RBS special feature: China – access all areas

Posted on 7 Mar 2012

Peter Russell, head of manufacturing, UK Sector Coverage, at Royal Bank of Scotland, considers how British firms might access or increase their share of attractive Chinese export markets.

Regardless of how faltering the road to economic recovery, the UK’s manufacturing sector is likely to rely increasingly on exports to sustain growth. Indeed, a survey commissioned last year by RBS entitled Business Export Research found that 19% of UK manufacturers anticipate significant increases in export activity over the coming five years, against an average of 8% across all sectors. Soundings we’ve taken from customers at RBS suggest that a larger proportion of UK manufacturers anticipate exports to China to increase even more over the coming five years.

But almost half (46%) of those manufacturers say difficulty finding international customers presents a barrier to successful exporting. And since nearly three in five (57%) expect trading with Asia to become more important, activity and know-how must be improved to satisfy these markets.

That means understanding which activities represent opportunities for significant business growth. UK exports to China grew by an annual average of nearly 18% between 2003 and 2010, and more than 20% in 2011 according to HM Revenue & Customs.

But ONS/IMF data indicate that, as a share of our total export trade, China makes up just 2% of UK exports. With Chinese GDP forecast to grow at an average of 9.4% between 2011 and 2016, China is a market that UK manufacturers must stay in tune with.

Made in Britain: a marque of distinction

For many Chinese customers, traditional hallmarks of British manufacturing – such as quality, reliability and service – underpin the appeal of UK-made products.

“British manufacturers enjoy a positive reputation for design, technology and production innovation,” says Alastair Morgan, Consul General at the Guangzhou branch of UK Trade & Investment (UKTI), the government body promoting UK plc overseas. “Their business ethics and the high standards of support and aftercare are greatly admired.”

Such high regard is what makes China so appealing to UK exporters who initially fear being priced out the market. Vince Cunningham, a Business Adviser at the China-Britain Business Council (CBBC), which assists UK-registered companies trading within China, says, “It’s not unusual for UK manufacturers to explore markets for, say, automotive equipment, industrial machinery or building materials, and discover similar products being made in China at lower prices. But that needn’t cut them out; their products may well still be highly sought-after.”

Be bold and focused

But is British reserve holding back our potential? “There’s a reticence among many UK exporters,” says Morgan. “They need to promote their products’ USPs more vigorously and widely.”

Cunningham believes the most successful British exporters to China are those who take time to understand their customers’ often highly specific needs. “Research thoroughly, focusing on specific demands you know you can meet, or which could be met by refining existing products. It doesn’t matter if you produce nuclear power plant valves, flight simulator testing kits or shower unit brackets; if it has something special, there’s likely to be a market here.”

Many UK firms have established production facilities and supply chains in China. Janet Ming, head of the China desk at RBS in London, says, “The government encourages foreign investment; they’re incredibly keen to meet British manufacturers and provide them with support to facilitate investment in property, plant and jobs, such as securing planning permission or trading licences.”

Untapped potential: growth opportunities for SMEs and MSBs

Both UKTI and CBBC are highly proactive in China, helping British companies with information and, crucially, introductions to all the right people. These well-developed support structures means successful trade with China is by no means the preserve of large multinational manufacturers. SMEs and mid-sized businesses (MSBs) are increasingly capitalising on export opportunities.

Recently, a British firm making machine tools for the diamond industry displaced a Swiss competitor as top exporter to China in its field. “It was a classic case of UK manufacturing entrepreneurship,” recalls Morgan. “Senior management came over; they met potential customers, they took on board what they’d need to do to fine-tune those products which had generated the most interest, and they identified a local distributor they could trust.”

He continues, “We’d like to see more SMEs and MSBs make similar inroads. Yes, they might have fewer resources to dedicate to finding markets in China, especially if they’re struggling to protect existing UK business. But for many, they can’t afford not to at least take soundings.” Reassuringly he adds, “Thorough research and a well-planned reconnaissance trip, including UKTI support and introductions, can turn a tentative foray into a solid platform from which to grow business here. We see it happening all the time.”

Pinpointing strategic high-demand locations

UK exports to China may have been growing but the potential market for goods made or designed in Britain isn’t confined to indigenous companies. There are many foreign-owned organisations established in China, some (including British firms) operating under their own steam, others acting in joint ventures with Chinese private sector investors, from makers of FMCG goods to those producing plant equipment or luxury garments.

Target China - a checklist for UK Manufacturers
Target China - a checklist for UK Manufacturers

“The speed at which the economy is growing and the increasing affluence and sophistication of the middle-class population means no one field of manufacturing can be singled out as the number one opportunity,” says Morgan. “But I’d suggest that the automotive, food and drink, precision engineering, healthcare, pharmaceuticals, high-speed rail and ICT sub-sectors will be amongst the fastest-growing over the coming five years.”

Many UK manufacturers already enjoy brisk business exporting to China’s developed urban eastern and coastal cities. But new regional opportunities are emerging in providences that up until now have been less explored.

The western and south-western provinces are the upcoming hotspots that are set to deliver significant growth opportunities within certain sub-sectors over the next five years. From aviation and high-tech in Gansu providence, healthcare equipment and life sciences in Yunnan to renewable energy in Guangxi, these represent just some of the opportunities with tremendous potential for UK manufacturers. (For full details on upcoming growth opportunities, see map)

Few quick wins but plenty of sustainable business

An enormous infrastructure programme is also opening doors. “China is building roads, airports and rail networks, linking its second-tier and thirdtier cities, many of which are becoming specialist manufacturing centres,” says Janet Ming. An increasingly affluent population means these regions represent lucrative markets for exporters of everything from components and equipment to food, drink and fashion, already being snapped up in China’s eastern conurbations.

“For forward-thinking UK companies, there are plenty of opportunities to carve out niches,’ says Ming. But she warns, ‘There are rarely quick wins to be had. Be prepared for the long run, building a solid foundation by talking to the right people and demonstrating your commitment to a demanding customer base.”