China – Opportunities
by Brian Finch

Background -

To understand what is going on in modern China it is important to understand some of the political and economic background to the development of that vast nation. Why China is what it is has a great deal to do with where it came from and how it got here.

For example, modern Chinese politics is based on ancient imperial China. The current regime is, in effect, the latest in a long line of Chinese imperial dynasties that stretch back thousands of years. And the mechanisms it uses to control the levers of power and to run the country owe as much to Chinese traditional governing methodology and thinking as they do to Marx and Lenin.

Economically, most people with the vaguest knowledge of recent Chinese history will remember that the Chinese economy reached virtual collapse during the 10 years of the Cultural Revolution from . This is hard to believe looking at modern China. What happened thereafter is that the economy was allowed to open up to the outside world, for the first time ever in history. This opening up was accompanied by economic reforms, which began slowly in 1978 and gathered pace more rapidly from 1992. Since then the growth of GDP has been phenomenal, in the face of global negative trends and looks like continuing for the foreseeable future. 

Why China?

Enough of the background.  Why should British businesses be interested in doing business there? What are some of the realities of modern China?
 
Let’s take some illustrations.

Shanghai. On the East bank of the river running through Shanghai is an area called Pudong. This used to be agricultural land providing food for Shanghai. The modern Pudong was built from nothing in 10 years. It is a bustling commercial city, which rivals Manhattan both in its architecture and in terms of its high-level business activity. It is in a constant state of buzz. Fortune 500 regularly holds meetings there, partly because most of their companies are well represented on the ground, and partly because they see it as a great place to do business, and to hold successful meetings. They certainly don’t do so out of naivety, fondness for panda bears or any other non-business reason. To the world’s most successful businesses, it makes good business sense.

Shenzhen is just across the border with Hong Kong.  Some 35 years ago, when I first went to Hong Kong, it was just a local market town – in reality quite a small village. The first advances in mechanisation came in the shape of one tiny hand-held tractor – about the size of an average lawnmower in this country – which was used to plough the entire area. Then in 1978 Shenzhen became one of China’s first Special Economic Zones; the success of this experiment is now self-evident, as Shenzhen is now a bustling city of some 7 million people, larger than Hong Kong. And because of the way it was set up, the population came from all over China; all desperately keen to make money. They are all, by definition – i.e. by self-selection – entrepreneurs. The results are tangible. Walking through the city you can feel the vibrancy.

So What?

So what has China’s economic success got to do with the average British businessman? 

Quite a lot, really. We could bemoan the fact that cheap Chinese labour is ruining our manufacturing industry, but that does not take us very far. Or we could look at the position pragmatically, work out where our best realistic interests are, and get on with doing business. 

Let’s look at some facts:

Fact: - China and the UK enjoy extremely good political and diplomatic relations. This matters to British business, because the Chinese government still has very significant influence over business matters, especially – but not exclusively – government procurement. British business should welcome this with open arms and seek to take advantage of the situation.

Fact: - The Chinese are very keen on British culture and British quality goods and services. They salivate over a variety of names such as Princess Di, Posh & Becks (although this might now be of more benefit to Spanish businessmen!), Man U, Rolls Royce, Oxford & Cambridge, Walls Ice Cream, Land Rover, Jaguar, BBC, BP and so on. David Beckham’s recent visit to China was a real crowd puller. Again, let’s take advantage of this hunger for good quality British brands.

Fact: - China has now joined the WTO. This has already made, and will continue to make, a huge difference to how business is conducted in China. The playing field is gradually levelling and business is becoming more transparent.  Now is the time for British businesses to get their collective feet in the door.

Fact: - Britain is Europe’s largest investor in China and the world’s 4th or 5th, and Europe’s 2nd highest trading partner with China. 

Where are the Opportunities?

They are literally countless. Let’s scratch the surface and have a look at just some of the examples:

1. China is vast – roughly the size of Europe (not Western Europe, the Europe, say from the West coast of Portugal to the Ural Mountains). And it is just as varied. So the quick answer is that the opportunities for British businesses in China are comparable to the opportunities in Europe…  Except that by contrast with Europe the Chinese economy is continuing to grow to the benefit of all kinds of business. A better question might be, what kinds of business cannot find opportunities in China? Remarkably few, and restricted to those which by choice have only local interest (but even then they could aim at the Chinese tourist market).

2. There are now good markets in China, including good consumer markets. No, there are not 1.3 billion consumers in China. The vast majority are still very poor. But consider:

a.  Last year China overtook the USA as the world’s biggest mobile ‘phone market. There are now well over 200 million of them in China. This indicates a significant number of people with pocket money to spend.

b. A small percentage (depending on your product) of 1.3 billion is still a lot of people.

c. A very small percentage of Chinese (but still quite a large number) are obscenely rich.

d. There is a growing and increasingly affluent middle class. Look for instance at the housing market. Civil servants used to have their homes provided at peppercorn rent. Now they have to buy their homes, and they take an interest in them. They now go shopping in B & Q. The Shanghai store is B & Q’s biggest in the world. No, the Chinese don’t do DIY, the get someone else to do it, but they still shop in B & Q.

e. I visited Sanya earlier this year on business. This is a tropical paradise on the southern tip of Hainan Island, previously unheard of. It now has wall-to-wall luxury hotels, and more under construction. The visiting tourists are mostly from Mainland China. And the prices are not cheap. This illustrates that there are a lot of Chinese with significant disposable incomes.

