China’s new mar­ket re­al­i­ties

Our rep­u­ta­tion was se­ri­ously tested there in 2013. The chal­lenges in gain­ing mar­ket ac­cess are for­mi­da­ble. How­ever, China is now New Zealand’s big­gest ex­port mar­ket. Op­por­tu­ni­ties con­tinue to grow and Kiwi firms are work­ing smarter to har­ness them. Ex­port

Exporter - - FRONT PAGE - By Glenn Baker.

If you had to de­scribe the pace of the Chi­nese econ­omy in this, the Year of the Horse, you could say it has slowed from a gal­lop to a can­ter. Cer­tainly, it’s still well ahead of other world economies – most of which slowed to a walk dur­ing the GFC (thank­fully, New Zealand’s econ­omy has re­cently man­aged to break back into a trot!)

Horse analo­gies aside, it’s clear the Chi­nese econ­omy is grow­ing at a slower pace, al­though for New Zealand ex­porters this needn’t be a con­cern.

Mike Arand, NZTE’s trade com­mis­sioner in Shang­hai, says com­men­ta­tors who fo­cus on the lower growth rate for the cur­rent decade are miss­ing a fun­da­men­tal point. “Over the decade to 2012 an­nual GDP growth av­er­aged more than ten per­cent and cur­rent pre­dic­tions seem to set­tle on around 7.5 per­cent for the cur­rent decade. How­ever, at the start of that last decade China’s GDP was around US$1 tril­lion; now it is around US$10 tril­lion, so we are go­ing to con­tinue to see strong growth from China for some time,” he says. “What’s ex­cit­ing for New Zealand ex­porters is that much more growth over the next two to five years will come from the do­mes­tic con­sumer sec­tor. While ex­ports re­main im­por­tant to China’s GDP, many are pre­dict­ing that it is the growth in the con­sumer sec­tor that will drive China for­ward.

“The good news is that this means well-ed­u­cated and well-paid con­sumers are de­mand­ing high-qual­ity safe foods and bev­er­ages. Kiwi com­pa­nies that are ‘China-ready’, pre­pared for the chal­lenges, well-re­sourced, and ready to com­mit to the mar­ket should be able to cap­i­talise on this op­por­tu­nity both short and long term.”

Damon Pal­ing, part­ner at PwC World­trade Man­age­ment Ser­vices in Shang­hai, be­lieves the more mod­er­ate pace of growth in China bodes well for New Zealand’s pre­mium im­ported F&B prod­ucts. Ris­ing house­hold in­come in ur­ban cen­tres, in­creas­ing ur­ban­i­sa­tion un­der the 12th Five-Year Plan, chang­ing life­styles and con­tin­ual food safety con­cerns – as well as changes in tastes and pref­er­ences due to more in­ter­na­tional ex­pe­ri­ences, and changes

in pop­u­la­tion struc­ture and dis­pos­able in­come lev­els – are all mar­ket trends that favour our pro­duc­ers and ex­porters, he says. Fur­ther pos­i­tive sen­ti­ment is ex­pressed by Louise Leonard, founder and MD of Shang­hai-based B &C Con­sult­ing Ser­vices, whose mar­ket­ing in­sight in­cludes mega­trends for seafood con­sump­tion in China. “Food­stuff buy­ing trends in 2014 will con­tinue to be ex­per­i­men­tal, par­tic­u­larly in re­gard to taste and tex­tures, with the ‘fin­ger tap’ of so­cial me­dia plat­forms play­ing an im­por­tant role in speak­ing for food safety, trans­parency, trendi­ness and chic­ness – all in­di­rectly grow­ing con­sump­tion.

“Chi­nese mid­dle class con­sumers have strong wal­lets, are price sen­si­tive and are grow­ing in prod­uct savvi­ness,” adds Leonard. “The Xi Jing Ping man­dated govern­ment en­ter­tain­ment aus­ter­ity pol­icy (curb­ing ex­penses) has im­pacted high value prod­ucts. How­ever, the counter bal­ance is a grow­ing mid­dle class con­sumer who wants to buy and con­sume.”

