Chamber Eye Spring 2009 by The British Chamber of Commerce Guangdong

MAGAZINE OF THE BRITISH CHAMBER OF COMMERCE GUANGDONG SPRING EDITION

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SURVIVING RECESSION

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CHAIRMAN’S MESSAGE DEAR MEMBERS AND FRIENDS, From all of us at the Chamber, we welcome you to this new, revamped spring edition of the ‘Chamber Eye’ kindly brought to us by RADDISSHMe Design House. In this uncertain climate, as unemployment rises and companies ride out the storm, managers, now, more than ever, need up-to-date information and advice they can use to steer their enterprises towards calmer shores. The theme for this spring issue of the ‘Chamber Eye’ therefore not surprisingly takes a look at the downturn, whose insights we hope you will find useful. We are absolutely delighted to welcome Qatar Airways as our Universal Sponsor under the airlines category and RADDISSHMe Design House as the new designers of the Chamber Eye. We welcome them both onboard and look forward to promoting their services over the months to come. We are always looking for support for the Chamber Eye both in terms of contributors of content and external advertising. If your company is interested in becoming involved, please do not hesitate to contact the Chamber office.

CONTENTS WHY CHINA MATTERS

CHAMBER EYE GUANGDONG

There are some incredible opportunities still available in China – and, in some ways, are even more attractive given the depressive nature of the rest of the world.

British Chamber of Commerce Guangdong Chairman

BUSINESS EXPANSION IN TIMES OF A CRISIS Many businesses are currently facing an extremely difficult period as it is proving increasingly arduous to obtain working capital finance through either equity or debt financing.

CHINA ‘09 - A ROLLERCOASTER RIDE 2009 will be the most challenging year for China in a decade, with increased downside risk, international companies would be well advised to keep a close eye on the economy through 2009.

INVESTING IN HUMAN CAPITAL DURING A RECESSION

Guangdong Magazine

Jeremy Sargent

Editor

Josef Jelinek

Chamber Executive Manager Erin Beilharz

Business Development Manager Pat Kwan

Office Administrator Emelie Zou

British Chamber of Commerce Guangdong

Suite 1206, 12/F Guangdong International Hotel 339 Huangshi Dong Lu Guangzhou 510098 Tel: +86 20 8331 5013 Fax: +86 20 8331 5016 E-mail: manager@britchamgd.com www.britchamgd.com

Shenzen Sub-Chamber

Roof 314, 3/F Chinese Overseas Scholars Venture Building South District Hi-Tech Industry Park, Shenzen 518057 Tel: +86 755 2658 8350

Companies should be making strategic HR changes to promote future corporate growth and to retain hot talent needed to make those changes.

Advertising Contacts

Finally, we would like to thank, as always, our members and friends, for their continuing support and enthusiasm.

CHINA’S OUTWARD FOREIGN INVESTMENT

Design RADDISSHMe Design House

Yours sincerely,

China’s flow of outward foreign direct investment is currently the fourth largest in the world among developing countries according to the OECD.

Josef Jelinek jj@inecko.com

Room B5, 60 Xian Lie Dong Hen Lu, Tianhe District, Guangzhou, China 510500 T: +86 20 28296215 F: +86 20 28296219 E: info@raddisshme.com www.raddisshme.com

BRITISH CONSULATE-GENERAL GUANGZHOU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Jeremy Sargent

DEVELOPING OPPORTUNITIES IN SOUTHERN CITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 EXPLORE BUSINESS OPPORTUNITIES IN REGIONAL CITIES OF SOUTH CHINA . . . . . . . . . . . . . . . . . . . . . . . 8

CHINA’S ECONOMIC POLICY RESPONSE TO THE FINANCIAL CRISIS . . . . . . . . . . . . . . 9 REGIONAL CITIES TAKE CENTER STAGE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 QATAR AIRWAYS: WORLD’S FIRST GAS-BASED FUEL POWERED AIRLINE . . . . . . . . . 12 NEW MEMBERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 EVENT PHOTOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 LISTINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Chamber Eye Guangdong

BRITISH CONSULATEGENERAL GUANGZHOU

REGULARS

Developing Opportunities in Southern China’s 2nd Tier Cities In 2008 UK Trade and Investment and its partners at the China Britain Business Council commissioned some research by Leeds University on ‘Opportunities for UK Business in China’s Regional Cities’.

BY Bob Manning

The report highlighted 35 cities across China including 5 falling under the British Consulate in Guangzhou’s responsibility: Changsha, Dongguan, Foshan, Xiamen, Zhuhai.

British Consulate-General Guangzhou Trade and Investment team’s Schedule for Q2 2009 Table. MONTH & DAY

WHO

LOCATION

CONFIRMED

DESCRIPTION

March 2-5

UKTI

Construction Industrial Briefing Course-Angela Yang

2-7

UKTI

Biomedical Exchange Mission -Emily Liang

7-14

UKTI

Business Development Visit to the UK-Angela Yang

16-17

Brian Davidson & UKTI

Xiamen

UKTI Priority Regional City Trade Mission's visit to Xiamen

18-20

UKTI

Guangzhou

The UK Furniture/Home Interior Design Exhibition at China International Furniture Fair (CIFF) - Kiki Kwok

18-26

UKTI

South China

South West Mission visit to Hong Kong, Shenzhen, and Guangzhou - Chris Butland

16-21

UKTI

Guangzhou

Information Communicating Technology R&D Specialist Simon Duan visit to Guangdong and Guangxi

23-24

UKTI

Changsha

Sustainable construction/infrastructure UK delegation

23-24

UKTI

Guangzhou

tbc

Bob Driver, Director of Hi-technology Services visit to Guangzhou

23-25

UKTI

Hong Kong

Hong Kong Filmart - Simon Kelly and Kiki Kwok

26-27

UKTI

Chongqing

Information Communication Technology team meeting -Kevin Liang and Kiki Kwok

UKTI

Shenzhen

China Medical Equipment Fair

17-19

Brian Davidson & UKTI

Hainan

tbc

Sir William Erhman, Peter Mandolson and Brian Davidson visit to Hainan Boao Forum

17-19

UKTI

Hong Kong

To Meet National Microelectronics Institute TAP exhibitors at Hong Kong Electronics Fair - Kevin Liang

18-21

UKTI

Shenzhen

China Medical Equipment Fair - Emily Liang/Jessie Zhang

Late Jun

UKTI

Changsha

tbc

Cross sectoral mission to Changsha

24-30

UKTI

Business Development Visit to the UK - Bob Manning

UKTI

Business Development Visit to the UK - Bob Manning

April

JUNE

JULY 1-7

The British Consulate-General Guangzhou’s Trade & Investment team supports British businesses entering the Chinese market through missions, seminars, trade shows, research and ongoing advice. They also foster positive bilateral trade and investment conditions through 6

Chamber Eye Guangdong

their contacts with the Chinese government. For more information please visit their website at www.uk.cn/gz

“Our visit took us to two of the thirty-five Regional Cities covered by the Report.We met the Mayors of Foshan and Dongguan, both of whom have the ambition and the capability to be regional financial hubs. They are looking to the City of London for help, which it can certainly provide.The result will be better financial and professional services support for companies in Guangdong and a much needed increase in job opportunities for graduates in that province” Sir David Brewer - Chairman, China-Britain Business Council

REGULARS

(Full version available from www. uktradeinvest.gov.uk/ukti/chinacities) In February, Michael Zhang and Simon Kelly of my UK Trade and Investment team at the British Consulate in Guangzhou took the opportunity of a visit by Sir David Brewer, Chairman of the China Britain Business Council and former Lord Mayor of the City of London, to take a delegation of UK Financial and Professional Service companies to Dongguan and Foshan.

The delegation was recruited by UK Trade and Investment and CBBC and covered a mixture of UK company representatives mainly based in Guangzhou and Shenzhen but also the UK, Hong Kong and Beijing (and some already with offices in Foshan, such as HSBC and KPMG). Led by Sir David, Sir Stephen Wright, CEO of International Financial Services, London, and Brian Davidson, Consul General of the British Consulate-General Guangzhou, companies and organisations represented included: • London Stock Exchange Limited (Hong Kong office); • The City of London’s Beijing Office; • AsiaSetUp (UK); • HR China International (UK); • The Chartered Institute of Management Accountants (Shenzhen office); • KPMG (Guangzhou, Shenzhen and Foshan offices); • ABN Amro (Shenzhen office); • Lehman Brown (Guangzhou office); • Flexicare Medical Equipment (Dongguan operation); • Rio Tinto (Beijing office); • Invest Northern Ireland (Shanghai); • South West England Regional Development Agency (Shenzhen); • Jardine Lloyd Thompson (Singapore and Guangzhou offices); and • Tesco (Guangzhou/Shenzhen office covering stores in Dongguan, Foshan and Shunde). The programme was geared towards providing access to senior government officials in each city; enabling visiting organisations to enhance their profile locally; and to showcase a cross section of UK expertise in a sector which had been highlighted by both the Dongguan and Foshan governments as being one where they wanted to

attract more overseas participation in the development and restructuring of their economies. In Dongguan a call on the Financial Service Office was followed by a meeting with the Mayor, and a welcome banquet hosted by the Executive Vice Mayor. In Foshan the format was similar but with an additional site visit to HSBC’s impressive data processing centre, where we heard first hand accounts of the positive environment and policies for overseas companies setting up. Back in Guangzhou Sir David opened an event for the Association of Certified and Chartered Accountants and an “Insurance in Practice” seminar, and presided over a lively dinner for the UK Financial Service community, all in the City’s new Central Business District. The real value of the visit will only be distilled after assiduous follow-up but the initial impact of assessment was universally positive.

“For Foshan, I am very impressed by the openminded senior officials from the municipal governments, and their good understanding and sincere support to the financial services industry.This plus their competitive cost and skilled worker availability can make Foshan a very attractive place.”

Our hosts in each city were clearly impressed by receiving such a large delegation of internationally renowned UK companies, led at such senior level. This was especially so as it followed on quickly from specific requests to engage more with the UK in this sector during meetings that Brian Davidson and I had Jane Zhu, Head of Asia had in Dongguan and Foshan respectively Pacific, London Stock toward the end of 2008. Many of the offi- Exchange cials in each city commented “off-line” that the delegation was “very refreshing” and that we had been “quite aggressive” (a compliment!) in leading it, the thrust being summarised as “we have many visitors from many consulates but this is the first time anyone has actually come back with companies”. “As a newcomer to China, I was most impressed by the confidence and vision for the future expressed by the municipal and regional authorities in the three cities that we visited and their strong wish to work with the City of London.The UKTI/ CBBC initiative to build relationships with leading regional cities in China will clearly offer great opportunities for our City-based businesses as they build up their involvement in the Chinese market.” Sir Stephen Wright KCMG - Chief Executive Officer of International Financial Services, London (IFSL)

The Mayor of Foshan, Dr. Chen Yun Xian, having worked in the financial sector for 12 years, holding the positions of Chairman of Guangfa Securities and vice president of Guangdong Development Bank, was particularly excited about the prospect of inviting the London Stock Exchange to return to present to Foshan’s leading companies later in the year. The UK companies already doing business in these cities took advantage of opportunities for raising their profile at a local government level, and even a little soft-lobbying in the margins of the lunches. The mix of organisations and the collegiate atmosphere on the tour bus made 7

“The mission provided us the opportunity to get a real picture and first hand information about Guangdong, not only in the capital but also the 2nd tier cities like Foshan.Visiting the HSBC data processing centre is very impressive and to see the local government’s support to this project is more so. British firms can sometimes achieve more and make a better impact in the less travelled cities, the opportunities are there, and visits likes this could help us to identify them.”

it conducive for delegates to swap notes on how they rated the relative opportunities and what they might do next. This will provide an important overlay to the earlier research as we further hone our understanding of the opportunities and how to tackle them. Most tellingly the majority of the delegates based in Guangzhou and Shenzhen signed up there and then for the next business delegation to Xiamen on 16-17 March (this time multi-sectoral).

