To the Front Lines of the World’s Emerging Markets – A Look at the New UK Trade & Investment Strategy

By Timothy Anderson, timothyanderson2005@gmail.com

A common complaint amongst companies in China has been that although the UK government supports investment into China and Chinese investment into the UK, it does not do enough to help established UK companies in China.

With the release of the latest 5-year strategy of UK Trade & Investment (UKTI) in July, it would seem the sort of changes designed to help alleviate these complaints might be in the air. With this in mind, the brain trust at The Beat decided that a quick and dirty examination of the new UKTI strategy, and how it is likely to play out in China, was in order.

At the heart of the plans are a number of strategic, organisational and cultural changes at UKTI set to have potentially significant ramifications on UKTI’s stakeholders in China. Unsurprisingly, emerging markets - lead by China - figure prominently in the new strategy.

The ambitious goal of the UK government is to make the UK the country of first choice for those abroad looking for a business partner. The new UKTI strategy is the design for turning this vision into reality.

The cornerstone of the new UKTI strategy is a shift of resources away from headquarters and into front-line services, alongside an infusion of private sector expertise (including the addition of a Managing Director and Executive Director of Marketing with significant private sector experience), increased freedom for UKTI’s overseas staff to adjust their approach to relevant local market condition as they see fit, and a focus on employing professional marketing skills to better get the message of the UK’s significant strengths out to the world.

In practise, this means that emerging markets, lead by China, will receive a greater proportion of resources, made possible by internal moves such as the shedding of some 100 posts at UKTI headquarters by early 2007.

The upshot of the strategy for companies operating in China is a UKTI better positioned to offer ground-level assistance to established small and medium enterprises in China. Companies should expect to see a significant strengthening of regional ties within UKTI in different cities across China and stronger networks with other UK organisations.

The new UKTI strategy will involve a restructuring of the organisation around client groups, the introduction of client account managers for key clients supported by a proper CRM system and the previously mentioned reallocation of resources targeted towards the front line – those in direct contact with business customers in the UK and overseas. Again, all changes expected to benefit China’s SMEs.

The changes also signal a new drive to attract inward investment into the UK, highlighted by a joint public/private sector strategy designed to promote the City of London and the UKs financial services sector. In the case of China, a clear priority is attracting large Chinese companies to list on the London stock exchange.

Focus will be put on innovative companies, companies with a high R&D intensity, high value potential investors, major exporters, exporters to emerging markets and offering help to SMEs exporting for the first time. Financial services, oil and gas, information and communications technologies, and biotechnology are singled out as priority sectors. Trade and investment activities will be increasingly integrated in these areas.

The case of China, where major contract and commercial decisions are referred to the Chinese government for approval, is illustrative of the need for critical UK government support and informed action to enhance the competitiveness of companies wanting to trade in emerging markets. The new UKTI strategy is an acknowledgement of this reality, and the increasingly important role of UKTI acting as a facilitator for coordinating such UK government action.

Though critics are bound to note that these increased resources for emerging markets, such as China, will not come from new money (rather they are being fully funded by resources reallocated from other parts of the UKTI overseas network), what can at least be said is that their appears to be some meat behind the rhetoric –the potentially significant changes at the ground level.

That said, the envisioned shift in organisational culture towards a UKTI that is a streamlined, target-driven, entrepreneurial and client-focussed organisation capable of competently meeting client demands, professionally marketing the UK’s strengths, and effectively co-ordinating the work of central and regional government with that of the private sector, is hardly a trivial undertaking.

Whether this shift can indeed be accomplished without any increase in overall UKTI resources and if the new strategy can live up to those lofty ambitions and expectations, and just how much those working at the ground level in China will feel the changes, remain open questions that will be answered over the coming months and years.

This article will appear in the October 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.

