CHINA - A LAND OF VAST TRADE OPPORTUNITIES

August 24 2018

On 21 December 1972, one year after Gough Whitlam’s historical visit to China, Australia and China established diplomatic relationships. Forty-three years later, on 20 December 2015, the China Australia Free Trade Agreement (ChaFTA) entered into force. Australia’s exports to China have since surged over 50%. Under ChaFTA, over 95% of Australian products will enjoy duty free when being imported into China from 1 January 2019. This is expected to further enhance Australian exporters’ competencies in China and boost export to China.
 
However, China is a diverse and fast moving target. The changing economic landscape in the global market is adding complexity for Australian businesses’ engagement with this second largest economy in the world and Australia’s number one trading partner.  What are their implications for Australian businesses? What are the challenges and opportunities? How do Australian businesses tackle the complex situation and thrive in China?
 
Charisse Gray raised these questions at her recent interview with Sara Cheng, Head of China Practice, NSW Business Chamber/Australian Business Consulting Solutions.  Sara is a highly respected and widely recognised China business specialist in Australia, who was the pioneer in introducing the opportunities of China’s Five Year Plan and China’s 2nd and 3rd tier cities to Australia over a decade ago. She is also actively involved in the bilateral business community, serving as Vice President of the Australia China Business Council in NSW over the past 5 years, is Asia Literacy Ambassador and worked on the City of Sydney’s Chinese New Year Advisory Board.
 
Charisse: Given the recent bilateral relationship being strained, and the current trade war between US and China, what are your thoughts on the outlook of the economic relationship between Australia and China?
 
Sara: The bilateral relationship seems to be strained on the surface, especially in the space of the diplomatic and political world. In the business world, Australia’s export to China grew by 37% in 2017, the largest surge since the signing of ChaFTA. Australian wine export to China grew by 61%, the highest among its export to all markets. Business sense talks here.
 
In the short term, the sensitive relationship does defer some business decisions. However, from the long-term perspective, what has underpinned the two decades of economic honeymoon between the two countries still exists, and is getting stronger.
 
 
China needs our supply of agricultural products, mining resources, advanced technology and services, and will keep Australia as a key supplier due to our competitive  advantage in these fields in the global market. Vice versa, we need China. Over 80% of manufactured goods imported into Australia are from China. Our people enjoy the benefit of low cost provided by China’s scale of production.
 
China has been our number one trade partner for twelve consecutive years, and contributed one fourth of Australia’s global two-way trade which represents around 40% of Australia’s total GDP. We are one of the few OECD countries which are on trade surplus with China. The co-dependency exists and will stay for a long time.
 
As to the impact of trade war between the US and China, we have noticed some Chinese businesses start to eye Australia as a backup of supply. A few Australian businesses are looking at the option of moving partial production from China to Australia, and then exporting to the US so to avoid the loss from the trade war between the US and China; and leveraging the changing landscape to rebuild their production capabilities.
 
Charisse: This is promising and interesting. With this backdrop, what are the key China opportunities for Australian businesses?
 
Sara: In the trade space, in the short to medium term, Australian consumer goods, especially food and beverage, health supplements, cosmetics, high-tech, mining resources, education, and tourism will keep enjoying the benefit brought by the growing China market. On a longer timeline of 5 to 10 years, services, especially personal growth service and entertainment,  specialised training programs, unique and tailored consumer goods, most advanced bio-technology, high-tech and financial services will enjoy a huge, growing and diverse market in China.
 
In the investment space, unique resources, and the most advanced technology are always chased by Chinese investors.
 
Charisse:  Sara, you have worked on the frontline of bilateral trade for over 20 years. What challenges do Australian businesses face in China, and what common mistakes do Australian businesses make in dealing with China? Is there a formula for success in China?
 
Sara: I can share with you a tedious list of challenges such as IP protection, complex regulations, language, etc. Among the challenges we all know, consumer preference, speed to work with the market, and business practice are my top picks.
 
I would like to elaborate these challenges a bit.
 
You need to have real in-depth knowledge of your target Chinese customers. Assumption does not work in cross-border trade. Listen to them and respond to their needs in your daily business operation: product development, marketing approach, distribution channels, and daily communications.
 
China is also a fast moving target and works at its own pace. Your prospects may not contact you for six months, but once they order the goods they hope it was shipped yesterday.
 
Chinese business people usually do not check emails at work as often as we do. Phone calls do not work well either. Instead, they may WeChat you at 11.00pm when you are just in bed or early Sunday morning when you are jogging, and expect you to get back to them within five minutes regarding a price list or a product ingredient. Also, the negotiation of a deal seems to take forever. Sometimes they just stop communicating and then come back six months later for an urgent order. It is just different. To succeed with China, you have to work in this mode, or find a way to deal with the situation and not get frustrated.
 
Talking about common mistakes, with my background of having assisted over 300 businesses including some Australian iconic brands myself, and leading the China Practice to work with over 150 businesses each year, I have seen too many Australian businesses jump into an airplane just to explore the market by meeting with a contact’s contact in China. Mandarin speaking and living in China does not guarantee that person is a client or a potential business partner. Proper research and systematic approach to building the connection is required.
 
Also, I suggest businesses build a strong financial position and some brand credentials in Australia before they go to China. Exploring the China market is a costly journey.
 
Years ago, my colleagues and I co-authored a book Engage China-The Realities for Australian Businesses. The success formula identified then still applies today: do your homework before you go to China, be nimble and flexible, work on the fast-paced China clock, offer the best breed, and keep the competitive edge through a streamlined operation if you are a Small Global Enterprise.
 
