A recent report mentioned that in 2006 more than 108 publicly traded companies in the U.S. are making 5% or more of their revenue from Chinese markets, the number is up 145% from 2001. Why is that? It's because even as recent as 1998, 33% of all multinationals were not profiting in China, and another 25% were barely breaking even.
Apparently, within a decade's time, the situation is a complete reversal. In 2006, over 80% of businesses said that their China operations were profitable. What caused this change, and why should businesses and shareholders be more aware about the Chinese market?
1. China's growing consumer market.
Here's one for you. The key difference between China and Japan is not their trade balance with the US, but rather the possible expansion of Chinese consumption. Although the unforeseen growth in the Chinese economy (+11% GDP) is thanks to its export market, internal development of consumption and investment should foster sustainable economic growth in the long run, and that is where China and Japan differs. Japan, as with other developed economies, have above 50% in private consumption as a percentage of GDP, whereas China has less than 40%. Given the size and capacity of the Chinese market, I think this means more room to grow rather than a setback.
As aptly put by the VP of operations at AstraZeneca plc (NYSE:AZN), David Smith, "[China] is an emerging market, but it's also a market of huge scale. It's a mixture of two worlds." The company expects China sales to grow by 25% this year as China becomes its the 3rd largest market, although AstraZeneca currently makes less than 2% of its revenue there.
Nonetheless, other multinationals also see potential in China, such as Yum! Brands, Inc. (NYSE:YUM) (parent company of KFC, Pizza Hut and Taco Bell) and Intel Corporation (NASDAQ:INTC), both of which see China as their greatest growth market.
Who can ignore Chinese market for cellular phones, the largest in the world, and China's demand for personal computers, cars and commodities such as mineral ore, oil and precious metals? No wonder companies from Nokia Corporation (NYSE:NOK) to Rio Tinto plc (NYSE:RTP) can't get away from China.
2. China's integration with the whole world
Another important fact is China's 2001 entry into the WTO which opened the Chinese market, as transparent as it may be, to the whole world. This helped bolster a positive cycle upwards: with more interaction, per-capita income tripled in less than a decade, as well as significant increases in consumer spending and demand for commodities.
Even to companies that have no interests in China, China's growth has increasing importance to the welfare of the global economy, and is expected to contribute more to international economic growth this year than ever before.
China is coming to your doorstep whether you like it or not. Is your business ready to embrace the change?
Comment Preview