(Episode 307; 17 minutes 12) The Australian Business Foundation (ABF) has just launched a major study, outling the real experiences of 25 Australian businesses engaging in China.
On today's BTalk Australia Phil Dobbie talks to Narelle Kennedy, Chief Executive of the ABF, about the report that provides useful insights for anyone considering a move into the region, either to source products, manufacture or to benefit from the rapidly expanding marketplace.
Narelle Kennedy describes China at the beginning of the 21st century as a "perfect storm of rapid economic development, internationalisation of Chinese markets and dramatic societal transformation".
China continues to present an enormous opportunity for Australian business, but you need to understand the country before you can expect to reap the rewards.
Leave your comments in the Talkback section at the end of this post.
Some Facts and Figures:
Major Australian exports to China (2007-08):
- Iron ore and concentratesâ€" A$12,420 million
- Wool and other animal hair (Including tops) â€" A$1,487 million
- Copper ores and concentrates â€" A$1,169 million
- Manganese ores and concentrates â€" A$854 million
Major Australian imports from China (2007-08):
- Clothing â€" A$3,521 million
- Telecommunications equipment â€" A$2,606 million
- Computers â€" A$2,530 million
- Prams, toys, games and sporting goods â€" A$1,632 million
(Source: Department of Foreign Affairs and Trade - Country economic fact sheet)
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It's a good question isn't it? How do you effectively do business in China? And with the accusations around Rio Tinto, have the goal posts suddenly moved? Australia Business Foundation has studied the experiences of Australian businesses operating in China and Narelle Kennedy is the Chief Executive of the Australian Business Foundation. Narelle, we think about trade relationship with China first and foremost being the exporter of resources. But what else are we doing? What's driving Australian businesses into China? What sort of industries?
Narelle Kennedy: There's all sorts of industries, Phil. There's certainly the low cost manufacturing that we hear about just as often as we hear about the resources industry. But there are some hidden gems in Australia's business engagement with China. A number of services firms are proving highly competitive in the work that they do, from the ANZ Bank right through to energy companies, design companies, companies that are providing legal services, freight forwarding companies. There are a number of examples of really good services firms. And even the manufacturing firms who are going into China obviously wanting to take advantage of some cost efficiencies in that market. But that doesn't seem to be the main agenda for them. They're also prompted to go there for other reasons. But they don't have to do with price and cost. Reasons like the Australian market becoming too mature and they're seeking to get a bit of action on those 1.3 billion consumers that China possesses. Or they're going there because often they've worked out that globalisation really is affecting their industry and their structure. And so they're needing to go to China to actually secure the right sorts of products and services with the right kind of price points.
Dobbie: Now if you're selling to that market, it is growing so rapidly, isn't it? That means if you wanted to sell to that market, you've got to be able to meet that growth or you could miss out. There's just an insatiable appetite from there at the moment.
Kennedy: There certainly is. But one of the dangers of that is that many companies kind of get mesmerized by the huge potential and the vast scale of that opportunity and tend to get a bit overwhelmed. So I think one of the beauties of the intelligence that we've acquired from doing this engaging China study is that we've tried to break down some of the active ingredients of securing success in China. And I think it's about a lot of the insights that we had are about capitalising on that massive size and scale and complexity of that market. But with agility and being a fast learner. The importance of dealing head on with some of the cultural differences and the importance of relationships in the China market and the often ambiguous and somewhat opaque business environment that happens.
Dobbie: That relationship building, that need to form strong relationships, is something which is very different though isn't it? You almost need to know the person before you can do business with them.
Kennedy: That was certainly a key feature, culture just saturates all aspects of business engagement in China at a level and a depth that is different from other markets. I mean obviously cross cultural differences appear in any market, but the level of which they do in China is quite remarkable. And key to that is the whole concept of relationship building, unlike in western culture. The social relationship in China more often than not proceeds the commercial relationship. So there's a lot of soul put on demonstrating commitment and establishing trust first and then only then moving onto the business formalities of contracts and agreements. And that's been the experience of companies like Wisera Engineering who are a very successful engineering firm operating in many remote locations across China. With factories in a number of different places and they've actually gone to the ends of getting to know their staff, getting to understand what's going on, getting to understand the partners that they're supplying factories in those remote Chinese locations. And even to the point of helping look after the sons and daughters of their personnel in China as they come to study in Australia. So the point that Wisera Engineering makes is that the business is almost like a family.
