Download India and China states

Increasing Need for Regional Analysis in India
Emerging Markets Insights 8/15/13
http://blog.frontierstrategygroup.com/2013/08/increasing-need-for-regionalanalysis-in-india/
My colleague Shijie Chen recently wrote about the need for provincial analysis to uncover new business
opportunities in China. Regional analysis is also needed for India since a study of the parts is more
revealing than a study of the whole. Comparative performance analysis of the Indian states has become
more prominent than studies of national strategies, as state-based reforms will likely be one of the key
drivers of higher national growth in the future. Here are four things to consider:
1.
2.
3.
4.
Divergence in development: India’s economic growth story has not been one of coherent national
expansion—it has been one of scattered tales of development, making the study of its individual
parts highly important
Above average states: At a time when the country is going through a slowdown, companies need
to find the opportunities in states where there has been sustained high growth; in 2011, 75% of the
states grew above the national average, and 25% experienced a double-digit economic expansion
Coalition politics lead to regionalism: Because the central government is composed of coalition
of parties, economic competition between the states has increased as regional parties vie to
distinguish themselves
States with their own policies: State governments are also likely to begin introducing their own
economic policies to promote growth. Narendra Modi, chief minister of Gujarat, has introduced a
five-year export policy in the state to promote its products on an international level. It is the first
of its kind to be adopted in the country
Frontier Strategy Group aggregated critical variables into an index and benchmarked the states in India
against each other to understand their structural differences:
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Factors chosen: Six areas of focus were chosen based on factors that are considered imperative
for making investments
Weights: Weights were chosen to favor states that would reveal a long-term attractiveness
Normalization: Variables were normalized in order to account for the size differences between
the states
After ranking the states, we divided them up into three key areas as you’ll note in the chart below (this
division would differ from business to business)
1.
2.
3.
Execution Focus: Established States Where Optimization of Operations is Necessary
These are states where several MNCs have had a presence for over a few decades, making these
markets established and well penetrated, necessitating a pivot in strategy from one that is
expansion focused to execution focused
Expansion Focus: Growth Trends are Key Deciding Factor States under this umbrella are
those where you currently have a presence or potentially consider creating one. Analysis of these
expansion-focus states should not be conducted purely on a size basis, because many of them have
grown tremendously over the past decade; a study of change in growth trends is more relevant for
gauging true potential
Exploration Focus: Mostly Eastern, Northeastern, and Central States of IndiaAn exploration
focus is needed in states where your firm does not have a presence but would be interested in
exploring; especially the top-tier or highly-populated cities in such states. Companies should
conduct longer-term comparative studies to judge the true performance of some of these up-andcoming states in the eastern, northeastern, and central parts of India
India’s economic growth story has not been, and will not be, one of coherent national expansion; it will
remain one of scattered tales of development. As the country goes through a phase of decade-low growth,
companies need to find opportunities in states where there will be sustained growth, wealth creation, and
overall development.
https://www.google.com/search?q=india+economic+growth&client=firefox-a&hs=P5L&rls=org.mozilla:enUS:official&channel=sb&tbm=isch&tbo=u&source=univ&sa=X&ei=OCTAU6yyIMGuyASBzoHwDg&ved=0CEIQsAQ&biw=1395
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acrobusiness.com.au%252Fwp-content%252Fuploads%252F2012%252F03%252F1trgdpci.gif%3Bhttp%253A%252F%252Fwww.macrobusiness.com.au%252F2012%252F03%252Fcharting-the-rba4%252F%3B600%3B516
Can India’s Power Problems Be Solved? 8/2/12 Arvind Subramanian
Global Development: Views from the Center
This post also appears on the Peterson Institute for International Economics Real Time Economics Watch.
In Lord Richard Attenborough’s movie Gandhi, an underling of the British Empire heatedly warns his
supercilious boss that Mahatma Gandhi’s impending protest march to the sea poses a far greater threat than
the Raj realizes: “Salt, sir, is a symbol.” This elicits the memorable sneering put-down from the boss
(played by Sir John Gielgud): “Don’t patronize me, Charles.”
Is power, or rather the power sector, today’s salt--emblematic of both the pessimistic outlook and promise
of India?
The epic blackouts affecting 600 million people in India were of course a tragedy. But the greater tragedy is
not the blackout but the chronic Indian shortage of power in India, which exacts vast physical and social
costs in people’s day-to-day lives. Outside of the metropolises, for example, power is unavailable for much
of the day in large parts of rural India.
In addition, there are the costs to industry, which has to pay higher prices for power to compensate for the
massive subsidization of farmers and other low-income users. In turn, these higher costs make the private
sector less competitive, slowing economic growth. Finally, there are the massive and accumulating costs to
the environment from government-subsidized power, which has encouraged tube-well based irrigation,
especially in the Northern farm-belt, a practice that has dried up aquifers and drained water tables. The use
of diesel-powered generators, by the more affluent, to make up for the lack of power or interrupted power
further aggravates the environmental problem because of the build-up of carbon dioxide.
Power is, of course, a key component of Indian infrastructure. The problems in power, as in much of the
economy, have multiple causes but a key one is poor governance. This ranges from corruption and venality
-- when politicians encourage power theft or diversion of power to their constituencies -- to pandering
politics in which politicians provide cheap or free power to farmers and other groups in exchange for
support. There are also problems of power lost naturally in the process of transmission and distribution or
when laws against theft are not enforced. (Power production is affected by problems in the coal sector,
including a public monopoly, and the difficulties of mining for coal in areas affected by Maoist-style
insurrection).
