The Asia Pacific Foundation of Canada’s 2010 survey identified China as a huge potential market for Canadian goods and services. However, that market is not without its unique challenges. Reviewing those survey results in the context of current events is necessary to determine if China is still a rising star in the areas of manufacturing and distribution.
In recent months, the Canadian federal government has shifted its focus in favour of enhancing economic ties in Asia through free trade negotiations and strongly signalling its desire to join the Trans-Pacific Partnership.
This has much to do with the recent performance of the U.S. economy as well as the delays encountered in obtaining U.S. government approval to the Keystone XL pipeline.
However, this shift of focus by our federal government also reflects something most Canadian businesses engaged in Asia already know: Asia is a region of huge opportunity, and the opportunities in China loom particularly large.
Manufacturing
Close to one-half of the respondent firms in the survey identified intellectual property protection as a problem in doing business in China.
While China’s domestic IP legislation has in fact been upgraded since China acceded to the World Trade Organization, one still may encounter practical difficulties when it comes to enforcement of that protection.
Understanding and navigating IP protection is especially critical for those manufacturing in China.
On the other hand, reforms introduced by China’s 1999 Contract Law have brought its law in this area significantly closer to that of other developed nations. One of the major purposes of the 1999 Contract Law was to unify two pre-existing laws that had dealt separately with foreign and domestic contracts.
It should also be noted that article 126 provides that Chinese law is to be the governing law for contracts between Chinese and foreign parties regarding investment and local natural resources.
Historically, a leading argument for setting up manufacturing operations in China and other Asian nations has been the low cost of labour. However, the cost of labour is rising in China.
In February, the Chinese government promised to raise minimum wages by 13% a year through 2015. This follows 10 years of legislative amendments aimed at improving labour conditions and the enforcement of labour laws.
At the same time, the Chinese middle class is growing, becoming more educated and more affluent. While wages are still low by North American standards, manufacturers are beginning to move production, especially of lower-margin goods, from China to countries like Vietnam and the Philippines.
In place of the manufacturing that is leaving the country, China’s ambition is to remake itself as a manufacturer not of low-margin goods made by unskilled labour but rather of high technology made by skilled workers whose abilities demand better wages.
Distribution
The effect of the growing middle class on manufacturing is that China is now a major market for manufactured goods. The growing numbers of affluent, better-educated consumers point to a huge and growing market.
Helen H. Wang, author of The Chinese Dream: The Rise of the World’s Largest Middle Class and What It Means to You, points to the enormous buying power of China’s middle class, a group, she says, that now outnumbers the entire population of the United States.
Reflecting the potential of this market, respondents in the survey identified selling into the Chinese market as the top priority for Canadian business in China.
Survey respondents identified local Chinese firms as the strongest source of competition. Indeed, the dominance of Chinese state-owned enterprises – they account for about 30% of China’s economy – and a market structure that has been criticized by the World Bank and foreign governments for limiting competition and marginalizing private enterprise may create a less-than-level playing field for foreign firms trying to distribute their products there.
Physically getting goods to market into China is another matter. Survey respondents did not identify transportation as a constraint to their doing business in the country.
The Chinese government spends 9% of its GDP on transportation infrastructure; six of the world’s 10 busiest ports are found within its borders. The Canadian and B.C. governments are investing in infrastructure in the Pacific Gateway and predict a near tripling of container traffic on Canada’s West Coast by 2030. •
