Should Your Strategic or Operational Objectives be Invested Head-and-Shoulders in The China Hype?
The emergence of the BRIC countries (Brazil, Russia, India and China), all at similar cross roads of new advancements in economic development, has caused business executives to rethink and recalibrate their strategies, to add business investments or establish market presence in these countries as part of their strategy play books.
To put this into perspective, Wikipedia estimates the total purchasing power parity of all BRIC countries combined represents $29.4 trillion in 2013—with China alone accounting for more than 50% at $16,149 trillion. These data points reveal why there has been tireless efforts made by major US and Western European companies to invest or establish a market presence in China, to capture a share of this astounding purchasing power from Chinese consumer wallets. Whichever company or industry group manages to capture a significant portion of this share of wallet, of the average Chinese consumer, will be winner takes all.
Just like business strategies are developed with similar complexities—as do game theories—to reflect real competitive situations, the China Strategy cannot be built upon game-theory principles alone. Companies that believe the China Strategy is a winner-takes-all game (like Chess) or requires a winner-takes-all attitude to win, have underestimated the terrain in which they have ventured.
As a strategist, I spend a lot of time reading data, processing and interpreting data to understand their implications, and the relational juxtapositions to business-strategic opportunities or challenges. It has become evidently clear to me that the China hype needs to be carefully dissected and understood, with a deliberated strategy, before going in head-and-shoulders immersed.
There are many reports I have read which are encouraging; particularity in respect to the rate-of-growth for the Chinese middle-class. This rate-of-growth is expected to double to $8,000 by 2020—from its current level of $4,000—per household of disposable income. From a pure growth perspective, this data suggests that it makes sense for US and European companies, who can afford it, to have an established presence in China as a long-term strategic play; in order to be well positioned to catch the wave of exponential growth when it happens. However, the devil is always in the details. When compared to disposable income per average US household of $35,000, the wealth factor fueled by disposable income to purchase discretionary goods is not supporting the argument for a China strategy play to meet most companies’ operational or short-term growth objectives, selling high-end durable goods to a consuming public; unless as a company, you are in the business of selling low-cost goods requiring low-involvement in the purchase decision.
Some additional data to consider: the Chinese well-to-do households are those with disposable income between $16,000 and $34,000; which makes up fewer than 14-million households. Compare this to US middle-income households between $50,000 and $100,000 representing 30% of the US population (which is 89 million people, assuming a 310 million population). Only 4.2 million Chinese households have income exceeding $34,000 per year, which forms a tiny group of affluent consumers. When compared proportionally to their population at large or relative to US affluent households with income of $100,000 or more, it makes up 21% of the population or 62-million people. The implications of these data points amongst others, are many; but as a strategist, it is obvious to me that the China hype should be looked upon carefully through strategic lenses. You must evaluate if your company should bet on it only for a long-term strategic play for accretive growth, or is it realistic and achievable to build an ambitious growth model with operational-sales objectives for the short-term, having a heavy percentage of expected sales to be generated in China, which is a very difficult terrain to play and win, based upon economic, geographic and regulatory limitations; or mine the embedded affluence and wealth in your indigenous US market as your core strategy.
If your company wants to review its current allocation of resources in China, to redirect a portion of it back to the US to better achieve your company’s commitment to its long- or short-term strategic objectives, with deeper penetration of existing US market segments, let’s have a conversation!
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About the author: Lynda Chervil is an entrepreneur, author, environmental sustainability advocate and active promoter of sustainable brands and luxury brands with sustainable practices. She is the principal of Pearl Strategic Consulting, a business strategy consulting practice. She graduated from New York University with a Master’s of Science in Integrated Marketing Communications and had held many roles in new business development, sales management and executive leadership.
She is also an affiliate member of the Institute of Consulting (Membership P0449911) and has completed the full advanced-level training requirements registered with the Institute of Value Management Certification Board, as a professional in Value Management (Certificate N0: ADV2 257). She is also a recipient of the Chartered Management Institute, Level 7 Award in Professional Consulting (Certificate number P04429911).