SNAKES & LADDERS

I have come to the conclusion that the main issue with doing business in China is that there are too many Snakes, and not enough Ladders.

A friend of mine has been negotiating for weeks for a deal, and at every step of the way the Chinese buyer has thrown up another "Snake" which could potentially kill the deal. Every Snake brings with it additional costs, additional process and additional time to renegotiate the deal price. All the while, the deal becomes more and more marginal for the seller until such point that one of two things happen:

(a) The seller gives up, and walks away vowing never to trade with the Chinese again

(b) The deal happens, but the seller is so frustrated with the outcome that he vows never to trade with the Chinese again

So if you are seriously contemplating selling something in China that is not luxury goods or exclusive cars, be prepared to lose your sanity, your temper, your patience and your hair.

Only the lucky few find the Ladders.

Five things you need to know about China's inflation

1. It will not go away quickly. China has maintained a relaxed fiscal policy for a number of years with lax lending criteria combined with massive state investment in infrastructure. China's 12th five year plan announced in March shows little sign of any change, with seven strategic emerging industries identified to receive an incredible US$2.1 trillion of investment over the next few years. With this much money in the system, combined with a stated intent to dramatically raise the minimum wage every year, Chinese inflation is here to stay.

2. China's 'Big stick' approach to the problem will not work. As was witnessed by Unilever's about turn last week on planned price rises following their "little chat" with the Chinese National Development and Reform Commission, China is trying to artificially hold down prices. But this control mechanism will only work in the short term before the growing pressure it creates builds to a critical point.

3. It will affect marketing budgets. In the meantime, international companies that market price-sensitive or consumer commodity goods will be forced to look for savings elsewhere to maintain their profitability in China. Marketing budgets are likely to be the first to be reviewed, and so we should all be braced for some belt-tightening in the next few months as the effects feed through to agency and media partners.

4. It will affect product quality. Ultimately, everyone in business needs to make money, and if profits cannot be made at one end of the supply chain, the pressure for cost savings will be pushed down to the suppliers. We know from the Melamine milk scandal in 2008 that raw material suppliers in China can find ways to enhance their profits through the supply of substandard goods - no matter the consequences. It is an economic reality that manufacturers will not continue making unprofitable goods indefinitely and so something will have to give.

5. It will force China to allow the RMB to rise against the US$. For every dollar of trade that China does with the rest of the world, it has to print a corresponding amount of RMB. This ever-increasing liquidity in the system stokes the inflationary fires that can only be reduced by allowing the RMB to rise. While China has resisted the pressure over the last few years due to concerns about exports, increasing domestic demand and a stated intention to focus future investment into higher value-add industries will diminish this argument. It is therefore likely that inflation reduction will become a higher priority for the Chinese government economists rather than export growth, with a resulting assent of the RMB.

Copyright © Campaign Asia-Pacific 2011

Big Stick Update: Unilever postpones price rises

The Chinese National Development and Reform Commission of the Chinese Government has "had a word" with Unilever who have announced the postponement of their price rises.

Now, there's a surprise...