Australia and China: Business Dynamics and Strategies
Ambassador Dr Geoff Raby's Speech to the Australia-China Business Council Dinner (26 May 2010)
Thank you very much (Paul Glasson?) for those kind words of introduction.
I am honored to once again be asked to address the Australia-China Business Council, having last caught up with many of you at the ACBC New Year dinner three months ago in Perth.
As people familiar with the rapid pace of China’s development, you will know that three months on “China time” can feel like it flashes by very quickly, yet in reality so much can change over that period.
I’m therefore pleased to share with you some further thoughts on the short-term outlook for China’s economy and also what I see as China’s near-inevitable re-emergence as the world’s pre-eminent economic power.
And also - most importantly for the majority of you here tonight – what this may mean for your business’ China strategy.
Short-term Outlook
When I spoke to you last in February, I expressed my confidence in the short-term outlook for China’s economy.
Events over the past three months have generally supported such a view, with exports continuing their recovery from the low point of late 2008-early 2009, and the impact of Beijing’s expansionary fiscal and monetary policies still washing through the economy.
Indeed, I consider China’s first quarter GDP growth rate of 11.9 percent as a clear sign that the country has moved beyond the recovery phase post-GEFC and returned – for the time being at least – to rapid rates of growth.
The leadership may remain publicly committed to proactive fiscal and monetary policies, particularly until they feel the recovery in China’s export sector is on firmer ground.
But there now is broad agreement that preventing overheating in the form of rising inflation and asset price bubbles is the major challenge facing economic policy makers in the year ahead.
My confidence in China’s economic prospects does not ignore downside risks to economic growth that have been the subject of much discussion in recent months.
These include the risk of a property bubble emerging in China’s major cities and also the threat posed by the accumulation of debt by local governments, who have taken advantage of Beijing’s stimulus policies to push ahead with a range of infrastructure projects financed by loans from state-owned banks.
Also, the unbalanced nature of China’s growth at present explains the apparent paradox whereby faster growth in the short-term may mean increased risk over the medium term – the faster China’s growth, the greater the imbalance between investment, exports and consumption as drivers of China’s economy.
And the harder it becomes for policy makers to undo these imbalances through much-needed structural reform.
China’s policy makers are all too aware of the fine line they must walk between pursuing the rapid growth necessary to maintain employment, increase living standards and secure the communist party’s political legitimacy, while at the same time promoting a transformation towards a more sustainable, balanced economic growth model.
Nonetheless, the strong fundamentals for China’s growth remain underpinned by the twin processes of urbanization and industrialization that should see China steadily make the transition to a more productive and more consumer-driven economy.
This transition provides enormous opportunities for Australian companies, a theme I would like to return to later.
Looking ahead: China’s Rise
I would like to now look ahead to where China might be in 10, 20, even 30 years time, and consider the implications for Australia’s commercial relationship with this major economic power.
If we are to assume an annual growth rate of 7.5 percent over the next two decades – a rather conservative estimate given the average growth of about 9.3 percent in the 30 years since reform and opening up – then China’s economy will by 2030 be at least four times larger than it is today.
So I certainly share the view expressed by Professor Ross Garnaut in his speech to the ACBC earlier this month that – barring a major political instability that at this stage is difficult to foresee – China will in the coming decades surpass the United States as the world’s largest economy.
Given the highly complementary nature of our two economies, there is no reason to think that Australia’s commercial relationship with China will not continue to grow at near present rates of expansion.
As you all know, China is now Australia’s largest trading partner, and in 2009 surpassed Japan as our largest export market – accepting over 20 percent of Australia’s total exports.
Bilateral trade for the first three months of 2010 has eased, with demand for raw materials such as iron ore and coal either falling or remaining flat compared to 12 months earlier.
Nonetheless, annual two-way trade will probably surpass A$100 billion within the next year or two – double the value of bilateral trade in 2007, when I commenced my term as Ambassador to China.
I expect the gap in value between our trade with China and other major trading partners such as Japan, the US and Korea to increase over the longer term, and find it difficult to imagine a scenario in which China will not be our largest trading partner for the foreseeable future .
This represents an important historical shift for Australia, as we enter a new era where our most important economic partner is not also a security ally, and stands some distance from the international political mainstream.
The strategic implications of this shift are worthy of a separate speech, and are best left for another occasion.
