China in face of the global economic crisis Dr. Zhan SU Professor of Strategy and International Business Director of Stephen A. Jarislowsky Chair in International Business Director of GERAC (Research Group on Contemporary Asia)
Faculty of Administrative Sciences Université Laval
Economic Situation of Major Countries
Chinese GDP Growth 12,0% 10,0%
10,6%
10,1% 9,0%
8,0%
8,0% 6,8%
6,0%
6,1%
4,0% 2,0%
1,9%
2,6%
2,0%
1,5%
2,0%
0,1%
0,0% 1st Trim 08 2nd Trim 08
3rd Trim 08
4th Trim 1st Trim 09 2nd Trim 08 09
Chinese Exportation
CPI Evolution
n-
0 Fe 8 b0 M 8 ar -0 Ap 8 r-0 M 8 ay -0 8 Ju n08 Ju l-0 Au 8 gS e 08 pt -0 Oc 8 t-0 No 8 v0 De 8 c-0 8 Ja n0 Fe 9 b0 M 9 ar -0 Ap 9 r-0 M 9 ay -0 9
Ja
%
PPI Evolution
12 10 8 6 4 2 0 -2 -4 -6 -8 -10 8
6,1 6,6 8,1 8,2 8,8 10 10,1 9,1 6,6 2 -1,1 -3,3 -4,5 -6 -6,6 -7,2
Profit of Industrial Firms Titre du graphique
Billion yuams
3000 2500
30,0% 16,5%
20,9%
20,0%
19,4%
10,0%
4,9%
2000
0,0%
1500
-10,0% -27,9% -20,0%
1000
-30,0% 500
-37,3%
0
-40,0% -50,0%
Jan-Feb Jan-May Jan-Aug Jan-Nov Jan-Feb Jan-Apr 08 08 08 08 09 09
Profits
Growth
Measures taken against the global economic crisis November 2008: 4,000 billion yuan over 2 years from the central government ( plus 14,000 billion yuan by local governments?): - Infrastructure: - 600 billion yuan for railways: 6 million jobs, 20 million tons of steel, 120 million tons of cement, 1.5% of GDP; - 300 billion yuans for gaz pipelines, - Roads, highways, water projects, electricity networks,... - Stimulation, innovation and restructuring of ten major sectors (370 billion yuan): automobile, steel, textile, equipment, ship construction, electronics and information technology, light industry, Petrochemicals, metals, logistics.
Measures taken against the global economic crisis - Support for export: financing, reimbursement of taxes, - "Green" projects (210 billion yuan) - Welfare (728 billion yuan): jobs for rural workers and new graduates (42 billion yuan), the social protection system in 10% of rural regions, health, education, housing, … - Support to the agricultural economy (123 billion yuan) - Domestic consumption: -- Grants for the purchase of cars, motorcycles, electric household appliances (1 million cars and 5 million appliances: consumption of 120 billion yuan)
16 14 12 10 8 6 4 2 0
14,7 12,8 11,4 8,3
8,2
8,9 7,3
5,7
5,4
-0 9 M ay
-0 9 Ap r
ar -0 9 M
09
Ja nFe b-
08 De c-
No v08
t-0 8 Oc
Se pt -0 8
08 Au g-
ly-
08
3,8
Ju
%
Industry Production Growth
1796 1689 1720 1722 1645
1712 1764 1542 1531
1385 1410
1575 1531
ar -0 8 Ap r-0 8 M ay -0 8 Ju n08 Ju l-0 8 Au g08 Se pt -0 8 Oc t-0 8 No v08 De c08 Ja nFe b 09 M ar -0 9 Ap r-0 9 M ay -0 9
2000 1800 1600 1400 1200 1000 800 600 400 200 0
M
10,000 Tons
Steel Production 1848
Ja nFe b 0 M 8 ar -0 Ap 8 r-0 M 8 ay -0 8 Ju n08 Ju l-0 Au 8 g0 Se 8 pt -0 Oc 8 t-0 No 8 v08 De J a c- 0 nFe 8 b 0 M 9 ar -0 Ap 9 r-0 M 9 ay -0 9
100 Mn Kw
Electricity Production A
12
10
8 9,35 9,38 9,46
8,62 9,78 10,31 10,2 9,64 8,53 8,47 8,84 8,28 9,14 9,04 9,16
6
4
2
0 9,76
Chinese GDP Growth 12,0% 10,0%
10,6%
10,1% 9,0%
8,0%
8,0% 6,8%
6,0%
6,1%
4,0% 2,0%
1,9%
2,6%
2,0%
1,5%
2,0%
0,1%
0,0% 1st Trim 08 2nd Trim 08
3rd Trim 08
4th Trim 1st Trim 09 2nd Trim 08 09
Is the Chinese economy is already out of the crisis? -The Chinese government can not invest without limit. - The Chinese banks can not always lend generously. - If domestic consumption still does not start? - If the export is not improving? - If private investment is still waiting?
