Posted on Monday 17 December 2012 by Ulster Business
As an export market China is nothing like what was recently described to me as the "low-hanging fruit" that is Great Britain or even western Europe, especially for SMEs with limited budgets. China is vast. By way of illustration: the population of Northern Ireland is just 0.13% of that of China, and our economic activity would be only slightly higher as a percentage. We simply don't have the capacity to provide any products in a big way for the whole of China. But that doesn't mean we should give up, because what's small for China could be massive for us.
Let's leave the cultural and tourism potential to one side for a moment. Sure, every high-ranking Chinese visitor who comes here wants to see the Giant's Causeway and the Titanic building, while golf tourism has real potential (if we can combine it with good shopping) and the phenomenal success of Riverdance in China shows the potential of Irish culture. But let's focus on exports. How do we engage, and how do we break into the market?
One problem we have is that we are arriving to this later than many others. Scotland, for example, got its first Confucius Institute (at Edinburgh University) six years ago. The Scottish government was quick to recognise the potential, and has invested heavily in developing links, not just cultural but economic ones as well. When Scottish businesses want to engage with China, China knows that the Scottish government is behind them. Scotland also recognised early on that the whole of China was a bite or two more than Scotland could chew, so it has selected some areas and developed strategic partnerships.
One key partnership for them is with Zhejiang Province, a comparatively wealthy province that has the benefit of being next door to Shanghai. Zhejiang was one of the earliest of China's 33 provinces to adopt the new economic openness that developed in the 1990s, and it is now one of China's wealthiest, with a GDP that is 170% of the Chinese average. It still wants more, and there may be opportunities for us, but it is a crowded field.
Yet not all of China has developed as rapidly as Zhejiang. The further inland one goes, the lower the GDP and the greater the potential to establish new links, because at this stage all of China has embraced the economic openness that brings greater wealth (and with it, it must be said, greater social and economic inequality, but that's another story). Take Hubei Province, which is about 400 miles west of Shanghai, and its capital city Wuhan. Hubei has a population of about 57 million, roughly equivalent to that of the UK. Its capital city, Wuhan, has 10 million inhabitants, a bit bigger than London. As a province it came later to the new economic potential, but in the last two or three years its performance has shot up. In a November 2012 report on "Emerging Markets" Deutsche Bank puts Hubei's year-on-year growth at 13.8% for 2011, some 4% above the Chinese average, while GDP per person has now caught up to the Chinese average, having lagged behind for over a decade. The province is now embracing opportunities to develop outside links in every area, and one example is that, beginning next autumn, it will sponsor teachers to come to Northern Ireland to teach Chinese in our schools, a scheme operated in partnership with the Confucius Institute here at the University of Ulster. So how do we develop those links further?
Engagement on the political level is crucial, but so, too, is the development of a China-specific economic strategy that defines specific areas for intensive engagement. What are the key exports that we can provide and where is there a likely demand?
Will we invest the time in building relationships? Will we turn up with a degree of cultural awareness that says we are serious? Will we invest in promoting engagement with Chinese culture for the future that sends a clear message that we are about building long-term relationships?
There are other barriers to internationalisation, too, that must be overcome. In a 2009 study in the Journal of Small Business and Enterprise Development Karise Hutchinson and Emma Fleck of the University of Ulster together with Lester Lloyd-Reason of Anglia Ruskin University in Cambridge found that a lack of vision, knowledge and resources coupled with a fear of losing control can seriously hinder SME attempts to develop international markets. Legislation, currency and cultural differences also play their part, as does an overall negative experience and perception of government support. In China, with its integrated approach to business and politics, such support is a given. As Prof. Cathal Brugha of the Quinn Business School at University College Dublin says in the book Doing Business in China – The Irish Experience, building relationships and taking advantage of networks is also important. And, crucially, the leaders of our SMEs need the courage to go for it.
