‘The China Game’ and the Value of Scenario Planning In Turbulent Economic Times

Clem Sunter2.jpgSmartProcurement recently hosted its 2nd annual SmartSourcing Conference on the topic of ‘Strategic Cost Management in Turbulent Economic Times’ at the Irene Country Lodge in Centurion, Pretoria. The conference’s first day’s keynote address was presented by internationally acclaimed scenario planner and popular motivational speaker, Clem Sunter, on the topic of “The China Game”.

In his career, Sunter has developed various models that integrate the ideas of scenario planning with the processes of strategic planning and decision-making. Some of his most well-known clients have been the executive boards of two of the top 20 FTSE organisations in England, as well as the Central Party School in Beijing, China’s leading think-tank on strategy.

Sunter kicked of his presentation by explaining the context around scenario planning: “It all started, just like the Internet, with the United States Military. With scenario planning, the military’s goal was to consider different future possibilities arising from the use of its Thermo Nuclear Warfare weaponry and how this could affect the Western world. In more recent times, scenario planning was taken even further with the occurrence of 9/11, since the notion and validity of this methodology was now more intriguing to those in power than ever”.

For the purposes of the 2008 SmartSourcing Conference, Sunter decided to convey some scenario planning ideas and strategies on, what he calls “The China Game”. This topic is especially relevant to the spheres of procurement and strategic cost management, particularly in the case of low-cost country sourcing.

The China Game – Background
For the past 1,000 years, the Chinese economy has been one of the largest forces to ever dominate in the global marketplace. In 1978, China was ranked the 100th economy in the world. Last year it overtook Germany to become the third largest economy after Japan and the USA. Projections are that China will rise to its previous number one spot in 2040.

In order for China to reach its economic goals, those in power have devised a strategy wherein China will only trade with countries that have resources – And right now, Africa is the Chinese content of choice. “Another reason for China’s focus on Africa is the fact that the West has more or less vacated the continent. This allows the Chinese enough room to turn raw materials into finished goods at one tenth of the price than the West could have”, Sunter told SmartProcurement.

Who are the players in the game?
When examining the current situation in China, Sunter distinguishes between two main players, namely:

  • ‘The West’: This player represents brands that initiates new technologies and therefore provides an export market for Chinese goods and services.
  • ‘The Developing World’: Africa, for example, provides China with the needed raw materials and resources, as well as with new export markets.

Future scenarios for the game
“Firstly”, Sunter pointed out, “China needs to look at potential hazards to their economic outlook, before they can have a realistic idea of possible scenarios”. Some of the identified hazards are:

  1. A recession in the USA: If the US markets fall, demand and supply will decrease drastically.
  2. War in the Middle East: The oil price could rocket to as much as $500 per barrel.
  3. Commodity Prices: As the largest industrial consumer of most commodities, China is putting pressure on world resources and the cost of getting them to markets is consequently rising (all the easy stuff has been found, mined and shipped out).
  4. Unrest in China itself: China is massive in size and geography, thus it is extremely difficult to manage and develop.
  5. Environment: China has over 750 million people in the countryside farming on less than a half hectare of land per farmer. The effects of this intense human activity on the environment are potentially disastrous.
  6. Global Warming: Under the Kyoto Protocol, most Western countries are planning to constrain carbon emissions, whilst China (with the largest coal reserves in the world) is commissioning one coal-fired power station per week.

Sunter noted that based on the above points, one of two scenarios could play out for China:

  • Positive: A noble and harmonious country with peace amongst the urban elite and rural poor, man and nature, and China and the rest of the world.
  • Negative: A ‘black swan’ future wherein a USA recession provides a big shock to the Chinese economy and the possibility of an ‘uprising’.

If China does achieve its economic objectives it will overtake the USA economy that has been reigning supreme for the past 600 years. This will be a histrionic shift since the world will then have its first ever Eastern Superpower in modern-day times. The importance of this possible shift for South Africa lies in the fact that China regards South Africa as a springboard into Africa. As a strategic partner of choice, South Africa thus stands to benefit greatly from partnering with this superpower.

Editor’s Note: Since the conference was held we have witnessed serious changes in the uni-polar economic power of the USA. The Federal Reserve has raised its concern of entrusting the world economy to the USA and thus we are witnessing the collective intervention of many economies in underpinning the sub-prime collapse in the USA as well as the unprecedented melt-down of financial services in the UK.

***In next month’s SmartProcurement, we will delve into specific scenarios for South Africa and explore how these can affect the long-term health of our economy.

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