Appendix
China and Its Trade Partners
This appendix includes interviews with representatives of nine of China’s key trade nations or regions. The people interviewed are members of embassies, chamber officials, associations, and trade institutions. Representatives of the following trade partners (countries in alphabetical order) are interviewed:
- Australia
- Brazil
- European Union
- India
- Japan
- Mexico (and Latin America)
- Nigeria
- South Africa
- United States
The countries or regions included were selected on the basis of their trade relationship with China. In total, these nine represent roughly 60% of China’s total global trade. All of the interviewees commented on the importance of China for their countries and stressed their interest in expanding the relationship, not only in the trade sphere but also via ties in education, tourism, and investment.
Country Representatives Interviewed (country by alphabetical order)
China Trade Partner: Australia
Interviewee: Mr. Christopher Wright, Senior Trade Commissioner, Austrade Country Manager for China, Deputy Consul General in Shanghai
Organization: Australian Consulate in Shanghai
Do you think Australians in general have an accurate picture of China?
I think the picture Australians have of China is constantly changing and improving. Australians in general still perceive China through the images portrayed by the national press. They watch television, and read newspapers and magazines. These translate stories about China for ordinary Australians. On a government-to-government basis, Australia has very substantial representation in China in trade, foreign affairs, science and technology, and education. As for the business community, we recently had 600 company directors from Australia visiting Shanghai (in May 2008). The majority of them had never been to China before. They were astounded by what they saw here in Shanghai.
Is China perceived as a threat or an opportunity in the business community in Australia?
I think Australia is quite fortunate in this area. Our economies are very complementary. Australia has what China needs and, at the same time, China offers what Australia wants, especially cheap manufactured goods. If you look at trade, it’s fairly balanced. What that means in terms of the individual companies depends on the different industrial sectors. Australia’s service sector wasn’t affected as directly by the growth of China as was the manufacturing sector. Some manufacturing companies were aware of these changes and made an early decision to transfer elements of their production to China. Others didn’t. Australia is seen by OECD and the World Bank as one of the most flexible economies in the world. That means it is able to handle change efficiently. If you look at the current unemployment level, at around 4–5%, talk of loss of jobs seems misplaced. There have certainly been changes in the makeup of employment across industrial sectors, but to characterize these as a “loss of jobs to China” would be misreading the situation.
What can be done to promote a better understanding between the two countries?
I am personally involved in the answer to that question. My particular role is to facilitate export trade out of Australia into China and two-way investment between Australia and China. In order to do that, we need to communicate what China means to the business community in Australia. I recently returned from two weeks in Australia where I spent most of the time meeting with senior decision-makers in the Australian business community, large accounting firms, and the major banks. We held seminars and roundtable discussions about what is happening in China and what that means to our businesses. I also spent some time with the TV networks and newspapers to get those messages out. So, there is a role for the Australian government in increasing understanding in the business community about what is happening in China. What else can be done? Clearly, organizations such as the Australian Chamber of Commerce, Shanghai have a role to play in these efforts to communicate.
What trends are under way in Australia–China trade?
If you look at the figures for 2007, trade between Australia and China totaled A$49.9 billion, making China Australia’s largest trading partner ahead of Japan. Around half of this was Australian exports, and around half of that was in resource-related commodities: iron ore, metals, energy, and gas. The rest is in a wide range of services, agribusiness, and industrial and consumer goods. Agricultural business and food have increased dramatically. Wine, of course, is a rapidly growing export to China. In fact, in 2006, of all the Australian wine sold in the Asian region, China bought 35% (bulk and bottled). In 2007, exports of wine to China doubled! Of bottled wine coming into China, Australia has the second-largest market-share, after France. I expect this will continue to grow. Other products that are coming out of Australia include manufactured products, and tooling and engineering products. Australian construction firms, architecture firms, and building products firms are well represented in China. Another growing area is services—particularly education. There are 90,000 Chinese students studying in Australia, and that number has been growing steadily over the last decade. Financial services will continue to grow. Australia has a number of banks that are already playing in the Chinese market.
In terms of goods out of China to Australia, this includes textiles and manufactured goods. I understand that Chery [Chinese car manufacturer] expects to export vehicles to Australia probably within two years, at a very low price.
What characterizes the flow of investment from Australia to China? And from China to Australia?
Today, the main investment from Australia into China is in building products and financial services. Agricultural business is another area. Australia has a very small automobile industry, and part of its component supply has moved to China. These investments are going to continue.
On the Chinese side, investment into Australia is fairly new. The areas are primarily in agriculture and resources sectors, with more and more Chinese companies looking at investing in mining. China is going to make a big investment in gas. It has already taken very substantial equity in that field. Chinese banks are also setting up in Australia.
What is the general experience of Australian companies in China?
More Australian companies are coming to China, and more companies are doing business in China. What they tell me is that, on balance, the results are good. Does it mean that it’s all fantastic? No, of course not. We all know that you have to work hard. There is a famous case of a foreign brewing company that ran into difficulty. They set up a company in Shanghai in 1990, but eventually had to close down all their business here in the beer sector. Some of the reasons for that can be found on the Chinese side, but they can also be found on the company’s side in terms of their understanding of what they could achieve in the Chinese market. Today, the company is taking a different strategy. They are still in China, but their new strategy is to focus on wine.
What advice would you give to an Australian entrepreneur thinking of investing in China?
The first thing I would say is to seek advice early and seek it often. China has a lot of peculiarities that you need to understand. In the tax field, in the legal field, in the banking and financial sector, there are things you need to know. If you want to set up a business, you will have to know what legal structure you need to adopt. Do you go as a joint venture? Or, do you go as a wholly foreign-owned enterprise? What are the tax implications of each? I spend a lot of time providing companies with frameworks with which to approach these sorts of problems, so that when they sit down with their banker, accountant, or lawyer, they are sitting down with a fully prepared sheet of questions. They know the questions that they need to address.
Second, there are always a number of general rules. One rule I use is: Whatever you forecast for sales expectations in China, halve it. Whatever your estimates in terms of cost and time, double them. Make sure you have a Plan B and a Plan C. What happens if the tax rate changes? What happens if your relationship with your partner changes? What is it going to cost you? What does it mean in terms of production, time, and distribution networks? Identify the problems in advance, and think about how you are going to address them.
The third point I always make to people doing business and investing in China is: there is no magic involved. It’s business. China has some peculiarities, just as you find when doing business in the U.S., or in Latin America, or in any other market. A transaction has to make sense. This means that you should have good commercial sense, good commercial practice, good operational practice, and good market knowledge. It’s about marketing, finance, and operations. These are the three fundamental aspects of doing business. If you get these organized, then you’ve got the main points of doing business in China.
Which sectors or areas are more promising for future development in China?
This is an interesting question. To some extent, there is no answer to it, as the Chinese economy is racing along. Every sector is growing, which means the opportunities within each sector are enormous. As long as the whole cake is growing, everyone is making a profit out of it.
If you look at the Australian economy, it is also growing quickly. Those areas that are growing very rapidly in Australia are probably the most relevant in China. Natural resources are clearly number one, and that will continue to be a high-growth area because China will continue to demand more and more resources. Services will continue to be a very rapidly growing area, because China is still relatively undeveloped in this sector. Tourism is growing in both directions. Visitor numbers from China to Australia will reach 800,000 by the end of the decade. It was 300,000 for last year [2007]. The Australian Tourist Commission is spending a lot of money in China to develop its network of agents.
