Friday, 15 November 2013

China, Europe, Britain, Hyndburn; Two decades of dramatic change?

The Bund & Pudong District - centre of Shanghai. Paddy fields 25 years ago.
“Be scared, be very scared” was the rather chilling advice that ended my trade trip to China last month. The question I had asked of the British Chamber of Commerce members in Shanghai; heads of global British companies such as RBS, BT, HSBC, Arup, “What advice would you give to me to give to SME’s in Hyndburn?”. 

There’s a mistaken argument about Chinese manufacturing I discovered, a convenient untruth perhaps that rising wages and poor quality in China is resulting in leading UK firms repatriating their manufacturing to the UK. That in some way a corner has been turned on Chinese advantage and ‘we’ll now be alright’. A belief based on the rise in power of organised Chinese Labour, the workers protesting as aspiration creates aspiring consumers demanding better living standards and that this will increasingly price out of the market Chinese manufacturing. These hopeful assumption’s are far removed from the reality of Chinese ambition that I met. Quite simply they are ahead of that curve. Low value added manufacturing may still be backbone but high end high value added is China’s future, a view made clear to us when we met the Shanghai Communist Party. They were clear about the country’s needs. They want a high skilled, high added value economy. They want our technology and know how across every sector. From heavy industry, to the environment, from IT to marketing.

In conversation, the British CEO’s were very quick to dispel the myth that chinese manufacturing is inferior. That some of the most hi-tech, innovative manufacturing facilities already existed in China and whilst lesser facilities existed, these were being consolidated into the bigger companies. Companies of such huge global size but who have never traded outside the chinese domestic market as yet. Jaguar Landrover are now selling more vehicles in China that anywhere else and plan to open a plant there but as is always the case, the chinese communist government insist it’s a joint venture with a chinese company.

Pudong District at night - Hyatt Hotel is the tall red bottle opener skyscraper

According to the Heritage Foundation’s “China Global Investment Tracker," China’s non-bond investments in Europe have reached $35 billion, compared to $28 billion invested in the US. China clearly wants an ever greater piece of the European market, and at the moment (due to the sovereign debt crisis that is plaguing Europe) a lot of European countries are willing to overlook earlier hesitations to Chinese investments.

High quality global journalism requires investment. Beijing has encouraged Chinese companies to increase their offshore investments to make them more competitive globally and also as a way of securing supplies of natural resources, technology and expertise for China.

China has a very big war chest amounting to more than $3.2 trillion. Most of this money has been invested in US treasury bills with very low returns and the danger of depreciation. Of the United States government’s $16 trillion of debt, half is owned by the chinese. So it is natural for Chinese investors to branch out into Europe where there are more generous trading terms of technology transfer with less reservation based on strategic considerations. A report by Rhodium Group and with CICC,a Chinese investment bank predicts Chinese outbound direct investment in Europe will reach $1tn to $2tn between 2010 and 2020 and it expects around a quarter of that will go to Europe through mergers and acquisitions or greenfield investments.

Only this week Petrobras’, Brazilian owned multinational energy company agreed to sell its Peru unit, Petrobras Energia Peru, to PetroChina and CNPC for $2.6 billion. China bought three oil and gas fields, which produce 800,000 tonnes oil equivalent per year.
This deal shows China’s strong interest in developing its overseas exploration activities and expanding its influence in Latin America. last month China’s took a 10% stake in Brazil’s biggest oilfield which is expected to reach 1.4 million barrels per day.

One senior British CEO at the Chamber of Commerce meeting - held incidentally on the 86th floor of the of the 96 floor Hyatt deluxe hotel - repeated a proverbial remark held by British Chamber members ‘that if British companies don’t find China, the Chinese will find them’ meaning that the tsunami of chinese acquisitions will gather greater pace and there will no hiding place for hi-tech UK firms from chinese entrepreneurs and rich chinese investors. If you are a hi-tech Hyndburn company it was suggested, in the next decade you will be in some way be linked to the China market.

Whilst London builds the Shard at 300 metres tall - albeit with middle eastern money - the Chinese are putting up 500-600m skyscrapers every month. Pudong’s skyline is to behold; a giant pipe organ rising out of where paddy fields stood just twenty years go. The latest in Shenzen standing at over 600metres or more than half a kilometre high; pure symbols that advertise the ambition of the Chinese government.