Growth Rate of Investment on Fixed Asset in Urban Areas
Contribution of Exportation and Domestic Consumption to Industry Growth 20 15
16,9 14,9
14,6
14,9
15,8
14,4 12
10
10,9
%
8,1
5 0
0,8
0,9
0,8
1,1
0,2
0,3
0,8
0,5
0,1
6,5
7
6
-1,1
-1,3
-2,2
9,7
8,8
-1,4
-1,5
Ja nFe b 08 M ar -0 8 Ap r-0 M 8 ay -0 8 Ju n08 Ju l-0 8 Au g0 Se 8 pt -0 8 Oc t-0 8 No v08 De Ja c-08 nFe b 09 M ar -0 9 Ap r-0 M 9 ay -0 9
-5
Export
Domestic
10,4
-1,5
Growth Rate of Total Retail Sales of Consumer Goods
Fundamental characteristics of China - A developing country • Still more than 100 million people living in poverty • Current GDP / capita is equal to South Korea in 1985 and Japan in 1963. - A country in transition One thing China is not lacking today are PROBLEMS. But, as long as there is growth… - An emerging key economic player
The Chinese development strategy is put into question … • • • • • •
Growth vs. real gains Growth vs. efficient economy Growth vs. social justice Growth vs. resource constraints Growth vs. sustainable development Growth vs. foreign resistance China doesn’t wish to be simply the “blue collar” of the world anymore …
The determining factors of Chinese rapid growth since 1978 • Introduction of a market system (private firms: over 70% of total GDP) • Government’s power to mobilize and to control • Investments (50%) • Exportations (35%) • Internal consumption (37%)
Contribution to Chinese GDP Growth 100,0% 80,0% 60,0% 40,0% 20,0% 0,0% -20,0%
66,0%
71,8%
85,5% 80,9% 50,4% 47,8%
39,4%
1,8% -5,4% 1978 1980
-80,0%
63,8%
44,7%
26,4%
21,7% 14,5% 1,8% 1985
1990
39,7% 38,8% 21,5%
0,3% 1995
2000
2007 Exportation
-40,0% -60,0%
55,0%
Consumption
-66,4% Investment
Investment in Fixed Assets (Yuan 100 Mn) 160000
55,0% 60,0% 137239 48,5% 50,0% 109998 40,0% 32,9% 33,2% 88774 30,0% 51,9%
140000 120000 100000 28,2%
80000 60000
18,3%
40000 20000
669
24,2% 16,4%
746
32918 20019
2543 4517
0
20,0% 10,0% 0,0%
1978 1980 1985 1990 1995 2000 2005 2006 2007
Investment
Percentage of GDP
Foreign Investment (USD 100 Mn ) 747,7
800 700
5,2%
603,3
630,2
6,0% 5,0%
600 3,4% 375,2 407,2
500 400
4,0% 2,7% 2,6%
300 200 100 0
0,3% 9,7 1983
0,6%
0,9%
19,6 1985
3,0% 2,5% 2,0% 1,0%
34,9 0,0% 1990
1995
A
2000
2005
B
2006
2007
Contribution to Chinese GDP Growth 100,0% 80,0% 60,0% 40,0% 20,0% 0,0% -20,0%
66,0%
71,8%
85,5% 80,9% 50,4% 47,8%
39,4%
1,8% -5,4% 1978 1980
-80,0%
63,8%
44,7%
26,4%
21,7% 14,5% 1,8% 1985
1990
