Economics in China Manufacture Term Paper

Excerpt from Term Paper :

Economics in China (Manufacture)

There is a time and stage for all types of manufacturing and what may be seen to succeed in China is not likely to succeed in many other countries like the United States. Chinese economy has developed very fast and that has attracted attention from all over the world in the business community. This has led to a rapid increase in their foreign direct investment and share in international trade. There are continuously new businesses coming into China, trade agreements are being finalized, and a lot of foreigners are rapidly coming into China. The point where the foreign managers and the Chinese managers are meeting is being studied by many consultants. Some reasons for the growth of business in china are also due to their culture, and that is one of the oldest cultures in the world. Their culture has always had a system of client and patron relationships. This is what made the country's rural areas very stable. The name in Chinese for this relationship was called "kan-ch' ing."

In the historical past and even today, the possession of good "kan-ch' ing" was considered essential for a social sense of well being, at ease in the society and a good relationship with people around you. People like farmers developed this sort of a relationship with their landlords. The landlords always felt that they had to depend on the kindness of their tenants to receive the rent, though it may be due as per Western concepts. Normally, the tenant would pay the full rent in time, if he could. If he had difficulties then he would discuss the matter with his landlord and end up paying a smaller portion for the time being. In the event of heavy damages due to droughts, floods, heavy rains, etc. The tenant could even explain to the landlord that he was unable to pay, so that he could survive. The landlord would accept the suggestions of the tenant if he had good "kan-ch' ing." The tenant also would pay him the rent when the times were better. This sort of a client tenant relationship maintained the good relations between them the entire relationships between different people were dependent on the good relationships between them.

The investment spree in China is widespread. According to the experiences of a portfolio investment manager, Jon Scharlau, thirteen years ago, most residents in China used bicycles for their travel around the city. Today, a large number of Chinese are seen traveling around in the latest model cars. This is what has encouraged the fund called Armada small Cap Growth Fund to invest a lot of money in companies that have high exposure to the Chinese market. It is expected that the growth in the Chinese market will be up to 8% in 2003. Till now this principle seems to have worked well, and the fund has risen by 40.3% in the period till October 2003. This is a growth that is higher than many of the other companies in the same business and higher than the Standard & Poor ratings for 500 companies by over 19%. The achievement has been rather easy for them this year as the growth has been led by small cap stocks. In future when the market broadens and other classes of stocks also become a significant share of the market the position may be different. One of their major investments is in a company called ChipPac. (Street Wise)

This company manufactures back end semiconductor equipment. They package and test semi-conductors. The operations of this company are in Shanghai. Many of the companies in the United States are shifting the testing of semi-conductors there as the costs are lower. Another of their clients has the name Merix. They make components that are used computer servers and other sophisticated electronic equipment. Here also the cost structure is lower for manufacturing in China, and the company shifted the operations to China. The equipment that is required with low lead times are however still being manufactured in the United States. Even some retailers in China have been financed by them. One of these retailers is called Aerpostale. They sell goods in china at the lower end of the market for the teen segment. The sales of this company seem to be increasing rapidly after their stores have been in operation for at least one year. At the time of the recent school season, they had good sales for the back to school market. (Street Wise)

Normally this portends to a future healthy sales for the holiday season. This company is likely to show earnings per share in the range of around 25% for the next 3 to 5 years, and this is over 400 stores that the company now has. The financier has the feeling that this chain has high growth potential and can grow to a chain of 800 to a 1000 stores. They have also invested in another company which makes Internet switches and is called Radware. This company has been growing at rates faster than their own projections during the last three quarters. It is expected that the spending by the companies on these activities will increase and this will lead too higher sales for them. The company is expected to increase its own earnings per share by around 60 cents when the sales of the company grow by $10 million. This is a very high projected return. (Street Wise)

It is clear from the above analysis that China is currently growing at a very fast pace. Historically, China has been a closed market, and is now facing some of the problems that have come up due to their being isolated from the rest of the world for a long time. All types of development are coming in all at once. There are now sweeping economic reforms in both the People's Republic of China and Taiwan. Along with this is the impact of the merger of Hong Kong into China. This has now become a powerhouse that is providing a lot of benefits to major American corporations like H.J Heinz, McCall's, Bausch & Lomb, and scores of others. This has led to the situation in Avon Products where they have sold $1.5 billion in China and this has led to a profit of $1 billion. It is thus being seen that any company that is putting its faith on the three countries and continuing to do business there, is earning good profits.

This term of "Greater China" was however originally thought of by the Chinese leader, Zhao Ziyang. The concept of united china includes Hong Kong, Taiwan and mainland China. The unity of Hong Kong with the mainland was achieved in 1997, bit Taiwan is still a different country and is likely to remain so in the short-term. The provinces in mainland China have however been growing at a very fast rate. Guangdong Province in South China has been growing very fast at about 12.5% in a year from 1985. The political and economic divisions between the three parts of China are not going to be permanent. The legal border between Hong Kong and China is gradually not being very strict any more, as the people on both sides are moving across to each other. China has been having a very high Gross National Product growth rate of 10% during the Deng Xiaoping government. This is due to the reform program that started in 1978. In 1993, the GNP grew by 10%, the industrial output increased by 18% and the foreign trade increased by 18%.

The growth is from a multitude of sources including the output by a large number of small and medium sized village enterprises which are run as small groups. These act as partners of local entrepreneurs and other bigger companies. Another part of the growth has come from the imported technology, and this has also given China a good chance to earn a lot of foreign exchange. These have also led to growth. In 1993, the government in China had approved about 80,000 foreign invested projects and the investments in these units were around $105 billion. This is almost as large as the total investments in China over the previous 13 years since the beginning of the opening up. Their business culture is also very different from the American people. In North America people try to develop business relationships through different hints instead of talking directly about it. In some other countries this is achieved by an eye-to-eye exchange. In greater China the business relationship is usually much deeper. This is achieved through the exchange of gifts, favors and promotions. These relationships are called "Guanxi" and this exists wherever the Chinese people do any business. This type of relationship may be defined in American terms as "ingratiating personal relationships" and they assume many obligations to be done automatically for the business acquaintances. The source of these relationships is not business but can be the city where one's…

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