The world is very familiar with the unprecedented economic growth enjoyed by China over the past few years. However, China, similar to other countries, has seen its financial engine slow owing mostly to the global economic decline. For instance, China's economy grew at 6.1% in the first quarter of 2009, which is the slowest rate of growth in nearly a decade, down from the 6.8% realized last quarter and from the 10.6% level year-on-year.
Gross domestic product (GDP) reached 6.6 trillion Yuan (approximately US$939 billion) during the first quarter. Meanwhile, overall industrial output grew 5.1 percent for the quarter and gave encouraging signs of continued improvement. Recent China Government supplied data indicated that industrial output grew 8.3 percent in March 2009, supporting the premise that the Chinese market is rebounding somewhat. However, continued increases in unemployment throughout China may erode both the output for the second quarter and the enthusiasm for a rebound in the economy garnered during the first quarter.
At the end of 2008 China announced that it would be initiating an economic stimulus package valued at more than US$580 billion. A good portion of this package was earmarked to expand China's infrastructure (i.e., roads, airports, train lines, electric power, etc.). Shanghai airport has already announced plans for serious upgrades and in Beijing, where highways already exceed 20,000 kilometers, there are plans to construct another 5,000 kilometers over the next two to three years. Tianjin plans to build at least nine additional subways. China has also indicated that investments in Zinjiang power grid will double that of last year. China will also use part of the stimulus package to increase subsidy for auto, home and appliance replacements. With the fall off in exports, China is hoping to increase domestic sales.
Another interesting measure of how well China is weathering the economic storm is the level of foreign investment recorded. Foreign direct investment declined 20.6% in the first quarter of 2009 compared with the same period last year, with investments totaling $21.8 billion. Of course, this data point relates more to the overall health of those countries who would normally be investing in the future of China as a growth engine.
Over the past few years the Chinese currency (i.e., Renminbi) has strengthened versus the U.S. Dollar (see Figure 2). Figure 3 describes China's role as a large purchaser/importer of goods throughout the world. China will soon be sending another purchasing mission to Europe, following in the footsteps of a delegation that visited the EU a few months ago and resulted in more than $15 billion in purchases. France was not included in the first purchasing mission as there were some concerns by the Chinese as to the position that France was taking relative to a "Free Tibet" debate. This next visit to the EU is said to include a serious review with the French Government and hopefully significant purchase orders by the Chinese.
To most of us, China is the world's factory for "everyday low price" merchandise. According to the U.S. Census bureau, the trade deficit with China in 2008 stood at $266.3 billion, with China imports valued at $337.8 billion compared with U.S. exports valued at $71.5 billion. The message is clear: China dominates the production of everyday goods. It is virtually impossible to purchase any household item that does not have China content. It just seems logical to assume it's simply a matter of time before China becomes an exporter of the most symbolic cultural icon-the automobile.
Although there appears to be a genuine rally in China's domestic car sales, China exported only 61,000 vehicles in the first quarter of 2009. According to China statistics, this represents a decline of 62% from the previous year. China auto insiders have pointed to the overall decline in worldwide demand as the reason, particularly in such key markets as Russia where protectionist measures have had a direct impact on vehicles entering the market. But this should not be accepted as a complete explanation. Unlike when Japan and Korea entered the global automotive market, today's market is crowded and comprised of market savvy producers who have already carved out a solid market position.
It is highly unlikely that the Chinese will be able to simply show up with "me too" products and achieve market acceptance. A more suitable route would be for them to focus on gaining market share through inorganic options such as acquisitions. This approach would also need to be augmented by the development of unique and superior products. In fact, the leading effort in the world to develop an all-electric car is not based in Japan or the U.S. but is in China. While most people think of China as being only a low cost producer they are in fact the leaders in developing superior battery technology for a variety of applications, including the automobile. If China's auto producers could acquire someone like Chrysler or even parts of GM this would allow them to move quickly into the U.S. market and bring with them their unique technology for an all-electric car. Pursuing a more traditional, organic growth strategy, including exports from China, would most likely prove unsuccessful for the Chinese.
According to the latest market data, China remains the second largest paint and coatings market in the world, with the U.S. market taking first place. The total paint and coatings shipment in 2007 totaled approximately 6.2 million tons with an expected annual growth rate of 22.3%.
According to the National Bureau of Statistics of China, the total production of paint and coatings was 3.2 million tons in the first half of 2008, which was up approximately 11.8% over the same period of 2007. Estimated year-end production figures indicate that the last six months were not as good due in part to the declining economy and a huge drop off in exports from China. In general, although the growth of the Chinese market is slowing down due to the global financial crisis, the market is expected to expand at a moderate speed in the coming years. The large stimulus package with its focus on infrastructure expansion and replacement of consumer goods should prove beneficial for the paint and coatings industry.
