By Allen R. Gibson.  
December 2004

The Chinese government recently released its growth forecasts and projections for the economy at a major summit. The economy is predicted to grow at a phenomenal 9 percent this year, and the government is sending strong messages that it intends to keep a rein (needs more here Allen - or perhaps that the government “intends to keep a tight rein on growth”)

President Hu Jintao and other members of the standing committee said “the government will continue to put macroeconomic control at the top of the agenda for next year,” saying the intention is to control prices while still allowing growth. The leaders also pledged to include rural farmers in the country’s prosperity in order to ensure a “stable society.”

The summit report, which received steady airplay on all of China’s state-run media, indicates a distinct shift in government policy away from massive government spending to fuel the economy and towards a more anti-inflationary approach.

Billion Dollar Deals Left and Right.

Signs of the Chinese economic power are everywhere. The state agency that buys airplanes for the country’s carriers has just placed an order for 23 Airbus jetliners. Including ancillary goods, the contract will be worth over a billion dollars.

The Airbus contract was only one of several large deals signed while a German delegation was in China recently. Germany’s Chancellor Gerhard Schroeder laid the cornerstone for a new factory owned by Daimler-Chrysler and a Chinese partner, and reiterated his position that Europe should eliminate its ban on weapons sales to China.

The military is also on a buying spree as it seeks to modernize its vast military.

In another sign of China’s growing economic clout, and its readiness to begin competing on a global stage, Lenovo Group Ltd. will become the world’s number 3 computer maker after signing a $1.75 billion deal to buy IBM’s Personal Computing Division. The move should make China’s market leader in personal computers a truly global player by adding IBM’s 5.6% of global PC sales to Lenovo’s own 2%. Combined revenues for the two companies are approximately $12 billion. IBM will have an 18.9% equity stake in Lenovo once the deal closes in the second quarter of ’05.

IBM has been looking to get out of the low-margin hardware business for years, and the deal, while large, will hardly affect IBM’s earnings per share.

Keeping up is hard to do.

China is nothing if not competitive. One of the reasons analysts quote for Lenovo’s IBM attempt, is that it will allow the company to enjoy bigger profits by competing outside the intense S.E. Asia market, where price competition is fierce.

Just how fierce the competition can be is a lesson that Nestle S.A. seems to have only recently learned. 

The Company has been in China for over 25 years, but has squandered the advantages of its head start in one category after another. In ice cream, bottled water, and candy – categories in which it is huge in other global markets; Nestle has lost out to faster competition, although its Nescafe brand has held on to top spot in instant coffee.

Not to say the company hasn’t found China profitable. It says it made a profit last year in the country, on sales of $750 million.

But in an object lesson to other companies, Nestle has suffered from not responding fast enough to market demands or shifts in the intense Chinese market, allowing more focussed and determined domestic manufacturers and those from Taiwan to come to dominate the packaged food and beverage sectors.

While not directly admitting to any errors, the company has completed a major restructuring to ‘respond faster to consumer demands.’

In China, getting your foot in the door is not enough. You must then pry the door open, and then run like hell to stay ahead of the guy coming through the door behind you! 

Allen R. Gibson

Allen R. Gibson has over twenty-five years of experience in media and corporate communications.  He has been a reporter, television producer, and marketing communications consultant for public companies in both the US and Canada .

Disclaimer:
InvestorIdeas.com and/or www.China-Asiastocks.com did not receive compensation from any of the companies in the report and has no direct affiliation with any of the companies in the report. www.InvestorIdeas.com/About/Disclaimer.asp
 
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