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The China Effect: The Good, The Bad and The Ugly

China’s meteoric growth has destroyed local industries – but it has also opened new markets.

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There’s no doubt about it – China has changed the way the world does business. And with its increasingly massive clout and the state’s growing closeness to the South African government the Asian giant is likely to play an even greater role in the lives of business owners here in future years.

In just over two decades China has catapulted from its spot as the 10th biggest economy, to become the second biggest economy in the world. It’s now also the globe’s biggest exporter and its hunger for resources has made it the third biggest importer in the world, after the US and Germany. Estimates are that it will overtake the US to become the world’s largest economy in the next seven to 15 years.

In the meantime, China will continue growing at  breakneck speed, albeit at a lower forecast average of 7,5% over the next four years. This is more than double South Africa’s expected growth over the next three years, but down on the 11,2% a year China recorded between 2006 and 2010.

Local manufacturers suffer

In the last decade cheap Chinese imports have wiped out large swathes of local industries. There is already evidence that fewer South Africans are setting up factories. Figures from Business Partners reveal that between March 2004 and March 2007 (the year before the recession), the SME financier’s investments in manufacturing grew from just 107 a year to 119, bottoming out to 105 the following year.

During this time the manufacturing sector, as a percentage of the financier’s total number of deals, shrunk from 20,9% to 17,9% of its portfolio, before falling to 15,7% in 2008. This was at a time when the local economy was pumping, but these figures suggest that not many South Africans were rushing out to set up factories.

On top of this, vacancy levels for Business Partners’ industrial properties had moved from 5% five years ago to 10%, says managing director Nazeem Martin. He adds that many of the properties which were once filled by small factories are now filled by businesses with repair shops or suppliers of goods to the services sector.

In the furniture sector where manufacturers have been hard hit by cheap imports, Michael Reddy, chief executive of Seda furniture incubator Furntech, says the only way for furniture manufacturers to stay in business is by supplying fewer goods at higher prices.

In Brazil, the South American country is ratcheting up support for small firms. But cheap Chinese imports only make up 3% of consumption in the Brazilian market, according to Lawrence Edwards, associate professor in the School of Economics at UCT.

Edwards, who is studying the effect of Chinese imports on South African businesses, believes that Chinese imports make up a much greater percentage of the market here – easily 5% or more. The penetration of Chinese imports into South Africa will be higher because the country has a small economy with a small scope for manufacturing, he says.

Yet, it’s only in recent months that the government has appeared ready to step in to assist local firms hit by the China effect, with the Minister of Finance Pravin Gordhan’s announcement in the 2012 Budget Speech that billions would be given in incentives to improve the competitiveness of local businesses.

Edwards believes that despite SA’s more defensive trade policy approach, following the stalling of the Doha round of World Trade Organisation (WTO) talks, South Africa won’t be bringing down tariffs, which are as high as 40% to 45% on clothing.

This might be good for some local factories, if it continues this way, but it won’t stop Chinese entrepreneurs from coming to South Africa. More local companies are being approached by Chinese companies that want to sell them raw materials.

Colin Mkhonta, the chief executive of Seda’s chemical sector incubator, Chemin, says he receives “almost weekly” requests from Chinese firms to sell raw materials for cleaning products to incubatees.

Now, as they have done in other parts of Africa, Chinese firms are steadily moving into South Africa to take shares in mines and manufacturing companies. Chinese investors are also likely to keep an eye on infrastructure projects announced by President Jacob Zuma in his State of the Nation address in February.

Already three Chinese automotive manufacturers are set to move into the country soon, according to Martyn Davies, emerging markets analyst and chief executive of Frontier Advisory. But Davies, who is helping the South African government to bring Chinese investors to the country, says local businesses won’t necessarily score big, as many Chinese firms will bring their own suppliers with them when they set up here.

Peter Draper, a trade analyst and senior fellow at the South African Institute of International Affairs (SAIA), believes China’s demand for commodities will be key. He argues that China’s enormous economic might presents certain opportunities for local entrepreneurs, including a quest for land, as the Chinese are looking for land from which to export goods or foodstuffs to China.

