Professional Documents
Culture Documents
Opportunities and
Challenges of EU-China
Trade and Investment
Relations
Study 8:
Distribution/
Retail
Study Experts:
Stephen Michael
Alexander van
Kemenade
Casper Jacobsen
LIST OF TABLES
LIST OF BOXES
Box 1: Challenges for European companies to conduct business in the Chinese distribution sector - Voices from
industry.............................................................................................................................................. 23
EU European Union
EUCCC European Chamber of Commerce in China
FDI Foreign Direct Investment
FICE Foreign-invested Commercial Enterprise
FIE Foreign-invested Enterprise
FTL Foreign Trade Law
GATS General Agreement on Trade in Services
GDP Gross Domestic Product
GRDI Global Retail Development Index
HS Harmonized System
M&A Mergers and Acquisitions
MNC Multinational Corporation
MOFCOM Ministry of Commerce
RFID Radio Frequency Identification
SME Small and Medium-sized Enterprise
SWOT Strengths, Weaknesses, Opportunities, Threats
WFOE Wholly Foreign-Owned Enterprise
WTO World Trade Organization
10 9.2
8.3
7.6
8 6.9
6.2
5.7
RMB trln
6 5
4.5
4.1
3.3 3.6
4 2.8 3
2.4 2.6
2
0
96
97
98
99
00
01
02
03
04
05
e
06
07
08
09
10
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
160
Mobile Phones
140
120 Sales by Store Format in 2004*
100
Air Conditioners Other
80
1%
60 DVD Players
Microwaves Convenience
40 PCs Stores
2% Department Stores
20 13%
0
2000 2001 2002 2003 2005 2006e Specialty Stores 40%
44%
Source: China Statistical Yearbook 2006 Hyper/
Supermarkets
Figure 3: Ownership Levels of Selected
Household Goods
Population dynamics can also be expected to *Data for firms with sales exceeding RMB 5 mn
have a significant impact on consumption Source: Statistical Yearbook of China
Retail Corporations 2005
patterns in China. Interestingly, China and
Europe share remarkably similar population Figure 5: Sales by Store Format in 2004
100%
High
80% Mid-High
Mid
60% Mid-Low
Low
40%
20%
0%
2000 2005
Source: China Statistical Yearbook, Emerging Markets Group 2006
Figure 6: Composition of Consumer Spending by Income Group
However, recent surveys have shown Chinese driven thus far by investment and exports,
consumers to be moving away from traditional despite government efforts to drive down the
to modern, large-scale formats for food safety disproportionately high savings ratio by
and convenience reasons. It is also interesting suppressing deposit rates. The main reason
to note at this point how store formats in China, cited for this phenomenon is the inadequate
particularly hypermarkets, differ from their social safety net, which leads consumers to
European or American counterparts. This save for a rainy day, as well as the
requires a look at Chinese consumer underdeveloped consumer credit market. As
preferences. Compared to a Western consumer, China develops its consumer credit, pension
the typical Chinese hypermarket shopper and insurance systems and other aspects of
tends to spend less (between RMB 60-70) per social welfare, one can expect domestic
trip, prefers fresh produce and consequently consumption to increase at a faster pace than
makes more frequent trips. They are also likely growth in population and disposable income.
to be overtly interested in hyeine and tend not
to won a car. 2.3 Recent reforms
Prior to China's WTO accession, foreign
Hence a typical hypermarket in China will be
investment in the distribution sector was
located in densely populated urban areas, with
heavily restricted. In accordance with China’s
several store levels (due to space constraints).
services schedule and Article V paragraph 1 of
They will stock lots of fresh produce (rows of
China’s accession protocol, a gradual approach
live fish tanks, for instance), have smaller
was taken to open the distribution sector and
pushcarts, a considerably higher number of
now, four years after accession, China’s
checkout lanes and no parking lots. Chinese
distribution sector has been significantly
food products also tend to be packaged in
liberalised in terms of provision of services and
multiple layers of wrapping.
international trading rights. China’s GATS
commitments cover the following sub- sectors:
Another observable trend in consumer
spending stems from the growing disparities of
1. Commission Agency services consist of the
income distribution in China. While disposable
sales on a fee or contract basis by an agent,
incomes of ‘high’ income groups have doubled
broker or auctioneer or other wholesalers
in the 2000-2005 period, those of ‘low’ income
of goods/merchandise and related
groups have seen much slower growth –about
subordinated services.
30%- over the same period (see Figure 6).
Hence, higher income groups are seeing a 2. Wholesale Trade services consist of the
surge in consumer spending, contributing to sale of goods/merchandise to retailers to
an exploding market for big ticket items such industrial, commercial, institutional, or
as cars and luxury goods. other professional business users, or to
other wholesalers and related
Finally, the composition of GDP growth in subordinated services.
