Switching your sourcing to the world’s third largest economy can save you 30%. But getting in there is no easy matter. 

Today China is an acknowledged early leader in pursuing green economic development. From having an almost non-existent renewable energy industry in the early 2000s, China is now a leading exporter of renewable energy equipment and machinery. Here we highlight three factors contributing to the explosive growth of China’s renewable energy industry.Active government supportRenewable energy will be a key focus of the 12th Five Year Plan and of China’s plans to achieve energy independence and reduce pollution. The 11th Five Year Plan already mentioned natural resource depletion as a challenge and up to 40% of China's RMB 4 trillion economic stimulus package is targeted at green projects. Not surprisingly, China is now the world’s largest investor in renewable energy. In 2009, China invested close to USD 35 billion in clean energy, almost twice that of the US. Today, renewable energy accounts for 4% of China’s total energy capacity and close to 20% if we include hydroelectric power. Still, despite the impressive progress, China still has a long way to go before boosting renewable energy capacity to 10% by 2020 and hence we can expect continual government investment in this sector for the foreseeable future.

After the end of its long-running civil war, Angola required funding in order to finance much-needed growth. From 2002 until 2007, various facilities were set up by the OECD community, including Portugal. However, increasing amounts of non-performing loans inspired the International Monetary Fund’s refusal to roll-over the Angolan debt in 2007. Many of the OECD financiers did the same and Portugal, being largely tied to the EU political decisions on the one hand and committed to maintaining adherence to the developed world’s lending practices on the other, was bound to toe the line. 

This is the first of a series of two postings contributed by our South Africa-based consultant, Kirill Riabtsev. In keeping with the Africa focus of our last few postings on this blog, these two postings look at Angola and how the business interests of China and erstwhile colonial power Portugal are competing in this resource-rich African country. Angola has become one of China’s leading partners in Africa. However, one unlikely contender to China is adopting its own very different ‘Angola strategy’, and instead of engaging in a head-on battle, it is opting for alternative and rather unique methods. 

China and Africa have become increasingly linked economically, particularly over the last decade. As a whole, Africa has become China’s fifth largest trade partner—behind only the United States, Japan, South Korea and Germany. The USD 90.9 billion exchanged between the two represents around 6% of Africa’s entire GDP. China to Africa investment has also picked up to the point where the People’s Republic has become the continent's second-largest foreign investor. Furthermore, China is the largest international contributor to Africa’s infrastructure development, its contractors receiving over 40% of all project revenues awarded to overseas-based firms. Key to this push into Africa has been China's banks, most notably Export-Import Bank of China (China Exim Bank) and China Development Bank (CDB).

China Exim Bank and CDB are two of three banks established by the Chinese government to further national economic policies (the third being Agricultural Development Bank of China). China Exim Bank’s main focus is on international loans and export credit, and is the only Chinese bank authorised to distribute concessional loans. As much as 80% of its funding activity in Africa is dedicated toward infrastructure projects.

Since Exim Bank’s founding, its impact overseas has grown substantially. Its asset base of USD 292 million in 1994 expanded dramatically to USD 116 billion by 2009’s end, with African assets accounting for as much as one-third of the total. If the Export-Import Bank of the United States is used as a benchmark, China Exim Bank’s footprint in Africa is substantial. The American bank claims a mere USD 7.8 billion in assets, with only 7% of its total exposure in Africa.

China Exim Bank issues loans in a wide range of African countries. Although Angola, Ethiopia, Nigeria and Sudan have been the traditional recipients, recent projects announced in 2010 suggest a more diverse group. In this year alone, China Exim Bank has agreed to back an airport upgrade in Mozambique, to the development of Zimbabwe’s water supply, and to a concessional loan for the Kenyan government, just to name a few.