“I strongly en­cour­age ex­porters to care­fully ex­plore the ben­e­fits and work­ings of the FTA with their Chi­nese part­ners or buy­ers, and their cus­toms bro­kers and other ad­vi­sors, be­fore ship­ping goods.”

– Mike Arand, NZTE.

Pat English, ex­ec­u­tive di­rec­tor of The New Zealand China Coun­cil, spent four years as con­sul gen­eral and trade com­mis­sioner in Guangzhou and 12 of the past 16 years work­ing in China. A mem­ber of the FTA ne­go­ti­a­tions team, he of­fers a unique un­der­stand­ing of the ‘China ex­port op­por­tu­nity’ and be­lieves the chal­lenges for our ex­porters are as great, if not greater, than ever. Those chal­lenges come from three di­rec­tions, he says; the first be­ing the do­mes­tic en­vi­ron­ment. “The reg­u­la­tory en­vi­ron­ment in­clud­ing the is­sue of trans­parency; do­mes­tic com­pe­ti­tion; busi­ness cul­ture and lan­guage; and now the cost of do­ing busi­ness – it’s not a cheap place to op­er­ate in.”

The sec­ond chal­lenge is in­ter­na­tional com­pe­ti­tion. “Even with a rel­a­tive slow­down, China as a mar­ket is still one of only a few large economies still spend­ing. New Zealand knows this but so does ev­ery­one else. The com­pe­ti­tion’s there in force and have of­ten been there for longer.”

The third chal­lenge, he be­lieves, is the ca­pa­bil­ity of New Zealand com­pa­nies and sec­tors. “Com­pa­nies need to have the right people in place, in­ter­nally and ex­ter­nally, to bring the skill sets needed; and suf­fi­cient re­sources, es­pe­cially fund­ing.

“China is not for the faint-hearted,” says English. “Not for com­pa­nies with limited re­sources and es­pe­cially not for those bas­ing their strat­egy on the his­tor­i­cal China of large pop­u­la­tion/low cost of op­er­a­tions.”

English points out the im­pact of dif­fer­ent reg­u­la­tory sys­tems on trade be­tween the two na­tions. “New Zealand and other OECD coun­tries have reg­u­la­tory sys­tems based on low reg­u­la­tion/high trust – while many Asian coun­tries, in­clud­ing China are low trust/ high reg­u­la­tion. To ad­dress this, New Zealand needs more reg­u­la­tory sup­port for New Zealand sec­tors. Com­pa­nies won’t like the idea of more reg­u­la­tions, but the key foun­da­tional re­la­tion­ship is govern­ment to govern­ment. So what’s needed is a pub­lic/pri­vate ini­tia­tive to de­velop a set of reg­u­la­tions that sup­port trade and in­vest­ment, not ob­struct it.”

What about the FTA?

Talk of a govern­ment to govern­ment foun­da­tional re­la­tion­ship leads to the sub­ject of New Zealand’s FTA with China. Is it de­liv­er­ing on ex­pec­ta­tions?

Pat English is con­vinced the FTA has been a crit­i­cal con­tribut­ing fac­tor in the growth in trade over the past six years. There are pos­i­tives be­yond the trade stats too, he says. “These in­clude the sta­tus that came from be­ing the first OECD coun­try to have a com­pre­hen­sive bi­lat­eral FTA with China. This is not lost on the Chi­nese.”

An­other as­pect is the coun­try to coun­try in­sti­tu­tional struc­tures that man­age the FTA and form the ba­sis of a strong re­la­tion­ship, adds English. “The FTA can’t stop prob­lems from hap­pen­ing but it pro­vides the crit­i­cal mech­a­nisms and re­la­tion­ships that en­able us to cope with is­sues when they arise.

“Some might not agree with this, but the un­known ques­tion is ‘what would have been the con­se­quences had those FTA mech­a­nisms and re­la­tion­ships not been in place?” He’s re­fer­ring, of course, to the whey protein scare and meat reg­is­tra­tion is­sues last year.