39,7% 38,8% 21,5%
0,3% 1995
2000
2007 Exportation
-40,0% -60,0%
55,0%
Consumption
-66,4% Investment
Total Consumption of Habitants as Percentage of GDP . 60,0% 50,0%
48,8%
50,8%
51,6%
48,8% 44,9%
46,4%
40,0%
37,7%
36,3%
35,3%
30,0% . 20,0% 10,0% 0,0% 1978
1980
1985
1990
1995
2000
2005
2006
2007
Family Consumption as Percentage of GDP 2005 80,0% 70,3%
60,0%
65,3% 59,3% 58,9%
58,3% 57,4% 57,1%
40,0%
55,3% 50,0% 37,7%
20,0% 0,0% Usa England Germany Italy
India
Japan France Canada Russia
China
Family Expenditure Structure 1981 Food
2007
Cloths
44,16; 10% 0,72; 0% 8,88; 2% 2,76;1% 1% 4,32; 25,92; 6% 43,68; 10%
699,1; 357,7; 4% 7%
Habitants
1329,2; 13%
3628; Household 36% Appliances
67,56; 14%
258,84; 56% 1357,4; 14% 601,8; 6%
982,3; 10%
1042; 10%
Communicati on and Transport Education and Hobbies House Others
Coefficient of Engle 80,0% 70,0% 60,0%
67,7% 57,5%
61,8% 56,9%
50,0%
57,8% 53,3%
58,8% 54,2%
58,6% 50,1%
40,0%
49,1% 39,4%
45,5% 36,7%
43,0%
43,1%
35,8%
36,3%
30,0% Urban
20,0%
Rural
10,0% 0,0%
1978
1980
1985
1990
1995
2000
2005
2006
2007
Saving Rate . 45,0% 40,0% 35,0% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0%
38,5% 35,0%
35,8%
37,2%
37,9%
40,5%
42,6%
.
1992
1995
2000
2001
2002
2003
2004
Possession of Automobiles (1 Car per 1000 Persons) . 900 800
809
700
658 600
600
595
591
586
Industry production
580
500
.
400 300 200 100
24
10
China
India
0 USA
Italy
France Germany Japan
Canada England
Contribution to Chinese GDP Growth 100,0% 80,0% 60,0% 40,0% 20,0% 0,0% -20,0%
66,0%
71,8%
85,5% 80,9% 50,4% 47,8%
39,4%
1,8% -5,4% 1978 1980
-80,0%
63,8%
44,7%
26,4%
21,7% 14,5% 1,8% 1985
1990
39,7% 38,8% 21,5%
0,3% 1995
2000
2007 Exportation
-40,0% -60,0%
55,0%
Consumption
-66,4% Investment
Chinese Import/Export Dependency (USD 100 Mn) 25000
80,00% 21738,3 66,52% 70,00% 63,82% 66,91% 17604 60,00% 14219,1 50,00%
20000 15000 38,66%
39,58%
10000
29,78% 4742,9 12,54% 22,92% 5000 2808,6 9,74% 696 1154,4 381,4 206,4 0 1978 1980 1985 1990 1995 2000 2005 2006 2007
A
B
40,00% 30,00% 20,00% 10,00% 0,00%
Made in China in the world market • • • • • • • • • • • • • •
90% of DVDs 75% of toys 70% of tractors 65% of sports goods 60 % of bicycles 58% of telephones 50 % of cameras 45% of watches and clocks 40% of screens 40 % of micro-waves 36 % of television sets 30 % of air-conditionners 20 % of refrigerators ……
China leads in the export of high technology products
36
Source: Global Insight, Inc.
