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Thursday, September 23, 2004
Ng: Real deal on business in high-growth China
By Wilson Ng
Wired Desktop
BOOM. There was a time I wished I was in China doing business. After all, how could you miss?
The economy has been growing at almost 10 percent for over 20 years now, and it seems like it will still grow fast in the next 10 or 20.
After all, you read about good years like the computer boom prior to the Y2K, when even not-so-good companies had no difficulty in selling their products or services.
Is doing business in China really a good idea?
LOSING MONEY. The other week, some of our family and friends joined the Cebu Chamber of Commerce and Industry in its business mission to Xiamen, China.
China has been growing, and most cities now look almost as good as any western city. For the last few years, China has been getting more investments than all the other Southeast Asian countries combined.
But it was revealed that nine out of 10 people (at least from the Philippines) that had invested in China had not made any money (actually, they lost money).
How could it be? Last July, I was part of a group of MBA students who went to Dalian on a 10-day consulting trip for one of the major hotels there.
We talked to the management and staff, and we looked at their financials.
These gave us insights on what it is really like to invest in a hyper growth economy.
That hotel for its first three years until last year operated a KTV and a massage place, as well as a theme restaurant. Last year, the KTV was making great returns, and had well over 50 percent margins and returns.
Then suddenly, almost 10 KTVs opened in the city, and the patronage of the hotel KTV suddenly went from 90 percent to less than 10. Within 12 months of announcing record profits, the KTV had to be closed.
The hotel had an occupancy rate of just 45 percent. In a place that was booming, everybody was in a rat race not to miss the opportunity. Within a space of two years, about 10 new four-star and five-star hotels were slated to be finished. And the less than strong hotels may soon go out of business.
DOTCOM CRAZE. In an investment-crazy environment, it can be easy to make money and even easier to lose it.
Think about the dotcom craze. It was estimated that the number of people going to the Internet would grow by double digits in the next five years. The problem was the people doing Web hosting, Internet service or putting up web-sites were also doubling.
Was it good business to operate in an environment where demand was growing 20 to 30 percent, but supply was growing 200 to 300 percent?
Think of it the other way around. Let us say call centers. Demand is growing 100 percent in their search for employees and agents, but supply is growing maybe 10 or 20 percent. Is it good? If you are an agent looking for a job, yes, but not when you are the call center.
The thing is that huge imbalances of supply and demand represent opportunities. But occasionally they are also headaches, and if not addressed for the long term, will result in serious mismatches and business failures.
I think that is one of the issues facing China today. During a few trips, we saw huge buildings being built, but still empty six months after completion.
We saw restaurants doubling, but most of them almost empty. We saw industrial parks going up, but there were no occupants.
Is it fun to do business in a place where the economy is in hyper-growth? Yes. But just like driving a fast car, a fast economy can get you into big trouble if you are not careful.
(Wilson urges readers to visit his web log at www.bizdrivenlife.net)
(September 23, 2004 issue)
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