China Tightens the Leash on Foreign Retail Investors
By Rick Moss
Multinational chains like Carrefour, Wal-Mart, Metro and Tesco seem to have an insatiable hunger for expansion. Perhaps the only market on earth big enough to satisfy that collective appetite resides in China, home of the fastest growing retail sector on earth. According to Huang Hai, the country’s minister of commerce, China’s retail business is expanding at an average rate of 20 percent per year. And that growth rate has accelerated more recently. The total number of retailers in China grew 34 percent in 2005 and revenue was up 27 percent, resulting in chain store sales of 1.07 trillion yuan ($134 billion), according to The China Daily.
Of all the retail chain revenue being generated, about 13 percent can be attributed to foreign-owned companies, and that piece of the pie is bound to get bigger, to the consternation of domestic retailers. The Ministry of Commerce approved 187 foreign-funded retail enterprises in 2005 – six times that of the previous year – as well as 24 foreign acquisition projects, according to the Financial Express.
Although Chinese officials want to continue to encourage the influx of foreign capital and expertise, recent news that foreign investment in retail is double that of domestic companies is not sitting well with Chinese retailers. It seemed only a matter of time before a greater degree of control would be called for.
An initial sign of that came earlier this week when minister Huang announced his government’s intentions to roll out new rules governing large chain store expansion. The regulations, to be put into effect later this year, are to be administered equally to both foreign and domestic retailers, but it was noted that it would be the overseas interests that would be most affected. That’s mainly because it is the larger foreign-owned supermarket and warehouse stores that are located in large cities, where the government sees the need for more controls.
The minister’s statement seemed carefully designed, however, to avoid panicking foreign investors. Huang was clear in saying that the new regulations would not deal with mergers and acquisitions by foreign concerns (the purview of the country’s anti-monopoly authorities), and that store size limitations would not be imposed. However, he reflected the nervousness of Chinese retailers in commenting that, in areas such as marketing, logistics, workforce management and IT, foreign chains have a competitive advantage.
Moderator’s Comment: Should these new regulatory developments indicate to U.S. and European retailers that they should be proceeding more cautiously
with their investments in China?
China has in recent years been so genuinely welcoming of outside investment and western influence on its society that foreign businesses seem to be heedless
of the fact that the country’s more open economic policies follow thousands of years of strict isolationism. Yes, the world has changed, what with the revolution in global trade
and communications, and it’s possible that the Chinese society is now on an inevitable path toward free enterprise, but history would teach us otherwise.
Judging from the description in The China Daily (self-described as the nation’s “only national English-language newspaper”), Mr. Huang spent far
more time talking about all the things the government would NOT be cracking down on than giving details about the new restrictions. “The government only aims to guarantee a pleasant,
competitive environment and boost healthy co-operation between all parties”, paraphrased the paper.
From all that was not said, it might be intuited that big foreign retailers are on notice that they would be wise to curb their appetites. –
Rick Moss – Moderator
One of the problems China’s government official face is that many of the retailers they fear are ones that are currently exporting billions of dollars of goods to be sold abroad. In turn, many of those retailers want to get a piece of the market they’re helping to create and are willing to make the investments China needs. However, in the long run, the government in China will stay in control, and western retailers will need to be cautious as to how much of their business, both in retail and in the wares they sell, are controlled by China.
As our President continually points out — as recently as yesterday in a doughnut shop — small business is the lifeblood of our economy. Individual entrepreneurs fuel our economic engine. Hopefully China’s increased controls on large retailers will create a similar entrepreneurial environment in their country. It’s not likely, because China habitually stomps on the little guy, but one can always hope.
The 2008 Beijing Olympics are meant to showcase China’s westernization, business acumen, and enhanced position in the global economy. To that end, the Chinese government is taking shortcuts (like this latest regulatory development) and treading roughshod over their citizens to put on a show for the world and international visitors in 2008. Lipstick on a pig. The critical element in doing business in China is bribes, pure and simple. Always has been, always will be. Not a bad thing, as long as you know it’s there and it counts. But, will they improve their human rights performance? Will they honor international intellectual property? Will they curb their world-leading pollution of the atmosphere, fresh water, and oceans? Those are definitely bad things, and not acceptable at all.
China tolerates Western businesses as long as they can sell us stuff (helloooo Wal-Mart) and steal/counterfeit our intellectual developments. They should always be approached cautiously.
Risk and reward…. aren’t these two always (supposed to be) sides of the same coin?
I’ve long thought/said that the size and value of the Chinese market is overstated, and in general I would agree with Michael – in direction, if not necessarily in degree. But it should be remembered that there is a risk in not going into China as well: things might not come to the worst, and you could be left behind.
And no “emerging market” (Russia, India, Ruritania, etc.) is safe from the spectre of political meddling …. or worse.
The Chinese are creating a “socialist free market economy.” While the central, regional, and local governments have released a good deal of control, one of the significant characteristics of that economy is that the government has the RIGHT to intervene at any point in time in any area. No matter how much the Chinese government may want foreign investment, retailers who forget this tenet of the system and do not tread cautiously do so at their own peril.
The bottom line is that China wants and needs foreign investment in retail while bolstering local business. They want certain guarantees that some of the money made in China will stay there and not just in the pockets of French and British shareholders.
This is one reason that the IGA franchise has been so popular with the government and Chinese investors and retailers. the money that’s made there, stays there and can be used for further expansion by independents and small chains.
Much of that expansion — for all retailers — is coming from inland cities. That’s the new frontier in China and that’s where the large foreign chains like Tesco and Carrefour are headed. However, it seems to be relatively easy at this point to get around government objections to growth by taking on Chinese companies as joint venture partners, which has been the case all along.
By the way, the same objections are now being raised by governments in Eastern Europe and other emerging markets.
With China’s WTO accession, they have (sometimes grudgingly) had to treat foreign and domestic retailers the same — at least officially. Legal and tax differences have remained, but many are being adjusted to treat foreign firms as domestic ones. This seems to be the case here, though the EFFECT is likely to be felt more by foreign firms. The issue is also related to the overheated economy, fueled largely by foreign direct investment. As the govt. seeks to slow the feverish pace of growth, it needs to balance expanding domestic growth with slowing foreign investment growth (a little), while maintaining the “stability” that is becoming more difficult to keep in place. Tough balancing act, so expect contradictions and layers of meaning going forward.
Safest ways for foreign retailers to invest in China: (1) borrow locally, in local currency, with debt secured solely by local assets and (2) use politically connected local silent partners. Borrowing locally will reduce currency fluctuation risk as well as seizure risk. Political connections will be helpful at critical times, since rapid expansion requires government approvals. Note: if demographic trends continue, India will have the largest market, since China’s single child policy, if continued, will lead to population declines. It is certainly leading to a higher average age.