If you are interested in hearing more please email or call me (bob. manning@fco.gov.uk 13500001650). Bob Manning took over from Tom Marchbanks as the Head of UK Trade and Investment at the British Consulate in Guangzhou in January 2009. Bob’s previous postings include Jakarta, Taipei, and most recently, Shanghai, where he led the four Inward Investment (China outbound) teams across China until moving south last summer. Born in Hampshire, England during an “unspecified year in the sixties”, Bob has his wife and four teenage children with him in Guangzhou, and lists his hobbies as listening to jazz, reggae and gamelan music, whilst thinking about cycling and playing football.

The Chinese government’s announcement in November 2008 of a huge £350 billion economic stimulus package to kick start its flagging economy was unprecedented both in size and scope.

That will have taken place by the time you read this but there will be other opAndie Wang - Chief Repportunities with provisional dates being resentative of the City of considered for Changsha in May and London’s Beijing Office Zhuhai in October, as well of course, as the possibility of a joint UK Trade and Investment/CBBC/British Chamber event in the margins of the CIFIT fair in Xiamen in September. We would love to have even more of the UK companies based in Guangdong involved in these outreach programmes and we think that these can add real value to both the collective UK profile in these cities but also to your individual business profile.

Transport investment, for instance, is set to increase by 70% in 2009 alone. Most of this will be part of a massive overhaul of the nation’s overstretched rail infrastructure.

Explore business opportunities in priority regional cities in south china with the british consulate-geneal Recent research, commissioned by UKTI and carried out by the China Britain Business Council (CBBC) and the University of Leeds, has shown that there are numerous potential business opportunities in key Chinese regional cities outside the well explored areas of Shanghai, Beijing, Guangzhou and Shenzhen. These cities have already drawn the attention of a number of UK businesses already established in major cities here. The real issue for companies is how to get access to these cities; this is where we can help! (Full version available from www.uktradeinvest.gov.uk/ ukti/chinacities) Five priority regional cities in the South have been identified in the research, Xiamen in Fujian Province, Changsha from Hunan Province and Foshan, Zhuhai and Dongguan from Guangdong Province. The British Consulate-General Guangzhou is planning to organise British Trade Delegations to these cities, in conjunction with the Embassy/Consulates in China, China Britain Business Council, and the British Chambers of Commerce in China. 10-11 February 16-17 March 23-24 March Late May July 7-8 September October November December

Foshan and Dongguan (Financial mission led by Sir David Brewer) Xiamen (Multi-sectors including infrastructure, healthcare, ICT and service sectors) Changsha (Sustainable development and construction) Changsha (Cross sectoral mission) Zhuhai (Multi-sectors including life science, advanced engineering and ICT) Xiamen (UK mission to CIFIT) Foshan (Multi-sectors including environment and financial services) Xiamen (ICT and telecom) Zhuhai (Multi-sectors including Life science, advanced engineering, and ICT)

CHINA’S ECONOMIC POLICY RESPONSE TO THE FINANCIAL CRISIS

It is hoped that these visits will provide valuable opportunities for UK companies, primarily those already established in China, but those yet to make a location decision should also find these visits informative. What are the benefits? • Our strong links with the local government will be able to open doors for you that would otherwise remain difficult to open. • We will provide a platform to convey your key messages to senior government contacts and other major stakeholders. • UKTI trade missions raise the profile of your company, and enhance your standing with a variety of key contacts. • With our comprehensive programme, you will be able to get a wider perspective in one visit, which could take you years to develop on your own. • You will be able to learn from each other’s experiences, and share information on opportunities. We are doing more….

The package, equivalent to a spending boost of 6-7% of GDP, has had its detractors with many analysts declaring that only ⅓ of the cash will come from central coffers, leaving regional governments to make up the difference. Furthermore doubts have also emerged that an uncontrolled public spending spree might result in further wastage and excess – particularly in the poorer provinces far from Beijing’s control. Nevertheless the government has responded with a raft of policy measures aimed at the rural economy and include, in addition to the massive infrastructure building programme, subsidies and tax cuts for businesses. In December bank lending was up by 19% on the year. Housing down payments were reduced from 40% to 20% – an unambiguous incentive to encourage homeowners to invest in property in 2009. Recently released figures indicate that domestic retail sales were up by 18% in December, a sign perhaps that the policies are working.

Apart from these trips to the five priority regional cities, we are already a step ahead, looking into opportunities in other emerging regions/cities, such as the Beibu Gulf Project in Guangxi Province, and a Sustainable City Project in Hunan Province. We are also actively representing specific UK business interests in many other cities in the South.

Interest rates have also been reduced five times since September and on January 21st a further £85 billion was earmarked for rural healthcare provision over a three year period.

If you would like to learn more about our activities or you are interested in participating in our visits, please feel free to contact Vivian Zheng at vivian.zheng@fco.gov.uk.

Earlier in the year a 13% rural consumer rebate was made available on purchases of electrical and household goods as the authorities seek to boost domestic consumption.

REGULARS

BY Guy Dru Drury

The authorities are even considering implementing a voucher scheme currently used in Taiwan whereby citizens are given government cash vouchers to spend on consumer purchases. Many of the latest measures are aimed at stemming the tide of more than 20 million job losses which have occurred since the current economic crisis began in late 2008. Hence Premier Wen Jiabao’s announcement at the World Economic Forum in Davos that “extraordinary measures” were going to be needed to “combat the credit crisis”.

The stimulus package has, at its heart, a simple objective – to ‘create a stable rural economy’. It is an irony that in the short term the weather might prove to be a greater destabilizing factor for the government than the current global economic turmoil. Guy Dru Drury is Chief Representative of the Confederation of British Industry (CBI), the UK’s leading (independent) employers’ organisation, in Beijing. Guy can be contacted at Guy. Drury@cbi.org.uk

It is assumed that the stimulus package will take effect during the second half of the year as demand for raw materials, goods and services return to pre 2009 levels once again. However, an extraordinarily severe drought has been gripping most of Northern China’s wheat belt. More than 9 regions, representing more than 40% of China’s winter harvest crop, have been drought stricken since November. Henan province, for example, has had the driest winter since 1951 with an unprecedented 105 rainless days. The greatest challenge to the policy makers in Beijing is that these same northern regions were badly affected by the restructuring of State Owned Enterprises (SOEs) in the late 1990s resulting in more than 40 million unemployed not to mention mass rioting and social unrest.

Jan - Dec 2009 Visit Schedule 8

Chamber Eye Guangdong

REGIONAL CITIES TAKE CENTER STAGE

REGULARS

When faced with a choice of 270-plus cities in China with more than one million inhabitants, deciding where to start a business venture can be so difficult that many companies stick with what they have heard of: usually Beijing, Shanghai, Guangzhou or Shenzhen. However, a new study could help them find a more suitable market in one of China’s emerging regional cities, writes Chen Wu.

DAQING HARBIN

REGIONS:

CHANGCHUN

NORTHWEST BAOTOU ORDOS

NORTHEAST

DONGYING SHIJIAZHUANG

SOUTHWEST

JINAN XI’AN

ZHENGZHOU

SOUTHEAST CHENGDU

BOHAI

TIANJIN

HEFEI WUHAN CHANGSHA

CENTRAL

Traditionally, UK companies have focused on looking for business in a few established Chinese cities, such as Beijing and Shanghai. However, these markets are maturing, competition is intensifying and costs are increasing. As a consequence, companies are increasingly willing to consider alternative locations in China for business expansion and development. These emerging cities are also fast becoming the target of local and foreign investments as we witness their impressive rise as part of China’s economic development. CBBC has recently delivered the research, Opportunities for UK Businesses in China’s Regional Cities, on behalf of UK Trade & Investment to highlight opportunities in some of those cities. Why has this research been carried out? The aim of this research is to identify where, and how best, British business can take advantage of the opportunities presented by the ongoing growth of China’s regional cities. Specifically, the objectives of the research were to: • Identify key growth locations in China that offer the most promise as business locations for UK companies, taking account of the different types of business activity that might be conducted • Map these opportunities against specific sectoral capabilities of UK companies • Recommend how UK companies should best capitalise on the business opportunities presented by regional cities in China • Suggest to UK government how the entry and operation of UK companies in these cities can be better supported. How did the research come together? This research was the result of collaboration between CBBC and academics from the Centre of International Business, University of Leeds. On the basis of economic size, economic growth rate and population, 35 cities were short-listed from 274 cities across China. These cities were then benchmarked and ranked using indices measuring their relative attractiveness as business locations for UK companies, according to each city’s overall attractiveness, general business environment and attractiveness for four different types of business activity, namely local sales, domestic market-oriented production, export-oriented production, and research and development. A further set of rankings was devised to capture the attractiveness of each city for seven business sectors in which UK companies demonstrate international competitive advantage: financial and professional services, environment and climate change, energy, infrastructure, life sciences, information and communication technology (ICT), and advanced engineering.

Chamber Eye Guangdong

We also carried out 60 interviews with UK and foreign companies, as well as intermediaries (TPOs), many with a presence in the regional cities, in order to understand their business strategies and challenges they are facing. An additional 80 CBBC and British Chamber of Commerce members participated in an online survey. These data provided the qualitative evidence of the research. Key Findings The key findings of this research are as follows: • Collectively, the rapid rate of urbanisation, expansion and economic growth of regional cities in China offer considerable opportunities across a range of industrial sectors and business activities for UK companies. • The key characteristics shared by the regional cities include rapid economic growth, low input costs, large and developing consumer and industrial markets, and strong local government support and policy momentum in regional economic development. • The majority of regional cities are concentrated in the economically advanced regions of the Bohai Rim (in particular, the Shandong Peninsula), the Yangtze River Delta and the Pearl River Delta. The remaining short-listed cities are distributed more widely in the northeast, central, northwest and southwest regions, where strong government policy and infrastructure investments are helping to promote economic growth. • In the coastal provinces of China, a number of economically interconnected ‘city clusters’ are developing, where several regional cities can be found in relatively close proximity to an established city and, or each other. For instance, the cities of Suzhou, Hangzhou, Nanjing and Wuxi now provide clusters of manufacturing and services activities to complement the industrial structure of nearby Shanghai. • UK companies locate in China’s regional cities in order to follow existing clients, explore new markets (gaining early mover advantage) and reduce costs. Cities such as Dalian, Dongguan, Hangzhou, Qingdao, Shenyang, Suzhou, Tianjin, Weifang, Weihai, Wuhan and Yantai offer the best overall business environments, although, because of their heterogeneity, the attractiveness of each city varies according to business activity and industrial sector. • Although wide-ranging business opportunities exist, UK companies face a variety of challenges arising from government policies, market forces and operational barriers.

However, companies looking to manufacture in China to serve the local market, or to conduct R&D activities, should also consider inland cities, such as Shenyang, Chengdu and Xi’an, which offer quality labour force and lower cost bases. These regional cities also enjoy strong support from government policies such as the ‘northeast regeneration’, ‘go inland’ and ‘go west’ campaigns, which encourage more foreign business in these regions. Match capabilities We have also highlighted those cities with sector opportunities which match UK capabilities. For instance, it would be interesting for UK companies in the energy and environment sectors to investigate Baotou, Ordos, Tangshan, Shenyang, Changchun and Zhengzhou, as they all have strong mining, chemical and power-related industries, whereas cities such as Tianjin, Dalian, Hangzhou, Chengdu, Xi’an and Wuhan have well established ICT capabilities, which offer great opportunities for UK businesses. A note of caution is needed. These rankings do not provide a single ‘right’ approach to forecast success in one city over another. There are also many examples of successful businesses in cities that are not included within the study.