One area that is growing is energy. Australia has the biggest reserves of uranium in the world, and there is an agreement between China and Australia to explore this resource. For the foreseeable future, though, China will still rely on fossil fuel energy, particularly coal, of which it has very large reserves. Australia and China are cooperating on the development of technology to reduce emissions in this area.
Relevant websites
China Trade Partner: Brazil
Interviewee: Mr. Ricardo Primo Portugal, Deputy Consul General
Organization: Brazilian Consulate in Shanghai
Do you think Brazilians in general have an accurate picture of China?
The main problem we have is lack of mutual knowledge. Neither Chinese nor Brazilians have a clear picture of each other. In recent years, Brazil has begun to discover China. Three years ago, the biggest Brazilian TV station came to China and made a TV series called The Rise of the Dragon. The program had an enormous audience. People were curious, as well as amazed. They could not imagine that China would have a city like Shanghai. Now, they are seeing more and more images of China after economic reform and opening-up. The interest in the Chinese language in Brazil reflects the rapid change. I first came to the Brazilian Embassy in Beijing in 2003. Before coming, I wanted to learn some Chinese in Brazil. I went to the Chinese Embassy and asked them to recommend a Chinese teacher. I got a schoolgirl, 16 years old, whose father owned a Chinese restaurant. She came to teach me Chinese after finishing her own classes. Several years later when I went back to Brazil, I found people learning Chinese everywhere. Universities have set up Chinese departments. Even big enterprises have Chinese lessons for their employees. The discovery of China in Brazil is recent, but it is happening very quickly. Brazilians suddenly woke up and found that China was their third-largest commercial partner. The U.S. is our first trading partner, Argentina is our second, but China is catching up.
How does the Brazilian business community see China—as an opportunity or as a threat?
As both an opportunity and a threat. For some sectors, China and Brazil are competitors; but in most sectors, we are complementary. As bilateral trade relations improve, more people win than lose. Some sectors, such as toys and clothes, are facing strong competition from China. They are complaining and asking for protection.
Basically, though, there are many more opportunities. Brazilian firms are coming to China to sell. There are also initiatives to start joint ventures. Bigger enterprises also have a strong interest in China. For example, CVRD, the biggest mining company in the world, founded a joint venture with Baosteel in Shanghai. They export iron from Brazil and we import steel from Baosteel. They also have an agreement in the transportation sector, and Baosteel has invested in some plants in Brazil.
What are the main areas of trade between Brazil and China?
Raw materials are doing well. What’s more promising is the direct investment from China to Brazil, mainly in infrastructure. Brazil is developing its infrastructure and we have a lot of projects. Infrastructure is the only way to develop Brazil and South America. Chinese companies are participating in infrastructure projects and making direct investments. Another example is Huawei, which is investing in high-value goods. There are also Brazilian auto-parts companies coming to Shanghai, Jiangsu, and Zhejiang.
What challenges or problems do Brazilian companies tend to face when operating in China?
Sometimes, there are problems. Two years ago, we established a Forum for Brazilian Entrepreneurs in cooperation with the Embassy in Beijing. In this forum, Brazilian businesspeople meet regularly and share their experiences. There are some problems, such as unclear rules and regulations in China. Sometimes, local governments apply the same regulations in different ways.
What advice would you give to a Brazilian entrepreneur starting a business in China?
The first advice I would give is to make contact with other Brazilians through the Forum for Brazilian Entrepreneurs. There are a lot of activities organized by the private sector. Representatives from the Brazilian Embassy and Consul-General attend when there is a meeting or forum in Beijing or Shanghai. We give our support when it’s needed.
Next, I would also advise them to be patient. Be careful not to trust anyone who comes up to you and says, “I have a lot of guanxi.” China offers enormous opportunity in the long term, but in the short term, you may lose money. China is risky and complicated. Don’t come blindly; come with some connections.
What are some recent trends in the investment flow between the two countries?
Very recently, Brazil began to discover China. The Chinese government had discovered Brazil long ago. They see Brazil as an important gateway to South America. They invest in Brazil, and then reach other South American countries from there.
The Brazilian government is an old friend of China and we have strong relationships in many areas. As more Chinese firms go global, many of them are making direct investments in Brazil. I once attended a seminar in Guangzhou on the invitation of the local chamber of commerce. There were high-tech companies in Guangzhou that are very interested in going to Brazil. Their strategy was to go to Brazil, and then reach the whole South American market. For Chinese companies, Brazil is seen as a platform.
Relevant websites
China Trade Partner: European Union
Interviewee: Mr. Miguel Ceballos Baron, Counselor for Trade & Investment
Organization: Delegation of the European Commission in China
Generally speaking, do Europeans have an accurate picture of China?
There are approximately 500 million people in the European Union, so it’s hard to judge how much they know about China. If we look into the business community, I think there is a very good knowledge and understanding of China. They see China as a market in the midst of expansion and offering lots of opportunities. Many European businesspeople have already been here or have included China in their global expansion plans. Of course, China is very big and complex and Europeans often have a limited picture of the country. I wouldn’t say that Europeans have a better of worse picture of China than Americans or other foreigners. Certainly, there is significant interest in China among Europeans. There are some surveys available on the perceptions of China in the U.S. and the EU. One interesting conclusion is that many Americans perceive China as a political and economic threat, while Europeans see China mostly as an economic competitor and a business opportunity.
What is the common experience of European businesspeople in China?
The European Chamber of Commerce in China conducts an annual business survey among its members. The main conclusion of the survey is that China remains a good place to do business for European companies. Among the China-based European businesses surveyed in 2007, 73% of the respondents were optimistic about future growth opportunities; 76% were either making a profit or at least breaking even, while 82% of the unprofitable companies expected to make a profit within three years. The profitability of their investment differs from sector to sector, but varies based also on the company’s age. The survey explains that the first year in China is difficult and that 50% of newcomers don’t make a profit for the first four or five years. After five years in China, a higher percentage of companies start to make a profit. Of course, there are some companies that have been established in China for some time that are yet to make a profit. They stay because they see China as part of their strategy. They keep their operations going, stay in touch with local partners, and develop business networks as they wait for a better business environment.
European investors in general think that China is a good opportunity. China is also a challenging market, with competition growing not only from Chinese companies but also from foreigners. Despite this intense competition, EU businesspeople still believe the market has big potential. It’s a good place to do business, due to the excellent infrastructure, advantages such as the low labor cost and large pool of talented people, and the concentration of industrialized production. The main reasons to be in China are, first, to supply and sell in the Chinese market; and second, as part of a global strategy. Very few EU businesses in China claim that they have set up here in order to re-export to Europe. Very few of them come exclusively for the lower labor cost; the competitive advantages lie in other factors, such as infrastructure, stability, the huge labor force and market size, subsidies, and so on.
What can be done to promote mutual understanding between China and the EU?