Breakfast in Shanghai with The Mayor of London: A Steaming Cup of Java and a Generous Helping of Fiery Ken Livingstone

By Timothy Anderson, timothyanderson2005@gmail.com

It would be hard the dispute to assertion that Ken Livingstone’s passion for London is genuine. Beginning the early morning Q and A session with a few minutes of London cheerleading which could have left even the most cynical of hardened London-critics with a momentary warm, fuzzy feeling for the city, Ken Livingstone’s message – that is, the purpose behind his visit to China - rang out loud and clear. London is open for international business from all corners of the world and Chinese companies thinking of moving to the west would be wise to choose London over rival cities like Paris and New York.

The agenda of the day included discussion of the appointment of a new representative for the Mayor of London in Shanghai (tagged with the responsibility of promoting greater trade, education, culture and tourism between the two cities), the upcoming London 2012 Olympics, not to mention to Mr. Livingstone’s own record and performance as mayor. In typical Livingstone style, the platitudes and bite-size sound bites often favoured by politicians on similar foreign junkets were largely left out.

Mr. Livingstone’s reputation generally precedes him wherever he goes. Known for offering up direct and biting answers to the question lobbed his way - answers often infused with colourful, off-the-cuff and dart-like commentary - and a stubborn refusal to become an on-message cheerleader for the Labour party, this morning was no different.

Take the issue of transportation.

The man who has spent much of his two terms as London mayor battling transportation issues on various fronts professed to be in awe at the Chinese capacity for planning and construction – noting that construction of Shanghai’s metro network in it’s entirety will be completed in the time it takes to plan and build a single line in London.

In touting his own record improving transportation in London, Mr. Livingstone emphasised bringing in experienced people from the private sector to create contracts with meaningful incentives and penalties was key. For example, whether buses were full and ran on time was not factored into previous contracts awarded to the private operators of London’s buses.

“You can’t have civil servants negotiating with the some of the biggest companies in the world,” explained Mr, Livingstone, sardonically noting the civil servant approach is typically, “if I bend over this table, is there anything you would like to do?”

When asked about the much-debated issue of sliding A-level results across the UK, and whether this may be a barrier to foreign direct investment into the country from places like China, Mr. Livingstone deftly steered his talk back onto the issue of transportation.
“When I took over office, the number one complaint of business in London was traffic”, noted Mr. Livingstone. On this basis, transportation became top priority, ahead of education.

Mr. Livingstone nonetheless acknowledged that there exists a skills shortage across all sectors of the London economy. His standard response to problem issues (“give control to me”) seems to be happening in this case, with the mayor’s office to be handed control of the Skills Council by the end of the year. He also noted that in percentage terms the number of jobs in London demanding a university degree, some 38% of jobs, continues to increase - a positive sign.

In answer to a question regarding whether high set-up costs in London were limiting market access of Chinese companies to the city, Mr. Livingstone suggested the pattern of investment for companies coming to the UK is to place their headquarters where core functions are carried out in London, while production functions (and typically 90% of employees) locate elsewhere in the UK - where costs are lower. With the gap in financial investment between London and its European rivals Paris and Frankfurt continues to widen in London’s favour, this approach seems to be working for London.

Unsurprisingly, the upcoming London 2012 Olympics figured prominently in Mr. Livingstone’s banter, as he continued to bask in the afterglow of London’s victory. One could sense a palpable relief from Mr. Livingstone’s as his spoke of the wave of infrastructure and land re-development in London being unleashed in the wake of this victory. That said, Mr. Livingstone suggested there would be a marked difference in the approach Beijing and London take as host cities.

While Beijing will spend $3 billion more on the games than London, with the aim that every single facility be state of the art (an approach readily endorsed by the IOC), the London Olympic buildings will rely exclusively on proven technology and techniques. Mr. Livingstone emphatically noted that anybody known for demanding state-of-the-art designs and technologies would not be allowed near the planning process.

It was those continual off-the-cuff comments that kept the mood of the session generally light. Seizing an opportunity to take a jab at arguably his fiercest group of critics – the UK media – Mr. Livingstone caustically noted there were certain UK newspapers that rather wished he simply, “crawled under a rock and allowed someone more measured, cultured and useless to come forward in his place.”