China is worth mentioning briefly in the
3. Retail services consist of the sale of
context of consumption patterns. Domestic
goods/merchandise for personal or
consumption for the last few years was at
household consumption either from a fixed
around 40% of GDP growth, approximately 20
location (e.g., store, kiosk, etc.) or away
percentage points lower than the average
from a fixed location and related
developed economy. Growth has mainly been
subordinated services.
This may not come as a surprise as retailers of 86% of sales of foreign retailers in 2004. Sales of
European origin typically tend to have a globally foreign-invested Hyper/Supermarkets accounted
more diverse source of sales. While Wal-mart is for 21.5% of sales of all Hyper/Supermarkets in
by far the world’s largest retailer, only 19% of its China for the same year.
sales came from non-US countries in 2002 13 .
Sears, Roebuck and Co. likewise made 90% of
Sales of Foreign Retailers by
its sales within the US. Carrefour and Royal
Store Format 2004*
Ahold on the other hand, saw 49% and 80% of
sales in none-home base countries
respectively. 14 5%
Hyper/
Hyper/
Supermarkets Specialty Stores
Supermarkets
More non-European foreign retailers, however, 86% 86%
Convenience
5% Convenience
Stores 1%
are entering the market. While the present Stores
7% Single1%
- Brand
position of Europe-based retailers remains Boutiques
dominant, it still constitutes a decline from the 1%
position held by Europe-based retailers in 2003, Department Stores
when they held over 50% of sales by foreign
retailers in China. As for store formats, the data Corporations 2005
in Figure 8 shows clearly that the
mn
*Data for companies with sales exceeding RMB 5
Hyper/Supermarket format is the preferred Source: Statistical Yearbook of China Retail
choice for foreign retailers in China, comprising Figure 8: Sales of Foreign Retailers by Store Format
This is in contrast with other sectors considering Figure 9: Number of Selected Foreign Retail
the degree to which foreign companies have Outlets in China by Region by Mid-2005
been complaining about their partners in
industries such as ICT and automotive. Foreign Shanghai, Beijing and Shenzhen are the
retailers have adopted a flexible attitude, wealthiest cities in China and consequently
buying out the more burdensome partners boast a modern retail sector. These are the
while keeping the useful ones. first targets of foreign retail expansion in China.
They are already home to a large number of
In addition, since localisation is encouraged by supermarkets and hypermarkets, owing to
the Chinese government, keeping domestic high population densities and a boom in car
partners contributes to the projection of a ownership. While the hypermarket segments
strong local image, which has helped many tend to be dominated by foreign retailers,
retailers minimise red tape and curry favour domestic companies hold most of the market
with local governments. Some retailers even in the supermarket segment, with SOE giants
consider this an essential strategy, considering like Lianhua and Hualian (Bailian Group) and
the plethora of approvals required to open new Nonggongshang in the lead.
stores and restrictions placed on 100%
foreign-owned companies. Nonetheless, Some cities, notably Shanghai are beginning
WFOE’s are the preferred type of investment to see a convenience store boom, filled by the
for most foreign retailers entering China rapidly-expanding number of suburban
post-2004. According to the Ministry of residential compounds. Usually ranging from
Commerce, roughly 61% of applications for 300-1000 square metres in size, these stores
market entry by foreign retailers in 2005 were have filled a gap in the markets for formats
under the WFOE format. which are larger and cleaner than the
traditional Xiaomaibus 15 but more
3.3 Geographic Expansion conveniently located than larger 2000-3000
square meter supermarkets. Convenience
In terms of geographic expansion, foreign
stores initially followed a 7-11 model
retailers have already established a solid
possessing in-house processing functions such
presence in first-tier cities and have already
as the ability to serve warm, cooked foods, but
began to move into second- and third-tier cities,
this model has seen limited returns on the
the populations of which having soared due to
much higher investment required outside of
urbanisation. Figure 9 shows, based on a
the major metropolises.
selection of global retailers, the geographical
distribution of foreign retailers in China. The
Many of the convenience stores chains such as
wealthier coastal regions, with cities such as
Quik, Kedi and Alldays, are owned by the SOE
Shanghai, Beijing and Shenzhen, are not
giants like Bailian and Nonggongshang,
surprisingly host to the highest density of stores.
though Japan’s Lawsons and Family Mart, as
We can also see that international retailers have
well as Taiwan’s C-Stores have already
entered most of China’s provinces, with Tibet,
established in Shanghai. 7-11, having gained a
Ningxia, Hainan among the exceptions. Apart
foothold in southern China, is taking its first
from the coastal provinces, Sichuan province
steps in Beijing. While European retailers have
with the mega-city Chongqing in central China
only made limited inroads, the convenient
is also heavily targeted.