Some aspects of China’s growth and economic success could be better explained, to present Chinese growth as a success story, and not as a worrying phenomenon. Millions of Chinese citizens are rising out of poverty and improving their living standard. The growth of the Chinese economy is benefiting the rest of the world, because it promotes global growth as well. Of course, the media tend to focus on the problems. In such a big market, some problems do exist, and there are concerns in the EU and U.S. What matters is that the Chinese authorities be vigilant in improving the image of Chinese products abroad, and in making every effort to solve consumer problems when they arise.
Intellectual property rights are a big concern, and affect not only European companies but also Chinese ones. In developed economies such as the EU and the U.S., our business competitiveness depends on sound IPR protection to stimulate innovation. We believe very much in this system, and we want the Chinese authorities and Chinese businesses to adhere to it and obtain the same benefits for their economy. IPR protection is a long-term investment—it requires a good legal system, proper enforcement, and the business conviction that R&D and innovation are a better deal over the long term than the shortcut of violating IPR. China has made a lot of effort since joining the World Trade Organization in 2001 and the Intellectual Property Agreement (TRIPS). The Chinese authorities have adopted new legislation and are fighting to ensure proper law enforcement. The EU is helping China in this effort through a technical assistance program worth €15 million. We need more political support, and also a change of mind among many Chinese consumers and businesses.
Given the main trade items between the EU and China, what trends will affect two-way trade in the future?
The pattern of trade flow between China and Europe has been changing in recent years. In general terms, we see a trend where Chinese exports are shifting from low-cost, labor-intensive goods toward high-end, capital-intensive products. This trend is moving very quickly. In terms of trade in 2007, the EU exported to China around €71 billion-worth, a year-on-year increase of 12%. Chinese exports into Europe also grew very fast, to reach €230 billion. That represents an average increase of 21% annually over the last five years, creating a trade deficit of around €159 billion in 2007.
What are the main trade products? China is now the number one exporter into the EU, and 16% of all EU imports come from China. Machinery, electrics, and mechanical equipment are the most-imported items, including transportation equipment and parts for machinery. Textiles are losing weight among Chinese exports to Europe, though they are still significant. The EU has a trade surplus in one particular sector only—transportation equipment—which includes aircraft, cars, and trains.
What is the outlook for the flow of investment from Europe into China—and from China into Europe?
European investment into China is hard to measure, because very often investment transits through other regions, such as Hong Kong and other offshore locations. European investment is very important for China because of its high quality. It is particularly focused on high-tech sectors in manufacturing industries, although in the last two years, we have seen important investments in the financial and services sectors. According to the Ministry of Commerce, the EU invested €8 billion in 2007 in high-tech sectors, which is twice that of the U.S. Japan for the same category was €6 billion. So, we are well ahead of the U.S. and Japan in high-tech investment. Europe is investing a lot in sectors with huge growth potential. It is also a result of the very open system in the EU, with no restrictions on high-tech transfers and exports.
Looking from the other direction, Chinese investments in Europe are still symbolic. So far, we have seen China investing in the manufacturing sector by acquiring some EU companies. Chinese investors are attracted by good technology and well-known brands, or both. Some well-known investments have been the acquisition of Thomson by the TV manufacturer TCL, and the acquisition of U.K. carmaker Rover by Nanjing Automobile. In both cases, a well-known brand and the technology were the main reason for acquisition. More recently, we have seen acquisitions of companies and infrastructures linked to Chinese exports. For example, a Chinese company bought an airport in Germany for air cargo, and there have been investments in ports to create maritime hubs for Chinese maritime companies. In recent months, we have seen important investments led by state-owned enterprises and state agencies. The SAFE (State Administration for Foreign Exchange, under the People’s Bank of China) acquired shares in TOTAL and British Petroleum, although it has not confirmed this officially. The purchase of a stake in Barclays Bank by China Development Bank (owned by the Chinese government) is the largest Chinese investment in the EU so far. The creation of China Investment Corp (CIC—China’s Sovereign Wealth Fund) in the summer of 2007 is the latest important operation in Europe. The European Commission, and in particular EU Trade Commissioner Peter Mandelson, has reiterated the EU’s openness to investment and welcomes CIC investing in Europe.
How fast is the growth in number of EU companies in China?
It is very difficult to say. Almost all big EU corporations are present in China. Some have a very strong presence, with factories and thousands of employees; others only have representative offices. There are two European manufacturing companies in China employing 40,000 workers each and producing exclusively for the Chinese market. The European Chamber of Commerce in China currently represents 1,300 members. Many of them are big companies, although around 300 or 400 members are SMEs. Including the national chambers, such as the German, French, Spanish, British, and Italian chambers, the total is maybe around 10,000 members. There are also companies outside of the chambers. But the number of companies isn’t so important. What is important is the quality of their presence. Some big European companies have already been in China for more than 25 years. They are well established and conduct very important business in the manufacturing sector. They were the first wave of big investments in the 1980s. In the last five years, we had a second wave, mostly SMEs, attracted by China and also following the big corporations. This is clearly the case in the automobile sector. First, the big carmakers came; and then the SMEs, producing components, followed. It is a similar pattern in other sectors.
What is the general experience of EU companies in China?
The general experience is positive: EU companies have come to China to stay. They are bidding on a long and stable presence in China. What EU businesses would like to see in the future is more transparency and predictability in rule-making, more openness by the authorities to business concerns, and more recognition of the positive role played by foreign companies in China—creating jobs, bringing technology and know-how, and helping to create better respect for the environment and social rules. Sometimes, foreign companies feel that their positive contributions to China are not sufficiently recognized.
Because the rules sometimes apply differently in different provinces of China, the business environment can be difficult to navigate. In particular, big companies that operate all over the country may have to adapt their business operations to the different locations where they have a presence. Companies often complain that there isn’t enough clarity in the way the rules are implemented in different parts of the country.
What would you say to a European entrepreneur thinking of starting a business in China?
A European wishing to expand his business into China should first ask himself, “Why come to China?” It is important to understand the purpose of doing business in China. Is it to produce and sell in China? Is it to produce in China for overseas markets or to export to Europe? Sometimes, investors don’t think about these basic questions. Do you want to conduct your business alone or with a Chinese partner? If you want a Chinese partner, why, and what do you expect from your partner—that is, what is the added value your partner should bring? In some sectors, it is compulsory to form a joint venture; while in other sectors it is open. It isn’t always better to go with a Chinese, and it isn’t always better to go alone—it depends on the company, the sector, and the business conditions. The geographic location is important: are you targeting the whole Chinese market or a part of it? China is much bigger than the European Union and conditions differ from province to province. We always advise EU companies to take time to reflect on the best business plan and to prepare it carefully. When planning to produce and sell something that contains high-technology, it is important to ensure the necessary IPR protections. If the company holds patents in Europe, are they registered and protected in China? Do you know how much registration costs, and how long it takes? We strongly recommend getting adequate IPR protection in place before starting a business in China.
I recall one case of a European company that sent a sample of its machine to a potential Chinese buyer. Several weeks later, it found the machine had been copied and was on sale in China. A good engineer had gotten access to the machine, duplicated the parts, produced and assembled the machine, and even registered for a patent in China. Sometimes companies don’t pay sufficient attention to registering their products and brands in advance.
Which sectors are most promising for future China–EU business ties?