Ah, but they’ll surely miss him when he’s gone, whenever that might be.

This article appeared in the June 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.

A Developing Challenge: A Discussion of Banking in China with Rachel Lomax, Deputy Governor of the Bank of England

By Timothy Anderson, timothyanderson2005@gmail.com

On May 25, Rachel Lomax, Deputy Governor of the Bank of England paid BritCham a visit, participating in the monthly Business Forum.

Professing a keen interest in the affairs of developing economies stemming from her time at the World Bank, Mrs. Lomax noted China continues to face numerous challenges in moving towards a full market approach with flexible exchange rates, liberated capital accounts and fully developed market based monetary instruments. And as participants noted, the Chinese banking sector in general does face challenges.

Five years ago, the ‘Big 4’ banks in China each declared non-performing loans (NPLs) of between 40-60%. The risk remains high that the previous situation of massive NPLs could repeat itself in the future – and risk management is therefore a hot issue in China.

“Chinese banks may claim only 5% bad debts exist, but this is largely thanks to the massive capital investment from the state for the purpose of preparing the banks for IPOs”, intoned Michael Askew of Business Development Bank. “Yet there has been no fundamental change in loan behaviour of the big Chinese banks.”

It doesn’t take long to pile up NPL loans of 20% or more – with many Chinese banks already fast accumulating loans. Banks build up assets intentionally to manage their bad debt ratio. However, if these assets are not of a particularly high quality, the NPL problem is potentially exacerbated.

"The understanding of rules and what is possible and not possible in China
is still very much developing and maturing", noted Nick Harrison of Lloyds
TSB. "This means there is a lot still to learn and discover."

So how is the Chinese banking sector distinct, and what are the consequences?

“Financial intermediaries - such as the stock market and bond market - are underdeveloped in China, so they simply do not play the same role that they do in developed economies”, noted Charles Li of The Royal Bank of Scotland. “Consequently, Chinese banks bear a much higher burden than banks in the West – a fundamental difference between the two – so it is not fair to expect that banks in China can run at 5% NPL level. The role of the banks is to provide the system with liquidity - if they don’t, the system crashes.”

However, an adequate assessment of who not to support seems to not be happening, which remains a significant problem.

“As in the past, policy lending is still prevalent in China”, noted Michael Askew. “The government in one form or another often decrees who is to be lent to and the banks lend the money. The capacity to apply sophisticated risk management tools and techniques in such scenarios is obviously quite limited.”

It was noted that credit risk managers (CRMs) are supposed to oversee, account for, and assess if and when loans are NPL. However in Chinese banks, the person selling the loans and person doing credit risk management often don’t interact, which is a problem since CRMs acting alone cannot adequately assess if loans are NPL.

Foreign banks, with only 1-2% market share, have limited influence over regulations in China. This market share and influence will increase if and when foreign banks are allowed to engage in RMB borrowing with individuals and enter the retail-banking sector – something the government promises will happen.

Rachel Lomax noted that as China is likely to face growing inflationary and exchange rate pressure, its reform agenda needs to move quickly. This is an issue attracting much international attention since Chinese inflation contributes to global inflationary pressures – and the Chinese economy does have the critical mass to impact the global economy.

Originally published in the July 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.

Vendor Due Diligence – Securing Your Supply Chain in China

By Timothy Anderson, timothyanderson2005@gmail.com

“They say,” said Ian Riley, chair of the evening’s discussions, “that Chinese companies make the best samples in the world!” Of course, there still the question of the quality of the goods that follow. How can vendors ensure that those high quality initial samples really are representative of a potential supplier’s capabilities and that a given supplier is actually one they want to work with?

“A key task is to carefully define the supplier selection criteria,” suggested panellist Matt McCurdy of PricewaterhouseCoopers. “Considerations such as size, export experience, production capacity, location, along with a comprehensive assessments of various other commercial, market and environmental factors are all a part of the selection process.”

