Enter the Dragon:

Neighbor. Mao. Enemy. Bruce Lee. 1962. Noodles. Jackie Chan. Communism. Floods. Population. Jet Li. These are the answers I got on asking a random bunch of people to respond with the first thing they think of when they hear of China. These were average Indians, from all walks of life. Now, ignorant as they may seem to informed readers, the common Indian does really associate China with these things. We know it is a folly, because China is now so much more than that.

That ‘much more’ has to do a lot with China’s still rapidly increasing economy, which has now come within touching distance of the economies of the U.S. and Japan. In 2009, when the entire world was still shaking off the worst depression in almost a century, China’s economy grew by 9.1 percent. Her GDP stood at Rs.393 lakh crore, just behind Japan and the U.S. In the same year, it also made Rs.54 lakh crore in exports, just behind the exports made by the entire European Union.

These are jaw-dropping figures when you consider that till about 1978, China had a predominantly centrally-planned economic system which was closed to international trade. It was only after a series of systematic reforms were undertaken under Deng Xiaoping that the system turned into a market-oriented economy by the early ’90s.  From then on, fuelled by the availability of cheap skilled labor and a determined government, China has rode on to become the economy of this century.

To explore the greater Chinese picture, however, is the mandate of other publications. Our job though is about informing and educating our readers, who are mostly entrepreneurs and small businessmen, about opportunities and how they can best tap them. That is what exactly this issue on China will focus on.

Further down this issue, we will give you on-the-field information on how you can take your business there and how you can do business with the Chinese. These will be practical and informed steps and tips that entrepreneurs can deploy in order to break through the China wall. But going in uninformed about the factors that make China’s economy and market what they are would be foolhardy.

Rise of the capitalist class

Beginning in 1978, China undertook a series of reforms akin to Russia’s Perestroika that saw the development of civic infrastructure, networks and public transport. Quite naturally, this transformation has changed the standard of living for the average Chinese citizen as well. And that is evident in the changes they have made to their spending and lifestyle patterns since the economic reforms began.

Till the late ’80s, shopping in China was boring and uniform. There was a lack of variety in the products available and supplies were perpetually short in state-owned stores. But now, the average urban Chinese consumer is sitting in a market miles away from those times. In 2008, China was home to about 549,000 retail enterprises, each with an average of 15 employees. According to the PRC Ministry of Commerce, China had about 2,400 foreign-invested retail enterprises in the country as of August 2009.

And the Chinese love having a choice. In 2009, China’s retail sales hit Rs.81 lakh crore, up 5.5 percent from 2008. This was a year that saw declining sales everywhere else in the world. What this data has made evident is that the better living standards have now created a class of people that has moved on from the basic needs of life to pursuing a better lifestyle.

According to available government data, in 2008, China’s urban and rural households spent 37.9 percent and 43.7 percent of their incomes on food, respectively, down from 44.7 percent and 53.4 percent in 1998. Again, between the years 2001 and 2008, the average Chinese household more than doubled its spending on clothing, healthcare, transportation, and telecom services.

The Chinese now have extra cash, thanks to the growing incomes. And they are spending it. In 2009, the per capita disposable income in urban areas reached Rs.1.1 lakh, three times over 1998. In cities like Shanghai, the average per capita disposable income is more than Rs.1.7 lakh. This is a class on the urge to move higher. And entrepreneurs should ride with them.

Get over the size

Yes, you need to get over the size of China pretty quickly. You also need to understand that the 1.3 billion people are actually groups of people of much smaller populations clubbed together by over-eager economists who see it as a sort of Shangri-La for their clients. These economists don’t tell you that China’s economic development and wealth distribution varies greatly from east to west and from south to north, thanks largely due to a variation in population density.

While western China is very thinly populated, eastern China is one of the world’s most densely populated. And thanks to a policy of the Chinese government to develop selected cities on the western coast on the Hong Kong model to lead its economic transformation, there now exists a staggering economic gap between China’s eastern and western regions.

According to data from the Chinese government, GDP of the western regions is 58 percent of the national average, far below that of the east, where it is about 85 percent of the national average. Further, according to the Boston Consulting group, in urban cities, incomes have been growing at about 10 percent annually in recent years, while incomes of rural people rose only 1 percent a year. Much like India, it is a situation where there is a gradual ceding away of economic and geographic groups from each other. Clearly, the concept of China as a homogeneous mass market is a thing of the past.

And consequently, entrepreneurs would do well to understand that consumer behavior in China is more varied than it was a decade and more ago. What may be fashionable in one city in the west may not be in another in the east. The successful companies in China are those which have understood the difference between urban and rural China, and also eastern and western China.

