China is the most important emerging market to the global economy, and arguably has been for hundreds of years, if not a thousand years (perhaps this is stretching too far...but my Chinese colleagues and friends probably will agree with the sentiment). The allure of China has been ever-present in western economies since the trading and traveling stories of Marco Polo of the 13th Century first emerged, and arguably the influence of China extended into much of the western world earlier that that through the traded goods that entered Europe along the Silk Road as far back as the time of Alexander the Great and then subsequently through the Roman Empire. The 21st Century is no stranger to the allure of China, but do we in the west really understand China? Are we looking at China for what it is, or what we think it could be? Are we perhaps looking at opportunities in China through rose coloured glasses, tinted by the experiences of our home markets?
China has undergone unprecedented economic growth over the past 30 years, and much of the growth has been driven by the rapid modern industrialisation as China has integrated effectively with global markets. China has advanced from a large market of potential in the 1980’s, although coming from a lower level than markets in South East Asia such as Indonesia, Thailand and Malaysia, into the dominant global production house for the world. As most people appreciate, China has become the manufacturing centre of much of our consumer goods. We only have to look to the back of our phones to see that they were made in China (note* Apple, and Samsung both manufacture their phones in Chinese factories).
Economic growth in China has seen major social upheaval in China including the mass movement of people from regional and rural areas into the major urban centres on the east coast of China. This has seen population booms in cities such as Beijing, Shanghai, Tianjin, Guangzhou, and Shenzhen where populations are a greater than 15 million and in some cases approaching 30-35 million. These populations are greater than many western countries. This mass movement of people has seen a property and infrastructure boom throughout China, which has demanded access to high quality mineral resources for structural steel production, which has directly benefited Australian exports to China for Iron Ore (mostly from Western Australia’s Pilbara region), and Coking Coal used in the production process to convert iron ore to steel. In the past few months the spot price of both of these commodities have risen again, as China has clamped down on domestic production and stockpiling of the local commodities, requiring larger international supplies of the commodities. We often get carried away with how good we are in Australia, and how we have mineral resources that are not available in China. However its important to note that although China does not have the super high quality of the iron ore available in Pilbara, it does still have arguably one of the worlds largest resource bodies of iron ore, it also has a large natural ore body of thermal and coking coal at its disposal. Chinese minerals may not be as high quality, and there may not be the efficiency in exploration and extraction of the minerals, however it is not short of localised resources.
Australian economic integration is well established, and for most of the past decade China has been the largest export partner for Australia, which has been replicated with most of Australia’s states and territories. However if we look at the commodities that are dominating this export trade its is nearly always mineral exports. That is to say Australia’s majority benefit from our export trade with China is focused upon some core commodities of Coal (both coking and thermal coal), iron ore, and a range of other minerals used in other value added manufacturing in China. China is still important to Australia and we can see a range of agricultural, food and wine commodities that are succeeding in the Chinese market. The message that I would like to portray is that although China is certainly an outstanding growth market for many Australian businesses, and our economic integration with China will lead to a range of economic benefits it wont necessarily be the right market for every Australian company, indeed this lesson can and should be headed by other international companies, which is that China is a huge market of opportunity, but choose your market segment, target it strategically, and make sure there is capacity to pay. If you don’t do this successfully you may end up losing an opportunity in a neighbouring market that provides a more attractive proposition for your product mix than in China greater and faster returns on investment.
Dr Nathan Gray is Managing Partner of AsiaAustralis – a strategic management advisory firm that specialises in markets throughout Asia. Over the past three decades our consultants have assisted companies achieve their market objectives in Asia.