Effective International Market Potential Assessment: China

ABSTRACT - A comprehensive view, including changes in China's economic structure, is taken to make a meaningful assessment of market potential. A spectrum approach, outlining three scenarios in regard to China's open door policy are discussed. Focus is then placed on the changed market profile and international marketing opportunities in China's market.

Citation:

V.H. Kirpalani and Xu Kuan (1987) ,"Effective International Market Potential Assessment: China", in NA - Advances in Consumer Research Volume 14, eds. Melanie Wallendorf and Paul Anderson, Provo, UT : Association for Consumer Research, Pages: 398-402.

Advances in Consumer Research Volume 14, 1987      Pages 398-402

EFFECTIVE INTERNATIONAL MARKET POTENTIAL ASSESSMENT: CHINA

V.H. Kirpalani, Concordia University [Montreal]

Xu Kuan, MBA Concordia University [Peoples University of China, Beijing]

ABSTRACT -

A comprehensive view, including changes in China's economic structure, is taken to make a meaningful assessment of market potential. A spectrum approach, outlining three scenarios in regard to China's open door policy are discussed. Focus is then placed on the changed market profile and international marketing opportunities in China's market.

INTRODUCTION

How should international marketers assess the market potential of a developing country like China in the mid 1980s and further? One naive approach used often has been to estimate its "demand" simply based on the population size [Stewart 19851. Some have gone further and predicted China's market potential by population and current purchasing power [Sokoloff 19821. But this is not enough; developing economies can change rapidly. Therefore, assessment of market potential requires an understanding of changes in the economic structure and resulting economic performance; economic policies and the business environment. In other words, a comprehensive approach is needed to make a meaningful assessment of China's market potential now and in the future.

Changes of the Chinese economic structure in the past few years have caused a tremendous impact on its economic performance and external economic relations. For example, in the 1980-1985 period, the total product of society had an average annual growth rate of 11.3 percent and, the average annual growth rate for China's foreign trade was 10.5 percent [Beijing Review 1986]. This indicates that analyzing China's market potential from the perspective of international marketers needs insight as to the economic structure change.

This paper uses the spectrum approach to policy study. Then three scenarios in regard to China's open door policy are discussed. After that, the discussion focuses on the changed market profile and marketing opportunities in China's market.

SPECTRUM APPROACH TO POLICY STUDIES

In free market economies, formation of the development pattern has been a rather evolutionary process due to the nature of the system. In centralized economies policy changes can often bring about dramatic unexpected results in the development pattern.

The spectrum approach in context studies the spectrum of various possible foreign economic policies. The idea is that, in reality, for governments all open door policy options vary in degrees. There can be no simplistic categorization into either "open" or "close". Most countries position their policies somewhere in the middle range of the spectrum. If the pros and cons for each possible open door policy scenario for a country can be revealed, then the degree to which that country will retain openness to the international market can be assessed. We believe this approach is very useful for a country like China which is experiencing a policy change.

The spectrum approach already has been used for example in comparative economics. With the concept of the spectrum, economic systems can be positioned on a scale rather than in the two traditional categories, "market" and "planned". Most economies are located somewhere in the middle range of the scale. This approach provides a way to understand the reality [Loucks 1969]. A country obviously could have different external economic policies toward different partners. But we can still identify a country-oriented general policy on the spectrum.

What we are interested in is not China's policy to any specific country, because the choice of trading partner pattern toward a specific country involves many factors which are governed by international politics and beyond international marketing. However, we believe that corresponding to China's economic strategy and economic structure, the country will have a basic stance in external economic relations which can provide information about its market potential. This is of interest rn international marketing researchers.

THREE SCENARIOS OF CHINA'S OPEN DOOR POLICY

China's open door policy can be discussed in terms of foreign trade and foreign investment. There are three possible policy scenarios. The first is the choice of fully closing the door. The second is the choice of fully opening the door. The third is the actuality of a partial and gradually opening door. The first two are extremes and will be briefly reviewed while the last will be discussed in depth.

