With the Australian dollar now at more realistic levels against the US dollar, many manufacturers are revisiting their exporting plans, with a focus on China in particular. Alan Johnson reports.
Maybe the softening of the Australian dollar has come too late for Holden, but for those manufacturers with a long term future in Australia 2014 could be a perfect time to dust off their export plans from a few years ago.
Mark Thirlwell, Austrade’s Chief Economist is upbeat about manufacturing’s exporting future, saying the key indicators are all positive.
“There are grounds for optimism, especially with a gradual weakening of the currency,” he told Manufacturers’ Monthly.
He admits it has been a tough couple of years for the manufacturing sector with a very high currency and a fairly weak trade environment; all against a backdrop of a structural transition to highly competitive Asian manufacturers.
“You put these three things together and it has been a really tough external environment for the manufacturing sector overall.
“But looking at 2014, I can see things starting to turn around, with the currency starting to come down to where it should be, in line with the fundamentals of the Australian economy.”
He also said the external picture is starting to look better as well.
“We are not expecting a global boom, but we are expecting global growth to pick up and be far stronger than in 2013. And when you look at the trade forecasts, they are all looking a lot better than they have for quite a while.
“So after being hammered for the past few years, the manufacturing sector will not be quite as much under the cosh as it has been,” he said.
Thirwell said that for manufacturers keen to start exporting, it is important they understand their strengths, and their competitors’ strengths. “They should also understand what their proposition is, and the markets they are going into.
“While there are a lot of opportunities out there, it is important manufacturers do their homework and understand where is the best fit for their products and which are the best markets for them.
“Sometimes you can target an opportunity and seize it, but in most other cases it is important to do due diligence and make a strategic decision to go to market.
Thirlwell said one of the most effective ways of avoiding commercial disputes is to choose the right business partner.
“This includes fully understanding the company, its history, structure and background, as well as the key individuals involved; both with your business and, if they are different, the owners/key decision-makers in the firm.”
He said the most common regret expressed by Australian businesspeople who have encountered disputes and worse, is that they didn’t put enough effort into this selection.
Opportunities in China
Thirlwell describes China as an ‘interesting’ story.
“For the past couple of decades it has been an excellent opportunity if you had input into China’s exporting machine with resources and commodities, but if you were competing against it in the global manufacturing sector then China has made life tough for you.
“But with the on-going adjustment in the Chinese economy, which is part of the broader adjustment across Asia more generally, these economies are shifting away from a pure export growth model towards something that has a bigger role for the domestic economy.
“This leads to China being a far more interesting demand story for people beyond just the resource sector.
“We have seen that in terms of tourism and education, but as you broaden out that consumer story in China then you would expect to broaden out to a wider demand story coming out of China. There should be scope there for some excitement,” Thirlwell said.
However organisations such as McKinsey are warning companies that they must adapt their offerings and ways of doing business, as China gradually shifts to a more consumer-driven economy.
New government policies are said to favour household income growth and support the expansion of the service sector and private enterprises, especially small and midsize businesses.
Researchers at McKinsey say two pointers of a more economically developed society will be higher productivity of its workers and higher productivity and greater efficiency of the government. These trends will create more and better-paid jobs and thus raise the share of the national income in the hands of consumers.
The evolution of China’s middle class means that sophisticated and seasoned shoppers, those able and willing to pay a premium for quality and to consider discretionary goods and not just basic necessities, will soon emerge as the dominant force.
A recent report from McKinsey’s China office, What’s next for China?, identifies key areas companies should focus on:
1. Embrace the new trends in urban development. Companies should design city-specific solutions—products, marketing approaches, and operating models—that meet the varied needs of the smaller cities that are expanding rapidly and underpinning China’s long-term growth. In addition, they should optimise their resources across the hub-and-spoke city clusters emerging throughout China. Hub cities will increasingly service the needs of the spoke cities, where most manufacturing takes place.
2. Focus on the growing demand for services and consumer goods. As disposable incomes rise, consumers will be able to buy more services and goods. That should spur the expansion of new service businesses ranging from catering to financial services, as well as the further expansion of demand for consumer products, across China’s immense and growing market.
