Insider Media Limited

China was deemed the panacea to the ills that beset Midlands manufacturers a few months ago. The wisdom was that they just needed to park their supply chains there and wait for their margins to be restored as cut-price components poured back across the oceans.

Now it isn’t so simple – if it ever was. Rising wages and China’s slowing economic growth have created a very different and unsettling landscape.

Simon Lloyd, the head of DTZ’s industrial agency and logistics team in Birmingham, believes companies in the Midlands still looking to China must differentiate between short, medium and long-term expectations.

“There is clearly going to be a great slowdown in trade in the next six months. Investment is still going into China’s logistics sector, but currently everything is driven by price,” he says.

“The carbon footprint debate, with regard to bringing components and goods from China, may be an influence in the long term. The biggest issue is that Western manufacturers are looking to inland China because the eastern seaboard is becoming more expensive.

“However, they will face large upfront capital costs. Finding and paying for new premises, perhaps new machine tools, and the associated investment will be high. Inland China may offer cheaper labour, but it won’t be easy to access, not least because the infrastructure is often poor,” says Lloyd.

Fast-rising security costs are another issue, whether against the threat of piracy as container ships head towards Western Europe, or the loss of cargo rather closer to home.

“Internal theft is always the biggest issue when international supply chains are involved, although people don’t like to talk about it,” says Lloyd. “Theft from warehouses and distribution centres costs the industry billions, and, as we saw in December 2008, piracy en route is a growing threat.”

In the medium term, Lloyd believes manufacturers will have to consider the merits of using rail, and even road, to bring components back to the West.

“It’s possible to go north via the ’stans, but that really would be heading into the unknown. Rail routes are valid, but would need to be assessed in more detail. If shipping prices increase in the long term, though, overland routes, such as the old Silk Route, may come back into favour.”

Despite the carbon footprint debate, Lloyd sees air traffic as the most likely long-term route between China and the West, saying: “It wouldn’t make sense for widgets, but as more high-value items and perishable goods come here, air freight will be in demand.

“The critical strategic issue, especially for manufacturers, is to consider whether they still need to be in China, where they should be or whether they should look again at Eastern or Central Europe. China may have been the place to be in 2000, but that doesn’t always make it the right place.”

Helen McLeod-Jones, director of Ernst & Young’s China Business Services Group in Birmingham, shares Lloyd’s perception that it is the right time for reflection.

“There are mixed signs. For centuries, China saw itself as sharply insulated from global affairs, but for the past four or five years it has been reversing such traditional attitudes,” she says.

“China has long been a nation of savers, and although the Chinese are now more cautious their market for consumer products is holding its own. Their infrastructure investment programme is also huge, so significant opportunities are still there for Western companies and advisers.

”Now, as its economic growth slows, corporates that went into China, perhaps a little too quickly, need to be realistic about why they’re there.”

McLeod-Jones says issues about location should be equally high on the agenda for Midlands manufacturers and others still looking to Chinese markets.

“It’s still scary to see companies wanting to be there, but not having much of an idea about where they want to be,” she says. “They may have heard Shanghai is passé, but still haven’t taken advice about which region or urban centre they should consider.

“It’s just over a year since China changed the way its special economic zones worked, so overseas companies lost their previous tax advantages, but some British companies still haven’t heard about the reforms.”

McLeod-Jones also counsels that the desire of Chinese organisations to seek capital and profile via Western stock markets has ebbed dramatically.

“The tap seems to have been turned off for overseas listings, whether in London or New York. There wasn’t the pick up in activity expected after the summer, and it hasn’t returned,” she says. “The number of Chinese companies listing in Hong Kong and Shanghai has also dropped off, so the appetite for flotation has clearly lessened, and the work isn’t coming into the UK.”

As Lloyd emphasised, it is vital that Midlands corporates seeking opportunities do not restrict their endeavours in China to established destinations.

Birmingham’s decision to establish links with the southern manufacturing centre of Guangzhou looks astute, especially given the latter’s impressive achievement of double-digit GDP growth throughout an extremely challenging 2008. The port city began the new year by underlining its commitment to the industrial sector, with the start of site works for China’s largest diesel engine production plant.

No final development value for the scheme has been issued, but Guangdong Province’s economic and trade commission says it will cover 45 sq km.

Cultural links between the two cities were also enhanced when 25,000 people saw the Birmingham Royal Ballet, and its orchestra, the Royal Ballet Sinfonia, perform in Guangzhou, Beijing and Shanghai in January.