50
40
No. of stores
30
20
10
0
0 5 10 15 20 25 30 35 40 45 50 55
GDP per capita (RMB '000)
Source: PRC Ministry of Commerce, Emerging Markets Group 2006
Figure 10: Relationship between Provincial GDP per capita and Selected Retailers Hosted
5
9
0
9
20
20
20
20
20
20
Source: China Chain Store & Franchise Association reported to have been in excess of USD 1 bn. 18
Figure 11: Concentration Ration of Retail
Industry in China Domestic companies are participating in
government-backed efforts to build scale,
China’s retail industry however, is highly none more so than state-owned mammoth
fragmented, with the top 100 retailers Shanghai Brilliance (Bailian), which has been
accounting for 10.5% of total retail sales in designated a ‘flagship enterprise’ in line with
2005 (see Figure 11). While a wave of the 11th 5-year programme.
government-backed industry consolidation is
taking place, competition remains fierce. Bailian was created in 2003 as the result of a
Some retailers have pointed out that the merger between then market leader Lianhua,
distribution of profit margins across the supply Shanghai Yi Bai, Hualian and Haomeijia. In
chain are inverted: Where in Europe 2005, Bailian took a 45% stake in Dalian
manufacturers see the lowest margins, Dashang (no.5), another SOE, forming part of
followed by distributors, and retailers seeing a government-orchestrated effort not only to
the highest, in China it appears to be the other resist the emergence of foreign retailers, but
way around. While it will still take some time also to create a national champion that will be
before concentration levels reach the same able to expand into overseas markets.
level as Europe, one can expect these levels to
increase in coming years. 4.3 Productivity and Profitability
Foreign companies, with relatively advanced
The current degree of industry fragmentation business models, operational processes and
makes comprehensive data very difficult to management, have on the whole achieved
obtain. To simplify matters, statistics are only greater profitability and productivity.
Margins, returns on assets, sales per employee, hyper/supermarket segment. As we saw in the
and even sales per unit of floor space are all previous section, hyper/supermarkets are the
significantly higher for foreign companies than most important segment for foreign retailers in
for domestic competitors, as shown in Table China, accounting for 84% of all sales by
5. foreign retailers with sales exceeding RMB 5
million in 2004.
Due to cutthroat competition, margins 19 are
razor-thin. The national average, comprising The source of revenues for many retailers is
foreign and domestic firms across all retail also worthy of mention. Because of the market
formats, is 1.41%, compared to 5.7% for power exercised by many of the larger retailers
non-food and 10.5% for food retail in the EU. they are able to negotiate extremely
While foreign retailers have the highest favourable conditions with suppliers. In many
margins in China, the gap in profitability cases, suppliers must pay a fee to retailers for
between foreign retailers and domestic ones, stocking their products. Large retailers are
particularly SOEs, is not as high as in other also often able to shift a significant proportion
sectors. A simple explanation for this fact is of market risk onto the suppliers by
that many SOEs enjoy monopoly status in their negotiating free return of unsold products.
sub-sectors due to restrictions on sales of
certain products, for instance in tobacco. 4.4 Challenges and Opportunities
Furthermore, SOEs receive the best store As is generally the case with foreign companies
locations from local authorities. in China, the competitive edge of foreign
retailers is maintained through their innovative
Another explanation for the low margins may product formats and streamlined management.
lie in the fact that the attention of foreign For instance, the now popular hypermarket
retailers’ management has been largely format was introduced by foreign retailers.
focused on expansion. Foreign retailers have Foreign retailers will no doubt continue to play
been expanding their number of stores at a key role in bringing innovative technologies,
around 20% a year. With so much of the such as RFID, to China in the future.
management’s attention on opening or
acquiring new stores, less focus is given to 4.4.1. Fostering and keeping talent
streamlining operations or on improving sales
Qualified supply chain managers are in great
of existing stores. The productivity gap
shortage in China. The China Chain store and
between foreign and domestic retailers is more
Franchising Association (CCFA) forecasts that
significant. This is not surprising considering
nationwide demand for personnel with
that state-owned retailers are obliged to retain
university-level logistics training will reach
staff in order to keep unemployment down. A
300,000, while there are only 5,000 logistics
visit to most state-owned department stores in
graduates annually. Considering that each new
China, with droves of idle blue-shirted
hypermarket requires around 400 new staff,
employees sipping tea and chatting away
including around 50 managerial staff,
behind the sales counters, will confirm this,
recruiting strategies take a high priority for
though this is starting to change in recent
retail executives in China.
years.
