Chinese commercial expansion opens up a new Silk Road

International companies are moving their manufacturing plants and factories out of China to other Asian nations to take advantage of cheap labour as the Chinese market matures, growth slows and costs and wages increase.

ASEAN nations such as Thailand, in addition to other countries such as India, are proving to be popular alternative destinations for these international manufacturing plants and factories.

Chinese companies are expanding into other Asian nations too, to take advantage of talent, cheap labour and to sell their goods in growing consumer markets. Chinese enterprises’ marketing has become more sophisticated and exports more diverse too, which is opening up opportunities for UK companies to partner with them.

These were some of the key developments surrounding Chinese trade that were discussed at the New Frontiers in China Trade & Investment conference, held on 19 May at Asia House, in association with the China-Britain Business Council (CBBC).

More than 100 delegates including Asia House corporate members, members of the China-Britain Business Council, senior business leaders and diplomats, attended.

The Rt Hon the Lord Sassoon, chairman of the CBBC and executive director of Jardine Matheson Holdings, said that China was investing US$25bn in infrastructure in Indonesia. He also said that China had a strategic interest in “another sea” which was driving investment in railways and pipelines in Burma. “The Shanghai Cooperation Organization is driving some of the political thinking of Tajikistan, Uzbekistan and Kazakhstan. ASEAN is now the third largest trading block by volume. I certainly know that deals are being done. Very large Chinese companies are waiting to do joint ventures in ASEAN,” he said.

The audience also heard about Chinese investment in infrastructure and mining in Myanmar, as well as Chinese investment in refineries, highways and hydroelectric power plants in Cambodia, in flood protection in Thailand, and in power in Indonesia.

Gordon Orr, a director at McKinsey and Company, who led McKinsey’s Greater China Practice for many years, said he too was noticing a lot of change and Chinese companies were now “ready to go out and invest across Asia.” Japanese, Korean and Taiwanese factories were moving their factories out of China and “Chinese R&D operations will spread to India, Japan and Singapore,” he said. He said Chinese companies would continue to make cheap Chinese goods in China for the domestic market but set up factories for mid-value products outside China. “Chinese brands at the aspirational level could replace Japanese brands,” he said.

More private Chinese companies were now prepared to invest in Asia in partnerships, including having minority stakes in those partnerships, he said, unlike previously when they wanted to own 100 per cent. He said Government encouragement was driving this, as was a sense within these companies that they had better capabilities now, making them far more confident they could compete in outside China. “Chinese investment in real estate across the region is starting to become really significant,” he said.

When it comes to building materials and energy, he said there was a desire within China to move away from the Middle East and focus on Indonesia. Chinese companies were investing in infrastructure projects in certain Asian markets to help mining projects become successful or gain access to pipelines and mineral rights, he said.

Those views were echoed by Chris Devonshire-Ellis, founder of Dezan Shira & Associates, who said that the China-ASEAN Free Trade Area had eradicated tariffs on 90 per cent of products, apart from four countries which are meant to be in compliance by 2015.

“China’s middle class is now 250m and is set to reach 600m by 2020-2025. Manufacturing is going to be increasingly placed in ASEAN where average wages are a third of those in China and the China FTA has eradicated many tariffs. The consumer market for Chinese goods is growing in India and ASEAN. Chinese companies are manufacturing for Chinese consumers but setting up overseas to manufacture exports, as land and labour costs are so high in China. Vietnam is a significant player as worker wages there are a third of those in China,” he added.

Devonshire-Ellis explained that MNCs were increasingly choosing other Asian nations rather than China to set up their manufacturing hubs to service Asia. Volkswagen had put its car plant in Thailand and Ford chose Gujarat in India.

Yong Ou, head of Financial Institutions at the Bank of China UK, said the Renminbi, the official currency of the People’s Republic of China, was increasingly being used to settle trade deals. Last year nearly 18 per cent of trade deals were settled in it, compared to just two per cent in 2010.

