A DAMAGING BLOW

THE unravelling of what has become known as the ‘Scottish shambles’ is not only a huge embarrassment to Nicola Sturgeon and the Scottish Government.

It also potentially wipes out a £10billion programme of investment in Scotland’s infrastructure and may sour intergovernmental relations between Edinburgh and Beijing for the foreseeable future.

The collapse of the agreement in August provides a vivid illustration of the pitfalls governments and companies can fall into when trying to have commercial relations with the People’s Republic of China, which overtook Japan to become the world’s second largest economy five years ago.

Lesley Batchelor, director general of the Institute of Export, believes that First Minister Nicola Sturgeon and her advisers committed a ‘howler’ by not doing enough preparation.

Asked how the Scottish Government could have sought to do business with a company whose parent was blacklisted over corruption fears and had a questionable track record on human rights, Miss Batchelor said: ‘It’s really a question of doing your homework before you start signing things.

‘As far as the Scottish Government is concerned, as a businessperson, I would have done a lot more due diligence.

‘They do have the benefit of support from what was UK Trade & Investment, which is now the Department for International Trade, there are people in the country [China] who could have helped them, so I don’t really understand how this can have happened.

‘People make mistakes, though it does seem incredible when you consider all the help and advice that a government, such as the Scottish Government, has access to.

‘When it’s a government you expect them to be ultra-careful... This does sound like a real howler.’

Martin Gilbert, the chief executive of Aberdeen Asset Management, which gained a licence to operate in China from the Chinese government last year, said: ‘When it comes to China it is important to engage, be constructive but at the same time tread carefully.

‘Its potential is beyond doubt but you need to be discerning and think long term.

‘China is the world’s second largest economy and may well overtake the US in the years to come. The opportunities within the country and its financial muscle to invest elsewhere in the world cannot be ignored.

‘But in our experience there are no quick wins.’

Chinese trade is vital to Scotland and increasingly Chinese inward investment is, too.

In a five-year China plan published in 2012, the Scottish Government said it was determined to build stronger economic ties with the country.

Investment

The five-year plan, put together when Alex Salmond was First Minister, stated: ‘To facilitate inward investment, we will position Scotland as the ideal European base for Chinese companies with a focus on our pro-innovation business environment.’

The Scottish Government said it would vaunt our strengths in low-carbon renewable energy, innovation, air routes and investment finance.

Scottish Development International has established four offices in mainland China – in Beijing, Shanghai and Shenzhen – and one in Hong Kong.

There are plenty of Chinese companies with significant Scottish operations, including the state-owned oil company Petro China, which entered Scotland in 2011 through a joint venture with Switzerlandbased petrochemicals group INEOS.

Today it has joint control of the Grangemouth oil refinery, formerly owned by BP.

It has not always worked out well for Chinese investors in Scotland, though.

Beijing-based Sinopec acquired a 49 per cent stake in Talisman’s UK North Sea business, but the deal soured when the oil price collapsed.

According to energy expert Jilles van den Beukel: ‘For Sinopec, a $1.5billion investment turned into an abandonment-related liability within three years.’

A partnership between Chinese battery technology specialist BYD and Falkirk based bus builder Alexander Dennis – which is 55 per cent owned by investment funds of Brian Souter – that kicked off in October 2015 looks more promising, and there have been reports that BYD may make a £200million bid for the whole of Alexander Dennis.

The companies are equipping municipalities across the UK – including London and Liverpool – with zero-emission fleets of electric buses under the Enviro 200 EV marque.

Unveiling the deal, Alexander Dennis and BYD predicted the partnership could involve making £2billion worth of vehicles.

Chinese aviation giant HNA Group, which part-owns China’s fourth largest airline, Hainan Airlines, last year expressed an interest in an acquisition of Prestwick Airport, which the Scottish Government nationalised in October 2013 but is keen to sell.

HNA signed a memorandum of understanding with Prestwick airport in October 2015, allowing preliminary discussions to proceed.

The Orkney-based European Marine Energy Centre and the University of Edinburgh have signed a memorandum of understanding with organisations in the Qingdao area with a view to developing a marine energy test site in China.

It is not a one-way flow. Last year Scotland’s food and drink sector exported £85million worth of goods, including whisky, to China.

In a deal last year, Chinese internet giant Tencent invested in Scottish mapping business Sensewhere, to use its mapping solutions.

Sensewhere will be Tencent’s preferred vendor for locationbased advertising services.

Also, huge numbers of Chinese students, undergraduates and postgraduates, attend Scottish universities.

One major risk of doing business in China is that Chinese business partners lack the same levels of corporate governance as a Western suitor.

After all, it is a country where pirating everything from smartphones to T-shirts to Range Rover Evoques is a way of life.

The theft of intellectual property remains a massive risk for anyone doing business there.

Stooshie

Edinburgh-based Pelamis Wave Power, a Scottish renewable energy company, had several laptops stolen during a burglary after it was visited by a 60-strong Chinese government delegation in 2011.

A few years later, it noticed the launch of a strikingly similar project in China.

As Miss Sturgeon has discovered to her cost, there are obvious risks when a government seeks to win business from a regime such as China’s, which is renowned for having a poor record on human rights and the suppression of dissent.

Her predecessor, Mr Salmond, found himself in an awkward position when the Dalai Lama, an enemy of the people in Beijing, visited Scotland in 2012.

He was received at the Scottish Parliament and opposition leaders and human rights activists urged Mr Salmond to meet the Tibetan spiritual leader. But he kowtowed to the Chinese ambassador, who urged him in the strongest possible terms not to meet the Nobel Peace Prize winner.

Fearing a meeting would threaten Chinese investment, Mr Salmond gave the Dalai Lama a wide birth and reassured Beijing the trip had nothing to do with his government.

Overall, Scotland is lagging where winning inward investment from China is concerned.

Mark Harvey, senior partner at Ernst & Young, said: ‘China is actively looking to invest internationally. However, China is favouring other parts of the UK over Scotland.”

The latest stooshie over the Scottish shambles is unlikely to help matters.