NANJING NANTONG SUZHOU NINGBO SHAOXING WENZHOU HANGZHOU

DONGGUAN ZHUHAI

Geographic Distribution of Regional Cities The research developed several indicative city-attractiveness rankings, according to business activities and sectors. We found that cities in coastal provinces, such as Dalian, Hangzhou and Qingdao, generally offer more attractive domestic market opportunities. Cities with sound infrastructure, proximity to international transport hubs and availability of quality human capital, have strong location advantage as exportoriented manufacturing bases.

SHENYANG TANGSHAN DALIAN YANTAI WAIHAI QINGDAO WEIFANG ZIBO

Yet the research provides guidance and insights which assist UK companies to focus by narrowing down their options, and encourage them to think strategically about their objectives in the market. We have also prepared one-page profiles for all 35 shortlisted cities, as well as profiles highlighting sector-specific opportunities. When choosing a business destination, companies need to map out their own criteria, which will vary greatly according to market entry strategy and business objectives. The assessment of business climate ultimately depends on considerations unique to each business, ranging from sectoral strength to the personal instincts of the investor or businessman. There will be many examples of successful businesses in cities that are not included within the study. Taking on the challenges Companies we surveyed identified a series of challenges UK companies have to take on as they seek to exploit opportunities in China’s regional cities. These challenges revolve principally around regular changes in government policy, market forces and operational barriers. Many of these challenges are reflected across operations in China, such as recruitment and retention, intensifying costs and competition.

na’s GDP. Most of these regions are forwardthinking and keen to attract more exposure to foreign businesses. Companies need to be well informed and prepared in order to execute their strategies successfully in these markets. Even more importantly, companies must take a longterm and prudent view when developing their businesses in China away from traditional locations, and they will need to adopt an open-minded and flexible approach. What next? The China regional cities report was launched at last month’s ministerial Joint Economic and Trade Committee meeting in Beijing. The full report can be obtained through the UKTI website (uktradeinvest. gov.uk). UK Trade and Investment and China-Britain Business Council are working on a number of initiatives to encourage UK companies to get prepared and seize these opportunities. To get involved, or to find out more about how CBBC can assist companies to advance their businesses in the regional cities which are the focus of the report, please contact Chen Wu, at: chen.wu@cbbc.org

However certain issues are more acute in regional cities. In particular, problems with government bureaucracies and cultural barriers tend to be more prevalent there. There are greater risks in venturing into lesser known areas in China. However, there are also many opportunities to be gained in an already sizeable, yet still fast growing market. The short-listed 35 regional cities combined, account for around 16 per cent of China’s population and 36 per cent of Chi11

QATAR AIRWAYS Qatar Airways Set To Be First Airline In The World To Be Powered By Gas-Based Fuel

Qatar Airways has been joined by Qatar Petroleum, Shell, Airbus, Rolls Royce, Qatar Science & Technology Park and Woqod (Qatar Fuel Company) for an intensive study to be carried out over the next few years to investigate the fuel-related benefits of using Synthetic Jet Fuels to power aviation turbine engines. The revolutionary move would see Qatar Airways become the first commercial airline in the world to operate flights using gas-to-liquids kerosene fuel – seen as the technology of the future that will be environmentally friendly, helping to significantly reduce carbon emissions and reduce the impact on climate change. Qatar Petroleum and Shell are currently building a multi-billion dollar, world class, fully integrated gas-to-liquids complex, which is set to transform the State of Qatar into the GTL capital of the world.

At present, Qatar Airways is now also working with the Guangzhou British Chamber of Commerce to offer Corporate Travel Agreements to British Chamber member companies. These agreements allow partner companies to enjoy the airline’s Five Star service for less than the market rate, truly making Qatar Airways one of the most affordable and best value ways to visit the Middle East and the rest of the world.

GTL kerosene will be an important component of the Pearl GTL project, intended to be marketed as a natural gas derived synthetic component for jet fuel.

Qatar Airways Corporate Travel Agreements can be tailored to suit your needs, for more information, please contact Qatar Airways’ Guangzhou office on +86 20 3814 3019.

Global Expansion Let our Five Star airline take you around the world. Qatar Airways, the national carrier of the State of Qatar, is one of the fastest growing airlines in the world with unprecedented expansion averaging almost 35 percent year on year. From its hub in Doha, capital of Qatar, the airline serves a global network of more than 80 online business and leisure destinations around the world. Across Europe, Middle East, Africa, South Asia, Far East and North America. Together with code share partners, Qatar Airways flies to over 100 cities worldwide. Voted the world’s Leading Business Class airline at the World Travel Awards during 2008, as well as Best Airline in the Middle East for the third consecutive year by readers of TTG Asia magazine, Qatar Airways also holds the illustrious 5-star ranking from independent aviation industry monitor Skytrax for service, excellence and high standards.

Qatar Airways China Qatar Airways operates 21 scheduled flights a week from China to its hub in Doha with excellent onward connections to a global network of key business and leisure cities. During 2008, the airline achieved rapid growth in China, setting up branch offices in Guangzhou and Chengdu to complement its existing Beijing, Shanghai and Hong Kong offices.

Chamber Eye Guangdong

WHY CHINA MATTERS There are some incredible opportunities still available in China – and, in some ways, are even more attractive given the depressive nature of the rest of the world.

BY Kent D. Kedl

These are tough times. Really tough. We have avoided going from talking about the possibility of the “R” word – “recession” – right to the “D Word” – DEPRESSION. The news cycle has been a bit schizophrenic lately, too, and understandably so. Bouncing between the macro-economic crisis in the U.S. and Europe to how it is impacting the average citizen (using the well-worn phrase “Wall Street to Main Street”) and then flipping to the international situation, how the U.S. and European meltdowns affect global markets and the ongoing war in the Middle East. Its enough to make you want to crawl in a hole and wait until its over. And depending on who you talk to, that could be quite a wait. But even though climbing in a hole to avoid the whole mess sounds like a good idea, it isn’t. We all know that. However, just peering out of the hole and staring at our immediate surroundings is not going to do it either. In this dawning age of globalization, when trouble hits, we all tend to turn inward and stare at our economic navels, shutting out the rest of the world that looks even more scary than our own, already-petrifying, situation. But again, this is not the way to do it. To deftly switch metaphors, the financial crisis is not going to be solved by only getting under the hood and messing with the engine (although I think we all admit that this engine is long overdue for an overhaul). We need to not only fix our engine but we also need to look for new roads to drive on… and many of these roads are going to be outside our home markets.

SURVIVING RECESSION

A neighbor of mine is the regional CEO of one of the biggest foreign companies working in China – they have tens of thousands of employees, over 30 factories and are doing billions of dollars in business. I asked him what the current mood was in his company and he said, “Well, the executives in the U.S. are ready to jump off a building, but here in China, we are feeling pretty good. Sure, things are slowing down a bit from what they were a year or two ago, but we are still seeing 12 or 13% growth here. Where else are you going to find that??” He’s right. Where else are you going to find that? The simple fact is that markets are growing here in China and they are NOT growing elsewhere. Isn’t that enough to make you just the least bit curious about what China could mean for your own business? One of the challenges that China is going to face in the coming years is to move from an export-oriented economy to one that consumes a greater amount of what it produces. As they make this transition, the demand for everything here is going to increase. The challenges are going to be great and competing with local companies will not be easy. But if you are looking for growing markets and rising demand, China is the place to be looking. If you are reading this article, chances are that you are already finding sales growth opportunities in China. So my challenge to you would be to look for more opportunities. Don’t rest on the laurels of what you have already done. Sure, be proud of it, revel in its success (if, indeed, you have found success), but find a way to go further.

In this article, I will talk about some reasons why China matters in our current situation. Warning! I am not going to talk about how important China is because of their foreign currency reserves, their ownership of massive amounts of U.S. T-bills or their potential military might. These are issues much too big for my little brain and are – to steal a phrase – way above my pay grade. I am not going to talk about why China is important for our economy, I am going to talk about why it is important for our companies. For your company.

One of the best ways to do this is to consider tier 2 and tier 3 cities in China, the “smaller” cities of only 1-8 million in population. Remember that China has over 200 cities with over a million population and we are seeing growing demand in all of them. If you are already selling in the bigger cities of Beijing, Shanghai and Guangzhou, you will likely need a different distribution strategy to reach the other tiers – but the opportunities could be very good.

In times of economic crisis, our natural tendency is to look for ways to cut costs and maintain what we’ve worked so hard to build. Everyone is assessing the situation according to indicators of mass firings, retrenchment in capital spending and diminished acquisition activity. When times are tough, we tighten the belt and learn to go without. Or so we think.

The next reason “China Matters” is that it still is a great source for lower-cost goods and services. Notice I did not say “low cost” – the distinction is important. You hear a lot of people decrying the fact that China is no longer the lowest cost source in the world. Yes, prices for labor, raw materials, logistics, etc. have gone up in China, but it still might be one of the best places to source product in the world.

Over the years, my clients are nearly tired of me saying that, as companies, our mantra should be “growth” – growth of revenues, profits, market share and influence. Its about growth, stupid!! But when economists use oxymoronic terms like “negative growth” to describe the current environment in North America and Europe, where can we find positive growth opportunities?

But what about Vietnam? India? Other places where prices might not be rising so much. Certainly check them out and compare. But don’t ignore China. I was chairing a panel of procurement leaders late last year and the question was asked if China was no longer interesting as a source and shouldn’t everyone start considering other countries. The procurement leader of a consumer products

Chamber Eye Guangdong

company that sources about $2 bln from China said that he was not really considering other countries besides China. He said, “we have not explored other cities in China…why would we want to explore other countries?” For those of you already sourcing in China, this could be some good advice – as you are looking at other countries, look at the tier 2 & 3 cities in China as well. Many of them have been improving their manufacturing capabilities and infrastructures at an amazing rate. And if you’ve already established an operation in China to support your current business, going deeper in China is just incremental. The third area that China Matters is in its very early stages and so is a bit tougher to pin down – but it should be on everyone’s radar screens. And that is China as an “investor”. For a couple of years now, the Chinese government has been quietly encouraging Chinese companies to look outward, to find markets and investment opportunities outside of China. Well, that quiet approach is now done and the government is voicing their encouragement in very LOUD tones and is providing support to help them do so, organizing research delegations and providing cash grants and loans for overseas investments. The path is similar to how the West looked at China many years ago – the first companies to do so were the larger ones with the money and vision to go global. Then, as time went on, the smaller companies started investing in China as well. Same with Chinese companies – the larger, state-owned firms have been going global first. Lenovo bought IBM’s laptop division; Haier is selling their appliances aggressively into North America and is reportedly looking at buying GE’s appliance division; the Chinese oil and gas giant CNOOC was blocked in their attempts to purchase assets in the U.S. but is still looking for opportunities; and there are rumors flying about that some of the larger Chinese auto firms (SAIC, Dongfeng, etc.) are eyeing the troubled assets of the U.S. Big Three auto makers. But it is the smaller Chinese companies going global – privately owned in the $50 to $100 mln range – that could really spark growth in this area. One of the practical ways we see this developing is in doing M&A deals here in China where one of the primary motivations for the deal is to help the Chinese company go international at the same time that the Western company is coming into China. Chinese companies have the products and investment appetite and Western companies often have the channels – the combination is a very powerful one. My last reason that China matters is pretty loose, I will admit … but I really believe that China should be on everyone’s radar screen because of the potentially new things that could come out of China. Now, that might sound a bit contradictory given what everyone (including me in the past) has been saying about China – that they are great at copying ideas but not very good at inventing them. And historically, that has been true: give an engineer here a blueprint or even a sample, and you’ll have a very good copy in a very short period of time (and at a pretty low cost too). But bring a Chinese engineer a problem and ask them to design a solution…well, you might be waiting around awhile. But this is changing but maybe not for the reason that you might think, that engineers are getting better. While it certainly is true that technical and business education is growing exponentially in both quantity and quality, it is the context of China that is going to motivate creativity. By context I mean it is the business, social, technical and environmental situation in China that is going to spawn creativity by necessity.

