Execs see China growth slowing, more focus inland

By Scott Malone

NEW YORK (Reuters) - After years of riding the wave of China's booming, rapidly urbanizing economy, makers of infrastructure equipment say China's business environment is starting to change, with signs of a mild slowdown and a shift in where they are making new investments.

"GDP growth in China is going to slow to about 7 percent annually from the 9 percent plus it's been running," said Jim Owens, chairman and chief executive of heavy-equipment maker Caterpillar Inc. (CAT.N: Quote, Profile, Research, Stock Buzz), reflecting the views of many of the industrial CEOs who spoke at the Reuters Manufacturing Summit in New York this week.

"That's sustainable because there's still a very large population base that's under-employed," Owens continued. "The Chinese government is going to work very hard to stimulate domestic consumption."

INLAND MIGRATION

The Chinese government is now encouraging more Western companies to shift their new growth from the country's more-developed coastal region, stretching from Shanghai to Guangzhou and instead move more of their resources to inland cities in the central and northern regions of the country, such as Chengdu, Chongqing and Harbin.

"We've got more cities of 3 or 4 or 5 million people -- that most people have never heard of -- almost than you can count," said John Rice, president and CEO of General Electric Co.'s (GE.N: Quote, Profile, Research, Stock Buzz) infrastructure unit. "There's no shortage of places to go, and they all need power, they all need water."

Executives also noted that Western businesses have their own motivations to seek out new, less-developed territories of China and India to operate in. Wages there can be lower than in more developed cities, and costs are becoming a larger concern as home-grown industries present more of a challenge to foreign firms.

"If we are not feeling a sense of urgency, in terms of rapid cost out and more localization, it will be harder to compete in the long term in China and India because local companies are improving their quality and improving the value chain faster than we think," said Dinesh Paliwal, president of global markets at Swiss engineering group ABB Ltd. (ABB.N: Quote, Profile, Research, Stock Buzz) "Costs will keep growing every year."

CAPITALISTS THAT ADMIRE TOTALITARIANISM

One factor that so far has helped make China such an attractive market to large Western firms is its authoritarian government, executives said. Several noted that once authorities in Beijing sign off on a plan to build a new power plant or airport, there is little if any local opposition.

"Totalitarianism does work. You can see that. Pudong could never have happened in India," said Herb Henkel, CEO of Ingersoll-Rand Co. Ltd. (IR.N: Quote, Profile, Research, Stock Buzz), referring to the section of Shanghai that developed rapidly over the past decade.

"In India they'd still have been negotiating and debating it," Henkel said.

But some executives noted that different styles of government are not the only reason that projects are completed faster in China than in India.

"Willingness is one thing and finding money is another," said ABB's Paliwal, who was born in India. "The Indian government does not have the same deep chest as China has ...That's the difference."

Still, executives said the government system that today is helping China to grow so quickly could eventually lead to unrest that could throw it off its economic growth track.  Continued...