But if we are to return our minds to what China’s economy may look like in 20 years time, certainly the nature as well the scale of the domestic economy will be very different.
Hundreds of millions of rural Chinese will have moved to the cities, a mass migration that even by that stage will not be near completion (China’s own forecasts are that it will be 2050 before China reaches an urbanisation rate of 75 percent, still below many developed countries).
China will boast a transport infrastructure network that, at least in terms of length of highways, length of high speed railways, numbers of airports and so on, will be unrivalled in the world.
Hundreds of millions of Chinese will have joined the middle class, with per capita consumption of modern services and luxury goods approaching developed economy levels.
This idea of China as a great untapped market has of course been around for centuries, and brings no guarantee of prosperity to those looking to expand their trade with this country.
The 19th century British saying that “just adding an inch to every Chinaman’s shirt tail will keep Manchester’s cotton industry going forever” is a reminder that rosy predictions can often go awry.
And the government is keenly aware that it is not in our long-term economic interest to become overly-reliant on China – we want to remain a leading supplier of goods and services to countries throughout the Asia-Pacific region and beyond.
However, it is a realistic assumption to expect that China’s transformation into the world’s largest economy, with an economic structure and consumer habits more closely aligned to those of developed nations, has the potential to bring enormous benefits to Australian businesses.
We are after all internationally competitive in key service sectors such as education and finance, possess considerable expertise and experience in fields such as urban planning, green design and clean energy, and enjoy abundant natural resources that are absolutely fundamental to China’s continued economic growth.
The decision for you as business leaders is how large a part you want to play in this historic transformation, and whether your company is willing to make the investment in time and resources necessary to commit to China for the long haul.
Developing a China Strategy
I would like now to discuss some of the dynamics around doing business in a China that understands its growing influence in the world, and what this may mean for Australian companies who wish to make a long-term commitment to the country.
My aim is not to be too prescriptive – many of you after all have extensive business dealings in China, and in any case business advice from a career bureaucrat should always be taken with a grain of salt!
But I would like to share some of the impressions and insights I have gained from my time in the country, including frequent travels to China’s regions.
I will also outline what we are doing at the government level to promote opportunities for Australian businesses in China, and how this may assist your company’s goals.
The first point I would like to make is the importance in the Chinese business world of “face”.
By this I don’t mean the usual advice – in my experience often overstated – on how to avoid the seemingly endless ways a foreign business representative can offend his or her Chinese partner.
Instead, I am referring to the simple notion of showing your own face and your company brand in China at every opportunity, and developing a range of contacts not just among business colleagues but also government officials.
After all, business simply cannot be separated from politics in China.
Perhaps the most striking example in recent times of this was when Chinalco CEO Xiāo Yăqìng - in the midst of his company’s highly sensitive bid for an increased stake in Rio Tinto – was appointed Deputy Secretary General of China’s State Council.
In the Chinese system, such a move was most definitely a promotion.
I understand that for many companies, language barriers and other difficulties associated with maintaining expatriate staff in China means that localising your China operations makes sense from a financial point of view.
However, this should not mean that your business’ China footprint should be downsized, with CEOs and Directors remaining distant from local operations.
Proper representation on the ground is the best way your company can demonstrate to Chinese officials that your company is serious about its China operations.
Likewise, business leaders who frequently come to China to meet their local partners and relevant government officials are highly respected within the Chinese system.
From the feedback I have received from Chinese officials, arranging a delegation of board members to visit China – even holding a formal board meeting in China which senior Chinese partners can be invited to address – is a worthwhile investment for your company.
To put it bluntly, a CEO – no matter how big your company and how long its engagement with China – is kidding themselves if they think they can arrive in China on their first visit and sit down with Vice Premier Wáng Qíshān to discuss their business plans in China.
Meetings at this level do occur, but only after a significant amount of groundwork has been undertaken, and only when Chinese officials are sure that your company has a genuine, long-term commitment towards China.
If your company wants to make the most of China’s rise and rise, a substantial investment in terms of time, travel and resources is a fundamental requirement.
The second point I would like to make is this – don’t be afraid to look beyond first-tier cities such as Beijing, Shanghai, Shenzhen and Guangzhou for opportunities to develop your China business.
I have been fortunate enough to travel to nearly all of China’s provinces and autonomous regions, and never cease to be amazed by the scale and pace of development that is taking place.
The population of some of these provinces – around 100 million for Hénán Province, 95 million for Shāndōng Province – are quite staggering.