Competition among retailers is intense and
Looking more closely at different store formats,
salary levels for middle management are
one sees that the advantage of foreign
among the highest in the country. Foreign
companies is strongest in the
This results in lost revenues and increased Retailers operating in other segments have
costs for retailers. Another CCFA survey of 13 differentiated themselves by offering
fast-moving consumer goods including various after-sales services. For instance, B&Q have
toiletries and beverages placed the likelihood moved away from the DIY concept to home
of a customer in any given hyper/supermarket improvements by offering comprehensive
finding at least one of the items to be interior design and installation services. This
out-of-stock at 9.9%. has been particularly effective in China due to
increasing levels of home ownership in recent
The situation however, is improving. The entry years, and the lack of Chinese enthusiasm for
of foreign 3rd Party Logistics providers has doing ‘it’ oneself.
heightened competition among distributors,
and the growing scale of retailers has put SWOT Analysis
pressure on distributors to consolidate in an Table 6 summarises the Strength,
effort to counteract growing buyer power. Weaknesses, Opportunities, and Threats
(SWOT) of European and Chinese retailers
discussed in this section.
Weakness Weakness
- Less familiarity with local business - No global networks
environment, consumer preferences - Less advanced operational processes/
business models
- SOEs driven by non-commercial goals i.e.
employment
- Poor understanding of foreign consumer
preferences
Opportunity Opportunity
- Sourcing of made-in-China goods for global - Large consumer base from which to base
markets overseas expansion
- Sourcing of foreign-made goods for Chinese - Proximity with and good knowledge of local
market e.g. wine manufacturers/suppliers from which to base
- Large and growing Chinese consumer market overseas expansion
- JV partners good source of management
expertise
Threats Threats
- Government support for competitors - Foreign retailers winning market share
- Poor supplier efficiency - Gradual abolition of government support
- Political backlash against foreign investment - Foreign protectionism (for those Chinese firms
- Economic nationalism, negative publicity expanding overseas)
Times Mentioned
Main Advantages of European
Source: Emerging Markets Group;
Companies DEVELOPMENT Solutions (2006)
Figure 13: Strength of Chinese Competitors
Innovative 23.3%
Products 5. REMAINING MARKET ACCESS
OBSTACLES 21
Human
Resources 20.0%
Section Topic
5.1 Regulatory Restrictions
Marketing & 5.1.1 Conditions on Majority Ownership
Branding 16.7%
5.1.2 Special Approvals
5.1.3 Rules Pertaining to Existing Manufacturing
Quality & Foreign Invested Enterprises
Service 16.7%
5.2 Transparency Related Issues
5.2.1 Customs Problems
R&D and
Tech. Dev. 13.3% 5.2.2 Media Distribution
5.2.3 Real Estate Prices
Other 10.0%
Despite the 2005 reforms, some restrictions
still remain, such as the limit on the total
Times Mentioned
number of outlets a foreign majority owned
Source: Emerging Markets Groups. company can open up, limits on store size, and
DEVELOPMENT Solutions (2006)
limits on the sale of certain products. Even
Figure 12: Main Advantages of European though local authorities can now authorise the
Companies in the China Market opening of new stores, some provisions
stipulate that central-level approval must still
Despite these strengths, surveyed companies be sought after certain thresholds have been
expect the strength of Chinese competition to surpassed (e.g. number of stores in China).
steadily increase over the next five years. The This suggests that the government is keeping
capabilities of Chinese companies such as a wary eye on foreign retailers becoming too
quality, design, technology and foreign dominant. A number of other non-regulatory
know-how are improving, and thus present an obstacles also exist, such as difficulties in
increasing threat to European companies obtaining land-use rights, and a lack of
(33.3% of times mentioned, Figure 13). transparency, particularly in sub-sectors such
Government support and intervention (26.7%) as media. Counterfeiting is also a problem,
in the industry is expected to further Chinese particularly for brand-reliant products such as
companies’ growth in the sector and with their fashion.
lower cost base (20%), Chinese companies will
become increasingly more competitive. Other
product which falls under the scrutiny of of enough buying power to negotiate
antitrust regulators, as this may be an favourable conditions with their suppliers,
indication that the retailer is engaging in thereby forcing them to innovate and increase
exclusionary practices in order to share their competitiveness, or risk going out of
monopoly profits with the supplier. Therefore, business. It is likely that the suppliers of
it would seem strange that a practice which influential SOEs, who would rather keep their
promotes competition would be scrutinised. A cosy relationships with the SOE retailers, are
possible reason for this condition could stem reluctant to allow retailers to gain such a
from the impact of retailers on their suppliers. position.
