CHINA: CRACKING CHINA - TRADING WITH HONG KONG AND CHINA.

CHINA: CRACKING CHINA - TRADING WITH HONG KONG AND CHINA. - It is only in the past few years that Britain has realised the importance of China's fast-growing economy. But with business opportunities so abundant it is difficult to know where to start and

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Last Updated: 31 Aug 2010

It is only in the past few years that Britain has realised the importance of China's fast-growing economy. But with business opportunities so abundant it is difficult to know where to start and strong commitment is what is needed for success. By Jonathan Reuvid By Jonathan Reuvid

'Trade follows the flag' it used to be said. Before the high summer of Empire, though, trade was often way out in front. You only have to think of India or West Africa or Singapore or Hong Kong. When the flag was raised over Hong Kong 152 years ago, it was after Britain had intervened to protect her commerce. British opium traders had by then been active on the China coast for a decade or more. These days opium is far from acceptable as a commodity, but trade with China is vastly greater, more diverse and potentially more rewarding (for some) than it has ever been. Yet having led the way in opening the country to foreign trade, the British have been strangely indifferent to the opportunities on offer in the second half of the 20th century.

True, Britain's exports to China have grown encouragingly of late, nearly doubling (to £739 million) in 1993 with a further 25% projected for the current year. Re-exports of UK-manufactured goods from Hong Kong - where the flag will finally come down in 1997 - may have contributed another US$356 million last year. But that still leaves the UK's share of China's imports below 1.5%. By any standard, and especially by those of the US, Japan and Hong Kong itself (which respectively accounted for 20%, 19% and 17% of China's total two-way trade in 1993) Britain's present impact is puny.

Until 1993 the record of investment was hardly more impressive. Cumulative contracted foreign investment in China at end-1993 amounted to $217 billion, of which the lion's share ($151.6 million or 70%) came from Hong Kong and Macao corporate and private investors.

Some of these corporate investors are of course British-owned or controlled: Hongkong Telecom is a subsidiary of Cable & Wireless, for example. A few other British groups are heavily involved in developing China's infrastructure: GEC is a major equipment supplier through China Light Power. However such high-profile examples are not representative.

The latest official investment statistics for 1993 show that pledged investment last year on 388 projects involving companies was nearly $2 billion compared with just $1 billion on only 288 projects over the 14 years from 1979 to 1992. This spectacular upturn puts cumulative British investment well ahead of Germany ($1.5 billion on 569 projects), France ($0.9 billion on 547 projects) and all other EU countries. However, UK investment remains well below that of Taiwan ($18.4 billion on 20,952 projects) the US ($14.6 billion on 12,019 projects) and Japan ($8.9 billion on 7, 812 projects).

Why was UK trade and investment so weak until this last year or so? Given its long history of trade with China up to 1949, its links with the coastal cities of Canton, Shanghai and Tianjin, and above all the resumption of Hong Kong's entrepot role through the 1979 'open door', Britain was well placed to assume a leading role in China's industrial revolution. Instead, British industry adopted an ambivalent attitude towards the Chinese mainland. It was content to benefit from the spectacular success of Hong Kong, and to reflect the post-colonial attitudes of successive Thatcher governments which were preoccupied with the political threat posed by China rather than with commercial opportunity.

With hindsight, the very success of Hong Kong may have been an impediment to entrepreneurial effort. In the early 1980s Hong Kong was still a low-cost manufacturing base; it was easier and more comfortable to do business there than in China, and to rely on local traders to source product out of the interior. Moreover, Hong Kong has never discouraged the notion that it is the gateway to all China, rather than to Guangdong and a few other southern provinces. Nor have the 'honky', slightly patronising attitudes of the colonial master helped Britain's businessmen (or its politicians) gain an understanding of what it takes to treat successfully with the Chinese.

