The New China and International Business

1. The New China and International Business Gary Knight Fellow, Academy of International Business Professor and Helen Jackson Chair Atkinson Graduate School of Management Willamette University Salem & Portland, Oregon, USA April, 2019

2. The most populous country, with 1.4 billion people • The second largest economy, and growing fast • Per-capita GDP of $10,000 (nominal). The middle class exceeds 300 million people, with average annual income over $15,000 • Huge market for cars, food, luxury goods, and many other goods. • Government plays enormous role in business China Overview

3. Hofstede Culture Dimensions: China & US 3

4. Leading Countries in International Merchandise Trade, by Total Annual Value Total annual value of products trade (exports + imports) in billions of US dollars

5. Leading Countries in International Services Trade, by Total Annual Value Total annual value of services trade (exports + imports) in billions of US dollars

6. Total Contribution to World GDP, 2015 to 2020 Source: Based on International Monetary Fund, World Economic Outlook Database, www.imf.org, 2018 6

7. China: Recent GDP Growth Rates, % A rate of 6.5% in 2018, while excellent by world standards, represents the lowest percent in China since about 1990. China’s economy is slowing for several reasons: -- Aging population, resulting in a declining labor pool -- Lower inward investment and softening entrepreneurship -- Chinese exports slow as global economic growth softens -- Trade tensions with the US and other countries 10-7 7

8. China is a mix of entrepreneurship and government control. The government leverages business while exercising control to reduce undesirable outcomes. • Abundant low-cost labor is a big advantage, supported by a strong K-12 education system • Inward investment and massive exports have fueled the economy, providing enormous capital • Strong societal cohesion and general consumer optimism • China will become the world’s largest retail market in 2019, which holds the promise of new opportunities (and challenges) for foreign firms. Business Environment

9. Total Annual Retail Sales, China & US, $trillions China United States Sources: eMarketer and P. Davidson, “China to top U.S. as world's No. 1 retail market in 2019: Report,” USA Today, January 23, 2019, www.usatoday.com 9

10. Pyramid of Chinese Cities Percent of Population 4 cities In terms of GDP, many Chinese cities are huge. Examples: CityGDP (PPP billions) Shanghai $860Beijing $800Shenzhen $650 Guangzhou $620Chongqing $570 Tianjin $550 Suzhou $500 Tier 1 New Tier 1 Tier 2 Tier 3 Tier 4 & 5 5% 11% 14% 70% 15 cities 30 cities 70 cities 531 cities

11. Chinese Cities Tier 1. Typically 12m+ population; most developed markets. Four cities: Beijing, Shanghai, Guangzhou, Shenzhen New Tier 1. Typically 3m+ population; 15 cities, often provincial capitals. E.g., Chengdu, Hangzhou, Wuhan, Chongqing, Nanjing, Tianjin, Suzhou, Dalian, Ningbo Tier 2. Typically 1m+ population; 30 cities, lesser known. E.g., Xiamen, Fuzhou, Wuxi, Hefei, Harbin, Foshan Tier 3. About 70 cities. E.g., Weifang, Baoding, Yangzhou, Guilin, Tangshan, Sanya, Huzhou Tier 4 & 5. About 571 cities. 11

12. One Belt, One Road Initiative • China seeks to extend its presence in various countries – especially in Asia, Africa, and Europe – through a China-centered global trading network. • Aims to increase capital inflows, ensure access to needed resources, and develop technology and the talent pool in China. • Some critics see it as a push by China for dominance in world affairs through development of a China-centered global trading network. • The central government in Beijing aims to promote what it sees as China’s rightful position in the global economy and in world affairs. 12

13. Key Trends • Growing middle class • Rising disposable income • Rapid urbanization. About 50 cities in China now have more than 10 million people each. • Aging population (with associated opportunities and challenges) • Transitioning from a manufacturing to a service economy • China’s central government is promoting: -- development of domestic consumption -- greater market openness for inward FDI and international trade

14. China: Retail Consumer Market • Nearly 1.4 billion consumers; half are in cities. • Numerous regional consumer markets, with distinctive characteristics. • The world’s No. 1 or 2 market for cars, motorcycles, cell phones, luxury goods, electronics, appliances, bikes, shoes, and various commodities. • Buying is strongly influenced by group behavior. Consumers make decisions based on what is best for their family, including the extended family. • Successful retailers leverage strong capabilities in mobile phone platforms, including WeChat and payment apps. WeChat is used by 700 million Chinese for everything shopping-related.

15. China and Technology • China is the most advanced nation in mobile telephony • China’s digital ecosystem is highly integrated across e-commerce, payments, social media, video streaming, and search engines • The Chinese use QR codes on their phones for all variety of purchases. Chinese has effectively leap-frogged credit cards, and gone directly from cash to QR technology. Many Chinese have stopped carrying cash, and use their phones instead. WeChatPay and Alipay are major platforms. • WeChat has 700 million users, and is used for everything.

16. Percent Who Do E-Commerce Via Mobile Phones: China and US Sources: Criteo, iResearch, eMarketer, C. Biggs et al, "What China Reveals About the Future of Shopping," Boston Consulting Group, May 4, 2017, www.bcg.com

17. China: Top Technologies for Retailing Source: Brad Loftus et al, “To See Where Retail Stores Are Heading, Look to China,” Boston Consulting Group, September 7, 2018, www.bcg.com

18. Challenges Bureaucracy, red tape – much government regulation and burdensome rules. Corruption – especially cronyism, officials profiting from their positions, bribery, kickbacks, misspending of public funds Evolving rule of law – regulation and laws can change quick; enforcement is inconsistent Various restrictions on FDI – formal and informal regulations hamper inward investment activities. Government intervention – the federal and provincial governments intervene enormously in business. Intervention is often unpredictable and hasty, a big added layer of uncertainty for firms doing business in China. 18

19. Challenges, cont’d Weak intellectual property laws Trade tensions and rising protectionism Poor physical infrastructure – in roads, sewers, electrical utilities, telecommunications, etc. Partner availability and qualifications – local partners are often needed, but qualified partners may be hard to find. Rising labor costs – increases the cost of doing business. 19

20. Seizures of Counterfeit Goods at US Ports Source: CBP Office of International Trade (2018), Intellectual Property Rights Seizure Statistics Fiscal Year 2017, Washington DC: U.S. Immigration and Customs Enforcement

21. Main Sources of Counterfeit Goods Source: CBP Office of International Trade, 2018, Intellectual Property Rights Seizure Statistics, Washington DC: U.S. Immigration and Customs Enforcement; OECD, Counterfeiting and Piracy, www.oecd.orgfc; and www.statista.com