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China: Changing forever

PwC Australia China Practice January 2012 China: Changing Australia forever

The rise of China is the most The numbers tell the story A stable outlook? remarkable event of this century. 4 China has now become the world’s According to the 2011 PwC According to the PwC APEC survey , 3 powerhouse economy, returning to Institute Asialink Index , trade in goods Chinese CEOs have concerns about a level of international status and and services with China in 2010 grew inconsistent regulations and standards, influence held for centuries prior to by 18.3%, reflecting export growth of underdeveloped infrastructure, the industrial revolution in the west. 19.2%, which exceeded import growth restrictions in cross border investments, In 2000, China accounted for only of 16.9%. Total engagement with talent shortages, lack of access to 7.1% of global GDP in PPP terms. China grew by a massive 16% in 2010. capital, effects of climate change, In 2010, the number had increased This was driven largely by a surge in inadequate and unreliable power to 13.3% and by 2020, it is expected two-way trade, education and tourism supply, weak and restricted access to reach 20.7%1. China is now the engagement. With China’s economic to consumer credit and political and world’s second largest economy after growth outpacing that of other major regional instability. countries, Australia is well placed to overtaking Japan in 2010 and Experts from the region say the Chinese benefit from Chinese growth through Goldman Sachs estimates that China’s government is aware of these issues and energy and resource exports, amongst economic output will match that of the is moving to rectify them with various other things, and trade with China is United States by 2027. China has been programs, a number of which are keeping Australia’s economy on track. growing on average at around 8% per outlined in the government’s 12th Indeed, this country’s trade with China year. It contributes about $400bn of Five Year plan, published in March 2011. new wealth annually, doubling the hit an impressive AU$105bn in 2010, amount of new wealth creation in the a national record which produced You might ask if Australian businesses United States. a record overall trade surplus of are running a risk building links with AU$16.8bn, compared with a trade China when the World Bank has China will change Australia, creating deficit of $4bn in 2009. According to warned of a slowdown in China5? new opportunities for Australian figures released by the Department businesses to tap into the world’s of Foreign Affairs and Trade, one- biggest market. According to Austrade third of Australia’s exports to China data2, about 3000 Australian comprised iron ore and concentrates, companies have a presence in China worth AU$35bn. Coal was the next and 4800 Australian companies export biggest product at AU$5bn with other there. By 2015, that number is expected ores coming in at AU$2bn, all to feed to grow significantly with governments China’s industrial growth engine. on both sides encouraging investment and growth.

In this short paper, we consider the dynamic relationship between China and Australia, and consider what opportunities this offers to businesses from both countries.

1. Euromonitor Global Market Research blog. July 2010. Available at http://blog.euromonitor. com/2010/07/special-report-top-10-largest-economies-in-2020.html 2. Austrade. A tale of two cities - Tim Harcourt. June 2011 3. PwC Melbourne Institute Asialink Index, November 2011 4. The future redefined, Asia Pacific at an inflection point. PwC’s 2011 APEC CEO Survey, November 2011 5. Marketwatch. World Bank’s Hansson sees slower China growth. November 2011. Available at http://www.marketwatch.com/story/world-banks-hansson-sees-slower-china-growth-2011-11-25

2 PwC Australia China Practice China: Changing Australia forever While some commentators have talked about a real estate bubble in China, China’s housing market is not central to its financial system in the way that housing is critical in Australia and the United States.

It is important to keep these warnings China also has plenty of capacity to in perspective. China is still in the early deal with the issue. With national stages of its development. China’s GDP debt at less than 20% of GDP, the per capita is just US$5000 and its PPP Chinese government can engineer a is only US$10,000. Compare that with soft landing. According to the official Korea where the GDP per capita is figures, consumer price inflation US$20,000 and PPP is US$30,000. dropped from 5.5% in October to 4.2% in November 2011, suggesting It is important to remember that the Chinese government is taming China led the world in science and inflation. Bank lending is also tightly Phases of investment technology from about the tenth controlled by the Chinese government. century to about the fifteenth century. While some commentators have talked Chinese investment in Australia Chinese sciences and technologies about a real estate bubble in China, is increasing, with direct were concentrated in several fields, China’s housing market is not central to investment totalling AU$19.5bn mainly material production, transport, its financial system in the way in 2010. Chinese investments in weaponry and medicine. While western that housing is critical in Australia Australia have largely focused countries have led the way in these and the United States. Buyers are on the resources sector. This is fields in recent times, China is certainly restricted to the relatively wealthy, phase one of the relationship with returning to a stronger global position and they generally pay in cash. Chinese companies investing in the once more. It’s important to recognise There are also strict regulations, resources sector to support growth that this long history of industrial including mandatory 30% down at home. and economic strength means that payments for first-time buyers and the Chinese government takes a long But we are now moving into 60% down payment for a second term perspective on economic cycles. Phase 2, and the Chinese footprint is property purchase (regardless of There will be rises and dips but the starting to expand into other areas. whether the loan for the first property trend to growth will continue. With a We’re seeing increasing interest in real has been repaid, or the property has population of 1.4bn, no other country estate, infrastructure, pharmaceuticals, been sold), limiting opportunities for is in a position to replace China as the agribusiness and food industry, risky borrowing like the kind seen in world’s factory. China has the world’s particularly the sugar industry, which the US sub-prime market. In short, largest manufacturing workforce, have all been targeted by Chinese a slowdown in China is expected to estimated at more than 112m people investors. Financial services and the be carefully managed, ensuring that at the end of 2006. banking sector will be other targets, there are opportunities for Australian with BoCom recently obtaining its business both at home and abroad. first Australian banking license as an example.

