China: the waking giant

China offers vast potential for UK companies considering expansion overseas – a massive consumer market, enormous manufacturing capability and economic growth forecast at over nine per cent for a decade ahead. And although expert guidance is still advisable, the country has shrugged off most of the bureaucratic, legal and cultural obstacles that previously barred the way.

China offers vast potential for UK companies considering expansion overseas – a massive consumer market, enormous manufacturing capability, low labour costs, economic growth forecast at over nine per cent for a decade ahead. And although expert guidance is still advisable, China has shrugged off most of the bureaucratic, legal and cultural obstacles that barred the way to foreign investment under its former communist leadership.

When it comes to China, the world’s most populous nation, naturally the tendency is to think big – and with good reason. In purely macroeconomic terms, China has become an economic powerhouse. Its manufacturing and purchasing power is immense: it is the world’s largest producer of steel, coal and cement and manufacturer of textiles, garments, footwear, refrigerators, microwave ovens, televisions, radios, toys, office products and motorcycles. It is now a huge importer of oil, steel and raw materials, all of which are needed to fuel and sustain its economic boom.

Running a huge trade surplus, China has accumulated foreign exchange reserves approaching $1 trillion. Few doubt that at some point this century it will surpass the United States as the world’s biggest economy. Sooner still (by 2010, according to the Organisation for Economic Cooperation and Development), China will be the world’s top exporting nation.

The opportunity

Better still, so far as the business world is concerned, China has become a market in which businesses of all sizes can profit. Whilst in the early days of the country’s ‘opening up’ (to use an expression commonly used to describe the policy), it was solely the big companies that had the money to invest in China, today the market is wide open to middle market businesses. It is not uncommon to hear of companies winning orders for comparatively small amounts, measured in thousands rather than millions of pounds, from Chinese purchasers. Similarly, investors no longer have to invest in huge factories to break into the market. Anything from a small office to a workshop can represent the first step.

Bringing matters closer to home, the UK as a whole is benefiting from the rise of China. UK direct exports are rising by some 17 per cent a year. Last year, direct exports were £2.8 billion, on top of which a further £561 million of products were re-exported through Hong Kong, to make a total of some £3.4 billion, 50 per cent up on the position five years ago. On top of that, Britain provides some £1 billion of services to China each year and, in terms of investment, the UK is one of the largest investors in the country, with over 4,585 British-invested projects, as of June 2005, boasting contracted value in excess of £12.7 billion.

With such growth, it is hardly surprising that the world’s entrepreneurs have been drawn to China, according to Delson Yu, chief representative of Shanghai Foreign Investment Development Board in the UK. ‘It is not just the fast growth of the economy; it is the fact that it has been sustained and will be sustained. In my opinion, growth rates of nine per cent or more are likely to continue for ten or 20 years. That sort of growth is bound to excite the interests of anyone remotely interested in business opportunities.’

Business openings present themselves in almost all areas of the Chinese economy, many of which have been prised open under the terms of China’s membership of the WTO. One example is transportation: SRT Aerospace, the Norfolk company, is supplying aircraft floor lighting systems to China Southern Airline; Caledonian Alloys, the recycler of nickel, cobalt and titanium alloys which can be used in aircraft parts, is winning more and more China-related business; Menzies Aviation has a joint venture with Chengdu airport to provide passenger and cargo handling systems, and maintenance services; and Rolls-Royce has set up a marine equipment factory in Shanghai to capitalise on the country’s burgeoning shipbuilding and marine industry.

Taking advantage

What are the motives for companies doing business in and with China? Again, they are many and varied. Companies are moving to China to manufacture, to source goods or components, to move closer to the market, or to save costs for products produced for overseas markets, and quite often a combination of all of these things.

Take the case of Sortex, which makes high-speed optical equipment used to sort food commodities, to ensure standardisation of quality. The company, which is based in east London, supplies its machines all over the world, and saw China as a growing market – particularly to buy sorting machines for rice. It has recently set up an assembly operation in the southern city of Shenzhen (across the border from Hong Kong), where it assembles 100 machines a year, and has the capacity to double that number. All of those machines will be sold in China.

There are no drawbacks to the move: it meets the requirements of the company’s customers who were insisting that the machines they bought should be made in China; the machines are cheaper to assemble; they have access to plenty of workers, who are hardworking and willing to learn; some parts for machines assembled in London are now being sourced from China; and the company believes it will recoup its investment within two to three years.

Delson Yu advises UK companies to focus their attention on those sectors in which they have a worldwide competitive advantage, in particular the hi-tech businesses, services (especially financial services, accountancy and legal services) and the growing need for energy-saving products and eco-friendly products and services. Education is another area in which the UK has a leading worldwide reputation – Nottingham University was the first UK university to open its own campus in China, and Dulwich College now has franchises in Shanghai and Beijing.

For all these opportunities and examples of successful businesses, China is still regarded with caution by many UK businesses. It is seen as being a remote and challenging market, for reasons associated with the differences of culture and language and – a long-standing bugbear of foreign business – the lack of clarity of the business environment. It is still true that regulations are too often contradictory or ambiguous, and China has a very poor record when it comes to protection of intellectual property. Some would-be entrepreneurs have been deterred by a number of highly publicised books, which delight in pouring scorn on the China market.

But this negative perception is happily diminishing as the world gets to know more about China, and foreign businesses become known for their successes. It is no longer necessary for new companies to ‘reinvent the wheel’ when they make their first foray into the China market, because a body of valuable knowledge has built up about how best to do business there.

Today’s China is a new, challenging environment for entrepreneurs with an eye to business growth, the determination to overcome obstacles and the flexibility to adapt to new markets. As Sortex managing director Bruno Kilshaw concludes: ‘My only regret is that we didn’t move to China sooner.’

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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