Equally impressive is the way that some regions – with the considerable help of central government stimulus policies - appear to have been almost immune from the effects of the global financial crisis.
For example, Inner Mongolia recorded 17 percent GDP growth in 2009, Chóngqìng 14.9 percent, and Sìchuān 14.5 percent.
Australian companies have been among the leading group of foreign companies to establish themselves in some of China’s lesser known areas, and I provided some examples of these when I spoke to you in February.
However, I still believe that we have only scratched the surface in terms of the opportunities for deeper integration with China’s booming regions.
It is no exaggeration to say that some of China’s second and third-tier cities, particularly in central and western provinces such as Ānhuī, Húběi and Inner Mongolia – feel like one giant construction site.
Such cities are crying out for architecture, project management and logistics services that Australian companies are so good at providing.
They are also very interested in Australia’s experience and expertise in areas such as clean energy and environmental protection – particularly management and conservation of water resources.
Government officials in such regions often ask me to encourage Australian companies with expertise in these areas to invest in their local area, promising a high degree of government support for any ventures in these fields.
In terms of future demand for Australian goods and services, travel away from the developed coastal regions is necessary to appreciate fully just how much further the China story has to run.
The roads of China’s major cities may be choked with cars, but the relatively empty expressways in China’s interior remind us that China still has a very low penetration rate when it comes automobile ownership, at just over 20 cars per 1000 people.
Similarly, while a visitor to Beijing or Shanghai will be impressed by the range of modern service industries and high-end retail outlets that are present, China’s tertiary sector in less developed regions is still dominated by low-skilled, low-value added industries such as restaurants and small- scale retailing – not to mention the multitude of foot massage outlets that litter the streets of China’s cities.
Even in relatively well developed regions such as Shandong Province on China’s north-east coast – visited by Trade Minister Simon Crean last week - the services sector still only accounts for one-third of GDP.
If your business is committed to China for the long haul, there are still so many places in China where a relatively small investment, assisted by local governments eager to attract foreign companies to their cities, can provide the potential for attractive returns over the longer-term.
A willingness to invest in China’s regions may also be rewarded with more favourable policies and less red tape on the part of China’s regulators.
Special arrangements have long been granted to foreign investors in port cities such as Dàlián, Qīngdăo and Tiānjīn, and are the best fit for many businesses.
But China’s State Council also recently released new guidelines to attract foreign investment into the interior of the country, promising favourable tax policies and a range of other assistance.
In some fields – such as banking, for example – a foreign investment in a western province will almost certainly be approved by regulators far quicker than a similar investment in one of China’s first-tier cities.
At the government level, we are working very hard to build recognition of Australia and highlight the special skills of Australian companies in China’s regions.
In addition to seeking substantive commercial outcomes though our bilateral FTA negotiations, the government is pursuing a “second-track” strategy, with a dual regional and sectoral focus, to ensure that we are doing everything we can, at every level, to promote opportunities for Australian business at the local level.
Over the past few years, Trade Minister Simon Crean has been particularly dedicated to strengthening ties with China’s regions.
In seven visits to China since assuming his portfolio, Mr Crean has travelled to provinces including Yúnnán, Húběi, Ānhuī, Shāndōng and Zhèjiāng, talking directly to local leaders about opportunities for broadening and deepening cooperation between Australia and their provinces.
This resulted in commitments from local leaders to strengthen collaboration with Australia in areas such as urban design, autos and clean energy.
Just last week, Mr Crean witnessed the signing of a Framework for Cooperation with Ānhuī province which will underpin the expansion of existing cooperation in areas such as the automotive sector, as well as open up new areas for cooperation with Ānhuī, such as agribusiness and mineral resources.
Other Australian ministers have shown a similar commitment to developing links with regional China.
The Foreign Minister, Mr Smith, commenced his March 2009 visit to China in the south-western province of Sìchuān, while the Minister for Resources, Energy and Tourism, Mr Ferguson, has visited the north-eastern Hēilóngjiāng province.
Such visits are very warmly received by provincial leaders.
The last point I’d like to make on the need for your business to engage with China’s provinces is the fact that these places are often proving grounds for future government and party leaders.
The very top leaders of China’s Communist Party, including President Hú Jĭntāo, Vice President Xí Jìnpíng and Executive Vice Premier Lĭ Kèqiáng, all worked their way up the ranks through the provincial system before moving to positions of power within the Politburo.
