How Black Monday could affect western companies starting up in Asia
The Chinese stock market’s crash has caused a tidal wave of panic across the economic landscape at a time when many western companies are investing heavily to set up in the region but the problems of a contracting Asian economy may not prove unsurmountable.
Economists’ opinions have dominated the headlines this week; some predict an impending major financial crisis that will dent businesses while others argue that the Chinese market volatility might benefit some of the western newcomers.
In recent weeks a host of major western companies such as BuzzFeed, Mashable, Twitter and Netflix have moved into the region. The companies were no doubt aware of the Chinese market’s gradual slowdown in recent years but they would have been alarmed by Monday’s disastrous crash which saw China's benchmark Shanghai Composite index drop by almost 9 per cent, marking its biggest one-day drop since 2007 and wiping out all gains made this year.
Crucially the crash will have an effect on the surrounding economies too. Throughout the Asia/Pacific region, countries like Vietnam and Malaysia have become over dependant on China’s demand for their exports and crucially, they don’t have the government will, cash and power to influence their home markets as China does. There is little doubt that the combination of China’s slowdown and the devaluation of its market will reverberate throughout the region in some form or another.
This is where consensus is hard to come by. Many economists are arguing what shape the repercussions will take on these major western companies who are desperately trying to get a foothold in such a massive market.
Large news brands such as the FT, WSJ, BBC and CNN have been highly successful across Asia for a while but Jayati Ghosh, a leading economist and professor of economics at Jawaharlal Nehru university in New Delhi, has argued that the crash in China “signifies the end of a particular growth strategy that many other countries were trying to emulate”.
Richard Vague, an economist at Gabriel Investments and chairman of The Governor’s Woods Foundation, has claimed that all signs point to a major financial crisis and has warned that “business activity must slow down while demand catches up”. The extent of the crisis is perhaps most evident in the level of private debt which has been a principle factor of major financial crises and now sits 215 per cent above GDP; a far higher level than that of the US and Europe.
Claire Enders, chief executive of Ender Analysis, holds hope for the new players entering the volatile market though because as she points out to The Drum, “less material consumption might boost personal media consumption”. Enders points out that this in turn is helped by the fact that the companies raise their funds outside of China as well as Chinese consumer demand remaining broadly speaking, independent of Chinese macro-economic conditions.
Historically, breaking into the Asian market has been a difficult undertaking for big media players though. Wayne Arnold, chairman of the marketing society for South East Asia, points out that countries like Japan, Korea and China in particular are the hardest to crack due to “lack of English as a first language, combined with some pretty restrictive government regulations.”
Arnold highlights “mobile” as a fundamental aspect of business strategy which the newcomers must focus on in order to achieve success, pointing out that with over two billion mobile users and growing exponentially versus a 1.8 billion desktop users across Asia, mobility “has to be a no brainer”. Evidenced of success for this mobile led approach can be taken from Facebook, Google and Spotify, which have all experienced strong growth in the region thanks to the medium.
A recent report by Business Monitor International (BMI) paints a promising picture of mobile’s predicted growth despite the economic instabilities in the region thanks to an increase in 4G and data usage which more than doubled since the beginning of the year.
Another aspect of how the current situation in China could play into the hands of the emerging business like Twitter, BuzzFeed and Netflix, is the attractiveness of investors in the region. The opening of Twitter and Facebook’s shiny new offices in the last couple months is proof of major investment in the region and will be warmly welcomed now.
Even though the FTSE100 position, which currently sits at levels last seen in 2012 given its heavy weighting to basic resource/oil and gas stocks. the FTSE250 is still well above its 2014 lows, despite losing over 1,000 points in the last two days.
Andrew Kitson, senior telecoms analyst at BMI, highlights other potential advantages of the current situations in China. Government regulations in the country require digital media businesses have a local office and store data in local servers/datacentres, meaning a “contracting Chinese economy lead to lower building rents and cheaper datacentre rates and increased unemployment could make recruitment easier/cheaper.”
As with any other market, asserting dominance is crucial in attaining success and each of the major companies that have made recent moves into the area have the financial firepower to succeed in the market compared to any competitors. The consequences of the financial situation may be less of an issue for the likes of Twitter, BuzzFeed, Mashable and Netflix who may find their biggest challenge adapting their model to the Chinese market.