Reversing the China Syndrome

Standing in the burnt orange dining-room of Kakadu, his Australian-themed restaurant in Shanghai, Sing reflects on the recent influx of his countrymen to China.

A few tables away, Chinese diners stab clumsily at yabbies with their forks, laughing at the novelty in the way westerners do when they fumble chopsticks.

Sing says his Chinese ancestors were among the migrants lured to the Lucky Country by the promise of gold more than 150 years ago.

About eight years ago he made the same journey, but in reverse, joining a wave of Australians looking for opportunities in a new frontier.

Instead of gold, the prize is to 1.4 billion customers.

“My family moved out to Australia in the 1850s thinking the streets were paved with gold. All they were thinking about was making money,” Sing says.

“Some Chinese people made it big, some didn’t.

“It’s the same for my generation. A lot of Aussies are moving out here to set up businesses and it’s working very well for some but not everyone.

“It’s like a reverse Gold Rush.”

The flow of local businesses into the Middle Kingdom is underpinned by a convincing set of statistics: a fifth of the world’s population and 7.4 per cent annual growth of a $9.2 trillion economy.

Never before in its 4000 years has China been so open to western investment and so hungry for its expertise in driving the biggest shift from poverty to middle class in history.

The rapid transformation has made it Australia’s number one trading partner. In a sign of how China’s economic tentacles have spread across the globe, a further 122 countries count it as their most important trading partner.

While there is no doubt China has the dazzle factor, opinion is divided about how much opportunity is left for Australian companies as growth slows slightly from highs of 10 per cent and as other countries turn their attention to the shining light of global economic growth.

“We have the problem of the dragon slayers and the panda huggers, ” says Alan Morrell, senior trade commissioner at Austrade in Beijing.

“There are some people who are incredibly negative and very suspicious about doing business here.

“They think it’s too confusing and that you can’t trust people, and they have their eyes closed to a lot of opportunities.

“There is another group that is overly positive and probably see the market in too simplistic terms.

“The reality is probably somewhere in the middle.”

Finding exactly where the balance lay was at the heart of a recent mission to Shanghai and Beijing organised by the Australian Institute of Management WA, in conjunction with AustCham, a China-based peak body for Australian businesses.

Eleven WA businesspeople from private and public companies participated in AIM WA’s eight-day Global Leaders Program to talk to Australians trading in China.

The Australians collectively have hundreds of years experience navigating the country’s legal, political, banking, industrial relations and regulatory environments.

AIM WA chief executive Gary Martin says the program, which will be offered to Australian business people annually, is as much about finding opportunities as identifying the challenges that will be encountered.

“Everyone we talk to wants a slice of the Chinese market, ” Martin explains.

“We’re finding that the way to penetrate the market is to establish strong networks on the ground in China because you can’t do it from afar.”

There is a 30sqkm area in Shanghai to which WA owes its current standard of living — the Baosteel factory.

Nowhere else is China’s reliance on WA more apparent than at the Government-owned industrial behemoth.

Baosteel is the leader among the country’s 2500 steel mills, which collectively purchase more than 400 million tonnes of Pilbara ore each year.

When the AIM WA delegation visit, machines are busy pummelling the molten ore, kneeding it back and forth like pizza dough into rolls of steel.

It’s a schedule that has been repeated relentlessly over the years and is set to continue for many more as China prepares to transfer another 300 million people — equal to the population of the US — from rural towns to cities.

Peter Arkell, chairman of the Global Mining Association in China and managing director of Australian recruitment firm Swann Global, says a lot of the new apartments, roads, infrastructure and offices needed for this social transformation will be formed from WA minerals.

“The resources connection between WA and China is one of the great commercial relationships in the world’s economy, ” he says.

While China is the world’s biggest producer of coal, gold, rare earth magnesia and low-quality iron ore, difficulties in developing projects means there are only five foreign exploration companies in China.

The major opportunity for Australian companies looking to do business in China is in what Arkell calls our “sweet spot” — the service sector.

That is, in the manufacture of mining equipment, in trading, engineering, geology, geotechnical services, metallurgy, environmental science, banking, the law and in recruitment.

Arkell says Australians already have a strong presence in the field but that the high calibre of local professionals should not be overlooked.

But they won’t necessarily come cheap — local workers with international experience overtook western expats as society’s highest-paid workers about five years ago.

M1NT nightclub, found on the 24th floor of a Shanghai skyscraper, throws into sharp focus the wealth accumulating in China.

When the AIM WA delegation visits the club it is a lesson in opulence.

Baby sharks lurk in a giant tank, close to lounge suites which can be rented at a minimum $715.

Sulky Russian glamazons watch firecrackers shoot from their cocktails and the full moon peers through the window, seeming to dare M1NT’s new breed of sophisticated local and expat professionals to outlast it.

That new social breed is a development not lost on the Australian purveyors of luxury goods, especially in the food sector, where a number of toxic scares placed a premium on quality produce.