In an academic paper of a few years ago, I argued that one of the better measures of the quality of
governance in the Indian states was the performance of the power sector. And the quantitative indicator that
I chose to measure performance was the “transmission and distribution (T&D) losses” of the state
electricity boards. In areas where T&D losses are high, the quality of power, as reflected in the voltage as
well as reliability, is low. T&D losses, ultimately reflect state-level political decisions -- their unwillingness
to enforce laws, and the phenomenon of state electricity boards controlled by bureaucrats and politicians
corrupted by powerful private interests.
Now, these T&D losses in India are substantially greater than in other emerging market countries,
highlighting the drag exerted by the power sector on India’s economic prospects. As Figure 1 shows,
compared to a number of emerging markets, India’s power sector is substantially more inefficient. For
example, compared to China, the proportion of power output that is lost in India is 5 times greater. The gap
between India and competitor countries in power that the figure illustrates is true for infrastructure more
broadly.
Figure 1: Power sector inefficiency: International comparison, 1980-2009 (transmission and
distribution losses as percent of power output)
What is interesting also is the relationship between governance in the power sector and the performance of
the states within India. Figure 2 below plots the relationship between a state’s economic growth (measured
as the growth in state net domestic product per capita between 1993 and 2009, broadly the reform period in
India, on the y-axis) and the state’s transmission and distribution losses in the power sector (on the x-axis).
The association is strong, suggesting that states that do poorly in the power sector because of weak
governance also do poorly more broadly. (This association also holds for earlier periods)
Figure 2: Transmission and distribution losses and economic growth
These arguments suggest strong grounds for pessimism. Where is the promise? There has always been a
mystery about the politics of the power sector. Successive governments in India at the central and state
levels have considered populism—the promise of cheap or subsidized power—an effective strategy. But
the consequence has been either no power or highly interrupted power for a vast majority of Indians.
Why has the Indian voter fallen for this demonstrably non-credible promise by the politician? Put
differently, why hasn’t a politician seen the possibility of delivering steady and reliable power as a superior
electoral strategy? Consumers, even the poor, would be willing to pay for power if they could be assured
that it would be there. And, if consumers pay for power, there might even be a flood of private investment
that is now deterred by the mess resulting from populist politics.
The good news is that greater decentralization in power sector decision-making opens up the opportunities
for interesting experimentation by the states. And some of this is happening. Tamil Nadu in the southern tip
of India is investing in nuclear power; Gujarat, in the west, is considering giving farmers a choice between
more expensive but steady power and cheap but uncertain power; and a number of states and cities have
privatized, or are contemplating privatizing, the distribution of power, which would allow more effective
metering of power usage and facilitate payment by consumers.
None of these experiments is close to being successful and worthy of emulation by others. But, in a
perverse way, one of the benefits from the tragedy of the recent blackouts might be the impetus to break
with the status quo and force state governments to be more responsive by being more bold.
The power sector and addressing its problems are critical for India in two respects. Like salt in the 1930s,
power has become a necessity for ordinary Indians and an integral part of the rising expectations that Indian
dynamism must satisfy. More importantly, if India could “crack” power, it would address the bigger
problem of severing the link between (costly) populism and electoral success.
Saying to a latter day politician that power is a symbol should not provoke the Gielgud snub. It should
provoke political action.
http://gulzar05.blogspot.com/2010/11/analysing-trends-in-indias.html
Wednesday, November 10, 2010
Analysing trends in India's macroeconomic policy
The Great Recession has accelerated several changes already underway in the world
economy for the past few years. Arguably the most significant development has
been the emergence of developing countries as engines of global economic growth.
It has also exposed several deficiencies in the dominant Washington Consensus
model of economic growth. So much so that, faced with its deepest economic
downturn since the Great Depression, the US itself is reassessing many of the sacred
tenets of the Washington Consensus.
The spectacular rise of China and the increasing certainty of India emulating China
have meant that Beijing Consensus and now, the "Mumbai Consensus", are slowly
gaining wider acceptance. In a recent speech in Mumbai, Lawrence Summers coined
the phrase "Mumbai Consensus" to describe the nature of India's economic growth
model which has seen the country's chart the troubled sub-prime waters relatively
trouble-free.
The Indian model is characterized by "a reliance on domestic consumption rather
than exports, services rather than manufacturing, and private enterprise rather than
state-led companies and investments". It bears striking similarities with America's
own growth history and trajectory, and unlike the Chinese model, revolves around
private-sector driven growth and democratic pattern of development. Further,
India's response to several important global macroeconomic issues has generated
the impression that the Mumbai Consensus is closer to an open-market economy
driven approach. This feeling gets amplified when seen against diametrically
opposite reactions among other developing economies and even developed
economies.
India's willingness to allow both capital unfettered access into equity and debt
markets and the exchange rate to strengthen stands against reluctance among
others, both developed and developing, to do the same. These have been part of a
remarkable trend where Indian economy charts a path at variance from the rest of
the world, one which appears to put India to the right of the economic spectrum.
Here are a few examples.
1. The aftermath of the sub-prime meltdown has engendered deep financial market
uncertainty. However, despite the Great Recession in the developed economies, the
global financial markets have recovered smartly since March 2010. This has been
characterized by sharp spurt in capital flows into the emerging economies, whose
equity markets are clearly showing signs of froth.
