Feb Insight- Achieving Better Visibility in China’s Muddy Waters

Understanding China’s Economic Indicators, which is becoming a standard reference book, by The Wall Street Journal correspondent Tom Orlik, raises the question: how reliable are China’s Economic Statistics?  

As was widely reported, the stock research analyst group Muddy Waters and the subsequent regulatory fallout have eviscerated the market value of numerous public companies whose primary business operations are in China. This was done by exposing the massive discrepancies between reported income and shareholder equity and the true picture on the ground.

China is the world’s second largest economy, but is ranked a lowly 75th in terms of transparency and corruption by Transparency International.

These conditions suggest that there is still a fog in the market that causes many leading multinational corporations or foreign invested SMEs in China manufacturing and marketing operations to fly blind.  Many of the investment strategies or market development assumptions reported to headquarters are being constructed using sub-par information and analysis.

How do foreign companies navigate muddy seas to obtain real information about market size, price points, customers, partners, competitors in order to make the best decisions and to bench market their own operations.

Some China-based personnel are either not trained professionally, over worked or have a vested interest in not providing accurate information to gauge the overall market or to assess a deal.  International companies must balance the cost of getting information against the value to the bottom line.

To overcome these information deficits, larger companies have developed sophisticated data models based around internal and external data points with sufficient original internally developed as well as existing public domain data points to be able to create a framework for analysis. The goal is to put together a template of inputs that can create a process that permits objective market analysis.  

Key assumptions can be benchmarked against industry association, government or academic reports or in-depth sector reports that can either be purchased on line or contracted out to consulting firms. It has important to delegate the contracting of external research to an independent market research team within the multinational, or a regional office or headquarters that is not subject to influence at the operational level. The Board at the parent level must have an independent understanding of the market’s depth and margin that its offshore business teams are using to make business and investment decisions.

Most companies are also remiss in debriefing their sales and marketing teams and suppliers. Despite its overall population, the actual number of industry insiders with good information is small. By having a formal debriefing process internally or organized and purchased from third-parties, international companies will find that many of the questions and concerns they have about a product, sector trend or its competition’s practices and strategy are known by their staff but not formally recorded, analysed and presented up the chain of command.  This debriefing is an area where the private sector can study and learn from the military.

Another consultant’s tactic is to read the prospectus and market research of companies that are listed internationally in your sector. These can reveal very detailed market analysis and price points for the cost of searching on the internet.

There is, however, no substitute for proprietary research that builds on desk research and internal knowledge by investing in the process that permits comprehensive interviews across a sector or a product line.

China’s muddy information environment is a liability; but also creates an opportunity for those smart companies that design and implement internal and external procedures to mitigate the opaqueness. This insight permits them to stay a few critical few steps ahead of the competition.
 

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