Archived report: this report was archived September 2005 and has not been updated. In late September I travelled to China to experience, first-hand, some of the exciting new developments in this, the largest country in the world. My last visit had been 15 years ago. I am sure that most people outside China have little comprehension of the mind-boggling pace of change, not only economically, but socially as well. In 2004, the Chinese people are far friendlier, more open and socially engaged. China is rapidly changing from a global market to a global power and this will have farreaching consequences for global competition. The question is whether the rest of the world, and our industry in particular, is ready for this tsunami?
2. BUSINESS TRIP
Louise and I travelled mostly by train in the provinces of Jiang Su and Zhejiang, between Shanghai, Nanjing, Suzhou and Hangzhou, and we also visited the historic towns of Zhouzhuang and Wu Zhen. None of these cities are much further apart than a couple of hours by train.
Apart from a very keen personal interest in the developments in the Central or Middle Kingdom, as the Chinese call their country, I was further motivated to have a closer look at this market since we now also have local Chinese customers to our research services. In the past we only serviced Chinese companies through the various western management consultancy companies, who were doing most of the international business developments for the Chinese.
Very much in line with other business trends, more and more Chinese companies are now ready to take over this role themselves. However, from my western viewpoint, I believe that the Chinese still have some way to go in this respect. I am fascinated, and feel honoured to be able to play a role in this process via our research activities. The communication process with my Chinese customers is an interesting part of this development. Getting to understand and to know each other better; explaining our business concepts and learning about theirs. Successful communication can sometimes be quite a challenge. And at our office we are still not quite used to the bargaining process that Chinese people would like us to become involved in when buying our reports.
Another interesting observation here is that, up till about 18 months ago, the Chinese companies were mainly interested in research about the developing countries (Africa, Eastern Europe, Latin America). While this is still generally the case, they are now becoming increasingly interested in the more developed markets of the USA and Europe as well.
3. FIRST IMPRESSIONS
3.1 EQUALLING WESTERN DEVELOPMENTS
I am sure that most people outside China have little comprehension of the mindboggling pace of change - not only economically, but socially also. It is all happening so incredibly fast, but it is critical to keep abreast of these developments as they will have a profound impact on all of us. In comparison with my last trip, 15 years ago (Beijing), the Chines people are far friendlier, more open and socially engaged. There are department stores after department store, and plasma screens are leaving the shops as quickly in China as they do in the West. All the high-fashion brands are represented in every single shopping centre, not just in Shanghai but also in Suzhou and Hangzhou. In general, you will be able to find any product that you can buy in New York, Singapore, London or Sydney.
Having said this, the area that I visited (Yangze and Pearl River deltas) is the most prosperous region of China and, as such, shouldn't be seen as the yardstick for the whole country.
A side effect of the boom here is an NPL (non-performing loans) crisis, not dissimilar to the dot.com crash. Thousands of entrepreneurs received loans for all sort of business plans, many of which failed to deliver results. This has left the Shanghai financial industry, where most of these loans originated, with a severe headache. Slow financial reforms and a legal system that is not up to scratch to safeguard these processes are all being used to place the blame elsewhere. The upshot is that the distressed assets are selling for rock-bottom prices, providing the foundation for others to do a much better job.
3.2 COMMUNISM AND DEMOCRACY
As will be discussed below, China's 'wirtschaftswunder' is done the Chinese way, based on communism and autocracy. One could argue that this has served China well; however, the Tiananmen Square massacre has demonstrated that a more educated and wetitlehier society is beginning to question its leaders and will require social reforms and a larger participation in the decision-making process. It is, however, remarkable to notice the social and economic changes since 1989, clearly Tiananmen had sent out a message to the Chinese leadership.
Given the recent political changes at the top, with the younger (61) Hu Jintao now firmly in charge of the country, the regime might become slightly more benign, but it is far too early yet to see signs of any changes that might lead to greater political freedom and better social welfare. The Chinese people I talked with all spoke highly of Hu Jintao and foreshadowed important positive changes under his regime. In Hong Kong, people were more cautious, as they are expecting a tightening rather than a loosening of Beijing's grip on their territory.
