 | |
While you may not be working with figures quite as large as Tesco’s £140 million investment in a Chinese hypermarket chain, venturing into the world’s fastest growing community could be a good step for many UK firms, according to Robert Coe a partner at Wilder Coe, Chartered Accountants.
Robert believes that China offers huge trade and investment opportunities for British companies - by the end of 2001 cumulative pledged investments in China by British companies amounted to over US $19.2 billion. Britain is currently the sixth largest investor in China, and the leading EU investor with more than 3000 British-invested joint ventures. Changes within the country have also increased the opportunities for the UK, such as China joining the World Trade Organisation almost three years ago. The Government is now encouraging the development of a free market and attracting overseas investors more and more.
But however good the opportunities the new markets of China offer, any moves toward them should be tempered with thorough investigation and a plan to deal with risks, according to global credit insurer Atradius. In November 2004 the company put together a panel of experts to debate the issue, chaired by BBC Four TV news presenter, Kirsty Lang. According to the panel, there is clear evidence that the Chinese government is making some reforms and opening up the market more to facilitate trade with foreign companies. They cited the Chinese government’s first interest rate rise as a good example, as it suggests that the Chinese government is taking seriously the need to manage and control the rapid economic growth. They have previously taken some administrative measures to cool the economy – such as restricting investment spending, and directing the flow of credit to certain sectors. Although these have had some effect, it has been limited, and the government is now using both market-based measures and administrative measures to control the economy.
Another positive step by the Chinese government was to reward two of the countries ‘big four’ banks with recapitalisation. This suggests a change of approach, where improved performance is being favoured and rewarded. Continuing in the banking sector, banks are now allowed to price for risk on loans. Previously, there was a ceiling on the interest rate banks could charge. This ceiling has now been removed, which will stimulate lending to the rapidly growing private sector.
“There’s no doubt that China is experiencing an economic revolution, and this is starting to have a major impact, not only on China itself, but also on the global economy,” commented Jon Lindsay, Director of Atradius in the UK & Ireland. “Although there are still many unknowns and questions about doing business in China, the overall view from the panel was that for those companies who are willing to do their research, assess their risks and plan around these, the opportunities are enormous.”
Haier, the Chinese electronics giant is soon to launch a series of mobile phones within the UK, followed by LCD TVs throughout 2005. Paolo Mainardi is Haier’s top European representative, and he offered some insights into the emergent and developing nature of the Chinese market. “The Chinese market is booming as hundreds of thousands of people (the total population counts 1300 million) earn higher incomes everyday. These people are looking to satisfy long-delayed needs and the consumption of goods reflects this. Large cities are growing with skyscrapers and millions of people moving to newly furnished flats, which they are filling with commodities and new technology items.
“This rampant economy will probably yield ten more years of two digit growth, to become probably the first or second largest in the world. Car sales, well-designed and tailored clothes, fine food, toiletries, beverages and domestic appliances are driving the economic growth.
“However, I would say that not all the Chinese population are enjoying these benefits. The rural areas are still struggling to achieve the first improvements of their quality of life. However, the central government control, implemented by local authorities, will improve this by placing new local industrial ventures in newly developed areas, and trying to equalise the growth in the coming years from coastal to inner areas.” With Paolo’s experience of the Chinese and European markets, he also identified some Chinese idiosyncrasies that business needs to be aware of.
“The main differences are the market speed and the growth ratio of the two economies,” he said. “Europe is moving as if in slow motion, with mature market requirements and crowded supplier’s offers. Consumers in Europe are more conservative and less keen to test novelties while in China the local consumers are more open to everything new.
“There are cultural and recent historical reasons for this, but the market behaviour and environment of China are deeply different to Europe. Key to this difference is the fact that China has one country/one population/one language (official) to shorten all procedures that impact upon a vendors TTM (time to market). Local vendors and manufacturers have an incredible advantage there.
