Market report: The boom of the service sector in China

The reforms of the 12^th five-year plan concerning the service sector in China look on track and are likely to be reached by 2015. The reforms consist to raise both the proportion of the service sector as well as the ratio of service sector employment by 4% by 2015 compared to 2011.

A continuous rise in the service sector in China

In June 2013, the sector of service has expanded at its fastest peace in the span of a year. The change in purchasing manager’s index (compiled by the bank HSBC), from 50.7 in May to 53.1 in June has confirmed the continuing rapid extension of the China’s service sector.

The rapid progression of the service sector in China follows a trend which has been growing fast since the past three decades, faster than the industrial sector. China’s service sector has outperformed the industrial sector for the first time in 2013.

Back in 1978, the service sector contributed to 23.9% of the China GDP, according to the National Bureau of Statistics (NBS) and market report, while it represents nearly 47% at present. The ratio of service sector employment is also up to 38% as of June 2014. Wholesale and retail trades make the highest proportion and contribution among the service sector in the China’s GDP.

Overall, this outlook is due to accommodative polices and stronger order which prompted Chinese enterprises to further hire since the Chinese New Year. The government has initiated a series of measures by providing further credit flows to small businesses which contribute to a large part of the mainland service sector as well as to its exports.

Moreover, the service sector in China has been benefiting the largest share of foreign direct investment since 2010, according to market report from the National Bureau of Statistics.

However, the service sector spans on a wide range of economic activities, not all benefiting the same potential and contribution. Retail banking and securities markets now offer great future potential to domestic enterprises, years after poor profitability and weak internal development. Developing low-cost operating and scalable economic models have been successful to this component of the service sector. On the other hand, shipping and logistic which have been strong since years, could be hurt by any reform slowing down exportations.

What are the challenges and opportunities of the service sector in China?

The 12^th five-year plan points out the need of competition as well as innovation within the service sector in China.

Firstly, the whole service sector is not source of opportunities. It is a sector made of different economic activities, as mentioned previously. Examining on an activity-to-activity basis will definitely be helpful to unearth activity with great future potential.

Secondly, concerns exist about the striking contrast of quality and price with international markets. It is yet common to see in China services with lower quality and higher price than in developed countries. This is due to lack of supply and capabilities.

Thirdly, offshoring and outsourcing are yet underdeveloped in mainland. There is need to develop high-quality and profitable services that are competitive domestically but internationally, primarily.

Finally, there is need to provide incitation to skilled personnel to work in the service sector in second and third-tier cities, this to avoid stronger disparities.

Opportunities exist and are at hand of any investor ready to compete in a diverse and demanding market. By 2020, the government aims to make the service sector exceed 50% of the GDP according to market report.

China is not a single market but multiples markets with clients from different provinces wish different expectations in term of quality and prices. Often, investors underestimate this point.

Differentiation and value to the buyer have become the primarily goal in the service sector in China. Sustainable development and structure optimization are also key point that service enterprises pay much attention nowadays to ensure consistent growth and their market share. Moreover, the growing competition and intellectual property protection make the landscape even more challenging with a rush to innovation.

That’s being said, some activities such as messenger services are better for those willing to add external plus such as app rather than developing the core system. The reason being that such activity remains highly regulated by the government and out of reach especially by foreign company. Tencent is by far and likely the one which will remain the leader in messenger services. Similar observation for the financial investment services which remain most time under the control of Beijing. On the other hand, health care and social assistance have strong demand of foreign brands. Arts and recreation services are also activities of the service sector to be investigated for potential market entry due to growing interest by Chinese for foreign arts.

Expectations are high, that is true. However, specific hurdles exists but can be avoided doing activities-to-activities analyses as first step, while continuing on a potential market entry analysis.

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