3. Specific openings. There are so many opportunities that it is difficult to select any, because this implies that there are gaps elsewhere. So these examples should NOT be taken as in any sense restrictive, but merely illustrative of a tiny percentage of the kind of opportunities that are constantly cropping up:

a. Construction and all related businesses. Some specifics:

i. Beijing Olympics 2008. US$1.7Bn is being spent on the Olympic facilities. But the total spend on revamping Beijing, covering transport, environment, housing, etc etc. is US$23Bn. It is difficult to think of an industry or commercial sector that could not find an opportunity here if they were interested.

ii. Western China. The Chinese authorities are currently running what they call the Great Western Development Strategy. They are using some of the wealth generated by the successful economic development along China’s eastern coast to build the infrastructure of the rest of the country, which remains relatively backward. They are now running a vast programme building thousands of miles of high-grade motorway, railways and other infrastructural projects such as water, sewage, town planning, science parks and so on.

iii. Also in the same region they are currently in the process of building some 40 + airports.  Compare this with the ongoing debate over one new runway for London. And we’re not talking little airstrips. Each airport will have a full range of facilities, again covering a variety of sectors.  The contract for supplying the baggage X-ray machines would be interesting, for example. 

b. Retail. I’ve already mentioned B & Q. Other retail outlets such as Carrefour are also doing well out there.

c. Hi-tech. This is one of the fastest growing areas in China. Most of the big mobile ‘phone companies manufacture there, and their widget suppliers follow them (because of local content rules). There are plenty of hi-tech science parks, supported by numerous universities with excellent training and research facilities, which are really impressive. It is often hard to believe that during the Cultural Revolution there was virtually no education throughout the country for 10 years. There is a virtually inexhaustible supply of highly trained, highly motivated skilled labour and management force, all at relatively low salaries. And the other manufacturing costs are generally lower than in the UK, too

d. Education and Training. Everyone in China wants to learn English (although not all can afford to do so). Opportunities abound for schools to set up out there, to send teachers, and to recruit students for UK courses. In addition, WTO entry has created a demand for training in international legal, accountancy, regulatory, corporate governance and similar disciplines. There are never enough courses for the candidates.

e. Entertainment and Sport. Famous and not so famous sports teams travel to China and exchange players. The Chinese are fanatical football fans. They also provide packed audiences for all kinds of theatrical performances, pop and classical music concerts and other forms of entertainment.

f. Manufacturing. Not just cheap labour, but reliable, well-motivated work force; and other costs remain low, despite relatively high start-up costs.

Visibility

There is a problem of visibility for British products in China. Much of our exporting does not have a high profile, so the Chinese find it hard to believe that we are such a high exporter. They recognise foreign enterprises by famous brand names, so they know Coca Cola, KFC, McDonalds, Mercedes Benz, Carrefour. And of course very high profile examples like the German Maglev (magnetically levitated) train due to begin service in Shanghai at the end of this year. This is a world’s first, running from the airport to the City centre. Chinese officials often used to question our trade figures, because they did not seem to fit with their perceptions. In the worst case, former President Jiang Zemin explained that he thought Wall’s Ice Cream was an Italian company, because of the Cornetto adverts.

The Government have taken the initiative to try to make an impact on this. They have recently mounted a campaign called Think UK, designed to bring fresh young creative British ideas and innovators to the attention of young Chinese (with high disposable incomes).

Whether or not this has a lasting effect remains to be seen. But frankly, a campaign like this can never expect to have a lasting impact on the thinking of ordinary Chinese businessmen and consumers. They will ultimately respond only to British businessmen on the ground in large numbers. That will have an impact, just as the American fast food chains have done.

The Negatives

Yes, of course there are problems in dealing with China. It would be foolish to recommend that people simply rush out there willy nilly. This is what happened in the 1980s with disastrous results and horror stories of shark infested markets and lost shirts. 

There are problems doing business anywhere, including in the UK. Particular issues in China include leaden bureaucracy (though not everywhere), opacity and the abuse of IPR. The Chinese, whilst being wonderful and generous hosts, also drive very hard bargains and don’t suffer fools. It is a very tough market. But approached sensibly it can be rewarding. 

Some general words of caution:

1. Prepare thoroughly. Commission the necessary market research and due diligence.
   
   
2. Take lots of advice.
   
   
3. Use to the full the facilities of Trade Partners UK, Business Link and any other public support.
   
   
4. Use professional help. Upfront costs can save you a fortune in the longer term.
   
   
5. Don’t leave your business sense at the check-in counter at the airport. You have spent many years in the school of hard knocks.  Remember the lessons. 
   
   
6. Always remember the bottom line is that you’re there to make a profit.

And finally….

Everyone will tell you that the one crucial factor about doing business in China is in developing the right personal relationships with the right people. The Chinese term, which you will hear a great deal, is “Guanxi”.

If you wish to take advantage of some of the business opportunities in China, contact Brian Finch, Managing Director of EastBridge Associates.  Tel:  .  Website:  www.eastbridgeassociates.co.uk.  Brian is a fluent Chinese speaker with wide ranging contacts and decades of experience of dealing with the Chinese by breaking down cultural barriers and establishing relationships of trust.

First published by Croner.CCH Group Ltd in the Journal of Credit Management Issue 21