Although we expect moderate economic growth in the medium term, the environment is still unpredictable. There are three types of risks
Cost, volatility and raw material acquisition. In fact, every input used by chemical suppliers has risks. For new projects, access to land, water, waste disposal and skilled labor is not a matter of course. Existing investments have some advantages in obtaining approval, but these investments and supplies are often not guaranteed; even with reasonable assurance, volatility is still a major risk.
Economic system. The economy is changing. The five-year plan aims to reshape the industry and introduce new and stronger competitors. The financial consequences of provincial and speculative lending interrupt the infrastructure investment needed for business activities. Environmental degradation could trigger sudden regulatory changes, with Beijing shutting down some chemical suppliers to improve air quality during the 2008 Olympics. Policy decisions to maintain social stability may come out of the blue, even if they are economically unreasonable.
High levels of central and provincial government debt also increase the risk of sudden changes in credit supply and costs. Inflation is high, which means that those who can get cheap capital may choose to hedge inflation in fixed assets, further distorting the economic environment.
The political system. A factor that is often overlooked is that the difficulty of the central government in controlling inflation is a new phenomenon, which reflects economic growth and, perhaps more importantly, the polycentrism of economic and political power. Although the central government maintains firm control over state-owned enterprises, China’s economic and socio political evolution is creating a less centralized society, characterized by larger and therefore more influential commercial and regional institutions. Today, the conflict is reflected in the differences between local and central governments in balancing employment growth and pollution.
Despite the environmental problems, the central government still focuses on maintaining political and economic stability, driven by sustained economic and employment growth. However, it is challenged by regional and ethnic social unrest, resource constraints, aging population and its impact on government spending, as well as the economic and legal environment in transition, leading to a high level of corruption and improper allocation of resources. For most multinational companies, intellectual property protection is another issue. Although the situation has improved with Chinese enterprises owning intellectual property and lobbying to strengthen protection, intellectual property infringement is still a major problem.
The planning of multinational chemical suppliers needs to include scenario analysis, more attention to regional differences, and increased risk analysis and mitigation. China is basically a safe and orderly society. Nine times out of ten, these problems are not riots, but resource and environmental disputes. Foxconn’s experience as a major consumer electronics supplier of iconic western brands, forced to double wages and improve working conditions, may become more typical, especially when the government encourages consumption by increasing wages, as labor becomes scarce as the economy grows, and Western customers demand higher working standards.
With the increase of risk and complexity, many multinational chemical suppliers in China will need to expand their functional expertise, especially in the field of operational risk management.