Dominant retailers are typically in possession
Box 1: Challenges for European companies to conduct business in the Chinese distribution sector -
Voices from industry
The following are a selection of quotations from interviewees and the returned questionnaires:
“After application procedure and requirements have been clarified our company has applied for a distribution
license, however, the application has been ongoing now for nearly a year and bureaucratic hurdles keep
delaying the process.”
“It is clear from the regulations that the central government does not want big retailers to expand too fast.
There are a number of extra approval requirements for larger chains, and restrictions on foreign ownership.”
“Our domestic rivals get big discounts on land and utilities and they get better store locations from the local
governments.”
“When entering new local markets in China we find that local authorities will have preferences for using locally
produced products.”
“The land auction system should prevent corruption but really favors only real estate giants and slows down
the process of getting a plot.”
China Chain Store Almanac, China Chain Store & Franchise Association, 2005
Distribution services: Note by the UNCTAD Secretariat, United Nations Conference on Trade and
Development 2005
European Business in China: Annual Position Paper 2006/2007, European Chamber of Commerce in
China, 2006
Regulatory Reform in Retail Distribution, OECD Economic Studies No. 32, 2001
Retail: Food Sector, All China Retail Annual Report 2006, GAIN Report, USDA Foreign Agriculture
Service, 2006
Statistical Yearbook of China Retail Corporations in Chain, China Statistics Press, 2005
UNCTAD World Investment Report 2004, United Nations Conference on Trade and Development, 2005
Websites:
www.ccfa.org.cn
State Council
Measures for the Administration on Foreign Investment in Commercial Fields promulgated on April
16, 2004.
Measures on the Administration of Wholesale, Retail and Lease of Audio and Video Products
2002-3-28;
Decision of the Ministry of Culture on Revising the “Provisions of the Ministry of Culture on the
Administration of Foreign-related Culture and Art Performances and Shows”, and Other
Regulations 2004-7-1.
In addition to the genuine market driven are plotted to the left. The author has indicated
competitive threats posed by Chinese the relative importance of these competitive
operators in this sector, European companies forces in terms of their position on the vertical
also face competitive forces as a result of axis with those nearer the top deemed as the
non-tariff or ‘behind the border’ barriers. most significant. The graph is designed as a
Those NTBs which are deemed to result from guide only to give some perspective to the
strong Chinese government intervention are descriptions of competitive forces in this
plotted on the right of the horizontal access sector.
while those derived from genuine competition
Upgrading of Capabilities
Chinese Competitors
IPR Infringement
Language Barrier
Financing (Discriminatory Access)
LOWER
Impact on Competition
Notes: (1) Chinese operating practices here refer to a lack of transparency, corrupt practices and other forms of
graft. (2) See Section 5.1.1 for further details. (3) See Section 5.1.2 for further details.
Distribution
MNC SME
WFOE 6 WFOE 1
JV 1 JV
Both 1
Total 8 Total
% Sample 89% % Sample 11%
1.2 For how many years has your company been engaged in China-related business?
Generally speaking the companies surveyed have substantial experience of operating in the
Chinese market. All of the foreign companies participating in the survey have conducted business
in the Chinese market for more than five years. 56% of the companies surveyed have at least 10
years of experience. 22% of the companies have 5 to 10 years of experience in China. 22% of
those surveyed have had established offices in China for at least 5 years.
Nature of No. of
Engagement Responses %
EU Exports to China: 7 33.3%
China Production for
export to Europe 4 19.0%
China-based
production for local
market 5 23.8%
Sourcing 4 19.0%
Other 1 4.8%
The foreign companies surveyed were involved in various market segments in the distribution
sector. This is demonstrated by the diversity in the market sectors in which the companies operate.
In addition, 33.3% of the participating European companies export to China and 19% of the
surveyed import China-based products. 23.8% of the respondents are involved in China-based
production for the local market and 19% in sourcing.
2.1 - How important is the China market for your business in terms of sales?
67%
70%
60%
% of responses
50%
40% 34%
30% 22% 22% 22%
20%
11% 11% 11%
10%
0% 0%
0%
Today In 5 years
There is agreement among the respondents that the Chinese market will become increasingly
more important to their business. Currently 56% of those surveyed considered the Chinese market
to be of significant and utmost importance in regards to their sales. The respondents percieve that
there will be a significant shift with 89% stating that the Chinese market will be of significant or
utmost importance in 5 years time.
2.2 What is the percentage of your company’s turnover in China today compared to overall/
global turnover in sales and market share?
MNCs, comprising the majority of the surveyed companies do not have a significant presence
regarding sales and market share in the Chinese market. The MNCs reported only 1-8% of their
sales are in the China market, with a number of companies reporting only 1%. In contrast, the
surveyed joint venture company is entirely reliant on the Chinese market with 100% of their sales
and market share from the Chinese market.