Getting out and seeing the factories, warehouses, shipping facilities and employees is vital – anything and everything that proves a potential supplier has the capacity to deliver the goods they claim they can produce. But where to begin?

“Management is key”, said Roger Owens, General Manager of Drennan (Shanghai) Co. Ltd. and one of the evening’s panellists. “A supplier may have a superb plant with modern machinery, competent personnel and sufficient technical know-how, but in the absence of dedicated, engaged and competent management, a satisfactory supplier relationship is unlikely. Meeting the owner is crucial when making a judgement regarding a company’s likely level of commitment to its customers”

Of course, the job does not stop there.

“Suppliers in China are best kept on a short leash,” Mr. Owens continued. “This means getting involved in every process, ensuring they are able to source the materials required to fulfil orders and continually inspecting the final products.”

Vendors should not be afraid to reject goods, even if it ruffles some feathers. It is crucial that goods have no flaws once they leave China. They should also be prepared to work closely with suppliers to improve quality.

“A lot of companies arrive in China without having considering why it’s cheaper – and get shocked when they see the real conditions,” noted Daniel Tay of B&Q. “Vendors coming to China should not expect to be met with international standards. Old equipment and poor safety standards are all too often the norm.”

Companies planning to do business in China need to recognise that corporate social responsibility (CSR) has costs - and they should be prepared to something for it. Unfortunately, not all do. Ultimately, CSR is a high-level judgement call that the management of each and every company coming to China must make. A firm decision regarding what can and cannot be violated by a given supplier is important, because tolerance will always be necessary in some areas.

“Managing the people is the most effective approach in China,” suggested Chris Chen of China Country Manager of Thomas Swan, offering some realistic advice to close the session. “This means insisting on hard proof to support all claims being made, and putting in place the necessary processes to make sure such proof can always be obtained.”

While the approach to supplier relations advocated throughout the evening may be a time intensive one, requiring a high level of effort, energy and commitment, companies must be realistic about the business environment in China. Contracts can offer a certain degree of protection, but court battles are costly and cannot resolve all disagreements. Ultimately, comprehensive due diligence from the start and continual, hands-on management throughout is the best assurance and protection a company working with Chinese suppliers can obtain.

Originally published in the May 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.

Banking Relations and Borrowing Money in China

By Timothy Anderson, timothyanderson2005@gmail.com

“The problem with banks”, said Michael Askew, President of the Business Development Bank and chair of the evenings panel discussion, “is they are famous for lending an umbrella when it’s sunny and taking it away when it rains”.

No different than their overseas counterparts, the two hundred-odd China-based foreign banks and countless local Chinese banks are eager to lend profitable companies with proven track records, steady cash flow and suitable fixed assets for security. For those, SME’s, service companies and start-ups looking for funds but who do not quite fit into this profile, the picture remains daunting. But what does seeking to borrow money in China entail?

“Assume absolutely nothing and don’t believe everything you hear”, remarked Rory Farquhar-Thomson, Deputy General Manager of San Paolo Imi and event panellist. “Rules and regulations are continually shifting. By asking right questions and getting the right advice, most things possible elsewhere are also possible in China. Talking to a lot of people on the ground and gaining as broad a picture of the market in question is a necessity.”

Nonetheless, the various legal standards, documentation levels and operating practises found in more developed countries are not yet the standard banking procedures in China. While the global trend is towards ‘paperless’ banking, in China bureaucracy and paperwork continue to obstruct efficiency.

On the other hand, Michael Askew noted 95% of his bank’s customer-base is Chinese companies borrowing money, dispelling the notion that it isn’t possible for foreign banks and Chinese companies to successfully do business. They had experienced zero bad debts from these loans to date, and generally required no foreign guarantees when lending in this fashion.

But is banking in China such a science?