However, ignoring China is no longer a realistic option. Its economy is now too big and too fast-growing. Over the period 1978-93, GDP growth averaged nearly 10% annually, while per capita personal income in the cities increased 239% in real terms. Growth has been particularly impressive in the last six years, and in 1993 it reached 13% for the second year running. Economic management is currently focused on dampening inflation, but the economy is still expected to grow by 11.5% in 1994 - against 2.6% in the OECD countries, rising to 2.9% in 1995. If China is not a founder member of the World Trade Organisation when it comes into being early next year, as successor to GATT, then its membership cannot be long delayed. That will certainly be an important staging-post in the country's long march to economic superpower status.

The early 1980s pipe-dream of the 'two billion armpit' market of Chinese domestic consumers is already a reality. Looking ahead, the planners anticipate a continuing 'golden era of industrial revolution' with GDP growth averaging 8.25% up to the year 2010. This will be powered by continuing high rates of consumption and investment - much of it direct investment by private sector foreign companies - which together have fuelled the first 15 years of China's economic miracle.

Clearly, British companies have much to play for - and there is plenty of room at the table. 'Business opportunities in China are so abundant that one hardly knows where to start,' says David Kiang, chief executive (China/Macao area) of Standard Chartered Bank. But how to get in on the game? 'Technology licensing is not a suitable way to do business because it is uncontrollable,' warns Kiang. Moreover joint venture activity - which exploits China's capacity for low-cost production - should look beyond the Chinese market: 'Joint ventures should minimise cross-currency risks by maintaining a high element of exports'.

But how can a western businessman identify a suitable joint venture partner? Most westerners have a dim perception that China is composed of a large number of regional (even individual city) markets, but would be hard put to lay their hands on enough information to identify a promising customer or supplier. While exports and imports were almost entirely in the hands of a few Beijing-based 'foreign trade corporations' (FTCs), opportunities for penetrating such mysteries were indeed limited. Over the past 15 years, however, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has dismantled these product sector monopolies. There are now more than 5,000 foreign trade enterprises in China. There are also some 80,000 enterprises - equity and contractual joint ventures and wholly foreign-owned businesses - which enjoy automatic rights to export their own products and to import the materials and equipment needed for their manufacture. While decentralisation has in one sense added to the complexity of finding a business partner, it has also improved the quality of information. At the last count, in 1992, the top 500 FTCs still accounted for 66% by value of China's foreign trade. There were also some 120 suppliers exporting more than 50 million yuan-worth of products each. All these organisations with the right to conduct foreign trade are members of one of seven Chambers of Commerce established in 1988. The Chambers are co-ordinated by MOFTEC, and each is responsible for a specific product sector.

From published information, therefore, it is possible to draw up a preliminary list of relevant FTCs. Economic profiles are available of the 46 prime business locations, the 19 municipalities and coastal cities with their ancillary Special Economic Zones (SEZs) and 27 provinces and autonomous regions. Similar, though less detailed information can also be found on some of the third rank cities whose economic prospects are particularly strong. Desk research may be simplified by buying one of the several publications which contain this information, or by taking out membership of the China-Britain Trade Group (CBTG) - which is an offshoot of the DTI - and spending time in its library.

In the days before systematic research into market segments was possible, would-be China traders usually had to rely on one of two hit-or-miss methods - which might be characterised as 'travelling in hope' and 'China chose me'. To the first category belong the numerous trade exhibitions in China, and trade missions often organised with CBTG and DTI assistance. Although both types of event attract a lot of interest among the Chinese, they suffer from the same defect. Participation is self-selecting and contacts are necessarily restricted to the Chinese companies which decide to attend.

Some years ago, for example, a UK manufacturer of coin-operated passport photograph booths took part in an exhibition in Tianjin where it was introduced to a potential partner. The partner signed a letter of intent to purchase a number of booths for trial in China. Unfortunately it had no access to foreign currency and proposed payment via a form of barter. The 'marketable' product it offered in exchange turned out to be many thousands of hand-painted porcelain ponies of the familiar 'Emperor's horses' design. When this was rejected, it suggested several hundred thousand pairs of corduroy trousers. The manufacturer's Hong Kong agent, who had tried to broker the deal, was last seen jumping up and down on a bed in the hotel room where the bargaining had taken place.