Scenario One: A Fully Closed Door

A fully closed door is not a feature of a modern society. The evidence indicates that external economic exchange and division of labor in the increasingly integrated international economy are necessary conditions for economic development. Since the late 1970s, the Chinese leadership have rejected the closed door and have been making great efforts to reform their economy. The reform has moved away from the rigid planning economic organizational structure and altered the development pattern. The results of the reform are remarkably favorable.

After tremendous changes in China's economic organizational structure and development strategy, the open door policy has already become an inseparable part of its economic development. The total value of imports and export accounted for about 10 percent of China's national income in each year during 1950-1979 [Zhiyang 1985]. But in 1985 it was well above 20 percent [Guangming Daily 1986]. In 1984, China's export volume ranked 16th in the world, from 28th in 1980 [China Daily 1985]. Thus, a reversal to the first scenario of a fully closed door is highly improbable.

Scenario Two: A Fully Open Door

The second scenario is a fully open door to the international market. This is quite an unrealistic position because, while the Chinese pursue economic development, they also want to avoid the possible risks of depending on the international market for growth by opening the door too wide. The lessons of China's history and that of some other developing countries have made the Chinese fully aware how dangerous it is if a country cannot maintain a relatively high economic level on its own. Considering the population size of China, it cannot be expected that an economic miracle will happen without a strong indigenous economy which is not dependent on the help of the rich industrial countries. Moreover, in the long run, independence as one of China's goals determines that the fully open door policy will not be chosen by the Chinese in the 1980s and even beyond.

Scenario Three: A Partial and Gradual Opening Door

The rejection of the two extremes leads to consideration of the third scenario; which is a partial and gradual open door policy. Tremendous changes in market accessibility have taken place in recent years because the centralized economy is gradually integrating more of the market mechanism into the original system in order to increase economic efficiency. In today's China the development strategy heavily depends on external economic relations to obtain funds, know-how and technology. The easier market accessibility is evident from the following facts. The Chinese government allows foreign companies, including banks to open offices in China [Quarterly Economic Review of China, North Korea 1984].

- decentralization has been taking place not only in the domestic economic sectors but also in the foreign trade sector [Beijing Review 19851.

- China has opened its door to foreign investment; of which very little was permitted in the past thirty years or so.

- Special economic zones in coastal cities and inland areas have been granted more authority to trade independently with foreign traders and accommodate foreign investors.

- In recent years, the Chinese domestic market has been partially opened to foreign joint ventures for manufacturing products for consumption in China. Such products originally were regulated so that they could be sold only abroad [Beijing Review 1984].

- New treaties and legislation regarding foreign economic affairs have created a relatively confident atmosphere for foreign businesses even though there is much room for improvement.

However, indications show that the Chinese authorities have been opening the door slowly and cautiously. For example, attracting foreign investment is one new and important component of China's open door practice. Tracing progress in this sector is indicative. In 1980 four special economic zones were set up in order to experiment with assembly-manufacturing and compensation trade. Then the Chinese-foreign joint venture came into use. Following the relative success of these four special economic zones, fourteen coastal cities and three of the richest coastal regions were also opened to the outside world. Later, more inland provinces and cities received the power to deal with external economic affairs independently as the policy of decentralization gathered momentum. Also new legislation allows wholly foreign owned businesses to operate in China.

Causes For A Permanent Partial Open Door

The partial open door position is inevitable under the Chinese government plans. The economic growth rate stipulated by the Chinese authorities in their plans is about seven percent annually to the year 2000. On the one hand a fulfillment of this growth necessitates change in the economic organization structure from rigid central planning to a combination of central coordination and market regulation. It also necessitates a change in the development pattern from an imbalanced strategy which advocated heavy industry to a balanced strategy. These changes are aimed at an increase in efficiency, and complementary development. The partial open door policy is an inseparable part of this whole policy package. It can bring into the country advanced technology and know-how, management knowledge and skill, capital investment and funds necessary for China's modernization program.

On the other hand, the open door policy cannot be implemented without limitation. These should be studied in particular context. The main practice of the open door policy is concentrated on foreign trade and foreign investment. The relationship of such trade and investment with the domestic economy is illustrated in Figure 1.