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New opportunities

Yet it’s not all bad. The China effect, as some have termed it, has helped spawn new businesses, such as suppliers and importers, and opened up a large new market in the Asian giant itself.

The Johannesburg Chamber of Commerce and Industry (JCCI) has set up a matchmaking programme with chambers in Sao Paulo, Brazil; Shanghai, China; and Delhi, India, to allow local entrepreneurs to interact with one another over the Internet.

“We are going to work with the new BRICS (Brazil, Russia, India, China, South Africa) thing, instead of fighting it,” concedes JCCI chief executive Keith Brebnor. “China is not going to go away, so we are embracing them. If you don’t embrace them these other countries outside Africa will go direct to African countries. So we should move in.”

China’s continued rise is likely to bring with it both threats and opportunities for South African entrepreneurs. Here are some predictions:

  • Chinese exports to move to high-tech

Chinese goods will continue to land on our shores in large numbers, but years ahead these are likely to include more sophisticated, high-tech products. Even if prices are expected to be a bit more expensive than before, local factory owners manufacturing high-end products will have to ensure they have cornered a niche market and can compete on price and delivery with Chinese products, by turning to just-in-time delivery or doing small runs.

Some say China is where Japan was in the 1960s – producing cheap goods which were often of dubious quality, before shifting to more technical electrical and computer products.

Under its current 12th five-year plan (2011-2015), China is looking to aid seven priority sectors as it moves to focus more on high-technology. These are: renewable energy, energy conservation, new materials (such as high-end semi-conductors), biotechnology, IT, high-end manufacturing in telecoms and aerospace equipment and clean-energy cars.

China is also making significant investments in the development of new products and between 1998 and 2007, the country along with Korea, showed the biggest increase in R&D spending, according to the Beijing Axis.

At the same time wages are set to rise. In February the Chinese government released a job market plan to set minimum wage levels at 40% of average local salaries within three years. Cheap labour, which up until now has been supplied by the country’s poorer interior, is also becoming more scarce.

Also, under the current plan the country is making a concerted effort to strengthen its domestic economy, or the share made up by private consumption, but Chinese exports won’t slack off. According to a KPMG report, exports will continue to grow – from ¥11,3 trillion last year to an expected ¥16 trillion in 2015. So expect more high-tech goods at higher prices to start streaming into South Africa in coming years.

  • Opportunities in Africa

Much has been made of Chinese businesses backed by easy finance, moving into Africa, particularly where infrastructure projects are rolled out in exchange for mineral resources. Some liken it to neo-colonialism, others say the Asian country’s projects are a godsend to a poor developing continent.

China’s growing presence on the continent may even create big opportunities for South African firms in financial and other services.

Barrie van Wyk of Beijing Axis points out in a September 2011 edition of Beijing Axis publication, China Analysis, that China’s increased business in Africa has also created demand for services, and thus opportunities for legal firms, banks and other service providers. These are areas of strength for South Africa, and more local companies should be exploring the African market.

Standard Bank economist, Jeremy Stevens says that while China’s focus is turning towards domestic matters, the Asian dragon is also eyeing Africa now more than ever – particularly with the uncertainty in traditional northern markets of Europe and the US.

Africa remains a key market for China, particularly when it comes to its demand for commodities,including minerals and oil. Last year China-Africa trade hit a high of $155 billion.

Africa is also growing fast, and has already been outlined by McKinsey and others as one of the most attractive markets over the next few years. Yet despite this, Africa is in need of an urgent infrastructure overhaul. Stevens estimates that the continent needs about $100 billion a year to build new roads, erect new powerlines and maintain and develop other key infrastructure.

And although it will mean stiffer competition for local firms operating on the continent as they struggle to compete against cheaper Chinese turnkey projects, Stevens, who has been based in Beijing for six months, believes it also means more opportunities for South African entrepreneurs.

He stresses that it makes “long-term structural sense” for China to partner with South Africa, the biggest manufacturing sector on the continent. Added to this, many larger South African firms have become household names across the continent. Stevens believes Chinese firms could also help with another South African problem – unemployment.