Nigel White of Avis, the car rental company, presented an instructive case from his own company’s borrowing and banking relations in China. Avis has borrowed in RMB in China to fund the expansion of their car fleet - at a cost of capital higher than a U.S. dollar loan. Some would argue a missed opportunity from a purely financial perspective. But numerous China-specific considerations, such as the wishes of the company’s Chinese partner, had to be factored into the decision and Avis has had great success expanding its Chinese fleet from 800 to more than 2000 cars over three years with plans afoot for further expansion still.

Rory Farquhar-Thomson took up the query of Andrew Douglas, Business Manager at the European Chamber of Commerce in China, regarding his view of the motives of British banks acquiring minority stakes in Chinese banks. Mr. Farquhar-Thomson noted that any notion of a British bank attempting to stage a takeover of a Chinese bank (or attempting to set-up their own China-based retail network) was farfetched. However, with a minority stake in a Chinese bank and couple of board seats, British banks would be well positioned to utilise the existing distribution networks of these banks to market lucrative products of their own in China, such as mortgages and credit cards.

The Chinese government continues to make noise about creating a level playing field between local Chinese and foreign banks – though details remain sketchy. Nonetheless, opportunities for those seeking to borrow or lend money in China, and the standards that go along with it, should improve with time. Just don’t expect banks to start handing out umbrellas when it rains.

Originally published in March 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.

Sponsorship Strategies in China

By Timothy Anderson, timothyanderson2005@gmail.com

The telephone rings. It’s another unique once in a lifetime sponsorship opportunity being pitched.

“China is awash with sponsorship possibilities at the moment”, according to Chris Humphrey of Virgin Atlantic, one of the expert panellists tackling the subject at the November 24 BritCham Business Forum. “Perhaps too much from a sponsor’s point of view.”

Sponsors in China, as anywhere, need to get the most out of any sponsorship deal - value for money is of paramount importance. Cost is one measure of this, but not the only factor. Cooperation is key, which requires a two-way flow of information, a theme echoed by each of the panel members over the course of the discussion.

“We see sponsorships as partnerships”, said Jeff Streeter of the British council, “by working as a project team and brainstorming the idea with the sponsor the process changes dramatically. It’s a win/win situation since we learn more about the target audience, how to approach publicity, logo placement and we challenge each other to develop the idea more effectively.”

Take the case of sports sponsorships, of which China offers many possibilities. Sporting events tend to evoke powerful emotions beyond those experienced in everyday life, noted Mark Thomas of S2M Group & Vroom Motor Sports Marketing. If a sponsor can link that passion to their brand, the result can be behaviour changing. To do this requires a clear vision and an integrated approach where the sponsor works closely with the event organisers to maximise the match between their brand values and the event, the fit with their marketing plan and the exposure it offers to their target market. If sponsors are unclear of their objectives from the outset, they will likely leave the experience uncertain just how they benefited from it - and dissatisfied as a result.

Effectively exploiting sponsorship arrangements often requires as much or more money than the cost of sponsorship itself. Companies need bear this in mind and plan for this as part of their involvement, David King of Publicis Dialogue pointed out as he chaired the evening’s discussion.

What is important for those seeking sponsors in China? Getting to the decision maker is key, which requires doing a bit of homework. The focus should be on finding potential sponsors who understand the relevance of the opportunity to their business, then discussing potential sponsorship strategies together. Top-down buy-in starting from the CEO’s office and an active engagement from the sponsor’s marketing and PR departments are all crucial elements.

On the other hand, knocking on a lot of doors with a set proposal and hoping somebody will come on board with a large cheque is not a very sophisticated approach and does not tend to result in long-term collaborations.

