Market Capitulation, Competitive Devaluation and Thou
Shanghai got noticeably colder last week. It wasn’t just the mercury that dropped sharply for us after an overly long autumn threw us off-guard. All the woe and hardship on Wall Street suddenly jumped the barricades and invaded our real life. Unemployment and collapsing demand finally showed up in the US numbers – and China’s own headlines were littered with scandals, warnings and new government bailouts.
It didn’t seem to be business as usual for China, 2008. More like 1998, with China and Western leaders trading barbs and recriminations. China has been turning up the accusatory rhetoric and dialing down the value of the RMB. The weather ain’t the only thing getting chillier.
In every recession, there comes a moment when the average, baseline view of business prospects suddenly re-sets to a lower, bleaker level of expectations. For some of us in Shanghai, last week was that time.
The problem with taking a bearish view on the economy during a recession is that you aren’t right or wrong – you’re either ahead of the curve or behind it. The gap that matters isn’t between supply and demand – it’s between reality and expectation. As the reality of statistics and lackluster demand sets in, business owners start to lower their own expectations and build a gloomier outlook into their operating budgets. This sets of a vicious cycle of lower expectations leading to less real demand. It doesn’t happen overnight, but China-based businesses are now starting to feel like they are standing at the bottom of the mountainside waiting for the avalanche.
The doom & gloom prophets are no longer talking about ‘what happens if China gets pulled into the global recession’. We’re there. The new debate is what happens if China and the US can’t cooperate and develop an integrated plan of action. US policy is going to be in limbo for the next month, and China is unlikely to wait around to see how the new administration does things. Beijing has already declined a summit (Europe), criticized an ally (Sarkozy – for meeting with the Dalai Lama) and DEVALUED the RMB.
Owners and senior managers in China need to stop worrying about whether or not China will get dragged into the global downturn. We’re there. The question is how bad it will be – and how long it will last. What you need is do now is take the latest bad-case scenario for your business and translate it into an effective operating model for your business. Hoping that demand picks up in 2009 has just gone from ‘optimistic’ to ‘lying to yourself and to your team’. Make sure you stay ahead of the curve on the way down – or you won’t be around for the recovery.