The Situation in China

1. Some commentators predict that china will be the worlds leading economy by 2050. Critically review this prediction. Given that the Chinese economy will inevitably change, what new business opportunities might arise from china’s predicted growing global economic importance? Justify how you would exploit this opportunity and explain how you deal with problems that might arise.

2. The Situation in China • Capital City : Beijing • Population : 1.3 billion • GDP : $1.1 billion • Growth Rate : 9% • Major growth since 1978 with open door economy • Runs a socialist market

4. Will China be an Economic super power by 2050?

5. The Optimistic View of China • We have already seen a great increase in China’s economy. • Only 20 years ago 80% of china’s population lived on less than 1$ a day. • Due to steadily improving human capital, china enjoys many “Software Advantages” which will sustain growth and greater prosperity for the next 5-10 years. These factors will be looked at in greater detail.

6. Optimists : Dependency Ratio • Between 1990 – 2000 the number of people under 15 and over 64 decreased. • This will remain like this for the next 5 years • When the number of elderly increase, the number of younger people will decrease. • It is likely families and governments will maintain or increase investment in education, thus providing an excellent core curriculum across the country.

7. Optimists : Education • China is very strong in terms of educational achievement. • Illiteracy dropped significantly during the second half of the 1990’s. 17% amongst men and 13% amongst women. • Higher percentage of teenagers are attending school than ever before. Drop out rates are just 1%. • Greater access to post-secondary schools in 1990 was about 3.4% of those aged 18-22 attended them. By 2000 it was 11.5%.

8. Optimists : Health Status • Life expectancy in China is now 68.7 years for males, and 73 for females. • China has a national health system capable of mass coordination and education. • More than 95% of Chinas children are immunized against a full range of childhood diseases.

9. The Optimistic view • Because of Chinas investment in human capital, it is very reliable and is continuously improving. As a result the core fundamentals for economic growth remain strong. • Predicted to stay growing until 2040 by some analysts. Even if it is a bubble, it will be a long time before it bursts.

10. The Pessimistic View of China • China is only going through short term growth that it cannot maintain. • The Chinese government’s incompetence seriously restricts growth. • It is just a bubble which is close to bursting point.

11. Pessimistic : Unreliable Statistics • It is likely that economic growth fell short of the official claims taken between 1998 and 2001. • 45% of shanghai informants reported constant or declining family economic circumstances from 1995 to 2000. This clashes with official double digit growth claims. • Inventory figures show inventory accumulation occupies large segments of the capital formation in some provinces. Yet official statistics show effectively zero accumulation in 2000 and 2001. • NBS director Zhu Zhixin “China cannot effectively resist intervention”.

12. Pessimists : Private Business • Private business is massively restricted by artificial barriers. These are set up by the government to favour national privatized business. • Deep seated hostility towards private business – communist/socialist mentality. • Private business accumulated 30% of Chinas industrial output, but received less than 1% total credit issued by banks. • This has led to many missed opportunities, and makes the running of the economy inefficient.

13. Pessimists : Overheating Economy • Rapid growth in investment is going faster than consumer demand. • Deflation due to over capacity. • “Analysts in KMPG predicted last year that car makers in China would soon have the capacity to produce 1 million more vehicles than it could find buyers each year”. • Yet Ford, GM, Toyota, Honda, Nissan and VW have all announced plans to invest billions in new factories in China. China to raise deposit reserves to curb overheating money supply

14. The Pessimist View • Feel there is unlikely to be substantial reform in the Chinese economic and political system. • These restrictions will hold back the economies current state of growth. • This will create stagnant employment, wide spread over-capacity, create inflation and create low investment demands.

15. The future of China? • Despite differing views on the future of china, we know that there are some major issues that china will have to deal with. • These obstacles and issues are factors which will decide if China will be an economic super power or not. • It is unlikely every single one of these issues will occur. It is also very unlikely that none will occur. • Due to the nature of them, they will most likely occur at the same time since they are all interdependent.

16. The Issues China may face • Unemployment, Poverty & Social Unrest • Economic Effects of Corruption • HIV & epidemic diseases • Water Resources and Pollution • Energy Consumption & Prices • Fragility of the financial system and State-Owned Enterprises • Possible Shrinkage in Foreign Investment • Conflictual Adversities – Taiwan and other potential Conflicts

17. New Business Opportunities • Increasing wealth has led to an increasing financial services sector. • There is more demand for high quality domestic goods as a result of the boom • There is a bigger market for leisure goods/services due to Chinas increasing wealth. • Increasing population and modernization leads to problems managing pollution, water resources and energy consumption – Business opportunity?

18. New Business Opportunities • Decreasing ability for the state to run the health service as well as the increasing disposable incomes allows many opportunities in the area of health and care. • The Olympics being held in 2008 give an opportunity for business’s to advertise and exploit the tourism increase. • Chinas increasing military capabilities – weapons manufacturing.