The CBSO is now planning a concert tour during 2011, according to Kelly Wu, Birmingham City Council’s international officer for China. She also highlights a series of trade missions in the coming months.

“Business delegates are coming here from Beijing, Guangzhou and other cities following the launch of the Big City Plan in China last November,” she says. “The Chinese company that printed all the tickets for the Beijing Olympics came here in December to meet Mike Whitby, and is planning to return this spring as it’s looking to set up a joint venture with a Midlands company for some of its UK projects.

“The company that designed the Bird’s Nest Stadium is also coming to Birmingham this year, and a group of property developers and investors will be here in March or early April to see what opportunities they might find.”

Senior civil servants will also be visiting Birmingham University for advanced training, and teachers arriving in the city to hone their English language skills, she says.

China’s corporates, academic establishments and other organisations remain eager to foster links with Birmingham, and the wider West Midlands, despite the downturn, says Wu: “Nanjing emphasised its confidence in the Rover brand by renaming its Longbridge operation MG UK in January 2009, and its management team has not changed its optimism about the British market.

“The next few months will provide a good opportunity for everyone to see where the markets are heading, and it will be interesting to see what the Chinese economy looks like after the boom, which always happens when the New Year celebrations end.”

Carole Murray, of No 5 Chambers – Birmingham’s barristers’ chambers – has also returned to Birmingham after a month visiting China’s major commercial centres, including the northern city of Tianjin. It may not be on every corporate radar, but surely should be, given its 10.5 million residents, which make it China’s third-largest city, and its long-term focus on industry and technology.

The slowdown in China’s spectacular expansion has induced negative musings by some Western commentators, but Murray – a dedicated Sinophile since her undergraduate days at Cambridge – has a more positive mindset.

“I think a pause for thought would help everyone. We shouldn’t forget that China’s modern economy has only been developing over the past 20 years, and it’s still early days to see what it might become,” she says.

“We might see the evolution of a more mature business climate, certainly with regard to corporate governance and banking standards. Predictions are always precarious, but I see more reasons not to be pessimistic.”

Not that Murray believes China is insulated from the current woes, simply because economic growth remains significant by Western standards.

“People are defaulting on invoices, workers are being paid in kind because their employers have run short of cash and there are a lot of sudden bankruptcies. I went past one site where I knew a factory used to employ 12,000 people and it had closed,” she says.

However, Murray points out that the power of China’s central government gives it great sway over the country’s fortunes. “It still has the ability to switch from a capitalist economy into a command economy, it holds close to two trillion US dollars in its reserves, and has pledged to invest $600bn into infrastructure projects, which will certainly create openings for Western companies,” she says.

Murray’s greatest concern is soaring unemployment among the rural millions who flooded into urban areas during the boom years.

“About a quarter of Beijing’s population is migrants, and the spectre of civil unrest haunts the major cities. There’s no experience here of an economic slump because the period of dramatic growth has been so short, and no-one knows what could happen.”

Uncertainty about China’s economic fortunes may be new, but confusion caused by its complex social and cultural mores certainly is not. Kepner-Tregoe has been advising executives about what they should say and do for half a century, and Albert Chan, who leads its industrial practice, says China will always unsettle the unwary.

“Even the most accepted phrase can lead to unexpected problems. In the West, due diligence simply means acquiring and assessing data about a merger or acquisition target,” he says.

“Translated into Mandarin though, it is closer to the word ‘investigation’, which obviously has different connotations; negative and even frightening. It’s vital to explain that due diligence isn’t an attempt to blame people or catch them in illicit activities.”

Another linguistic quirk means that Chinese use the same word for problem and question, so when a Westerner asks for information a listener may feel as though they are being judged or asked to justify their actions.

“Westerners – and their translators – always need to ensure the correct meaning is being conveyed. You also have to listen for the commitment and feelings behind the words you are hearing,” says Chan.

Equally, status is critically important in Asian corporate culture, so don’t try to open negotiations with your potential Chinese partner through your local sales representative.

“Chinese managers sometimes pay closer attention to the status of the person entering the agreement than the agreement itself,” says Chan. “It is wise to put negotiations in the hands of senior personnel from the outset, which will highlight the importance of the transaction to the Chinese partner.”

Chan also points to the often rigid and hierarchical structure of most Chinese companies, many of which have previously operated under state control.

“Westerners used to horizontal organisations may be disconcerted because their new colleagues are accustomed to decisions being made at a higher level and simply executed by those below,” he says.

“It’s not lack of knowledge, experience or interest on their part. It’s just that the previous structure did not require, or permit, them to be involved in decision-making.”