US trade deficits with low-cost countries 0 -20
$ Billions
-40 -60 -80
China Mexico Taiwan South Korea India
-100 -120 -140 -160 -180 1999
2000
2001
2002
2003
2004
Source: International Trade Administration, Trade Stats Express (as of August 2005)
Canadian trade deficits with China
Globalization and the new international division of work Source: A. Gupta and al., The Quest for Global Dominance, Jossey-Bass, 2008
New International Division of Work (NIDW) • The NIDW is an outcome of globalization. • It can be defined as “the spatial division of work” which occurs when the process of production is no longer confined to national economies. This has led to the "global industrial shift", in which production processes are relocated worldwide. This can also be called the “Globalization of tasks”.
1. “Made in China” products are the result of a globally organized production system •
•
•
•
A lot of countries participate in the “made in China” production. i.e.: of the 12 million lap-top computers sold by China to the United States in 2005, the majority of the key components (screens, software, sound cards, hard drives, etc.) were in fact imported from around the world only to be assembled in China. The true contribution of China in this case represents less than 30% of the final value of the product. China is not the master of the “made in China” products. China currently counts approximately 600 000 companies with foreign capital. They contribute to more than 33% of the Chinese industrial production and to more than 60% of Chinese exports. The majority of the high-tech products exported by China is either the result of assembly or is products that are less knowledge-intensive in the technical sector of the value chain and furthermore, is primarily the production of foreign multinationals operating in China: globally, their share rose from 59% in 1996 to 81% in 2000, and it reached 91% for the export of Chinese electronic equipments More than 50% of Chinese exports were achieved in the form of "outward processing" on behalf of foreign companies: 50% in 1995, 55% in 2000, 53% in 2006, while necessary purchases for the assembly exceeded 50% of imports from China.
Cellular Phone manufacturing process
42
i-phone: an American product? Screen: Japan Flash memory : Korea Assembly: China
Apple : Design, software and integration of innovations of the others. Source: The Econmist,30th decembre,2008
43
Contribution of foreign companies to China's exports
2. China only obtained a small part of the added value of the “Made in China” products • The development of the “made in China” products was very beneficial for China: It is responsible for 20% of economic growth, contributes to 17% of the state’s tax revenue and also creates more than 100 million jobs. Mainly due to the technological and managing learning, the competitiveness of Chinese companies is no longer limited only to the low cost of Chinese labor. • However, China only obtains a small percentage of the added value of “made in China” products. i.e.: to purchase an Airbus A-380, China needs to export 800 million shirts. A Barbie doll, produced for 2 US$ in China will be sold for 16 US$ in the United-States. 85% of the “made in China” is for foreign brands.
Change in Chinese prices of export and import between 1993 and 2000 Average exportation Price
Average importation Price
All Products
+ 4%
+ 19%
Primary Products
+ 14%
+ 18%
Manufacturing Products
+ 3%
+ 20%
High tech products
- 6%
+ 17%
Technology products at the intermediate level
- 0.5%
+ 2%
Technology based Products
+ 3%
+ 26%
3. China does not yet have the necessary technological level to become a world manufacturing center • Royalties paid to foreign patent owners: 20% for cellular phones, 30% for laptops, 20% to 40% for digital equipments. • Importation of 95% of medical equipments, 70% of digital equipments, 80% of equipments in the petrochemical industry, 85% of equipments used for the production of integrated circuitry, almost all of the machineries used in the fiber-optics industry,… • 99% of Chinese firms do not posses any of their own patents and 60% do not posses their own commercial brands. • Of the 18000 main technique norms in the world, the Chinese ones have contributed about only 0.3%.
Place of "Made in China" products on the "smile curve"
Reality of “made in China” - China occupies today a very important place in the world economy. That is due as much to its relative economic weight as to the impacts generated by its fast rise. However, it is exaggerated to already qualify China as a “world factory”, the title that was given to the empires of past and present (England, United States, Japan, etc). China should rather be considered as a country which is today only an assembly workshop of world in industries of consumer goods, but aims at becoming a world industrial superpower. - The rise of "Made in China" products has long been very beneficial for the development of China, both economically and politically. However, the participation of China in the new international division of labour has faced an increasing number of constraints in recent years. The negative impacts of the development strategy of "Made in China" products adopted since 1978 are now, to some extent, becoming a hindrance to the development of China and even to that of several other countries.