NZTE’s Mike Arand re­minds us that New Zealand is a rel­a­tively small trade part­ner for China – rep­re­sent­ing a tiny 0.25 per­cent of China’s to­tal trade – and the op­por­tu­ni­ties for our eco­nomic growth lie in the abil­ity of ex­porters to pro­duce the type of high qual­ity goods and ser­vices the Chi­nese want. The FTA is a big en­abler and a real ad­van­tage at the in­di­vid­ual com­pany level over in­ter­na­tional com­peti­tors.

Arand says there are some com­pa­nies not tak­ing full ad­van­tage of re­duced tar­iffs for a va­ri­ety of rea­sons, and they may be for­go­ing con­sid­er­able ben­e­fits

that could be utilised to fuel fur­ther growth and gain lower-cost mar­ket ac­cess.

“We have seen cases where the ex­porter has not been able to en­joy the FTA tar­iff pref­er­ence as FTA pro­ce­dures have not been fol­lowed. I have some­times ob­served some con­fu­sion about the FTA as well – of­ten when an ex­porter has run into prob­lems at the bor­der.”

He says it is com­mon to blame the FTA for prob­lems when it of­ten tran­spires that it has noth­ing to do with it. Prob­lems of­ten re­late to a fail­ure to ad­here strictly to the China Cus­toms or CIQ (China In­spec­tion & Quar­an­tine Ser­vices) rules and reg­u­la­tions.

“These rules and reg­u­la­tions are a chal­lenge in them­selves,” says Arand. “I know of a com­pany that had to re-la­bel all prod­ucts in their container sim­ply be­cause the font on one line of the la­bel was 0.5mm dif­fer­ent than the stan­dard.

“I strongly en­cour­age ex­porters to care­fully ex­plore the ben­e­fits and work­ings of the FTA with their Chi­nese part­ners or buy­ers, and their cus­toms bro­kers and other ad­vi­sors, be­fore ship­ping goods.”

Trans­parency and food safety

Trans­parency and food safety are high on the agenda of Chi­nese au­thor­i­ties and are likely to re­main there – a re­cent ex­am­ple be­ing stricter reg­u­la­tions on the ad­min­is­tra­tion of in­fant milk pow­der. PwC’s Damon Pal­ing points out that there are sev­eral au­thor­i­ties in­volved in reg­u­la­tory re­form and de­vel­op­ment.

The Na­tional Health and Fam­ily Plan­ning Com­mis­sion (NHFPC) is the com­pe­tent author­ity to es­tab­lish the na­tional stan­dards on food safety, or GB (GB stands for Guo­biao, which is Chi­nese for Na­tional Stan­dard).

The China Food and Drug Ad­min­is­tra­tion (CFDA) is of­fi­cially in charge of the ad­min­is­tra­tion of do­mes­tic

man­u­fac­tur­ing and dis­tri­bu­tion of F&B prod­ucts from Jan­uary 2014.

The lo­cal CIQ, un­der AQSIQ ad­min­is­tra­tion, is re­spon­si­ble for in­spec­tion of im­ported F&B prod­ucts ac­cord­ing to the GB.

“Dur­ing the past one to two years, var­i­ous old GB re­lated to F&B prod­ucts have been up­dated and the new rel­e­vant GB adopted by the NHFPC,” says Pal­ing. “As a fur­ther ex­am­ple, a new rule for or­ganic prod­uct cer­ti­fi­ca­tion is set to take ef­fect in April 2014.”

All New Zealand pro­duc­ers and ex­porters are en­cour­aged to stay abreast of these ad­min­is­tra­tive and reg­u­la­tory de­vel­op­ments and be open to the need for govern­ment-to-govern­ment di­a­logue in or­der to find rea­son­able and sus­tain­able so­lu­tions, he says.

In­deed the Chi­nese never shy from pa­per­work, so New Zealand ex­porters and brand own­ers must be up on the lat­est reg­u­la­tions and know what pa­per­work and/or test ap­plies to which el­e­ment of the reg­u­la­tion – this ad­vice from B& C Con­sult­ing Ser­vices’ Louise Leonard.