Sound Strategies for Seekers of Sponsors…

Virgin Atlantic’s Chris Humphrey offers a few tips when approaching potential sponsors:

• Leave plenty of lead-in time and make realistic requests.
• Be prepared to accept non-cash donations.
• Offer flexible, negotiable proposals for cooperation.
• Explain how the sponsorship can be tailored to fit the potential sponsor’s marketing plans and brand values.
• Stress the opportunity for relevant and affordable mass, long-term exposure in the Chinese market.
• Don’t bury the price, skimp on the details or expect charity – value for money is crucial.
• Emphasise the scope of possibilities to mutually benefit from synergies and complementarities arising from multiple sponsors working together.
• Ensure the proposal reaches the key decision-maker.

Originally published in ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.

Update of the Latest UK Budget and the Impact on UK Citizens Working Overseas

On March 28, Robert Hodkinson, Stephen Green and Christina Chan of Deloite, ran through the latest updates regarding the UK budget, tax implications and China regulatory changes affecting UK Citizens working in China. The highlights of the discussion are summarised below.

The UK budget

The recent UK budget contained few tax changes. The self-assessment filing deadline moves forward to Sept. 30 for 2007/2008 (Nov. 30 for returns filed electronically). Tax authorities have a twelve month enquiry window from the date of filing (previously twelve months from January 31 the following tax year).

Tax avoidance schemes and disclosure

In 2005, the rules were limited to schemes considered employment arrangements, along with various financial products. The rules have now been extended to all schemes aimed avoiding income tax, corporation tax and capital gains tax, effective July 2006 – resulting in a significant increase in reporting requirements.

Pensions

A number of fundamental change to the pensions regime. There are no limits on benefits from registered arrangements, but there are limits on benefits and contributions that are tax efficient. The annual allowance for 2006-2007 is 215K and the lifetime limit is 1.5M. For non-registered arrangements, contributions will not be taxed going in and do not qualify for tax relief for the employer until paid.

Notable for UK expatriates, foreign residence provides an opportunity for greater tax relief through contributing to a UK pension fund while abroad, which can be used to increase lifetime allowance. There are also new incentives to join an overseas pension scheme, thanks to the new rules, as overseas pension contributors can receive ‘migrant tax relief’ after returning to the UK, through which their foreign plan will be treated as a UK plan.

Foreign employees working in the People’s Republic of China (PRC)

A number of issues specific to those working inside the PRC were touched upon, and are briefly summarised below.

Tax

Two recent circulars have implications for non-PRC nationals. Circular 120 increases scrutiny of individual income taxes, while Circular 35 clarifies tax applicable to income resulting from stock option exercised - the ‘Big 4’ had differing interpretations of stock option tax implications prior to this circular. Employers now have obligations to report the details of all stock option plans offered to employees working in China.

As of 2006, foreigners in China with an annual income exceeding 120,000 RMB must file 12 monthly tax returns and 1 annual one, due by March 31 the following year - the primary implication being more paperwork. Additionally, non-PRC nationals receive a deduction of 4800 RMB per month, up from 4000 RMB - essentially an extra $1000 US extra per year. As of Feb. 2006, employers must report all movements of foreigners spending any time working in China – a change clearly aimed at catching foreigners not paying tax, and one likely to result in closer study of double taxation treaty exemption claims.

Immigration

For incoming foreigners, if their Chinese employer has a registered capital of less then $3M US, they must apply for Z-visa to enter China. In this case, allow more lead-time the as process is more complex for a Z-visa. Business travellers can still travel up to 3 months without a work permit, however note that under Circular 85, employers must nonetheless report all movements of such employees.

Time apportionment claims

While previously most time apportionment claims were accepted, authorities are now beginning to question them and viewing duties carried on outside China as pertaining to the business of the regional (China) office. The issue remains a tricky one. Previously, managers could wait until day 183 inside the country before filing any returns. Authorities are increasingly questioning why returns can’t be filed immediately, then taxes claimed back if a manager’s time spent in China proves to be less than 183 days. The best advice here is to carefully document in detail how a tax exemption is claimed, remembering again that with Circular 85, employee movements are reported anyway.
Timothy Anderson

Originally published in the May 2006 issue of ‘The Beat’, the monthly magazine of The British Chamber of Commerce in Shanghai.