China calling

China

China calling

Global Opportunity 2015  | China-Britain Business Council

The UK must be sensitive to the shifting internal dynamics of the Chinese economy if we are to continue to take advantage of the the Chinese opportunity, says Stephen Phillips, Chief Executive at the China-Britain Business Council

The stratospheric rise of the Chinese economy has been well documented over the last 20 years; it is now the largest merchandise trader, holder of foreign exchange reserves, manufacturer and economy in terms of purchasing power parity.

Whilst this rise has significantly altered the dynamics of the global economy, there remains a pervasive mystery that surrounds this giant. Although China may not be experiencing the double-digit growth that it once enjoyed prior to the global financial crisis of 2008, the internal dynamics of the Chinese economy are shifting.

What is the current state of the general relationship between China and the UK from a business perspective?

The last couple of years have seen a significant deepening and more sophisticated trade and investment relationship with China. Whereas the focus five years ago was on British companies going to China, the discussion is now focused on collaborations between British and Chinese companies.

These could be in China, within the UK or in third countries. The goal is to get the conversation going and allow successful business to flow from there. The Chinese economy is changing as it moves away from reliance on exports towards a more advanced consumer-led base.

Whilst this can be a painful process in some sectors of the economy, it’s opening new doors in others. Parts of China that were once very buoyant are becoming less so, with other perhaps less familiar regions growing faster.

To grasp the complexities of China, you have to think of China in a similar light to that of the individual states of the EU – large and complex.

How does China differ from the monarchies of the Middle East or democracies like India? How does this affect the Chinese mentality?

That is a simple question but the answer is complex. Modern China does not fit the stereotypical image so often portrayed in the media.

What I see is a vibrant economy, one that is increasingly laissez-faire. But there are sectors with market access issues and government still plays an important role but overall the environment is more welcoming than many UK businesses may expect.

How much does [mis]perception hinder UK businesses at SME level from engaging in suitable opportunities in China?

Although not a suitable international business environment for novices, if you’ve a management team that knows how to work outside the UK, then there’s no reason why you cannot be successful in China. Thousands of UK companies have entered the Chinese market successfully.

Although it is rarely ‘plain sailing’, some companies are lucky, quickly find the appropriate partner and achieve considerable success.

How important is the appreciation of cultural difference in China when doing businesses?

As with anywhere in the world, you need to be aware of basic courtesies and how certain situations are approached. These courtesies, including the way business cards are exchanged or the behaviour that is expected at a Chinese banquet, are not difficult to grasp but are equally essential to avoid embarrassment.

What sectors particularly are the Chinese interested in?

Vast opportunities lie in the consumer market from basic goods to luxury products. One of the most buoyant areas is the mid-market, serving predominantly the middle class.

Whilst luxury spend was once growing incredibly strongly, it’s increasingly the mid-level consumer opportunity that is very tangible and thus more suitable to high street brands.

At the same time there has been an explosion of e-commerce platforms with the Chinese population using them to purchase foreign goods and services. This offers new and cost-effective routes to market. And that is a market that is all over the country.

Whilst most UK nationals still gravitate towards Beijing, Shanghai and Guangzhou as these locations enjoy a global reputation, they are the most competitive markets for domestic and international competition.

Moreover UK businesses should acknowledge that 65% of middle income consumers in China don’t live in these cities, with demand from central and western areas of China growing strongly and accompanied by less competition.

Without a requirement for a ‘bricks and mortar’ presence, e-commerce has a significant benefit in these areas.

The middle class consumer bracket in India is growing rapidly. Are we seeing the same rise and demographic shift in China?

The phenomenal economic growth in China has lifted 400 million people out of poverty and created a middle class of more than 100 million who are now looking to travel internationally, and who want to purchase quality goods and services including foreign food and drinks to accentuate their more sophisticated tastes.

Therefore the Chinese are offering opportunity on a truly international scale, from which the UK can greatly benefit.

We’re actively in competition with the Chinese, in many regions of the world. What about this competition domestically within China?

It is a globalised world. Your partner can also be a competitor. As an example, engineering companies such as Atkins, Arup, and Mott MacDonald along with leading UK architects continue to enjoy fantastic opportunities in China.

