A “new normal” offering new opportunities – China’s economy in transformation

As China’s economy is slowing down and the stock markets are undergoing turbulences, trade journalists, economists and industry experts alike wonder whether this is just a temporary slump or the beginning of a „new normal“ for the Chinese economy.

A growth rate of 6.9 % in 2015 – in many countries around the world this would be considered a tremendous success. But in China with its history of double digit growth, the significant slowdown causes some wrinkled brows. To be sure – the economy is still growing, and still growing much faster than in most other regions of the worlds. And in absolute figures, the annual increase of China’s GDP still surpasses the total GDP of countries such as Switzerland or the Netherlands.

Nevertheless, it has become obvious not only to economists that China is facing challenges that run deeper than just changes in trade statistics. Air pollution levels this winter have reached unprecedented heights, causing the government to raise alerts and restrict traffic and industrial production. The explosions in Tianjin in August 2015 stimulated questions about safety precautions in logistics and production. And in the “Guardian”, columnist Will Hutton describes China’s economy as one big Ponzi scheme “that is waiting to implode”.

Better stay away from China then? Quite the contrary, according to leading stakeholders in the German economy: “Even with lower growth, business opportunities are still good”, said Martin Wansleben, Chief Executive of the Association of German Chambers of Commerce and Industry (DIHK) in an interview with the “Neue Osnabrücker Zeitung”. Sanjeev Gandhi, Head of BASF’s operations in Greater China and Asia Pacific, explained in a recent interview with China Daily that the segment of innovation would open up new opportunities for global companies and expressed that BASF was “very, very confident about the China market”.  And Axel Schweitzer, CEO of Alba Group, stated in the Berlin-based newspaper “Tagesspiegel”: “The second-largest national economy in the world cannot continuously grow by six or seven percent.” He regards the decrease in growth as a “healthy” development. Alba has recently invested massively in plants for the recycling of electronic scrap and urban waste in China.

The focus on innovation and on technologies that go beyond mass production is in line with several actions that China’s government has set in motion even before the recent economic turmoil. One is the transformation from China as the “workbench” of the world towards a center of innovation, as expressed in the “Made in China 2025” strategy. This ten-year action plan that was issued by the State Council in May 2015 aims to transform China in a leading manufacturing power by the year 2019. The focus is clearly on innovation and the combination of manufacturing and services. A great emphasis is placed on digitalization, mirroring Germany’s “Industrie 4.0” initiative. “Countries, both developed and developing, are reshaping their competitiveness as new technologies, including 3D printing, mobile Internet, cloud computing and new energy, emerge and China needs to urgently improve its ability to innovate and grasp these cutting-edge technologies, the plan states”, according to the official news published on the State Council’s website.

For international companies, this strategy is a double-edged sword. On the one hand, it poses a severe challenge to the established global players who now have to anticipate serious competition from future Chinese high-tech companies. On the other hand, many technologies that are required to implement the plan are not available in China today, opening up huge business opportunities for suppliers from all over the world, especially in the fields of plant equipment, systems integration and automation. M&A activities such as the takeover of German plastics machinery producer KraussMaffei by ChemChina for 925 million Euro in January 2016 are part of the Chinese initiative to incorporate the necessary know-how into its industry. Companies who want to take part in the Chinese economic transformation need to manage their activities wisely and have to stay on innovation step ahead in order to succeed. 

Another growth sector is environmental technologies. The alarming levels of pollution have turned the spotlight towards the need for cleaner production and the remediation of air, water and soil. The 13th Five Year Plan for 2016-2020 that will be published in March will have a strong focus on these areas; they were already high on the agenda in the 12th Five Year Plan. According to Chinese officials, the targets laid out for the reduction of four major pollutants -- sulfur dioxide and chemical oxygen demand, ammonia nitrogen and nitrogen oxide – have been fully met. Nonetheless, according to Environment Minister Chen Jining, some major pollutants must be cut by another 30 to 50 percent for remarkable improvement of environment. More ambitious regulations have already taken effect, seeking to reduce pollution at the root especially in the most polluted region that includes Beijing, Tianjin and Hebei. For the European industry that has performed the shift from end-of-pipe technologies to integrated environmental protection already some time ago, the modernization of the Chinese industry creates an attractive market – even more so as concepts for resource management (e.g. in the field of industrial water management) have to be designed individually according to specific regional and industrial requirements, meaning they cannot be bought “off the shelf”.

The development in China is not only closely monitored by industry, but also by politics. In 2015, the German government turned a new page by developing the first-ever strategy paper for bilateral cooperation in research and development. The “China strategy” emphasizes the opportunities for a joint development of knowledge and technologies, but it also stresses the necessity to create a level playing field regarding IP rights, market access and mutual benefits.

With the “new normal”, the cooperation and economic relations between China and its global partners will undergo a transformation. But companies managing the changes wisely, providing innovation and taking the specific requirements for technologies and services into account will find an attractive new market instead of an extended workbench – and this might make a deal whose long-term potential can only be estimated today.

(This trend report is published by DECHEMA. DECHEMA is not responsible for incorrect or incomplete information).

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