  • Prospects to enter the Chinese market look good

With over 1,3 billion people China has become a valuable market for entrepreneurs to tap into. Chinese consumers are on the rise and the country is already the biggest car manufacturer and second biggest energy consumer in the world, as incomes have tripled between 2000 and 2010, according to Beijing Axis.

China is set to become the largest market for luxury goods by 2015, when it will account for 29% of consumption of luxury goods, according to the Boston Consulting Group.

And China’s goal to increase technological capabilities in a range of sectors will mean that Chinese regulators will welcome advice and training from experienced foreign companies, according to public affairs global giant Apco.

South Africa is looking for a slice of the action and the Department of Trade and Industry last year presented the Chinese Ministry of Commerce with a list of ten key sectors that they would like to promote to Chinese consumers, including wine and vehicle manufacturing.

But, trade analyst Draper cautions that South African entrepreneurs who export food products to China will come up against health checks and have to compete with China’s heavily subsidised local agriculture sector.

For South African firms looking to invest in China, having expertise in a cutting edge technology or service is far more important than arriving with briefcases of cash, says emerging markets analyst Davies. China, with the world’s largest dollar reserves, isn’t short on funds.

Breaking into the market, he says, will also require good people skills, as doing business in China is a very human relations-dependent exercise. There is also the issue of language. Any meaningful transactions will require knowledge of Mandarin.

According to Davies, about a dozen or more South African companies have a presence in China. These include Kumba Iron Ore, Naspers, SAB Miller, Anglo American, Hollard, Old Mutual, earth compacting company Lanpac, Barloworld, FirstRand, Capespan (which invested 20% in a food distribution company in Shenzhen) and Discovery Health.

Despite this, Davies says the number of South African companies in China remains limited, particularly compared with Australian firms which have been there for some time.

“South African companies have been late to the party,” he says, adding that a small country like Switzerland already has 500 companies based in China.

This means that entrepreneurs will have to keep a watchful eye on China – be it exporters looking to expand into new markets or  business owners looking to roll out a new factory. The Asian giant offers both opportunities and threats, but, with careful planning, the opportunities can outweigh the threats.

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Stephen Timm is a freelance writer at Entrepreneur Magazine.

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2 Comments

2 Comments

  1. sugarequip

    Jul 11, 2012 at 08:05

    Its interesting that I recently learnt that in Pakistan that the government raises or lowers customs duties to earn foreign exchange and to protect local manufacturing / employment. Why do we not do the same seeing as employment read jobs is so widely discussed??

  2. Andrew Blaine

    Jul 11, 2012 at 12:27

    Unless South Africa initiates a serious programme for the beneficiation of both raw materails and small manufacturing organisations in the very near future the country is destined to become a vassal state to China who will control our raw materials. The evidence supporting this contention is everywhere in Zimbabwe but then we could not follow that example courld we?

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Business Landscape

We Need To Unite For A Better Entrepreneurial Future!

Here are my key entrepreneurial tips from The Passport Showcase.

Godfrey Madanhire

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In our modern world, where nationalists walk the street and xenophobic beliefs are on the rise, as a Zimbabwean serial entrepreneur and motivational speaker, I’ve identified that we need to bridge this division and unite us all through celebrating our diversity.

We need to come together not because it’s the right thing to do, but because united, we can work towards a profitable future.  However, before this can happen, we need to change the global mindset. That’s why I transformed my book The Passport into a showcase in which performers from across the continent took part and showed off their talents.

While preparing for the show I noted some important lessons that I learnt along the way. Here are my key entrepreneurial tips from The Passport Showcase.

Success can’t happen in a vacuum!

Setting up The Passport Showcase took a lot of collaboration. As an entrepreneur and a believer in a united Africa, I’ve learned you can’t operate a successful business if you’re not willing to work and deliver services to everyone. It’s for this reason I invited fashion designers, artists, and dancers, to come together and educate us about the dangers of xenophobic beliefs through their art forms.

We need to be able to blend skills and overcome our preconceived notions, in business and the arts, so that we can achieve great things.