China has given an opportunity to architects that last happened in the Victorian era in the UK with impressive artistic and budgetary freedoms resulting in buildings that are bigger, grander and fulfill every superlative one can conjure up.

Noting the sheer scale of the country, what is the quality of the infrastructure?

One of the most striking changes in China over the last couple of decades has been the impressive progression of Chinese infrastructure.

A journey from Shanghai to Nanjiang took roughly seven hours by car 20 years ago; currently it stands at one hour and fifteen minutes by high speed train with an ever-growing number of Chinese cities now connected by high speed rail. This vast expansion of Chinese infrastructure has transformed the economic landscape of China.

Does manufacturing continue to dominate the Chinese landscape?

China is, of course, a global manufacturing behemoth. But it is changing. Manufacturing has migrated more towards the Centre and West of China and whilst the sector remains extremely active, this year has seen the service sector overtake in terms its contribution to GDP.

Perhaps surprisingly, we’re now witness to Chinese companies relocating their manufacturing to other developing countries. Reasons for this sectoral shift stems from a more general desire to reshape the Chinese domestic economy into a thriving service sector which is more sustainable for long-term growth.

This is not to imply that manufacturing isn’t critically important; it remains a pillar sector that provides substantial employment but it’s one that’s undergoing an internal transformation.

The Chinese government strategy, ‘Made in China 2025’ focuses largely on industrial upgrading and encouraging Chinese companies to progress up the value curve, utilising more advanced materials and precision engineering.

With the UK at the forefront in this field, we have a fantastic opportunity to capitalise on these shifting dynamics and we hope to see a significant increase in collaborations between the UK and China.

Financial Services
The financial and professional services sector can be split into two strands. Firstly the servicing of Chinese companies who venture overseas is associated primarily with advisory and financial work. The second concerns the servicing of the Chinese consumer through asset management, insurance, and banking.

Whist opportunities in this sector are amongst the most highly regulated, we are beginning to see signs of liberalisation.

The internationalisation of the Chinese currency, the Renminbi, has also brought opportunities for the UK with London currently ranked as the major offshore centre for Renminbi products and services.

Additionally Chinese Renminbi investment into the UK has seen some significant merger and acquisition deals with Chinese companies acquiring relatively small UK companies, learning from them and bringing their technology back to China while simultaneously ensuring the UK business continues to grow.

How does the CBBC help the UK to service this country with its colossal size and near infinite opportunities?

The CBBC’s presence spans more than 60 years with an extremely knowledgeable team. This longevity gives us access to the Chinese system. We currently have 15 offices across China with around 100 staff.

Their practical advice is borne from first hand experience: where to do it, who to do it with, what to and what not to do.

We also have 11 offices within the UK that offer local access to Chinese advice. This is critically important for SMEs whose limited resources may not allow travel to farther regions.

Particularly at this SME level, is it true that you won’t be able to see a return on initial investment for at least five years?

It all depends. There is no general rule. Whilst the CBBC can help fast-track your entry into the market, management of expectation is crucial to avoid disappointment; significant time and effort is required over a long period to ensure you build those working relationships before you can expect significant returns on your investment. But more and more companies see early success.

What does the future look like for China? Where do you see the Sino-UK relationship developing in the next five years?

China is undoubtedly changing and the nature of the commercial opportunities is changing too. China is moving towards an economy driven more by consumption. These are opportunities in China; with Chinese companies in the UK; and they are opportunities to work together in third markets around the world.

UK-China business cooperation is more varied and accessible than ever before. China and the UK’s business objectives are well aligned and opportunities lie in sectors of strength for the UK, including financial & professional services, healthcare, education, advanced engineering, retail, innovation and creativity.

Each region of China can, and indeed must, be looked at in the way that a business would look at the different countries of Europe.

And what of China’s growth prospects?

China has made an important step-change in its development. GDP growth around the 7% mark or, possibly, lower is the new normal. But the focus on growth rates is simplistic.

The absolute growth in the size of the Chinese economy this year is almost triple what it was a decade ago and by extension, GDP per capita continues to grow strongly in absolute terms.

The on-going adjustments in the Chinese economy will not be without pain but should be viewed in a positive light for the opportunities they offer to British companies.

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