Opportunity and risk - Supply Management

Opportunity and risk

David Noble, Group CEO, Chartered Institute of Procurement & Supply
14 October 2015

When the western world languished in the depths of recession, it became increasingly envious of the meteoric rise in China’s fortunes. Over the past decade, the region has enjoyed almost double-figure economic growth and a winning formula that Europe and other parts of the world could only dream of.

But it was never going to be sustainable. As the second largest economy in the world, China is now experiencing a decline that has serious implications for all the economies that are now reliant on its products and expertise.

Fears are growing for another global recession; such is the region’s importance. Combine that risk with the devaluation of the Yuan (or RMB as it is more commonly known) and also changes to the Chinese economic system to encompass a more western style, and the next decade is beginning to look very different.

Chinese president Xi Jinping has called this era and new economic strategy ‘One belt, one road’ to showcase his intent to open the country up to the rest of the world and create a ‘New Silk Road’ with less regulation and a higher level of good practice and ethics.

One of the implications is that Chinese businesses will no longer enjoy the financial protection of a government that once valued control of reputation above good financial and procurement principles. Instead of government bailouts being the norm, corporates will now succeed or fail by their own efforts. In the short-term at least, there will be less stability and more risk in the marketplace. The region also requires a significant cultural shift, which will have an impact on the Chinese collective psyche.  

China’s new economic model of more consumption and higher manufacturing capacity to replace exports and investments as key engines of growth may result in a further slowing down in the economy too, but any growth is now likely to become more sustainable.

But risks are looming on the horizon. Overcapacity is the first. Manufacturing suppliers with highly polluting or energy intensive industries will place further strain on the environment. As a result, they may be forced to curb their activities, which could lead to a possible shortage of raw materials, chemicals and other products for the rest of the world. The intention to increase industrial consolidation with a reduction in the number of smaller enterprises means the larger conglomerates are regulated to become more efficient, more lean and more ready to trade with the west. Anti-corruption measures enforced by government will smarten up the acts of CEOs managing these bigger enterprises and all the suppliers that work with them, which should result in more sustainable and ethical supply chains.

This ambitious new age won’t be easy to manage even if western support is forthcoming. Following the UK chancellor’s visit to China last month – and the desire for the UK to be China’s “best partner in the west” – the issue of what cultural change should encompass was high on the agenda. This means positive change not just in the economy, but change in the political landscape, where activists have demanded more democracy and more freedom in press reporting.

This year’s last quarter CIPS Risk Index is out this month and it will be interesting to see how much of an impact China continues to have as a result of these developments and also the effects of the Tianjin explosion. This is a vast industrial area with 12 million people and the results of this disaster haven’t yet been fully realised. With China so full of opportunity and risk, the world should be ready for the dragon’s roar.

David Noble is group CEO, CIPS

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