While the high profile stories about Chinese companies are increasingly about acquisitions and investments in the UK, outbound investment is still a trickle compared with the inflow. But it is no longer one-way traffic and China’s latest five-year plan talks of outbound investment exceeding inbound. A lot of money could potentially come the UK’s way. The first question to ask is: why here?
“I went to a speech recently by the PRC Ambassador to the UK,” says Sharon Shi, partner and head of the Chinese desk with Eversheds LLP. “He referred to an economic theory that, when a country gets to a GDP of $4,000-$5,000 a head, it will look to invest outwards. They see this as a natural course of events, as something they need to do.”
China has seen urbanisation on a massive scale in the past 30 years. An urban population demands different things from rural communities and consumerism is something that even a centrally planned economy cannot totally control. China has a middle class, which is huge and still growing. Its cities’ shopping malls are filled with familiar brand names and Western cars. The UK’s education system has status, especially its universities, and established, premium brands including the recently acquired Gieves & Hawkes (by retailer Trinity). But there is more to it than Brand UK.
“Chinese people want things that are made in China but designed in Europe,” Ms Shi says. The £6 million Shanghai Automotive Industry Corporation investment in its UK Technical Centre at the Longbridge site in Birmingham is one example. It designs MG cars that are then made in China, although there is some final assembly at Longbridge. “They want to come here, get technology, work in joint ventures and learn our management skills,” she adds.
Intellectual property and counterfeiting
The quest for technology raises the matter of intellectual property protection, which has been a serious concern. Hu Jintao, Secretary-General of the Central Committee of the Communist Party of China (CPC) and the country’s most senior politician, said in a recent address to the CPC Central Committee that “To build an IPR (intellectual property rights) system and significantly enhance the capability of creating, managing, protecting and utilising intellectual property is an urgent need for strengthening China’s capability of indigenous innovation and for building an innovative nation”.
The country has established an organisation for the protection of IP and to detect and punish counterfeiting. Transgressors who are caught can expect pretty severe punishment. The presence in China of several major western companies, including Airbus and others with high volume IP to protect, indicates increased confidence. The growing external investment has a local emphasis.
Changing tastes, new demands
“They aren’t looking for customers, as such – they have customers at home,” says Nick Emerson, partner and head of the Japan and Korea groups of Eversheds in London. There are areas that are critical for China’s growing demand, such as baby milk, after the recent poisoning scare, which led to Danone being rumoured as an acquisition target.
The Weetabix purchase represents changing tastes in the consumer market. Companies involved in energy, especially alternative energy technology, are of interest.
What matters is how the UK plays it. “The UK played well in the 1980s, attracting Japanese investment,” says Mr Emerson.
Part of the success was infrastructure, in the less formal sense – schools, supermarkets, restaurants and so on. When Nissan opened in north east England, it found that NKK Ball Bearings had already established a kind of ‘beachhead’. The UK is more open to inward investment than some competitor countries; the USA, for example, has gone so far as to ban some Chinese investment. The UK has a well developed financial and legal infrastructure, which is also accessible.
When the Japanese manufacturers invested, legal and financial services followed but after a delay. However, a Chinese law firm, Zhonglun W&D LLP, has already opened its doors in London and the renminbi is soon to be traded here. British education is highly respected and the Chinese have been sending their children to British schools, and universities, for years. Which is not to say there are no challenges, and cultural misunderstandings offer potential pitfalls.
Getting to know you
“British people don’t know China – middle management does not speak Chinese – but if you go to Shanghai, you will find it is attracting young people from all over the world,” says Emerson. The Chinese are prepared to work with those who want to do business with them. “Any suspicion is on our side, not theirs. China wants to make money. It can remember poverty and hunger and it does not want it again.” The key to doing business successfully is building up knowledge and trust.
The Japanese came with complete factories and often brought their suppliers with them. Chinese companies have shown a greater tendency to start smaller, build up relationships and then make the larger investment.
“Relationships are important, especially in China. The people are straightforward, honest and decent but you do need your wits about you. You need documentation to be correct in every respect, for example,” he says. So how do UK businesses attract Chinese investment, both as trading partners and as direct investors? “Many [UK] businesses already have Chinese customers and suppliers. The thing is to invest time in working with them. Join Chinese business associations. CBBC (China-Britain Business Council) facilitates networks than can be plugged into. If your neighbours are doing business with Chinese companies, get an introduction.”
“Chinese companies coming here ask for lists of British companies looking for investment, for purchase or to work with,” Ms Shi says. That seems pretty straightforward but there is a problem. “The answer tends to be ‘but please tell us what you want’. The problem is: they don’t necessarily know.But whichever side takes the initiative and puts information out, will get the advantage.”
Costs are rising in China – and UK companies have experience of cutting costs, introducing Lean manufacturing techniques and moving up the value chain. All of that is interesting to Chinese investors. “Europe offers a stable market and technology,” Ms Shi says. “They expect a commercial return and it is up to the UK to show how it offers a better environment, compared with other countries.”