This article is the first in a series that TM will publish in 2012 exploring the opportunities and potential hazards of various high priority export markets. Read on to learn more about the application your products and services may have in the world’s second largest economy, China.
For decades now China has been acknowledged as a power to be reckoned with in the global manufacturing industry and its ability to lure manufacturing operations away from the UK has been bemoaned by many. But according to Stewart Ferguson, head of research at the China Britain Business Council (CBBC) many in the UK are missing a trick by simply thinking of China as a competitor and not a rich market.
In 2010 there was a 40% rise in UK goods exports to China and a further 20% rise was measured up to October 2011, and yet experts say that we are only scratching the surface of the business available. UK Trade and Investment (UKTI) has targeted a doubling of British trade with China by 2015, equating to $100bn worth of trade a year. It is hoped that $30bn of this sum will be made up of British exports to China.
Where to start?
To facilitate this growth in exports UKTI is strengthening its national and regional presence in China. Reflecting China’s status as the world’s second largest economy UKTI’s team there will soon be its second largest in the world, located in Beijing at the British Embassy, but also distributed at British Consulates General in regional hubs like Shanghai, Guangzhou and Chongging.
But these are just the most widely recognised of China’s centres for trade and industry. UKTI and its sister organisation, CBBC is working hard to gain a presence in more and more of China’s rapidly developing provinces, many of which will be completely unheard for the majority of UK firms, but which are keenly seeking foreign engagement.
Nick Baird, CEO of UKTI says that his organisation is being approached thick and fast with suggested initiatives to help open up the huge tracts of China still relatively untouched by foreign investment or the influx of foreign brands and consumer commodities for a burgeoning middle class. Mr Baird recounts, “It is remarkable how many opportunities are still rising to meet us. When I was visiting China in November last year  I met with the Governor of Anhui province. He wanted to work with us to establish a high technology business park specifically for British businesses and we are now working towards an MOU.”
But UKTI and CBBC are not only being reactive to proposals from Chinese government and industry. A piece of 2011 research from the two bodies entitled Opportunities for UK Businesses in China’s Regional Cities identifies 35 cities of over 200 in China with populations of over one million people, where UKTI and CBBC believe there is potential for UK products and services. On the back of this research a number of sector profiles have been produced which highlight industry clusters in China and show where there are markets with clear, well established objectives as well as markets with emerging objectives – potentially less rife with competition for the moment (see p17).
Money makes the world go round
Lack of confidence in the ability to monitor whether or not customers in China are able to pay for the goods they receive, over the clarity of payment agreements and the availability of resource to pursue non-payment or contest payment amounts are a concern for companies setting up export operations in many countries and China is not excluded.
Stewart Blake, CEO of international transaction services company, Global Reach Partners says that such concerns are justified to some extent. Mr Blake says that around 80% of the transactions his firm assists are now with the Far East, where 10 years ago the majority would have been with the USA. But although the direction of trade has reoriented Blake says that three major issues continue to make the ease of transactions difficult to predict.
- Currency risk
In relation currency risk Blake recommends avoiding request to price locally and always to price in US dollars. In relation to cultural challenges Blake urges companies to be aware of the impact Chinese festivals can have on the financial system. “Chinese new year can completely disrupt business for a whole week,” he says. “We are not used to this kind of shut down for more than a single bank holiday.”
UKTI acknowledges the concerns companies have over payment and settling disputes in China but CEO Nick Baird is keen to reassure UK SMEs in particular that the Export Credits Guarantee Department is “back in the market” for supporting smaller firms and that there are a variety of indemnity insurance offerings on offer to protect companies in the event of non-payment.
There is no doubt that the size of China, its population and diversity of culture, can be daunting for any company looking to export there. Considering it is one market would be a mistake – no company would approach the EU’s 27 member states with the same go-to-market strategy and many would dismiss certain EU nations out of hand as having no traction for them. Similarly China’s 23 provinces have differing requirements and some will be easier to access than others in terms of infrastructure, cultural openness and regulatory enforcement.
But there are a number of means by which companies can get to grips with the confusing landscape of Chinese opportnity. Aside from the helpful resources available from UKTI and CBBC other bodies like the China Machinery Industry Federation and China Association of Automobile Manufacturers can help pinpoint the best areas for entry into China.
Furthermore Nick Emmerson of law firm Eversheds reassures potential exporters that identifying and finding focus areas for business opportunity in China is not as difficult as it might seem. “China is actually one of the most transparent economies in the world in terms of what it wants to achieve thanks to its Five Year Plans,” he says. These plans do not just list of policy objectives but also clarify what industries need to develop in order to reach goals. Mr Emmerson explains, “The Five Year Plan [the latest of which was published in March 2011] filters down into a foreign investment catalogue where the Chinese government sets out quite plainly where they would like foreign companies to play a part in the Chinese economy – some areasare merely restricted, some are prohibited but others are actively encouraged.”
Furthermore the nationally identified opportunities laid out in each Five Year Plan translate into specific projects with given budgets and timescales at a regional, city and village level so companies can see clearly where they are able to tender for contracts to supply certain programmes.
Who should export and why?
Looking back on 2011 it is hard to miss the increasingly urgent tone with which government and trade bodies expressed a need for the UK to address its balance of trade and secure an estimated £20- 30bn of additional GDP through seizing hold of export opportunities in rapid growth markets.
