A China Slowdown To Last Five Years

Having run a successful business in China for close to quarter of a century, one gets used to the subtleties of the China market. As media rushes to inform us, breathless, that “China is experiencing a slowdown”, this is actually an entirely predictable scenario. Economies just do not continue to grow at 10 percent per annum indefinitely, and it is prudent to note that the last time the United States had such growth rates was 30 years ago. 

In fact, I raised red flags concerning China five years ago, and began planning for our own budgets accordingly back in 2010.  I also raised concerns over increasing China manufacturing overheads at that same time in “The Communist China Price.” Current media attention on China’s slowdown is therefore somewhat old hat news.

However, it is important to get things into perspective. Firstly, as I said, the entire issue has been predictable. Secondly, and perhaps of more interest to businesses, is the question of what impact a “slowdown” has. A slowdown doesn’t mean that the economy is shrinking. It does mean that it is not growing as fast as before, and that means obtaining growth in profits is going to be far tougher. Growing your business at 10 percent per annum the past few years has just meant keeping pace. Successful businesses in China have been growing at rates far in excess of that.

Personally, I have always treated China’s stats with a large pinch of salt, and I doubt that China’s growth is actually 7 percent. I’d place it more like 3-4 percent and, in some cities, close to zero. The fundamental reason this is happening is because China is in a transition period from being purely a manufacturing economy to becoming a consumer oriented economy. It never was going to be a case of an overnight switch from one to the other, and to suggest so is naive. Rather, the Chinese economy is gradually evolving. It will take time for Chinese citizens to begin to spend. That they will I believe is a given; a new middle class is still emerging that is expected to reach 600 million by 2025. It will be another five years before we start to see the beginning of that consumer trend, and in ten years, China will be booming again. The future for China looks bright – but requires patience.  

What should companies do in the meantime? Well run businesses will have no problem with a slowdown and will use this time to consolidate, or invest. Slower times are always a pertinent opportunity to take stock and perhaps cut a bit of fat away from the business. Preparation is another way of putting it. This alludes to looking at alternatives – such as considering the production costs in a country such as Vietnam as opposed to China, where in contrast to the recent European Chamber report on China, the European Chamber report on Vietnam demonstrated bullish views, with 75 percent of members “positive” about the business environment and prospects in the country. 

RELATED: The Cost of Business in Vietnam Compared With China

Other issues relate to India – with a sizeable middle class market of its own, the combination of cheaper labor costs than China and a similar middle class consumer base indicate it is time to conduct market research into that market. There are plenty of opportunities for foreign investors in India, and especially within infrastructure, biotech, manufacturing & assembly and auto components.

Foreign investors are currently flocking to Gujarat, a state with some of India’s best tax incentives and which Prime Minister Modi used to govern. As I have said before, foreign investment opportunities into India are similar to those of China twenty years ago.

The China slowdown, then, is generally a good thing. It allows companies to properly prepare for the next opportunity wave – that of China finally delivering on its 100 year old potential to be the world’s largest consumer market – and in the meantime either push into new areas or consolidate China costs by considering cheaper alternatives. China might be experiencing a slowdown in growth, but that doesn’t mean your own business model has to as well.

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