Given the opaque nature of China’s political system, you just never know whether the local official you build a relationship with will at a future time assume a position of real power and influence.
Finally, I would encourage Australian companies doing business in China to join the Australian government to encourage a greater appreciation among Chinese officials of the shared value chain that is created by our bilateral trade.
While many officials, including in China’s regions, have a good understanding of Australia – often through their own or their family’s experience of travelling to or studying in Australia – we remain at risk of being viewed simply as a provider of raw materials to China.
This is understandable, given the dominant role of resources and energy in our export mix to China.
And China’s keen awareness of its reliance on Australian iron ore and other commodities for its continued economic development is not necessarily a bad thing from our point of view.
However, there is a danger that such thinking closes China’s minds to the broad array of goods and services that we can contribute to China, and the expertise and experience our companies can pass on their Chinese partners.
Even in the area of resources, our bilateral trade is creating a shared value chain that is benefiting the development of China’s advanced manufacturing exporting sector.
In 2009, Australia imported over A$1 billion of industrial machinery and parts from China, and just under A$500 million of transport machinery and equipment.
To provide some specific examples, Rio Tinto last year purchased 2500 rail cars from China for its iron ore operations in the Pilbara, and BHP Billiton commissioned a floating production storage and offload facility from a shipyard in Qingdao to service an offshore oil project.
If we can show how Australian companies are not just fuelling China’s rapid growth, but also assisting Chinese partners up the value chain and contributing to China’s transition towards a more sustainable, balanced growth model, we will find many more opportunities opening up for Australian firms to do business in the country.
A Challenging Business Environment
I have focused my remarks today on some of the implications of the rise and rise of China, and the many positive opportunities for Australian businesses to tap into the rapid growth of what is destined to become the world’s largest economy.
While I remain an optimist about China’s economic outlook and the potential for Australian businesses to benefit from this, I do not want to leave you with the impression that the government seeks to downplay the range of challenges that you as business representatives face in doing business in China.
The close connection between politics and business I discussed earlier of course has some negative consequences, in the form of excessive regulation, an often uneven playing field and of course corruption.
While China’s economy on the whole continues to open up towards the outside world, there are occasional setbacks.
For example, within the past 12 months policy makers have introduced so-called “Buy China” regulations that appear to skew government procurement processes in favour of local firms, particularly those dealing in high-tech products and services.
These measures were perhaps partly in response to the economic slowdown, and also in accordance with long-standing plans to protect state-owned “national champions” in areas such as telecommunications, banking and aviation from what China sees as excessive foreign competition.
When appropriate, the Australian government has raised its concerns at these measures directly with senior Chinese officials.
As investors in China, some of you may also find a tension between the welcoming attitude of regulators towards foreign-invested technologies and their eagerness to develop home grown industries.
Often, foreign investments in areas such as clean energy and advanced manufacturing are dependent on a foreign company’s willingness to give up control of its hard-earned, heavily-invested know how.
I know of some Australian companies who, to secure a joint venture with local partners, were required to hand over complete designs of their manufactures, effectively abandoning their intellectual property rights of the products.
Such decisions are among a range of difficult calls that Australian investors in China must make on a regular basis.
However, with such risks come the potential for great rewards.
Looking around tonight, I see a number of examples of companies who have taken the challenge and opportunity of doing business with China head on, and can look back with satisfaction at how far their business has come, and forward with excitement at the future prospects of their China operations.
Conclusion
I hope tonight that I have been able to pass on a few impressions that may be food for thought as you continue your engagement with China.
I also look forward to a continuing dialogue with you on China’s rise and the opportunities this presents for your company, and would welcome your views at any stage on how the government can promote the interests of Australian business in China.
The diverse and mutually beneficial economic relationship that we talk about with leaders around China is only possible through the ongoing willingness of Australian companies to expand their presence in this exciting but challenging market, and commit to China for the long haul.
As I noted in my address to the ACBC in February, the challenge for Australia is to come to grips intellectually with China’s re-emergence and think creatively about what we have to offer this rapidly developing economy.
We should be confident in our ability to embrace China’s rise, yet never take our bilateral relationship for granted.
Only then can we position ourselves favourably for a world in which China is the world’s pre-eminent economic power – a scenario that brings with it a wide range of challenges, but an almost limitless range of opportunities for Australia and its business community.
Thank you.