Related: As An Entrepreneur, Be A Motivational Leader To Your Staff

Education is the key to every problem

It’s a part of starting any business; educating the public about your company and quickly converting them into consumers. Arguably the same was true of the showcase, creating a truly unique experience to inform the public about celebrating diversity.

Helping individuals understand that acceptance is key for a better future is critical for business expansion. If any of us want to expand our businesses, we need to be able to engage with different markets – who won’t chase away the unknown.

Be different

Identifying a new opportunity is one of the fundamental building blocks for a new business. Finding unique solutions is a truth that echoes across corporate industries and the arts. But change can cause concern and adverse reactions.

On our continent, ideas that disrupt the norm are needed to catapult our brothers and sisters to a brighter future. But this can only be achieved when we celebrate our diversities and collaborate.

Related: 8 Books Every Manager Should Read To Become A Better Leader

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Business Landscape

9 Ways To Elevate Your Small Business To The Next Level

The South African economy is strongly supported by the nation’s entrepreneurial spirit, which encourages a culture of growth and development in communities.

FedEx

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With the unemployment rate currently at 27.71%, people of all ages and backgrounds are looking for an opportunity to work.

Although many entrepreneurs have enjoyed great success on their small business journeys, choosing to start your own business comes with many risks. One of these risks is the financial burden it can bring. While there are various challenges faced by small businesses, it is possible to overcome these and jumpstart your business with these useful tips from FedEx Express, the world’s largest express transportation company.

1. Connect with customers

As a small business owner, it is important to know who your customers are, where they spend their time, what they are looking for and how your business can meet their needs. Times have changed and waiting for customers to come to you is no longer a feasible business strategy. In today’s evolving business environment, entrepreneurs need to be approaching their customers and building strong relationships with them to form a lasting impression. If your small business cannot grow its customer base, it cannot grow profits.

2. Network

Attending networking events will allow you to find professionals and other small business owners who offer services your business may require. Many small business owners get this critical aspect of starting a new business wrong by networking purely to gain customers, not realising that networking with other business can assist you in acquiring the services you need to continue the growth of your business. Small businesses have a lot to gain through networking at the right time and at relevant events.

Related: Licensed To Thrill: Meeting The Global Demand For Merchandised Products

3. Use social media

There are a number of social media networks and social networking platforms that can drastically grow your business, however, it is important to understand your customers and identify the channels they prefer to communicate on. By implementing a comprehensive social media strategy, you can ensure social media works as a driver of new business that positively promotes your service offerings.

4. Build customer loyalty

Building customer loyalty begins with great customer service. Great customer service starts with a positive customer experience and first impressions are vital in this regard. If a customer has an enjoyable experience when using your services, it is likely they will return and use your services on an ongoing basis. By ensuring your business has a user friendly website and informative brand collateral, new business prospects will increase and those who have experienced quality customer service from your business are likely to refer you to friends and colleagues.

5. Ask for help

All small businesses face challenges, particularly in the early operational stage. This is why asking for help from your peers/mentor who may be more experienced than you is critical. Tapping into the mind of someone with more experience and a broader knowledge base will ensure you learn and acquire the skills needed to make a success of your business. The FedEx Small Business portal offers business owners useful advice that will assist you on your small business journey. Visit www.smallbusiness.fedex.com for tips and success stories that will inspire and help you to grow your small business.

6. Hire the right people

Each person that forms part of your business needs to share the same vision with you that will drive growth. Your workforce will be responsible for the success of your business therefore, ensuring your staff remains motivated is important. When hiring a new employee, implement a check list that includes traits that you feel are imperative to the culture of your business.

Asking out-of-the-box questions in the interview will also assist you in determining if the potential employee is a suitable candidate to fill the open position.

7. Manage cash flow well

Many small businesses close due to cash flow problems. Managing money spent versus money earned is critical as it provides you with a clear indication of whether your business is running at a loss or whether you are excelling. If your small business is losing money, you can implement a strategy to iron out the issues that are contributing to this and identify ways that will ensure your business generates profits.