Whereas China Exim Bank focuses on infrastructure development in Africa, CDB is more focused on investment. Yet CDB is less focused on international affairs than is China Exim Bank. Although its USD 560 billion asset base is larger, only around 5% of its loans are extended to parties overseas. Only recently has CDB played a significant role in Africa, this due to its establishment of the China-Africa Development (CAD) Fund in 2007. USD 5 billion was proposed for the fund which is now finding its way toward minority stakes in African businesses, particularly those in primary industries.

In 2009, CAD Fund invested USD 148 million on the continent. Deals announced so far in 2010 include USD 226 million for a South African wind farm, USD 284 million for a copper mine in DR Congo (deal still pending), and USD 228 million toward a platinum company, also in South Africa.

Based on the activity of China’s financiers in Africa, 2010 may prove to be the most remarkable yet for China-Africa economic ties, and China Exim Bank and China Development Bank are setting the pace for another record breaking year in the story of “South-South” trade.

Transactions are prioritised based on the duration of client relationship and volume, as production difficulties make it a challenge to fulfill growing orders on time. This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through e-magazines, trade shows and industry research.

There are a few outstanding similarities between the African countries of Angola and Zambia, yet the most glaring one is probably the fact that both these countries have their economic stars hitched to a single commodity: oil in the case of Angola, and copper in the case of Zambia. If you look at a map of the state of transport infrastructure in the region, you could certainly also say that another thing these countries have in common is that they can both count the number of railway lines they have on one hand, so to speak. 

The words 'Made in China' can be found everywhere, from the labels on basic necessities such as clothing to the portable music players and cellular phones which exemplify modern life’s conveniences. It is the work of international procurement professionals who have brought these products from the manufacturing floors of China to households worldwide. China’s emergence as the world’s largest exporter in 2009 is further evidence of the immensity of this nation’s sourcing potential. But before calling the bank to open a letter of credit, it is best to first understand sourcing from China and how to engage with this unique business environment.

The reason for China’s position as the foremost sourcing destination is of course, low costs. On average, 30% cost savings can be expected for products procured from China in comparison with the home country. Everything from machinery to articles of steel to furniture can be obtained cheaply. At the heart of this are labour costs. Average wages in developed nations such as the United States are nearly 30 times those of China. Even other developing nations are unable to compete with China on a cost basis, as the average wage in Brazil is over six times that of China, and in Mexico, three times.

Second and often overlooked is China’s infrastructure which gives it a distinct advantage over other developing nations. China ranks 27th on the World Bank’s Logistical Performance Index—higher than the other BRIC nations. Numerous, newly constructed, multiple lane highways and 78,000 kilometres of railway end in six of the world’s ten busiest ports along China’s coastline. By air, 500 airports are available to link Chinese products with their end-users abroad. This network of thoroughfares effectively link China’s low labour costs with the world.

The question then becomes how does the world—or more specifically, the procurement manager—access China’s potential. This process begins at home with an effective strategy, the pivotal element of which involves deciding on the point of contact with Chinese suppliers, the conduit between decision makers at home with Chinese producers. To manage this crucial task there are three options: to work with a local Chinese agent, to work with an international company with a presence in China or to dispatch employees to China for on-site operations.

Using a local Chinese agent is the cheapest option. Such agents have the potential to be well connected within various industries. The most experienced Chinese agents are likely to find the most suitable products for their foreign partners at the most favourable prices. The downside is that this approach is open to cultural misunderstandings and difficulties. A common complaint is that Chinese counterparts are often less responsive to emails, and even when responsive may be less direct regarding actual circumstances; a straightforward “no” is rare. Thousands of Chinese agents exist, making the best ones more arduous to find. Furthermore, many of these agents may not have the appropriate import/export registration.

An alternative to this is to use an international firm with a presence in China. These firms typically employ international staff members alongside local Chinese to obtain “the best of both worlds”. A more acute understanding of the home office’s procurement requests can be obtained through the use of these agents; it may even be possible to find such an agent from the same country of origin in the more cosmopolitan cities of Shanghai and Beijing. These foreign-owned companies are able to obtain import/export rights, and often do. On the downside, international agents tend to charge higher fees for their services and are subject to more strict administrative controls which may cause delays or unexpected costs in the procurement process.