A report from CBI in partnership with Ernst & Young entitled Winning overseas explains the potential benefits and analyses the market potential of both the BRIC nations and 11 other emerging growth economies in some detail. This report can be found in full at www.cbi.org.uk/campaigns/ increasing-exports.
In its report CBI particularly identifies the value to be leveraged by medium sized businesses in the UK which it terms a “forgotten army”. CBI says that research shows grouping medium-sized businesses with smaller peers has resulted in unsuitable services being offered by financing bodies and government.
Medium sized businesses could play a much larger role both as exporters themselves and as suppliers to large primary exporters. According to CBI’s research one in three medium sized businesses in the UK said that improving export capability is now a critical factor for growth.
A central theme in the 2011-2015 Five Year Plan is the growth of a green economy including renewable energy sources and smart monitoring of energy consumption. These are also key priorities for UK industry and areas where Britain has a strong development base. Advanced engineering companies are also seen to have an eager market for their products and capabilities in China as well as construction products, healthcare and pharmaceuticals, rail and automotive – particularly luxury brands or ‘smart’ products and materials (see p20 for a special feature on smart chemicals opportunities in China.)
Taking the plunge
Of course identifying a market for your products is only the first step on the path towards establishing a successful export enterprise. And for many the rest of the journey is fraught with concerns. Understanding the regulatory climate and requirements in China is foremost in the minds of many UKTI clients. According to Nick Baird this is closely followed by a fear of being unable to secure payment and a popular conception that sending products to China is a kiss goodbye to any inherent IP.
Tackling the last issue head on, Baird says the issue of IP protection is far from misconceived and must be taken seriously by firms looking at distributing their products in China. He does maintain however, that Chinese authorities are working hard on the enforcement of rigorous IP protections and also points out that of the 30,000 IP claims currently in front of Chinese courts just 2,000 are from foreign companies while 28,000 are between indigenous organisations.
Kim Walker, partner at law firm Thomas Eggar strongly recommends that companies protect their IP in advance of any contact with the Chinese market as she says it is impossible to act on infringement retrospectively. “Companies must think ahead and make sure their products are patented or trade mark protected,” she says. “China is a committed member of the Patent Cooperation Treaty and provided companies do their homework they shouldn’t run into problems.”
Apart from getting the necessary protections for products Ms Walker says that the most important element to protecting IP, and indeed for gaining confidence in the stability of all your business operations in China is to develop close personal relationships with agents and partners. Helping companies to do this in advance of establishing offices in China, CBBC’s Launchpad initiative gives interested companies the chance to locate a representative in a locality, build networks and test the market without the risk of upfront investment (www.cbbc.org/what_we_do/services/launchpad).
Attending a trade mission with UKTI is another means of getting to know the ground of a targeted market and UKTI schemes like Passport to Export and Gateway to Global Growth are designed to inform and educate both first time exporters and those looking to scale up existing export operations (www.ukti.gov.uk/export/howwehelp).
Sophie Howe, director of Comtec Translations has concerns over the lack of awareness many firms have around the establishment of a languages strategy alongside their export strategy. She asserts that incorrectly translated marketing material or official documentation can be disastrous for a company venturing into a new market. Mistakes need not be in simple word for word translation, but also in cultural nuance and expression. Below she gives some general advice around language strategy as well as some insight into the specific needs Chinese markets.
- Ensure all sales copy is professionally translated.
- Make sure you select the appropriate form of Chinese depending on your target audience – Traditional for Hong Kong and Taiwan, Simplified if your target audience is in mainland China.
- Consider setting up a Chinese micro site with key information about your products and services. Consider the impact of alternative search engines.
- Focus on the keywords for your site. Using a native speaker, take time to consider the terms which will be used to look for your products and services. Although Google is the main search engine for the UK, it has a lower market share in China. The key search engine used in China is Baidu.
- To effectively target a website for local audiences, there are a number of options for setting up the Chinese site including buying the top-level domain name for your company, i.e. www.company. cn. However, current regulations state that only overseas (non- Chinese) international entities owning a Chinese branch with at least one Chinese employee are eligible to apply for .CN or CDN (Chinese Domain Name). Alternatively, a subdomain, i.e. http://cn.company. com or language specific subdirectory, i.e. http://www.company. com/cn can be used.
Building reliable relationships can take time. Specialist manufacturer of super plastic forming equipment, Group Rhodes, for instance, started exploring China as an export market in 2003 but only truly began reaping the benefits of its hard work in 2005. The rewards for its diligence have however, been great. In the last 5-6 years Group Rhodes has secured over $10m worth of orders from China – significant income for an SME of around 200 employees.
Explaining the need for patience in establishing business links in China CBBC’S Stewart Ferguson, who was also responsible for the Cities research mentioned above, says “Remember that even for some large companies that are well known in the West, you may find yourself a completely unknown quantity to Chinese organisations. Particularly in some of the more remote provinces this means that you will have to build up your credentials from the ground.”
Mark Ridgeway, managing director of Group Rhodes comments, “It is crucial to have strong local representation in China, as reputation is everything. We have become known as a reliable provider of an excellent product that meets local requirements.”
The next export focus for TM will be on India. Look out for articles on the opportunities and risks involved in exporting to the Indian subcontinent in TM’s April issue.