Take the environment – no where on earth is the environment more of an issue than in China. And its not just because there are incredibly polluted waters and skies here (look at any developing country – and some developed ones – and you’ll find the same thing). No, its because the rate of development is SO fast and the expectations of the Chinese population to succeed are SO high that new ways are going to have to be found to overcome these challenges. Time and again I have seen the creativity and entrepreneurial drive that seems resident in the Chinese cultural DNA rise to the surface. In the 80s when things were just beginning to take off, I saw farmers in the countryside where I lived literally create markets out of nothing in an attempt to sell their extra produce. They had to skirt some very restrictive rules to do this, but they did it. Look at the annoying DVD sellers, the impromptu street markets, the guys on the side of the road with a bucket of warm water and a screwdriver, marketing themselves in “Car Repair and Beautification”! Sure, there is a vast difference between selling fake DVDs and inventing a new solar energy technology … but the creative and entrepreneurial underpinnings in China are the same. There is a vast amount of creative energy here that is looking for new outlets and now that the core technology here is improving, I think we are going to see some explosive growth in this area. To see where a market is going, follow the money. And there is a LOT of money changing hands here these days – a LOT of people are looking around for interesting things to invest in. We are working with several local investment funds to sniff out new opportunities. They are all small and in their VERY early stages – but they all have big dreams and a big field to play in. And they are going to matter some day. So as you are struggling with your own investment portfolio and your company’s bottom line, resist the urge to stare at your navel and block out the outside world. There are some incredible opportunities still available in China – and, in some ways, are even more attractive given the depressive nature of the rest of the world. None of this is low-hanging fruit and exacting due diligence here is still the watchword. But new top-line growth opportunities and bottom line cost savings are real opportunities here. And China is looking to invest outward and seems to have the cash to do so. Also, there is a legacy of creativity here and a strong motivation to do something new. One of my early mentors emphasized the old saw about “keeping your head when others about you are losing theirs.” At no other time in recent history do we need to dust this off and begin to apply it – and if we do, we will find that China matters a great deal. Kent D. Kedl is a partner in Technomic Asia, a market strategy consulting firm based in Shanghai. Technomic Asia was one of the first foreign consulting firms licensed to practice in China, entering China in 1985. Kent has been working in China since the mid 80s, in education, manufacturing and IT. Kent is co-author of the recently published book “The China Ready Company” and is a sought-after seminar speaker and media analyst on China business issues. He welcomes your comments at kkedl@ technomicasia.com.

Business Expansion in times of a crisis Many businesses are currently facing an extremely difficult period as it is proving increasingly arduous to obtain working capital finance through either equity or debt financing

SURVIVING RECESSION

BY Marty Lau

During a recession that is adversely impacting almost every nation, it is not surprising to see many businesses entering a difficult and frustrating period; many are faced with pessimistic sales orders; bank managers reducing or removing overdrafts or not extending existing bank loan facilities; or the initial public offering (IPO) or private placing process moving very slowly due to lack of investors, etc. It is equally frustrating to see opportunities lost because you cannot obtain suitable and sufficient funding. It is extremely difficult to secure new bank facilities as the banks have tightened their lending policies. The global IPO market has been extremely quiet since the real bite of the credit crunch, which commenced around a year ago. So, what are the options available to you if you want to expand your business or even, sadly to say, how to survive during this global recession cycle? Debt Financing As a result of the global credit crunch, banks around the world have been tightening their credit policies. Businesses with a low-grade credit status may have their existing overdrafts or loan facilities withdrawn or amended to less favourable terms. However, if you have existing facilities that are not being used, make use of them to ensure that they are retained. It is also wise to arrange new facilities before you need them because some banks may take what might appear to be an unreasonable length of time to approve a normal loan application. Where feasible, facilities offered by overseas banks should be explored, as the current interest rate in China of 5.31% is substantially higher than that of many countries/regions, e.g. Hong Kong, United States, United Kingdom or the European Union. Indeed, foreign currency borrowings should be supported by an effective hedging provision to minimise the foreign exchange risk. In the current climate, substantial debt arrangement fees should be expected as lenders hold a greater bargaining power.

DEBT FINANCING

EQUITY FINANCING Why now:

Why wait:

Why now:

Why wait:

+ No “commited” regular repayments. + Time to plan now. + Lower advisory fees. + Achieve public status now. + Equity may be easier then debt.

- More cautious investors - Lower valuation. - Local regulations to be relaxed.

+ Existing facilities. + Lower interest costs. + Arrange before you need them.

- Extremely difficult to obtain. - High arrangement costs.

Equity Financing The most visible casualty of the credit crunch is inevitably the stock market. As well as the substantial drop in stock market value over the last few months, equity funding raised in the public markets has reduced significantly. During the six months ended 31 December 2008, only HK$15.6 billion (approximately US$2 billion) of IPO funds were raised through the Hong Kong Stock Exchange, compared to HK$192 billion (approximately US$25 billion) raised during the same period last year. Similarly, the London Stock Exchange had only raised £1.2 billion (approximately US$2 billion) of IPO funds during the six months ended 31 December 2008, compared to £6.3 billion (approximately US$13 billion) for the same period in 2007. Equity investors are either holding on to their cash due to market uncertainty or they simply do not have the cash to invest as they are stuck with their existing portfolio due to illiquidity and are nursing losses. Despite the disappointing track record of the public markets in the past year, one should not rule out the option of equity fundraising, as it is only a matter of time before the equity markets revive. Furthermore, it seems that raising equity finance may be easier than debt in the current climate. As the length of time to float a company is usually under-estimated, provided that an IPO is the right choice for you within the next year or so, it is sensible to start the IPO planning process now and get the company “investor-ready” before the market picks up again. Given the low level of activities at present, the advisory and related professional fees tend to be more negotiable. Also bear in mind that public status can be achieved via an Introduction or an IPO with a small amount raised, further equity can then be raised via a secondary fundraising when the market becomes active again.

Why now:

+ Difficult to obtain working capital finance. + Less costly than from third party.

+ Debt and equity financing are more difficult. + Share for share transaction.

Why wait:

- Risk of illiquidity. - Slow down growth.

Chamber Eye Guangdong

Why wait: - Extra due dilligence work. - Control of business through dillution.

MERGERS & ACQUSITIONS

ORGANIC GROWTH

How to expand your business during the global recession cycle?

Mergers & Acquisitions Whilst obtaining both debt and equity financing are more difficult now, acquisitive growth linked to synergies and economies of scale may be a more achievable way to expand your business. In particular, a share for share transaction (i.e. an acquisition or merger) would minimise cash outflow for the acquiring company. Also the opportunities to acquire distressed assets at a lower price have improved as there are now many businesses which unfortunately are less likely to survive. Some good news for domestic Chinese companies; on 9 December 2008, China’s banking regulator issued guidelines allowing China’s commercial banks to lend money for domestic M&A transactions. Under the new rules, banks may support domestic companies in M&A activities that involve share transfers, purchasing new shares, and acquiring assets and debt. Nevertheless, the impact to the Chinese M&A market from the new rules is yet to be observed. While it appears to be a good time to crystallise an M&A opportunity, an important risk factor worth noting, particularly for a crossborder M&A, is that businesses have recently experienced and are exposed to much more difficult market conditions in the short to medium term. Therefore, more extensive due diligence work on the target should be carried out to ensure there are no hidden or unforeseen problems that could arise post acquisition.

Organic growth During the current climate, many businesses may inevitably need to grow organically if neither debt nor equity financing is available to them. Whilst less costly than third party financing, this strategy could slow down business growth. It is also worth bearing in mind that the risk of illiquidity is increased if adequate and sufficient sources of financing were not available when required. Conclusion Undoubtedly, many businesses are currently facing an extremely difficult period as it is proving increasingly arduous to obtain working capital finance through either equity or debt financing. Nevertheless, there are alternative ways to help you fulfil a well thought through business plan. It is worth investing some time to talk to your accountants, financial advisors and bankers in order to explore the financing opportunities available to you. The earlier you explore the opportunities the greater the chances of success. Marty Lau is a senior manager of the Corporate Finance team of , an international, integrated and independent organization, specialized in the provision of audit, accounting, tax and advisory services to public and private companies around the world. Mazars has more than 8,000 professionals operating in over 46 countries. In China, there are Mazars offices in Beijing, Shanghai, Guangzhou and Hong Kong.

CHINA 2009 A ROLLERCOASTER RIDE 2009 will be the most challenging year for China in a decade. We believe it will still be a good year, but with increased downside risk, and for some sectors more than others. Most importantly, the Chinese government has both the mindset and the means to control and overcome potential problems, and has already acted preemptively and aggressively to minimize the economic slowdown and promote a fast recovery. Nevertheless, international companies would be well advised to keep a close eye on the economy through 2009. China is now facing a very different set of risks from 12 months ago. The main risk, in our view, is consumer confidence. A global recession, combined with other factors such as a further weakening of the real estate market and a continued slump of the stock market, could damage consumer confidence and inhibit economic recovery. As we move through 2009, the government will focus on stimulating both domestic investment and domestic consumption, as well as controlling the decline of the export sector which is set to worsen. The outcome is uncertain, but we believe that a turnaround midway through 2009 and a stronger second half is the most likely scenario. Macroeconomic risks aside, the focus of attention for most international companies over the coming year will be dealing with the volatility and uncertainty in the Chinese market. Fortunes will vary sector by sector, but for those with resources available, the economic slowdown offers a golden opportunity for better value investments. International companies should also take this chance to seek efficiency gains and implement cost control measures, while continuing to pay as much attention to human resources now as before. The question is: how many international companies are ready for this changing environment? A Look Back At 2008 We forecasted that 2008 would be a good year, but possibly with some surprises, and there have been plenty of surprises. It has been an eventful year for China beginning with the uprising in Tibet, followed by the controversial Olympic torch relay, the huge earthquake in Sichuan Province, the collapse of the Shanghai stock market and many property markets around the country, a major food safety scandal in the dairy sector, and more recently the impact of the global financial crisis on China’s exporters. The central government’s handling of the various crises has been impressive, in particular the Sichuan earthquake. More broadly, China’s fourth generation leadership further asserted its political power, promoting its vision for a ‘harmonious society’ with stronger anti-pollution measures, a greater effort towards energy efficiency, and a focus on social issues such as health. The central government also had to manage a ‘soft landing’ through 2008, with a lower but still strong economic growth rate of 9% for the year. The highlight of the year had to be the enormous success of the Beijing Olympics. Less visible, but more relevant here, has been the continued improvement in the profitability of international companies active in China. According to a member survey conducted by the European Chamber of Commerce in China, 84% are now profitable or breaking-even. The findings were similar for a member survey conducted by the US China Business Council, showing that 65% had stronger margins than the preceding year and 49% were more profitable in China than globally. 18

Chamber Eye Guangdong

SURVIVING RECESSION

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By Jan Borgonjon & James A.C. Sinclair

2009: Crystal Ball Given the level of uncertainty that the global financial crisis has caused, we believe it is helpful to think in terms of scenarios for China in 2009. We have outlined two scenarios below, the first being more pessimistic (and we believe quite unlikely) and the second being more optimistic (which we believe to be much more likely).