It is in this context that, early this year, the IMF broke with its long-held ideological
position, and said that capital controls are a "legitimate" tool in some cases for
governments facing surges in external investments that threaten to destabilize their
economies. There have been an increasing chorus of voices calling for capital
controls for developing economies. The World Bank is the latest to advice Asian
economies of temporary and targeted controls to contain asset bubbles in the
region’s stock, currency and property markets.
Before and after the IMF's change in stance, countries like Brazil and Thailand have
announced policy measures to limit capital flows. Brazil imposed a 2% tax on
foreign portfolio inflows last October. Thailand has imposed a 15% withholding tax
last month on interest and capital gains earned by foreign investors on Thai bonds
issued by the government, central bank and state enterprises, and is contemplating
more controls. Earlier in June, Indonesia introduced "quasi-capital control measure"
by making short-term investment less attractive to foreign funds. A few days back,
the South Korean government moved to stabilize the won by limiting assets
accessible to foreign capital, while Taiwanese officials made some bank deposits off
limits to foreign investors.
However, despite itself experiencing a steep rise in foreign capital inflows into its
equity markets which recently breached its highest ever mark and shows signs of a
bubble getting inflated, India has so far refrained from any talk of capital controls.
The FIIs have pumped in a massive $26.7 bn into Indian equities till October end. In
fact, just a few days back, even as some other economies were contemplating
introduction of capital controls, the Indian government again reiterated its resolve
to not impose capital controls. Instead it has preferred sector-specific selective
credit controls to prevent the build-up of asset bubbles.
India's tolerance for higher capital inflows stem partly from the realization that it
requires foreign capital to bridge the widening current account deficit (CAD) and to
fund its huge infrastructure investment needs.
The strong economic growth and its import-intensity, coupled with a not-so-strong
export growth and relatively stagnant domestic savings rate, makes foreign capital
critical to sustaining high growth rates.
In view of all the aforementioned, the RBI and the Government appear to have
informally agreed to raise the tolerable level of net capital inflows to $150 billion, up
from the earlier figure of around $110 billion.
2. China's policy of keeping its currency pegged to a steadily declining dollar confers
significant advantages on Chinese exporters. This has raised concerns among its
trade competitors, especially those from other emerging economies. Atleast some of
them have already started open-market operations to buy up dollars, and more look
likely to follow.
Recently, after many years, the Bank of Japan carried out foreign exchange market
interventions to keep the yen from appreciating any further. The central banks of
Brazil, Thailand and South Korea have also been active in the foreign exchange
markets to limit the appreciation of their respective currencies.
The Rupee has appreciated strongly against the dollar. Led by the export-dependent
software industry, Indian exporters have been mounting pressure on the
government to take action to stem the appreciation. However, the RBI has been
remarkably reluctant to buy this line and has steadfastly refused to intervene. The
exporters have been advised to become more competitive to respond to such
market pressures, instead of relying on government crutches.
In fact, the RBI appears to have taken a measured and long-term view of the rupee
appreciation. In a recent speech, the RBI Governor even said that "currency
interventions should be resorted to not as an instrument of trade policy but only to
manage disruptions to macroeconomic stability" and cautioned about the costs of
such interventions.
3. The recent second round of quantitative easing announced by the US Federal
Reserve has been met with strong criticism across the world. The German finance
minister denounced it as "undermining the credibility of US financial policy". Many
emerging economies too have criticized the move, describing it as postponing
structural adjustments in the US economy and exacerbating the global
macroeconomic imbalances.
India has been the only major economy to support US QE. It has acknowledged the
importance of monetary accommodation for economic recovery in the US and the
importance of a healthy US economy to global economic prospects.
4. In a classic inversion of roles, India today appears on the free-market side of the
globalization debate more than even many developed economies. Apart from certain
controls on food-grain exports, it has been continuously liberalizing its economy,
albeit at a slow pace. This trend has been in contrast to protectionist sentiment on
the rise elsewhere, including the US.
In response to the outsourcing bogey, the US has tinkered with various measures
like limits on visas for IT personnel from abroad and restrictions on firms receiving
stimulus assistance outsourcing work abroad (discriminatory tax treatment based
on whether the firms create jobs at home or abroad). It recently imposed fee hikes
of $2,000 or more on H1-B and L-1 visas for highly-skilled foreign workers at firms
employing more than 50 workers, with half or more of their workers on H1-B visas.
Realizing the benefits of an open economy and expanding international trade, India
has been steadily opening up its economy. This stands in contrast to the continuing
reluctance of the East Asian countries to open their economies to trade. India has
gone far ahead of even OECD economies like South Korea in liberalizing both its real
economy and financial markets to international competition.
5. The contrasting fortunes of the developed economies and India to the sub-prime
mortgage crisis has drawn attention to the role of regulators on all sides. How did
India and its financial institutions, despite its relatively open financial markets and
conventional regulatory architecture, escape the fate of counterparts elsewhere?
The RBI has used multiple instruments and a menu of options to manage the
external sector and the monetary policy both before and in response to the subprime crisis. It has followed a carefully sequenced movement (which is also
dependent on the developments in both the real economy and financial markets)
towards capital account convertibility and controls on debt flows - both private and
inflows into risk-free sovereign debt instruments to take advantage of interest
differentials (carry trade). And all this has been backed up with strict enforcement
of regulations.
6. India has contributed its fair share to addressing the global macroeconomic
imbalances - skewed trade, savings, consumption, and investment preferences. In
stark contrast to countries like China which implicitly suppresses local
consumption, India has one of the largest shares of domestic consumption. Its
domestic savings rate at around 35%, which while not adequate, has grown
significantly over the past decade.
