Monday, 6 July 2015

Mighty China’s Tenacity: 
Entre the Dragonomics (Part-II)

It is somewhat known that much of China’s long held double digit growth has been internally driven. However, current single figure GDP growth has in part been due to global economic conditions. And although its GDP per capita ranks around 90th in the world ($4,200 versus $24,000 in the US); by the end of this decade, GDP per person in Shanghai, could be almost the same as the average for America back in 2009.

In the face of this, Beijing is determined to continue with its unprecedented infrastructure developments. Bear in mind that less than a third of China’s infrastructure has only begun modernization. Many hundreds of millions of people and vast territories have yet to be brought into the 21st century technological fold. And that is the key point: China is still a rapid development nation. Urbanisation and internal migration is a massive matter within China looking at the unparalleled numbers. And there is a considerable economic tailwind from urbanization.

Shanghai’s trade and finance zone, for example, is home to 51 skyscrapers. A new skyscraper is built every five days across China, and by 2016 the country will have 800 sky kissers, four times the number in the USA. Five of the world’s 10 tallest buildings are already in China; but construction on more than 200 skyscrapers have begun in 2012 alone.

As for mass transit projects nationwide, China has approved 25 new subway projects, including five projects in Shanghai. Second-tier cities such as Xiamen in Fujian Province and Taiyuan in Shanxi Province are also developing metro lines.

By 2020, 40 cities in China will have subways covering a total length of more than 7,000 km, 4.3 times the current length. A total of 13 new highway projects were also approved recently, covering a total distance of 2,000 km. Municipal governments will be spending approximately ¥10 trillion ($1.57 trillion) on these new infrastructure projects until 2016.

And if you think that is extraordinary, as I write, the world’s tallest building is Dubai’s Burj Khalifa; taking five years to reach its 828-meter height. However, by the time you read this, a Chinese firm called Broad Sustainable Building (BSB) would have left the Dubai structure in the sand by erecting a taller 220-storey Sky City Scraper within 3 months.

Despite its gargantuan size, the building is designed to use one-fifth the energy of a traditional edifice (its 6-inch-thick walls and quadruple-glaze windows provides better insulation). When it is complete, 104 elevators will connect 220 floors and 1 million square meters of usable space.

This magnitude of attitude and scale pours into the city of Beijing’s underground metro system as well. 20 years ago, Beijing did not even have a Tube. Today, it has the largest subterranean train system in the world, achieving in twenty years what London (the first underground railway) has not achieved in one-hundred years. The government also wants the high-speed railway network, already the world’s longest at 8,300kms, to quintuple in length by 2015.

As of 2011, there were 21,638 general hospitals in China. With a recent announced of the construction of 20,000 new hospitals (2,000 county-level hospitals, 29,000 township hospitals and upgrading of 5,000 township hospitals).  The government will also finance the construction of village clinics in remote areas so that every village will have a clinic in the next three years. In addition, 3,700 community health centers and 11,000 community health stations would be set up or upgraded in cities.

China’s economy is so colossal, and its weight to the world so great, that it is easy to forget the country’s property market is still in its adolescence. Two decades ago most city families were relegated to rundown accommodation provided by their state-owned employer. Today, 36 million new affordable housing units, more than Britain’s entire housing stock, is under construction in Beijing. The idea being, affordable homes makes it easier for the Chinese to get into the housing market (are you listening and learning London, New York, Madrid?).

Clearly increasing city life means increasing numbers of middle class. As an example China will be the major contributor of new business and tourist travelers. Of the worldwide 800 million new travelers expected by 2014; 360 million (45 percent) will travel on Asia Pacific routes and of those 360 million 214 million will be associated with China (181 million domestic and 33 million international).

Civil aviation in China is anticipated to grow at 11 percent per annum till 2015, requiring a total of 1,100 new aircraft. And it is perhaps no surprise that Chain’s private aviation sales increased by 400 percent in single year. US-based Gulfstream and Dassault Falcon are boosting their presence, as Chinese executives become aware of the benefits of travelling in their own aircraft.

Luxury seems to be on the mind of China’s rising middle classes. Art, jewellery and antique investments among HNWIs has driven up prices. China has overtaken the USA as the world’s largest market for art and antiques, representing 30 percent of the global market versus 29 percent in the USA. Diamonds and gold outperformed the market again in 2012 with a 19 percent price increase from the previous year. Chinese HNWIs are clearly motivated to acquire investments of passion by more than financial considerations; however, such investments will continue to play a role in HNWI-portfolios going forward, especially for HNWIs seeking investments with a low correlation to global financial markets.

