China opportunities from a European perspective

China opportunities from a European perspective

People looking at a car inside an Audi dealership in Shanghai, China. Photo: Carlos Barria/Reuters

People looking at a car inside an Audi dealership in Shanghai, China. Photo: Carlos Barria/Reuters

As China’s economy matures, new opportunities for Europe’s manufacturing and services industries are emerging, but to make the most of them companies need to seize the chance before their international competitors.

From a European perspective, for the past three decades China has been principally a source of cheap manufactures and a destination for a lucrative but narrow slice of luxury goods. But economic success is changing the China proposition and important new consumer markets are opening up.

The people who 10 years ago barely registered as global consumers have grown exponentially more sophisticated: today they want steak, and sleek restaurants to eat it in; they want to travel overseas, and a cosmopolitan education to make the experience rewarding rather than merely foreign; and they want the latest in urban architecture, and clean air so they can enjoy the view from the top.

But understanding how overseas companies can capitalise on that potential presents a formidable challenge. To crack the China market, especially with its changing taste and dynamics, companies need a targeted strategy. Those who set out with a vague ambition to “sell more stuff to newly rich people” are likely to fail.

Two themes of consumption growth are emerging. The first is the well-documented demand for aspirational goods – like fine wines or fast cars or fancy holidays in Italy – that showcase the arrival of the nouveaux riches. The second is a quieter but potentially more profound revolution as Chinese consumers seek to improve their quality of life.

Europe’s economic strengths lie at the focal point where these themes converge.

For example, repeated food scares have made Chinese consumers much more conscious of what they eat, opening up a new market not just for European agribusiness, but also for European agritechnology. There is intense interest in low-impact, high-productivity farming techniques, particularly those from the more arid parts of southern Europe: northern China is one of the driest populated areas on earth.

But China’s eye on technology is not limited to agritech. Where Chinese companies once opted to form JVs, they are now buying European companies for their manufacturing technology – they have been particularly active in the Mittelstand market – but at the same time they are becoming more sophisticated. Many Chinese buyers are now nurturing their new acquisitions in situ to promote continuing technological advances.

But perhaps the most intriguing possibility is that China’s newly affluent could offer a broad new market for Europe’s struggling manufacturing sector. As Chinese consumers move into more expensive, higher value added goods, relative wage costs for European producers become less of a factor, opening new opportunities for Europe’s relatively high cost, high-productivity workforce.

But these new opportunities mean little unless you can connect to them. From the outside, breaking into the China market can be a daunting prospect, but it is becoming notably easier.

Renminbi is on the cusp of becoming a major global currency, and companies planning to make a long-term commitment to the Chinese market need to understand both its idiosyncrasies and its potential.

Regulatory changes have now made it possible for international vendors to connect directly with Chinese domestic consumers in their own currency, renminbi, and remit it to offshore accounts.

It is also becoming simpler for companies to establish a physical presence on the ground in China. At the most basic level the authorities have streamlined the bureaucracy: much of the paperwork surrounding clearing import/export payments can now be handled by banks, for example.

And the recent creation of the Shanghai Free Trade Zone will further lower the barriers to entry, making it possible for a whole new class of businesses to set up in China. Although the exact details are still being worked out, the outlines of the new dispensation are clear: lighter regulations for establishing businesses, and simpler rules for efficient cross-border flow of funds are all on offer.

The SFTZ offers a kind of stepping stone to greater China engagement. It is located within the country, but its business regulations make it resemble global trade hubs like Hong Kong and Singapore more closely than it does the surrounding economy.

For some industries, it is not even necessary to have a presence in China. In 2013, the mainland overtook the US to become the world’s largest online marketplace. China is a ferociously competitive environment, but European businesses have a head start: Europe is already a favoured destination for tourists and students, and Brand Europe is riding high in Chinese esteem.

The growing spending power of Chinese consumers could be a game changer for the European economy, but it is up to European business to grasp the emerging opportunities.

Helen Wong is the CEO at HSBC China.

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