2.3 Over the next 5 years, how do you expect business opportunities to evolve in the retail
sector in China? How will this likely impact on your sales/ market share figures?
There is an overall consensus projecting a positive future in the Chinese market with sales and
market share figures expected to rise. Although slow, the respondents expect the Chinese market
to expand, therefore increasing demand and predicting that sales will rise by 3-5% in the next five
years.
50%
44%
% of responses 40%
33% 34% 34%
30%
20%
11% 11% 11% 11% 11%
10%
0%
0%
Today In 5 years
2.5 How much of a problem would you rate market access and other commercial practices
by China?
70%
60%
50%
% of responses
50%
40%
30% 25% 25% 25% 25%
20% 13% 12% 13% 13%
10%
0%
Today In 5 years
A majority of the surveyed companies believe that market access and other commercial problems
in China will decrease in five years time. 50% of the surveyed foreign representatives reported
that problems with market access and other commercial practices in China are of moderate
importance today, but will decline over the course of the next five years (25%).
25.0%
21.4%
17.9% 17.9%
10.7%
7.1%
Chinese operating practices such as a lack of transparency (25%) are considered by surveyed
companies to represent a significant obstacle to expansion in the China market. Complex
bureaucracy and government intervention, especially at the provincial level create barriers for
European companies operating in the Chinese market (17.9%). In this regard, registration
requirements for foreign invested companies are noted to be more stringent than for local
competitors. The lack of an adequate legal framework and the constantly changing product
standards by government agencies and ministries also hinders European companies (17.9%).
Limited supply channels prevent European companies from further accessing the Chinese market
(10.7%). Furthermore, the participating foreign representatives mentioned IPR infringements
(7.1%), and other obstacles (21.4%) as barriers to expansion. These included lack of financial
resources and the language barrier.
No Change
31%
Positive 54%
Negative 15%
There is a general positive outlook with regard to the reduction of Chinese market access
constraints (54%). Although the situation is expected to improve, it is perceived that it will do so
at a slow pace especially in the area of policy and regulation.
Selected Comments
Positive “We are optimistic that the government will improve the business environment for MNCs.”
“In general we expect gradual improvement on both transparency of policies and
regulations, and their enforcement.”
No Change “Will be improved but at a very slow pace”
Negative “Chinese standards issues will likely get worse in many sectors but the legal framework
will hopefully improve.”
The respondents reported that as a foreign company they operate at a higher cost than Chinese
companies due to the above mentioned barriers. One respondent estimated that operation costs
are approximately 10-15% higher than those of local companies. Obstacles such as import tax, for
which Chinese companies receive tax breaks, results in of revenue constraints of 4-5%. Overhead
costs are estimated to be as high as 90%.
No change
12.5%
Negative 25.0%
Positive 62.5%
62.5% of the surveyed companies have a positive view of their situation in the next five years. It is
believed that China’s expansion in the global market will increase the Chinese government’s
efforts to decrease obstacles preventing expansion of European companies within China. A
smaller proportion believe that in the next 5 years the situation will become negative or no change
will occur at all because the Chinese government’s actions are unpredictable.
Selected Comments
Positive “We expect these costs to decrease in line with Chinese government efforts to level the
playing field. We expect and need a fair playing field in China.”
Negative “Central government will open wholesale market this year but no promise about import
market. Even for the approval of retail/wholesale project, their rule and process are
complicated and inefficient.”
25.0%
16.7% 16.7%
8.3%
A majority of the foreign representatives stated that mergers and acquisitions can maximise their
opportunities in the Chinese market (33.3%). Establishing more retail outlets in the Chinese
market will increase their local presence, which is expected to increase profitable turnover.
Furthermore, it the use of China has been recommended as their second home market to develop
and launch new products in China. To reduce costs and optimise China’s strengths in
manufacturing, the industry representatives suggested localised global production and
development (25%). Joint ventures with Chinese companies are also highlighted to help increase
market access (16.7%).
2.11 China’s 11th 5-year programme (2006 to 2011) sets ambitious targets and priorities for
rural development, environmental protection (rural and urban), energy efficiency
(rural and urban context) as well as the need for a home grown innovation society,
affecting all sectors. This direction would represent a major step change in China’s
approach to sustainable development.
The surveyed companies are optimistic about the opportunities China’s 11th 5-year programme will
bring to the sector. A majority of the respondents have already invested in several sustainable
development projects. The 5-year programme is expected to develop these invested industries
sectors, thus increasing the market size. This will then create an increase in demand for European
expertise, hence creating opportunities for European companies.