At a time when the developed economies are attempting to export their way out of
recession and emerging economies want to continue with their export-dependent
growth model, India is one of the handful of major economies willing to provide
aggregate demand. Unlike, the closed and export-oriented East Asian economies,
India has steadily liberalized its economy and is an increasingly significant market
for global exporters.
A recent speech by the RBI Governor conveyed a great sense of maturity about the
way India conducts its macroeconomic policy. He described the dilemma facing the
Central Bank
"The biggest problem thrown up by capital flows is currency appreciation
which erodes export competitiveness. Intervention in the forex market to
prevent appreciation entails costs... If the resultant liquidity is left
unsterilized, it fuels inflationary pressures. If resultant liquidity is sterilized,
it puts upward pressure on interest rates which, apart from hurting
competitiveness, also encourages further flows."
He had more wise words for Central Banks and governments across the world,
"In as much as lumpy and volatile flows are a spillover from policy choices of
advanced economies, the burden of adjustment has to be shared. It’s
unrealistic to expect emerging market economies to carry the full burden of
lifting global growth... Managing currency tension will need shared
understanding on keeping exchange rates aligned to economic fundamentals
and an agreement that currency interventions should be resorted to not as an
instrument of trade policy but only to manage disruptions to macroeconomic
stability."
And about what the world needs now, he said
"The surplus economies will need to mirror these efforts — save less and
spend more, and shift from external to domestic demand. They need to let
their currencies appreciate."
Are US, China, and Germany listening?
Update 1 (13/11/2010)
Among the major economies, India has the lowest exports to imports ratio.
Identifying Top Provincial Opportunities
in China
http://blog.frontierstrategygroup.com/author/shailenezhu/
7/24/13
Companies are expanding beyond coastal provinces into inland central and west provinces to leverage low
manufacturing costs and capture growing domestic markets. To be successful in geographical expansion,
multinationals need to foresee the growth trajectory of provinces and regions in China to understand from
where future growth will come. FSG has identified nine provinces of growth opportunity, which
multinationals should focus on to maximize ROI in geographical expansion – refer to the green circle in the
chart below (click image to enlarge):
As indicated in the image below strong economic growth in western China can be attributed to organic
growth from the provinces’ low base and favorable government polices launched in 2010 to bridge the gap
between eastern and western China.
I will have a subsequent post to continue the conversation of provincial expansion in China. Check back
later for a look at China’s potential urbanization and a closer analysis of nine key industries in the region.
China | Industry Analysis by Province
Continuing the topic of Provincial Opportunities in China, urbanization will become a major growth
driver for China as 250 million farmers will enter cites in coming decade. However, the trajectory of this—
the largest urbanization program in human history—is not certain; policymakers and academics are still
debating the pros and cons of different urbanization scenarios. The path China eventually takes will have a
huge impact on its economic future and wealth distribution, creating both threats and opportunities for
multinationals. China’s urbanization plan will create growth opportunities for companies targeting private
consumption, infrastructure investment, and productivity gain (see info-graph below)
Provincial governments in China have great power in designing industry polices and approving investment
projects. 95% of FDI projects were approved by provincial governments and only 5% by the central
government. Therefore, it is critical for multinationals to understand the government’s policy orientation at
a provincial level and identify attractive provinces in each industry based on investment level and incentive
structure.
FSG has analyzed the growth opportunity provinces’ competitiveness in nine key industries. Manufacturing
and real estate are not ranked, because all provinces invest heavily in those two, which represent about 60%
of total investment in aggregate. Other 7 provinces are ranked based on investment level in that particular
industry – you may click the image below to enlarge the chart:
About Shailene Zhu
Shailene Zhu is a Senior Analyst for China thought leadership at Frontier Strategy Group. Ms. Zhu is based
in Singapore where she manages the China thought leadership research for FSG and advises heads of Asia
and heads of China on strategies for the region. Ms. Zhu has experience in corporate strategy, business
analysis, and research and previously worked for MNCs including Ingersoll Rand and General Electric. She
received her Bachelor’s degree at Shanghai International Studies University, studied at the University of
Hong Kong, and speaks English, Mandarin, and Shanghainese.
Find more about me on:
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LinkedIn
Recent Posts
July 24, 2014 By Shailene Zhu Leave a Comment
China’s Rapid Pulse: Thoughts from the Road
I am standing amid the hustle and bustle of the main street of Shanghai, unable to hail a taxi and scrambling
to open Google on my phone. I’ve forgotten it’s recently been banned in mainland China and that
drivers now prefer passengers who book through WeChat, a mobile app that lets taxis charge an additional
service fee. I’ve lived in this country for most of my life, but I still have trouble keeping up with the pace of
China’s evolution.
During the 12 days I spent in Shanghai, I spoke at length with clients, experts, local think tanks, and
consulting analysts all focusing on one thing: how businesses can adjust to a developing China. A few of
the on-the-ground insights I picked up are highlighted below.
Older Shanghai-style “Shikumen” architecture is found adjacent to newer model facilities.
From the business operations standpoint, local competition is happening at the provincial level rather
than the national level. Many strong, regional-based Chinese brands are emerging and ramping up their
capabilities in order to become “national” brands. Echoing the findings detailed in my past report on
Managing Local Competition in China, the biggest challenge multinationals are facing is how to localize
their strategy in an increasingly sophisticated China. Opening up a developed-market “toolbox” is not
sufficient enough to solve China-specific issues.