19. Our Business Opportunity • In order to exploit this opportunity we will become a large drugs company which specializes in HIV related drugs. • We feel we will be successful in penetrating the Chinese market for several reasons. • Firstly there is a growing HIV epidemic which is predicted to reach massive numbers in the future. • Secondly, The decreasing ability of the state to provide a National Health Service means people are more reliant on private sectors to provide this. • Thirdly, The increasing wealth of China will mean that they are more easily able to purchase our drugs. • “China’s demand for HIV drugs has grown at a fast pace in the past decade. In the next five years, demand and production will continue to grow”

20. The HIV Epidemic in China • Chinese estimates claim 1 million persons have HIV/AIDS. It is likely this is figure is toned down by the government, but even if we accept this figure, it has a growth rate of 25%. This will leave China with about 6 million HIV/AIDS cases by 2010.

21. Why the virus has spread • For many years the virus was ignored by the Chinese government, and seen as a “foreign disease” • Since becoming capitalist, it has created a “floating population”. Rather than being bound to where they have grown up as before, large numbers of people can now freely move around the country, taking the disease with them. • IV drug use is on the rise in China due to helping people with the dispair and dislocation caused by the hardships of the economic system.

22. How the virus has spread • Increase in casual and premarital sex in China • China has a growing commercial sex industry since becoming capitalist. • Cultural issues. More men than women due to one child policy, increases males reliance on sex industry. • Traditional conservatism makes education and talking of sexual matters hard, e.g. No sex education in schools • Taboo against blood donations means people buy blood from underground sources which rarely get screens for HIV and other diseases.

23. AllKlear Pharmaceuticals • AllKlear Pharmaceuticals is a British pharmaceutical company which deals mainly with the production of HIV related drugs. • We sell to private health firms in the UK and in a number of other countries in Europe. • We have a large research team of scientists, and have patented many of our drugs in Europe. • We have 2 main production factories in the UK, and various warehouses situated throughout. • We also do research on behalf of the government regarding education and advise them on ways in which to reduce the number of HIV infected in the UK.

24. What AllKlear aims to do • Sell HIV preventive drugs to the Chinese Government and other Private Health Companies in China. • Research into HIV prevention on behalf of the Chinese. This includes both from a biological standpoint and a social standpoint • Aid China in education programmes in which to educate the population on HIV preventive behavior.

25. Company Strategy • In order to gain a foothold in the market, a long term strategy is needed. • We plan go have long term contracts with Chinese health companies, and to move much of the production over to China to reduce the cost of production and the end user price (export price escalation, etc). • Our short term plan will require an intensive programme of marketing to the main drug sellers in China. • We plan to sell drugs at costs lower than those already being sold in the Chinese market today. • Once long term contracts have been established, this will allow us to keep producing low cost drugs, due to moving production to China, as well as other factors (economies of scale, experience curve, etc) • Once we are recognised as a distinguished company tackling the AIDS/HIV epidemic in China, we will then look into doing research for the Chinese government

26. Issue 1 : Competition • There are other large drug companies which also sell drugs to China. • This include GlaxoSmithKline PLC and Bristol-Myers Squibb Co. • However, these are still very high cost, and since many of those infected are poor, it leaves a large segment of the market for low cost HIV drugs. • We have more competition from Chinas own drugs companies. For example, Shanghai Desano Biopharmaceutical Co. • These companies are rather small, and are only just starting off. If we act now, we still have a good chance of getting a large market segment.

27. Issue 2 : Chinese Legal System • The Chinese patenting system could be seen a both a benefit of a problem • The patenting system has many loopholes and allows other drug companies to copy patented drugs by only making very small alterations to the formula or description. • This could be beneficial for us as we will be able to sell patented drugs in China at a much lower cost. This will allow us to gain an early foothold in the Chinese market. • However, in the long term this system could be unbeneficial. We have developed many of our own drugs in the UK, and when we start using them in China, these may be easily copied. • We assume that as China develops economically, so will it politically and legally. This means we can take advantage of these short term loopholes but we will have security in the long term as its patent system fixes these problems

28. SWOT Analysis Strengths • We have many years of experience in research into this issue, and have helped in the prevention of HIV in the UK and other European countries. • We have several warehouses already and will be able to supply China with the necessary drugs. • We have experience in educational programmes in the UK to help prevent HIV • We have a large team of scientists who specialize in this subject. Many of which are of Chinese origin.

29. SWOT Analysis Weaknesses • We have only dealt with UK and some parts of Europe – China is a completely different culture and economy. • Need to do more research on the HIV crisis from a China standpoint. • Do not have the capacity for long term production for the Chinese population – need capital for additional laboratories and factories in China • Language and business culture problems.

30. SWOT Analysis Opportunities • Increasing wealth of China gives many market opportunities • China are in desperate need to address the problem, and would be very reliant on HIV drugs • Few low cost HIV drug companies, and those in China only just starting up, so now a good time to strike • Ethical obligations?

31. SWOT Analysis Threats • Conflict with Chinese government • Hard to get patents • Large elaborate distribution system • underdeveloped legal system • Competition from other dugs companies • Possible resentment to foreign company

32. Conclusion • In order to penetrate the Chinese AIDS/HIV market, it will need a long term strategy at the expense of short term costs. • Due to the increasing wealth, but increasing infection rates in China, we feel this is a good market opportunity. • There are various problems, such as that of competition and their ineffective legal system • Once these problems are overcome, we feel there are great profits to be yielded in this growing country.