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Fast-track China

By Denise McNabb

Tuesday 1st April 2003

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Every weekend at 5am they start queuing in droves outside Beijing's Foreign Language Bookstore, hoping for a chance to sharpen their English speaking skills at free language lectures promoted by the municipal government. "Hello, hello, you be my friend" is a more pervasive catch-cry than ever. Chinese students cling to anyone speaking what is largely accepted as the universal language of business.

As China moves to synchronise with the outside world at hyper-speed, English fluency is the barometer of future salary levels. Proficient English speakers command yearly incomes of around 53,400 yuan ($NZ11,517). Only a moderate understanding and the salary drops by half. Language schools are booming in the cities and language programmes have invaded radio and television stations. Demand for interpreters is huge.

And as New Zealanders know well, China's English addiction has spawned a healthy trade in children of the moneyed who travel here to hone their speaking skills. But there's more to it than that. If there are opportunities at home, the opportunities in China are far greater. Take Auckland-based educational institution Unitec. In 2001 Unitec and its Chinese partner that recruits students for its Auckland classes decided to set up a small niche language school in Beijing. One hundred students study by day in seven classrooms and another 50 schoolchildren fill the classrooms in the evenings. Unlike many language schools, Unitec offers small classes, only native speakers, and a high-quality curriculum. It also charges considerably more than the average. It's just been voted one of the top 10 English language schools in Beijing by a prestigious local television station.

At the moment, Unitec's school is only open to students who intend to come to New Zealand to study later, and it doesn't make a huge profit, but Unitec's Nick Shackleford, head of English language, has bigger plans. He's carved out a small niche at the very top of the market and can see room for growth in that niche. He's talking to Shanghai University about another school there, he's negotiating to be involved in English language teacher training, and he'd like to get into on-site training with businesses - particularly hotels and tourism operations.

With Beijing hosting the 2008 Olympics, the push is on to lift the general standard of English all around the city. The government is even demanding all taxi drivers master some rudimentary English. "Someone must have that contract," Shackleford muses wistfully.

Probably. Whether they are making money out of it is another question. New Zealand author Gordon Dryden, whose book The Learning Revolution has sold over 10 million copies in China since 1996, has seen almost none of the estimated $5 million owing to him as co-author, despite battling through lengthy negotiation and the courts. Dryden is deeply impressed by the entrepreneurial marketing talents of the private sector technology company that now has the rights to the book (hence 10 million sales). But he's deeply frustrated by the complex web of regulations, secret deals and government-controlled publishing companies that has seen him so royally fleeced.

Still, Dryden is optimistic the business climate in China is changing fast, and in anticipation of some big money eventually coming his way he is negotiating three education-related joint venture deals, at least one of which should be signed before the end of the year, he says. "The Chinese are genuinely looking for major changes in the education field and are developing a lot of stuff at a fast rate." Several of Dryden's potential projects are with multimedia partners, he says, as internet use has soared dramatically. "The number of Chinese with internet connections will have overtaken the Japanese next year and the Americans by 2006. I'm extremely confident we can get a deal we will make money from."

English addiction is just one phenomenon that bowls the foreign visitor in China as the country gears up efforts to be a market-based economy by 2005, to meet the commitment it made when it joined the World Trade Organisation in November 2001. Another is the proliferation of luxury cars that purr over newly sealed, sprawling motorways. New construction (and large-scale bowling of old city precincts) cracks at such a pace that new road maps have to be printed every other week in Beijing. Singapore-style, air-conditioned shopping emporiums have squeezed out fusty Friendship stores and supermarkets and shops the size of football fields have been planted all over the place by megachains such as France's Carrefour and Germany's Metro.

On the business and trade front, the WTO regime means tariffs are dropping like flies. Stock markets are flourishing, rules and regulations to make commercial transactions more transparent are being forged, foreign banks are arriving to try to grab a slice of the money that the Chinese tuck away at a surprisingly high rates and the judicial and legal infrastructure appears to percolating, albeit with some way to go.

To the small New Zealand company looking for a way in, the numbers are so large they are off-putting. Where do you start with an economy whose government says (although take the actual figures with a pinch of salt) its gross domestic product grew last year by 8% to around 10.2 trillion yuan ($NZ220 billion). Or where average household income for the 12.8 million people living in Beijing has risen from $US3300 in 1998 to $US4800 in 2002 and is expected to be $US6300 by 2006.