This is not to say that exhibitions and trade missions are always a waste of time. This autumn's mission organised by CBTG, on which 102 British companies were represented, was the largest of its kind ever supported by the DTI. Delegates were divided into groups according to interest, each party being led by managers well versed in doing business in China. These included men such as David Brewer, chairman of insurance brokers Sedgwick, Robbie Robertson, director of strategic relations, GPT Limited, Colin Golding, regional sales manager, Courtaulds Engineering and Malcolm Proctor, special projects director of Metrotect Industries of Cleckheaton, West Yorkshire, a leading manufacturer of anti-corrosion products. Proctor joined the mission in Beijing, having just signed a joint venture agreement between his company and Pipeline Scientific Research Institute (PLSRI), a subsidiary of the China National Oil Corporation.

Metrotect's involvement in China began with participation in an exhibition five or six years ago. But the British company followed that up by investigating the market carefully before entering negotiations with PLSRI. The agreement, signed in September, gives Metrotect a 60% interest in the joint venture and the right to appoint its general manager. The new enterprise will produce plasticised coal tar enamel for the protection of steel pipelines. The product will be manufactured to a BS5750 quality standard and Chinese staff will be trained in the UK.

Initial production is scheduled at two tons per week, compared to a weekly output of 1,500 tons at Cleckheaton. However, the joint venture is under an obligation to export a proportion of its production after the first three years to generate sufficient foreign currency for its operational requirements. Metrotect's business in China is now soundly established - and based on proven performance. In 1993 the company supplied materials for an 800km offshore pipeline from the Yancheng gas field in the South China Sea to its landfall in Hong Kong.

'China chose me' is really the converse of 'travelling in hope'. This label belongs to businesses that have been approached by a Chinese organisation - or intermediary - and invited to take part in discussions. Such an approach can be quite flattering, particularly when a factory visit is requested. However the disadvantages of entering into discussion with a self-selected sample of one are obvious. The tale of Tube Runner might serve as a warning.

A small Bicester manufacturer of equipment for cutting and preparing steel tubes prior to welding, Tube Runner occupies a market niche in the area of refinery heat exchanger repair. Never having done business in China, its managing director, Colin Hewitt, was naturally intrigued when invited, by a specialist China consultancy, to a seminar in London for a visiting delegation from the mechanical and electrical engineering industry. Hewitt's presence at the meeting brought an invitation to give a series of technical seminars, organised by the same consultants, in Beijing, Harbin and Guangzhou. These, in turn, led to equipment orders worth more than £50,000 - which Tube Runner fulfilled - plus negotiations on the training of service engineers.

However the consultancy had placed the second batch of orders in its own name, and failed to remit the full amount. At this stage Tube Runner had no direct contact with its Chinese customers, so following the breakdown in relations with the consultants the business lapsed. For Hewitt the experience 'left a nasty taste in the mouth'. But he is in no doubt that there is major business to be won in China.

The Tube Runner anecdote demonstrates the difficulty, for the small company, of going it alone in a market as big and as foreign as China. A second lesson might be: beware consultants bearing gifts. Business adventures of this kind should be driven by a company's deliberate strategy, not by chance. Nevertheless consultants are likely to have a place in the information network of any company exploring possible openings in China.

One leading industrial and consumer research consultancy is the Centre for Market and Trade Development (CMTD), which operates under MOFTEC and has a string of blue-chip Western corporate clients. Last August CMTD appointed an agent in Europe and is now undertaking research projects for European companies. A proportion of these costs may be recoverable from the DTI. Other contacts worth cultivating include accountancy and law firms, also the banks. The UK is well represented in commercial banking through the Hong Kong and Shanghai and Standard Chartered. Indeed Britain's performance has been unusually strong throughout the burgeoning financial services sector. Sedgwick, for example, sells insurance through a wholly-owned Chinese subsidiary with offices in Beijing, Shanghai and Shenzen. In invisibles, at least, 'Britain is more than holding its own,' according to the brokers' chairman David Brewer.