Elders has been serving meat to the likes of the Shangri-La, Ritz Carlton, Hyatt, the Westin and the Hilton, as well as many high-end restaurants, through its Fine Foods division since 2004.

Shanghai-based Craig Aldous, the general manager of Elders Fine Foods, says the market requires a bit of patience.

“In terms of a healthy return on capital invested most companies should take a longer term view than they would normally take back home, ” he says.

“To get where Elders is today has taken a lot of investment but the reward is access to a high growth market with good long term returns.”

Clearly it is a field where mining magnate Andrew Forrest sees potential. His agreement with Elders to pursue a deal for the live export of cattle to China is a proxy investment on the country’s growing middle classes.

Having ridden the iron age, Forrest predicts China could spark a decade-long boom in agriculture.

He plans to act as a trade facilitator by using his extensive government and business contacts in China where his Fortescue Metals Group expects to do business worth up to $20 billion this year.

Quanxi is a word you will hear often in China if you are in business.

The literal translation is “relationship” and it refers to the dynamic of conducting business through extensive networking.

It has its origin in the historical fact that for generations the Chinese could not rely on the courts to settle disputes.

They attempted to mitigate risk by ensuring the trustworthiness of potential business partners.

Quanxi has evolved over time.

As one businessman explains, traditional lunches involving 27 courses and copious amounts of the finest Chinese liquor have now been replaced by four courses and a soup.

Andrew Whitford, the head of Westpac Bank’s greater China desk, believes the focus on quanxi is sometimes overplayed, claiming it is simply a more extensive version of western networking.

Nonetheless, it created some crucial differences with western business practices most notably by pushing out the time it takes to do a deal.

“The Chinese will only ever do business with you once they know and understand you and know they can trust you, ” he says.

Westpac’s decision to enter the Chinese market seven years ago is testimony to its faith in the country’s potential, given it was Westpac’s first offshore branch since its withdrawal from offshore markets in the early 1990s.

Whitford’s brief was to set up a branch in Shanghai with a focus on supporting clients with trade flows between China and Australia and New Zealand, including Chinese corporates and institutions.

He says China still has much to learn from Australia’s banking system, including the securitisation and bond markets, which potentially opens up huge opportunities for local financial institutions.

“On the retail side, there is a huge, huge opportunity for Australian companies in the wealth and pension market, ” he says.

“One of the biggest issues China’s going to face going forward is the lack of security around the social security network.

“They recognise they need to have a much more sophisticated pension and that Australia has the leading world’s best practice.”

AIM WA delegate David Pettit, the managing director of Advocate Wealth Management, sees opportunities for Australian companies in health and wellness, aged care and professional services.

“With the inverted family tree structure that exists in China due to the one child policy, their ‘V’ shaped family tree creates challenges and opportunities that will need to be addressed, ” Pettit says.

“Consider that due to the one-child policy, a newly married Chinese couple may have up to four parents and eight grandparents that may be reliant on them as life expectancy and mortality rates evolve.

“As the aged care requirements become prevalent, the financial burden on that couple cannot be ignored.”

Fellow delegate Daniel Brockway, from WA-based SRG Corporate, believes even small Australian businesses have a chance at cracking the market.

“If you have a unique intellectual property or business concept, there is a massive market in China to experiment in and have a go, ” he says.

“Of course, big businesses will have an advantage in any foreign market initially, however if you get things right in China, a sole-trader or joint venture business could become a big business very quickly.”

The bullet train shoots out of Shanghai and the six-hour, 1300km journey to Beijing begins.

Some of the 236 cities in China that are already bigger than Perth flash past the window with monotonous regularity.

Half-built clusters of glass monoliths tower over deserted streets.

Could they be the infamous ghost cities of China?

The fabled evidence that China has over-reached on its long march to urbanisation?

Not so, according to Peter Duncan, chairman of HASSELL Architects, who has lived and worked in Shanghai and Hong Kong for 20 years.

He says the Chinese build towns the way we knit jumpers for children.

“If it’s a bit bigger than it needs to be right now they will surely grow into it, ” he says.

HASSELL Architects, a 75-year-old Australian practice responsible for such Perth buildings as 140 William Street and Fiona Stanley Hospital, currently has five studios in China.

Duncan says Australian architects have developed a well regarded niche in China — one built on environmentally aware designs.

It’s a niche he believes Australians have to themselves for a while. But competition is barking from every corner.

“Things are changing without a doubt, it’s becoming far more competitive, ” he says.

Duncan says his firm operated in China from a base in Hong Kong for many years until 2003 when regulatory changes allowed it to establish independently as a wholly owned foreign entity on the mainland.

He says there have been many cases of failed joint ventures, and while issues were slowly resolving he believed it was safer to avoid the arrangement.

Another key piece of advice for Australian companies was to consider setting up in the so-called second and third tier cities, instead of Shanghai and Beijing.

“At this point, in 2014, China is the most open it has been in its 4000 years, ” he says. “And it will only become more open. The outlook is very strong.”

KIM MACDONALD TRAVELLED AS A GUEST OF AIM WA