Already, there are some great New Zealand success stories. Wendy Pye has found a successful niche selling children's educational books and internet-based material into China, and the company is counting on China's joining the WTO to make the market even more lucrative.

Bay of Plenty palm grower Del Costa has been exporting Phoenix palms into China for a year. Owner Barry Hill ships the plants in giant containers from the Port of Tauranga to brokers in China who distribute them for use in urban beautification projects, including the tarting up of Beijing for the Olympics.

Fonterra (the former NZ Dairy Board) is doing tremendous business in China, according to New Zealand's China Trade Association chairman, Vic Percival. It has been supplying milk powder to the premium end of the Chinese market for 10 years and, as more Chinese turn to milk and milk-related products such as yoghurt, the company is now looking for joint ventures with local milk suppliers to grow middle market milk supply. Fonterra is also supplying cheese to McDonalds in China and cream for Starbucks out of its large factory in Guangzhou.

But perhaps higher profile are the scary stories. Lion Nathan got burnt when, eight years ago, it decided to set up a state-of-the-art brewery operation on China's eastern seaboard. In 2003, the brewer is still a long way from financial nirvana with its China operations with continual losses, the latest being $15.8 million in the year to September 2002. In 2001, it wrote off $128 million on its Wuxi and Suzhou brewery investments, and nobody wants to take its two breweries off its hands.

And remember Fernz Corporation and its disastrous attempt to manufacture the hepatitis drug Interferon in China? It got ripped off big-time when it gave the drugs to Chinese hospitals for human trials. (The hospitals illegally sold them to patients and Chinese authorities then accused Fernz of breaching lab testing and registration rules.) Meat processor Affco got beaten up, too, over supply problems at its Chengdu plant.

Clint Laurent, boss of Asian Demographics, a New Zealand-based company specialising in the collection, analysis and modelling of Asian demographic data, says too many people get carried away with the 1.2 billion people, China powerhouse thing. "Everybody told Lion Nathan there were going to be lots and lots of rich people who would spend a lot of money on beer," he says. "The market was never there. The average urban household has 3.1 people. Expenditure on beverages and liquor is 322 remimbi a year ($NZ69). At 8 remimbi a bottle the average household would have spent its entire annual liquor consumption budget on four bottles each of Lion Nathan beer."

Sure, opportunities are there, particularly in areas that lift productivity, he says. Transport and telecommunications are two that come to mind. But like so much to do with Asia business, it's the hard facts that should rule your decision-making. China is dogged by excess supply, capacity, downward price pressure, near zero employment creation, inventory buildup, around $941 billion of bad bank debts and a large amount of savings lying idle in banks instead of going into consumer spending. "Chinese people have more money stashed away than the whole of the US," Percival says.

The demographics
Laurent is not against investing, he's just wary of people who don't do their homework. For example, the increasing number of motorbikes on the streets is a sign of private wealth, but those luxury cars aren't. Most are company vehicles. Indeed, Laurent foresees massive problems in the car industry. The extra vehicle manufacturing capacity being built this year alone equals all of last year's sales and can't be justified.

And take the demographic changes. The preconception is that China has a large, young population that is going to keep growing and be enormously wealthy. Not true, says Laurent. "The youth market is shrinking at more than 1% a year. The one-child family mandate in urban areas has been going long enough now that it has actually killed off the supply of women of child-bearing age." Many pregnant women had scans and aborted girls in favour of boys as their only child. "China's population will peak in 2014, then decline," he says.

The plus side, says Laurent, is that restrictions on the number of children born meant they could be educated and given proper healthcare. "So China has an educated labour force. A third of urban homes have a mobile phone and 13% have computers." PC penetration is around 50% in Beijing and Shanghai. The "wiring" of China will continue in the next 10 years as the urban drift, driven by improving education standards and greater earning opportunities, will lead to more urban than rural households. As a result, all new household formation in the next decade will be in urban areas, increasing urban living from 45% today to 54% in 2012. And of those in the urban areas, 46% will have no child (a person under 20) in the household, compared to 29% today, thereby increasing the disposable income available for "luxuries" like eating out, travel and equipping the home.