While in China, a delegation representing the Dalai Lama was discussing/negotiating the political situation in Tibet with the Chinese Government. Hu Jintao was in charge of Tibet between 1988 and 1992. The fact that the Tibet meeting had been in progress for several weeks was seen as a positive sign.
3.3 CHINA WANTS TO BE TAKEN SERIOUSLY
In this fast-growing era it is very important for China to be taken seriously. It doesn't just want to sit there and be told what to do and what not to do. It clearly wants to be treated as an equal partner, with equal input on international issues. The problems in the past have often arisen from a lack of communication. Slowly but surely, here also the people involved are learning to communicate with each other. The superior attitude hitherto displayed by the west is slowly changing to make room for proper dialogues, and China is coming to understand that it can't just sit on the sidelines and complain that it is not being taken seriously. The Chinese people realise that they will have to work equally hard in this communication process. They must put systems and people in place to become involved in the many international platforms that have been set up in the past, when they were not interested in participating in a dialogue.
In the telecoms market this, of course, revolves around the creation of standards. The 3G issue is a case in point. China didn'r like to be told that they had to follow the 3G developments that the other countries had already embarked upon, and they threatened to come up with a standard of their own, TD-SCDMA.
However, it was not until 2003 that China started to set up its own standardisation organisation, the Chinese Standards Institute, under the Ministry of Information Industry (MII). This has now been broadened into a new organisation, CCSA, which, since 2004, the private telecoms industry can also join.
This organisation provides China with an excellent platform to become actively involved in the international standards-setting process.
What I didn't realise was that this socialist country doesn't have free education and hetitlehcare. At present all services have to be paid for, but social reform will soon be demanded by a more engaged population, which is now in a position to look beyond the basic necessities of life.
During the economic boom hetitleh and education in most of rural China has actually deteriorated. I understand that these issues are currently on the top of the political agenda in Beijing.
Another 'surprise' was the traffic. When the travel agent in Australia told me that I couldn't rent a car to drive around in China I thought that this was some sort of a government restriction on foreigners. However, I have seen chaotic traffic in India and Italy, but China certainly beats them. Unless you are a very seasoned visitor to China driving a car over there would be tantamount to suicide. I also think that the Chinese pedestrians deserve a bravery award for crossing their roads.
3.5 BALANCED REGIONAL/CITY DEVELOPMENTS
The communist element of the current developments also aims at achieving a reasonably equal spread of development throughout the country, not just on the eastern seaboard. This is a major difference between India and China. India might also have a middle class of 200 million but the average person in that country is worse off than in China. As a matter of fact, China is now used as a benchmark by international bodies in relation to national development.
However, China's agricultural central and western provinces are still lagging significantly behind the seaboard ones. The use of technology, in particular, in all aspects of life is very low in these areas. While I was in China a delegation of business and government representatives from the mid-western states in the USA were on a trade mission in central and western provinces in China, establishing trade and development relationships to address some of these issues - an example of how economic regional and rural development and trade can work hand-in-hand.
Nowhere, however, did I ever receive the impression that communism had a negative effect on the people. I had many political discussions (Taiwan which, of course, is called a Chinese province on the mainland; Tibet; Cultural Revolution) and they were all animated, critical and open, with no fear of repercussions.
What I did miss was a good choice in overseas newspapers and news TV channels. The China Daily and Shanghai Daily are the only English language newspapers I could buy, and then only in hotels and airport lounges, not at the newsagents. And the information available in these papers is very limited indeed.
China's open communist society is in striking contrast to the one that existed in Russia and the eastern European countries when I visited them under the communist regime. I remember a discussion in the 1970s in Novgorod, Russia, where we could only discuss politics in the car, when driving, and with the windows closed. And I couldn't drop off our Russian friend close to his house, as he was afraid that his neighbours would see him in a western car!