Charisse: You mentioned intellectual protection as one of the challenges in China. What proactive actions should Australian businesses take to minimise the risks of IP infringement in China?
 
Sara: From the legal perspective, registering your trademark in China as soon as possible because China works on a “first-filing-gets-the-trademark” system. So do it today, even if you plan to work on the China market in five years’ time.
 
From a commercial perspective, select reputable business partners, bundle the interest with your business partners, carefully select and market your official distribution channels, etc.
 
Also, please do some research and identify the most relevant class and subcategory for trademark registration. Success rate for trademark registration in China was as low as 57% last year. I am really proud my team’s success rate is 96% for our clients.
 
Charisse: Daigou, where a person outside of China purchases commodities for a customer in mainland China, and cross-border ecommerce, have boomed in the past couple of years. Any insight to share with us on this?
 
Sara: There are over 800 million cross-border ecommerce end customers in China and between 70,000 to 100,000 Daigou operators in Australia. Daigou is estimated to contribute over 800 million in exports to China last year. It is a substantial channel especially for dairy products, health supplements and skincare.
 
However, it is also a messy and challenging channel, dominated by individuals and new Daigou platforms. Businesses without a clear China strategy may risk losing brand identity and pricing control.
 
China recently started building 22 new cross-border ecommerce pilot zones throughout China to boost sales through this channel, while looking for ways to minimise tax evasion and fraudulent contact.
 
We have been watching this space closely and selecting reputable partners to work with. It is a channel for small business to test the market, for major brands to distribute associated brands, and for highly regulated products to be distributed into China market.
 
For exporters with scale production, a more comprehensive approach incorporating both online and offline channels is recommended.
 
Charisse: To assist Australian exporters, the Chamber put in place the Export Growth China program 3 years ago. Can you please share with us the journey, challenges, lessons and achievements to date?
 
Sara:  Export Growth China program started as a marketing oriented program to promote Australian brands with the initial funding from an Asian Century Engagement grant and Chamber subsidy. The program has evolved from a single marketing package to a series of comprehensive multi-tiered, industry- focused program packages. Over 200 businesses including 40% non-exporters have been assisted through the program, and over A$11.5 million in export sales were tracked during participants’ six months rotation on the program. The actual sales are multiples of this tracked value. A sales network of over 8000 Chinese importers and distributors were built for Chamber members. It is very successful in promoting Australia and Australian brands in China, generating leads and sales for exporters, and creating job opportunities and tax income for Australia.
 
It was a challenging journey for us at the initial stage though. The Chamber had successfully assisted large and medium businesses to engage with the China market for twenty years before we added this program to the successful and commercial China consulting service.  However, Export Growth China program participants are mostly in the ‘S’ sector of SMEs, who do not have as much resources and experience as our typical consulting clients, and require a handholding approach at low cost. While we were building up a program team in two countries, setting up working process, refining the program constantly to meet participants needs, developing distribution channels and partnerships in Australia and China, recruiting and servicing program participants, monitoring the fast-changing regulatory environment and market conditions in China, we also needed to provide extra assistance to guide SMEs on doing business with China. Small things like WeChat account setup and training is part of the many tasks beyond the program we do for program participants. Nevertheless, it is the most meaningful job we have done, as we handle these difficulties and alleviate the burden, making it easier for exporters to deal with China.
 
A major challenge is the long timeframe and fast pace exporters need to adapt to in working with China. Another challenge is the exporter’s competency in its product, pricing and capability to communicate with China. Export to China is a journey requiring commitment and business competency from exporters. These challenges are addressed and extra assistance will be provided to exporters in the updated Export Growth China program we are developing.
 
We may not be able to do ‘mission impossible’ but we provide a yes or no, how and who in a shorter timeframe and at a lower cost than program participants would do on their own. Exporters leverage Chamber’s expertise, endorsement and network resources through this program to test, enter and/or expand in China. It is the Chamber’s mission to maximise potential for Australian businesses.
 
Charisse: As you mentioned earlier, more and more Australians are setting up offices in China. The Chamber also has a Shanghai office managed by you. Leading a multicultural team in two countries, is there any tip to share with businesses here on remote management of offices in China?
 
Sara: Chinese staff require micro-management due to the hierarchy culture. For example, we have a 43 page rulebook for Shanghai office, and a most detailed working procedure for the whole China team in Sydney and Shanghai to keep everyone on the same page.
 
We also have a strict and comprehensive management system in place for accounting, payroll, seal management, communication and project management.
 
At the end of the day, a fair and strong management system, and growth of the business to provide career development and reward to achiever, are the key for successful remote management.
 
We have set up quite a few businesses in China for Australian businesses, and noticed the challenge of remote management they are facing. Actually, we have just launched a China local representation service for Australian businesses and industry bodies to minimise their financial and management risks. They do not need to set up and run their own offices in China, but can leverage the Chamber office in Shanghai as their local representation and facilitation office.
 
Charisse: As the Head of China Practice, what else do you see the Chamber could do to further assist members and businesses in the Australia China bilateral trade and investment space in the next 3 years?
 
Sara: Maximising the potential for Australian businesses is the Chamber’s mission. China Practice constantly assesses members’ needs and the market gaps, and develops programs and services to assist members.
 
This year we have launched the Wine Export to China 2019 program, will have an investment roadshow and trade mission to China this November, and introduce local representation services and China social media services. Currently, we are refining Export Growth China food and beverage services, and developing a cross-border ecommerce program. We are also assessing members’ needs for trade transaction assistance, etc.
 
We have started extending our services from two-way trade to two-way investment, and aim to cover all major gaps in the bilateral trade and investment space within the next two years. We are committed to being The Partner for our members and clients in their business engagement with China.

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