Dobbie: Right and that takes time of course. There's a danger you could go in with expectations that things are going to move quickly, but you've got to do a lot of groundwork first by the sounds of it.
Kennedy: Absolutely and it's there for the long haul. In fact, the timescale operates in two different ways in China, or it would appear from the case studies that we did. One is that point you just made of being there for the long haul, the long-term commitment and investing proper time and energy in building relationships. But on the other flipside of that, it's also being agile enough and nimble enough to pick up and respond to market changes and invest in the antennae to pick up the soft signals of what's going on in China and how your market might be changing.
Dobbie: And sometimes those subtleties are lost on Aussies aren't they? We're very good at calling a spade a spade. And I should imagine that sort of approach is not going to go down too well.
Kennedy: Well it's probably a bit of a two-edged sword. I think that this being the subtleties and the nuances of the relationship maybe we can learn a thing or two. But at the same time, from the words of our case study interviewees, they are actually saying that Australians, because they call a spade a spade and because they are fairly direct and no-nonsense, they're not pretentious, and they're reasonably straightforward in their dealings, they are well appreciated and well liked as business partners in China.
Dobbie: Now people who are selling services or products into China, some people might think because the country is growing so quickly and there's going to be a high demand for services, there might be less attention to the quality of what's being sold and there might not be the expectation of the same level or standards that you'd expect in the west. Do you agree that that might be a perception and is any of it true?
Kennedy: There are a range of issues about quality that were evident in the various experiences recounted to us. One was that the value and importance of quality that we would place on that is not often appreciated. And the trade off between cost and quality, we're operating on a different framework in China as in Australia. And that's not done through any ill will. It's merely the Chinese partner deciding that a lower grade of plastic in their audio accessories from Aki Associates for examples, one of the case study companies, that they could save some money by producing a lower grade plastic. Well, the experience there of course was the backs started to fall off these products and money and sales were lost. That wasn't done through any kind of mischievous intent. It was done to try to secure an advantage, a cost advantage in the business. And that came about through a miscommunication about the central importance to quality in that case. So that was one example, probably fits our stereotype a bit, but on the other side, there were companies who said look, as long as you communicate properly and manage expectations, you can get anything from the highest quality to the lowest quality in China. And we had case study companies being very explicit about their quality expectations and even designing them into the nature of the specification for the product understanding the limitations on the factories where they were being developed. So Cerella Homewares, for example, had very detailed specifications, so in-built design that built quality in. Wendy Simpson for Wisera described herself as the quality Nazi. And really communicated and insured compliance on quality. So you need to do the due diligence basically.
Dobbie: Of course you do. Now the report, I haven't mentioned its title, it's called "Engaging China". And it also talks about the rise of small global enterprises. So what's your definition of a small global enterprise and are there examples of those businesses included in the study?
Kennedy: A small global enterprise talks about the enhanced and low cost communications and service delivery channels that are provided by the internet and being capitalised on by a number of small firms who have unprecedented opportunities to experiment with different business models and to leverage advantages of a global economy because they can get low cost telephony, low cost internet access to customers and so on. And they can service multiple markets right around the world irrespective of their home location or the size of their company. Now I think we've got the rudiments of some of those small global enterprises. In fact, we think from what we know about what's going on in the world these days, there is a new breed of small enterprise which are these born global phones if you like. Because of the ease of access to communication in sales channels these days, they can afford to be a micro multinational if you like. Now I think we have some of the rudiments of those in the case study companies that we saw there. But I guess the lesson that we took out of it was there is an opportunity that we can capitalise on there. Australia is well set up because of its position in Asia and because we have a lot of small and medium size companies as the basis of our economy that these small companies really could steal a margin, China can become a test bed for the rise of this new breed of small global enterprise.