High-tech in manufacturing still has a promising future, but European companies have even more potential and competitive advantage in the Chinese service sector. The full potential of the service sector is still not developed. In the financial sector—and in particular, insurance—there is huge potential: Chinese consumers need insurance for cars, for businesses, for life, pensions, and so on. Insurance companies in Europe have long experience.
In addition, Europe has a cluster of good construction companies for civil engineering and infrastructure—not only building, but also operating and managing, infrastructure.
Another sector where we Europeans are leaders in the world is environmental protection. This is a promising sector that will develop very rapidly in the coming years between Europe and China. Besides energy-efficient products, there are also services such as water treatment, cleaning, and filtering. The potential for environmental protection products and services is huge.
Relevant website
China Trade Partner: India
Interviewee: Mr. Madhav Sharma, Chief Representative
Organization: Confederation of Indian Industries (CII) in Shanghai
Briefly introduce the presence of Indian companies in China now.
Indian companies in China are quite diversified, actually. There are pharmaceutical companies, electronics, electrical equipment, automotive components, automobiles, steel, rubber, and, of course, IT. There are more than 100 Indian companies already in China and the number is growing rapidly. In the past year (2007 to 2008), 15 to 20 new Indian-invested companies were established in Shanghai alone. Most of these companies had done business with China before and decided it is much better to have a representative based in Shanghai. For example, one of these companies, an auto company, has certain quality standards in India and the suppliers in China were not able to match them. So, the company sent a team here to do sourcing, and at the same time, help the suppliers reach a particular level of standards that could benefit the company in the long run.
What are the main challenges facing Indian companies in China?
Some mention language as one of the main challenges. Documentation and other information is all in Chinese. The interpretation of the legal documents is very difficult. Apart from that, not much.
Which sectors currently represent the best opportunities for Indian companies in China?
The auto industry is one sector, and IT is another. Indian companies are also focusing a great deal on pharmaceuticals, also a very promising sector. India is strong in the healthcare sector and in related services such as clinical research and development. There are some hospitals in China that have approached leading hospitals in India to form partnerships. Food processing is another area of opportunity.
In general, do Indian companies see China as a threat or an opportunity?
Indian companies see China as an opportunity—our types of business complement each other. China is an opportunity for India. People are not talking about India versus China, but about India and China. When we talk to our China counterpart, we always say “India with China.” We have to take advantage of each other’s strengths, and that’s exactly what’s happening.
What lessons can be learned from Indian companies in China? Have any Indian companies failed in China?
Not a single company [has failed in China]. Most Indian companies first establish a representative office here. They want to understand the complexity and the challenges of doing business in China. It’s not that they come here, and tomorrow, they set up an office and do business. No, there is a whole learning process.
In terms of investment, Indian companies are investing more money outside the country than India is taking in as FDI. Indian companies have invested aggressively in Europe in the past, and now the same thing is happening in China. Some Indian multinational companies now have factories in China, Vietnam, Thailand, and Malaysia. For example, one Indian company recently acquired a company in Guangzhou [in China’s Guangdong Province]. The whole process took them at least 1.5 years to complete. They brought the board members to China to understand China. There is a proper due diligence, a step-by-step process. They are not coming here for short-term business; they are coming for the long term. Another example is an Indian TV company that is sourcing components in China. It established an office here and has already done US$3 million-worth of business. That’s how Indian companies are operating. First, they come and start their rep offices, then they sell their products here, then they say, “OK, it’s time to set up operations here.” Then they buy the land and set up their factories here. They take a gradual approach.
Are Chinese companies investing in India?
There are only a few sectors. There are a few companies, but they are mostly focused on consumer goods and IT, such as Haier, Huawei, and TCL. Apart from these, there are a few companies that have invested in heavy machinery as well. The Zhejiang provincial government visited India to talk with Indian companies about collaboration. That’s exactly what’s happening now. One of the largest oil companies in India has already signed a contract with Sinopec to form a JV to invest in a third country.
There is a knowledge gap between our two countries. The CII (Confederation of Indian Industries in Shanghai) is trying to bridge that gap through our newsletters. We’ve launched a monthly newsletter called China Pulse sent to our members by internet. It talks about the Chinese economy, China and the world, China and India, and our activities. We also launched Market Watch in China. We identified five sectors—automotive, textile, food processing, pharmaceutical, and energy. These sectors offer tremendous opportunities between the two countries. We try to create awareness among Indian companies to focus on these sectors. In terms of food processing, we are trying to attract suppliers of Indian processed foods, spices, and Indian tea to come here. In term of Indian tea, Tata Tea has established a company in Hangzhou.
What is your advice to Indian companies that want to come to China?
Our response to Indian companies is that, as a newcomer here, they have to do their due diligence. They should be absolutely sure about who they are getting as partners. Similarly, we tell the same to non-Indian companies: do due diligence before forming a partnership with an Indian company.
If you want to find out anything about an Indian company, even if it’s a small-scale company in India, you just go to its website and you will find out everything about it, including its audited financial statement. If you want to see its performance for the past five years, you can ask the company and it will send it to you. But it’s different in China. That’s one of the things we keep hearing, and one of the challenges Indian companies face— how can we conduct due diligence research here? Sometimes, they have to hire a consultant who can do a due diligence on a particular company. That’s one of the challenges Indian companies certainly have here.
What trends are shaping the future of Indian business interests in China?
The bilateral trade volume between India and China is now about U$5 billion. If you see the composition of import and export between the two countries, India exports more raw materials as iron ore, cotton, and so on, whereas China is exporting more finished products such as electronics and machinery. The challenge we now face, in order to expand our trade basket, is to see more value-added exports from India to China, to make it more balanced. In terms of investments, Indian companies are growing globally, and they are also looking at China. Some Indian companies are in the process of setting up full-fledged manufacturing operations in China. Another IT company is coming here, which is the fourth or fifth IT company in India. Again, more and more Indian companies will gradually set up operations here. Some Indian banks have already set up offices in Shenzhen and Shanghai.
What is your opinion about China’s future? Do you have any concerns about continuing to do business with Chinese companies?
I don’t see any issues. If you travel to the interior of China, you generally don’t see poverty; if you travel to any city, you will see that every city is developing very rapidly. China has now started to focus on the two critical challenges of IPR protection and environmental protection. The government has invested a huge amount of money in the construction of new airports and the upgrading of existing airports. You see the kind of infrastructure they have and the investment they have made in the energy sector. They are now making strategic investments in overseas markets of US$60 to US$80 billion over the next five years. They are also targeting the right places by focusing on Africa, which is a great opportunity. India is also focusing on Africa. Through China Pulse, we tell Indian companies that things are changing in China. China is reinventing itself every day, and every day brings something new. I don’t think anything will stop China.
Relevant website
China Trade Partner: Japan
Interviewee: Mr. Masaki Takahara, Vice President
Organization: Japan External Trade Organization in Shanghai
What is the general opinion of the Japanese about doing business in China?
They don’t know much about China. They get information from the media, but Japanese TV often broadcasts the bad side of China, such as environmental pollution, forced labor, unsafe food, and so on. Japanese are now paying increasing attention to China, as its economy has been growing for the last 10 years and it is our neighbor.
Does the Japanese business community see China as a threat or an opportunity?
