U.S. Companies Are Smart to Dig for China’s Riches
China, which has long been churning out low-cost goods for U.S. consumption, is increasingly cranking up to serve another giant consumer market: its own.
General Motors Corp., for instance, recently reported earning more than $500 million, or about 40% of its worldwide automotive profit, last year in China. It sold about 400,000 cars and trucks to a rising class of Chinese with money in their pockets.
The world’s largest automaker, which has $2 billion invested in China, is expanding two of its four factories there and introducing auto financing through its GMAC division.
It is bringing the Cadillac into the country and also offering a slate of low-priced vehicles, attempting to entice Chinese consumers with a wide range of styles and prices. Such overtures are reminiscent of the way GM reached out to first-time car buyers in 1920s America.
Even though less than 5% of China’s 1.3 billion people can afford any kind of car today, GM Chief Executive Rick Wagoner predicts that the nation will surpass Japan as the world’s second-largest car market within five years. In his lifetime, the 51-year-old Wagoner figures, China may even emerge as a larger car market than the U.S.
China, he told Bloomberg News this month, “is feeling like the great Gold Rush.”
As with any gold rush, however, those eyeing China for its riches would be wise to keep an eye out for the fool’s variety.
For one thing, China’s economy remains heavily state-owned and inefficient, with 20% of state bank loans listed as “nonperforming” -- a euphemism for being in default.
At the same time, China’s government is trying to elude inflation by restraining credit and slowing economic growth. But there are pressures on the government as more than 100 million migrant laborers flood into China’s eastern cities in search of construction work and other jobs so that they, too, can get the feel of cash in their pockets.
It is a tricky dance. If economic output slows too much, China is destined to have big problems, which would surely ripple around the globe. “The challenge,” says Nicholas Lardy of Washington’s Institute of International Economics, “will be to slow the economy without jeopardizing growth” too much.
On a micro level, there are potential pitfalls too. Take, for example, the auto sector into which GM is plunging headlong. So many locals are rushing to produce cars in China -- everyone from appliance manufacturers to real estate developers -- that some see a glut as inevitable.
This oversupply is going to “guarantee that nobody makes the profit they project,” says Maryann Keller, an independent automotive analyst.
So are U.S. companies deluding themselves as businesspeople have done in China for at least two centuries, mistaking the vast but mostly poor population for a market of potentially well-heeled customers?
The answer is no. Even with all its troubles, China is clearly headed in the right direction -- and determined to keep going. It has linked itself to the global economy through membership in the World Trade Organization. This month, its Communist Party decreed constitutional protection for private property.
“The glass is three-quarters full,” says economist Rob Koepp of the Milken Institute in Santa Monica, who has just returned from China.
In 2006, he notes, the nation will open its financial system to full participation by foreign banks and investment houses. “That will liberalize and bring efficiency to its system,” Koepp says.
Andy Xie, a Hong Kong-based economist for investment banking firm Morgan Stanley, agrees. Xie points out that the economies of Southeast Asia all declined after growing rapidly because they did not create a robust system of private industry and rules of law. China, by contrast, is working diligently to develop such a system by privatizing state companies and functions of government.
“This is the right direction for China,” Xie says.
Douglas MacLellan, a USC graduate and Los Angeles entrepreneur, has played witness to the changes underway. He first went to China two decades ago and over the years has set up a series of ventures there. All have failed.
“I have founded and lost seven companies in telecommunications, mostly because the government took them over or put them out of business,” MacLellan says.
But now he is back in China with AXM Pharma Inc., a U.S. firm formed with Chinese partners. Its aim is to distribute generic pharmaceuticals, cold remedies and skin-care products in China.
And why is MacLellan convinced it will work this time? Because China is consolidating its pharmaceutical industry and insisiting on higher professional standards in response to WTO demands. This shakeout, MacLellan explains, favors more sophisticated companies such as AXM Pharma, which is building a plant in China.
Meanwhile, many others are panning for riches. Last week, Viacom Inc. Chairman Sumner Redstone announced that his company was entering into a joint venture in China to produce children’s programming. For its part, Citigroup Inc. is looking to have 100,000 credit card customers in China by the end of the year, five times the number it has currently.
Philip Neal, chairman of Pasadena-based Avery Dennison Corp., which makes labels for consumer products, also sees China booming. He notes that 75% of the adhesive material made at the company’s Chinese factories now stays in the country, winding up on bottles of Olay moisturizing cream and the like.
Walk into a drug store in Shanghai these days, Neal says, “and you think you’re in the U.S. Shelves are filled with merchandise, and the Chinese are buying.”
As a label maker like Avery Dennison well knows, this is a trend that’s bound to stick.
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James Flanigan can be reached at jim.flanigan@latimes.com. For previous columns, go to latimes.com/flanigan.