The huge construction/renovation and build up to the Olympics was a tremendous success for most paint and coating producers. However, as most of us will recall, the Chinese requested that all industry within a certain radius of the Olympics cease operation in order to improve the air quality. This meant that most raw material and finished goods producers stockpiled inventory to carry them through the down time. Unfortunately, most of this inventory was not sold until the following quarter thus delaying many planned start-ups.
The main impact of the economic downturn on the coatings industry was significantly realized after September 2008. Overseas orders decreased by more than 20% compared with last year. The architectural and wood coatings sectors witnessed almost the same level of decline. Furthermore, large industrial coating related industries, such as plastic toys, shipping and machine tools, all have significantly declined in export volume. The average growth rate of domestic demand for coatings dropped from approximately 20% in 2007 to less than ten percent in 2008. Although a firm growth rate for 2009 has not been established it is expected that unless the Chinese stimulus strategy commences to work soon, 2009 will be at a much reduced level compared to 2008. Unlike most markets, the Chinese coatings market is dominated by foreign producers, mostly through onshore production of paint/coatings. In 2007, the top ten companies' had a market share of approximately 12.5%. This kind of situation leads to low profit margins and counterfeit products. Leading multinational companies are expected to strengthen their competitiveness through mergers and acquisitions (M&A), improving distribution channels and increasing their production capability. The Chinese coatings market is overdue for significant rationalization and integration. The economic slowdown may prove to be the catalyst to speed up this process.
The global economic slowdown, ignited mostly by the subprime mortgage crisis in the U.S., has impacted the Chinese economy. The result has been lower levels of exports and foreign direct investment inside China. All of this has given rise to a much larger unemployment rate increase than China has seen in the past few decades. Although there are no reliable government statistics available, it is possible that the real unemployment rate in China is already in the double-digit range. Remarkably, the global slowdown has so far not brought much impact to Chinese commercial banks, investment banks and other financial institutions, nor did it greatly affect China's domestic demand. In all, the slowdown has a genuine negative impact over the Chinese economy, which they believe will be short term in nature. Most likely the rate of improvement will be tied to how quickly and how large of a recovery will be made by the U.S. and EU countries. China also has an appetite for imported crude oil, hence the government's commitment to producing an all-electric car. However, if OPEC is correct in that we will see crude oil topping $75/barrel by midsummer this could in fact delay or make worse any planned recovery by the Chinese or other countries that would be potential export customers of China.
China has made a series of tactical and strategic moves to maintain its economic growth, including the reduction of enterprise value added tax and individual income tax in a bid to stimulate investment and consumption. In November 2008, the central government embarked on an RMB4trillion stimulus plan, which consisted of massive infrastructure construction and further financial policy adjustments. The program involves housing, highway, railway, rural infrastructure, health and education and post-disaster reconstruction in Sichuan Province. If these measures are proven to be effective, China's macro economy is expected to maintain annual growth of approximately eight percent in the next two years. Of course this projection assumes a gradual recovery of the economies of the U.S. and EU. China's paint and coatings enterprises will find tremendous opportunities in the economic recovery process that has been defined. The extent of the negative impact from the global economic slowdown will be mitigated by the increasing domestic coating demand in the next three years.
If you wish to participate in the global paint and coatings market you do need to have a substantial presence in the Chinese market. Now may be the best time in recent years to move in that direction.
Key trends influencing China's coatings industry
� The rapid construction of Shanghai 2010 Expo sites and buildings is going on at full speed preparing for the grand opening in May 2010. The repainting of the outsides of all the elevated roads in Shanghai in preparation of the 2010 Expo will take a large quantity of exterior coating.
� The seven subways presently under construction in Shanghai will have to be up and in operation by the opening of the 2010 Expo, which will require a tremendous volume of paint.
� The saving/income rate in China has traditionally been much higher than that of the Western countries especially the U.S. With the economic down turn, China's general public still have some money to spend on consumer goods, including paint.
� The slow down of new housing construction has really hurt China's architectural coating business. Nevertheless, the exterior repaining of old apartment buildings subsidized by many big cities such as Shanghai is helping the exterior paint sector. Beijing is also allocating money for the refurbishment of such buildings.
- The wood coatings sector is really hurting due to its large export component. The same can be said for plastic toy coatings.
- Automotive coatings as are expected to grow at rates much greater than any other coatings segment.