On the visit we saw at first hand UK firms operating successfully China who had research and development facilities in China. However with no intellectual property laws, copying in China is rife and a challenge for British businesses. Enough to put off British companies but when we put that question, it was clear from both from the companies we visited and the British businessman in China that the only answer to such theft was innovation and added value through support and service.

British R&D in China

One successful British company explained that Chinese customers are more discerning and that the answer is to embrace China. That leading chinese firms want innovative partners and suppliers who build in customer support in order that Chinese companies can beat their competitive rivals. Whether British companies trade in China or not, Chinese companies will always reverse engineer British products and staying out of the chinese market only assists the copiers in the long term.

Meeting with HSBC - Looking out at Shanghai from 40th floor

The sheer scale of China is hard to imagine. Shanghai has a population alone of 23.9million compared to London of around 8.5 million. Shanghai is so big now that it has merged into the neighbouring cities of Suzhou (a ‘small city’) 12 million and Wuxi of 6 million - 42million maga-city area - with the cities of Jiazing, Nantong and Changzhou just outside the urban area. On our 50km drive to Suzhou all we saw was factories, colossal hi rise housing blocks built in batches of 6 or 12. Not an inch of land had been spared the digger or the concrete of industrialisation.

1 of 100's of tenant blocks housing c40million people in Shanghai mega-city area

With this economic might and an economy that has grown at 10% every year for the last 3 decades the chinese have the global finance, they possess the innovation and with an internal market 1.4billion people dwarfing the European Union and United States put together they are quickly becoming an economic superpower.

High profile European acquisitions have caused heads to turn. MG brand is now owned by a chinese brand and in March of 2010, the Chinese carmaker Geely paid $1.8 billion for Ford's ailing Volvo unit. In Sweden - Volvo's homeland - the acquisition triggered some negative comments in the media about China’s acquisition of a European icon.

With a market of some 1.4 billion people, China seems to have little interest in small businesses in comparatively small markets. Where a UK company may sell 100,000 of its products, the sales in China would be several million or more. They have bought a 60% share in Weetabix not to sell more Weetabix or even sell Weetabix in China but to buy the high end marketing and branding parts of the business. Johney Walker, Scottish whisky manufacturers have opened a small retail unit which has had a £3million fit out. The average chinese customer spends £150,000 on specialist whisky’s. Bentley are selling 2 cars a day and three times the European price and there are 2 five star hotels being built every day in China. 38 of the last 40 vineyards in France have been sold to the Chinese. The Chinese have recently concluded a deal to provide extensive government services in Europe in Bosnia.

A Chinese company will be part of a group investing £800m in Manchester Airport to develop its surrounding business. Earlier this year, developer ABP announced a £1bn deal to redevelop the Royal Albert Dock in east London and this month the ZhongRong Group said it would be investing £500m to rebuild The Crystal Palace in south London and MG brand is now owned by the Chinese. The report by the Rhodin Group estimates that Chinese direct investment in Europe averaged less than $1bn each year from 2004 to 2008 but then tripled to around $3bn in both 2009 and 2010 before tripling again to almost $10bn last year.

What China is seeking is the transfer of European and American innovation and knowledge to China. Buying companies or part of companies so they build up their knowledge base and they are not short of money to so. China is spending £ trillions buying and building assets across the globe from mining interests to western government debt to property to hi-tech companies.

The chinese economy is now the second largest economy in the world and no-one doubts it will overtake the USA soon. Where European countries took control of large parts of the globe in the 19th century, the United States in the 20th century, it may well be the Chinese who dominate across the continents in the 21st century. At some point in the near future when the Chinese currency floats freely it may well become the worlds second reserve currency to the US dollar and as the years roll on, how long will be it be before the Chinese currency takes over from the dollar as the worlds reserve? It would comes as no surprise to me if the coming decades, the worlds first £trillionairre was Chinese.

'Trafford Centre' in Shanghai
During our visit we took in a shopping mall that highlighted the scale of Chinese development. It was remarkable how identical it looked to the Trafford Centre in Manchester but then it shouldn’t be a surprise at all; the Chinese employed the same architects and demanded at least as good retail emporium. It is twice the size of the Trafford Centre over 6 floors, has twice as many visitors and is full of the same european high end retailers, Gucci, Louis Vuitton, Marks and Spencer’s etc. Chinese shoppers appear to adore quality European names. It was like being back in Manchester, just bigger. The owner Mr Ding said he had begun plans to build 6 more and the frightening reality is he was just one of many developers building such large shopping malls.