The crux of this problem is that, in a sense, China is not really a single country—it is a series of distinct
regions. A standardized strategy cannot work well in China because of the cultural diversities, wide range
of local dialects, and large wealth gap. Some clients are beginning to reconsider their city tier-based model,
questioning whether it is an effective way to segment customer needs. Even within one tier, the divergence
will be daunting. However, you cannot create 200 business models for one country because it will not be
profitable. In my upcoming report on Evolving Consumer Base and Urbanization, which will be released in
a few weeks, I will provide detailed analysis of FSG’s cluster model and its implications for MNCs’ go-tomarket strategies.
The idea to develop city clusters is central to the government’s plans to smartly urbanize people and cities
in order to better allocate resources and boost small and mid-sized cities by leveraging the agglomeration
effect from big cities. In the future, China will have three world-class super clusters that will radiate around
16 regional clusters. Logistical corridors will be built to strengthen the linkages between the northwest
Chinese city of Urumqi and Russia, as well as the southwest city of Chengdu and European countries
through the Pan Europe-Asia Bridge.
One pitfall that MNCs run into easily is making overambitious investments in backend facilities before the
business strategy has been proven successful and the front end starts to generate revenue. Another pitfall is
applying a swing strategy between the premier and middle markets. As the middle class booms, successful
MNCs will create high-margin products to serve the massive middle market instead of the super premier
market, which has very limited scale. (One client used the metaphor, “We don’t want only to skim a slide
of fat from a big soup.”)
The O2O (Online-to-offline) model is poised to be the future of e-commerce in China. An e-commerce
solution provider I talked to has already seen its O2O revenue contributions to their overall portfolio
increase from 0% to 30% within one year. Target clients include lots of big-name retailer/FMCG/luxury
products. Many MNC clients will be looking into this option in the coming years.
From the macroeconomic perspective, the recent shift in manufacturing is a result of the Chinese
government’s policies. Although the current manufacturing outflow is an irreversible trend for China, the
question here is about its timing. On one hand, this change is happening before the economy is fully
ready. That’s why this transition is creating some problems. Some enterprises in the coastal region cannot
afford the increasing labor/land cost because the government has implemented a land quota, and they will
eventually move to ASEAN. On the other hand, the government is encouraging investment in west/central
China by increasing the land supply and subsidiaries. However, the infrastructure-driven model makes
inland China more prone to debt issues, the “ghost city” phenomenon, and heavy pollution.
Government always follows the path of creating supply first and then waiting for demand to materialize the
supply. When the pace of “city-urbanization” outpaces “people-urbanization,” ghost cities are created.
When highly polluting manufacturers move to inland cities, polluted water then flows along the Yangtze
River from inland to east regions. Two types of manufacturing shifts are taking place. First, higher laborintensive manufacturing is moving to ASEAN (as we mentioned in our latest ASEAN manufacturing
piece), and possibly to Africa in the next 20 years. Second, lower labor-intensive manufacturing is moving
to Shanghai’s satellite cities, such as Hefei or inland/west cities, based on the analysis of overall
transportation costs and whether the business nature is more export-driven or more domestic market-driven.
Last but not least, China’s growth model dictates that it MUST grow. If growth is under 5%, all of the
problems—shadow banking, local debt, and the real estate bubble—will explode. The internationalization
of RMB and the financial market will feel consequences overnight and then will impact global markets too.
If the country manages to maintain current levels of growth, all of the issues can be resolved by themselves.
China’s current challenge is similar to the European debt crisis—one country, one currency. In addition,
people cannot move freely because of the “hukou” restriction (the local registration system in China), and
governance administrations are managed separately (different provincial governments work differently and
lack integration). However, the future of China’s growth is promising. China is different from Japan. The
advantage of having a centrally manipulated economy is also having well-planned fiscal/monetary policy
from a government that can achieve highly effective results.
Finally in a taxi on my way to the airport, I noticed something interesting. Old Shanghai-style architecture
is being replaced by model facilities. It’s a result of the rapid pace of China’s urbanization, and the sharp
contrast is visible on every corner. Differing styles must coexist as the society transitions, proof that
everything moves at an astonishing pace in this market.
Filed Under: Asia Pacific Tagged With: China, Competition, growth, manufacturing,
o2o, Shanghai
May 28, 2014 By Shailene Zhu Leave a Comment
How Can MNCs ‘Partner’ with Governments in China?
It only has been one month since my last blog titled, “Why MNCs Need a Better Government
Engagement Strategy for China.” However, since then, the dynamics have changed drastically. Foreign
multinationals have been publicly investigated for illegal business practices and have been exposed to
cyber security risks and intellectual property infringement. The paradox of an uncertain regulatory
environment existing alongside a relatively attractive market suggests MNCs must have found an effective
way to manage relationships with Chinese governments.
After extensive conversations with our clients, industrial experts, and business associations, I realized that
the biggest challenge MNCs face is how to build a strong advocacy message to governments.
Naturally, the rapidly evolving government structure makes it difficult for multinationals to identify the
right stakeholders. To make matters worse, the opaque environment hinders companies from having a
proactive reaction before a negative policy rollout. The crux of problem is that most foreign companies lack
a deep understanding of Chinese government agendas and are unable to deliver their values to governments
by facilitating their political objectives.
