BNZ: China Connection: Playing the long game

NZ Herald

26 Jun, 2014 06:30 PM8 mins to read

The waterfront area of Shanghai, the Bund. Photo / Mark Mitchell

In this, the first of a six-week series on business opportunities in China, Paul Lewis looks at the enormous potential of what is already our biggest export market.

It's the numbers in China that demand attention. Not just the population figure of 1.35 billion, though that is big enough - it's all the other numbers that not only add up, they spell out a tantalising word to New Zealand exporters: opportunity.

Try these for size. 38 children are born every minute in China; 54,720 every day and just under 20 million every year. There are 240 million vehicles are registered in China; it costs US$12,000 to register one in Shanghai. It's a bad place to be a pig - 50 per cent of the world's pork is eaten in China.

Here's another: the burgeoning Chinese middle class, younger people (20-50) with disposable income and estimated to be 250-300 million strong, are forecast to grow by 100m (some estimates say 150m) in the next 10 years. Nations are scrabbling for a share of this enormous market.

The Chinese are keen and increasingly sophisticated consumers, buying $10 billion of luxury watches each year, consuming 2.7 billion cups of coffee and buying 5.1 million cars a year. Travel spending will soon reach $60 billion annually.

New Zealand's leading exports to China are dairy, forestry and meat. When it comes to food, New Zealand's ability to access the potential of that growing middle class is made clear by some other figures.

China has 21 per cent of the world's population but only nine per cent of the arable land. Farm land is eaten up by contamination, including overuse of fertilisers. China's deserts are growing - 4.5 billion tonnes of soil is eroded away each year. Pollution is a major factor. Air pollution contributes to 7 million premature deaths a year in China. Water purity and availability is another growing concern. Rural Chinese are pouring into the cities, causing vast urbanisation rates.

Photos: China Connection

Amy Heenan and Donna Wilkins use a bicycle to looks around the head office of the online trading company Alibababa in Hangzhou, China. Photo / Mark Mitchell

Image 1 of 16: Amy Heenan and Donna Wilkins use a bicycle to looks around the head office of the online trading company Alibababa in Hangzhou, China. Photo / Mark Mitchell

China cannot entirely feed its own people from within; food quality is a growing concern among those same Chinese middle classes.

So a little country sitting down at the edge of the world with a clean, green reputation (well, mostly), a history of quality produce (even after the botulism scare) and who have a good, open relationship with China as evidenced by a landmark free trade agreement should be well placed. Right?

Yes, and so New Zealand is - but that comes with a "but" about as big as the growing middle classes. China's modern history is littered with corporate corpses who tried to surf the numbers wave but over-balanced and drowned. One example is Nokia, the Finnish mobile phone giant who went from owning 30 per cent of the Chinese market in 2011 to about two per cent last year. This is a volatile market where tastes and trends can change markedly and quickly.

While many Chinese are fond of luxury Western brands as status symbols, growing numbers are backing Chinese-made goods. Late in 2012, only 14 per cent of Chinese consumers were buying local branded goods. Less than 18 months later, that figure has risen to 40 per cent.

New Zealand Trade & Enterprise predict big opportunities for companies in a wide range of industries - not just food and beverage, infrastructure and technology projects, health and education. However, Chinese interests are also buying up international food producers. The Financial Times reported earlier this month that mergers and acquisitions in the food and beverage sector reached 17 per cent of total M&A in China so far this year - almost toppling buys in the energy and power sector, traditionally China's biggest area of acquisitions.

"Chinese businesses are also used to extreme volatility so they do not just focus on one area; they diversify as risk mitigation," says Glen Murphy, NZT&E regional director in China.

That sends a strong message to New Zealand businesses hoping to cash in: there is little point just playing the numbers game; sending up commodities based on price. There is a long game to be played with China with factors like commitment, quality and trust wound into one package. Nokia's fall can easily be someone else's - but the risk is smaller if a country and its producers are seen as genuine partners.

So focusing on premium products, with a clean and green emphasis, maintaining a presence in the market and a good relationship with China is key. The health of that relationship was underlined with the significant reception accorded Prime Minister John Key by Premier Xi Jinping recently. That came during a visit where Key explained the Fonterra contamination scare last year and outlined that while the scare was widely reported throughout China last year, the subsequent false alarm finding wasn't.

Some veteran China watchers say that Fonterra and New Zealand earned points for fronting up during the scare and, while it was a damaging time, the New Zealand approach earned friends in high places. Others say, however, that the scare could not have come at a worse time. The Chinese government was trying to promote locally grown milk products over imports to help the local industry after the 2008 melamine scandal saw six babies die and 300,000 sick. As one China veteran put it, "they played it like a fiddle and drove the point home."

While about 50 newspapers in China reported the scare, few reported that it had been a false alarm, an imbalance many take as a sign of government comfort with that state of affairs. They are acutely aware that, after 2008, many foreign firms are gaining prices in China far higher than the same products in Europe, for example.

The Chinese government is generally moving away from an export-led economy to domestic growth and private investment. That sits on top of their move to restore confidence in the domestic milk industry by trimming dubious brands and players from the market. They are also moving into bigger dairy farms to cut out the large number of smaller and harder-to-regulate local suppliers.

Still, a Bank of New Zealand delegation of exporters has recently been in Shanghai, Beijing and Xian checking out export opportunities. Among their key findings has been the need for quality, quality and quality - not just in products but in the systems and checks that need to comply with China's complex requirements for imports. There is also as great a need as ever to choose quality partners in China so distribution and other problems do not ruin good products before they get to market.

Do that and the opportunity is really there for New Zealand exporters. Numbers again: China has the biggest number of e-commerce users and social media users in the world. The average Chinese is bombarded with about four times the amount of advertising as the average Kiwi consumer. They are well used to outlandish claims and disappointment.

They have countered that by becoming perhaps the world's most ardent online researchers, spreading the news to each other of quality products. Their use of the internet is also a vast agent of change in China, forcing the government to become more transparent about issues like pollution.

"Word of mouth has always been big factor in China," says Murphy. "Now e-commerce and social media have given it an even louder voice."

There lies the opportunity for many New Zealand exporters - maintain and improve the quality and innovation, maintain and improve the relationships and let word of mouth speak for itself.

Next week, we will look at how New Zealand businesses can take advantage of the opportunity.