Four Futures for China Inc.
(Business 2.0) -- Investing in the world's largest emerging economy is risky business. Sure, China's GDP has more than doubled since 2000, and VCs report eye-popping ROI from Chinese investments. But with the ever-present threats of corruption, environmental crisis, and social turmoil, how long can that winning streak last?
We asked Global Business Network, a San Francisco consultancy whose clients range from Coca-Cola to the U.S. government, to give us four scenarios for the future of China. In scenario planning--GBN's specialty--you take two variables, intersect them, and treat each of the four resulting quadrants as a possible future (see diagram at right). So Beijing may continue to be a rising economic power and resolve disputes peacefully (scenario 1), but it's just as likely to grow slowly and stop playing by international rules (scenario 3). We've listed them in order from least disruptive to most disruptive, but your business needs to be equally prepared for all outcomes.
EMPEROR OF BUSINESS
1. China grows peacefully and plays by the rules.
In this dream scenario, China becomes global business's best friend. After a wave of political and economic reform, Beijing is willing to play by Western trade rules and navigates through all internal woes, economic and environmental. The nation provides a credible, consistent infrastructure and cracks down on piracy. Beijing's streets are full of stores selling legitimate software and DVDs. As predicted by a Goldman Sachs study in 2003, China's GDP surpasses that of the United States by 2041. More Europeans are learning Mandarin than English as a second language. Chinese workers become so prosperous that industry starts turning to Africa for cheap outsourced labor.
WHAT IT MEANS FOR YOUR BUSINESS: Investment in China is duly rewarded. Though the United States's relative cultural influence wanes, a massively affluent Chinese middle class is spending more than ever.
EMPEROR'S NEW CLOTHES
2 China's growth rate is short-lived; it becomes a bigger Brazil.
As the adage goes, "Brazil has a bright future, and always will." In this scenario, China heads in the same direction--driven by boundless potential but never quite achieving First World status. The country flounders in the face of environmental crisis, political unrest, poverty, and government corruption. (Indeed, businesses in China already perceive a steadily increasing level of corruption, according to nonprofit group Transparency International's corruption index.) Growth first sputters, then grinds to a halt. Some provinces demand autonomy, and Beijing's tax collectors are rebuked. Infrastructure crumbles.
WHAT IT MEANS FOR YOUR BUSINESS: As has happened with Brazil, China could still pay off nicely for foreign investors, regardless of its internal strife. But it will take a lot of local knowledge to get the payout. Long-term investments may sour, especially if the Communist Party cedes economic and political control.
EMPEROR OF ASIA
3. China grows, but only as fast as its neighbors.
In this scenario, China enters an era of neoregionalism. Think pre-World War I Europe, except in Asia. China grows at the same rate as its neighbors and finds itself jockeying for resources with India, Japan, and Russia. A web of Asian economic interdependence evolves. Japan, South Korea, and Taiwan sign trade treaties and mutual defense pacts. Nationalist protests among ordinary Chinese, which have increased from 10,000 in 1990 to 74,000 in 2005, continue to grow--and even start to target Western corporations. Beijing's streets are dominated by Chinese companies. Regional saber rattling puts a brake on globalization. Service-sector outsourcing leaves China and moves to Africa and South America--now perceived as safer.
WHAT IT MEANS FOR YOUR BUSINESS: You'll need to hedge your bets on supply chains and watch events closely, as one Asian trade partner may not look kindly upon another. U.S. companies will find themselves aligning more with Latin America and Canada as the globe becomes ever more factional and regionalized.
EMPEROR OF THE WORLD
4. China's speedy growth tips all the scales in its favor.
In this scenario, China acquires economic power so quickly that it retains the ability to play by its own rules. Through sheer scale, it forces trade partners to play by those rules too. Beijing stops buying U.S. Treasury bills, and the Fed is forced to hike interest rates. The yuan replaces the dollar as the global currency standard. Piracy is rampant, and intellectual property rules are all but forgotten. China's military spending continues to rise, the nation fosters alliances with India and Russia, and the United States loses leadership in world affairs.
WHAT IT MEANS FOR YOUR BUSINESS: Companies that play by China's rules may find themselves conflicted in their interests globally. Growing hostility toward China in the United States could have a deleterious effect on investments. Large businesses may start moving their headquarters to Beijing.click here.