China – still a land of opportunity?

WITH its enormous markets and rich resources, China offers vast opportunities for UK companies, but it also poses significant and specific risks – understanding these risks is key to tapping into the growth of these markets. 

Mike Redfern, partner at Grant Thornton, analyses a recent report by the firm to give insight into current developments in China and help Yorkshire businesses to understand its potential.

Market Size

The size of the Chinese market is staggering. With a population of 1.33bn and GDP growth of 8.9% in 2011, China is the largest manufacturing nation in the world after its input exceeded American rates for the first time in 2010. 

While the growth rate for 2010 of 10.3% looks unlikely to be repeated this year, the 2012 target of 7.5% is still relatively high in the current climate. However, a word of warning – wages are estimated to have risen by 10% last year and The Economist forecasts that China will become as expensive as manufacturing in the USA as early as 2015. 

Over the last five to ten years, we have seen a number of clients move their labour intensive production into China with the costs to some of these businesses increasing as wage inflation has started to take hold.

Infrastructure Investment

UK investment into China has traditionally been in the heavily urbanised eastern coastal region. 
However, as China looks to increase urbanisation and reduce the disparity of wealth between rural and urban areas, there has been significant government investment in infrastructure, including transport, telecommunications and utilities. The rate of high-speed rail building alone is impressively fast.
This creates potential new opportunities for UK businesses in the less developed western parts of China, where costs are lower, incentives generally better, and Western companies may have a competitive advantage. The ongoing investment in infrastructure is opening up the vast hinterland and giving China a real competitive edge over the other BRIC economies.

Governance

One major investment advantage of India over China is its governance, legal system and a stock market that is aligned with that of the UK. While India’s well-developed legal system is based on British legal roots, China has legal problems surrounding issues such as the low enforcement of IP protection. This is perhaps illustrated by the competitive strategies in China and India. Domestic Indian firms have been quicker than the Chinese counterparts to internationalise their businesses. 

In China, the risks are real for those who do not appreciate the differences in business practice. Finding the right partners who you can trust to help you find your way into the market is an important first step. Industry and trading require real knowledge of China and having good local connections are important, both in business and, in some cases, political links. The current unrest sparked by tensions with Japan highlights some of the risks of doing business with China and this risk should be assessed as part of any business’ global strategy.

However, for businesses that invest properly in China, the opportunities can be huge. One important principle to remember is that the short-term profit motive is a significantly lower priority for the Chinese, dwarfed by the importance of status, of a desire to build long-term relationships and a real focus on building a strong balance sheet, be it through acquisition of strong global brands, cutting-edge intellectual property or of natural resources. There has been a real focus in recent years on accessing resources, which western governments ignore at their cost. 

Resources

As the economy of China shifts from an agrarian to industrial base, natural resources are key, and the subject of much protective feeling among the Chinese. One only needs to look at the markets for rare earth metals to understand that the Chinese are playing a long game with their resources, while they simultaneously build strong links with resource-rich developing nations. 

Those who have visited China will recognise that even with these resources, the need for the development of cleaner energy solutions is strong. Only 1% of the country’s 560m city dwellers breathes air considered to be safe by EU standards according to a World Bank study. The developing industries in this sector in the UK will have a market ready to exploit in China.

Retail

As China looks to move up the value chain to a more consumption-driven economy, it is becoming ever more interested in consumer brands and in the service sector.  It is estimated that the number of mainstream consumers will increase by nine times over the next decade.  This brings fantastic opportunities for UK businesses.

By 2013, China is predicted to be the largest online marketplace in the world – currently half of all city dwellers check out at least one retail website every single day. While this would appear to offer huge opportunities for retailers, they should be aware that Chinese consumers spend much more time than Britons researching products and as a result returns can be much lower.

The biggest winners in China are and for the foreseeable future will continue to be luxury goods. Although sales growth is slowing, it is still in double digits and by 2015 China is expected to be the largest luxury goods market in the world, even exceeding Japan.

Conclusion

Nobody can deny that there remains real opportunity in China, the world’s fastest growing economy. Recent eurozone woes mean the UK currently offers more stability than some of its European competitors.

More importantly, as China looks to move up the value chain to a more consumption driven economy, it has openly acknowledged that the UK has many leading brands, and that the UK is the second largest service exporter in the world. This is generating significant activity, both in the form of acquisition of leading UK brands as well as significant investment by UK service sector clients in China.

It is also worth pointing out that although Hong Kong is not the automatic choice it was a few years ago, it is still a useful spring board for trading in China and a good location for setting up offices. With a Mandarin and Cantonese-speaking Chinese community, but with English widely spoken and institutions built on the British model, it is also tax-efficient, and a very easy place to do business, with excellent transport links.

The key to success in China is realising that it is not one market but many. The question is how best to access this large and disparate market, especially in the face of hurdles like bureaucracy and concerns about IP protection. Finding the right partners who you can trust to help you find your way into the market is an important first step. And doing your homework thoroughly is essential – for businesses that are properly prepared, the operating risks should be fully manageable

To find out more about trading with China or any of the BRIC territories, consult Grant Thornton’s team of international business advisers on (0113) 2455514.