Dobbie: Right. And the attitude within China is not against that sort of approach. That's not a belief there that a firm has to be a certain size before they're worth doing business with?
Kennedy: No, not at all. If you're there you're doing business, you're building relationships, you've got the business fundamentals in place, you're reasonably adaptable to changing circumstances and conditions. There's business to be had. And I think some of the case study companies talked about almost like a cultural approach to entrepreneurship in China, that the full position was entrepreneurial. They really were out to better themselves, strong aspirations and maybe that's something that Australian firms could learn from China.
Dobbie: Absolutely, they probably had it once and maybe they've lost it a bit now. So of course in China I mean we're seeing a graphic change in almost every level. I mean in terms of the economy, in terms of attitudes and obviously in terms of politics as well. You talked about it as agility, but it's a pretty volatile mix that they've got there in China. So I imagine keeping up-to-date with those changes is crucial to success.
Kennedy: Absolutely, Phil, absolutely. And how you do that is a testing thing for a lot of businesses. Often the case study companies that we've dealt with stress time and time again the importance of people to people connections. Not just the sort of personal and social relationships, but the idea that by having decent conversations about business strategy and about approaches to doing business and the cultural issues and the social issues kind of blend together with the business and commercial issues in a way that we are sort of unused to in the west. And I think that the idea of the importance in many of the case study companies of having a local Chinese national as manager or in the management structure in the business was a very important source of information and ideas and knowledge. And it wasn't just a language issue. It was actually the social and cultural context of doing business. Now, of course, that can be fraught as well.
Dobbie: As we saw with Stan Wu.
Kennedy: Indeed, we don't really know what's happening in that circumstance, but and that's with the backdrop of negotiating iron ore prices that is of a considerable amount to the Chinese owner's economic development. But I guess written on a smaller scale, the idea of understanding relationships, having trusted partners, understanding where you might cross the boundaries, what might be in one situation just good information and intelligence gathering, in another can cross the boundaries to what is seen to be corrupt dealings. And being aware of those differences and those nuances, there's probably no substitute for being on the ground and being embedded in the relationships and networks that allow you to walk your way through that minefield fairly carefully.
Dobbie: Now, I mentioned Stan. Do you think the current political situation between Australia and China will rub off in the business community in any way? Or is it just a bit of a flash in the pan?
Kennedy: I think it's very difficult to tell. I think it's probably services to reinforce a message that is coming out everywhere that there are uncertainties and difficulties for international companies doing business in China. But at the same time, some of the rules about the role of government, some of the issues about culture and relationships that we've already covered in this discussion apply. It does need some diligence and attention to those sorts of details and some shifting of the mindset so you understand the cultural context in which your business is being done. I guess also the other salutary lesson is that while Australia and Australian businesses enjoy a very sound relationship in China, there's a lot of business success, there are a lot of good examples of strong competitive behaviour and commercial gains to be made. And of course we have our Mandarin-speaking Prime Minister that's always seemed to be a plus for Australia. And I'm sure it is. But at the end of the day, you can't oversell that. Australia won't get any particular favoured treatment. And so we have to play with a straight bat.
Dobbie: Right. I noticed Peter Hartcher who's a writer for Fairfax Press said this week that he used the expression kill the chicken to scare the monkey. He says the US is the monkey and Australia is the chicken. If that's right then that doesn't sound too good for Australian business does it?
Kennedy: I suspect that that's a very colourful term of phrase and I'm not altogether sure it's an accurate description of that complexity of the political and cultural situation between China and Australia. I think that the Chinese are very professional in both their business and their diplomatic relations. And I don't think they need to go to those lengths to send messages anywhere. I think they can have direct lines of communication.
Dobbie: That'll just be journalists over-simplifying things again. Narelle, thank you very much for your time today.
Kennedy: Thanks Phil, bye.