FIGURE 1

CHINA'S ECONOMIC STRUCTURE AND INTERNATIONAL BUSINESS OPPORTUNITIES

It can be conceptualized that national priorities and development goals, development strategy, economic structure, economic performance, economic policies, and the business environment constitute the domestic bases for external economic activities. This base determines the export capacity, borrowing pattern and investment needs. These factors, further determine the level of imports and foreign investment which would mean business opportunities for international businesses. The reality is that China's export capacity, and conservative borrowing practice places some substantial constraints on its imports. The other sector of this market, foreign investment, is often limited by the business environment.

In conclusion, the third scenario, the partial and gradually opening door policy is the most feasible and appropriate choice. Being aware of the third scenario, has important international marketing and business implications. Otherwise, one could easily be led to over-optimistic estimation or over-pessimistic estimation about China's market potential. Understanding the policy and corresponding background would provide a more realistic basis to evaluate the Chinese market.

The Changed Market Profile

China is a market with a considerable potential. It has over one billion people, nearly one fourth of world population. China also possesses various mineral wealth. It has coal deposits of various types, petroleum resources with low sulphur content, widely distributed iron-ore deposits, and many non-ferrous metals [A General Survey 19841. But China is still a developing country with per capita GNP of only US $300 [World Development Report 1985]. The majority of the Chinese population are engaged in agriculture and 68% live in rural areas.

China's consumers spend almost 60% of their incomes on food, and another 10-15% on clothing. Housing/rent expenditures are low in urban areas due to subsidization of urban housing. Consumption of durables in terms of numbers per household are in rank order-watches, bicycles and radio sets. The attractiveness of inexpensive watches and radios is understandable; bicycles are the primary mode of passenger transportation and are also used to haul various materials. Further the television market is growing phenomenally. Already there are 85 television sets on average per 100 urban households [Taylor 1985]. Most of the above goods are domestically produced. Of China's imports close to 80% consist of producer goods. Thus, the market for imported consumer goods is limited and likely to remain so. But international marketers should know how growth in Chinese domestic market for consumer goods in turn can create demand for producer goods; thus raising import demand for the latter products. Chart 1 is indicative of this effect.

CHART 1

ESTIMATED GROWTH IN FOOD CONSUMPTION AND TOTAL PROOUCTION REQUIREMENTS: 1984-90

International marketers can use this methodology for studying the effects on imports of a growth in demand for other specific consumer products that interest them.

China's potential can be released only when the economy takes off and maintains sustained growth. Two econometric projections, one by the World Bank, show that per capita consumption will grow by at least 4.5 percent a year to 1990 [ in 19841. According to the World Bank model such growth w 11 remain between 4.1 and 5.3 percent a year in the period 1990-2000 AD. Realizing the economic take-off and maintaining sustained growth largely depends on high but attainable goals, appropriate economic strategy and an efficient economic structure.

During 1950s-1970s, China adopted a relatively closed door policy. Therefore it was a very limited market for international marketers. The causes of this were the rigid economic structure, small volume of exports, non-borrowing policy, low level of economic development, the economic plans and policies, politics and ideology, and international environment. For the Chinese, the opportunity cost of the closed door policy was extremely high because they failed to benefit from economic exchanges with the international market.

The lack of incentive and motivation probably was the most crucial handicap for the Chinese economy. Decentralization and centralization took place several times between the central administration and provincial administration before economic reform was introduced in the late 1970s. It gradually became clear that changes in the economic structure should be initiated to improve the performance of the economy. At the same time, China reconfirmed the ambitious goal of modernizing the country. Later, it decided to quadruple the output value of agriculture and industry by the end of year 2000. Also it was concluded that, without any change in the economic structure, it would be difficult to reach the goals.

The directions of the economic structure reform are to increase incentive and motivation in the system; to further decentralize the decision-making down to the enterprise level; to introduce market forces into the planned economy; and to expand economic exchanges with other countries. The reform first succeeded in rural areas. Then it was introduced to urban areas, international trade, foreign investment, and the banking system. Vitalizing the domestic economy and opening it to the outside world are the two basic guidelines.