Some people think that Chinese take our jobs, because many plants are transferred to China. But the business community in general views China as a very good opportunity. That’s why there are an increasing number of Japanese companies coming to China. Regarding the manufacturing industry, Japanese electronic companies are doing very well in China, and they supply not only to the Chinese market but also export to Southeast Asia and Europe.
What can your association, JETRO, do to promote mutual understanding between the two countries?
By promoting business relations, we enhance mutual understanding. This year, we sponsored the Shanghai International Film Festival, and 13 Japanese films were shown. We want to offer Chinese people a window to see Japanese culture and society, and film festivals offer such an opportunity. There are some Japanese organizations that promote tourism from China to Japan, but it’s difficult for Chinese to tour Japan as individuals. Chinese have to join an organized tour, which can be very expensive. The travel-related procedure should be simplified.
What trends are emerging in China–Japan education ties?
There are a lot of Chinese students studying in Japan, and the number is growing. One reason for this could be that the Japanese government gives scholarships to Chinese students, and Japanese universities are willing to accommodate them. Our birthrate is only 1.3 for each couple, and the percentage of old people is increasing, so Japanese universities are competing with each other to get students. Meanwhile, Japan is sending more students to China. Chinese students mostly study in Japan on scholarships, otherwise they face difficulties living in Tokyo, or in other Japanese cities where the cost of living is high. But Japanese students pay for their studies in China. They come to China to study new areas, which they think will make them more valuable as employees when they return to Japan. They also come to learn the Chinese language. More and more Japanese students are choosing now to stay and work in China. China is a country full of opportunities for Japanese.
What are the main challenges facing Japanese companies operating in China?
One of the biggest issues facing Japanese companies is being paid by Chinese companies. Chinese companies have a habit of delaying payment. Sometimes the Chinese companies disappear. In some areas, Japanese companies need to have a Chinese partner; sometimes, after they invest money, the company is taken over by the Chinese. This is a result of lack of business diligence on the Japanese side. I sometimes meet Japanese businesspeople who come to China after hearing that it is a great place to do business and who think, “Why not go there and make money?” They come to China without doing the due diligence on their partners.
What about protection of intellectual property rights for Japanese companies?
We have two members of our staff in charge of registration of property of Japanese companies. There is also an intellectual property group in Shanghai with more than 150 Japanese companies. We suffer a lot in this area. We have been trying to protect Japanese IP for many years. The best way to protect IP is to train workers, and keep computer security—for example, only allow a few staff access to key data.
What suggestions would you give to Japanese coming to do business in China?
Think it over seriously. Making money in China is not as easy as they think. When they want to have a partnership, they should do enough due diligence about the Chinese partner. Also, the Chinese business culture is different from Japanese culture. Another issue is human resources; the job turnover rate is very high in China. In Shanghai, after two or three years, employees quit to join another company.
Which sectors are more promising for future development?
China is an ideal country for Japanese manufacturers to set up factories because of its lower labor costs. Japanese companies used to manufacture in China and export back to Japan, or to Southeast Asia and Europe. Now they have discovered the potential of the Chinese market itself. Manufacturers are doing well selling to the Chinese market. This is reflected in the number of Japanese living in China. This year, the registered number of Japanese living in Shanghai is 48,000. We estimate that the real number is more like 100,000.
But the current problem for Japanese in China is that production costs here are rising. It’s very costly to have a factory in the coastal areas. Now, they are setting up factories in interior China or Southeast Asia. Japanese companies used to have a lot of investment in Southeast Asia, but after the financial crisis in 1997, investments moved to China. Now, they are thinking about going to second- or third-tier cities in China or back to Southeast Asia. It’s hard to say which is a better choice—to set up factories in Chengdu or Chongqing, or in Vietnam or India. The political climate is also important. After the 2005 anti-Japanese demonstrations in China, Japanese manufacturers thought they should avoid the risk of putting all their investment in China. I know one Japanese washing-machine manufacturer that had a production line in China and exported from here to the world market. They wanted to set up a new factory in the interior of China, but after the demonstrations, they built their new production line in Thailand. Also, China’s value-added taxes are getting higher.
Relevant website
www.jetro.go.jp/china/shanghai/
China Trade Partner: Mexico & Latin America
Interviewee: Mr. Rafael Valdez Mingramm, Vice President for Latin America
Organization: ChinaVest*
Do you think that Latin Americans generally have an accurate picture of China?
Not really. Even though Latin America has had strong historical ties with China—during the 16th and 17th centuries, trade between Mexico and the East Indies in spices, porcelain, and silver was substantial—it wasn’t until recent years that China came to our attention again.
As the Mexican economy is still too closely related to the United States and our cultural heritage links us to Spain and Europe, most Mexicans haven’t had a chance to visit, learn about, and understand the positive and negative effects of the Chinese phenomenon. I would say it is a combination of ignorance, uncertainty, and fear that still persists in most cases. For example, in my country, whenever someone doesn’t understand something, he or she generally says: “Esta en Chino!” (“It’s in Chinese!”)
This perception is changing, though. Over the last three to five years, the government, private companies, and many individuals living in China have made concerted efforts to strengthen communication and commercial relations.
Is China perceived by the business community in Mexico as a threat or an opportunity?
Unfortunately, most medium-sized companies still perceive China as a major threat. Some industries, such as footwear and textiles, have increasingly suffered tough competition from imported products from China, and therefore are pushing the government to enforce protective measures, review the system of tariffs and quotas in some sectors, and even to consider retreating from the WTO.
Large Mexican corporations and small entrepreneurs, fortunately, see China not so much as a threat and more as a big opportunity, not only to reduce production costs (outsourcing) but also to sell their products to China. In the last three years, companies such as Gruma (Maseca), Grupo Bimbo, and Grupo Alfa (NEMAK), among others, have made major investments in the region. In the same period, hundreds of young Mexican students and entrepreneurs have moved to China.
The online communication and information-sharing platform that we launched in November 2007 (www.latinoamericanosen-china.com) attracted 1,160 registered members within six months, roughly half in China studying or working, and half living abroad but interested in doing business with China.
What can be done to promote mutual understanding between Latin America and China?
First, we need to try to change our mindset and put in place long-term and sustainable solutions, rather than protectionist strategies. Chile took a different approach by signing a free trade agreement with China in 2005 that is having a positive impact on trade and cross-border investments in both directions. I am not necessarily suggesting that Mexico is in a position to follow a similar route, but we definitely need to find a way to avoid competition, specialize in high-tech, value-added products, and look for synergies.
Second, Mexico and China should promote more cultural, technological, and educational exchanges. Even though the governments of both countries have cooperated in these areas for some time, the private sector and civil society need to push in this direction as well. The Instituto Tecnologico de Estudios Superiores de Monterrey (TEC), one of Mexico’s leading educational institutions, has taken a leading role by bringing 60 Mexican students every semester to study at different universities in China. Such initiatives will hopefully incubate more Mexican entrepreneurs interested in doing business in China. Mexico also needs to have more cultural and business exhibitions in China.
What are the trade trends between Mexico and China?
