By Dan Harris
I have always found it fascinating how macroeconomic issues can have such widely varying microeconomic impacts. When an economy declines, let’s say 10%, the impact on individual businesses can be all over the map.
I became starkly aware of this during the 1997 Asian crisis, as I spent large swaths of time in Seoul and Busan, Korea that year. One of the Korean newspapers did a story on the drop in imported goods coming into Korea. I do not remember the numbers terribly well, but I think it said that imports into Korea had declined about 20%. But the really interesting part was how unevenly this fall in imports was spread out among various products. The one that stands out for me is that some fruit (I am 99% sure it was either kumquats or quinces) had gone from $20 million in imports the year before to absolutely zero. Zero. The reason given for this was that it was a luxury and that such luxuries were no longer in demand. Some staple food products had seen virtually no decline and some domestically grown foods had actually seen an increase in consumption.
I have a lawyer friend who represents a huge number of medical practices. Long ago, he told me of how one of his surgeon clients had been decimated when insurance companies reduced payments and stiffened physician reviews. Giving my best guess to the numbers again, this lawyer told me of how surgery rates had declined about 5% across the board in Washington State, but this one surgeon’s income had gone from something like $450,000 a year to around $50,000. There were various reasons this had happened, but obviously this particular surgeon contributed a lot more than most of the others to the overall 5% decline in surgeon payments.
I mention all this because I have seen very little written about how China’s decline has impacted businesses differently, but it most emphatically has.
I thought of this today after receiving an email from a China consultant friend of mine who had this to say:
“Over the last ~6 months I’ve found an increasingly difficult business environment in China, in large part due to the challenges in getting money out of China. Whether it’s getting paid from a customer (claiming stricter controls on invoicing details by the banks) or dealing with tighter currency controls placed on Chinese nationals moving money to the US for investment or immigration purposes, it’s been really difficult.
Yes, we have absolutely been seeing this and writing about it as well. See Getting Money Out of China: The Reality Has Changed, Getting Money Out of China: What The Heck is Happening? and Getting Money Out of China, Part 2: Don’t Fall for the Scams.
But here’s the weird thing. Our law firm has been incredibly busy of late documenting deals, mostly in industries that are flat out booming in China. So much so that we hardly even think about any economic downturns, other than in how we are now careful to structure certain deals so as to be sure to make getting money out of China easier.
It’s not that my firm’s China lawyers never hear about the negatives stemming from China’s economy, because we do, but that is mostly from non-client companies dependent on receiving money from China. We are getting a number of calls from Western companies in industries negatively impacted by the downturn (like real estate) or in industries the Chinese government most wants to see doing their buying domestically. But on the flip side, we are also seeing a number of segments going crazy with growth, including the following:
1. Specialized manufacturing. Though China’s manufacturing is down overall, we are seeing a pronounced growth for Shenzhen companies that manufacture products for Internet of Things (IoT) companies. I will scream this from the rooftops, but the Internet of Things industry is growing at a spectacular rate and it has come from nowhere to having become a big part of my law firm’s revenues. Shenzhen is by far THE center of this industry and with IoT growth expected to continue for many years, Shenzhen IoT manufacturers ought to do just fine. For more on China and the Internet of things, check out China and the Internet of Things: A Love Story (where I rhapsodize about how much our China lawyers love this relatively new industry) and yesterday’s post, China and the Internet of Things and How to Destroy Your Own Company (where I warn of how so many companies in this new industry are making huge mistakes in China).
2. Health Care. Many China health care sectors are doing just fine and some are booming. To quote Health Intel Asia (written by people I know well and greatly respect), Investing in the China Hospital Market: Is Now a Good or Bad Time?, money is flowing into this sector from other industry sectors that are in decline:
“As several reports have showed, the economy of China is slowing and is likely to keep facing headwinds over the coming few years. It is true that as the economy in China slows further, the healthcare system as experienced by individuals and operators is going to come under strain. However, during this slow down capital is leaving traditional industries like mining industry or construction at the same time capital is jumping into the healthcare industry, especially the China hospital market. Chinese property and investment company Wanda Group signed a MOU with Britain’s International Hospital Group (IHG) on Jan 6th, 2015 for the investment of 15 billion RMB to build three high level private hospitals in Shanghai, Chengdu and Qingdao. Columbia Pacific Management, a Seattle-based health care company, also has begun to emphasize investment in China’s hospitals rather than senior care facilities since 2014. When we analyze some of the key news over the last several months, we start to get a clearer understanding on why capital is chasing the opportunities of hospital investment in China as of late and what the possible opportunity for profit is in the future.
3. Technology Licensing. For probably the same reasons money is flowing into China health care, it is also flowing into certain technology sectors and, most prominently for our law firm, into technology licensing deals. The Chinese government is actively encouraging Chinese companies to do more licensing of foreign technology and Chinese companies with money are doing exactly that. What started as a trickle years ago has grown into a flood. Chinese companies are seeking good technologies and good patents and they are prepared to pay what it takes to get those, and in all the hot industries, like batteries and chips and 3D printing and medical devices and artificial intelligence and IoT, just to name a few. See China Licensing Agreements: The Extreme Basics, for background on what it takes to play in this now booming field.
4. Service and Entertainment and Gaming Companies. This one is hit and miss. On the hit side, Our China attorneys are seeing a lot more high end computer and environmental services and education companies striking large deals to help out large Chinese companies and/or just thriving in China. See Service exports to China and India could be the next boom. On the flip side, we are also getting an increasing number of contacts from service companies with problems getting paid. China movie and gaming related companies are also doing just fine.
5. Food, skin care and cosmetics companies and anything e-commerce. An increasing number of foreign companies in these industries are going into China (either directly or via e-commerce) to sell their products and many of them are thriving, especially those with a “healthy” bent.
Now that I’ve talked about the sorts of businesses that are still thriving in China, I would be remiss as a lawyer not to mention the increased risks we are seeing and what you should be doing to reduce yours. But that will have to wait for part two, which will come tomorrow.
What are you seeing out there? Where’s the slowdown?