In order to support China's modernization, the Chinese need to increase their exports so that they can import more and attract foreign investment to their country. To the Chinese, the constraints lie in their export capacity, the borrowing pattern, and their pay-back capability for foreign investment. They want to make good use of industrial imports and foreign investment so that they can develop their own basis for development.

The vitalized 1980s Chinese economy has increased its ability to export which in turn has strengthened its foreign exchange purchasing power from the international market. This means there are more chances for international marketers to sell goods to China. Also, the healthier domestic economy resulting from the reform is providing more opportunities for international businesses.

In addition, to merchandise exports, other service foreign currency earning businesses such as tourism, and building and engineering services abroad are flourishing as central government control is relaxed and the new economic structure emerges. These service exports substantially increase China's importing capacity in the international market. According to Chinese statistics, China's foreign exchange service income reached US $5.1 billion in 1985, while foreign exchange expenses totalled US $1.61 billion.

Attitudes and policies on foreign investment have gradually changed in the 1980s in China towards one of welcome. Now the Chinese government allows all forms of foreign investment practice: assembly-manufacturing, compensation trade, joint ventures, and wholly foreign owned subsidiaries [Beijing Review]. Although again one can observe the partial and gradual opening of the door by taking taxation as an example. To provide incentives to foreign investors, a series of favorable treatments are offered. In the special economic zones joint ventures, cooperative enterprises and wholly owned foreign enterprises, be they productive or non-productive enterprises, all pay 15 percent income tax. However, in the coastal city economic and technological development areas, only productive enterprises enjoy this preferential tax treatment. Under other circumstances, tax deduction from the normal level and tax holidays will be applied in different degrees according to China's planned priorities. Other examples of favorable treatment can be given. In October 1985, China further relaxed its control over foreign exchange. It allowed the enterprises with either overseas Chinese capital, or foreign capital, or Sino-foreign joint venture to retain their foreign exchanges receipts for their own use without selling them to the Bank of China. They could also apply for loans from domestic and overseas banks to meet business operation need, [China's Foreign Trade 1985]. Moreover, in order to provide more reasonable terms to the investors who are or will be engaged in joint ventures, China will allow some joint ventures which have a long pay back period to extend their operations to fifty years and beyond from the original 10 to 30 years before disinvestment [People's Daily 1985].

Compared with the situation before 1978 when there was little direct foreign investment and foreign debt was minimal, the progress in attracting and employing foreign investment has been indeed significant. During the 1979-1985 period, the volume of foreign loans reached US $20.3 billion, and the contract value of direct foreign investment totalled US $16.2 billion [Beijing Review 1986]. Let us now focus on the opportunities for international marketers in China.

MARKETING OPPORTUNITIES IN CHINA

The opportunities in the Chinese market, overall, are growing. The bottlenecks for China's economic development lie in transport, communication and energy. Therefore as the government wants rapid economic development, these sectors create demand for imports, foreign investment, and international cooperation. Transportation in China mainly depends on the railway system. Compared to 30 years ago, rail freight volume today is 31.07 times greater, while railway mileage has increased only 2.29 times, and the number of locomotives and wagons has increased only 2.50 times. The growth of railway carrying capacity is so far short of freight volume growth that some trunk railways can meet only 50-70 percent of their actual needs. The new Five-Year Plan (1986-1990) and a new research study titled "China in 2000" admit that by the end of 1990 the demand pressure on transport can not be totally alleviated [People's Daily 1985]. Furthermore, as China tends to diversify transport loads to all types of transportation, the need for trucks, ships and highway systems, and ports facilities, will increase dramatically. In order to lay a solid transportation foundation for economic development, foreign investment in this sector will be given higher priority [China Daily].

There is also a big gap in the communication industry. A survey conducted in January, 1983 indicated that only one person in every 200 in China has a phone. Only five other countries in the world have such a low number of telephones per capita [Beijing Review 1984]. Foreign technology and investment are sorely needed in this area. Electricity generating is another bottleneck. The supply of power cannot meet the needs owing to the relatively low energy efficiency, the fast growing economy, and the low rate of growth of the energy industry. There is a possibility that a serious energy supply shortage will occur by the year 2000 [People's Daily 1985]. In trying to develop the energy industry, the Chinese face the problems of lack of funding; because this industry needs an enormous initial investment and has a long pay back period. In the future development of the energy industry, because of China's rich coal and hydraulic resources, stress will be laid on the simultaneous development of thermal and hydro plants. Nuclear power plants are also needed, as along the coast nearby coal and hydraulic resources are not available.