Mexico’s total trade is about US$400 billion per year. Ninety percent of this trade is still with the United States, but Mexico’s second-largest trading partner is China. Imports from Mexico to China include synthetic fibers, raw cotton, steel, plastics, and electro-mechanical equipment, while China exports mainly household appliances, textiles, and chemical and high-tech products to Mexico.
Whereas other Latin American countries such as Brazil, Argentina, Chile, and Venezuela are increasingly supplying China with commodities such as copper, iron, and soybeans, Mexico and China still compete in a number of manufactured products that can generally be produced at a lower cost here. Again, Mexico needs to scale up in the manufacturing chain and find ways to collaborate and co-invest, benefiting from its unique location to produce and distribute products to the United States and Central America.
What investment trends are taking shape between China and Mexico?
Investment is still very limited, but examples are emerging. Gruma (Maseca) invested US$20 million to install a production facility in Shanghai to sell corn-based products to the Asian market; Grupo Bimbo completed a €9.2 billion acquisition of a baking company in Beijing in 2007; and Alfa’s subsidiary, Nemak, acquired two production facilities in Nanjing. There are a number of smaller investments in consumer-related industries: el Fogoncito, a famous restaurant chain, has opened its first branch in Beijing; and Televisa has signed co-production agreements with Hunan TV and Shanghai Media Group to produce and broadcast soap operas in China. Mexican wine companies and tequila producers are finding their way to the Chinese consumer as well.
How about Chinese investment into Mexico?
Even though China’s registered investment in Mexico is still very small, it is definitely growing. Lenovo is building a production plant in Monterrey; and the Chinese state-owned FAW Group Corp. and Grupo Elektra, a Mexican retailer and banking chain, both plan to sell Chinese-made cars in Mexico from early 2009. (The agreement calls for producing cars at a US$150 million plant to be built in the state of Michoacan by 2010.)
In other countries in Latin America, we have also witnessed a significant increase in Chinese investments. In Peru, China Aluminum Co. and other Chinese mining companies have acquired and invested in a number of mining assets; Baosteel has started its first overseas investment in a steel plant project in Brazil; and investments in land and agro-business in Brazil, Bolivia, and Argentina are also booming.
How fast is the growth of Mexican companies entering China?
There is no official data on the number of Mexican companies that have invested in China, or on the amount of investment, but it is definitely growing. Most Mexican companies are interested in exporting their products to China and selling through local retailers and distributors. A few companies have small procurement or representative offices in China to source materials to export to Mexico, or to market their products in China. There are still very few Mexican companies that produce in China.
In the last couple of years, a number of state governments have opened representative offices to help local businesspeople to identify business opportunities, find Chinese partners, and encourage Chinese investment abroad.
What generally has been the experience of Mexican companies in China?
Generally, it has been very positive, although it has taken longer for many of them to reach the desired results because adapting to local tastes and preferences, developing relationships with local suppliers, and finding the right employees are challenges that most of us tend to underestimate.
I am sure that there have been bad experiences as well, mainly with companies that didn’t take sufficient time to check references and conduct due diligence of their suppliers and business partners.
What would you advise a Mexican entrepreneur who was thinking of investing in China?
I would recommend taking the time to observe and understand business practices in China, developing strong local relationships, and (ideally) partnering with a local. Above all, I would say: “Be patient—doing business in China is much more complicated than it seems.” Also, I would advise them to try and pass the two-year learning curve, and to learn the language.
Which sectors are most promising for the future development of China–Mexico business ties?
In Mexico, there are a number of opportunities in tourism, infrastructure, agro-business (farm products), and mining. As the middle-income segment in China continues to grow and more Chinese travel overseas, there is a unique chance to promote tourist spots in Mexico. These might include beach resorts in Baja California, and nearby historical and cultural spots, serviced by direct flights between Shanghai and Tijuana. In the infrastructure sector, there are unique synergies between Chinese and Mexican construction companies for building ports. There are multiple opportunities as well in the automotive and spare parts industries.
Agro-business and mining are promising, as China is becoming a net importer of such commodities. Opportunities in China for Mexican companies and entrepreneurs are mainly in consumer-related products and services.
Relevant websites
www.LatinoamericanosEnChina.com
China Trading Partner: Nigeria
Interviewee: Mr. Badeji A. Abikoye, Trade Commissioner
Organization: Nigerian Trade Office in Shanghai
Do most Nigerians have an accurate view of China?
Yes, I think most Nigerians have an accurate view of China through three sources: (1) the political and economic roles China is playing in Nigeria, and in Africa in general; (2) information from the Chinese agencies in Nigeria, and the Nigerian agencies in Nigeria and China; and (3) the important flow of trade and investment between our two countries. Investment is a powerful tool for knowledge transfer, business creation, and partnership.
Does the Nigerian business community see China as an opportunity or a threat?
In one way, China is considered a good opportunity, while in another way it is considered a threat by some members of the business community—especially those who used to make a good profit from selling cheap products. They lost business when Chinese businessmen came and offered cheaper, more affordable products for the Nigerian market.
What can you do from your position to promote mutual understanding between China and Nigeria?
First of all, there should be more exchange of information. Second, more conferences, seminars, and other political and economic activities should be organized by the two sides. The bilateral relationship between China and Nigeria has been growing dramatically in the last five years. Since 2001, tourism and trade have been boosted. The bilateral trading relationship is in favor of China.
What are the major trading items?
China exports to Nigeria mostly consumer products, light industrial products, machinery, building materials, and motor vehicles—especially motorcycles. Nigeria exports to China mostly crude oil and agricultural products (sesame seed and cocoa products)—mainly raw material products.
In which main sectors and industries do Nigerians invest in China, and vice versa?
China invests mostly in telecommunications and Chinese IT products. Chinese also invest in service industry businesses in Nigeria, such as restaurants. The investment flow from Nigeria to China is still very small—mostly in logistics, warehousing, and shipping.
What future trends do you expect to change the terms of exchanges of goods and investment?
I expect changes in the sectors of petroleum, manufacturing, and tourism. Nigeria allows foreign companies to invest in petroleum instead of merely doing petrol trading. Tourism is another area that can be further developed.
How fast is the influx of Nigerian companies into China?
It’s difficult to know. In the city of Guangzhou alone, there are around 20,000 Nigerians working in trading, and the number is growing. We have a steady stream of visitors enquiring about how to open offices and start businesses in China. From these enquiries, I can say that there is substantial interest among Nigerians in investing in China.
What has been the experience of most Nigerian companies in China?
In Guangzhou, we have received some complains against Chinese companies. The main problem is that Chinese companies sometimes don’t produce according to the contract.
What advice would you give to Nigerian entrepreneurs coming to China to do business?
First of all, know the rules and regulations and be sure to comply with them. They must know all the government resources and incentives available in order to operate under the most favorable business conditions possible. We ask them which province they want to establish their business in, and to explain their specific area of interest. We normally don’t encourage people to set up a business in which they can’t expect a quick return on their investment. We also advise them to take part in the China International Fair for Investment and Trade, held every fall in Xiamen. There, Nigerian companies can meet with their Chinese counterparts.
Looking ahead, which business sectors are emerging as the most promising for developing the China–Nigeria business relationship?
The areas of manufacturing, energy, tourism, and infrastructural development. Chinese are doing a lot of work in infrastructure projects in Africa. We also need power generation technology from China, as well as consumer goods. We should encourage increased trade.