There is also the option to forego the use of third parties by directly dispatching employees to China. This may be the most attractive option for those considering large scale operations abroad. Expatriated staff members will already be aware of the product requirements and time frames, thus eliminating any communication problems. This option may also be considered if relationships have previously been established with Chinese suppliers as the China-focused strategy matures. It is a less feasible option for those still in the early stages of their China strategy as it is difficult for newcomers to China to find appropriate suppliers and to manage all steps in the production-to-port process.

Although there are options for establishing a point of contact in China, having a representative of the home company physically present in the country greatly eases the business process with suppliers. Business in China is centered on relationship-building. Having a face to associate with the voice over the phone or the signature line of an email will foster a more personal commitment from the Chinese supplier. This process entails regular visits, if even from an agent, and is an important cultural aspect in dealing with Chinese producers. Concurrent on-site inspections further work to ensure greater quality control.

Through effective communication the China low-cost advantage can be transformed into profit and customer savings. The question is just HOW this will be done, because China sourcing is all about having a strategy that works for you. 

Given the worldwide importance of environmental protection and the continued drive for a shift away from fossil fuels, the market for electric vehicles is becoming one of the leading emerging markets for China and the world. With the electric vehicle industry rapidly gaining importance, and with HSBC anticipating China’s share of the global market to rise from 2.7% in 2010 to 35% by 2020, global players within the industry are already working to position themselves in China through new products and innovations. These concerns may be overcome with the help of government support for the expansion of China’s electric vehicle industry. The government is currently providing subsidies of up to RMB 60,000 (or USD 8,789) for consumers to purchase an electric vehicle, and strong government support for China’s electric vehicle industry may yet act as a springboard to drive sales, increase production, and in time, reduce manufacturing costs. In this the Chinese government is not alone in the promotion of electric automobiles. At least 12 other nations are also investing directly into the development of alternative energy sources through programmes similar to China’s ‘Revitalisation and Readjustment Programme for the Automotive Industry’. China’s programme is one of the largest of its kind, however, with a subsidy of RMB 10 billion (USD 1.5 billion) earmarked for alternative energy, to be distributed over a three year time period, for research and development.

The dry spell that began in the fall of 2009 is hurting China's industrial sector despite its location in the primarily agricultural provinces of the southwest.

China needs to experience at least ten instances of medium to heavy rainfall to ease the current aridity of Chongqing, and the provinces of Yunnan, Guizhou, Guangxi and Sichuan. Otherwise, productivity in the export manufacturing industries and, consequently, delivery lead times will be significantly impacted.

Although production in the southwestern provinces centres on agriculture, some industrial sectors have a presence there. Yunnan, for instance, is one of the country's major manufacturers of rubber. Last year, the province turned out 302,000 tons of raw rubber, contributing nearly 39% of the nation’s annual yield. The months-long drought, however, is curtailing volume, which is projected to decrease 10 to 20% percent if the situation does not improve before June.

China already imports much of its rubber from Indonesia, Malaysia, Thailand and Vietnam. But the drought affecting the country's southwest is felt by all areas along the Mekong River, which includes Thailand and Vietnam. Demand for rubber continues to grow alongside China’s heightened tyre production. As a result, the cost of natural rubber increased to 25,000 yuan ($3,660) per ton in April, up 12% from just two months prior.

Publicly listed tyre maker Aeolus reports that rubber in the domestic and international spot markets is now 10 to 14% more expensive than it was in October 2009. Among local processors, Kunming Yun Ken Rubber Co. Ltd, which is currently turning out two-thirds less than its average yield, offers natural rubber at more than 24,000 yuan ($3,510) per ton.

There is some concern that rubber costs might soar to record highs in H2 2010 if the drought does not ease in May.

