When China experienced double-digit economic growth, multinationals probably felt like there was plenty of market share to be had. The pie kept getting bigger. But now that China’s growth is slowing, the pie has more definite boundaries.
In an International Finance Discussion Paper, Dr. Jane Haltmaier, senior adviser to the Board of Governors of the Federal Reserve System, presents the following breakdown of Chinese GDP growth (notice the single-digit growth in three of the last four years):
Sector shifts occur when resources and production shift from one area of the economy to another. We’re talking about the primary, secondary, and tertiary sectors – sectors like agriculture, industry, and services. The green bars in the graph above represent sector shifts that caused Chinese GDP to grow.
China already shifted employment away from agriculture to industry. As Chinese farmers used more modern methods, fewer farmers were needed, so more workers began manufacturing goods. More manufactured goods means Chinese GDP grows.
Haltmaier argues that sector shifts will contribute less to Chinese GDP in coming years (smaller green bars). As China’s economy matures, Haltmaier proposes that employment from agriculture will shift more and more into services. Look at the growth of the tertiary sector in Haltmaier’s chart below.
Here’s the key–the services sector is more productive than agriculture but less productive than industry. So when farmers leave their fields and move to services, we won’t see as large an increase in GDP as when farmers joined industry. That would partially explain why we’re seeing slowed productivity growth in China.
Empire building
Some companies are ready for the shift. Samsung Electronics is one of them. As China’s top smartphone producer, Samsung beat out the next competitor by more than four million phones in the first quarter! You might think that smartphones are secondary sector products, but the smartphone segment toes the line between a product and a service. Consumers can’t use smartphones without communication services. Software and app development are additional services which accompany the smartphone market. As China’s economy develops, consumers have more discretionary money for technological devices and services. Smartphones attract that extra pocket cash, and they’re cheaper than personal computers.
Unlike Samsung, BlackBerry Ltd (NASDAQ:BBRY) and Nokia Corporation (ADR) (NYSE:NOK) need to get their acts together. Both companies are among the top five players in India’s smartphone market. India is about to become the third-largest smartphone market – just behind China. But both BlackBerry Ltd (NASDAQ:BBRY) and Nokia Corporation (ADR) (NYSE:NOK) lost their top five status in China’s smartphone market last year. This is the wrong time to lose market share. At this pivotal phase in China’s smartphone market development, where major consumer spending shifts will likely translate into billions of dollars, companies need to get entrenched now.