They are the ones who are offering their goods in different varieties and designs and constantly introducing new products. They are the ones who know that while a rural family may aspire to a motorcycle, an urban family will aspire to a car. But they both are aspiring nonetheless and one can’t ignore either. Nor can entrepreneurs looking to go there.

Where do you go?

For the average entrepreneur, the fact that the Chinese have money and are willing to spend it, should be enough to think seriously of taking his business to China. But what real business opportunities are there in China that Indian entrepreneurs can tap? Many. And many more we cannot even cover in this magazine. But these three are tipped by many experts to be the best bets for Indian entrepreneurs.

The tech and IT sector

The suggestion that we can perhaps go over to China and gain a foothold in their tech industry would seem weird to some. However, the puzzle is not really that complex.

While the Chinese have mastered the hardware side of all things technological, where they still fall back is on the software and service side. And this is where the opportunity for Indian entrepreneurs lies.

China is trying hard to attract technology companies and entrepreneurs to come set up base there. It has set up high-tech parks that offer very competitive terms to startups and investors alike. The good bit is that most of these tech parks are mostly at loggerheads with each other over attracting companies and that means better terms for businesses.

For example, the Zhongguancun in Beijing, Zhangjiang Hi-Tech Park in Shanghai and Shenzhen’s High-Tech Industrial Park. Many of these tech parks have also been located near universities, ensuring a steady supply of skilled talent to companies in the parks. Further, these universities also collaborate with businesses in their research and development needs in what are called technological alliances.

While there remain issues with China’s patenting and copyright problems, technology players from India are already making themselves at home there.

Tata Consultancy Services and Wipro are already in China with their IT and ITeS businesses. So are many other small companies that are trying to make their technology expertise match with the undoubted manufacturing expertise of the Chinese.

The auto sector

China is the world’s second largest automobile market behind the U.S. And at its current rate of growth, it is expected to surpass the American market in the coming decade due to a variety of reasons.

It was in 1991 that China embraced the auto industry as a pillar industry that would boost other industries in the Chinese economy such as fuel, glass, steel etc. This push by the government has transformed the bicycle-using Chinese towards a more car-loving one.

While the lower middle class is buying local brands such as Geely, the better doing ones are going for the Volkswagens and Hondas. The Chinese government continues to invest heavily in road infrastructure as well. While new roads are being built across the country, existing roads are made wider and rural roads are being converted into highways. This would only mean that more and more people would like to buy cars.

Herein lies the opportunity for entrepreneurs, though perhaps not in the making and selling cars bit. That requires a bit of political clout as well as a huge budget. But as the demand for cars will grow, so will the demand for auto ancillaries as well as for many automotive services such as insurance, financing, spares, maintenance, etc. Further, China has embarked on a plan to adopt green technologies for cars and that creates another opportunity for entrepreneurs. Chinese local expertise has not been able to match up to the demands of the green sector within automobiles yet. Entrepreneurs must rush to grab this opportunity before it is too late.

The pharma sector

The only upside of having a very large population has to be rooted somewhere in the medical sector. After all, the more the population, the more visits a doctor can expect. China, much like India, falls into this space.

China has a large pharma market that is expected to pass the Rs.1,12,500 crore a year mark by the end of this year. Sales in this market by the top 10 multinational pharmaceutical companies have been growing more than 15 percent a year since 1999. Spending on healthcare too has grown at a rate higher than 12 percent in China, much faster than the GDP. Those are numbers that can’t lie about the business opportunity even if they tried to.

Though making medicines for the Chinese market is again something for the big boys to attempt, Indian businesses can make medicines locally and import to China.

Previously, this was a rocky path, given China’s reluctance to engage any other companies other than established western ones in her pharma market. But in January 2010, China agreed to give Indian companies access to government contracts on its program to procure pharmaceuticals.

This is substantial news. According to the State Food and Drug Administration’s Southern Medicine Economic Research Institute, the Chinese domestic drug market may reach a size of Rs.1,31,760 crore in 2010.

Apart from exporting medicines to China, Indian entrepreneurs in the pharma space must look to China for their research and development needs. China has the advantage of a relatively lax regulatory environment. Unlike in India and other nations, the rules on clinical trials and patient consent are less stringently enforced, for example. Similarly, animal testing is far more accepted in China than elsewhere.

China also has abundant skilled labor that can be employed for less. According to market reports, Chinese scientists and technicians can be hired for about 20 percent less than what Indian scientists and technicians cost. In addition, given the higher technology lean of Chinese universities, younger generations of Chinese scientists and technicians are much better trained than Indians.

This dual advantage of relaxed laws and cheap talent makes China the place for Indian entrepreneurs to go to when they want to set up an R&D center. Plus, there is always the chance that a product developed in China will get entry into the local market.