A lot of information and advice comes free. The commercial section of the Chinese embassy and the DTI (which maintains a register of consultancy services in China) are invariable ports of call for the intending China entrant. But eventually the time will come when, armed with recommendations and short-lists, he must make his own assessment at first hand. 'The is no substitute for personal exposure,' as David Kiang of Standard and Chartered observes. 'Choose the cities where there is already a high level of western involvement. Look for collective enterprises with an entrepreneurial outlook.' And remember that 'To succeed in China a strong mental commitment is necessary'.

Jonathan Reuvid is the editor and part-author of Doing Business with China (Kogan Page 1994).

HONGKONG TELECOM AND MPT - A joint venture which makes the right connections.

Co-operation between Hongkong Telecom and China's Ministry of Posts and Telecommunications (MPT) dates back to 1983 when Cable & Wireless, Hongkong Telecom's controlling shareholder, formed a joint venture with Shenzhen Telecommunications Development Corporation. China has been a major beneficiary of Hong Kong's all-digital network through its share in revenue from communications between the two. It has also inherited 1.8 million lines of decommissioned electro-mechanical equipment from Hong Kong, which have contributed to expansion of the customer base in Shanghai and the Guangdong and Fujian provinces.

Since 1985 C&W has provided training for MPT staff in both Hong Kong and the UK: Chinese personnel join Hongkong Telecom on three-year attachments and senior management courses have been arranged in Hong Kong for departmental chief,s provincial administrators and municipal bureau directors.

The years of Lord Sharp's chairmanship of C&W were also marked by important technical developments, such as installation of the first fibre optic link between Hong Kong and Guangzhou. This co-operative tradition has been continued under C&W's present chairman Lord Young. In 1992 a second fibre optic cable was laid between Hong Kong and Shenzhen. Last year saw implementation of a new, high-capacity digital network, giving Guangzhou access to the rest of the world via Hongkong Telecom's submarine cable and satellite links. A new partnership for the installation and maintenance of submarine cables was set up in April.

Exploratory talks are also being held with Beijing Telecommunications Administration about joint development of a digital mobile network - until now telecoms services have been a state monopoly.

Meanwhile, Hongkong Telecom and MPT are conducting a feasibility study for an optical fibre link between Hong Kong and Beijing. Nathan Hsu, general manager for China marketing at Hongkong Telecom, says that 'This relationship is unique in that Hongkong Telecom itself is not an equipment manufacturer'.

COURTAULDS' COATINGS & SEALANTS - Low-risk investment demands high level of effort.

Courtaulds' Coatings & Sealants division is a partner in three manufacturing joint ventures in China. The oldest, in Shanghai, manufactures coatings for marine applications and chemical plants. The second, in Suzhou, makes packaging coatings for the food and drinks industry. The third and most recent produces powder coatings in Shenzhen.

Derek Welsh, Courtaulds' senior investment project manager, visited Shanghai to evaluate opportunities in 1986 and serious negotiations went on for two and a half years before the first joint venture agreement was signed in March 1990.

The business, in which Courtaulds has a majority interest with 51%, started out in a factory leased from the Chinese partner but was later transferred to Shanghai's Special Economic Zone, the Pudong New Area.

Because of its heavy involvement in the marine trade, a significant proportion of its revenues are in foreign currency.

The second venture opened in April 1994. Again a partner was considered necessary to give access to local markets, but in this case Courtaulds owns 80% of the equity. Time spent in negotiation was cut to 18 months. The third plant, which also opened this year, is a joint venture of a different kind, being wholly foreign-owned. Courtaulds and its Taiwanese partner each have 50%. Shenzhen's position on the border with Hong Kong means that most of its output can be sold for hard currency.