“China has many ports of en­try so the lo­cal in­ter­pre­ta­tion of these newly in­tro­duced laws [Pub­lic No­tice 55 and De­gree 45] will take time for the dif­fer­ent bu­reaus to have a uni­for­mity of un­der­stand­ing, es­pe­cially with what is com­pli­ance,” she says. “The pur­pose is to force sourc­ing from ei­ther ac­cred­ited sources or pur­chase from ac­cred­ited fac­to­ries.”

Amend­ments to ex­ist­ing laws and pro­mul­ga­tion of new laws that lay out clar­ity and trans­parency are in­evitable for China, says Leonard.

On­line trad­ing is not ex­empt from reg­u­lar law up­dates ei­ther. Pal­ing says new up­dated on­line trad­ing reg­u­la­tions were due to be in ef­fect in March this year. Among other things they are ex­pected to pro­vide Chi­nese con­sumers with a wider set of cir­cum­stances in which prod­ucts pur­chased on­line can be re­turned, he says.

“Multi-chan­nel pur­chas­ing and the rise of e-com­merce is a crit­i­cal con­sumer be­hav­iour pat­tern that New Zealand com­pa­nies need to un­der­stand and de­velop strat­egy around,” he re­minds us. “For ex­am­ple, on 11 Novem­ber, which is ‘Sin­gles Day’ [a hol­i­day pop­u­lar with young Chi­nese] e-com­merce trans­ac­tions reached a stag­ger­ing RMB35 bil­lion for one day of trans­ac­tions, with 325 mil­lion pack­ages re­quir­ing de­liv­ery within ten work­ing days there­after.

“New Zealand pro­duc­ers sell­ing on­line need to con­sider how to build con­sumer con­fi­dence in their brand; the plat­form for the web­site in­clud­ing on­line pay­ment, lo­gis­tics ful­fil­ment, prod­uct in­tegrity, cus­toms duty ex­emp­tions, and prod­uct re­turn.”

Mar­ket lessons

China is un­ques­tion­ably a tough, de­mand­ing mar­ket – and af­ter 12 years ex­pe­ri­ence there Pat English still be­lieves too many com­pa­nies fail to take in­de­pen­dent ad­vice at cru­cial stages. “They’ll take crit­i­cal and some­times tech­ni­cal ad­vice [reg­u­la­tory, fi­nan­cial, le­gal, HR] from in­di­vid­u­als and or­gan­i­sa­tions who are in a po­si­tion to gain from the out­come.”

There is also an over-em­pha­sis on re­la­tion­ships, he says. “Yes, it’s a crit­i­cal fac­tor, with­out doubt, but one of a num­ber of fac­tors.”

Other myths do­ing the rounds in­clude the one about China be­ing ‘a cheap place to do busi­ness’, and a ‘huge op­por­tu­nity’. The old adage ‘if it sounds too good to be true, it is’ still ap­plies, he says. “En­sure the in­for­ma­tion you’re work­ing with is fac­tual and backed up by qual­i­fied, in­de­pen­dent ad­vice,” says English. “Num­ber 8 wire won’t work very well there – mar­kets like China are com­plex and in­creas­ingly so­phis­ti­cated places to do busi­ness. So you must step up and build in­ter­nal ca­pa­bil­ity and ex­ter­nal knowl­edge and net­works to meet the chang­ing en­vi­ron­ment.”

His other piece of ad­vice may sound a lit­tle odd in the con­text of this story, but he also be­lieves there can be an over-em­pha­sis and re­liance on China. “New Zealand com­pa­nies and sec­tors tend to com­mit all re­sources to high­growth mar­kets; which is prac­ti­cal, and un­der­stand­able, when it’s im­per­a­tive to pay bills and stay afloat. How­ever, it should not be to the detri­ment of other mar­kets.

“Should things change, we must ask, ‘where we would be if all our eggs are in one bas­ket?’”

Louise Leonard also be­lieves there can be too much re­liance on dis­trib­u­tors and agents on the ground in China to be proac­tive, “when in fact the real re­sult is re­ac­tive”. Ex­porters must also be the driv­ing force, she says.

Leonard’s ad­vice is to “be pre­pared and stay pre­pared” by:

• Mar­ket due dili­gence – un­der­stand­ing de­vel­op­ments within each mar­ket seg­ment, even if within the same sec­tor, such as food ser­vices.