Scenario 1: Pessimistic (Unlikely)

In this scenario, the global financial crisis would envelop China, putting it effectively in recession with a growth rate well below 8%. Such slow economic growth would result in massive unemployment and damaging social unrest, jeopardizing China’s political stability and ultimately its longer-term potential. This scenario would happen if the 2-year RMB 4 trillion (USD 586 billion) stimulus package announced in November 2008 does not have a major impact. It may be that the incremental investment spend turns out to be significantly lower than announced. It may also be that the investment spend gets bogged down in bureaucracy, or gets siphoned off by corruption. It may also be that companies and banks do not follow through with investment directives out of a lack of confidence. The likelihood of this scenario could be increased by a number of other developments. It would be cause for concern if the central government didn’t announce any additional incentives to the original stimulus package. It would be worrying if the global economy weakened further and China’s exports collapsed, or if the real estate sector remained sluggish with sliding transaction volumes and housing prices. And it would be disturbing if consumer confidence, rather than merely dipping temporarily, failed to recover and remained weak. We believe that this pessimistic scenario is quite unlikely.

Scenario 2: Optimistic (Likely)

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preciation, assistance for the real estate sector with reduced taxes and loan rates for home buyers, and help for the rural sector with the liberalization of agricultural pricing and subsidies for big ticket items such as electrical appliances and agricultural vehicles. The early signs are positive. We are aware of substantial investment projects in the railway and highway sector that are already underway, and in the automotive sector that are under planning. We are also aware of many machinery purchase contracts that were put on hold but are now going ahead, and a boost in purchasing by rural consumers. All of these are the result of the stimulus package. Pivotal here is the real estate market, as its return to life would help rebuild consumer confidence, and thus real economic recovery. The fundamentals for the long-term development of the real estate market remain in place, and the slowdown in transaction volumes is creating significant pent-up demand. However, consumer expectation is that housing prices will continue to fall, and there won’t be an upturn in buying until consumers believe that the market has bottomed out. This is not a matter of if, but when. Thus, we believe that this optimistic scenario is much more likely. Consumption: A Dip In Confidence Consumption held up well in 2008, with retail sales up 22% yearon-year. However, consumer confidence took a major hit in the last quarter following the onset of the financial crisis. It was the Chinese media that helped build awareness and alarm among the Chinese population, and the response has been clearly evident. Net savings are up, accelerating to 26% in December 2008 compared with 6% the year before. Conversely spending has slowed, especially on discretionary items such as automobiles, and surveys show that the majority of urban consumers plan to cut their expenditures further through 2009.

In this scenario, China would produce a turnaround midway through 2009, with economic growth at 8% for the year. This would make China the bright spot in the gloomy global economy, strengthening China’s standing in the world and confirming its significance for international companies, not just in the immediate future but also for the longer-term.

The changing climate has been felt by consumer-oriented companies, with many brands having to switch to less costly marketing mixes as their budgets were trimmed by headquarters, and retailers offering price discounts to stimulate sales. There are companies that are performing very strongly, but in many cases they are countercyclical due to their value offerings.

This scenario would happen if the stimulus package starts to have an impact by the second or third quarter of 2009. It already appears that the investment spend is going to be much larger than announced, with provincial governments planning their own stimulus packages to augment the central government package. In addition, we are already seeing additional incentives, including support for exporters with increased export VAT rebates and a halt to RMB ap-

Media reports of a spike in retail sales during the Chinese New Year period, up 14% year-on-year, should be treated with caution. Spending growth in 2009 was lower than 2008, and would have been much lower but for the winter snow storms that impacted retail sales during the CNY period last year. Moreover, the spike was encouraged by huge price discounts offered by retailers during the period, together with government subsidies, such as those provided for the purchase

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of home appliances in rural areas. Nevertheless, we are cautiously optimistic for 2009, expecting a recovery in consumer confidence through the second half of the year. Despite the government subsidies, this is less likely to be driven by the rural population. China’s Ministry of Agriculture has reported that around 20 million migrant workers have lost their jobs due to the global financial crisis (other economists estimate 30-40 million), and confidence there will take longer to return. Instead, the recovery will be led by the urban population, where savings is stronger and demand is pent-up. The State Propaganda Office has taken greater control over the Chinese news media in an attempt to ‘stimulate’ consumer confidence (they are currently much more positive than the Western media, which have become quite negative on China). However, the real turning point will come when real estate prices and the stock market start to recover, which will likely be from the summer onwards. International Companies: A Set Of Implications The slowdown in the Chinese economy, and the changing business environment that has occurred as a result, have major implications for international companies operating in China. While there is much uncertainty, there are a number of suggestions worth heeding.

Market: Prepare For Volatility

The Chinese economy will continue to grow, and although growth will decelerate, the government will pull out all the stops to achieve the 8% target that is needed to generate sufficient jobs and avoid social instability. However, the key issue is here is not the growth trend, but the volatility in that growth. For those that have been active in China for several decades, the potential for the economy to lurch dramatically is well known, and companies will have to be prepared for a rollercoaster ride. What that means is watching out for signs of a pick-up in the first half of 2009, as things could start moving very quickly once that pick-up comes. It also means being ready for a subsequent slowdown, and another pick-up thereafter. The nature of the market will vary greatly depending on the sector. There are several sectors that will remain strong or attractive during the first half of 2009 despite the slowdown. These include healthcare (medical devices, pharmaceuticals, other medical supplies) and transportation equipment (aeronautics, railway) which are government controlled and considered a strategic priority. In addition, infrastructure (airports, railways, utilities) will benefit from the stimulus package, and food & beverage will benefit from the shift towards branded and quality products (following the melamine and other food scandals). 19

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The Way Ahead What is clear is that we have entered a period with a new set of dynamics. Those international companies that profit most will have shifted their focus from exports to the Chinese market and have management watching their markets closely, ready to respond to the expected volatility. They will also have streamlined operations through efficiency gains and cost control measures, while also managing to strengthen the loyalty of their workforce. And finally, they will have identified opportunities to expand and strengthen, including acquisitions at more acceptable valuations. As with all slowdowns, those that survive are bound to emerge stronger.

This article is based on InterChina’s ‘China 2009: Business Perspectives’. The full publication is available from Ms. Hu Fang at hu.fang@interchinaconsulting.com. InterChina is a boutique management consultancy specialized in strategy, corporate and human resources Co-contributed by Mr. Jan Borgonjon, Partner & President, InterChina Consulting and by Mr. James A.C. Sinclair, Strategy Practice Director, InterChina Consulting Shanghai Office.

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Investment: Seek Better Value

Where companies have resources, 2009 will be a good year for investment initiatives. This is not to say that FDI will match the USD 92 billion of 2008. Quite to the contrary, we expect FDI to fall dramatically in 2009 as many international companies will lack the financing and stomach to make investment decisions this year. It’s for this reason that China will make itself as attractive as possible for FDI and improve investment conditions.

Economic slowdowns also present a golden opportunity to make acquisitions. In addition to the acceleration and easing of acquisition approvals, the major change has been the lowering of comparative valuations, due largely to the collapse of the Shanghai stock market. At the same time, as sellers/owners are worried about the future survival of their companies, they are becoming much more flexible regarding transaction and cooperation terms. In general, acquirers have gained the upper hand over targets once again.

Human Resources: More Now Than Ever

Human Resources have been a major challenge for companies in China for the past 10 years, and the economic slowdown is providing a moment of respite, as turnover rates have dropped and good candidates become easier to bring on board. However, HR will be a major challenge for the next 10 years. Given that the economic downturn in China will be temporary, and that the need for strong and motivated people is enduring, now is the time for companies to demonstrate to their workforces that their people really are important to them.

Chamber Eye Guangdong

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The companies that too quickly use layoffs to reduce costs will damage workforce loyalty and suffer instability when the market turns around. What are needed are alternative measures to reduce payroll costs. There are many, and they will be accepted by most employees. Examples range from freezing salaries and suspending promotions, to eliminating overtime benefits, introducing unpaid leave or reducing working hours. During this period communication between senior management and the workforce is critical. However, even more effective is leading by example, and senior management accepting salary reductions ahead of their workforce is a common practice in Chinese companies. It is likely that the enforcement of the Labour Law will become more relaxed over the coming months. However, this does not mean that companies should become more relaxed about implementing the Labour Law. The relaxation is only temporary, and non-compliance now could well be punished in future.

Operations: Efficiency Gains & Cost Control

Many China CEOs have received a two-part instruction from their headquarters: not only to expand revenues in 2009, but to do that whilst also reducing costs. Fortunately, the environment is now conducive to efficiency improvement drives and cost control measures, as they will be more readily accepted by employees, business partners and government bodies. Such initiatives would be standard practice for an economic slowdown anywhere in the world and not specific to China. The difference in China is that, given the long period of economic expansion that preceded the slowdown, some of these initiatives are long overdue. Efficiency initiatives in China could include streamlining corporate structures, converting an opportunistic sales effort into a more systematic approach, and revamping performance management systems. In addition to the payroll cost measures described above, other cost control initiatives could involve strengthening cash flow management, re-negotiating contracts with various suppliers, and reducing travel allowances and privileges. Meanwhile, companies should pay special attention to the financial health of their suppliers. Many Chinese companies subsist on working capital alone, but don’t efficiently manage receivable and inventory positions, dangerously exposing them to liquidity problems in slowdowns. This is exacerbated around Chinese New Year, when workforces demand their wages before returning home for the holidays, and creditors collect debts or call in loans.

POWER TO LOCAL GOVERNMENTS Although the efforts to re-assert central control will stop the decentralization process temporarily, we expect the influence of local governments to increase over time. LIKELY PROTECTIONISM China will increasingly protect and support domestic industries resulting in more difficult market access in many sectors, in particular those considered ‘strategic.’ However, 2009 will witness relatively flexible implementation and faster granting of approvals, albeit temporary. CERTAIN BUT MORE FLEXIBLE SOCIAL INSTABILITY Due to rising income disparity, unemployment and corruption, there will be increasing incidents of unrest in the short-term. We do not expect these incidents to get out of control, as long as the economy grows at an acceptable level (7%-8%). LIKELY, BUT CONTROLLED

BUSINESS

Finally, for food service and retail companies, 2009 will present a window to acquire good sites. A number of quick service restaurant brands are already finding this easier, including McDonalds, which recently announced that it would expand its number of outlets in China by an additional 175 in 2009.

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ECONOMIC

This begins with the establishment of new entities. Government bodies are granting investment approvals quicker and easier than before, with the longer-term protectionist trend currently put on hold. Meanwhile, development zones are now less fussy, starting to welcome manufacturing businesses in addition to hi-tech businesses once again. In addition, land is becoming more available and land prices are falling, as are construction costs.

‘03

POLITICAL

Several other sectors will be mixed. For example, machinery used in the infrastructure and food & beverage sectors will be much stronger than machinery sold into export sectors like textiles. Other sectors will depend on the strength of the recovery. Big ticket items, such as automobiles and consumer electronics, will have to wait for the return of consumer confidence.

‘02

COST INCREASES Cost increases will continue but at a slower rate, and labour cost increases will slow down considerably. As first tier cities and coastal areas are becoming increasingly expensive, some international companies will consider alternative regions in China, or other countries, for all/part of their activities. CERTAIN BUT SLOWER FIERCE COMPETITION FROM CHINESE COMPANIES Chinese companies will continue to put pressure on margins, including for those products that are too advanced to have direct Chinese competitors at present (i.e. technology). CERTAIN AND GETTING FIERCER

TRADE TENSIONS BTW EU, USA AND CHINA Market access and quality concerns will remain major issues, but the US and the EU will move more to cooperation with China in the face of the global economic crisis.