No rain, no power

The resulting shortage in electricity is one of the reasons why the drought has severely hampered rubber production. Hydropower is one of the most important sources of energy in the southwestern provinces, contributing 45 to 50% of the region’s total energy supply. The extended dry season, however, has made it difficult for hydropower stations to generate at full capacity. As such, the region is now experiencing a 25 to 30% shortfall in its required electrical output.

Apart from rubber, nonferrous metals such as copper, aluminium, zinc and tin are widely processed in Yunnan. Although the energy deficit has slowed smelting and refining, productivity in this sector has not been as severely affected.

Although copper is a major input for the manufacturing of consumer electronics, Yunnan accounts for only 9% of national output. Priority has been given to large nonferrous metal suppliers in the process of power rationing, to include producers of copper, allowing those in the nonferrous industry to yield a 64% m-o-m growth in output during March. Moreover, many of these large producers have standalone power stations.

Aluminium is a key metal as well, particularly as an input for the production of kitchenware, hardware, and in the housing for some electronics products. The drought and the resulting energy shortfall is affecting manufacturers’ ability to perform electrolysis—the energy intensive technique used to produce aluminium—thereby causing those in the industry to reduce their projections of output by 20% for the year. However, this may not be a detrimental development for China’s aluminium industry, currently experiencing an oversupply of the metal.

The effects of the power deficit have reached even the coastal provinces. Guangdong, for instance, used to acquire 30 percent of its electricity from the southwest. Now, the province supplies a portion of its power load to the interior.

The Guangdong Economic and Information Technology Commission puts the current shortfall at 3.35 million kW per day. This situation has led to a peak-shifting strategy, where high-electricity consuming industries have to carry out their operations at night. In major cities such as Guangzhou and Shenzhen, industrial parks and high-tech enterprises are guaranteed sufficient power.

However, if the drought extends through June, Guangdong’s production will inevitably be affected. Businesses that are already reeling from the effects of a labor shortage will have to contend with power outages as well, which will inevitably result in missed deadlines and delayed deliveries.

This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through e-magazines, trade shows and industry research.

With Google gone, is Baidu set to completely dominate the Chinese search engine market or are there other challengers waiting in the wings? Before its high-profile withdrawal from the Chinese market in March, Google was competing for control over the highly lucrative Chinese search engine market – growing fast and forecast to be worth $4.9 billion in advertising revenue by 2015 – with its Chinese competitor Baidu. Now, with the dust of Google’s exit to Hong Kong settled, Baidu indeed seems destined for a monopoly. Yet the future of this vast market hinges on other competitors’ readiness to fill Google’s void and challenge Baidu’s position as the clear market leader.

In spite of Baidu’s dominant position, the Chinese search engine market is host to several smaller competitors. The main ones are the Chinese division of Microsoft’s Bing; a Beijing based search engine named SoGou, owned by the large Chinese internet entity SoHu; former Google partner SoSo.com, owned by Tencent Inc.; and the Chinese division of Yahoo which owns 44% of the Chinese business-to-business site Alibaba.com. These potential challengers are all much smaller than Baidu, each holding less than 1% market share prior to Google’s withdrawal.

Nevertheless these companies are displaying some advantages which may yet enhance their ability to take on Baidu. Many of the competitors are, like Baidu, domestic firms with a better grasp on the Chinese market. Craig Mundie, Microsoft’s Chief Research and Strategy Officer, recently stated that Microsoft’s ability, as a Western firm, to maintain a longer presence in China indicates Bing’s potential to succeed. For its part, SoGou is supported by an active community centered on its parent SoHu.com.