The Chinese development strategy is put into question … • • • • • •
Growth vs. real gains Growth vs. efficient economy Growth vs. social justice Growth vs. resource constraints Growth vs. sustainable development Growth vs. foreign resistance China doesn’t wish to be simply the “blue collar” of the world anymore …
Quality of Chinese Products
Energy Dependency (2004) . 90,0% 80,0% 70,0% 60,0% 50,0% 40,0% 30,0% 20,0% 10,0% 0,0%
82,2% 65,0% 55,7%
34,6%
33,2% 21,1%
17,1% 10,5% 2,0%
Japan Germany France England
USA
India
Canada China
Russia
Chinese Energy Consumption Structure in 2005
World Energy Consumption Structure in 2005
2,8% 7,1%
27,2% 36,8%
21,0%
12,3%
69,1% 23,7% A
B
C
D
Coal Petrol Gas Renewable Energy
New Chinese development strategy: “climbing up the value chain” • Since 2004, especially since 2007, the Chinese government adopted a new economic strategy that aims towards a more efficient, more socially responsible and more ecological development. Although it is still early to evaluate the real impacts, it seems to initiate a new phase of Chinese development. Objectives:
- Growth: by 2010 double the GDP per capita in regards to 2000 - Efficiency (consumption of energy resources for each unit of GDP): 20% less in 2010 than in 2005 - Innovation capacity: In the top 20 by 2020 - Standards of living: be a developed country by 2050
Motors for future Chinese economic growth? - Growth in domestic consumption (especially by the rural population) - Urbanisation (40% vs. 60% in Asia) - Growth in service sectors (40.7% vs. 70% and more) - Development of high technology sectors - Development of “green” sectors - Improving the competitiveness of Chinese products on the international market (productivity, quality, labour costs …)
56
Patent Application 694200
700000 600000
573200
500000
Approved
476264
400000
353807
351800
300000
268000
200000
170682
100000 0
No. Of Applications
13680 2671
1986
83045 45064 41469 22588
1990
1995
190238
214003
105345
2000
2004
2005
2006
2007
Chinese invention patents granted to domestic and foreign entities (%)
59
CRISIS
危
机
Danger
Opportunity Dr. Zhan SU Professeur titulaire
60
The worst is still to come?
• An increasingly complete and efficient industrial system, an important tank of human capital, little qualified but inclined to work for low wages, a political stability ensured by a totalitarian regime which however puts the economic growth at the center of its concern, an increasing domination of the private companies in Chinese economy, the existence of an important and relatively inexpensive infrastructure are many factors that contributed and will likely continue to contribute to the rise of the “Made in China” products in the international market. • Up to date, production of industrial goods in Western countries (2/3 of manufacturing production) has not quite been affected by the “Made in China”. During the next 15-20 years, products from Chinese manufacturers could penetrate these markets at prices that might be 25% - 35% less expensive than international prices.
Canada faced with the rise of China The rise of China is both a threat and an opportunity. Above all, it represents a challenge. If China were not the major supplier of consumer goods for Western countries, another developing country would be. The most important is to be able to take advantage of the competitive factors of China in our favour, and not try to beat China at any cost To be successful in global competition, firms must put emphasis on the development of new and distinct competencies, instead of simply trying to keep all that they have. They need to know how to do things differently than their main competitors instead of contenting themselves to passively follow others’ lead.
Canadian companies should reconsider their business strategies • Produce by ourselves? Excel in the domains where we posses distinctive advantages, or where there are strategic importance for our future.
• Have them produced? Delocalize in a selective manner the activities that represent the least amount of competitive advantage in order to take advantage of the strengths of China to reinforce our international competitiveness and even to halt the disappearance of certain industrial sectors.
• Produce together? Exploit complementarities and synergies through partnerships.
• Not produce, or stop producing? Be capable to bring about the radical changes necessary to ensure the “survivability” of our firms.