PwC Australia China Practice China: Changing Australia forever 3 China is more open than ever before to inbound investment and expertise.

Water and cultivatable land scarcity in China limit Chinese agricultural production, making Australian agribusiness an attractive option for Chinese food producers feeding the world’s biggest market.

One of the biggest growth areas in the Finding your opportunity This is significant because it suggests short term is agribusiness. Australian in China that China is more open than ever agribusiness, particularly in seafood, before to inbound investment and dairy products, fruit, wheat, barley, Chinese investment in Australia is a expertise. And with Europe and the rice, wine and beef, is particularly big opportunity which will generate US economies still convulsing from the attractive because of rising demand jobs and create prosperity. It will impact of the global recession, Australia for quality food from a growing strengthen the bilateral relationship might be well positioned to offer good middle class. Water and cultivatable and draw the two countries closer partnership opportunities for China. land scarcity in China limit Chinese together, creating a valuable China’s perception of Australians agricultural production, making economic and political alliance. laid back approach presents a great Australian agribusiness an attractive advantage, but how should Australian Still, Chinese investment in Australia option for Chinese food producers businesses make the most of it? will be heavily influenced by the focus feeding the world’s biggest market. of Chinese companies on their domestic Australian businesses that could target If China has positioned itself as the market, and that offers Australian China would include beef and seafood world’s biggest factory, Australia business significant investment suppliers, transport, architecture and could turn itself into a world food opportunities in China. In the PwC engineering firms and companies bowl as China is rapidly running out APEC survey Chinese CEOs reveal that operating in financial services, of farmland and its population is of the Chinese investments being made agribusiness, pharmaceuticals, health growing and getting richer. Australia, over the next three to five years, products, and niche IT technologies. by way of contrast, has plenty of 88.5% said they would be investing water in the north. Australia also has Other opportunities are emerging in domestic manufacturing and strict rules about growing crops and with Chinese planners trying to 75% said they would be making stringent regulations about animal transform China from being just investments to meet domestic demand. welfare and food production to the world’s factory. In China’s 12th According to the survey, Chinese CEOs ensure a high quality product. Use of five year plan preferential tax, fiscal remain heavily focused on domestic hormone growth promotants (HGPs) and procurement policies have been demand with 34.4% seeing that as the is closely monitored by the Australian introduced to develop seven “strategic main growth opportunity, and 51.7% government. Australia does not have emerging industries: biotechnology, saying they saw their domestic market the same sort of contamination issues new energy, high-end equipment as the most important investment that are found in other markets. manufacturing, energy conservation driver over the next three to five years. This is why Australia is in a good and environmental protection, clean Furthermore, 79.3% said they would position to become China’s food bowl. energy vehicles, new materials and be making their largest investment over Already, China is the largest market for next generation IT”. the next three to five years in China. exported Australian lobster. That could This is the opportunity for Australian be just the beginning. There are specific areas of focus: businesses with expertise in these areas. 64% nominated financial services, 66.7% would be looking to develop managerial capabilities, and 53.8% said they would be investing in innovation.

4 PwC Australia China Practice China: Changing Australia forever The big opportunities for Australian business are in the Chinese hinterland, in the second and third tier cities.

