms that can at the same time accept and address the first two changes without abandoning a market that will inevitably define their future position.

1.  Constant change in China will continue to challenge assumptions. A short while ago, it was reasonably accurate to characterize China as the land of low-cost manufacturing. Increasingly, China has become the growth market standing above all others. In the future, China will become the source of your competition in western markets: the fountain of innovations that combine with low-cost manufacturing to challenge the status quo in many industries. If you are in one of the industries that China’s government has identified as their route to a stronger position in global markets, this change will soon dominate your firm’s strategy discussions. And as one more provocative thought, if you’re in an industry that is struggling with profitability, think about how quickly China economics might be transformational on the global stage.
2. China’s cost structure will evolve to the point where you begin to think about other locations for manufacturing. This is especially true if your operations require a presence on the eastern coast of China or demand skills like English language competency. Average incomes in China have been doubling every six years or so for several decades and new labor regulations have raised the costs of employing workers even more over the past couple of years. The growing demand from Chinese consumers and global customers will begin to drive up Chinese labor costs. For many firms, this evolution should and will motivate an assessment of other manufacturing locations, including in some instances a return of operations to U.S. locations. The highly-developed east coast has seen the hottest labor markets, different from other geographies where hundreds of millions lower-skilled people in the countryside are still waiting to be transitioned into formal employment.
3. You must be in China. Going forward, China will join the U.S. as the two country markets in which any global firm must be present and a significant player if they are to be a global leader. And this statement is true even when Europe is (appropriately) viewed in aggregate as opposed to a collection of country markets. And, between China and the U.S., China will be the unambiguous growth leader, accounting for a substantial portion of the growth in global GDP. A firm that fails to participate in the larger China market (as opposed to only participating in the high-end niches of the China market) will eventually fall by the wayside in terms of their global position.