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This is the third in a series of guest entries on economics and life in Shanghai by Bill Dodson, director of Strategic Analysis at TrendsAsia Ltd and author of the upcoming book ‘China Inside Out: 10 Irreversible Trends Re-shaping China and Its Relationship with the World’. Bill normally blogs at This is China!
A couple of weeks ago, I went to a local Cantonese restaurant in Suzhou to buy some food to take home with me. Suzhou is a relatively small city by Chinese standards (about 1.5 million), and is 75 kilometres west of Shanghai.
But I almost walked straight past the establishment I was looking for because it had been ‘dis-established.’ The restaurant had been completely gutted some time after I had gone there two weeks earlier. I went back empty-handed to the pub I’d just been to and explained to my waiting friends that the restaurant was gone. They were as surprised as I was, noting it had only opened last year.
The same thing happened a few days later, with a different business: heading off to a regular lunch establishment for some Malaysian fried noodles and an iced tea, I was disappointed to find that old haunt had vanished too. A note on the door in English and Chinese said the cafe was permanently closed.
Perhaps the noodle shop closure shouldn’t have come as a surprise—the week before one of the owners had asked us what kind of business she should get involved with in Suzhou.
Businesses in China are structured to be obsoleted when they don’t provide the kind of pay off owners expect as quickly as they’d like. Businesses across the services and manufacturing sectors come and go in China with head-spinning rapidity. Restaurants, bars, clothing stores, entire malls and factories come and go with a speed difficult to match in Western countries.
Tens of thousands of factories along the eastern seaboard closed literally overnight in the winter of 2008, owners and bosses melting into the night with suitcases stuffed full of cash. Some of the factories sprouted up again in the interior of China, where salary levels were lower, while the proceeds of others were likely poured into industries completely different from the original business.
China now abounds with hundreds of thousands of empty apartments, concrete shells for which the owners await the most appropriate time to ‘flip’ the properties for profit. Urban centres are glutted with empty office space—also, in most instances, concrete shells—with few interested or able to pay the exorbitant fees property developers seek to recoup their investments.
I’m writing this blog entry in Suzhou in a complex of shops and restaurants called Times Square that opened two years ago. I’d say about half the establishments have been dis-established since the mall opened for business (although some big brands in the mall like Starbucks still bring in substantial custom).
So far, the business obsolescence model has worked well in China. The marketplace is still young and flush with easy cash. In a way, the economy and business climate is much like a Las Vegas casino: it’s all a numbers game, so try your luck and see what sticks. If you find a business model that actually makes money, then you, too, can be a fat cat.
But when the markets mature and the cash is flowing to other emerging markets, will the casino market still work for entrepreneurs in China? Will businesses, communities and the country be able to actually create genuine wealth at that time, instead of taking speculative flows and re-distributing them as the urge takes them?
Given that the past 30 years have been a boom time for the Chinese economy, with few rough patches, I think some of the less creative entrepreneurs will certainly be surprised when they've discovered their entire marketplace has been dis-established.
The newly-monied in China may have to decamp to Vegas to ply their investment ‘genius’.
Inst
I don’t understand why you posted this blog, given that a lot of it is related to the current economic climate. The mass closings on 2008 were related to the 2007-2008 economic crisis, and perhaps your Suzhou closing is also related to the present economic environment.
I also don’t understand your criticism of Chinese entrepreneurship; in the United States, something around 60% of new businesses fail within the first 3 years. Is it any surprising that Chinese businesses fare similarly?
Perhaps your point of view is more related to different economic structures in the United States and China; in the United States, I see a majority of mall shops being operated by franchises and big-brand names. Very few of these are mom-and-pop stores, and I’d be surprised if I found many “new” small businesses that opened in the last few weeks.
Also, as China is a rapidly urbanizing country and a developing country that, we hope, is in the process of modernization, does it make sense that tastes and customer expectations are in the process of rapid change? What may be adequate today will not necessarily be adequate tomorrow, and what has no market yesterday may be successful today.
reader
According to IRS’s data, 95% of business disappear here in the States within the first five years of incorporation. So what’s the big deal?
Fengqin
@Inst
Wumao also have to Eat.
Hope you are happy with the River Crabs.
Bill Dodson
Inst and reader;
A fundamental tenant of doing business in China the Chinese Way is NOT to build it to last (much to the frustration of German and Scandinavian vendors). Businesses in China are not so much seen as long-term investments as piggy banks from which business people can withdraw their cash whenever they want to and need to. Indeed, the social and economic structures here are different than in the States. Throughout China’s long history the Rule of Man has trumped the Rule of Law through arbitrary and capricious policy shifts and court judgments, creating a perpetual quick sand as a base for business interests.
Some businesses, of course, are long-lasting: mostly those in HK and Taiwan, which have rationalized business structures and relatively more transparent governance than on the Mainland (in general). However, in China, State-Owned Enterprises (SOEs) rule the roost with the result that for the past 18 months in increasing numbers private companies are being absorbed by SOEs through a policy known as guojinmintui – literally, “the state advances as the private sector recedes”.
Such an attack on a nascent private sector combined with the dearth of bank loans and alternative financing sources for SMEs combined with vague and immature property rights laws make building a business that “lasts” in China far more challenging than America’s more rationalized economy. Black Jack, anyone?
Yes, China is just that different.
Marty
Bill,
Maybe I’m getting too academic, but my memory from Microeconomics is that two key hallmarks of a ‘competitive’ industry are easy entrance an exit, since that allows the number of competing companies to easily adjust to the supply and demand. I think an argument can be made that many industries in China are far more competitive in this regard than their counterparts in the West. Of course things vary in the West, Texas has far less red tape than say California. One could argue that from the perspective of both businessmen and consumers it is a good thing.
Of course many new business owners are not competent or simply have a bad business model and are doomed to failure. But why not give them a shot at success? My neighborhood in Chicago has a restaurant density that rivals Chinese cities. Restaurants come and go but after 10 years I find myself mostly frequenting places that have been open longer than the 10 years that I’ve lived here. Perhaps it is because these survivors have figured out a winning formula of good food, comfortable atmosphere and good business management that keeps customers coming back.