CONFLICT OVER TAIWAN Actual conflict is unlikely, as this would result in the destruction of both economies.

LIKELY, BUT LESS TENSE

UNLIKELY

INFLATION Inflationary pressures have come down and inflation will be in the 4-5% range. LIKELY, BUT LIMITED INCREASING NON-TARIFF TRADE BARRIERS (NTBS) Whilst China will continue to comply with its WTO commitments, it will also introduce further NTBs, in particular related to market access (JV requirements) and to standards. LIKELY CURRENCY REVALUATION Limited (2%-3%) or no adjustment UNLIKELY STAFF SHORTAGES There will be continued competition for mid and senior level management, as well as qualified technical and purchasing personnel. In addition, wage levels for blue collar workers in the coastal areas are rising rapidly amid worker shortages. CERTAIN

POLLUTION CONTROL & ENERGY CONSERVATION Pollution control and energy conservation have surged to the top of the political agenda at both national and local levels, resulting in additional controls and costs (including indirectly through suppliers).

LIKELY EXPORTS PROBLEMS Slowing global markets will have a serious impact on exports, and thus we expect slow (<10%) or no export growth.

LIKELY ADMINISTRATIVE ARBITRARINESS AND LACK OF TRANSPARENCY The Chinese corporate environment is developing quickly, with many new and important regulations being promulgated. However, local governments lack the resources to implement these changes and international companies should expect different levels of legal transparency between locations.

POWER SHORTAGES Nation-wide shortages have been avoided as new power generation & distribution capacity has come on-line. We expect supply and demand to be balanced through 2009, with a surplus in certain areas. COMPLETLY UNLIKELY

CERTAIN

China 2009 - Risk Overview

INVESTING IN HUMAN CAPITAL DURING A RECESSION Companies should be making strategic HR changes to promote future corporate growth and to retain hot talent needed to make those changes.

BY Tony Dickel

As the reality of the 2008 economic meltdown becomes ever more apparent, many businesses and organisations are seriously looking at their short term survival strategies. In some cases this means diversification, in others more focus. In nearly all cases it means dramatic cost cutting, including trimming staff and reducing fixed compensation costs. Others still are developing new products more accessible to consumers who have lost significant disposable income (e.g. netbook manufacturers). Most management executives are already deep in discussion on how to steer their organisations safely out of troubled waters and take their business to the next level when growth returns. Conversations at board level range from product and service development appropriate to the “new order”, contingency planning should things get even worse or last longer than expected and opportunities arising from the downturn There is, of course, a tendency for companies to adopt a survival and capital preservation strategy rather than a growth strategy in circumstances such as these. However, organizations who keep their eyes raised above the morass can emerge as winners with the right products or services, organization and, most importantly, people to drive their future growth. In each case success will be dependent on managements’ ability to align their business plans closely to their manpower strategies and have the right people doing the right things at the right time. Talent management is, or should be, an instrumental part of a business plan in any economy and senior management should take an active role in the development of an effective talent strategy. Just as it is possible to acquire “hard assets” which may have appeared inaccessible just a year or so ago, the same potentially applies to “human assets”. Just as investment professionals are scouting for opportunities to acquire such “hard assets”, so should all companies scout for opportunities to acquire human capital which can help position the company to better survive and also to grow. Communications as a means to competitive advantage in tough times It is natural that during tough times employees become anxious. In a communication vacuum humans tend to assume the worst even in the best of times. Gossip can come from many sources, within and outside the company and remarks casually made by management can easily be taken out of context if their impact is not properly assessed and planned. In order to avoid people “drawing their own conclusions”, embark on a regular communications plan. Better still, be as transparent as possible about any issues facing the company and enlist the help of all levels of staff to work out the solutions. People tend to be more understanding and tolerant if issues are shared and feel more “in22

Chamber Eye Guangdong

SURVIVING RECESSION

vested” in the success of the company. They enjoy being trusted and it can be surprising where good ideas can come from. There are complexities with this approach however which need to be borne in mind. Asians generally and particularly mainland Chinese tend to expect strong leadership and direction from their bosses and may be uncomfortable with a participative approach. Attempts at Q and A with large groups tend to be met with uncomfortable or even stony silences. The best way to handle this is to organize events and working lunches with small “focus groups” to explore what is being said around the company, pass on relevant information and answer any questions. Bring small groups together to handle different aspects of issues, particularly those who may have a vested interest in the outcome. E.g. volunteers can be sought from those who travel frequently to come up with ways of reducing travel costs. Effective, regular and well planned communications will give companies the edge with respect to retention of top talent as well as keeping morale, employee engagement and investment in decisions that need to be made high. A robust HR strategy can help lift the company’s operations Besides taking into consideration the short-term survival goals, management must also consider their long term plans for business growth when the recovery kicks in. Slower times give organizations pause for reflection and time for development or refinement of longer term strategic objectives. It goes without saying that the success or failure of any corporate mission of a company depends on the effectiveness of HR strategy and its proper integration with the business strategy. This includes looking at what existing resources can be deployed, what skills are missing, where “top-grading” can be accomplished and what may be surplus to existing and future requirements. Once the type of skills and expertise required are determined, HR personnel can then activate HR plans by exiting staff whose skills are not required, retaining staff whose skills are essential to the business plan as well as investing in new hires with the right skills and mind set. All these activities are absolutely necessary to turn the company round and should be implemented quickly. Dealing with underperformance During periods of rapid economic growth the supply and demand equation for goods and services tends to favour the seller. In this type of environment it is easy for companies to overlook poor performing business units and individuals because their impact is masked by the overall success of the total business. In this current environment the first task that businesses must handle is probably

letting go of underperforming staff who may suddenly become very exposed. Adequate performers who refuse to partner with the business and adapt as appropriate to fight the downturn may also need to go. HR directors must have the foresight to look ahead to obtain the right combination of skills needed to guide the company into a successful business operation in that year. They should have already done their homework and know which are the underperforming staff that should be removed. When cost-cutting becomes necessary, HR should be ready with a “good performer” list to get rid of the poor performers.

Do not, under any circumstances, badmouth departing employees, either during or after their departure. You should not under-estimate the friendships formed at work and departures must be handled with sensitivity. If at all possible and if in line with your business strategy, it is good to combine bad news with some good news. For example, one or two high profile hires will reinforce to staff that the organization is not “capitulating” but is rather “re-engineering” the business to adapt to differing circumstances. It is also vital that when allocating manpower, the management does not over-rely on too few remaining staff.

Businesses must, during tough times, adjust the balance of risk and reward between the staff and the company. The “frothy” market situation during the boom time when there was more of a scramble for talent at all levels created untenable situations where fixed compensation packages were bid up like any other scarce asset. Current times bring an opportunity to the company to lower fixed compensation and, possibly, compensate by increasing the bonus element (be careful that KPI criteria ensure that the bonus can be funded. If revenues are forecast to be back at 2005 levels then you must ensure that your cost base reduces concomitantly).

Top caliber staff must be retained at all costs In addition to getting rid of underperformers management must also ensure that top caliber staff remain in the company as these are the people which will form the platform for recovery and growth later. Their leaving is likely to be highly detrimental to the business. If cutbacks are absolutely necessary, it would be much more beneficial for the company to forego average and backroom staff as they can be easily rehired under any circumstances, unlike top performing staff. You must therefore be careful that actions taken do not destabilize those who are regarded as being top performers.

Savings thus obtained can then be passed on to the good remaining employees to further strengthen their loyalty to the organization. As long as people are removed amicably, a strong performance culture will prevail to set a good example to the new employees and the organization’s employer brand will not be affected. A communication plan should be worked out to go hand in hand with any “re-engineering” of the business. This should be positive in spin but it should be assumed that employees will be intelligent enough to draw their own conclusions so an honest approach is best.

Apart from allocating some of the “savings” from elsewhere to keep top performers happy it is important that they are properly engaged and invested in what you are trying to do. Implement bonus programs with deferred compensation schemes to encourage loyalty and keep communicating and consulting with them regularly. As management steer staff towards the new business direction, it would be best for them to be supported by a strong team to achieve their business objectives. With committed staff, the organisation is probably more likely to achieve their goals. 23

What HR should realise is that what really motivates employees is not the money or the position, but rather how they feel about the work itself. In addition to bonuses, they should also provide career paths for these treasured staff so that they are committed to stay in the company, even when they get better job offers. Training and leadership development courses should be offered to these staff as a form of employee engagement. Recruiting top talent is easier During recessionary times, organizations who have managed themselves well and who can keep their eyes raised can obtain the services of individuals who would normally be inaccessible to them. As Warren Buffet says, the time to be greedy is when everyone else is fearful and the time to be fearful is when every one else is greedy. Provided survival is not put at risk this is a great time to “top-grade” an organization and those who do this carefully can profit immensely. Cautious investment in human capital at this time will ultimately enhance the company’s productivity, streamline workflow and improve business performance. When considering new hires in these challenging times, it is just as crucial that management does not offer salary packages below the current market to the crème de la crème of talent. This is because that when the upturn comes, the company would be in the lower percentile of the compensation benchmark. As a result, high potential as well as top performers are more likely to move out once the recession ends and better times return. Invest in Employer Brand to reach out to top talent An Employer Brand basically is the reputation of an organization as an employer. Having a strong HR strategy in place, HR professionals should also ensure to invest in their Employer Brand. Many organisations have been overlooking the significance of its Employer Brand which, in actual fact plays a major role for companies in attracting top talent to work for them. Even during a downturn, top talent are still sought after and a company with a strong employer brand is likely to more easily obtain better staff than those with a weak employer brand. It is thus critical for each company to have a well developed corporate vision on the growth of the company, the position and the career path which can be clearly articulated to employees. A strong Employer Brand and a clear career path are some of the biggest motivators for candidates to decide whether to make a move to another company. It is also critical for all those involved in the hiring process to deliver a consistent corporate vision and message. Candidates have many options and all things being equal often choose to move to the company with the strongest employer branding To attract top talent, firms should formulate an effective recruitment campaign targeted only at top caliber people. Businesses should make use of more than one avenue of candidate attraction methods. Regardless of the attraction strategies used, such as job boards, staff referrals, third party recruiter, management, HR executive and line managers should be in sync on their criteria and requirements of the job scope and role to create a specifically targeted talent attraction campaign. A focused recruitment campaign can then successfully acquire the right staff for the company.

Effective communications to get commitment from staff Once all the manpower allocation has been determined and in place, management should keep the staff committed especially in times of great stress. To do that, management should devise an effective internal communications strategy that ensures that its corporate messages are conveyed to all staff effectively. This would include the use of formal as well as informal channels. Formal channels would include company newsletters, team meetings and regular management meetings with the staff. Firms should also be flexible in their communication tools and can even hold casual team meetings offsite, as in the holding of barbeques and company outings. Management should nevertheless be consistent and clear in their messages to their staff. Besides improving internal communications, HR must also be aware of the different motivation tools and strategies for the different generations that co-exist in the company, such as baby boomers, Generation X and Generation Y. HR staff should ensure a concerted effort to drive employees motivation and commitment for the company during such pressuring times. Synchronise goals with staff It might sound cheesy, but when the employee’s goals and the company’s vision are synchronised, the road to success for the company, will be a lot smoother and easier. Retaining your top talent coupled with the new hires of available top talent in the market can then support your radical business changes. Radical changes are absolutely unavoidable if the company wishes to institute a complete turnaround to its underperforming culture. Tony Dickel is the CEO of the MRI China Group, a leading executive search firm. He can be contacted at info.hongkong@mri-china.com

China’s outward foreign direct investment China’s flow of outward foreign direct investment is currently the fourth largest in the world among developing countries according to the OECD.

