In the city of Wuzhen there is a restored traditional Chinese village that gives visitors an idea of pre-twentieth century China. It is also the site of one of the communities established to build the grand canal that travels from Beijing to Hangzhou. Wuzhen Tourist Village also contains the fascinating, if under promoted, Mu Xin Museum, that houses the work of dissident poet Mu Xin who was imprisoned for his views by the Communist Party (CCP) and which also includes presentations on western enlightenment philosophers. Mu Xin is a famous son of Wuzhen, and his eponymous museum seems out of place in what one might expect of a re-centralising authoritarian state, but it reflects the complexities of modern China and contradict, perhaps, the easy stereo types some may have about the country. That this museum is tolerated at all tells you a lot about modern China. Whether this continues under Xi’s attempt to return to a more centrally controlled “socialism with Chinese characteristics” is another matter. Nonetheless, China is a fascinating and complex society and a market to get involved with.
China is a large economy, and the Chinese people are eager to do business. Within the country people know how to get on with doing a deal but recognise that whatever their feelings, you cannot resist the system. Working with Chinese business in Shenzhen or Shanghai is like doing business anywhere with people keen to strike a deal and build upon their modern enterprising economy. The capriciousness of the party is a factor that everyone tries to accommodate. As in the old days of the Chinese empire, people find ways of working around Beijing but the old distance from the capital that enabled this in past times has now been reduced by the application of technology.
From the 1980s people will tell you that there was a sense that reform was coming with the CCP loosening controls on economic activity and society more broadly. But, with Xi Jinping taking on apparently more dictatorial powers for life, there is a concern about whether this reverses the gains made. The impact on innovation of recent decision regarding leading technology companies, the rich business and celebrity elites and even how much tech time kids have, are often cited as a move to Mao 2.0. I have friends in China who have expressed dismay at these developments and who have told me there are factions in the party that are also not happy. So far, these have been successfully suppressed by Xi.
However, with improved intellectual property rights, better rules around doing business and courts upholding contracts, these recent changes can also be seen as re-balancing relationships and introducing some of the things that anti-trust laws aim to achieve in the West, and which many would still like to do to some of the major US technology companies. The moves to break up Alipay echo Australian concerns about Apple Pay and Google Pay being outside regulatory control.
The fundamental truth that must be understood about the CCP is its steely focus on staying in power while also being terrified of social upheaval. Both reinforce the need to control any form of dissent or alternative power that is driving the need for greater control of major Chinese companies and rich entrepreneurs. The comprehensive use of cyber and surveillance technology to observe and manage society has distinct Orwellian features, but also echoes concerns currently raised in western society about pervasive technology, inequality, and conspiracy theorists on social media. The cyber laws also have significant implications for foreign owned business in how they manage digital data captured in China and whether they are allowed to send it offshore. China has laws but not the rule of law, but it does have rule of the party.
With the recent attempts by the CCP to align Australia’s behaviour through economic coercion the question arises should China be seen as a reliable market for Australian business? There is no doubt that the country is authoritarian and perhaps becoming totalitarian while having also developed a successful capitalist economy. This is a heady mix that contradicts the easy assumptions of the neo-liberal economic theorists that questions whether the mix of a market economy with authoritarianism is sustainable. China is, then, a live socio-economic experiment that make forecasting challenging.
Whether the CCP is ‘communist’ is a moot point for political philosophers, but it has certainly taken on the role that embraces the interest of its the people in recognition of the need to keep people happy if the party is to retain their loyalty. Surveillance technology can monitor society’s mood and is claimed by some to be a better process than traditional elective democracy. And, like all powerful countries, the CCP clearly wants to consolidate its leadership position in the world by setting business and technology standards that suit its world view. After two hundred years, we are seeing the first serious attempt to eclipse ‘Anglo-Saxon’ led market liberalism, and this naturally causes people to become uncomfortable with implication for themselves and their business relationships. It is this that underpins the geopolitical rivalry between China and the United States.
China’s rise doesn’t mean that they will have everything their own way, but it does mean that the systemic changes to the political and social environment established in leading economies since World War 2 is now a bigger factor in business decision making than it has been. This is not just a China issue but looking at events in 2021 we can see that populist and emerging authoritarian tendencies suggests a political landscape that cannot be seen as a steady state environment for business decision makers.