Concerns were expressed regarding the Chinese government’s commitment to the 5-year
programme and obstacles created by Chinese standard practices such as lack of transparency,
bureaucracy and corruption. Local competition operating at lower costs due to lax
implementation of environmental legislation was emphasised as being a continuing challenge to
European companies.
a) Selected Comments
New market “We see tremendous opportunities along the way, in particular from healthcare, energy
opportunities saving and better lifestyle perspectives.”
(1)
New market “Interesting development opportunities due to large demand.”
opportunities
(2)
Higher “We have already made substantial investments in R&D for alternative energies in China
standards (1) (wind energy; solar etc). We hope that the next five year plan will further support the
development of these industries and some up-front preferential treatment will be given by the
government.”
Higher “We support the FYP and believe it will raise the bar for environment protection and foreign
standards (2) investment in manufacturing as well as retail for our sector. It is also a good opportunity for
foreign investors to lead labour and environment protection for our sector.”
b) Selected Comments
Constraints (1) “Bureaucracy & transparency at local/provincial government levels; real commitment to
execute plan at local level”
Constraints (2) “Preferential treatment might not be equally endowed on foreign MNCs as on local
companies”
3.1 How significant is the competitive challenge of Chinese enterprises operating in your
sector in the Chinese market?
60%
Generally, the foreign representatives perceive that the competitive challenge of Chinese
enterprises today is of moderate and significant importance (77%) with 12% believing the
challenge to be of utmost importance. There is then a shift to 33% in the five year persoective
where the surveyed think the challenge of Chinese enterprises will be of utmost importance in 5
years.
20.0% 20.0%
A third of respondents, (33.3%) see the operating capabilities of Chinese companies improving,.
This presents a major challenge to European companies. Government support and intervention
(26.7%) in the industry sector will help close the technology gap between Chinese and European
companies. And with their lower cost base (20%), Chinese companies will become increasingly
more competitive. Other identified strengths (20%) include familiarity and knowledge of local
market conditions and the ability to fully concentrate on their home market without the need to
consider global operations as MNCs do.
Selected Comments
Upgrading of “Chinese products achieving higher quality, good design, high technology and overseas’
Capabilities know how.”
Local Firms (1)
Upgrading of “I have seen some new projects/ aspirations of Chinese competitors which will challenge
Capabilities our current niche higher value and premium markets.”
Local Firms (2)
Lower Cost Base “Local companies can operate at lower costs than WFOEs. Once they catch up on quality
(1) and features, they will be very tough to beat.”
Lower Cost Base “SOEs are more familiar with Chinese operation practices, they can produce much cheaper
(2) product, and what’s more, they are able to grow more globally insights.”
Government “Local players in general have a lower ROI expectation, and in many cases have a lower
support & cost of capital helped by local government financially.”
Intervention (1)
The surveyed companies emphasised that product innovation is the main advantage they have
over Chinese companies (23.3%). Here, it is noted that products produced by European
companies are more geared towards the consumer’s needs then those made by their Chinese
counter parts, therefore more marketable. Recruitment and retention of experienced and
well-trained staff is also believed to be advantageous in maintaining a competitive edge (20%).
16.7% of the respondents noted international brand name recognition as an advantage while
another 16.7% noted quality and services as important competitive qualities. In addition, R&D and
technological development are also stressed as advantages European companies have in the
Chinese market (13.3%). Other factors (10%) mentioned included government incentives and IPR
infringements.
80%
70%
% of responses 60%
50%
37% 37%
40%
30% 25% 25% 25% 25%
20% 13% 13%
10%
0%
Today In 5 years
With regards to the competitive challenge Chinese companies present in the US market, the
respondents considered it to be of some importance to significant importance with none believing
it to be of utmost importance. The situation is predicted to change over the next 5 years where
37% of the respondents believe that the challenge presented by Chinese companies will be of
utmost importance.
3.5 Please describe the nature of this challenge. What is its likely future evolution (5yrs)?
Even though there is recognition among the respondents that Chinese product quality will improve
and will compete with European product standards in the international market, there is a
consensus that Chinese products will not pose a great challenge in the US market in 5 years time.
This conclusion is derived from the belief that the Chinese companies will not be able to
meaningfully enter the US market because of the strength that local American companies will
present in the industry sector. In addition, it is highlighted that it would be harder for China to
effectively penetrate into a Western market because they lack local knowledge and resources.
60%
50%
40%
30%
20% 14% 14% 14% 14%
10%
0%
Today In 5 years
Overall, the respondents predict that China will be more competitive in 5 years time. The majority
believe that the competitiveness of Chinese companies currently operating in ASEAN and other
Asian markets to be of some importance (72%). A noticeable shift occurs when considering the
challenge in 5 years time where 14% of the respondents believe Chinese companies to be of
moderate importance today. This figure then increases to 72% when considering the situation in
five years time. Where none of the respondents considered Chinese competition in ASEAN and
other Asian markets to be of significant importance currently, 14% believe it to be of significant
importance in five years time.