Chinese people under a communist regime are critical of their own government and complain as much as we do in the democratic countries. As a matter of fact, community, business and local issues are all based on democratic processes. However, to my surprise, the Chinese people I spoke with were unanimously behind their government in relation to Taiwan, and I made sure that I got good background information from them on the reasons for this. I surely can understand their position. On the other hand, an interesting cartoon in one of the (English language) newspapers in Hong Kong showed a picture of the democratic elections in Indonesia with embarrassed Chinese people looking on!
Prior to my departure I had read the book '1421' by ex-UK navy captain Gavin Philips. In that year one of the world's largest flotillas left China with the order from their emperor, Zhu Di, to explore the world. As many as 1,000 ships with over 18,000 people on board - including the concubines of the top military leaders, as well as separate water tankers, grain cargo ships and live animal transport ships for hundreds of horses and cattle - were part of this so called treasure fleet, a logistical marvel by any standards. And evidence is building up that various sub-expeditions from this massive exploration circumnavigated the globe, visiting places such as Antarctica, Greenland, Australia, New Zealand, South America and North America, decades, and in some instances centuries, before the Europeans. The expedition took place under the leadership of eunuch admiral Zheng He.
Many of the thousands of the Chinese and their allies from India, Japan and Korea ended up on foreign shores, as less than 10% of the expedition made it back to China. More and more remnants of these settlements are now being discovered and DNA research indicates that these Chinese visitors mingled with the local population. Unfortunately, this happened at a time when dramatic changes in Chinese foreign policies started to occur. After a disastrous fire in that same year, shortly after the flotilla left, in the just-opened Forbidden City, the following rulers of China closed off China from the rest of the world, perceiving the fire and the consequent collapse of the empire to be a punishment from the gods.
And when the expeditions came back home in 1423/1425 the new rulers ordered the burning of the logs, maps and other materials that these ships brought back from their travels. They depopulated all coastal areas to make sure that no contact could be made with foreigners and it is only now, 600 years later, that China is beginning to titleer its traditional isolationist policy.
More and more evidence is now emerging that confirms China's earlier status of global superpower. I am sure that we will hear more of this earlier period of global glory in the decades to come.
5. CHINA, THE RE-EMERGING SUPERPOWER
With staggering growth over more than 15-years, China is now re-emerging as a world power.
Despite government attempts to slow down the economy, recent estimates during my discussions with the various business people were that growth for the year was still happening at around 9.7% (the government argues it will slow down to 7% in 2005) and most economists agree that between 7%-10% pa seems to be around the natural growth percentage for the foreseeable future.
I don't have to tell you what this means for the global economy. The country will soon become the global economic engine. China is no longer a huge market for a range of new products ?it is also very much a global power and will start competing, not just with overseas companies operating in China, but also in the home markets of these companies.
With one-fifth of the world's population, three times the size of Western Europe and almost five times that of the USA, the economies of scale for manufacturing companies in China are greater than anything the world has ever seen, and pose a challenge to competing manufacturers in all developed economies. The textile and toys markets around the global are already finding this out, big time. Telecoms and IT will follow suit. But anything to do with manufacturing will encounter Chinese competition and I was told that services will follow soon.
If China's growth rate continues, it will overtake the USA as dominant economic power before the middle of the 21st century. This century will be the Chinese century. The pace of economic change is, in my opinion, much faster than in, for example, in Eastern Europe (after the collapse of the Berlin Wall) and in my opinion China will rapidly surpass some of the economies in those parts of the world (measured per capita GDP). For the 200 million strong middle class, I would say that the economic living standard (not lifestyle) would be very similar to most western people. And an estimated 5%-10% annual growth is expected for this marker segment.
China's emergence as a world superpower is having an impact on the Asia Pacific region and the world as a whole.
By 2006 the Chinese telecoms market will be worth $US77 billion, comprising 20% of the Asian telecoms market.
