Capital constraints will impose increasing rationality on decision making for Chinese companies and trigger a new focus on quality for goods and services purchases. MNCs are positioned for gains, even amidst decelerating growth.
Tightened capital conditions in China, and the decelerating growth it fosters, are gradually undermining the conditions that have permitted government supported companies to access artificially low-cost credit, ignore the price of credit or avoid timely loan repayment. Constrained capital resources – and the higher costs of capital that come with it – will necessarily cause Chinese companies to be more concerned about their returns on capital deployed and the efficiency of their capital use. Counter-intuitively, debt-constraints could cause price rises as companies that previously sold below cost to enhance market share find themselves struggling for cashflow in the absence of new loans.
This is good news for foreign companies who compete along dimensions of product quality and performance. Factors such as lifetime costs, MTBF, functionality, and productivity performance of capital goods will ascend as key drivers of purchasing decisions, even despite “buy local” influences from some quarters. Despite the public rhetoric, for the executives making the capex decisions, the risks of financial distress or failure will necessarily outweigh the benefits of buying local. Fair competition concerns amidst rising trade tensions provide a useful foil.
Changes are also likely in purchasing practices. Decentralized (siloed) purchasing by SOEs – a legacy bureaucratic and political-economy feature of the market – will begin to be scrutinized by both top management and their bureaucratic overseers and rationalized in the interests of enhancing efficiency. The legacy approach of parsing procurement as a means of dividing and conquering vendors to obtain the lowest possible unit price despite the efficiency losses at the aggregate level caused by heterogeneous platforms and interoperability issues, will come under question. Strategic procurement will ultimately gain traction as a concept and practice for vanguard SOEs and flagship private companies.
MNCs will need to adjust their sales, business development and relationship management approaches to take advantage of this transition, if not drive it. Early mover opportunities may exist to reposition domestic competition via innovative business practices and processes – e.g. bundling, pricing, and value proposition conveyance. Offering solutions that strengthen customer balance sheet performance will become a new and critical driver in sales performance.
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Forward Thinking is a digest of one or several ideas percolating at the China Center based on insights derived from expert opinion, data work, market observations, and/or member dialogue. Digest entries are premises and working hypotheses on key China issues and developments of high importance to members.
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