Uncertainties in a mega-market

OPINION: Chinese companies are increasingly knocking on other countries’ doors to invest.

While this is the predominant model at the moment, China hasn’t taken its attention away from luring more investment into the country.

Many restrictions have been lifted, the latest of which were revealed in February this year.

Yet, there’s a sense that if China is heading towards a more ODI (overseas direct investment from China) model, why is it that FDI (foreign direct investment into China) is still a relatively high priority?

There are many possible explanations. But there is one certainty: while FDI into China remains attractive, but foreign companies have no guarantees of an easy ride.

When Korean firm Shinsegae entered the Chinese market in 1997, its target was opening 1000 E-mart discount retailing stores. By 2010, it had only 27.

After 20 years in the country, South Korea’s largest discount retailer might shut up shop in China in 2018, citing high costs, unfavourable locations and a slump.

Those high costs probably apply to every other player in the market. Despite the occasional slump, the Chinese economy has been growing at phenomenal rates in the past 20 years. Unfavourable locations can be put down to poor strategic choices.

Hershey’s, the biggest chocolate maker in North America, plans to cut 2700 jobs globally, partially as a result of poor performance from its Chinese investments.

Technology companies such as Seagate and Oracle are also closing some of their factories and facilities in China in order to stay focused.

Exits and scale-backs have become more common. Lurking behind the scenes is the fact that foreign companies in China have not adapted their business models to suit the current climate.

Are they ready for a market that is growing at more than 6.5 per cent each year?

Are they ready for new market entrants that come in the thousands each year?

Are they aware that China is moving towards becoming an advanced developing country?

Are they aware of the changes in consumption patterns?

Are they aware that their customers are becoming more sophisticated, whether they are businesses or individuals?

If the answer to any of these questions is no, then they will struggle in China, sooner or later.

All is not lost though, as China is a huge market that provides lots of untapped opportunities.

Ikea, for example, has been encouraged by its Chinese operations and is projected to open a megamall each year for the next eight years.

Then there’s AirAsia. The Malaysia-based low-cost airline is planning to enter the Chinese market, suggesting that China is one of the last untapped markets for budget airlines.

So, the red carpet is still there for foreign investors, and the prize is huge. But the uncertainties are rife, even for the big multinationals and those that have been in China since the beginning of its open door policy.

Things in China do change within the blink of an eye. Adapting business models has never been more important.