China's Five-Year Plan 1986-1990 is targeted on transforming and enlarging a number of industrial sectors. Thus there will be opportunities for international marketers in the following industries: machine-building, electronics, metallurgy, chemicals, building materials, light industry, textiles, packaging, medical equipment, pharmaceutical, construction, agriculture, forestry, and animal husbandry. The Plan also focuses on some crucial new projects: large hydroelectric plants, nuclear power plans, strip-mining coal operations and harbors [Beijing Review 19841.

A goal of the Five-Year Plan is to upgrade the technology of enterprises. Technological upgrading is needed in almost every sector of the Chinese economy, from high technology, such as the computer and aircraft industries; to ordinary technology such as in food processing packaging; and managerial skills; such as hotel management and consulting. However, since China has only a limited amount of foreign exchange, they will only have the choice of buying technology on a selective basis. Accordingly joint ventures, cooperative enterprises with foreign investors, solely foreign-owned enterprises have been developed in the key project sectors of energy, railways, harbors, and raw and semi-finished materials [Beijing Review 1986]

DISCUSSIONS AND CONCLUSIONS

While there are increasing opportunities in the Chinese market, there also exist some constraints. This is the obvious consequence of a partial open door policy. The constraints can exert a negative impact on international businesses conducted in this market. Being aware of them is of great importance. The constraints are discussed below:

1. The centralized control over foreign economic affairs will be maintained. Although there are many relaxations in external economic relations and local governments have been granted some authority to do businesses with foreign firms. In practice, rather than directly intervening in foreign trade and investment, the government uses import and export licensing, and specialized import and export corporations and institutions, to monitor foreign economic activities, and implement control and coordination.

2. The conservative foreign borrowing policy is impossible to change in the short term. The Chinese authorities are conservative in borrowing because they believe that China's export ability is not strong enough; while it is crucial to pay back any borrowing in order to preserve their independence of action. This attitude is steeped in history and the Communist approach. Most exports are primary products such as grain, coal, oil, and other raw materials; those prices fluctuate very frequently in the international market. The other main exports, textile products and clothing, often find difficulties increasing their market shares because of the increasing protectionism in the world market.

In recent years, China's foreign trade has had a deficit every year, which has led to some concern for the Chinese Government. If China's exports decrease due to changes in the international market, it is very likely that imports will be controlled sooner or later.

3. The infrastructure in China is relatively weak. It will take time to achieve improvement in sea and air ports, highway system, telephone system, and other public utilities.

4. Legislation in China concerning foreign economic affairs and firms is still in its early stage and not "equivalent" to international free market country standards. Because of lack of experience in new sectors after a long time of isolation, improvement in the legislation is relatively slow.

5. Operational constraints exist. They result from cultural differences, geographic distance, bureaucracy, and management and technical skills. Without enough necessary preparation before arrival in China, operational problems may not be properly handled and could even lead to business failure. However, it is possible for foreign businessmen to have cultural orientations before leaving for China, and obtain some assistance from qualified local people. Therefore they can learn to deal adequately with operational constraints.

The nature of the Chinese market has changed in the 1980s. It has an increasing importing capacity, new opportunities for foreign investors and improved accessibility. Besides all the factors mentioned in the preceding discussion, another factor is also important although it is beyond economic analysis. That is political stability in the country. This can either increase business confidence or jeopardize it. At this stage, there does seem to exist increasing foreign business confidence in the Chinese market.

From the analysis of priorities and shortages, which function as demand indicators as the partial open door policy continues, international marketers can importantly use demand pattern analysis along with other methods, in order to estimate demand [Kirpalani 1985]. China's purchasing will be highly correlated with its industrial growth sectors. International marketers to be successful must also study the various alternatives in China's investment regions, its sectoral development and consumption patterns. Finally, from what has been discussed earlier international marketers can take comfort from the fact that the partial open door policy is unlikely to ever turn in the negative direction of closure.

