Shanghai Security News - April 2009

Reported by Guan Lu

[Click here to read the full article in Chinese or for the English translation, read below.]

The financial crisis’s influence in China’s economy has shown fully that China is an indispensable player in the world market economy chain. According to commercial figures, China’s FDI (Foreign Direct Investment) for March was USD 840.3 billion, a decline of 9.5% compared to the same period last year, but smaller than the decline of 15.81% in February and 32.67% in January. The FDI in the first quarter of the year was USD 2.177 trillion, a decline of 20.56% compared to the same period last year. Despite this, there are clear signs of growth as compared to the end of last year.

Therefore, some experts are of the opinion, that although China is now affected by the financial crisis, the growth has shown China to have the ability to attract investments within this year. But during this extraordinary period, what should a foreign company or individual pay attention to if he wants to invest in China? Which areas offer the best opportunities for investment now?

Currently pioneering the development of the self storage industry in Mainland China, Mr. Carson Block is a professional investor and lawyer, who used to practice at Jones Day, representing foreign customers in domestic M&A projects. Before arriving in China, Carson was a partner of a boutique private banking firm, W.A.B. Capital, in Los Angeles. At the same time, he is the founder and owner of ChinaPrimer.com, a website that helps Western small and medium-sized enterprises save money and minimize risks when entering China.

With his commercial creativity, he analyzes via Shanghai Security News the items foreign corporates should pay attention to when entering the Chinese market for the first time. At the same time, as the co-author of Doing Business in China for Dummies, he is happy to share with everyone all aspects that should be noted while starting up companies in China during this economic crisis.

CASE STUDY: Love Box Self Storage: Full Investigation

Carson Block is the pioneer for the self storage industry in Mainland China. Love Box Self Storage is Mainland China’s first international standard self storage facility. This is the brainchild of an American, who in theory knows the Chinese market very well. After 14 months of assessment, the company was set up at the end of last year.

The idea to start this company originated from everyday life. According to Carson, because he had a relocation package when I first moved to China, his apartment was full of furniture, books, and clothing that he wanted to store. Therefore, he started with his friend to begin researching the expat market, assessing whether other expats also have the same needs. The reaction they generally received from expats was “Yes! I need self storage!” This is the same method used by foreign companies or individuals when entering the Chinese market, first investigating the needs of their own citizens in China. This is however a marginal investigation.

A complete analysis is essential. “We began thinking about whether the local market in China has potential. Many Chinese seem to see our service as useful for short-term storage needs, such as when renovating. But we believe that Chinese living in luxury apartments will eventually become clients. There needs to be an educational process, letting them know the advantages of self storage. After all, what’s the point in paying RMB 15,000 or more for a square meter of home space that’s going to be wasted by something that you seldom use – particularly when you can put it away for a few hundred RMB / month?” Carson concludes his analysis of the Chinese market.

Love Box spent 14 months in planning, research, and development before opening. His experience is: Initially, we started on the goal to minimize risk with a limited amount of capital. Secondly, we wanted to establish a strong brand. Rather than merely testing the waters in this market, we decided to establish Love Box as a durable brand. In that way, we’re taking a bigger risk than we originally thought, but we believe it’s paying off.

Love Box has been open since late December, focusing on marketing to expats because they’re already familiar with the service. In March this year, they began marketing to the domestic market.

For Carson’s self storage operations, the biggest success lies in finding a suitable location and successfully opening the facility. “Geographical positioning is very important. We chose a property at the intersection of the Inner Ring Road and the North-South Highway, providing all the amenities our customers need. Finding and opening this property was a huge challenge. We secured this property toward the tail end of the property boom – during this time, prices on this type of property shot up about 30% - 40% in a period of only three months,” He reminds the foreign companies and individuals that are considering an entrance to the Chinese market: The choice of the property is very important – details in location, fit-out, fire code infrastructure etc must satisfy the needs of the purpose. This is a major point for companies that have special requirements, like Love Box.

Carson’s Suggestions:

Investment tips for Asia in the crisis

With the economic recession, Carson believes that the industries with the most room to grow in China are services. “My list includes: education, healthcare, financial services, environmental services (especially water treatment), and specialty retail. There is also ample opportunity in the agricultural sector.”

More importantly, Carson thinks that the financial crisis is presenting a good opportunity for investment. He states that if one has patience and can select good companies, this is a good time to invest. “I don’t think that most economies have bottomed yet. But I fear European nations and the U.S. are going to make serious mistakes that worsen the crisis. If this happens, I doubt that the Chinese economy has bottomed yet. If the economic situation continues to worsen, the markets will fall more. But if you are willing to wait 3-5 years to make money, you can do extremely well buying at these levels if you find a good company at a low price."

Carson has analyzed the whole Asian market, and he generally doesn’t view Asia as a whole.

"I’m always a big believer in Singapore, their society and economy are so flexible with so many strengths (including education, Chinese / English proficiency, international orientation, stability, and technology) that I’m sure they will pull out of the crisis in a better position than ever."

"Vietnam was generally moving in the right direction, but made some mistakes. Will the country continue on its liberalizing path, or pull back? This is the key consideration for Vietnam."

"The Philippines has so much potential given its well-educated, English-proficient workforce, but it has always had poor political leadership – I worry about whether it will be able to bounce back."

"It will be difficult to interest me in Indonesia for a long, long time."

"As for China, it is weathering the storm better than other Asian economies. It has the room to stimulate the economy, which it is now doing. However, I worry about inflation here when the rest of world recovers in a couple of years. Moreover, I cannot tell whether China is engineering a soft landing in the property market, or re-inflating it. If the former, I believe this is prudent. If the latter, then I fear there could be a U.S.-style day of reckoning a few years down the road (minus the derivatives of course). It is essential that Chinese economic recovery not be founded solely on real estate – this was the mistake the U.S. made in that it never fundamentally recovered from the 2000-2001 downturn. The U.S. papered over its excess capacity problems by artificially creating demand through a property bubble."