Related: How Online Embroidery Shop Trish Burr Found Business Success With Support From FedEx Express

8. Work to build success

Work to make a success out of your business with your employees by being involved in the everyday activities that are critical to your businesses success. Being involved will ensure employee morale remains high while allowing you to identify areas that need improvement.

9. Find inspiration

There will always be someone who has been in your current position, even if it is a different business to yours. Learning how they made a success of their business during hard times will provide you with the knowledge you need to succeed as a business owner. Starting your own business is a learning experience made easier by speaking to others who inspire you.

A business can safeguard its success if it continues to innovate. For example, e-commerce has changed the way the world conducts business, and the rise in technology has made it easier to interact with customers quickly and across borders. With economies becoming more interconnected, companies large and small are now able to access markets that were previously unattainable. E-commerce will assist small businesses in establishing their territory in the market and as a result, guarantee growth and longevity,” concludes Higley.

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Business Landscape

How Algorithmic Forecasting Can Improve Business Efficiency In Challenging Economic Times

Harnessing the power of predictive analytics, in-memory computing, and artificial intelligence to forecast risks will help entrepreneurs stay ahead.

Carryn Tennent

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Algorithmic Forecasting

The ability for businesses to accurately predict risk and develop insights has traditionally involved manual drudgery, spreadsheets, and been confined mainly to the finance department.

With the advent of new technologies such as predictive analytics, in-memory computing, and artificial intelligence (AI), smart Chief Finance Officers (CFOs) are harnessing their power to automate the process, free up human capacity, and get deeper, more accurate insights.

The success of any business, from small start-up to large enterprise, depends on how accurately they can predict future performance, as well as recognise and respond to warning signals.

Deloitte recently launched a report titled Forecasting in a digital world, the sixth in its Crunch Time series for CFOs, which delves into the advantages of algorithmic forecasting and why it will change and challenge the way businesses look at and consume data.

There is a shift away from having people gather, compile and manipulate data, to handing over the menial work to the machines – which employ data-fuelled, predictive algorithms to sift through historical data and use statistical models to describe what is likely to happen in the future.

It is a process that relies on warehouses of historical company and market data, statistical algorithms chosen by experienced data scientists, and modern computing capabilities that make collecting, storing, and analysing data fast and affordable.

Algorithmic forecasting is a well-oiled machine, with more than 80 percent of the work happening automatically. Every piece of financial data a decision maker could want is available on their device and all they need to do is ask—literally.

How it change the workforce

While it seems like the machines are taking over, humans are not left entirely out of the process. The success of algorithmic forecasting depends on collaboration with the machines and among people from different teams, including finance, data analytics, and business.

The business finance talent model should evolve to keep up with changes in how work gets done and that will likely require a different mix of people than what organisations have in place today.

However, once they hit their stride, these teams can move across the range of forecasting needs, embedding capabilities in the business and driving integration. These teams are integral to establishing an algorithmic solution that can work for the business, bring insights to life within the organisation, and support continued business ownership of the outcomes.

Related: Workflow And Business Efficiency – 5 Strategies You Ignore At Your Peril

How it changes the workplace

The new teams required for algorithmic forecasting to succeed and the pulling of human resources from other departments will need the workplace to evolve into a more collaborative space, banishing outdated silos.

Forecasting is not limited to finance but all functions, from marketing to supply chain to human resources – basically all functions that need to predict the future to drive important decisions.

While CFOs may not lead function-specific forecasting, they should help shape these forecasting initiatives since finance will inevitably use the outputs they generate.

A shared forecasting infrastructure — even a physical Centre of Excellence (CoE)—can help improve collaboration and coordination while providing efficiencies in data storage, tool configuration, and knowledge sharing.

The beauty of algorithmic forecasting is that once the work is done to solve one specific problem, the same process and capability can be extended and applied in other areas.

Algorithmic forecasting doesn’t create anything out of thin air and it doesn’t deliver 100% precision. However, it is an effective way for getting more value from planning, budgeting, and forecasting efforts.

A commitment to algorithmic forecasting is both cultural and statistical. Making it happen involves people working with technology – neither is enough on its own. Every company will make its own unique journey from its current approach to planning and forecasting to an improved approach.

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