China is growing fast, then if we consider that its consumer market has the potential to be larger than that of North America and Western Europe combined, it is not surprising if companies from every corner of the world are rushing to establish a presence here.
China‘s rapid economic growth, especially in the urban areas, has led to a booming consumer market for high-end goods and services, including tourism and education. China will account for the consumption of about 20 percent of global luxury goods by 2015, or $27 billion. About 80 percent of people buying luxury items in China are 45 years or younger, whereas that percentage is only half for the United States. By 2020, China‘s middle class is expected to account for around 45 percent of the population, or approximately 700 million people. To be more precise, China has the potential to account for 25% of all the new consumption in the world in the next fifteen years (McKinsey, Asia 2009 Annual Chinese Study: Part II, available at:
https://solutions.mckinsey.com/insightschina/_SiteNote/WWW/GetFile.aspx?uri=/insightschina/default/en-us/aboutus/news/Files/wp2055036759/Insights_Cluster_FNL_web_4da74e92-e518-4a10-9528-862e75339b3b.pdf
).
As living standards in China continue to advance (see “2012 Annual Chinese Consumer Report – From Mass to Mainstream: Keeping Pace with China Rapidly changing consumer), its vast consumer market is undergoing fundamental change. A fast-growing segment of the population is becoming more self-indulgent in purchasing products, more individualistic in wants and needs, and more loyal to favorite brands even while maintaining some of the traits for which Chinese consumers are renowned, such as spending lots of time in stores comparing products. (
http://www.researchfindr.com/2012-annual-chinese-consumer-report-mass-mainstream-keeping-pace-chinas-rapidly-changing-consumers
).
However, it is also interesting to note that “despite these remarkable changes, China is still a developing country with significant economic divisions between urban and rural areas, albeit one with vast potential. A dichotomy is emerging between the wealthier segment of the population and the broader mass of consumers who are still in the early stages of satisfying desires for goods and services that exceed basic needs. The number of migrant workers remains high. In 2011, the urban population exceeded that residing in rural areas for the first time, with 690.79 million urbanites (more than double the U.S. population) versus 656.56 million rural dwellers. As of 2011, the per-capita disposable income of urban residents was $3,454 and the per-capita disposable income of rural residents stood at $1,105”. (
http://export.gov/china/doingbizinchina/index.asp
).
One of the challenges foreign investors face when structuring a move into China is navigating its framework of laws that govern business. Here one thing must be stressed: China often lacks predictability in its business environment. China‘s current legal and regulatory system can be opaque, inconsistent, and often arbitrary. Implementation of the law sometimes is inconsistent. This is why, when planning to establish a presence in China it is necessary not only to became familiar with all these laws and regulations governing FDIs (Foreign Direct Investments) and M&A, but also it is a must to know China a little be more before to invest in this market. To succeed in China, one must understand not only the regulatory environment regulating a prospected investment but also have a strong understanding of Chinese culture. I am an ravenous reader of the old classic The
Art of War
of the Master Sun Tzu, and in his treaty on the Art of war there is a sentence which fits perfectly in this context: “only if you know your counterpart and know yourself, you need not fear the result of your (business) adventure and you will succeed, otherwise if you know yourself but not your partner, for every victory gained you will also suffer a defeat, and if you know neither the enemy nor yourself, you will succumb in every battle (i.e. business adventure). So this is the basis when investing in China. To understand the cultural and the investment environment it is a necessary step to be included in your agenda before to enter the market, otherwise it is better to reconsider an investment only after it is possible to master all these elements.
In fact, as introduced above, the legal environment is one thing, but cultural issues also play an important role when doing business in China, and both must be understood in order to be succesfull here. So, the next entries will be about these topics, in fact before to continue to analize the legal framework regulating M&A, I come to realize that it is better to spend some more words on this particular “Chinese environment” if I wish to help my readers and followers to become more familiar with the this market, and hopefully accompany them investing in China.
– Cristiano Rizzi