6. HUGE NATIONAL CHALLENGES
Apart from regional and rural development, one of the other big problems China is facing is pollution and too hastily organised developments, where corners are cut. Pollution occurs in every area of life. From my own observations, air pollution in Hangzhou was the worst, but water pollution and the rubbish that people throw out or dump along the road is also quite shocking. Noise pollution - car horns in particular - is another major annoyance.
Quality of life is not yet on the agenda of the Chinese people, but at the current rate of development there won't be an easy way back.
Town planning is another major issue. Between the four major cities we visited (by train) there are hardly any natural green barriers ?evelopments are everywhere.
In these trains one passes huge developments. I calculated roughly 10,000 people in some of those developments (eg 150 buildings 12-storeys high, with 20 apartments in each row). And I have easily seen hundreds and hundreds of these developments, all under construction at the same time.
On top of that, there are dozens and dozens of new freeways (8-lanes), new airports, gigantic economic development zones with hundreds of new huge factories, new schools built to cater for thousands of students, and so the list goes on. And the electricity power problems China is presently facing make the recent electricity problems in the west seem like nothing.
The rural population is certainly screaming out for a better social and economic deal. China's history is littered with rural revolts and the government is very much aware of the potential for unrest that still exists today.
Unemployment in some of the cities could be as high as 20% ?and this in a society not used to unemployment. But good people are still very much in demand, especially in engineering, business management and the service industries, where salaries are rapidly approaching western levels.
It will be very interesting to see if the Chinese leaders will be able to control all of these, and many other, processes in a peaceful fashion. President Hu Jintao certainly looks like a more moderate leader in that respect.
7. HONG KONG's FORTUNES ARE CHANGING
I started my trip in Hong Kong and the most interesting observation there in respect of China was that Hong Kong is losing the economic leverage it has had over the last decade or so. China doesn't need Hong Kong any longer to move forward into the global economy.
Many companies in Hong Kong have positioned themselves as gateways for western companies into China, but, while this is still a relevant position to take, change is in the air and premiums are no longer paid for gateway services such as these. I have been told that, in some cases, the Chinese are deliberately shunning companies in Hong Kong, thus undermining the economic position of this territory.
But Hong Kong is not giving up easily and the talents built up over decades will most certainly secure a long-term prime position for Hong Kong in the booming Chinese economy. Hong Kong believes that it will be able to maintain its position as the Chinese face in the international market. However, this time round, it will be on much more of an equal footing with its mainland rivals, Shanghai in particular.
If Hong Kong is anything to go by, this country had three telephones per 100 people (teledensity of 3) in 1960. At that point, South Korea was in a similar situation. Now both countries are among the richest in Asia - both have teledensities of well over 60. And, after Korea, Hong Kong leads the world in broadband.
I am sure you will all be familiar with the iron pit covers in every city street, inscribed with the name of the local telephone company, indicating where the telephone cables are in the ground. Hong Kong was the first place where I saw these lids with the word 'broadband'?also written on them!
8. REPORT: CHINA - ANALYSIS TELECOMS MARKET - LATE 2004
In a separate 12-page report written during my China visit I analyse the Chinese telecoms market.
Table of content:
Structural changes needed for western ICT competitors
Are you ready for the next billion customers
From personal computer to sharing products and services
From mass production to innovation
The Huawei success story
Western countries should stop crying wolf
ICT industry will have to lower its costs
Chinese overseas aspirations
Analysis of the Chinese telecoms market:
Unique communist environment
Four major players
China Telecom ?the good old incumbent
China Unicom struggling to increase market share
Dressing up for the float
Talks with PCCW collapsed (for the time being
The Reach connection
Limited overseas control
Analysis of the mobile market:
The all-important rumour mill
Observations of an insider
Tips for overseas investors and suppliers
My own Q&D market research
The latest on mobile trends
Not much mobile data beyond SMS
The latest on broadband trends
No wireless broadband
See: China - Analysis Telecoms Market ?late 2004
9. OTHER REPORTS
We have a 169-page report on China that you might be interested in: China annual report
For web reports on China see: China web reports
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