“Simultaneously, a low level of market saturation for several product categories has created a local industry bonanza, resulting in rampant growth. Interestingly this has been achieved amidst tight central authorities control and an ‘army-style’ way of life.”
Steve Baxter, managing director of Ross Systems, could also offer some insights into the different ways of doing business that Chinese companies have compared to those in the West. Ross Systems was acquired by Chinese company Chinadotcom in September 2004, and this has given Steve the opportunity to experience both Western and Eastern business methods. He offered some practical advice on what to look out for. “Doing business in China is quite different than in the UK and Europe. You can’t be half-hearted about your decision to be there and you must invest in the employment of local management and understand the politics of what is going on. All the signs are encouraging and the relationship between government and entrepreneur is excellent. Many aspects of doing business, particularly the selling process, are quite different and understanding this can only come from local knowledge. This is where our connections give us a huge advantage.”
The Atradius panel agreed that good, reliable local advice is essential because of China’s semi-federal system. The report highlighted some of the other issues that must be considered with regard to doing business in China. It notes that intellectual property rights are still difficult to protect legally in China, although the TRIPS (trade-related aspects of intellectual property rights) agreement comes into force in 2007, which will afford greater protection for foreign companies trading in China. The strong advice of the panel was not to get into a litigation situation – you won’t come out well.
The report also notes a shortage of skilled labour. At the moment, there are huge gaps in education levels between people in the cities and those in rural areas. Although vast numbers of people are migrating to the cities to find work, many need to be trained. There are big opportunities, however, for foreign companies to provide training and education to their workforce, and those that do will be viewed favourably.
Steve Baxter of Ross noted that these staff issues make the choice of location very important. “One has to balance the knowledge, productivity, and cost of human resources. There is not a ‘one size fits all’ answer to where one should locate. Cities such as Beijing and Shanghai are just like London, Paris and New York, very sophisticated and well educated and thus expensive but go a few hundred miles inland and you find a significant reduction in cost. As you move inland there is a ready pool of labour that is significantly cheaper than Europe but one should not assume that the same levels of productivity will be achieved.”
The Atradius report also notes that there are already insufficient resources, such as power and water, to support the rate of growth. This is an area that needs to be addressed urgently if China is going to be able to fuel its forecast growth of eight to nine per cent a year for the next decade. Paolo commented: “This issue has caused China to re-think its growth plans, as it has found the market could grow in months but to get a new power plant you need years.
“Last autumn saw the launch of a campaign by the Government aimed to introduce standards for energy consumption and control pollution of all resources. This campaign is enforced primarily upon manufacturers and also consumers. Its first target is to reduce overall energy consumption by ten per cent by the end of 2005. All new energy consuming products have to pass strict approval to achieve the necessary sales permission.”
Linked to these power and water demands are the environmental issues facing the country. China has already become the world’s second biggest generator of carbon dioxide emissions and could overtake the US as the biggest source of greenhouse gases in due course. This is a global issue, and one that cannot just be left to the Chinese government to manage. Foreign companies doing business in China must also be mindful of their responsibilities on this front.
Paolo noted: “Environmental concerns were left aside in the past as the major concern of the Government was economic growth. Now, like everywhere else, the environmental issues come to fore as quality of life improves. “The government is now re-ruling that the standards be applied firmly to manufacturing companies without delays with plant closure as the penalty. For the standards to be completely enforced it will take one or two years but the task is underway.”
In conclusion, Adrian Griffiths of Vendigital believes that making sense of these issues that surround doing business in and with China is essential for 2005, because “last year, anticipated or not, companies of all sizes felt the impact of a big economy in growth the other side of the globe, as its demand for materials drove commodity costs upwards.”
Although the issues surrounding doing business in China can be overcome, many companies are underestimating the cost of doing this. “Unless the contract is large, the cost of addressing the issues properly can virtually eliminate the cost advantage of going to China in the first place,” Adrian warns.
VTR
|