BY Tiaan Herbst

China’s non-financial outward foreign direct investment reached a total of $40.65 billion according to a recently published government statistical gazette, evidencing a year-on-year increase of 63.6 per cent from the previous year. The Organisation for Economic Cooperation and Development (OECD), in a report on China’s external investment published in 2008, stated that since 1979 (when China virtually had no capital outflows) China has become an important source of outward foreign direct investment. China’s flow of outward foreign direct investment is currently the fourth largest in the world among developing countries according to the OECD’s report. In 2000, China officially inducted a “go global” strategy, as announced in its tenth five-year plan (2001-2005), in order to aggressively promote its outward foreign direct investment, encouraging businesses in various industries to look abroad for capital investment opportunities. In the fourth quarter of 2006, China’s total stock of outward foreign direct investment reached an astonishing $ 90.6 billion, a growth rate of more than 110 per cent per annum during the period 2000-2006. Approximately 95 per cent of all Chinese outward foreign direct investment was directed toward other developing countries between 2003 and 2006. According to the Ministry of Commerce of the People’s Republic of China (MOFCOM), more than 5,000 Chinese investment entities had established nearly 10,000 overseas enterprises through direct investment across 172 countries at the end of 2006. The most prominent recipients of Chinese outward direct foreign investment are Hong Kong, the Cayman Islands and the British Virgin Islands (longstanding tax havens or offshore financial centres) as well as Australia, Denmark, Korea, Macao, Russia, Singapore, Sudan and the United States. According to the 2006 statistics, Hong Kong was number two on the list of host countries for China’s outward foreign direct investment, reflecting its close ties with the mainland. From the period 2003-2006, Europe received 3.6 per cent of total outward foreign direct investment flows from China. Despite investment flows to Western Europe stagnating at around $120 million per annum, investment to Central and Eastern Europe increased from $38 million in 2003 to nearly $500 million in 2006 with Russia being the most popular destination, accounting for more than 50 per cent of outflows to Europe, followed by Germany and the United Kingdom. Perhaps one of the most prominent forms of Chinese overseas investment is the increasing number of acquisitions (a favoured overseas expansion strategy by Chinese firms); acquisitions in developed countries had ramped from a meagre $60 million in 1990 to $15 billion in 2006.

Chamber Eye Guangdong

SURVIVING RECESSION

The most prominent acquisition cases include the acquisition of South African mines and British mining companies by China’s Zijin Kuangye, Lenovo’s acquisition of IBM’s PC business, CITIC Group’s acquisition of Kazakhstan oil fields, and China Mobile’s acquisition of Pakistan Telecommunications Company. Feng He, a researcher with the Chinese Ministry of Commerce, said that major reasons behind these overseas acquisitions are that domestic enterprises want to seek more developing room overseas; the state has loosened its control on overseas investment; and some large enterprises see overseas mergers and acquisitions as the best way to become internationalized. 1990-’91

2000-’02

2003

2005

2006

China’s deals

430

3,561

1,647

5,279

14,904

As a ratio in total OFDI Flow (%)

13.9

16.7

43.6

43.1

84.5

The volumes of China’s outward foreign direct investment are, not surprisingly, dominated by state-owned enterprises, primarily operating in the natural resources sector in order to provide supply to gratify expanding domestic demand of energy and mineral products. The distribution of China’s outward foreign direct investment is, however, not limited to natural resource extraction projects. In fact, business services (see Table 2) are also a major contributor to the total outward foreign direct investment. Despite the Chinese government’s policy to promote outward foreign direct investment and the subsequent introduction of the Qualified Domestic International Investors (QDII) scheme in 2006 and the establishment of the China Investment Corporation in 2007, obtaining the necessary approval to do so has often been marred by restrictive and complex administrative procedures. Nevertheless, China’s increase in outward foreign investment, as considered by some critics, is a logical step for her economic development and contribution to the global economy.

2004

2005

2006

1,460 1,380 80

2,089 1,800 289

1,781 1,675 105

8,725 8,540 185

Secondary Sector (Manufacturing)

620

756

2,280

907

Tertiary Sector

775

2,654

8,200

8,003

Lease and business services

280

749

4,942

Primary Sector Mining, quarrying and petroleum Agriculture, forestry, husbandry and fishery

Sudan

46.2

Sudan

23.3

Algeria

19.0

Mauritius

13.7

Nigeria

14.3

Algeria

21.7

Zambia

16.8

South Africa

11.8

South Africa

5.6

Nigeria

13.6

Nigeria

13.0

Zambia

7.4

Guinea

4.5

South Africa

12.1

Sudan

9.8

4,522

Algeria

3.3

Benin

4.3

Guinea

South Africa

7.8

Top 5

68.9

75.1

74.8

66.5

Top 10

78.3

89.1

85.8

88.2

800

2,260

1,114

829

577

1,377

Miscellaneous

276

422

991

2,854

5,498

12,261

17,634

Why are Chinese companies looking abroad? In light of the steadily relaxing Chinese governmental controls on outward investment, China’s outward foreign direct investment has become increasingly driven by Chinese companies’ own commercial motivations, rather than the government’s political agenda.

vestment in Africa experienced a breakthrough in 2004 when its outward foreign direct investment flows into Africa soared by more than four times that of the previous year. China’s recent economic activity in Africa has shown a remarkable shift from ideological to increasingly economic motivations despite the critique that China’s investment in Africa has an indirect political undertone.

According to the OECD, China’s outward foreign direct investment projects are driven by five major motivations: (i) projects seeking natural resources; (ii) projects seeking product markets; (iii) projects seeking strategic assets including advanced technology, brand names and customer/distribution networks; (iv) projects seeking diversification; and (v) projects seeking efficiency.

The same OECD report as cited above cites that from the period 2003 to 2006, China’s direct investment flows into Africa have shown a sevenfold increase. China has also become a prominent source of foreign direct investment for a host of African nations, such as Niger, receiving 27.5% of its foreign direct investment from China, Madagascar (10.8%), Guinea (8.0%), Zambia (7.1%), Gabon (6.5%) and Mauritius, receiving a share of 5.7% (see Table 4). Despite China’s burgeoning economic interests in Africa, its direct investment currently accounts for less than one per cent of the total foreign direct investment in Africa, far lower than that of investors from European countries (Great Britain being Africa’s primary source, boasting a share of 16.6% in Africa’s total foreign direct investment) and North America.

Another notable motivation for China’s outward foreign direct investment is, as stated above, that of asset-seeking. Several foreign enterprises owning proprietary technology and globally-recognized brand names have become the target of acquisition by Chinese companies. This mitigates vast research and development and marketing costs whilst at the same time gaining access to considerable goodwill, depending on the stature of the company acquired. Lastly, Chinese banks are actively seeking overseas investment opportunities to expand their businesses, tap the savings of the Chinese diaspora and to gain access to more sophisticated financial management techniques and practices in developed countries. Chinese banks thus seek to provide essential support to other Chinese businesses abroad, especially in Africa. Lastly, capital outflows from China can reduce its rising foreign reserves. Chinese investment in Africa The vast natural resources of the African continent have attracted significant sums of Chinese investment in recent years. From copper mining in Zambia, iron ore extraction in Gabon and oil refineries in Angola (Sinopec, a major Chinese state-owned oil company offered over $2 billion for the right to engage in oil exploration activities off the Angolan coast), there seems to be something of interest to Chinese companies all over the continent (see Table 3). China’s outward foreign direct investment in Africa is highly diversified, reaching a number of 48 (primarily resource-abundant) countries. China’s inChamber Eye Guangdong

2006

32.6

360

Sector

2005

Nigeria

Wholesale and retail

Resource-seeking projects have been the primary driving force behind China’s outward foreign direct investment ever since its inception. China’s resource-seeking outward foreign direct investment was driven by its insatiable domestic demand for natural resources. The Chinese government has been involved in a number of diplomatic activities, especially in resource-rich countries, in order to secure natural resource transactions. These diplomatic activities range from placements of several high-ranking Chinese officials on missions to the provision of official development aid programmes.

2004

Transport and storage

Total

2003

No. of Projects

Investment Value (USD Million)

As a Share of China’s Total Investment in Africa (%)

Agriculture Resource Extraction

7.0

188

27.6

Manufacturing

230

315

46.2

Machinery

2.3

Home Appliances

3.7

Light Industry

12.8

Textile

102

15.0

Other Manufacturing

12.6

Services

200

125

18.3

Others

0.9

Total

499

681

100.0

Experts are of the opinion that Chinese companies view Africa as both a lucrative market for their low-cost consumer goods and a burgeoning economic opportunity as more countries are in the process of privatising their industries and opening their economies to

foreign investment. The OECD, however, argues that China’s contemporary relationship with Africa has been driven by a strong commercial impulse and an economic rationale. China’s demand for oil and other natural resources to keep its economic engine purring and sustain economic growth has made Africa a key economic partner. Sudan, an oil rich nation in Northeast Africa, is the most prominent recipient of Chinese investment, currently selling approximately two-thirds of its oil output to China. China’s investment interest in Africa extends far beyond oil. China currently ranks as the continent’s second-largest trading partner, behind the United States, and ahead of France and Britain. From 2002 to 2003, trade between China and Africa doubled to $18.5 billion and by 2007 it had reached $73 billion. In 2008, the annual bilateral trade volume between China and Africa climbed to an astonishing $10.68 billion. China’s economic presence in Africa has to some extent given citizens of many African nations, such as the Congo, a slightly higher standard of living. This is partly due to the insistence of officials in these countries that Chinese firms mostly employ local workers. China’s economic presence and role in Africa has, ever since its inception, been the subject of widespread criticism, such as its presence in Sudan with its humanitarian crisis in Darfur and investment flows into other African nations known for human rights abuses, rampant corruption and unsavoury regimes. Irrespective of widespread international criticism of the Chinese economic presence in Africa, China insists that it strives to encourage African nations toward sustainable development. Despite a number of setbacks in its African economic conquest, the most notable being three attacks in 2008 on Chinese-invested oilfields in Sudan, Chinese being amongst the more than 200 foreigners kidnapped between 2006 and 2008 and the nine Chinese who were killed early in 2007 when gunmen attacked an oilfield in Ethiopia, China’s economic engagement with Africa is set to continue unabated to a large extent. However, many observers argue that China’s capital injection is in dire need of a strategy overhaul. China argues local communities are benefiting from its economic presence, although this has sometimes been met with violent discontent. (China’s official development aid to Africa is double that of its total foreign direct investment.) China has been involved in numerous projects to improve the abysmal state of infrastructure so common in most countries on the continent. He Wenping, an African affairs researcher with the government-affiliated Chinese Academy of Social Sciences argues that despite China’s state-owned enterprises’ concentration in the natural resources sector, projects in infrastructure are gradually taking shape.