Below is a snapshot of the most pressing challenges for the Chinese government. To better work with the
Chinese government, multinationals should change from being regulation “destructors” to “instructors,”
who can demonstrate knowledge about policy and provide valuable industry input—areas in which the
central government is most interested. For example, multinationals can match their companies’ capabilities
with the Chinese government’s publicly stated objectives to develop cutting-edge technology in strategic
industries or promote innovation among China’s youth.
Nowadays, think tanks are playing an increasingly important role, and the policymaking process is no
longer a “black box” in China. Companies can work on participating in the decision-making process to
lobby think tanks and shape policy, thereby preparing for any policy “surprise” before it is too late to make
changes. In some cases, a company’s government affairs team can engage the right opinion leaders and
then recommend them for the policy development process. By doing so, they help the government select
true experts, who can provide professional suggestions, and also help themselves influence policy making.
Filed Under: Asia Pacific Tagged With: China, Chinese Government, government
engagement
May 5, 2014 By Shailene Zhu Leave a Comment
Why MNCs need a better government engagement strategy for China
Continuing from my last blog post around the workshop I led in Shanghai, I realized that across the board
all MNCs need to build/re-think their strategy around Government Engagement. There are three
fundamental themes that have changed in China and are leading companies to revisit their GA (government
affairs) strategies.
Increasingly
Decentralized
Landscape
Invites
New
Challenges
Local governments in China are rapidly becoming more important and have greater roles in economic
development and commercial investment issues; the governments are becoming economically liberalized
and politically centralized. The rise of second-tier cities are encouraging the development of government
relationship strategies from the national level to local levels. For example, MOFCOM delegated its
approval authority for the establishment of FIEs (foreign-invested entities) within “encouraged” industries
to its provincial counterparts.
However, this is not to say that MNCs can shift focus from the national level to the local level. Because the
central government still plays a decisive role in important policymaking, MNCs have to engage multiple
sets of government authorities.
Change of Barometer: “Guanxi” is Still Necessary But No Longer Sufficient
Guanxi (relationships) are less valuable now than they were in the past. By contrast, creating and
maintaining positive relationships with the Chinese government is more about developing a deep
understanding of policies and building a reliable public image than purely relationship building with
government officials.
We’ve witnessed that MNCs that use their knowledge to engage with the governments are more likely to
succeed more in China
GA Function is Prone to Expectation Conflicts and Functional Disconnection
Increasingly, we see a lot of MNCs considering merging GA and public affairs teams in China. This is due
to two issues:
1. Expectation Conflicts: Misaligned expectations complicate the balancing of
business units’ short-term commercial needs with headquarters’ long-term
policy studies as well as the application of global government affairs
standards to the unique China context.
2. Functional Disconnection: The Chinese media is censored by the
government. Separate GA and external communication functions may cause
the misalignment of key messages and delay prompt and proactive reactions
from GAs
Policy
Understanding
Differs
Through industry associations and local relationships with NGOs, MNCs can play a very active role in
ensuring that central policies are interpreted appropriately by the local government (another big issue).
Having the right advocacy through independent research, NGOs, etc. will work in a company’s favor.
Many MNCs report that local governments are taking much longer to make decisions, because the central
government’s view on their long-term role isn’t clear.
Leverage
Distributors
to
Build
Local
Relationships
MNCs are piggybacking on their distributors’ connections with local officials to build their own
relationships with lower level governments. The conversations may be tough, but the outcomes are often
profitable, because having a local face on your company is a big part of building an effective strategy
We are finalizing our report on Government Engagement tactics in China in the next couple of weeks, and I
would encourage our clients to download the report and review the best practices in detail when it is
available.
Filed Under: Asia Pacific, Uncategorized Tagged With: China, government
engagement
April 29, 2014 By Shailene Zhu Leave a Comment
Preparing for China 2020: Effective Distribution Management
I’m writing this blog post with great enthusiasm because the inputs came from more than 40 client
meetings I did during my trip to Shanghai in April. In addition to my meetings, I also had the privilege of
hosting a workshop for a group of FSG clients, mostly comprised of Heads of Asia-Pacific or GMs of
China.
During the workshop, we discussed in detail the implications of the macro environment for MNCs along
with break-out sessions on distribution management and government engagement in China.
I have listed some of the key learnings regarding distribution management from my trip below:
1) Distribution Consolidation—Good or Bad?
MNCs view distributor consolidation as both good and bad. Companies that have been in China for decades
want to drive efficiency by consolidating distributors (at times driven by government policies). In some
cases, MNCs have more than 350 distributors. A lack of hunger continues to be the biggest inhibitor to
convincing distributors to go beyond their respective cities and further expand.
MNCs that have been in China for less than five years aren’t in favor of consolidation, because it would
undermine their bargaining power. Some of the late entrants to the market prefer to work with tier 2
distributors, as they are more eager and hungry to grow the business.
2) Breaking the Myths on E-commerce
It is becoming increasingly difficult for MNCs to strike the right balance between brick-and-mortar and ecommerce operations. Pricing conflicts are on the rise, because country/provincial policies at times tax
goods sold via traditional channels but not via e-commerce.
Conflicts with distributors are also increasing, as some smart distributors are opening their own ecommerce platforms at the local level (and selling low-end products).
E-commerce is 2–3 times more costly than traditional channels, because it’s very expensive to drive
demand online. Educating consumers on the products is both costly and time-consuming.
3) Distributors as a Threat
It seems to be increasingly important in China for MNCs to reach out to end users directly and own their
customer relationships. In the medical devices space, for example, distributors are copying the devices from
MNCs and then selling them to clients as a cheaper option.