3.7 Please describe the nature of this challenge. What is its likely future evolution (5yrs)?
There was a low response rate for this question. A few surveyed companies stated that China’s
challenge in their industry sector in ASEAN and other Asian countries is very low and opportunities
for further expansion are limited. It is also mentioned that Chinese companies focused on other
industry areas with the intention of entering the markets of developed countries.
50% 44%
% of responses
40%
30%
0%
1 2
A majority of the foreign representatives believe the significance of Chinese companies today to
be of some importance (58%) with 28% reporting the challenge to be of moderate to significant
importance. In 5 years time the surveyed believe that Chinese companies will become slightly
more significant with 44% describing competition from Chinese companies to be of moderate
importance and 28% regarding it to be of significant to utmost importance.
3.9 Please describe the nature of this challenge and its likely future evolution?
There is a low response rate for this question. Of the selected responses, there is general belief
that Chinese companies do not pose a significant challenge in the future. It was mentioned that
Chinese companies are more focused in their domestic market and are now concentrating on
export oriented business geared towards OEM (i.e. US and Europe).
60%
50%
% of responses 37% 38%
40%
30% 25% 25% 25%
20% 13% 12% 12% 13%
10%
0%
0%
Today In 5 years
The effects of IPR infringements are expected to decrease in five years time. 37% of the surveyed
companies stated that the effects of IPR infringements today are of moderate importance and 38%
believe it is of significant to utmost importance. In contrast, only 12% of the respondents believe
the effects of IPR infringements to be of moderate importance and 25% believing them to be of
significant and utmost importance in five years time. These figures suggest that the surveyed
companies expect more stringent laws and regulation regarding IPR.
3.11 How will this situation likely evolve in the next 5 years?
The infringement of IPR is expected to slowly decline along with improved government regulation
and enforcement. In addition, it is noted that IPR will improve along with the living standards in
China.
18.2%
13.6%
9.1% 9.1%
4.5%
To maintain competitiveness within their industrial sector in China, price reduction through
localisation (22.7%), improvement in management and services (22.7%) and increase in foreign
direct investment (18..2%) were emphasised. Localisation such as hiring talented local employees
will help keep costs lower than in European companies and the company will also gain local
knowledge of the industry sector. Increase foreign direct investment is recommended in the
industry sector to illustrate their commitment to the Chinese market, thus developing relations with
the local industry and government. In order to increase market access, strategic alliances are
recommended (8.7%). Investment in continuingl innovation in all key markets and R&D/Tech.
development is vital to product competitiveness.
27.8%
Number of times mentioned
22.2% 22.2%
16.7%
11.1%
Developing local resources such as outsourcing and developing local personnel to gain further
knowledge and access to the Chinese market as well as ensuring quality service and
management are keys to reducing some obstacles that are present in the Chinese market (27.8%).
Improving competitiveness (22.2%) and expanding into new markets (22.2%) are also highlighted
by the surveyed companies. Better enforcement of rules and regulations as well as increased
transparency would help eliminate some standard operating obstacles and protect European
investments (11.1%). Other methods mentioned to remain competitive are to study the Chinese
market well so there would not be wasted opportunities, improve local business development
competences and to develop good government relationships (16.7%).
3.14 Please highlight ideas for acceptable investment scenarios in China outside those
currently permitted by the Chinese government. Please be creative in considering
EU-China win-win approaches to investment and cooperation.
Among the surveyed companies there is an emphasis on the development of a “fairer market” in
China for European companies. In exchange, the surveyed companies suggest that the EU should
create a fair market for Chinese companies in Europe e.g. for textiles and shoes. In addition, the
development of an EU-China bonded warehouse zones is proposed where Chinese staff can be
employed by the European companies. This is suggested to help set working standards and
procedures in China.
Selected Comments
“If our up-stream suppliers were encouraged to invest in China this would help our competitiveness.”
“EU program to help tier one Chinese companies to open up operations in the EU and establish stronger
presence in Europe.”
“Those big Chinese oil SOEs have had privileges/advantages in asset, network, etc. So if those assets and
networks are made as a precondition for new market/industry entry, it represents effective discrimination against
FOC which have just entered into China. So a fair play environment is important
We urge a fair market in China. Meanwhile, EU should be fair to China in some European markets. e.g.
textile/shoes. This bilateral benefit/respect and win-win solution can speed up the communication/collaboration
process.”
“EU-China bonded warehouse zones with low pricing and easy access for European companies”
“We would like to see more openness mainly in services areas, including: healthcare provisioning, financial
services, content”