China continues to drive luxury growth, with forecasts of an up to 22 percent boom. Luxury sales in China exceeded $257.73 billion in 2012. As a matter of Ferengi fact, Prada’s president, Patrizio Bertelli, said China would soon to be the world’s largest consumer market of luxury goods. So Prada boldly opened 18 retail stores in the Asia-Pacific region in 2011, eight in China. And Bain & Company analysts show that leather accessories, jewellery and watches are the most dynamic markets of all. Prada, Coach, Samsonite and L’Occitane have all seen sturdy sales growth in China recently. In the first three months of 2012, Coach’s sales revenue in China increased 60 percent from the same period in 2011. Lew Frankfort, CEO of Coach, said the main objective was to increase its brand awareness. Raising capital from the markets was a relatively easy second, he said.

And for you on the fly executives, Samsonite saw its sales income in China jump 57 percent in 2011 compared to 2010; making China its largest international market for handheld up-market plastic sacks (it is all in the Brand, see chapter-29 GigaBrands!)

You would think that this kind of premium souk would rage in the regions like Dubai or Monaco (it is, and more!). But word spreads like quick silver these days in the modern Orient. It seems that the impact of the so-called Great Firewall of China is obsolete: China is connected. With over 600 million Internet users, Chinese entrepreneurs and consumers are a frenetically nourished global consumer culture from high-end Roll-Royse luxury to high-tech supergadgets to √©lan sportswear brands. Hence, the world’s fastest Smartphone ‘Ascend D Quad’ was launched in early 2012 by high-tech Huawei; being first quad-core Smartphone, featuring a 720pHD touch-screen and an 8 megapixel camera.

In sportswear brands it is similar story. Li Ning launched its US retail website in March 2012, heavily branded with the slogan ‘Straight Out of New China;’ featuring a number of high-profile endorsements.  In fact, a fanfare end of the month promotion for special-edition ‘Year of the Dragon’ shoes caused their site to crash due to demand.

Chinese tech known no bounds. Chinese consumer electronics giant Haier demonstrated their ‘Brain Wave TV’, which allows users to control the action on their TV sets using their minds. The experimental technology was showcased alongside consumer-ready innovations such as 3D TVs with 2D to 3D conversion. And at the popular China International Fashion Week, the luxury brand NE-TIGER established what they call a ‘universal triumph;’ showcasing designs that reflect a transient Chinese-Western tradition and heritage. Hence, China’s impact on worldwide consumer tastes and trends is set to lead the world bearing in mind the numbers and international ambition. Expect East Asian savor and penchant to wield ever-more sway on American, European; and yes, African shopper tastes and cravings.

And the fact that most of these exports involve processing or handing goods: products imported into China, then tinkered with and sold overseas without much value-added. The export of commodity goods such as low-cost apparel or basic engineering components is incredibly high in volume. And that is where the majority of export value is made. However, as above, China intends to change that to higher value-added export trade arenas.

Avionics exports, for example, are potentially a colossal market for China (re above traveler figures). With such a surging legion of billionaires and swarms of millionaires, China is the fastest-growing market for Airbus corporate jets, with major options on aircraft over the next five years alone.

Comac (Commercial Aircraft Corporation of China) is currently developing the largest commercial airliner in Asia: the C919. A range of 168-190 seat airliners, expected to take maiden flight in 2014, with deliveries scheduled for 2016. Design and assembly of the aircraft will be completed in Shanghai using European and American technologies, including undercarriage systems, Michelin Tires, jet-turbines and flight control equipment. Eventually, China intends to produce a home grown jet-engine for the C919 by 2020.

Ireland’s Ryanair has had discussions with Comac about the purchase of the aircraft, signing an agreement to help develop the aircraft. Ryanair will share experience and expertise to assist C919 development. The target is to push the aircraft up to 200 seats, enabling Ryanair to lower costs.

Forget the ‘Made in China’ stigma. It should be clear by now that ambitious and confident Chinese brands and high end technology, is already catering to demanding consumers and commercial customs not only at home; but increasingly abroad.

And then there is inbound trade to China, which is the USA’s third largest export market; totaling a record $103 billion in 2012; trading chemicals, electronics, agricultures products, computer systems, transports equipment.