Hui Zheng, senior associate at Allen & Overy, explained that Chinese investors were not only driven to invest in infrastructure by a desire to get natural resources out of the ground and to build pipelines.

He said they were also attracted by cheap labour, talent, strong brands and good technology, and they wanted to gain international project management experience and skills from their JV partners in south East Asia, that they could use in the rest of the world. Finance was available from Chinese banks and regulations were fairly relaxed in Asian countries, making it easier, he said.

Peter Budd, director of Arup and vice chairman of the China-Britain Business Council, said: “At first there was a political imperative for Chinese companies to expand but now it was commercial and they are more professional and more willing to collaborate with third parties to take advantage of the third party’s skills.”

Raffaello Pantucci, Senior Research Fellow at Royal United Services Institute, said China was building pipelines and infrastructure  in Central Asia, often in joint ventures with Western companies,  at incredible speed to bring oil and gas back to China. It was not always the large Chinese companies, but often the small regional state enterprises, he said. But he warned the danger was the quality would be poor as they often cut costs to compete with each other. But countries like Turkmenistan were very eager for other countries to create access to their hydrocarbons, he said.

“These are exciting times,” said Stephen Ball, lead partner and client council member at KPMG. “China is growing and investing its US$4 trillion reserves. Last year the new leadership in China started a wave of reforms – VAT reforms, reopening the Chinese IPO market and creating a Shanghai Free Trade Zone,” he pointed out.

Inbound and outbound investment to the UK was on the increase. Examples Ball gave included Chinese property developer Dalian Wanda Group’s US$1.5bn investment in a luxury yacht maker and a real estate development, and Bright Food’s purchase of Weetabix. Meanwhile outbound investment includes Jaguar Landrover’s joint venture with Chery Automobile Company Ltd to build a new manufacturing facility in China and UK-based InterContinental Hotels Group Plc’s plans to open a further 100 hotels in China in three to five years.

This new desire among Chinese companies to engage and expand outside China is greatly helped by the bamboo network (network of Chinese diaspora connections across the world), he said.

Hong Kong is now the gateway for international investors wanting to invest in mainland and vice versa, he said. Mutual stock trading between Hong Kong and Shanghai is now possible meaning Shanghai stocks can be traded on the Hong Kong Stock Exchange and vice versa. The Hong Kong Stock Exchange bought the London Metal Exchange in 2012 as Hong Kong has ambitions to become one of the top global trading centres, Ball explained.

However Orr pointed out that China lags way behind Koreans and Japanese when it comes to investing in India. “Japan has made US$15 -16bn FDI in India whereas Chinese FDI is just US$500m. The degree of catch up of Chinese business leaders to understand and exploit opportunities in India is very high. More Chinese visited New Zealand than visited India last year,” Orr pointed out.

Devonshire-Ellis agreed. He said he was very hopeful about India’s growth prospects under the new Government of Narendra Modi since Gujarat  had seen consistent double digit growth under his leadership and he was not in a coalition government. He said key reforms Modi would need to undertake included freeing up prime land  that had been taken over by illegal slums and tax reforms. He pointed out that India’s current 400m workforce (paid 20 per cent lower wages than the workforce in China), was predicted to reach 900m in the next decade, whilst China’s workforce, which was currently just over 900m, would shrink as the population aged and people retired.

He said it was in China’s interests that India developed so that manufacturing could be moved there to keep the Chinese middle-classes happy with cheap reliable goods whilst Chinese companies moved into manufacturing mid-value and high-end goods.

China has offered to fund up to 30 per cent of India’s US$1 trillion dollar infrastructure development  during the 12th Five-Year Plan (2012-17).

India is still assessing the offer. If it does accept it, it will improve India’s relationship with China and no doubt bring more business for Chinese companies.

To see a slideshow of the conference click below:

naomi.canton@asiahouse.co.uk

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