There's another implication of the changing demographics. China's population is already middle-aged and a good number are over 40 years old. Though the population will peak in 2014, the rate of increase will slow down, adding just 23.7 million people between 2002 and 2012 compared to 101.4 million between 1992 and 2002. After that, the population will decline rapidly with less births and an increasing number of deaths as a result of the ageing population. A smaller workforce and increased number of older dependents will demand greater productivity. This may be possible. It is projected tertiary educated people will increase from 51 million today to 101 million in 2012. Higher education will lead to higher earnings per household, productivity will increase and therefore household incomes will continue increasing - particularly in urban areas with their smaller sized households.

Laurent says increased per-capita spending power will help drive the growth of the domestic consumption market. But he says changes are happening rapidly and companies need to move quickly to take advantage of it. So Lion looks set to make good out of its investment at its two breweries in Suzhou and Wuxi if it can hold out long enough.

Holding out has been the key for another New Zealand company in China, diversified investment group Richina Pacific. After five years of perseverance, the company's Shanghai tannery is paying healthy dividends. In February it reported it contributed 67% of Richina's $8.2 million net profit for the year to December 31. But chairman Alastair MacCormick is still wary. The company brings hides from the US and lambskins in from New Zealand, using Shanghai only as its manufacturing base, processing garments and shoes for worldwide export. Richina's Blue Zoo aquarium in Beijing, on the other hand, has been struggling and the company now has it at a "hold and observe" stage.

So does it all make you want to rush to China? The answer should be: "Yes, but ...". The cost of early entry has been huge for the likes of Lion. Confucius would probably say, "hang five, dude."

China opportunities
Education: Training China's 10 million teachers, or cashing in on education-hungry students. New Zealand author and budding China entrepreneur Gordon Dryden says parents in China's major cities think nothing of spending 30-40% of their income on their child's education

Building materials and furniture: China is building more than two million homes a year, according to China Trade Association chairman Vic Percival. Fletcher Challenge is already selling processed wood for furniture and pine for house framing

Consumer goods: China is fast becoming the world's largest consumer of most goods and services. Its consumption of mobile phones, televisions and motorbikes already exceeds the US's

Commodities and agricultural products: Rising standards of living will increase demand, perhaps even to the extent of lifting world prices

Infrastructure modernisation: From trains to the legal system

Environment: China has tremendous air pollution problems and sewage and waste treatment need massive improvement. New Zealand has already hosted several Chinese delegations looking at ways to clean up their country

Bottled water: Only13.8% of China's tap water is drinkable. China is already the biggest bottled water market in Asia consuming 8.5 million litres a year, and expected to increase to 14 billion litres by 2005. Already New Zealand mineral water company Siesta (with brand names like Waiwera) is exploring the market

Deer velvet, nutraceuticals and the dietary supplement sector: Worth $US3.63 billion now, dietary supplement sales are set to increase to more than $US10 billion by 2010

Business tips

- Try to obtain an introduction in China. It involves guanxi, an important component of business in China that can involve graft from connections for business deals seeking profit. Guanxi creates interdependency because favours received must be reciprocated

- Think small and niche unless you have the capabilities to take on big world players

- Hotels and restaurants are expensive but the Chinese do most of their deals over a meal

- Expect to pay a minimum $US100 a day in Beijing and Shanghai for hotel accommodation and $US50 a day elsewhere for three- to four-star hotels. You can now get non-smoking rooms

- Internet use in hotels is expensive, so go to a nearby internet café. The internet is censored by the government, as much as it is able. Change your password when you get home

- Take a Chinese name. Chinese find Western names difficult to deal with. Print business cards with your new name and practice saying it

- Chinese businesspeople expect at least two weeks' notice for meetings

- Don't talk politics. China's people still toe the party line - in public, at least

- Saving face is extremely important. Make sure that if you have to tackle something difficult there is a win-win situation for both parties

- If you are going to go in and out of China from, say, Hong Kong, ensure you have a multi-entry visa. The Chinese will send you back to Hong Kong to get one if you arrive without it on your second visit

- Drink bottled water

- The country has the same power plugs as New Zealand so you don't need adapters for your computer

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