3. Foster new skills and innovation capabilities. The growth of the urban labour pool is slowing as the country’s population ages. Companies will have to increase their productivity through training, automation, more flexible production, and enhanced employee loyalty. They will also need to foster new skills, from strategic planning to the maintenance of high-tech equipment.
Thirlwell says those companies that are already based in China are very optimistic about doing business there, citing the recently released Australia-China Business Perceptions Survey.
“The results highlight the opportunities and challenges Australian foreign subsidiaries face in China and provide a sense of how Australian businesses are leveraging the strong trade relationship between Australia and China to grow their businesses.
“The survey shows that while respondents report extra competition there, they think they will be able to handle it very well. In fact, four out of five people who responded to the survey said competition had gone up.
“However their expectations for growth and profitability for the year ahead, in fact for years ahead, are very strong, and when we asked why is this they said it was the quality of their offerings were a big part of it. In fact, three out of four respondents said they expect to expand over the next five years,” he said.
As well as having the right partners, Thirlwell said other challenges of operating in China included the availability of skilled staff, an unclear regulatory environment, and a lack of transparency of how things worked.
Protecting your IP
Austrade points out that while China is now a signatory to most major international IP agreements and has a legislative framework broadly in line with international norms, Australian companies need to be cautious of the risks around IP infringement.
China operates a first-to-file system meaning just that, the first person to register a trademark in China becomes the legal owner. Consequently, one of the most common IP risks is ‘Trademark squatting'.
If an Australian company finds this has happened, there are options available to recover your brand, but these are often lengthy and expensive, with no guarantee of success.
It is strongly recommended that Australian companies manufacturing in or exporting to China register their trademarks in both English and Chinese as early as possible.
Business etiquette in China
Austrade recommends the following when doing business in China:
• Building business relationships and trust is important in China, so expect to spend time at meetings and banquets with your potential business partners.
• Business meetings always start promptly, so it is important to arrive early for the standard formal introductions. It is usual to be introduced to the most senior person at the meeting first, followed by the others in descending order of seniority.
• A handshake is the standard way to greet men and women, whatever their age or seniority. Note that the Chinese respect their elders, so an extra show of courtesy in the presence of an older person will reflect well on you.
• Business cards (ming pian) are essential in China, and it is a good idea to have your card translated into Chinese on the reverse side. Present your card with both hands with the Chinese side face up. It is a sign of respect to spend a few moments examining the business cards you receive rather than putting them away immediately.
• When meeting potential business partners, it is helpful to know some Mandarin. Simple phrases such as ‘Ni hao’ (hello) ‘Zao shang hao (good morning) and Xia wu hao (good afternoon) can go a long way. Note that surnames are placed first, eg. Mr Yao Ming should therefore be addressed as ‘Mr Yao’.
• A great deal of business in China is conducted over dinner, where very senior people may attend who were not at previous negotiations, but are key to the approval of a business deal. However, business dinners can also indicate a general warming of a relationship, and in this case, their role should not be over-stated.
• Never begin eating or drinking until you host does. It is polite to try all dishes that are offered to you, but you can discreetly leave anything you don’t like at the edge of your plate.
• Dinner speeches and frequent toasts are standard, with locally produced wines or ‘bai jiu’ spirit the usual drinks for toasts. It is customary for toasts to be made by both sides.
• The Chinese generally like to give small and inexpensive gifts. It is a good idea to bring small gifts with an Australian theme for your hosts and wrap them in colours such as red, yellow or gold, which are regarded as lucky in China. It is not customary for your hosts to open the gifts in front of you, unless you encourage them to do so.
• Chinese negotiators are shrewd and know that foreigners will be reluctant to travel home from China empty-handed. They are willing to stretch out discussions, which can wear their foreign counterparts down. Be sure that your interpretations of any business deal are consistent with theirs and that everyone understands their duties and obligations.
• Expect to encounter delays or frustration during your business dealings in China, but it is important to remain patient and polite. The Chinese don’t like to ‘lose face’ so losing your temper or showing frustration will only set you back.
• If you are beckoning to someone, motion towards you using your hand and palm pointed downwards – never palm up. Furthermore, don’t use your index finger or point when speaking.