However, the big opportunities for Australian architecture and The importance Australian business are in the Chinese engineering companies on the other of relationships hinterland, in the second and third hand could pick up business with the tier Chinese cities like Huangshan, continued growth of the second and Experts say that relationships are Shaoxing, Wuzhen and Chengdu, third tier cities. Over the next three to very important to the success of a the capital of Sichuan province five years, China will have the entire product or service in China. If the in Southwest China which has a infrastructure it needs in tier two and relationship is solid and the product population of 14m, out of a total 80m three cities, a massive opportunity or service is good, the company is in a across Sichuan. China is much more for Australian companies. Australian strong position. Sometimes, even if the than Beijing, and other banks, with their extensive experience relationship is strong but the product or internationally recognised cities. in rural and regional banking which service is not top line, the company can makes them quite unique, would still do good business. European and American companies also benefit from exposure to the have been in Beijing and Shanghai for In China, the quality of the Chinese hinterland. 30 years. They are well entrenched in relationships can make or break a those markets and they have already At the same time, there would be business. In Australia, you win a built strong relationships. Without a opportunities to work with Chinese contract and develop a relationship unique product, or unless selling high companies to develop new products from there on. In China, if you don’t quality food products, it would be suitable for the local market which have a solid relationship to start with, difficult for Australian companies to could then be exported emerging you are probably wasting your time. break into those markets. markets like , But building relationships takes time and . and there are different approaches to doing it, much of it would depend on the industry and the products and services being offered. Some companies might choose to enter a joint venture with a Chinese company.

PwC Australia China Practice China: Changing Australia forever 5 A springboard into Asia? And China might be the beginning of a much broader story. Developing products there might serve as a springboard to grow in emerging economies across Asia. Linfox, for example, first entered Asia in 1984 by establishing operations in China. From there, it expanded into and Thailand in 1992. The company has since expanded into Singapore, Indonesia, the Philippines and Vietnam. In 2006, it entered . Asia accounts for half of the Linfox 15,000 strong workforce. In a recent interview in the 2011 PwC Melbourne Institute Asialink Index6, Linfox chairman Peter Fox said that the company now has more Asian employees than it does Australian. “There’s no doubt that the Asia-Pacific region is a place in the world where we not only partake but where we see significant new opportunities in the twenty-first century.” China could build on Japan’s role to partner with Australian businesses for success in the wider Asian markets. Austrade has already identified Japan as a springboard, using for example partnerships with Japanese firms to invest in infrastructure projects in Hanoi and Ho Chi Minh City. China could play a similar role.

Others would prefer to go in on There are also tremendous In summary their own, working with locals to opportunities for the Chinese build relationships. To do that, the expertise in building Australian We believe the greatest opportunities business needs to identify key decision infrastructure. Infrastructure for Australian businesses are in the makers; keeping in mind that Chinese development in Australia takes years, tier two and three cities in China. organisational structures are rigidly a problem exacerbated by the skills China’s long economic history means hierarchical. In Australia, companies shortage, but the Chinese have shown that business and government can build connections by developing the world they can build cities quickly. counterparts think long term, and relationships with entities and As an example, a memorandum of are not overly concerned with short managers at the coal face. Once those understanding between PwC NZ and term economic hurdles. To succeed, relationships are well established, the the China Development Bank has Australian companies need to plan business can make contact with the seen both organisations focusing on their own long term strategy, do their people running the company and the the rebuilding of Christchurch following research, build relationships and not owners. In China, it works the other the devastating earthquake in rush in. And that requires a change way. The connection needs to be made February 2011. The relationship in mind set for many Australian with the decision makers first. between Australian and Chinese businesses. China is not a market business is a work in progress and for the short term. Cold calling in that kind of market governments on both sides are heavily does not work. Instead, Australian invested in building those connections businesses need to find people either over the next few years, to keep things in their own organisation, or through on tracks and ensure it does not fall their business networks, who know and apart. That is a big advantage. have access to the decision makers and establish links from there. This requires a lot of time and research. For many companies, it could take two years to build relationships before they even start making money.

6. PwC Melbourne Institute Asialink Index, November 2011

6 PwC Australia China Practice China: Changing Australia forever Contacts Tim Goldsmith Cathy Li Calvin Fan Partner Director Director Head of Australian China Desk Business Development Business Development T: +61 (3) 8603 2016 T: +61 (3) 8603 5712 T: +61 (2) 8266 0310 E: [email protected] E: [email protected] E: [email protected]

Acknowledgements Thanks go to Leon Gettler for the writing of this paper, which was based on the findings of the PwC APEC CEO Survey and interviews with specialists from the PwC Australian China Practice. This document is published by PwC Australia. In this document, unless otherwise specified the terms “PricewaterhouseCoopers”, “PwC”, “our” and “we” refer to PwC Australia which is a member firm of PricewaterhouseCoopers International Limited (PwC IL),each member firm of which is a separate legal entity and does not act as agent for PwC IL or any other member firm. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another firms professional judgment or bind another member firm or PwCIL in any way.

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