Business Analysis: No bridge is too far as China strides out to meet the world

From oil to PCs, the Chinese are linking up with Western industries to bring about a revolution in global trade. Abigail Townsend reports
Click to follow

Once, not so long ago, it was all very straightforward. In the West, America was the economic powerhouse, while in the East, the tiger roared, led by Hong Kong - then still a British territory - and Japan.

Once, not so long ago, it was all very straightforward. In the West, America was the economic powerhouse, while in the East, the tiger roared, led by Hong Kong - then still a British territory - and Japan.

That, however, was then. Over the past few years, the global economic landscape has shifted, rocking once mighty regions and throwing up new heroes. And nowhere are these changes more evident than in the People's Republic of China.

The Communist country has been growing rapidly for several years. Its membership of the World Trade Organisation, which it gained in late 2001, prompted the authorities to start relinquishing their iron grip on the economy, and the boom times have rolled ever since.

John Guy, head of KPMG's UK industrial products sector, says: "There are very few countries where we can see this rapid level of development. The Chinese are inherent entrepreneurs, investors and gamblers, and the political relaxation means many people have started their own businesses. The Chinese take risks - if they think they can make money out of something, they go for it."

The effects of this rapid expansion are being felt around the world. Commodity prices are at record highs largely because China, developing at the pace it is, has a seemingly unquenchable thirst for raw materials.

Yet domestic growth is no longer the only focus. Last week, the Chinese computer group Lenovo agreed to buy IBM's PC business for $1.75bn (£915m). The merged company will be based in New York but have its principal operations in Beijing. The deal will take Lenovo's share of the global PC market from 2.2 per cent to 9 per cent - making it third behind Dell and Hewlett-Packard. IBM will continue to work closely with the Chinese group as its preferred services and customer financing provider. Lenovo will be IBM's main PC supplier.

Nor is the deal a one-off. It follows an announced £1bn tie-up between MG Rover and the Shanghai Automotive Industry Corporation (SAIC), just one of 22 Chinese companies that approached the struggling car manufacturer, and plans by Air China, the country's third-largest carrier, to list in London and Hong Kong in order to facilitate a European expansion.

The Chinese, it would appear, are coming. "We're definitely seeing the Chinese invest in global brands to enable them to provide for their marketplace - the IBM deal is a typical example of that," says Mr Guy. "I would think we're going to see a lot more of this. It will help the Chinese companies compete and differentiate. It's quite clever.

"I have some colleagues that were there a few weeks ago, and they were staggered by the scale and immensity of burgeoning wealth in Shanghai. So there's clearly a huge amount of investment going in and there's a rapidly developing consumer base."

With a population of 1.3 billion, China is a consumer base like no other, and retailers and manufacturers are falling over themselves to fulfil demand.

But the authorities are also keen for Chinese companies to take a bigger role on the global stage and compete internationally, not just against each other at home. Culturally, the country will put itself on the map in 2008, when Beijing hosts the Olympic Games. But the authorities want the corporate sector to be similarly visible and are keen to oversee an increase in the number of Chinese multinationals on the Fortune 500 list. Currently there are 16, which is in itself impressive, as there were just three 10 years ago.

Says John Kuzmik, a corporate lawyer with White & Case, who is based in Hong Kong and heads up the US firm's China practice: "China is attracting foreign financial investors - hedge funds, private equity and so on. But we're also seeing Chinese companies expanding overseas. The Chinese government wants them to be looking abroad.

"It wants to be the preferred supplier to everything on the planet. They are doing a pretty good job already with manufacturing, but they don't have the brands or marketing capabilities, and there is only so much margin in manufacturing."

To help facilitate the international invasion, the government last month introduced a new set of regulations aimed at facilitating corporate expansion overseas, which up until recently was difficult for most domestic firms.

More direct techniques are being employed, too: earlier this year, 55 senior technicians and managers from the state-owned oil company Sinopec were sent to London for six months to learn about the Western oil industry. That's six whole months - and let's not overlook the three months delegates spent in Shanghai beforehand, learning English.

Sinopec has stated that it wants to increase its daily production quotas by around 2.5 million barrels a day over the next five to 10 years, hence the interest in international expansion.

One expert who addressed the entourage during a series of lectures and seminars at Imperial College London says: "They were very interested in how Western mergers and acquisitions work, what the business etiquette of doing international deals is, and so on. Everything from strategic partnerships for pipelines onwards.

"They are working in a very controlled market but they have huge buying power. I have colleagues who, wherever they are in the world, are running into Sinopec officials talking to governments."

Another increasingly international sector is the internet, which is also a booming part of the Chinese economy. Companies such as alibaba.com are taking on global giants like eBay, while others have sought to list straight on to Nasdaq, enabling expansion to be funded via foreign investment. And the Chinese businessman has the advantage of learning from the West's mistakes.

One financial worker based in Hong Kong says: "If you look at the management teams of these technology companies, they usually have some international experience, either by working in the US or going to business school there. They then go back to China and apply what they've learnt, looking at their own market to decide which business models will work."

Of course, there are global side effects to such a rapidly developing economy, primarily competition getting tougher and, in turn, increasing price pressure. The impact of China's fixed exchange rate and growth levels on the dollar and raw material prices has also been well documented.

Overall, however, most agree little can be done about the Chinese march. Says Mr Guy: "As they develop, Chinese companies will look to invest in overseas territories, and that's got to be good for global trade. One of the solutions to political problems worldwide is that you have open and free trade."

China itself still has a long way to go. Outside developed regions such as Shanghai, Beijing and Hong Kong, poverty remains high, and the vast country is lacking infrastructure.

But most are confident that the economic boom will, if slowly, spread further across the country, making that consumer base an even richer source of business. As Mr Guy explains: "When all of these people have more money to spend, it can only be for the benefit of global trade. How that will pan out, who knows? But if it turns out like Hong Kong has, won't that be something to see?"

For much of the 20th century, China was the West's bogeyman, remaining largely closed off from the rest of the world. Now, as borders open and the market - albeit still firmly overseen by the Communist authorities - goes from strength to strength, its business community is finally emerging on to the global stage. China, it would appear, could end up having the last word after all.

Comments