Is China Really The Ultimate Growth Story For Every Company?

I had a conversation with my colleague Ser Jing recently on the future of China.

We were discussing whether investors are over- or under-estimating the ability of China to become the largest economy in the world (and maintain that status) over the next few decades. (For what it’s worth, I took the under while Ser Jing took the over.)

But even if you’re optimistic about the future prospects of China’s economy, it’s important to understand that it’s not necessarily a sure road-to-riches if you see a company wanting to expand into China. It’d still pay for us to take a step back and realistically analyse the risks involved.

Let’s use one local company’s foray into China as an example of the aforementioned mind-set we should have.

7 million new customers

Sheng Siong Group Ltd (SGX: OV8), the third largest supermarket operator in Singapore, announced last December that it has entered into a conditional joint-venture agreement with the Kunming LuChen Group to operate supermarkets in Kunming, Yunnan, China.

The agreement, which was first mulled over last August, seems like great news at first glance.

Sheng Siong is able to generate more than S$700 million in annual revenue in Singapore, where there’s a population of roughly 5.5 million people. With Kunming’s population of more than 7 million, Sheng Siong now has access to a market more than twice its previous size!

But a look beneath the surface would deliver more somber messages. Sheng Siong is now entering into a totally new market and it would likely have less knowledge about the sourcing and distribution networks for that market when compared with local competition.

Moreover, the consumer culture in Kunming might be very different from that of Singapore such that what works here (in terms of sales strategies) might not be applicable there.

In addition, the supermarket industry in China is not something new. There are plenty of players in the space and the industry is extremely fragmented, leading to very low margins for companies within.

Large foreign retail chains such as Carrefour and Tesco have both tried their luck in China and have failed to penetrate the market with much success.  Given such precedents, the chances for a small retailer like Sheng Siong to be successful in China is thus very slim.

Foolish Summary

Even if you believe, like me, that the growth prospects of China over the next few decades are still very strong, the prospects of a company entering the Chinese market might be vastly different. A rising tide does not always lift all boats.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim owns Tesco PLC.