In many cases, it is the distributor who has developed a close relationship with the buyer (e.g., a hospital or
doctor). Because of this relationship, they will be invited into the operating room to help operate the device.
As a result, the original manufacturer loses control over its sales and marketing process as well as its brand
image.
4) Go beyond “Volume” to “Value-Based” KPIs for Distributors
MNCs are experimenting with new ways of incentivizing distributors; many of these methods utilize KPIs
based more on value than on volume. Companies see quarterly reviews with their China leadership as
critical to success.
During the workshop, I asked our clients on how their 2014 targets comparison with 2013. Their responses
were quite interesting:
■ Extreme views are emerging on China’s 2014 MNC business outlook; 37% of respondents expect
growth in 2014 to be less than 5% higher than 2013 or slower than growth in 2013
■ On the other hand, 55% of the respondents expect their business to grow by more than 10% this year,
and a staggering 26% expect their business to grow by more than 21%
In FSG’s recent report on distribution management in China, we a) explore in-depth issues around
distributor consolidation and how government policies are impacting the business landscape, (b) provide a
robust and pressure tested framework for MNCs to consider as they evolve in their game plan to go direct
or indirect from tier 1-5 cities in China; and c) provide tactics around what other multinationals have done
in China (with inspiration at times taken from local companies in China).
FSG clients may click here to access to report.
Filed Under: Asia Pacific, Uncategorized Tagged With: China, Distribution Channel,
Distribution Management
March 31, 2014 By Shailene Zhu Leave a Comment
Capitalize on the Evolving Channel Landscape in China
Life is getting more difficult for foreign companies in China because of growing Chinese local
competition and invasive government policies that obscure the regulatory environment. MNCs which
wish to stay for the long-run will have to adapt their channel strategies to this changing environment. China
is set to undergo significant changes, and a few new channel models have already surfaced at a rapid pace
and have been adopted quite well by a few leading Chinese companies. Multinationals should be aware of
those trends and be prepared to revisit China’s go-to-market strategy a minimum of every two years to stay
ahead of the competition.
FSG has summarized three key channel trends to help companies better understand the local nuances and
capitalize on the evolving distribution landscape in China:
1. Channel disintermediation
The key issue affecting the Chinese distribution landscape is the fragmented nature of the market. As a
result of this high fragmentation, goods move through several layers of distributors before reaching the end
customer, thereby creating inefficiencies, high distribution costs, and an intensified frequency of channel
conflicts (or Chinese Buzz word, “窜货” pronounced ‘cuan huo’). It has now reached a tipping point,
where companies across industries are realizing the importance of developing their own sales and
distribution arms. They are choosing to remove intermediaries and cut out middlemen to have better market
access, or to just go direct in tier 1 cities.
2. Rise of e-commerce in lower-tier cities
Everyone understands the opportunities that China’s e-commerce market provides, as it has overtaken the
United States as the world’s largest market. However, not all companies fully comprehend how to utilize
the online channel, especially to penetrate into lower-tier cities. The effectiveness of the online channel is
more pronounced in less-developed tier 3 and 4 cities. According to the statistics, the online channel in
lower tier cities leads to incremental consumption instead of just replacing the offline spending. MNCs
across the B2B or B2C landscape need to start building an effective e-commerce game plan to leverage this
channel effectively. FSG has in-depth resources to provide its clients a strong starting point in this regard.
3. Distribution consolidation
Government policies laid out in China’s 12th five-year plan call for consolidation of distributors. In some
industries, such as pharmaceuticals and automobiles, numerous acquisitions have already taken place. A
few leading distributor groups are expected to benefit from expansion and acquisition policies, while
manufacturers (including MNCs) might be negatively affected, because their wallet share in their
distributors’ business portfolio will be diluted.
*Source: Frontier Strategy Group analysis
FSG is hosting a detailed session on effective distribution management for its clients on April 15 in
Shanghai.
Filed Under: Asia Pacific Tagged With: Channel Model, Channel Strategy, City
Prioritization, CRM, Distribution Management, e-commerce, Go-to-market Strategy,
joint venture, Merge and Acquisition, Partnership Model
January 6, 2014 By Shailene Zhu Leave a Comment
Decoding China’s Third Plenum Reforms for MNCs
There has been much talk about China’s Third Plenum, and with good reason because China’s Third
Plenum is one of most important meetings for Chinese economic and social policy. Deng Xiaoping,
China’s paramount leader following the death of Mao, inaugurated the meetings in 1978 to implement
economic reform within China, which effectively opened up China’s economy to increased foreign direct
investment (FDI) and laid the foundation for China’s golden 30 years.
Not only is the Third Plenum considered a crucial moment for China because of its global economic
impact, it is also the stage for China’s new 5th generation of leadership, Xi Jinping’s administration to
unveil a new agenda for key political, economic, and social policies. These policies will effectively decide
China’s growth trajectory over the next 5–10 years, which not only has an obvious impact on China but
also the global economy. The Third Plenum comes as China faces unprecedented economic and social
challenges from local government debt, shadow banking, and staggering GPD figures. The Chinese
government is expected to take the opportunity to address all of these challenges and to plot the course for
the coming years.
How will the Third Plenum affect Multinationals doing business in China?
The Third Plenum will certainly affect the competitive landscape within China. As part of the plenary
process, the Chinese government will identify relationships between SOEs, private owned companies, and
multinationals. Private enterprises are to obtain more freedom, but SOEs will still remain dominant players
in the market. The Chinese government will also emphasize the role of market forces, albeit a double edged
sword for multinationals. Allowing market forces to direct investment will give private domestic
companies in China reduced barriers of entry and easier access to capital.