Still, Q1 2010 data published by Analysys International suggests that Baidu profited the most from Google’s China exit. Baidu managed to extend its market share from 58.4% at the end of last year to an impressive 64% by the end of Q1 2010. While Baidu’s growth is not surprising, the fact that it extends beyond Google’s market share loss of 4.7% is. Instead of only acquiring some of the market share previously held by Google, other competitors have conceded a further 0.9% to Baidu, a significant chunk of their already puny holdings. Additionally, recent declarations of a 165% increase in Q1 net income and the implementation—to come on 12 May 2010—of a 10-for-1 split for its American depositary shares are indicative of Baidu’s momentum. Baidu’s competitors in China, it seems, simply lack the size and the ability to step up and fill the void left by Google’s exit. The current state of the industry thus seems to suggest that Baidu will reign undisturbed for now, drawing the majority of advertising revenue until its competitors manage to find a niche of their own in the Chinese market.

There are signs that something is stirring among Baidu’s remaining competitors, however. Recent rumors of a possible partnership between large Chinese internet company NetEase and MSN could, through NetEase’s vast user base and expert market knowledge, just give Bing a necessary boost to threaten Baidu’s entrenched position. Yet it remains a question of when – as well as if.

Its that time of the year again: after months of hard thinking and hard working and a few weeks of slightly too many cups of coffee, we can now share the latest edition of our handiwork, The China Analyst May edition. For this edition we have looked at China from a new perspective: Technology.

In the leading features we trace China's industrial heritage and progression in science and technology and look at its most innovative firms. We also consider the rise of China's engineering and design firms rapidly gaining global market share as well as China's new-found prowess in mining processing technology.


The rest of the magazine contains some interesting additions. In China Sourcing Strategy, for example, we have an extended map of China's leading industrial clusters, and in the Strategy section we have an in-depth analysis of China's role in the global gold mining industry, along with an investigation of China's largest and most successful gold mining firm: Zijin Mining Group. In addition, the China-Latin America Regional Focus section contains an interview with Tatiana Rosito, the Brazilian Trade and Economic Counsellor in Beijing, on the state of the Brazil-China bilateral relationship.

These are only some of the things you will find in the new edition, so without further ado, here it is (1.9 MB):
 
The China Analyst - May 2010.pdf

China has become the world’s largest exporter. Around USD 1.2 trillion in wares left its shores in 2009 for trade around the world. Sure, that is a large number but so what? The 'so what' is that every citizen on the planet, on average, received around USD 200 in new belongings last year courtesy of Chinese manufacturers. Chances are that the fixtures of your everyday life—the upholstery of your furniture, the stitching in your clothing and the electronic components within your appliances—were assembled by Chinese hands.

How much Chinese trade impacts your life largely depends on where you live. A diverse set comprises the nearly 40 nations which exceed the USD 200 per capita average. Those countries whose citizens receive the most from China may surprise you.

Number one on the list, Singapore, may not. The average Singaporean brought in USD 6,674 from China in 2008. Proximity and cultural similarities have made China and Singapore exceptional trade partners.

Then, there is the United States, which runs a perpetual trade deficit with China, prompting complaints about an undervalued yuan and spawning a host of protectionist disputes. However, it is the United Arab Emirates who takes the number two spot. The US is not even in the top ten. China’s exports to the UAE, per capita, equaled USD 4,942; the US, a mere USD 830 (actually putting it in 11th place).

Although heydays of the Silk Road have long since ended, Europeans still manage to acquire a fair share of products from China. The Netherlands is ranked third, receiving USD 2,798 per head from its Far Eastern counterpart, while Belgium, Finland and Denmark rank sixth, seventh and ninth, respectively.

Given its relatively small GDP, trade with China no doubt has the greatest per capita impact on number four: Kyrgyzstan. USD 1,745 for each Kyrgyzstani found its way across China’s western border to this Central Asian nation in 2008.

In Africa, it is not industrialised South Africa which takes in the most Chinese goods and services per head, it is Liberia, at USD 465 (ranked 25th)—just behind Switzerland. Further back is the first South American country, Chile, ranked 31st with USD 367 per capita.

Unfortunately, data for Antarctica is unavailable, but given the broad scope of Chinese export activity, it may be inferred that a few ‘Made in China’ labels can be found there too. After all, even in remote, sparsely populated Greenland each citizen receives USD 25 worth from China.