• Main­tain­ing mar­ket in­tel­li­gence – China mar­ket in­for­ma­tion has a shelf-life of nine months.

• Con­tin­ual map­ping of the crit­i­cal un­knowns and their po­ten­tial im­pact on the China busi­ness model and HQbased busi­ness model.

• Un­der­stand­ing the le­gal re­quire­ments – mar­ket en­try qual­i­fi­ca­tions, la­belling laws, com­pli­ance test re­quire­ments, cur­rency fluc­tu­a­tions, govern­ment pol­icy, and so on.

As for last year’s Fon­terra episode, in the big food pic­ture it was just a short­term blip, be­lieves Leonard, al­though it proved to Chi­nese con­sumers that in­ter­na­tional food com­pa­nies have their prob­lems too. The dif­fer­ence was that Fon­terra spoke up, which equals ‘trans­parency’, and took im­me­di­ate self-driven re­call ac­tion – which equals ‘food safety’.

Op­por­tu­ni­ties abound

Mike Arand agrees that the trust fac­tor was un­der scru­tiny in 2013, but he also ob­served the favourable

re­sponse, par­tic­u­larly in the so­cial me­dia space, to the trans­par­ent way in which the scare was han­dled. “Per­haps tes­ta­ment to the strength of the New Zealand Brand, dairy ex­ports have since picked up and are higher than they were be­fore; it ap­pears that this event has not im­pacted the wider bi­lat­eral dairy trade.”

Arand, who’s been based in Shang­hai for around two and a half years, is see­ing more Kiwi firms cap­i­tal­is­ing on the China op­por­tu­ni­ties than ever be­fore. He’s also see­ing more com­pa­nies in­vest­ing in their own people on the ground – thereby build­ing bet­ter mar­ket in­for­ma­tion, ex­pand­ing net­works faster, un­der­stand­ing bet­ter the needs of pro­mo­tional sup­port ac­tiv­ity and, as a re­sult, in­creas­ing sales.

“Ex­porters are re­al­is­ing that the busi­ness mod­els they use for Aus­tralia, US and Europe do not work for China. One of the most ob­vi­ous ex­am­ples be­ing that a con­tract is just the start of a longterm and ever-evolv­ing re­la­tion­ship with a Chi­nese part­ner. It’s not a start­ing gun to sig­nal that ev­ery­thing that can be pro­duced can be stuffed into con­tain­ers and dis­patched,” he says. “As it is now of­ten quoted, do­ing busi­ness with the Chi­nese is built around mu­tual re­spect, close­ness, and con­sis­tency, and in many cases the re­wards are longer term.”

Scott Brown, man­ag­ing part­ner at Shang­hai-based mar­ket con­sul­tancy Red­fern As­so­ciates, of­fers fur­ther in­sights on the China op­por­tu­nity, and his ad­vice is to en­gage now. “China has moved from be­ing the world’s pro­duc­tion site to a mid­dle-class FCMG con­sumer driven mar­ket. In re­cent times there has been an emer­gence of a bet­ter class of dis­trib­u­tor who knows what he wants. “When it comes to in-mar­ket part­ners our ex­porters are now spoilt for choice,” he says.

“It’s a far more so­phis­ti­cated mar­ket too – with shop­pers now mov­ing be­yond sta­ple food­stuffs to per­sonal niche prod­ucts.”

A mar­ket vet­eran with 17 years ex­pe­ri­ence in China, Brown urges New Zealand ex­porters to show com­mit­ment to the mar­ket – “just dip­ping your toe in the wa­ter won’t bring suc­cess. Put the ap­pro­pri­ate re­sources in place.”

Never make as­sump­tions, he adds – ques­tion ev­ery­thing. “It’s about best prac­tice and best prod­uct – not re­ly­ing on some­one you hap­pened to meet at a trade show who claims to be well con­nected.” It’s like any new ven­ture, he says, “al­ways plan for the worst, but hope for the best.”

Glenn Baker is edi­tor of Ex­porter.

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