February 21, 2018

The changing face of China business

As we move towards the end of one of the hottest summers on record, it’s worth posing the question: Has the heat gone out of Chinese investment in New Zealand?

Moves over the last several months to cool the New Zealand (especially Auckland) property market, by restricting the ability of foreign buyers to invest, have certainly had an effect.  But many kiwis may not be aware that a much bigger factor in the equation has been the Chinese Government’s actions in tightening up the outflow of capital from China.

Beijing has laid down stringent rules on what its citizens and businesses can invest in overseas – and residential housing is one category that is strictly not allowed. Investment money is still coming out of China into markets like New Zealand but the channels are much more restricted; trade or innovation are the strongest conduits.  Money can go into infrastructure, R&D, innovation, and the purchase of intellectual property but activities such as land banking are no longer allowed unless the action is accompanied by some form of innovation or trade objective.

That external investment tightening by the Chinese Government wasn’t the only significant activity in China in 2017.  On my most recent visit, it was again very notable how the nature of Chinese business there has changed and is continuing to do so very rapidly.  Companies we worked with surprised me with the quality of their products and the innovative thinking behind them.  Encouraged by the Government, they are pushing hard for high-end innovation in markets where the demand is hot – and moving away from the factory model. The prevailing view now is “we should make our own products, with our own brands, rather than do what others tell us.” In the technology area, for example, the likes of Xiaomi and Huawei have gone after Apple’s place as the epitome of technology design and innovative excellence; they are developing their own branding and look and not simply positioning as a cheap alternative.

There was also a challenge from a major dairy company we met with whose message was: Watch out Fonterra.  They are looking well past the commodity nature of dairy goods to high-value product derivations.

And I saw some astonishing examples of infrastructure developments, and in particular a tourism development at Zhangjiajie.  It was effectively a platform that wound around a cliff and was carrying considerable human traffic.  The sheer engineering sophistication and scale of the development was astonishing, and it illustrates that while New Zealand may have a great many tourist gems to attract Asian visitors, we can’t be complacent.  Developments like the one we saw offer a compelling holiday option for the Chinese, much closer to home.

It was interesting too to see the Chinese Government’s move to change the culture (and the cultural perception) of its people and business.  In the past, the perception (which is largely true) is that the Chinese make decisions that are solely driven by money. While this has led to the economic rise of China , it has also led to some serious issues and consequences that the Chinese people and the country as a whole, have suffered significantly from.

The Government is now keen to expand and develop the country’s business culture to be more moral and appreciative of proper business behaviour. An example of this is the education on the treatment of intellectual property (IP) in China, it is continuing to be better and more aligned with international practice, though it still has room to improve.

Looking to 2018

Looking to the year ahead, kiwi business people working in China, or interested in doing so, can expect it to be a dynamic environment in terms of regulations – as it was in 2017.

The vigorous encouragement of innovation in China also extends to Chinese entrepreneurs looking to New Zealand for innovation, new brands, companies with good reputations and good stories.  Innovative companies in New Zealand should be prepared for people out of China coming to them; there will be many potential opportunities to work together especially in areas like new technology and food and beverages.

Two very interesting consumer markets that are emerging may be of interest to kiwis –  products for the elderly and pet foods.  The former results from the “one-child” generation in China which is at a point where the children of that policy are now grown up and wealthy, and having to look after parents (and grandparents).  Products that support senior living will be in demand.

The emergence of pet foods as a market also arises through growing wealth in China.  In the past, pets (if there were any) and livestock got what was left over after the family had eaten – no special favours!  Pet owners can now afford to buy food specifically made for pets and there are a lot of animal food producers in China. But the products are relatively unsophisticated with not a lot of consideration given to the health benefits of the food specific to certain animals. Definitely an area of opportunity.

A very successful Chinese business person I spoke with during the last trip put the Chinese consumer market mindset very succinctly and simply. “吃饱了没事干的人会想买什么” – which basically translates to consider, what a person would want, when they are full and basically have all of the necessities they need?  Food for their pets is one thing – but what else might they be interested in given that mindset.

New NZ Government – what effects?

The recent election of a Labour-led Coalition Government in New Zealand has thrown some uncertainty into the trading relationship between the two countries.  Things may become clearer as 2018 unfolds.  Any moves to make it tougher for China to invest in New Zealand will likely see a negative reaction from China. It is fair to say that the majority view is opposed to China buying land here or snapping up residential properties needed for our young people, but I don’t see signs of the new Government being opposed to joint ventures and initiatives around technology and innovation.  Doing business in that space may become easier, which would be good for New Zealand innovation.

We’ve seen no concrete adjustments yet, so until the policies come out it’s all speculation.  But it looks like it could be tougher for Chinese companies to do business in New Zealand unless they are resident here.  If that’s the case, we will probably see a reaction over the next four years that may not be good for trade growth with China. So while consideration of the policies around foreign investment is needed for New Zealand, it is important for the Government to consider all aspects of any policy changes before implementing them if we are to minimise any collateral damage, especially to our export industry.

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