'Trafford Centre' in Shanghai - 6 floors high, 170k people per day

'Trafford Centre' in Shanghai - Owner says he is building 6 more

It’s not just the transfer of commercial knowledge. There are 100,000 chinese students in the UK many at top British universities and many more in the United States and across Europe benefitting from the best education that money can buy. Nearly all return back to China. It is clear during our visit how much of a mistake it has been by the UK government to clamp down on immigration particularly the ending of the three year stay on visa’s which encouraged Chinese students to use their intellect here in UK companies rather than return to China.

UK visa issues are just one side of the challenge facing the UK. The Chinese have encouraged so far Nottingham and Liverpool universities to open campuses in China. I visited the one in Suzhou just outside Shanghai where it was made clear the extent of chinese ambitions with ambitious targets for numbers of chinese students graduating.  It is clear Britain’s right wing views on immigration are hindering our development in this unstoppable global race.

Back at the Chamber of Commerce meeting it was made clear that chinese markets are not as open as European ones. Whilst we embrace free trade and open markets, particularly the UK and minimal government intervention, the chinese do not. There is a huge cultural difference. The Chinese government - the Communist Party - believe government and business are inseparable. That government establishes the framework for growth with five year industrial plans, a clear vision with clear targets in all markets, not just the ones China is successful in and who could argue with three decades of growth of around 10% per year. Shanghai looks and feels like any European city with it’s government dictated bilingual signs and language everywhere - Mandarin and English. Contrast that with how many Europeans can’t speak Mandarin and adding up the economic advantages and value it is something that must be addressed? I was in the States this summer and my friends 4 year old daughter is beginning to learn Mandarin at school.

It was clear from my visit that heads of top UK companies in China at the Shanghai British Chamber of Commerce felt the UK (and UK companies) unaware of the scale of change that is coming. That as a simple measure there are more German and French businesses. That all innovative British companies needed to make an assessment as to whether they could make the leap to China because as they markedly pointed out, the one way to insulate British interests are joint ventures in China where relationships are struck up and mutual self interest both opens up the huge Chinese market for British companies but prevents wholesale loss of Britain’s vital economic interest, it’s technology and innovation.

Shanghai Pudong District

The message to visiting MP’s was clear. The Chamber are there to help, the members available to offer as much guidance and support as is necessary other UK companies looking to put a toe or foot in China. From recognised names, giants of British industry such as  expert British banking companies such as HSBC and RBS to smaller companies with years of experience in China.

It’s not only the chamber that there to help. The Chamber compliments UK governments huge advisory arm in China, UKTI there to assist UK businesses. The government expanding it’s UKTI operation in China and elsewhere as Britain braces itself for a cultural and economic changes over the coming decades.

I flew back with fellow MP’s and my Dudley North colleague, Ian Austin and I agreed that with constituencies full of innovative but vulnerable SME’s it is imperative that the opportunities and challenges of China are widely discussed in our business communities if we are to protect jobs and businesses.

To me it was absolutely clear that that not only is the single European market vital, that a free trade agreement with the USA is vital too. The EU and the USA together are still minnows in terms of population to China. On the visit we met Chinese IT analyists who highlighted the advantages of Chinese IT firms who could have 500million customers just within Chinese borders within months of setting up. Compare Twitter with 120million users world-wide and it’s chinese equivalent Weibo set up in April 2011 which now has some 420 million users. Just to compare the chinese advantages scale and knowledge is of great concern.

I left with the thought that’s it’s not just China though that has expansionist ideas. The 7th largest economy South Korea, a country that recently which had an average earnings income equivalent to Tanzania is pursuing the same economic path. In Rwanda in Africa, the South Koreans are putting in super fast broadband across the country and we must add in Indian outward investment in growing too - all chasing a high value knowledge based future.

It leaves me one final issue; Britain’s sense of direction - to be part of the European Union to save ourselves or to pull up the drawbridge and accept long term decline. As Chinese globalised companies with an insatiable hi-tech appetite get larger, more powerful, more knowledgeable what are we to do, pull up the protectionist drawbridge and accept a feudal future of small inferior companies producing more expensive products? Whilst a democratic deficit may exist within Europe, such is the vast economic scale of China, I can’t help but think that the economics of withdrawal represent chilling economic winds through these isles.

Locally I am having this important conversation with out local companies as I meet them.