SAP Ariba’s Atzberger on the Future of China’s Economy and Trade Policy

In the past few decades, China’s economy has evolved by leaps and bounds. What used to be a country for low-cost sourcing has become an important global trade partner that should not be discounted. In this Spend Matters Conversation, Founder and Head of Strategy Jason Busch talks with SAP Ariba President Alex Atzberger about how trade between China and other nations has changed in the past 15 years, the future of Chinese trade policy and what this means for procurement and supply chain professionals. Those interested in the topic of China's ascent in the world economy, trade policies and Market Economy Status (MES) status should also look at our dedicated multimedia site on the topic.

Jason Busch: A lot has happened domestically in the past month: the surprise election of Donald Trump, his potential China policies and the impact on inflation and rising commodity markets.

Perhaps it makes sense to begin by looking at the recent history of trade between the U.S. and China and between Europe and China in the past 5 or 10 years and the context for today, along with what has happened from a procurement and supply chain standpoint in China during that time. I think we often jump to conclusions and are just interested in the headlines, but a lot has happened before this election, and I think we’d be negligent not to level-set ourselves and the audience.

Alex Atzberger: China has become a trading partner for countries across the world, and if you look at the relationship between the U.S. and China and even the most recent news, I think it’s interesting, because at the end of the day, globalization has been unleashed already. Many countries conduct a lot of trade with China, so I think that naturally brings about the question: “Where does some of the trade go if it’s not with the U.S.?”

I look at it more from a global perspective, since I work in a company that is truly global. And I think China is just too important and globally integrated not to consider it as a key trading partner. If you look at a lot of the different trade flows between China and the U.S. and between China and other markets, yes, of course there are ups and downs, be it steel policy or different pieces, but overarchingly there are a couple of core things that happen in China. Number one is the fact that, economically, China is maturing as a country.

You see this in terms of how they deal with their currency, for instance. You see this in terms of companies and their processes inside the operations. You see this in their urbanization and their adoption of e-commerce. There are a lot of things happening in China. Every time I visit — and I lived there for a couple of years — I see the progress that’s being made. Suddenly, beyond the investments and infrastructure, you see how companies operate. Even if you go down more specifically into procurement, you see that the function is becoming more sophisticated and influenced.

This obviously happens because a lot of the investment that China is making across the globe are also direct investments in companies and in acquisitions. And that brings in different skill sets and different opinions. One of the chief procurement officers of a German company just joined a Chinese tech company, for instance, in a managerial board position. You see these types of moves happen, and you see that Chinese companies are globalizing as well.

While the discussion certainly is interesting about what the U.S.–China relationship is, I think there’s also a China in terms of how it relates to the rest of the world. Whatever doesn’t happen between China and the U.S., I think others will take advantage of.

JB: Excellent points. I’ll just add a couple of things. I know you’ve got the more global perspective than me because of all the time you’ve spent in China and the rest of Asia. I confess I have not been to China in, I think, nine years. I went there a number of times during the heyday and then the tail end of low-cost country sourcing, when that was the mantra, but unfortunately I’ve been studying it from afar of late. But perhaps that external perspective is also useful, because a lot of the people criticizing Chinese trade right now likely have not spent a lot of time working with Chinese multinationals, Chinese suppliers or even their own facilities in the region.

I guess I would add a few comments centered on three recent stages of China’s maturity in trade that I see. I’ll put on my U.S. hat here but also try to put on a European hat.

The first stage of trade between China and the U.S. and the rest of the globe, as we might describe it, centered on arbitrage and enthusiasm. This was marked by the low-cost country sourcing era. This is going back 10, 15 years, when even the Chinese firms were very excited about the significant cost advantages they could offer, which were largely labor-based. Again, this stage was all about arbitrage-based enthusiasm.

I think the second stage was one we can best describe as “the new normal,” and that’s what we’ve been operating in since 2008 and 2009, where we saw commodity prices fall back down to Earth and China wage rates continued their upward ascent.

During this time, we saw China’s GDP growth stagnate not by by U.S. and European standards, but certainly by their own expectations of nearly double-digit growth (which saw a high of 14.2% during 2007). During this second stage, China got a heck of a lot more efficient at production, driving greater productivity, which was necessary to stay competitive given the wage pressures.

Then more recently, we encounter what we might describe as the “third” stage of recent China maturity. Before the election of Trump, I think the opportunity in the past couple of years really started to look at China more as an opportunity in terms of both sales (and export). I don’t want to call China a market economy yet, because that’s a very loaded term right now given the market economy status question. But during this third stage, we’ve looked at China much more as a market to purchase goods and services, not just produce them.

I know you share that enthusiasm as well. I mean, if you look at population, the rising middle class and everything else that is happening in the region, China’s is perhaps the biggest market opportunity for any company to target today.

This brings me to my next question: what is the near-term future of China policy and how should we think about it as procurement and supply chain professionals?

If you look at what we could call the “November surprise” – though maybe it wasn’t such a surprise following on Brexit – and we look at the election throwing China policy into flux, how should we be thinking?

I say “we” as referring to procurement and supply-chain professionals, those who cover the industry and those interested in the region from a trade perspective. Think about these next 12 to 18 months. Do you think we’re going to see major short-term policy shifts? Are we going to see challenges for U.S. multinationals selling into China? And, by the same token, from an export perspective, are we going to see those firms importing goods into Western Europe or the U.S.?

AA: From a U.S. perspective and from a supply-chain perspective, there’s certainly an element of uncertainty. And uncertainty, I think, is equal to risk that has been introduced. I think the risk is specific to – obviously – tariffs and potential trade conflicts that might hinder supply chains from being as effective as they could be. I think of the worst-case scenario as some sort of trade war or something that might hurt both economies significantly, because so many of the supply chains today touch China in some ways, be it on the high-tech side or retail.

As a supply-chain professional, I would certainly look at this as a risk component. I would run some scenario planning to say, “OK, what are my options, and how do I secure my supply? How do I ensure that I have the right assumption not only about the security of supply, but also the cost basis for it?”

And I do think there are different scenarios. Nobody has a crystal ball in terms of seeing how much of this is posturing. But the big picture for me is all about this: How do you manage uncertainty? How do you ensure that you have agility in your supply chain?

And then there’s the other part of this, which is selling into China. I think, even after Edward Snowden, especially for tech companies, it has been harder and harder to sell effectively into China, especially for U.S.-based companies.

This is why you have so many regional champions in China, be it Baidu, Huawei, Lenovo or others. I think that will continue, and it will make it harder for some of the U.S. companies to be successful.

Stay tuned for Part 2 of this conversation, in which Jason Busch and Alex Atzberger discuss China’s evolving economy, potential for innovation and economic opportunity.

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