There is no easy fix for this, and there is no "one size fits all" solution. DETI, Invest NI and DARD are the obvious economic partners for developing a strategy for China. DEL, DCAL and the Department of Education are our obvious partners in developing cultural, educational and research links. And given how important political buy-in is to China, OFMdFM has a crucial role to play in signalling top-level political support for engagement, which is one reason why last month's visit to China by Peter Robinson and Martin McGuinness was important – it sent all the right signals. The potential rewards are massive, but as Confucius said... He who would perfect his work must first sharpen his tools.
The recent week-long trade mission to China is likely to be the first of many for local politicians and business people.
A smattering of Northern Ireland based firms has already won business in China and many others are tentatively testing the water.
It is clear that, for the right product or service, the potential rewards of cracking even a small corner of the market in a country with 1.3 billion people, could be huge for any business.
Those who went out with the last delegation gained invaluable time networking with Chinese business leaders and the First Minister talked of participants returning with "fistfuls of business cards" and leads to follow up in coming months.
CBI Northern Ireland chairman Ian Coulter said the quality of these leads would provide "great building blocks for growth" and has encouraged Invest NI to make the missions to China a regular fixture – highlighting real opportunities for sectors such as agri-food, renewable energy and technology.
Guy Dru Drury, the business organisation's man in Beijing, visited Belfast last month to offer his perspective.
He said that while the global downturn has affected China the country's economy is tipped to see increased growth in the fourth quarter of this year, and following the transition of power to new president Xi Jinping, confidence in 2013 should be high – all of which is positive for the 500 more than CBI members in China.
"There is a steady UK presence in China. What we've seen this year, which has been encouraging, is 24% growth in UK exports to China, at least up until the end of September. That is from a low base, but it is an encouraging sign as it doesn't show indirect UK exports to China or include exports through Hong Kong," he told Ulster Business.
"I think that increase in exports is reflected in the Northern Ireland trade mission. Companies are taking the plunge and really looking at the nuts and bolts of opportunities in China. Not just talking about it, getting on a plane and seeing it and then hopefully translating that into business."
Like any overseas market China has its barriers to entry, including the inevitable bureaucratic hoops to jump through.
"You can't go in thinking the roads are paved with gold in Shanghai. It is going to be expensive. You'll have to do exactly what you'd have to do if you were setting up business in France or the USA or South Africa," said Drury.
"Where do I put money, how do I recruit people, what is the regulatory environment really like, cultural issues – there are a range of challenges. But my counter argument would be that, in the next three years in Europe and the US, the traditional markets, you're not going to see the growth you'll see in China," he added.
"China is not for everybody. But it is a country the size of Europe, it will be the world's single largest economy within the next decade."
In the past, one of the big concerns for hi-tech companies in particular has been protecting their valuable intellectual property, but Drury says so long as businesses don't cut corners, the risks are manageable for companies who approach China with an entrepreneurial and flexible game plan.
"There are all sorts of do's and don'ts for every market, but particularly for China because of the prevalence of IP theft. While most people would agree the law and legislation around it is first class now, it is the implementation of that law and ability to protect the IP that is somewhat lacking in some geographical areas," he said.
"You have to accept that because you're in a fast developing market law and respect of rule of law may not match what you've come to expect in Europe or the EU," he added.
"My message would be don't do anything different to other markets. Make sure you register before you go. Don't go and sell things and then come back to try to register."
While IP was the biggest barrier to entry reported by UK firms when CBI established its office six years ago, the big issue now is the cost of doing business in China. Companies who think they can set up cheaply and expect to see returns quickly are misguided, said Drury.
"You have to take a longer term view. Wage inflation in China is on average anywhere between 6% and 20% depending what sector you are in, which is a huge variable. And if you're employing a lot of people and need people on the ground who are properly trained, these are huge costs and they are only going to go in one direction," he said.
"The second challenge is the quest for good talent, finding quality staff. You're going to need tried and tested individuals either from your own market who understand China, or from China.
Managing people remotely doesn't really work. Lots of other people are looking for that person, so competition for staff is intense."