Low risk investment was the prime reason for selecting coating products to spearhead Courtaulds' drive into China, according to Welsh. But joint ventures make considerable demands upon management. Close attention must be given to the design of the plant, to the selection and monitoring of contractors, and to staff training. It is highly desirable that senior staff should be trained in the western partner's facilities. Continuing expatriate involvement is probably essential, particularly at general manager and technical manager levels where Welsh advocates employing experienced expatriate Chinese.

Asked to assess, on a scale of one to 10, the chance of setting up a manufacturing operation in China to western standards, Welsh's answer is clear: 'If you are prepared to put in the effort, eight out of 10, otherwise four'.

BEIJING/TIANJIN ZONE

Area (000 km2) 208

Population (million) 79

GNP (US$ bn) 40

Capital Investment (US$ bn) 5

Output (000 units) - Television sets 2,259

Output (000 units) - Refrigerators 152

Beijing (pop 10.9m), the capital city and seat of government, is a major industrial centre in its own right. Tianjin (pop 9.1m) is a centre of the cashmere and textile trade, the engineering and metalworking industries and one of the four major centres of China's burgeoning automative industry. It is also one of the 18 open coastal cities and its seawater port, Xingang, is the container port for Beijing and the hinterland

SHANGHAI ZONE

Area (000 km2) 206

Population (million) 123

GNP (US$ bn) 75

Capital Investment (US$ bn) 6

Output (000 units) - Television sets 12,533

Output (000 units) - Refrigerators 1,103

Shanghai (pop. 13.4m) is the largest of the three municipalities and has the highest standard of living in China. With the loosening of controls by central government, it is regaining its pre-war eminence as the financial centre of China. It has China's second stock exchange, hosts the largest number of foreign banks and the first joint ventures of many leading multinationals (GEC, Gillette, Pilkington, Volkswagen, etc)

GUANGDONG/HAINAN ZONE

Area (000 km2) 212

Population (million) 70

GNP (US$ bn) 77

Capital Investment (US$ bn) 7

Output (000 units) - Television sets 4,365

Output (000 units) - Refrigerators 1,269

Guangdong Province, with its miracle growth cities of Guangzhou and Shenzhen, has been at the forefront of China's economic development. Heavily influenced and stimulated by investment and cross-border transfer of manufacturing from Hong Kong (mainly assembly and light industry), the economies of Guangdong and Hainan island are now closely linked to those of Hong Kong and Macao

MID-WEST CHINA ZONE

Area (000 km2) 1,756

Population (million) 239

GNP (US$ bn) 57

Capital Investment (US$ bn) 6

Output (000 units) - Television sets 3,308

Output (000 units) - Refrigerators 561

These provinces will benefit from China's industrial revolution as it rolls west. They are not adjacent to the coastal provinces where the open cities are located but are next in line to those where development is already moving forward. Mainly agricultural, some have important mineral deposits, some are already engaged in power construction projects and there are pockets of significant manufacturing industry, notably in Sichuan connected by a modern expressway.

ECONOMIC INDICATORS: CHINA 1988-1993

Real indus- Retail External Debt

GNP trial price Savings/ current External service/

growth growth inflation GNP acct/GNP debt exports

(%) (%) (%) (%) (%) ($bn) (%)

1988 10.3 17.4 18.5 38.1 (1.7) 44.5 8.6

1989 4.3 6.0 17.8 37.1 (1.7) 45.8 14.4

1990 4.5 5.5 2.1 41.0 3.9 53.1 9.0

1991 7.7 13.0 2.7 39.3 3.9 60.6 8.9

1992 12.9 20.8 5.4 36.3 1.8 69.4 11.4

1993* 13.0 21.1 15.0 34.3 (3.0) 72.7 12.2

Source: World Bank

CHINA'S FOREIGN TRADE PARTNERS 1993($bn)

Total Exports Imports Balance

USA 39.6 31.2 8.4 22.8

Japan 37.9 20.6 17.3 3.3

Hong Kong 37.9 29.8 8.1 21.7

Other* 80.4 10.2 70.2 (60.0)

Total 195.8 91.8 104.0 (12.2)

*Includes Taiwan

Source: "Doing Business with China".

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