The USA and the EU for example has not, and certainly do not in the future intend to compete and export on mere commodities alone. In fact, commodities exports are a fraction of the total. Basic material and products exports are indeed prone to current exchange fluctuations, whether demand based or politically found. In the face of this, the EU in particular, especially the United Kingdom and Germany, intend to export higher-and-higher value goods and services in the future.

Boeing, for example, forecasts that China will need 5260 new commercial aircraft, valued at $670 billion over the next 20 years. China is forecast to be the second largest market for new commercial aircraft (after North America), as Asian travelers are beginning to care more about connectivity, efficiency and lower prices. Over 75 percent of Chinese demand will be new growth, rather than replacement or upgrade.

In fact, total global carrier demand will acquire in the region of $4 trillion worth of aircraft over the next 20 years, seeking more efficient models to offset elevated fuel prices and meet unyielding demand for journeys to and from emerging nations.

In roads to trading with China, on the other hand, have had many sticking points in the past. However, many industries such as telecommunications, low-energy lighting and solar-energy industries are beginning to open (re FYP above) to both foreign investment and the import of certain technologies. Two government policies may help assist in the penetration and eventual growth in import to China. First, technology transfer from foreign sources in return for market access; and second, harmonized R&D investment (re Ryanair above).

Knowledge and skills exchange has always had good negotiation leverage in business, and there is no reason for why China should not continue to engage here. For a start, Europe has incredibly advanced engineering craft, even esoteric skills that some may find hard to decipher. The UK, for example, has some of the best automotive engineering skills in the world. The majority of high-end performance car R&D is carried out in the UK (think Formula-1), ranging from the obscure meta-materials, to cryptic and ingenious engine design, to profound mechanical systems assembly and integration techniques. And then there is the US, with the best commercialisation and marketing skills in the world. So the west has the know-how and commercial skills; China has the markets. Good old fashion Quid Pro Quo.

Yet, modern China, like India, has yet to experience a true high-tech innovation revolution. Mainly they employ incremental innovations based on technological transfer and will need time to evolve to one where breakthrough and disruptive innovation is common.

This is because the mechanics of technological evolution is rather more complex than one might think. To use a metaphor, genuine breakthrough innovation is a bit like planning and then planting and nurturing a garden. You can train for technique and method and process, but China will take time to grow its transformational innovation capabilities. It takes time and effort to develop such new industrial complexes!

However, low-tech manufacturing ecologies – or Shenzhen as it is known in China – are at a point suited for simpler, lower complexity product innovations. What the Shenzhen systems offers is three decades of practice in making electronic systems through a network of manifold engineering skills, highly developed supply webs, acute experience of production processes and an eagerness to scale up production quickly. Apple iPhones, for example, are made via the Shenzhen program, as many of the electronic parts and assemblies utilise simple components and assembly and test techniques. The real trick in such systems innovation lies in conceiving the design and generating elegant software in the first place; which is a specialty of another successful Shenzhen, Silicon Valley.

Shenzhen network is an essential element of China’s international competence in manufacturing. It counts over 100 industrial network clusters in China; consisting of more than 3,000 small and medium-sized enterprises in the production chain. As long as China’s clusters maintain their edge, these jobs, whether producing iPads or socks, will not easily go back to America or Europe, even with the advent of US and EU instant production and cobot technology.

To maintain this edge, China needs to import not only hard, implicit knowledge, but tacit craft and scientific analysis skills. China may turn out 10,000 scientific and engineering related PhDs each year, but a degree, as advance as it is, does not transfers with it mature hard-earned scientific or engineering hands-on-know-how (I know! I’ve been a design engineer for over 30 years, and I still think I am scratching the surface).

Hence, for archetype, high-tech innovation to become integral to Chinese culture, it has many obstacles to climb. Another being a culture of obedience and observance to convention and prevailing rules. Risk taking, and positive conflict and confluence of ideas is an absolute necessity for innovation, which is much tempered in China. In many Chinese firms, traditional management systems and cultural barriers hold back such creative collaboration.

And that a big hurdle, as in the recent FYP makes clear that the emphasis must be on indigenous innovation. Hence, Chinese authorities now view innovation as critical to both the domestic economy’s long-term health and global competitiveness of Chinese firms. Innovation is right up the agenda. And the signs are there, as China’s proportion of global patent activity has doubled since 2005; where wind and solar-power industries feature heavily. In 2010, China obtained 1,652 US patents against the EUs 587 (telling!).

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