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Financial Crisis Update

China Unveils $586 Billion Stimulus Package

Despite a Slowdown in the Economy, in China and Globally, Multinationals Continue to Pump Money Into the Mainland

By Published on .

Yum Brands has created a restaurant brand just for China, a quick-service chain called East Dawning, and already has 16 East Dawning test outlets in the mainland.
Yum Brands has created a restaurant brand just for China, a quick-service chain called East Dawning, and already has 16 East Dawning test outlets in the mainland. Credit: CNImaging

BEIJING (AdAgeChina.com) -- China unveiled a $586 billion stimulus package on Nov. 9 to help protect its economy from a recession already hitting the U.S. and Europe.

The program--the largest ever undertaken by China's government--will relax credit conditions and reduce taxes in the world's most populous country.

China's government will also embark on a massive infrastructure program over the next two years that mirrors the actions taken by the U.S. during the Great Depression era.

It will plow money into rural infrastructure, low-cost public housing projects, railways and highways, power grids and social welfare systems. It will also revise China's tax system to boost investment in new technology.

Will the stimulus package help China and the rest of the world? Probably not. Many of the measures it calls for have already been put in place over the past year, but weren't publicly announced.

"It's really impossible to predict the impact of this package as yet, because as yet we don't really understand the impact of the global financial crisis in China," said Stephen Drummond, national planning director, China at Young & Rubicam, Shanghai. "In real economic terms I suspect it's more about cushioning sudden drops rather than actually having the clout to overcome any impact. Domestically it's designed to calm any local fears."

The government's plan is really about offering psychological benefits.

Ian Chapman-Banks, Singapore-based corporate VP and general manager, Asia/Pacific for Motorola's mobile devices division, doesn't expect the plan to have any direct effect on the marketing industry.

"But the indirect effects will be considerable," he said. "As China proves that its economy is prepared to weather the economic storm with much less disruption than those of other countries, attention and marketing budgets will shift here to follow the perceived opportunity. [The plan is] an impressive example of visionary policy. Not only is it designed to bolster near-term confidence among both business and consumers in China, it lays the groundwork that will allow the China to capture the greatest possible benefit when the global economy recovers.

Natural and man-made disasters
Chinese have good reason to crave peace of mind. In the past ten months, their country has been struck by both natural and man-made disasters. IThe economy was brought to a literal standstill last winter, when a snowstorm paralyzed the transport of consumer goods and people for several weeks.

Last May, a major earthquake rippled through Sichuan. Massive public and private spending have been funneled into the area over the past six months to rebuild the most important province in western China. A portion of the stimulus package has been earmarked to rebuild parts of Sichuan in the earthquake zone.

China is also suffering from another kind of earthquake--a financial crisis that started in the U.S. and has spread across the globe. China, the world's factory, is vulnerable because its economic growth over the past 30 years was built on manufacturing for foreign companies.

A significant drop in consumer spending overseas will slow production at home, a trend that has already started. More than 1,300 companies shut down, suspended business or relocated factories out of the Pearl River Delta in the first nine months of this year, according to government reports, putting millions out of work.

Ironically, it wasn't long ago that China's government started implementing steps to slow the growth rate of its formerly red-hot economy. At the beginning of 2008, China's ruling Communist Party was concerned about inflation and a real estate bubble that was sending property prices sky-high in major metropolitan centers like Shanghai.

Clearly, those days are over, at least for now. China's gross domestic product growth dropped below 10% in the third quarter for the first time in five years. Economic data for October, due out later this week, is expected to show a continued decline.

Despite bearish predictions from companies like Morgan Stanley, which cut its GDP growth forecast for China in 2009 to 7.5% from 8.2%--after the stimulus package was announced--multinational marketers remain bullish about the mainland longterm and are increasing investments.

Multinationals continue to invest
"Our focus in China is and has always been on the long haul. The fact that the nation's leadership understands that the reaction to a downturn is not austerity but investment re-enforces our confidence in China's economy, in her leaders, and in our business prospects in China," said Motorola's Mr. Chapman-Banks.
Motorola's Ian Chapman-Banks
Motorola's Ian Chapman-Banks Credit: Normandy Madden
Multinationals across every sector show equal enthusiasm for China and are pouring money into the market.

Last week, for instance, PepsiCo announced plans to pump $1 billion into China over the next four years to expand its business and broaden its product portfolio in the mainland. Pepsi is eager to boost sales in China, one of its fastest-growing markets, after a disappointing third quarter, when profit dropped almost 10%.

The funds will be channeled into manufacturing expansion, particularly in China's interior and western provinces, expanding local research and development facilities and building the company's sales force to broaden product distribution.

Rival Coca-Cola Co. made a $2.4 billion cash offer in September to buy China's biggest fruit-juice producer. If approved, the deal will be the biggest foreign takeover in China so far and Coke's largest overseas acquisition.

McDonald's Corp. is adding 150 restaurants in China this year, at a clip of about 17%, said Dave Garland, VP-controller of McDonald's Asia-Pacific, Middle East and Africa. And the Chinese are just discovering McDonald's breakfast menu, which was introduced last year and already accounts for about 7% of McDonald's China business.

Yum Brands is in about 500 cities in mainland China and opens a new KFC almost every day. The company has even created a restaurant brand just for China, a quick-service chain called East Dawning, and already has 16 East Dawning test outlets in the mainland.

David Novak, chairman-CEO of Yum Brands, told analysts in an earnings conference call last month, "China has great momentum in each of its brands as we move into 2009."

In late October, Nokia Corp. bought a stake in Madhouse, a Shanghai-based mobile-advertising network that covers more than 70% of China's mobile internet traffic, through Nokia Growth Partners, part of Nokia's venture-capital arm. With demand for mobile phones falling in Europe and profits down compared with 2007, Nokia has increased its focus on China and Asia's other big emerging market, India.

R&D centers are booming
Research-and-development facilities geared toward the Chinese market are booming. Coke's efforts include a Chinese-medicine-research center in Beijing to help the U.S. beverage giant better understand the tastes of local consumers.

At Nestlé's second China R&D site, which opened Oct. 31 in Beijing, the focus will be on food safety and quality. The $10 million center will also work on nutrition and life-sciences research; food technology, processing and packaging; and the benefits of traditional Chinese ingredients.

Next year, Unilever will open its Chinese R&D center, a massive structure under construction across the street from its Greater China headquarters in Shanghai.

Global automakers are also still investing in China, even though car sales have started to fall. Passenger-vehicle sales dropped 1.4% in September 2008 from a year earlier. And August 2008 sales were down 6.3% from a year earlier to 451,300 cars—the first decline in more than three years.

General Motors Corp. will introduce the 2010 Buick Regal in China in December 2008. GM is planning to introduce its Chevrolet Volt in China in 2011. Another U.S. auto giant, Ford Motor Co., is about to relaunch a locally-made version of its Fiesta model, to spur sales among Chinese 20-somethings.

The stimulus package may or may not help these companies as they strive to expand in China. But the announcement remains significant, and unusual.

"What's very interesting is the message that China is sending through by announcing this package in such a western, public way," said Mr. Drummond. "But perhaps most significantly it's a message to the rest of the world saying, 'We are connected' [and] at the same time saying, 'We are hurting too, so don't rely on us to pull the rest of the world out.'"

Contributing: Laurel Wentz, Emily Bryson York

Next year, Unilever will open its Chinese R&D center, a massive structure under construction across the street from its Greater China headquarters in Shanghai.
Next year, Unilever will open its Chinese R&D center, a massive structure under construction across the street from its Greater China headquarters in Shanghai. Credit: Normandy Madden

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