Navigating the Downturn

by Godfrey Firth

With most of the world mired in recession, all eyes are on China’s much-discussed and hoped-for potential economic recovery in the fall of 2009 or early 2010. Many multinational corporations seem to be pinning their hopes for positive results in 2009 on their China operations. For China-based managers, this hope brings increased scrutiny and intense pressure to deliver. The challenge of managing headquarters’ expectations, especially during uncertain times, looms large in the meeting rooms of multinational firms in Shanghai.

Hunkering down

The China operations of most companies reacted rapidly and effectively to the emerging downturn in the last quarter of 2008. Travel fell to a minimum, bonuses were eliminated or cut, and salary increases were postponed or reduced. Many companies conducted minor reductions in force, pruning less-productive or non-essential staff. The empty desk across the hall represented a rude awakening to young Chinese professionals accustomed to a double-digit wage bump, a round of promotions, and crops of fresh-faced young graduates joining the team every year.

The drumbeat of negative news about disappointing earnings reports, falling share prices, and collapsing financial firms was matched by a sudden and wrenching drop in demand all along the global value chain, in which many Chinese companies play a major role. Thinning order books prompted many of these companies to cut to the bone, and some unfortunate ones folded. Dislocations were particularly pronounced in, but certainly not exclusive to, China’s large export-oriented sector.

As local governments began collecting social insurance contributions from enterprises for November and December, the dramatic drop in employed staff at many foreign and private Chinese companies caused serious alarm in the corridors of power, from local governments all the way up to the central level. In every economy, cash is king for companies, but jobs trump all for governments. The PRC policymaking elite reacted quickly, and maintaining and creating jobs immediately became the top priority driving policy decisions.

Of stimulus and silver linings

Of all the policy responses rolled out in late 2008, none attracted more interest, analysis, and questions from US-China Business Council member companies than the ¥4 trillion ($585 billion) PRC stimulus package. The package is an amorphous amalgamation of existing policy priorities and pre-planned spending, rolled together into a large package with a single, eye-catching price tag, and presented to the public before President Hu Jintao’s visit to the G-20 summit in Washington, DC. The package was a green light to ministries, provinces, and companies to move ahead quickly with projects and spending. The result has not been new projects, but accelerated implementation of existing policy directives and projects and the early launch of projects from the next five-year plan. The majority of project funding in China, for both public and private investment, comes from bank loans, and the government has placed enormous pressure on the banks to lend. The bankers have responded by throwing open the taps, with ¥4.5 trillion ($658.5 billion) in new bank loans in the first quarter of 2009 alone, a clearly unsustainable rate, given that the lending target for the full year is ¥5 trillion ($731.7 billion).

The business opportunities in the package vary from sector to sector, with those in infrastructure, especially rail, most plentiful. Companies have delved into the specifics of the package to track down the highly elusive project lists and information. This is a struggle, as transparency remains weak at best. Some companies are working on other key initiatives that are technically not part of the stimulus package but have gained momentum from the political imperative to spend. These initiatives include China’s massive healthcare reform and the telecom network upgrades associated with the roll-out of third-generation (3G) telecom networks.

The early birds…

Cost controls are in place across the board, business remains weak, and forecasting even six months ahead can feel like tossing darts blindfolded. But in this environment, energetic managers in Shanghai are focused on mapping and targeting growth opportunities, whether related to government expenditure or the inevitable recovery. Regardless of when China emerges from the downturn, the long-term fundamentals and deep-seated optimism of companies operating here remain unchanged. Smart companies are planning for growth.

[author] Godfrey Firth is chief representative at the US-China Business Council in Shanghai. [/author]