The point of the above excursion into geopolitics is that in assessing any international market, it is not just a question of economic opportunity but a need to assess the short term and potential long-term factors influencing that market. Political and social change in any market tend to be medium to long term issues that can lull business into a belief that short term circumstances are permanent.
So, is China a good market in which to do business? Well, in short, yes. It is the second largest economy and is integrated with the global economic system and although the CCP is attempting to change global rules to suit itself, it is still an attractive target market. Businesspeople there are keen to do business with western investors and have a sharp eye to opportunity. The innovative nature of the country means being a part of it is essential. The sheer volume of purchases from a market the size of China means that order size tends to be in tens of containers rather than of pallets. Which is tempting for smaller growing business but also a potential trap.
Australia has recently felt the edge of the CCP’s attempted economic coercion, and it is clearly a concern for business entering that market. That the recent spat with the CCP demonstrated that around 80% of the rock lobster export from Australia goes to China was a classic example of over dependency on a market. How can an industry (never mind a business) allow itself to be so exposed to one market? No doubt it is a rich one for a relatively small industry, but the ups and downs of international politics suggest that an assessment of market dependency risk is needed.
Similar considerations apply to the wine industry and some agriculture products. Interestingly, although there were coal vessels stuck off Shanghai for a while, the fact that the CCP ordered coal from elsewhere to replace Australian sourced material meant that Australia was able supply those markets instead and so saw little damage to demand or price. This goes to show that market economics is not redundant and the CCP is frustrated that their manipulation of trade with Australia has not had the desired effect they expected. Understanding these global economic dynamics therefore becomes important in testing market exposure risk. Iron Ore miners certainly need to plan for the future
Market exposure in not just an international trade issue. Domestically, the saffron industry in Tasmania was highly dependent on major Australian retail chains: when these decided to sole source from overseas the domestic supplier’s market practically disappeared overnight.
It is not as though Australia has not had similar experiences before. When the United Kingdom joined the European Project in the 1970s the impact on Australian agriculture was significant. Australia did a great job in subsequently diversifying its target markets, but this was a costly and difficult process for individual business, and it now seems the country has allowed itself to do the same regarding China. The impact of the Pandemic on supply chains and Australia’s direct experience with CCP’s coercive tendencies is probably a blessing in disguise and a wakeup call to really think about diversification and the need to develop a meaningful industry policy for the country that looks at creating domestic value-added production rather than one based on raw material exports and reimportation of finished product based on those Australian raw materials.
There is a general rule of thumb that if a business is reliant on any one customer beyond around 25% of total revenue it faces a dependency risk. This applies to any domestic market relationship let alone international trade and certainly with one that can be as capricious as that ruled by the CCP. If you are 30% reliant or above, then there is very critical risk and if above 50% then your customer owns you.
Business strategy theory has several tools it uses in analysis and one useful approach is PEST (Political, Social, Economic, Technology) analysis to consider the core attributes of an overseas market. Often, political issues are ignored, but with a country that is led by a party that does all it can to stay in power, it becomes a critical component of strategic risk assessment. This market entry risk element may not always have been properly assessed and although the economic value may be attractive, the risk of adverse policy decisions as part of a “Great Game” can be devastating to an individual business or industry. What is required is a more thorough analysis of where potential global market opportunities arise as well as a determination of the level of relative exposure to each market a business is comfortable with. These geo-political issues cannot be easily mitigated by business in the short term, but they can have a direct impact on overall commercial viability if not fully taken account of. This not only applies to China, of course, and points to the need to ensure that your offering needs to be attractive enough to be taken to a diversified global market.
Understanding what could happen through some form of scenario analysis is also a key part of the international market assessment process and market diversification becomes a core element in reducing overall risk to your business. When business has done that, it can assess the acceptable level of market risk it is prepared to take on. For any market that seems attractive economically, the need for a thorough evaluation of political and social trends becomes a key determinant of how much business you want to do.
China is the topic of the moment for business and the objective of this piece has been to use it as an example of some of the considerations that are required for any market entry analysis. China is too big and successful to ignore and there is no doubt that accommodation and compromise is needed at the geopolitical level for business to feel confident in realising these benefits. It isn’t easy for business navigating these matters but if you seek international commercial opportunity these risks need to be understood when balancing the benefits of commercial engagement in a market.