So, as the world’s predominant exporter, Chinese producers are impacting individuals in every corner of the globe. Look around you and see for yourself.

Top 10 per Capita Recipients of Chinese Exports (USD)

1. Singapore: 6,674
2. United Arab Emirates: 4,942
3. Netherlands: 2,798
4. Kyrgyzstan: 1,745
5. South Korea: 1,521
6. Belgium: 1,393
7. Finland: 1,383
8. Australia: 1,038
9. Denmark: 1,017
10. Japan: 922

Source: China Commerce Yearbook 2009; UN Population Division

The US Trade Representative's office has just released a new report documenting the legal obstacles foreign firms face in their business dealings with China. As might be expected, there were many grievances, although the agency did concede that China has been far more welcoming to internationals than in previous years. Besides its focus on the topics of contemporary spats between China and the US – items such as steel, export subsidies and intellectual property rights (strangely, valuation of the RMB was omitted) – the American agency notably brought forth an issue in which the Chinese government has been particularly rigid: control of the media and telecommunications.

Under the terms of the Protocol of Accession to the WTO, China was obliged to allow non-state owned enterprises, including foreign owned enterprises, to import movies, DVDs, music, books, newspapers and journals. A WTO ruling against China called for a disbandment of this government-enforced monopoly, yet the Chinese government has remained very reluctant to release its control over these forms of media.

According to the report, once within China’s borders there are more hurdles. Movie imports destined for theatrical release are limited to 20 revenue-sharing films per year. The government then closely regulates the foreign film showings to ensure that their viewing time in the theatres does not exceed one-third that of Chinese movies. Then there is the provision that blockbuster films originating from abroad should not compete with those made domestically (think Avatar when Confucius was released). Prefer television? Foreign programmes are not allowed more than 25% of airtime, and are outright banned between seven and ten pm on the basic channels. Even on cable, the percentage is only increased to 30%. And of course, everything is subject to censorship.

Those in the telecommunications industry are equally obstructed. Foreign firms are limited to no more than 49% stakes in joint ventures, although none have been intrepid enough to enter the Chinese market within the last decade, nor have any local companies for that matter. There are only four nation-wide players – China Mobile, China Telecom, China Unicom and DBSat – and it seems that, based on the amount of restrictions on the industry, the Chinese government is content to leave its communication capabilities within the hands of these few domestic firms. Then there is the internet. Google completely evades mention by the US Trade Representative office.

Naturally, the report is not without its quirks. The first page mentions that the import of petroleum and sugar into China is reserved for state-owned enterprises, but that this is indeed consistent with its agreement with the WTO. One is left to ask, why sugar? Then in a later paragraph: “China still maintains high duties on some products that compete with sensitive domestic industries…Raisins face duties of 35%”. (May China anticipate Hillary Clinton’s next condemnation in a speech titled “Steel, Tyres and Raisins?”)

Humor aside, the US Trade Representative report says that despite the countless ways in which China has opened itself to international trade, if anything it has become more restrictive in its control of the media and its telecommunications systems.This may be an issue beyond the influence of trade representatives, American or otherwise.

The new edition of The China Compass has just been released, and can be downloaded free of charge below.

The China Compass is a knowledge tool by the China Strategy Group, a business unit of THE BEIJING AXIS. The publication is an extended chart pack examining China's current economic standing in the world. In this March 2010 edition, we provide the latest macroeconomic data available for a wide range of indicators, for China as well as for other major world economies, and include a new section, ‘What’s New: China From Rebound to Recovery’.

The publication summarises a wealth of information in an easily accessible format, and as such is intended to make China's complex economic rise a bit more comprehensible. 

To download The China Analyst - March 2010 (Size: 2 MB), click here:

The China Compass - March 2010.pdf

For more publications by THE BEIJING AXIS, please visit the Knowledge section of THE BEIJING AXIS website.