Intercedent Insight - November, Attack, a Form of Defence

This is not another opinion piece about whether China will have a hard or soft landing. The economists can debate the pace and percentage of the coming slowdown in GDP growth. Rather, our interest is to provide a warning for multinational corporations to review strategies and adapt operations to fit a softening Chinese economy.

In an environment where growth is declining, the standard reaction from management is to trim costs and adjust market prices and payment terms to ensure that business is not being taken away as a result of slash and burn pricing and other business practices introduced by competitors. However, where those competitors are local, it is worth considering that the companies in question could already be operating in the red or with razor thin margins.

Global Times, an official Party media organization, quoted a survey conducted by the National School of Development last month that 70% of Chinese SMEs are already operating without profit. In addition, an expected retraction of Government spending coupled together with steadily rising domestic inflation can be expected to add further downward pressure on the profitability of these players. In such an environment, it actually makes sense to consider investing deeper into the Chinese economy rather than ape the competition.

Expanding one's investment portfolio in China during this period of economic softness may lead to increased domestic market share and maintenance of pricing levels for products as a result of consolidating a competitor or competitors. An added benefit may be the protection of your international markets from discount pricing by cash starved competition.

As well, there are other factors for considering going harder and faster in China in the 2-3 year period ahead. First, the high acquisition premiums on Chinese assets commanded by the market in recent years are eroding, particularly as a result of rising inflation. Second, due to the particular complexion of its external trading sector and relationships with key trading partners, the price of the RMB Yuan is becoming more expensive over time. Meanwhile, history shows that Chinese government approvals for business project will be faster to get and easier to obtain in a slowing economy.

If you have the financial and management capacities in place, think about investing for the future in a down market. Failure to do so may risk the cost of that investment, which may be prohibitive when the economy rebounds.

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