Doing Business in China: Manufacturing Outlook

Signs for China manufacturing industry pointing to positive growth

China’s gross domestic product (GDP) attained a 7.8% growth for 2012, better than the forecasted 7.5%. In January 2013, the purchasing managers’ index (PMI) recorded by HSBC showed a strong reading of 51.9, the highest since January 2011 indicating the manufacturing industry is on an accelerated growth path. Does this imply the Chinese economy is rebounding and embarking on a healthy growth direction in 2013?

While manufacturing order books are filling up, with export reaching a seven-month highs in December 2012 with a 14% year-on-year increase, there is still a lingering concern whether this is sustainable in 2013 given China’s two largest export markets, the Euro zone and USA, are still in recessionary condition and muted growth respectively. With export making up nearly one-quarter of China’s GDP, any export softening will quickly turn the PMI in reverse direction.

Chinese Government's Role

A large component of the overall GDP growth is heavily dependent on the government infrastructure-focused investment. A US$150 billion stimulus package announced in September 2012 had helped to accelerate growth in the last quarter of 2012, and the effect will continue into 2013. Further government investment projected for the railway sector this year will also provide a boost to the construction industry, which is already shown in the projected increase in unit sale of excavator machines by 5-10% over 2012. This positive forecast is encouraging news to the construction equipment industrywhich has been experiencing soft and declined market demand since mid 2011.

Another engine of growth is domestic consumption, of which has been given much emphasis since the last financial crisis. Retail sales increased by 15.2% year-on-year in December and by 14.9% in November. Per capita disposable income has been growing quickly as a result of years of stellar economical growth. With the government promoting businesses to set up in the central and western provinces, many manufacturers have shifted inlandresulting in a more even spread of the economic pie across the country.

Changing business environment

With the changing business environment comes an evolving business challenge. At CGN, through projects with our clients and our observation of the industry trends, we note that many companies operating in China are making changes to cope with the downturn, and many have emerged stronger. The key challenges and changes that are evolving are:

• Increasing competitiveness of integrated supply chains focused on velocity, cost, and cash
• Requirements to dramatically improve transactional, material, information, and cash velocity across core operational, supply chain, sales / marketing, and financial processes
• Need for internal and external alignment and transparency / visibility including global / local business objectives, strategies, metrics, controls, and performance oversight across supply chains
• Urgent need to free up cash currently trapped in inventories and payables / receivables work practices
• High asset, expense, and material base costs relative to sales impacting competitiveness, sales, and growth
• Too many organizational and supply chain silos limiting communication, visibility, and coordination of product, information, and cash flows
• Lack of consistency / standardization / deployment of internal / external leading practices resulting in core process inefficiencies and over-reliance on tribal knowledge across the business
• Insufficient people available with the right skills and experience to improve customer and financial performance
• Lack of understanding and ownership across the organization of key balance sheet, income statement, and cash flow statement drivers and how to effectively manage them
• Ineffective make-buy decision processes and weak outsourcing and localization capabilities

Prepare for Change and Capitalize

As China manufacturing moves up the value chain, change is happening constantly leading to various business transformations that leverage best practices, innovative operational models, science and technology to institutionalize sustainable progression. Organizations that are extremely informed and prepared will be able to capitalize on the enormous potential of the Chinese manufacturing industry.

- Aaron Lo, Partner & Managing Director, Greater China & Southeast Asia