Developing and sustaining trade in China

There are many attractions in China as a global centre of manufacturing and consumption. Two UK businesses recount their experiences developing their trade into and out of the country.

China is no longer the world's factory. As it opens up to international trade, it is becoming a formidable “world market”, said Qu Hongbin, Chief Economist, China, HSBC, speaking at the recent HSBC China and RMB Forum in London.

But when China's ongoing intercontinental land and sea infrastructure programme, known as the Belt and Road Initiative (BRI), connects with the country's progressive stance on currency and trade rules, Hongbin feels great potential is released for overseas companies in China too.

His comments served as a suitable introduction to a brace of British businesses that have seized the moment and are now doing rather well in China.

Building business and trust

UK aerospace manufacturer, Sigma Components, set up a factory in China in 2006. Having decided from the outset to go it alone, Mark Johnson, Sigma's CEO, was nonetheless wary of simply parachuting its UK business model into China.

The business purposefully avoided “adopting all our old bad habits” and although initially an expat General Manager was employed, the aim was always to build two-way trust, allowing the operation to run according to local ways “without too much parental control”. With the subsequent appointment of a local GM, the business started to grow. Johnson noted that the self-belief developed throughout the operation as a result of this change enabled its stakeholders to feel “it was their business”.

Another way of “getting a toe in the water” in China is to establish a joint venture, said Brett Simpson, Group CEO of Low & Bonar. His firm, a performance materials manufacturer, began by building a local presence gradually within this structure. “They are not something to be scared of,” he commented, “but they are a place to be diligent”.
By adopting this approach and taking small steps he has built a business that is now “humming”.

Slow start aside, Simpson's view is that “there is no substitute for being on the ground”. In April 2016, Low & Bonar opened a new £26m production facility in Changzhou National Hi-Tech District. As China's key economic development area with a history in textiles, Simpson's due diligence saw the opportunity and, in working with a mix of local government authorities, “got a good hearing” as the company worked to build trust in the community.

The facility employs a local country manager and aims eventually to give work to around 100 local people supplying both domestic and Asian regional markets. The strategy of having production closer to these core markets enables Low & Bonar to secure short lead-times and give the company full control of the production process, Simpson explained.

However, Simpson added, having integrated as far as it can its China operations into its global business, he explained that the local leadership team has the same levels of freedom as anywhere else. “You make sure you pick the right market and the right people and then you let them get on with it.”

A country of potential

High-tech businesses such as Sigma and Low & Bonar have some very specific skills requirements. Hongbin's revelation that every year in China, over the next five years, some 7.5 million graduates will enter the work place demonstrates that a well-educated local work force is in abundance.

Chinese attitudes to progress offer a distinct commercial advantage too. Within the EU, ICT accounted for 19 per cent of total R&D personnel in the labour force in 2014. Huawei, the Chinese multinational ICT firm, employs 45 per cent of its staff in R&D. Sigma is leveraging this attitude, encouraging its Chinese entity to forge professional links with relevant academic communities.

Regardless of how progress is facilitated, the relative cost base of an overseas entity must always remain under control. Johnson explained that exchange rate movement is his biggest concern today although RMB would need to get “significantly stronger” to negatively impact the business. However, he does admit to “constantly tracking fluctuations” even if Sigma currently uses operating cash to support local growth.

For Simpson, it is “a mistake” to think China will deliver a long-term low-cost advantage. His advice is to view operations here “as any other market” and keep looking for efficiencies. As he stated, although Chinese policy makers know they need high quality foreign companies to upgrade the domestic production base, “you still have to work hard to stay competitive”.

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