Relevant website
China Trade Partner: South Africa
Interviewee: Mr. Vika M. Khumalo, Consul General
Organization: South African Consulate in Shanghai
Do you think South Africans have an accurate picture of China? How is their perception changing?
The perception and understanding of China among most African people dates back to the colonial period, during the time when South Africa and most African countries were going through liberation struggles. South Africa sent some of its military people for training to China. There has been a shift, from China being a brother in the liberation struggle, to China becoming a major trading bloc. As one of the developing countries, there is a very strong feeling that China is our friend and equal partner, not a nation that is going to dictate. The trade flow and volume between the two countries has grown exponentially over the past 10 years.
Is China perceived by the business community in South Africa as a threat or an opportunity?
We see China as more of an opportunity. China’s economic growth and the Chinese market present South Africa with enormous opportunities—not only for natural resources to enter this market, but also other South African products. Whatever negative perceptions exist, they are overshadowed by the opportunity that doing business with China presents.
What can be done to promote mutual understanding?
There is always room for improvement in any relationship, especially between nations. The best methods we have identified to enhance the relationship are people-to-people connections such as educational exchanges, institutional linkages, and cultural exchanges. That is another area for improvement. We have sent cultural groups to perform in Hong Kong, Macau, Shanghai, and Beijing. And China has also begun to send groups to South Africa. Some of our universities have already entered into some relationships with their counterparts in China. That’s a good start. Another avenue is sporting activities. We haven’t engaged as much as we should with the Chinese in sports. The other area is to encourage R&D collaboration. There could be more collaboration in R&D because we do have some areas of common interest.
What trends are under way concerning trade between South Africa and China?
South Africa has a huge trade deficit with China, as do many other countries in the world. We are working on that. South Africa has mineral commodities; lots of natural resources. We would like to continue trading these with China. However, we want more value adding to be done in South Africa; this would assist us in creating more jobs, and providing more skills development and technology exchange. For example, South Africa also has a wine industry. Wine consumption in China is growing at 20% every year, which also presents a good opportunity for us to enhance our expertise in the wine sector. We also export citrus fruits and other agricultural products to China. There is a long list of items, but it’s not long enough to offset the balance of trade yet.
China exports machinery, textiles, chemicals, and so on to South Africa. It has also now begun to sell cars to us. China hasn’t yet begun to assemble and manufacture out of South Africa. The prices of Chinese cars are more competitive.
How would you characterize the flow of investment from South Africa into China, and what changes do you think will occur in the future?
South Africa has invested in a number of sectors in China. For example, SASOL is investing in coal-to-liquids plants; and Miller SAB, whose roots are South African, now operates a significant number of breweries here. We also have other companies in road construction and media, such as MIH, as well as smaller companies in sectors from manufacturing to services.
And what trends can we expect in terms of Chinese investment into South Africa?
The ICBC (International Chinese Banking Corp.) just invested over US$5 billion in the acquisition of 20% of the shares of one of our largest banks, Standard Bank. There are other investments in other sectors—for example, mining, manufacturing, textiles, of course, as well as in sectors such as electronics, agro-processing, and smaller chemical industries. Chinese are also entering the services sector; we are seeing a growing number of Chinese construction companies. Mining is also growing, especially diamonds, gold, and chrome. We would like to see more investment in agro-processing, the energy sector, and the hospitality industry.
What is the experience of South Africans companies generally in China?
South African companies have generally had very good experiences here, but they have also faced ups and downs and challenges. Some companies have had to deal with IPR issues and bureaucracy . . . the usual problems one sees anywhere in the world.
What would you advise a South African entrepreneur thinking of coming to invest in China?
The first thing I would advise them to do is to find a Chinese partner who has good relationships in business and government, and who is reliable and with a good reputation. You need someone to hold your hand. It could also be a good idea to work through some of the business consulting companies in order to get the best professional assistance. A good partner can give you a competitive edge. Do your research and due diligence before you set up or select your partner. That’s critical. Don’t pick up a partner from the street. These are some of the things to consider. Also, location is very important.
Which sectors and areas are most promising for future development?
Mining—especially mining coupled with value adding. If you want to do mining in South Africa, we now encourage you to add value to the raw materials before they are exported. There are a number of opportunities in a wide range of sectors, from agro-processing to infrastructure development.
The other area is construction. South Africa is going through a construction boom, and this presents opportunities for a lot of Chinese companies. We are also focused on reducing poverty, so we favor investment in sectors that will benefit everybody and create new jobs. Tourism has huge potential. We would like to attract more than two million tourists from China to South Africa by 2010.
We see ourselves as the gateway to Africa. About 70% of what Africa buys comes from or through South Africa. We do most of our trade with Africa. Currently, South Africa is China’s largest African trading partner.
China Trade Partner: United States
Interviewee: Ms. Brenda Lei Foster, President
Organization: American Chamber of Commerce in Shanghai (AmCham Shanghai)
Do you think Americans in general have an accurate picture of China? How has it changed?
I think that most Americans’ impressions of China are colored by the media. Many Americans have never had the opportunity to travel to China and their perceptions are based on what they read or see on TV or hear from others. Luckily, there are an increasing number of good books, articles, and films that cover China. We all know how travel broadens the mind, and nothing could be truer of travel between the U.S. and China—with the opportunity it offers to build realistic and informed views of each other’s countries. Tourism, educational exchange, and business travel all contribute to the balance of payments in both countries and build cross-cultural awareness and understanding. The more delegations that visit China, the more Americans can learn about China. I actually consider those Americans who visit China as ambassadors who can carry the message back to the U.S. as to what China is really like.
AmCham Shanghai does everything it can to contribute to this understanding through our programs, publications, and briefings in order to provide Americans with an accurate picture of China. Overall, however, Americans need to learn more about China.
Is China perceived as a threat or as an opportunity by the business community in the U.S.?
China is definitely perceived as an opportunity. This year marks the 30th anniversary of normalized U.S.–China trade relations. Over the years, we have established a solid relationship, with trade growing steadily to an all-time high of more than US$350 billion and an unprecedented level of dialogue between our governments. China is now the U.S.’s second-largest trading partner and our third-largest export market. Nearly every state in the U.S. has recorded triple-digit growth in exports to China since 2000, outpacing exports to the rest of the world. In addition, statistics from the U.S. Bureau of Economics in 2006 indicate that U.S. companies in China repatriated profits of US$4.5 billion back to the U.S. If we look at Shanghai alone, in 2007 U.S. companies invested in 4,700 projects which resulted in US$31 billion in trade between the U.S. and Shanghai.
It is also important to note that, based on our research, 75% of American companies that have operations in China are here to serve the Chinese domestic market or other markets abroad. Less than 25% are manufacturing products for export back to the U.S.
Clearly, the U.S.–China relationship is not without its challenges. Unfortunately, in the last year, China has been on top of American minds for a number of less-than-positive reasons, including food and product safety and quality, human rights, security issues, the trade deficit, and IPR. We found on our recent Washington, DC Door Knock that discussion of the trade deficit brought out a protectionist sentiment that is fueled in part by a constituency in the U.S. that is worried about the downstream impact of China’s monetary policy on the jobs of U.S. manufacturing and agricultural workers.