The Chinese government will also deregulate the price for energy which will affect the cost of doing
business. Though this will increase the cost of doing business in short-term, the government will also enact
interest rate liberalization leading to the lower borrowing cost for companies in the future. Any company
currently doing business in China knows that government engagement is necessary, even if
cumbersome. This will remain the case for MNCs since purchasing decisions will remain consolidated at
the central level, including food, drug, healthcare, and construction. MCNs need to consider crafting a
centralized government engagement strategy to navigate the political field.
The Plenum will also affect consumer bases, namely those in the early childhood sector can expect a large
increase in the consumer base. After the relaxation of one child policy, urban families are allowed to have
two children if one of the parents is an only child, which is expected to lead to 2–3 million new babies born
each year. Baby-related consumer products, such as in food, diapers, infant milk powder, automotive, toy
and clothing industry, will boom in the short term. However, since newly born babies won’t enter the
workforce within the next 20 years and parents need to reduce working hours to care for additional babies,
a smaller supply of workers will push up labor prices in the middle term.
Lastly, and certainly not least, foreign investors will see significantly lower regulation barriers. Mixed
ownership structures will be allowed and investors will be encouraged to for private sector partnerships in
key strategic industries. MNCs will enjoy the improved regulatory transparency and stability for foreign
investments in the Shanghai Free Trade Zone. Unfortunately, China will also continue to intensify
indigenous innovation, resulting in a “techno-nationalism” and promulgating China’s IP protection, or lack
thereof. China is typically deemed one of the great economic powers of the 21 st century, and it seems the
Third Plenum is attempting to continue that trend. For further reading on China’s Third Plenum, Frontier
Strategy Group clients can click here to access the full report.
Filed Under: Asia Pacific Tagged With: China, Customer Base, government
engagement, Marco Economics, Policy Analysis, Resource Allocation, Risk
Management, Third Plenum
November 20, 2013 By Shailene Zhu Leave a Comment
The Time is Now for China R&D
The importance of a well-designed China R&D game plan
As multinational executives consider their China R&D strategy, local companies are already penetrating
into their key markets at an astonishing speed. The time is now for multinationals to take action on their
China R&D game plan, whether that means increasing existing R&D capabilities or initiating an entry plan,
failure to act now will risk missing out on a tremendous opportunity. Skepticism will always prevail but
overcoming that will require thorough and strategic thinking.
Define your R&D strategic goal
Defining a clear goal for your China R&D center is vital for success. Many MNCs often find their current
R&D center is not effective enough to sustain revenue growth, or current operations face challenges related
to cost, talent pressure, and regulatory barriers. This is likely because a clear strategic objective was not
properly defined at the very beginning. FSG proposes four types of objectives that an R&D center can
achieve based on your business’ maturity:



Market Entry: During market entry, MNCs should consider outsourcing the
manufacturing function to China by monetizing cost arbitrage. By
establishing a local supplier network, China sites will help MNCs become a
cost leader in the global market.
Early Stage: As time goes by, headquarters may allocate more
responsibilities to China R&D such as developing the full range of project
management competencies. R&D centers at this stage will begin to conduct
relatively complete modules of the development process rather than just low
value added manufacturing.
Late Stage: Given that local market is becoming more attractive, China R&D
centers may be elevated to develop a local product/brand to cater to the

domestic market. Organizations will also evolve from a centralized model to
a decentralized model.
Established: At the next level, companies can consider expanding their China
R&D center to serve similar Asian or even global markets. The benefits are
obvious; to improve China R&D centers’ scalability by converting them into
global resource integrators. This upgrade will also help to enhance the
bottom line, as revenue is increased by leveraging China R&D center for
Asia/global and cost is reduced by consolidating duplicated resources across
pan Asia/global wise.
Though this framework is not a one-size-fits-all solution it is a great starting point for MNCs needing to
enter or ramp-up their R&D efforts in China. FSG has done in-depth research assisting multinational
executives to consider deepening their China R&D plans. Eventually, the R&D offices in China can play a
larger role, i.e. manage some global product innovations or help in launching products which can be
optimally used across Asia.
Filed Under: Asia Pacific Tagged With: China, R&D, Research and development
October 1, 2013 By Shailene Zhu 1 Comment
Chinese Challengers: Dealing with Local Competition Inside and Outside the
Middle Kingdom
There is no silver bullet to address
growing Chinese competition; western executives already perceive Chinese companies as current and
potential threats to their business in China. However, it is high time that multinationals are urged to build
industry specific plans based on the strengths of Chinese competitors. FSG has developed a competitive
framework with tailored tactics and strategies at different maturity levels to help multinationals cope with
increasingly sophisticated Chinese competition.
Multinationals’ journey in China typically starts with a strong market position in terms of product quality
and brand image, relative to less sophisticated Chinese competitors. This “honeymoon” phase doesn’t last
long as nimble Chinese companies quickly absorb advanced technologies from multinationals, leveraging
bold innovation and deep understanding of the local market. This is a common result of the Chinese
phenomenon called Shan Zhai 山寨, or ‘knock off’ in English. Shan Zhai companies typically start by
producing low-end product and eventually evolve into highly competent businesses, thus becoming
formidable market disrupters or even market leaders; the latter being dangerous to multinationals looking to
legally build brand and IP ownership in China.