China Swot Analysis

Outlines the strengths, weaknesses, opportunities, and threats of mainland China from cultural, demographic, economic, social, political, and legal perspectives.

TABLE 1 - SWOT ANALYSIS - STRENGTHS

Growth

* National strength since reform in 1978. * Accelerated economic development. * Increased comprehensive national strength. GNP increasing an average of 9% annually (Benson, 1996) and ranked third in the world. * Export growth of 25% and imports up 15%. * Will continue to dominate light and medium-tech industries because of the large market in China and the pool of labor.

Key Money Recipient and Direct Foreign Investment

* Leads world in direct foreign investment - $135 billion (Taninecz, 1996). Foreign invested companies represented 31.5% of all China's exports (or about $46.9 billion). This netted about $8.4 billion in taxes (Taninecz, 1996 and "China: The Numbers Game," 1995.

* Moving to a market economy. * Will be one of the world's six largest economies by 2020 with Japan, Indonesia, India, and Korea and the U.S., according to the World Bank.

National Resources

* Rich reserves of natural resources. * Chinese prefer to work with U.S. companies for oil exploration and coal mine development. * Chinese allow compensation, trade, or cooperative development for ventures.

Large Population Base and Potential Customers

* Per capita consumption is low, but with a large population, opportunity is incredible, especially for low-end products. Also represents large future potential as buying power is increasing rapidly. Strong materialistic outlook, as citizens abandon the original collective party doctrine. * 1.2 billion citizens in China ("Coke Pours Into Asia," 1996) and 2.75 billion in the Asian Pacific Region which equals 10 times the population of the U.S. * Large consumer base as well as a low labor cost factor.

* World's most lucrative market (Schafer, 1996) of which China represents one-sixth of the world's population (Taninecz, 1996).

Available Labor Base

* Surplus labor in rural areas and impoverished farm lands (Gao, 1994) and growing 10 million per year.Estimated to reach 250 million by 2000. * Lower wages than Japan and Taiwan. * Source of valuable competitive advantage, providing growth and higher margins. * Good shift from U.S. for manufacturing traditional (labor-intensive) products.

Favorable Government Policies

* Committed to economic growth at the national policy level. * Overseas-funded enterprises are granted equal status as domestic enterprises for taxes, sales, transportation, purchase, distribution, and operations.

WEAKNESSES

Bottlenecks

* Hard to control distribution of products ("Coke Pours..", 1996). * Some disorder in the financial sector. * Energy, transportation, and important raw materials have remained issues slowing growth. * Agriculture lacks staying power. Production in cities has displaced rural workers. Average inflation is 15%, and surplus labor has resulted in rising unemployment and inequalities in income distribution (Benson, 1996). * Outdated equipment and technology.

* Wage growth has not kept pace with inflation.

Infrastructure

* Railways, roads, communications, and power supply are below standard. * Employees need customer service training. * Roads are jammed with thousands of bicycles, buses, trucks, and taxis. * World Bank calculates East Asia needs to invest between $1.2 to $ 1.5 trillion dollars in roads, ports, telecommunications, and power systems during the next decade.

Education

* College and University student enrollment of 2% is less than the 8% average of other developing countries (Jing, 1993). * 180 million illiterates or semi-illiterates over the age of 15. Average schooling term nationwide is only 6 years. * Little concept of maintenance or quality control. * Employees could lack the productivity and innovation to guarantee continuous growth ("Time for a Reality Check ...," 1996).

Shortages

* Shortage of construction funds for expansion of infrastructure and industrial production capacity. * Transactions are often at a premium over the official exchange rate quoted by the State Administration of Foreign Exchange Control. * Short supply of energy in some industrial markets.

* Lack of electricity, fuel, and raw materials. * Lack of modern pollution control. Sewage, industrial waste, and pollution are growing problems, and China is home to four of the world's ten dirtiest cities(Moffat, 1996).

OPPORTUNITIES Direct Investments or Joint Ventures

* To provide advanced technology that can be mastered by the Chinese. * Easy-to-target bottleneck industries of energy, communication, and transportation. * Equity and contractual ventures provide quicker access to the market. Partners in China can help with the bureaucracy, customer base, and distribution.

Financing Infrastructure Projects

* Opportunity to increase the available electricity to more than 120 million rural citizens without electricity. * Need for $10 billion in foreign funds (about 70% of the total project costs) to build a dam across the Yangtze River as well as build a hydro station. * Demand for foreign loans to construct more than 30,000 km of rail lines and to build expressways and classed roads. * Need for overseas investment in coastal ports since more than 90% of exports are carried by sea.

Automakers Bicycle economy will move to market for 4.2 million cars in the future (Clark, 1995). * Chrysler has a China Concept Vehicle made of recycled plastic planned to sell for about $5,000.

Improving Trade Relations

* Recent talks on trade between President Clinton and China's President Jiang Zemin. * APEC, the Asian Pacific Economic Cooperation Forum, leaders have a vision to create the world's biggest free trade region for developing countries in Asia by 2020. * 3-year moratorium on adding new members in APEC expires on December 31, 1996. The 18 member nations including Hong Kong, China, and the U.S. will have other future trade partners.

* Tariffs cut on computers, semiconductors, and telecommunications equipment and other information equipment to boost competitiveness. * Substantially eliminate technology trade tariffs for the $1 trillion of information technology produced each year of which 50% is exported (Belton and Nichols,1996).

THREATS

Long-Run Success

* Effectiveness of investments in China will only be evident in the long-run and policies make it hard for non-China companies to make money.

Reporting and Accounting Standards

* Fall behind Western requirements. * Only a small group of certified practicing accountants in China. * Lack of modern financial reporting makes the economy less attractive to foreign investors. * Lack of a legal structure similar to those we understand in the U.S. (Taninecz, 1996).

Cultural Differences and Tradition

* Cause of many business conflicts * Advocate collectivism and not individualism. Citizens have a long-term view and the rigid educational systems stifle individualism. Chinese take time in negotiations and dispute resolution. * Non-Western work habits and slow bureaucracy are frustrating. * Prefer harmony in all family, business, and social settings. * Must hire Chinese managers to better understand the role of courtesy, sensitivity, and perception in the culture.

Uncertain Advertising Market

* Strict advertising rules that ban superlative claims and comparative advertising. * Differences in dealing with government controlled media. * Still some open discrimination against foreign advertisers and discriminatory pricing policies, although slowly improving.

Political Risk

* Rapid internal changes in Chinese society. * Rising jobless rate, social unrest, and nonperforming state enterprises (A Hard `Soft' Landing ...," 1996). * Bringing China's mixed market and centrally planned economy into World Trade Organization GATT.

* Risk from further market-oriented reform. * Revelations between the central Chinese government and fast growing provinces. * Changes to a single currency, length of workweek, and tax system as well as unclear responsibilities. * Corruption is widespread at township, county, and even provincial levels (Chan, 1996). * Lack of protection of intelligent property.

* Slow government approvals for operations. * Differences over human rights, trade, and nuclear weapon non-proliferation. * Relations strained since massacre of prodemocracy demonstrators in Tiananmen Square in 1989. * Trade deficit reached a high of $4.73 billion in September 1996 (Nichols, 1996).

State-Run Enterprises vs. Entrepreneurs

* Failure to reform and privatize state enterprises has slowed competitiveness in both heavy industries and high tech. The state enterprises take 70% of bank lending and yield overproduction, inefficiency, and wasted funds on misguided property and financial investment.Entrepreneurs are forced to raise funds from local governments, friends, or foreigners due to lack of access to capital.