REFERENCE NOTES

Sally Stewart, "One Billion Customers?", Asian Affairs, Vol.XVI (Old Series Vol.72), Part III, October 1985.

Georges Sokoloff and Francoise Lemoine, China and the U.S.S.R." Limits to Trade with West, Atlantic Papers, No.46, (Paris: The Atlantic Institute for International Affairs, 1982).

The calculations are based on the data provided in "Ten Major Socio-Economic Changes," Beijing Review, Vol.29, No.15, April 14, 1986: "Guojiatonjiju Guanyu 1985 Nian Guominjingji He Shehuifazhang Tongjigongbao," Guangning Daily, March 1, 1986; and Statistical Yearbook of China 1984, (Beijing: Statistics Press of China, 1984).

William N. Loucks and William G. Whitney, Comparative Economic Systems (Eighth Edition), (New York: Harper & Row, Publishers, 1969), Cf. Chapter 1 An Introduction to the Study of Comparative Economic Systems.

China Daily, September 24, 1985.

Zhao Zhiyang, "China's Open Policy," Guangming Daily, January 22, 1985.

In 1985, the total value of China's exports and imports was equal to about 30 percent of its national income. This estimation was based on the data in market price and exchange rate. Cf. Statistical Communique in Guangming Daily, March 1, 1986.

The Economist Intelligency Unit, Quarterly Economic Review of China, North Korea, No.4, 1984, p.24.

"Chen Muhua Outline Tasks for 1985," Beijing Review, Vol.28, No.l, January 7, 1985. The Economist Intelligency Unit, Quarterly Economic Review of China, North Korea, No.4, 1984, p.13.

"Gu Mu on Policies for Coastal Cities," Beijing Review, Vol.27, No.50, December 10, 1984.

Qu Wen, China: A General Survey (Third Edition), (Beijing: Foreign Languages Press, 1984, p.13.

The World Bank, World Development Report 19 85, (Nev York: Oxford University Press, 1985), p.174.

Taylor, Jeffrey R. and Karen A. Hardee, Consumer Demand Factbook: China, (Washington, D.C., U.S. Bureau of the Census: International Statistical Programs Center, and Center for International Research, November 1985.

Song Min and Liu Anping, 1984, "Woguo xiaofei pin de shouru tanxing fenxi ji zciaofei jiegou yusuan," ["Income Elasticity Analysis of Consumer Goods and Forecast of Chinese Consumption Structure"], Shuliang jingji jishu jingji yanjiu [Quantitative and Technical Economics Research], Vol.l, No.l, p.35; and World Bank, 1985, China: Long-Term Issues and Options. Annexe 4, pp . 34-47.

For the detailed information, see Beijing Review, Vol.28, No.3, pp.16-17.

For detailed information, see The State Administration of Exchange Control, "Relaxing Foreign Exchange Control," China's Foreign Trade, No.10, 1985, pp.8-9.

Yang Guo jun, "Zhongwai Hezi Qiyie Qixia.: Jiangyanchang," People's Daily (Overseas Edition), December 13, 1985.

Yue Haitao, "Key Projects Encourage Investment ," Beijing Review, Vol .29, No.6&7, February 10, 1986, p.28.

"China's Transport in 2000," People's Daily (Overseas Edition), November 29, 1985.

"Ports open channels for overseas investment," China Daily,

"China's Telephones Cause Headaches," Beijing Review, Vol.27, No.47, November 19, 19 84, p.7.

"China's Energy in 2000 ," People's Daily (Overseas Edition). November 27. 1985.

"Five-Year Plan Target Outlined," Beijing Review, vol . 27, No.44, October 29, 1984.

Yue Haitao, "Key Project Encourage Investment," Beijing Review, Vol.29, No.6&7, February 10, 1986.

Dr. V.H. Kirpalani has a summary in his book, International Marketing, (New York: Random House, Inc., 1985),  pp.271-278.

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