You Think China's Weathered The Storm? Wait for it...

A factory owner related to me the reality of the current situation in China--we were complaining about quality, nothing new here.  They were complaining about how strict our QC was, also nothing new.  But what was new was the request from the owner--he said: "you need to teach your QC that China is changing and what worked a few years ago doesn't work any more."  Specifically, our QC was on the floor directly criticizing people for mistakes.  Apparently a few people actually quite, or so the boss said.  They don't need to put up with this any more--laborers are the scarce commodity nowadays.  They have their choice of jobs and if they don't like where they are, they can walk.This conversations fits into a larger context of a Changing China.  Two things stood out to me this last week that highlighted the "new" China.  First was the lowering of the annual grow rate that the Chinese govt would accept as 'enough' to keep the economy running.  This is public recognition that things are changing, and not for the better.  Second, (finally) the public warnings about the lack of credibility in the Chinese Banking System.  The banking system is as corrupt as the rest of the bureaucracy, maybe worse.  Which means that it will, at some point fail.  But regardless of if the system is in crisis today or if it will be in a few years or not for 10+ years, it’s not the same China that existed even 5 years ago.  And while the economy is growing the changes coming to China are not going to be good.Some are saying that Banks in China are currently at a 60% Risk of Crisis.  But maybe 60% is over stated.Some say that the Dollar will be  replaced by the RMB.  But, then again, maybe not.I’m firmly in the looming crisis camp.  Three books that I’ve read that would at  support the Crisis-is-Coming-Soon position:The Coming collapse of China--Gordon G. Chang.  This is a few years old, but is a detailed report on the horrible state of the Chinese banking system.Capitalism with Chinese Characteristics.  My review here.Red Capitalism--Walter, Howe.  WSJ review here--I’m reading it now.But what does this all actually mean for foreign SME’s doing business in China?  Practically, it means a change number of things that you may or may not realize are part of your business in China now.

1. Fewer Govt subsidies to export oriented factories.  As cash becomes scarce and policy priorities change, export subsidies will dwindle so prices will rise.
2. Fewer Govt subsidies to employ more people in lower end manufacturing so prices will rise.  We’re already seeing this now, especially on the east coast.
3. Fewer easy loans to export factories so prices will rise.
4. Less savings in banks, less capital in the economy to work with so money will be more expensive (interest rates will rise) and so prices will rise.
5. More money in real-estate, a traditional “safety net” for Chinese, so housing prices will continue to rise.
6. More an more suppliers are moving to other countries (fewer options in China).

You already know that higher wages, higher gas/logistics prices, higher materials costs, increasing inflation all are combining  to slow down growth and make China less and less competitive. If you’re a small buyer you’re going to find it harder and harder to find willing suppliers that can both accept your small orders are can allow for strict QC.Larger buyers are going be find fewer (but probably better quality) factory options to choose from.This coincides with an article in the China Economic Review last week too, a post by Steven Dickinson of CLB fame.  Steven knows China like no one else I’ve ever talked with--noThe question isn’t “if China is Changing,”  and it's not even if that change is good or bad (it'll be bad for both Chinese consumers and foreign businesses), but how bad it will get for everyone.  We're all ready seeing the rise in wages putting factories on the edge out of business.  These increases are/will drive foreign factories out of China too.  Labor in China is inefficient in China, but traditionally it's been cheap--so everyone put up with the inefficiencies.  But why will companies stay with no more cost advantage?  They won't.  Further, to the domestic side of things, if labor in China is inefficient, how will Chinese brands compete with int’l brands and more equal wages?  And if consumers are growing more sophisticated and they have more money, are they going to be satisfied with Chinese brands?  The answer to both is they won't.