4.2

The effects of the global economic slowdown on Chinese external investment and its future The increasing protectionist sentiment across the world is likely to lead to an increase in Chinese outward foreign direct investment as opposed to exports. By encouraging Chinese enterprises to embark on economic ventures in foreign countries, China can to an extent mitigate international pressure to revaluate its currency. Referring back to the recent growth of Chinese mergers and acquisitions, further appreciation of the yuan is very likely to encourage more Chinese enterprises to search for M&A transactions abroad as they endeavour to ameliorate their positions in the global market. According to Eurasia Group, a global political risk research and consulting firm, China’s outbound investments are expected to slow in 2009, but a huge drop off is not likely as China seems willing to continue pursuing investments and in fact seize on fresh opportunities during the global slowdown. China’s national oil companies are also being encouraged to purchase upstream assets, while China’s nuclear expansion will mean that southern Africa’s uranium deposits will continue to be of significant interest. Furthermore, China’s minister of Commerce, Chen Deming, is of the opinion that China plans to further deepen its economic ties with Africa despite the slowing domestic economy. A Chinese government fund invested $400 million in Africa last year, contributing some weight to Mr Chen’s argument. There are also several projects financed in Africa by the aforesaid fund including five industrial parks in Zambia, Nigeria, Egypt and Ethiopia. In light of the recent losses suffered by Chinese companies abroad amid the global economic slowdown, the Ministry of Commerce (MOFCOM) may ask companies, including state-owned enterprises, investing $100 million or more abroad to first gain approval and require that further approval be obtained when considering investments in countries with which China has no diplomatic relations or countries where the risk of doing business is deemed to be relatively high. These draft new rules seem to somehow contradict the government’s existing policies to encourage Chinese companies to actively invest abroad. Despite China’s continuing enthusiasm about its economic ties with Africa and the rest of the world, the effect of the global economic slowdown is yet to take its toll. Tiaan Herbst, Business Development Manager of RMS Migration Services, a full service employment migration and immigration consultancy based in Hong Kong. RMS also assists mainland Chinese investors to invest and immigrate to a number of countries. Tiaan Herbst can be contacted at tiaanherbst@rmsmigration.com or via the web site of RMS Migration Services at www.rmsmigration.com.

NEW MEMBERS

CHAMBER

BOCA CAFE Boca Café is the first location in Guangzhou that stays true to the Café concept. Our belief is it should emulate the warm feeling that is found across all small towns where the café is the principal place to gather and socialize. This desire for companionship and the craving for a great culinary and coffee experience is what inspire us. We understand this feeling and by staying true to the idea of a small town café we feel we are staying true to ourselves.

POWER POINT MANAGEMENT LTD. Founded in 1991, Power Point Management Ltd (PPM) has 65 branches in 23 countries. PPM is dedicated to offer professional consulting offshore company set up / Belize, Seychelles, Brunei, HK, BVI…etc. and onshore company / factory, branch, trading company set up and office rental & recruitment service in China,Vietnam, Malaysia, Thailand and Taiwan. Also China / Vietnam embassy legalization, open bank account and Tel / Fax / Mail forwarding service in HK & Singapore.

GUANGZHOU UNITED FAMILY CLINIC United Family Hospital is the first foreign-invested hospital to operate in China. It is accredited by JCI and has become the hospital of choice for thousands of families in China, providing the full spectrum of international standard healthcare services to the entire community. Guangzhou United Family Clinic is a pioneering and innovative model of evidence-based integrative medicine committed to create a community of health and healing for patients and practitioners by incorporating the perennial wisdom of ancient traditions and the power of modern science.

GUANGDA LAW FIRM Guangda Law Firm is proud to be one of the leading law firms in China. We have 25 partners, over 100 full-time lawyers, and totally 250 employees. Headquartered in Guangzhou with three branch offices in Beijing, Shanghai, and Shenzhen, we are highly capable of offering nation-wide legal services to our clients. Our firm has been committed to providing quality, efficient, and customized legal service in coordinated efforts to assist our clients in realizing their business objectives.

LEHMANBROWN ACCOUNTING & FINANCIAL CONSULTING LTD. GUANGZHOU BRANCH A China-focused accounting, taxation and business advisory firm, LehmanBrown operates dedicated offices in Beijing, Shanghai, Hong Kong, Macau, Shenzhen, Guangzhou, Tianjin, Mongolia & London (sales) and manages an entensive affiliate network providing service throughout China. Combining years of international expertise with practical China experience and knowledge, we offer expert advice and support to both local and international clients. With LehmanBrown, you enjoy access to senior, experienced counselors from China and many other countries.

UNIGROUP WORLDWIDE UTS St.Louis, Missouri based UniGroup Worldwide UTS is the international subsidiary of UniGroup.Inc. We offer International, domestic, local moving, pet transport and storage services. We are part of the United Van lines and Mayflower Transit group of companies with a worldwide network of over 1,300 offices.

CAPGEMINI BUSINESS SERVICES (CHINA) LTD Capgemini in a global leader in consulting, technology and outsourcing. Capgemini Guangzhou is one of Capgemini’s key global BPO delivery centers. We have 2 centers in Guangzhou with 900 seats, providing outsourcing service in F& A, Supply Chain Management, Customer Care and Assurance Services to our international clients.

COMPASS CATERING SERVICE (CHINA) CO.,LTD Compass Group is a market leader in providing food and a range of selected support services to customers in the workplace, in school and colleges, in hospitals, at leisure or in remote enviroments. We bring together the combined strength of a Group which operates in around 55 countries, with more than 388,000 employees, to deliver the same superior standards of service globally, daily, personally.

EVENTS

CHAMBER

Shenzhen Networking Drinks - 15th Jan ‘09

The RADDISSHMe team with Josef Jelinek. From left to right - Cedric Moree, Ajoy Sahu, Josef Jelinek, Regan Liang, Oru Kabir, Niki Zhuo,Yuki Wang, Stella Li.

Life on the Bankrupt Factory Beat by Associated Press - 13th Jan ‘09

Brilliant Presentations Workshop by Acorn Consulting - 7th Jan ‘09 JIAMEI DENTAL JIAMEI Dental is the first chain-running large-scale modern dental clinic in China. JIAMEI is a co-partnership company set up jointly by China JIAMEI Group, Britain Martin Currie Investment Management Limited and SIG. Our dental clinic offers quite a few professional services including oral medicine, oral surgery, orthodontics, porcelain crown, dental implants and so on. At present, JIAMEI has set up 100 chain out-patient departments in many cities such Beijing, Shanghai, Guangzhou, Shenzhen, Nanjing, Dalian, Shenyang, Hangzhou etc. It has more than 300,000 life members.

QATAR AIRWAYS Qatar Airways is the national carrier of the State of Qatar. Currently undergoing rapid expansion, Qatar Airways is one of the fastest growing airlines operating one of the youngest fleets in the world. Our network includes Europe, Middle East & Africa. Qatar Airways is one of only six airlines in the world with a prestigious 5-Star ranking for service and excellence awarded by Skytrax.

NOBLE APEX ADVISORS LTD. Noble Apex Advisors Ltd. is a financial boutique with experienced professionals dedicated in providing quality financial planning and investment management service. We are a registered Investment Advisor with the Hong Kong Securities and Futures Commission and members of the Hong Kong Confederation of Insurance Brokers, the Hong Kong Securities Institute of Financial Planners of Hong Kong.

RADDISSHMe DESIGN HOUSE Raddisshme Design House, founded in 2004, is a leading international design company based in Guangzhou. With a culture of product innovation and long term vision, Raddisshme has created product, marketing and brand packages for customers such as: Prada, Miu Miu, Kenzo, DKNY, Diesel, Replay, LECAF, Tecnica, Rossignol and many others.

YU LAN LIMITED Yu Lan Limited (‘Yu Lan’) is a Wholly Owned Subsidiary of Carillion Plc. Carillion is one of the largest construction companies in the UK, generating annual revenue of around US $11 Billion and employing 50,000 people world wide. Carillion is a publicly listed company on the UK stock market and is part of the FTSE 250.Yu Lan was set up in September 2007, as a part of Carillion Direct Souring. The main business is to identify and quality manufacturers that can provide products directly to Carillion’s construction sites around the world.Yu Lan is looking to bulid stable and long term direct relationship with suppliers

Chamber Eye Guangdong

Opportunities for UK Businesses In China's Regional Cities - 8th Dec ‘08

Qatar Airways Sponsorship Jeremy Sargent, Chairman (BCCGD); Chan Cheong Eu, District Sales Manager Guangzhou (QA) - 27th Feb ‘09

Talent & Business Strategies For Chinese Multinational Corporations by MRI - 21st Nov ‘08

Transfer Pricing Seminar The new Chinese Special Tax Adjustments Rules - By Deloitte - 20th Feb ‘09

Minimize Your Business Risk during the Global Financial Crisis - 4th Dec ‘08

LISTINGS

TONY & GUY Unit 109B-110, 75, East Tianhe Road, Tianhe District, Guangzhou, 510620, P.R. China +86-20 – 87540096 +86-138-0244-0010 E: tggzmarketing@gmail.com W: www.toniandguychina.com.cn

GUANGDONG HAOHE CONSTRUCTION CO., LTD T: +86 20 85661198-3408 F: +86 20 85664888 Direct Line: +86 20 85662998 E: bobhe@hecan.com.cn W: www.hecan.com.cn

PIEROTH WINE CO., LTD. Tel: +86 755 82037862 Fax: +86 755 82037286 E: info@pieroth-prc.com W: www.pieroth-china.com #1405, Building B, Perfect Garden, Shennanzhong Rd, Gangxiaxi, Futian District, Shenzhen

JIAMEI DENTAL Suite 203C, Hongxiang Building, 613, Tianhe Bei Lu, Tianhe Distric, Guangzhou

RADDISSHME DESIGN HOUSE Room B5, 60 Xian Lie Dong Hen Lu, Tianhe District, Guangzhou, China 510500 T: +86 20 28296215 F: +86 20 28296219 E: info@raddisshme.com www.raddisshme.com

Chamber Eye Guangdong

LEHMANBROWN Guangzhou Room 3317, China Shine Plaza 9 Lin He Xi Road +86 020 2205 7883 W: www.lehmanbrown.com.cn

WRAGGE & CO LLP, GUANGZHOU REP. OFFICE Suite 1706, Main Tower, Guangdong International Hotel, 339 Huanshi Dong Lu, Guangzhou 510098, P.R. China T: +86 20 2237 8664 F +86 20 2237 8665 M: +86 139 0229 7469 E: Jian_Xu@wragge.com W: www.wragge.com

THE GARDEN HOTEL, GUANGZHOU No.368 Huanshi Dong Lu, Guangzhou Contact: Ms.Virginia Zhang T: 83338989-3271 E:zhangz@thegardenhotel.com.cn W: www.thegardenhotel.com.cn

Nari Dadlani T: 3846 9466 / 134 2404 424 W: http://gz.jiameidental.com

BOCA CAFÉ Unit 107, No.75, Tianghe East Road, Tianhe District, Guangdong, 510620,PRC T: +86 20 87591558 F: +86 20 81088151 E: info@boca-cafe.com W: www.boca-cafe.com

UNIGROUP WORLDWIDE Guangzhou Office: Tel: 020-83284681 Fax: 020-83284680 Shenzhen Office: Tel: 0755-26452330 Fax: 0755-26452360

UK TRADE & INVESTMENT 7/F Guangdong International Hotel, 339 Huanshi Dong Road, Guangzhou, China 510098 T: +86 20 8314 3000 F: +86 20 8333 6485 E: Guangzhou.commercial@fco.gov.uk W: www.uktradeinvest.gov.uk

ROYALE ASIA Unit 01-02, 26/Flr, One Kowloon, Kowloon Bay, Hong Kong T: +852 2318 0370 F: +852 2819 0193 General Enquiries: info@royaleasia.com Sales Enquiries: sales@royaleasia.com W: www.royaleasia.com

CANSOLV TECHNOLOGIES (SHENZHEN) CO.,LTD 1801,1810 Suite,Excellence Mansion No.98 Fuhua 1 Road, Futian District 518048 T: 86-0755-82719333 F:86-0755-82947356