But, we have seen this protectionist sentiment on both sides of the Pacific. China’s drive to promote “indigenous innovation” is underpinning government policies and standards, government procurement, and other areas that threaten to exclude U.S. business from the Chinese market. AmCham Shanghai’s business climate survey found that the drive for domestic innovation has affected U.S. companies somewhat negatively—in particular, policies regarding the import of technical and industrial equipment, as well as M&A policies protecting key enterprises, technologies, and brands.
I personally feel that defending and preserving the openness of the trade relationship should be the core political commitment of both the U.S. and Chinese governments. It is important that the U.S. realize that we are part of an integrated international economy and that this integration benefits the U.S.
What can be done to promote mutual understanding between the two countries?
The Strategic Economic Dialogue (SED) established by President Hu Jintao and President George Bush in 2006 is an example of high-level bilateral dialogue that has focused on transformational issues and changes. It has delivered real achievements, including in food and product safety and an aviation agreement. It provides for multi-agency discussions of the challenges affecting our two economies and seeks input from the business community. The structure itself has been emulated by both the EU and Japan as they develop their own strategic frameworks. Most importantly, the SED has created a culture of cooperation. It has proved to be more productive and positive in addressing concerns than Congressional legislation that might be viewed as being punitive and could elicit protectionist reactions.
Organizations such as AmCham Shanghai are committed to working with the U.S. and the Chinese governments to improve the bilateral business environment and to create opportunities for our member companies. As the oldest frontline organization for U.S. business in China, we act as a bridge between American business interests and the Chinese government on important commercial issues, whether it be at the national, provincial, or municipal levels. Our goal is to foster dialogue and affirmative engagement.
AmCham Shanghai also puts considerable effort into bringing first-hand information to the American business community, through our monthly magazine, Insight, our annual China Business Report, an annual White Paper on Doing Business in China which is done in collaboration with AmCham China and AmCham South China, and our new report on China’s Manufacturing Competitiveness done with Booz & Company. Our China Business Report highlights the challenges and opportunities facing companies doing business in China; the White Paper, which represents the interests of more than 9,000 U.S. companies in China, provides recommendations to both the Chinese and the U.S. governments; and our benchmark manufacturing competitiveness study tracks and identifies key trends and challenges that U.S. companies must face in order to stay competitive. In general, this study clearly highlights the need for innovation and the integration of the global supply chain.
Finally, one of the most important areas for increasing mutual understanding between the U.S. and China is in the area of Corporate Social Responsibility (CSR). American companies bring many best practices to their China operations. CSR programs are seen as an integral part of delivering business prosperity and sustainable economic growth. AmCham Shanghai itself supports partnerships between business and the Chinese community through our CSR Program, which has five major focuses: community outreach, philanthropy, environmental stewardship, corporate governance, and employee health and safety.
What investment opportunities are there for U.S. companies in China? And, for China in the United States?
With regard to investment opportunities for U.S. companies in China, businesses with extensive expertise and experience in areas that address China’s development agenda—such as financial services, new and high-tech industries, business process outsourcing and logistics, environmental technology, efficient energy and clean-tech technologies, healthcare, education and technical training, consulting, rural development, and other strategic sectors—will be given tax incentives and commercial opportunities. The service sector, with a target of US$400 billion by 2010, will be an increasingly important driver of GDP production, and one should not overlook the growing consumer demand in China and the opportunities it opens up in the retail sector. The policy shift in China away from high energy and resource-intensive industries toward higher-value-added, high-tech industries also offers opportunities for U.S. companies.
Currently, the top five U.S. exports to China are computers and electronics, transportation equipment, chemicals, waste and scrap metal, and machinery, except electrical.
Regarding investment opportunities for China in the U.S., I would highlight the example of Haier, which is one of China’s “national champion” companies and a leading household appliance manufacturer. It entered the U.S. market in 1999 when it invested US$40 million in a 110-acre manufacturing facility in South Carolina employing over 300 people. Haier currently dominates the U.S. mini-refrigerator (dorm room refrigerators) market segment and is targeting the full-size refrigerator segment after the debut of its American-designed full-size model.
There are a growing number of Chinese companies interested in either investing in or sourcing from the U.S. It is important to support and nurture these partnerships to the mutual benefit of both countries. In recent years, China has shifted from being a recipient of foreign investment to being a global investor, investing US$18.7 billion abroad in 2007, including shares in Blackstone and Morgan Stanley. The level of outward FDI is expected to increase significantly in the near future, with predictions of up to US$37 billion as Chinese companies go global, attract international talent, secure resources, acquire technology, and leverage their huge domestic market and strengths in manufacturing.
AmCham Shanghai regards the acquisition of American companies and assets by Chinese corporations as a natural element of China’s integration into the global economy and as something that deepens the U.S.–China trade relationship. Chinese FDI brings economic benefits to the U.S. economy, including job creation, promotion of research and development, and enhancement of U.S. exports to China, just as investment from other countries do.
What in your opinion, are the main challenges of doing business in China?
According to our 2007 China Business Report, U.S. companies continue to be optimistic about doing business in China and see it as a strong investment destination, with many planning to expand throughout the country. Seventy-five percent of companies view China as a key strategic market in their overall global strategy.
Despite the positive business outlook and improved operating margins, the top five challenges facing U.S. business that were highlighted were human resource constraints, unclear regulations, inconsistent regulatory interpretation, lack of transparency and bureaucracy, and intellectual property rights. The rankings of the major perennial operational challenges have scarcely changed in the last three years and are persistent business challenges dating back to 1999. Several of our businesses also agreed that China is losing its competitive advantage due to rising costs, with the biggest financial impact coming from price pressure from competition and from major customers, salaries and wages, changes in commodities and raw material prices, distribution costs, tax expenses, and real estate cost inflation.
What is your advice for Americans contemplating starting a business in China?
The six Ds: due diligence, due diligence, and due diligence. You need to know the market, the laws, rules and regulations, the culture, and the people. It is important to understand that how you do business at home doesn’t necessarily translate to how business is conducted in China. China is an incredible, dynamic, and complex market that requires a fast learning curve and the ability to be flexible. China is also not for everybody. It is still a country in transformation. Someone once said, if you can exist in ambiguity, you will do very well in China. If not, China is not for you.
I encourage everyone to come to China to see for themselves. Come and look at the market—at its benefits, opportunities, and potential—but note that it doesn’t come without risk and challenge.
How do you see the future of China in terms of business and trade?
I am very positive about China, but I feel its success will depend to some extent on how it balances its domestic economic and social agendas as it emerges as a global stakeholder. It will need to embrace a mindset that includes a commitment to the WTO principles of transparency, national treatment, non-discrimination, and market access in order to improve the quality of economic growth, while at the same time focusing on an innovative society based on open markets, IPR, the rule of law, and a sound financial infrastructure. Clearly, tackling the challenges articulated by China’s leadership of energy efficiency and security, sustainable development, environmental protection, healthcare, and income inequality are issues that need to be resolved. Given China’s rapid ascent over the last 30 years since the opening of economic reform, I have no doubts that they are up to the task.
Relevant website
* Rafael Valdez Mingramm is also co-founder of LatinamericanosEnChina.com.