Relationships are Key

There is a story about a traveller who found that, in order to be welcomed into an eastern family, he would be asked to take three cups of tea. The first cup was taken as a stranger, the second cup as a friend and, if he was offered a third cup, he would then become part of their family. A place where trust was given freely and unconditionally, and from which he would forever be looked after.

I often use the “three cups of tea” metaphor to describe the journey that foreigners have to take to be truly accepted in China.  Unfortunately, many westerners who are used to relying on legal contracts to do business with strangers (or even friends) often don't have the time, patience and emotional intelligence to invest in building the deep, trusted and binding relationships that are necessary to succeed in China.

It must be remembered that, only 30 years ago, China didn’t have a legal system (the oldest law firm in China, King & Wood, is only 23 years old!) and I often ask my clients to imagine a business environment where you are unable to rely on the rule of law and the courts to resolve disputes between different parties. China managed for hundreds of years without a legal system largely because of the focus on trusted relationships and networks (often referred to in Chinese as “guanxi”) which allowed old friends, families, villages and tribes to do business together knowing that maintaining relationships, “face” and trust was more important and valuable than doing a deal.

As a foreigner doing business in China you are a stranger, no matter how much they appear to like you, trust you and respect you. The Chinese are gracious, generous and flattering hosts and often give the appearance of welcoming you as friends and business partners (usually accompanied by lovely wine, sumptuous food and big talk!) but you will never gain their real trust until you have invested deeply in the relationship. This requires patience, endless meals, going out of your way to support and understand them, and occasionally making a “leap of faith” to help them with something that they highly value (eg acquiring a foreign passport, opening a door for their child to attend a foreign university or welcoming them into your family) which takes the relationship to a deeper level where you might one day be regarded as part of their family (ie the third cup of tea)

Unfortunately, westerners don’t often appreciate the time and investment required to achieve this, and baulk at the suggestion that they might go out of their way to pick their Chinese visitors up from the airport or buy them a dinner. The western world has become so litigious, transactional and time poor that even some of the most simple common courtesies have been abandoned in chasing the dollar! It wasn’t always this way but the reality now is that you don’t even have to like someone to negotiate a business deal, as long as you’re supported by a watertight contract prepared by a hotshot lawyer who can take the other side to court if they default or mess you around.

From my experience, you will be lucky if you are ever able to achieve one trusted and binding relationship in China, no matter more than one. The time, effort and commitment required to make this work can be all consuming and even then you can find that you come across complexities and situations that are hard to understand and resolve.

There are no hard and fast rules about how to do this, except to say that you will require lots of patience, emotional intelligence and a deep and genuine respect of Chinese culture to get anywhere near that elusive third cup of tea.


What happens when the luck runs out?

Australia has always been thought of as the “lucky” country and it’s not difficult see why. As one of the very few western countries to weather the global financial crisis in 2008, our economic growth has been strong, stable and uninterrupted over the last 23 years. Being naturally rich in resources, foreign interest into our mining sector has always been strong, particularly from China, and we have not needed to work too hard to attract Chinese investment into mining, commodities and resources – of the $65 billion invested in Australia from China, around 95% has been into these areas. After the end of the mining boom, China shifted its focus into Australian real estate, property development and infrastructure projects, injecting much-needed foreign capital and sparking a boom in new developments and property prices.

However, just like the mining boom, will this be sustainable? It’s important to mention that no country has ever generated substantial or sustainable wealth as a mining and resources country (Brazil and Russia are examples of countries now struggling due to the fall in oil and iron ore prices). So we now need to ask, what will we do when the luck eventually runs out?

Are we truly ‘Asia-engaged’?

The Government’s Asian Century White Paper of 2012 was heralded as one of the most important documents for Australia’s future. It famously said that a “whole-of-Australia” effort is needed to deal with the social and economic transformations in Asia that will affect “almost all our economy and society”. However, it’s reasonable to say that Australian businesses and institutions haven’t entirely answered the Paper’s call to embrace the opportunities of the Asian Century.

We believe that one of the underlying reasons for this is the very low level of Asian-engagement within Australian companies particularly in their leadership teams. In 2014, the Diversity Council of Australia found that whilst the Australian labour force is 9.3% Asian born, only 4.9% make it to senior executive level. In ASX 200 companies, only 1.9% of executives have Asian heritage. These percentages would be even smaller if we just looked at those with Chinese heritage. And in a recent Australian Financial Review Article, PricewaterhouseCoopers’ CEO Luke Sayers spoke out about the “club” mentality of boardrooms in Australia that has locked out those with Asian and Chinese heritage, leaving them to languish in middle management positions. Sayers pointed that this has been seriously detrimental to our willingness and ability to engage with Asia at a corporate level.

Changing the system, however, requires much more than just diversity “quotas”. What is required are systemic changes to the way companies recruit, retain and promote staff with Asian heritage and the recognition of their relevant skills, knowledge and experiences. This undoubtedly involves greater recognition of the cultural nuances which affect approaches to leadership and management. If Australian companies want to engage with Asia, they need to lead with their Asian employees first.

It’s only the end of the beginning

One area where Australia could do much better relates to the China-Australia Free Trade Agreement (ChAFTA). After decades of negotiations, ChAFTA was seen as a “watershed moment” in the Australia China relationship. It has been considered Australia’s strongest FTA, not only because it reduces some export tariffs to 0%, but also because it delivers “best ever commitments” for market entry opportunities. One example is that Australian service providers will be able to establish wholly Australian-owned hospitals and aged care facilities in China.

There is no doubt that ChAFTA has created unprecedented opportunities for Australian businesses and Government agencies to establish positive diplomatic and high-level relationships which businesses can tap into. As much as the opportunities are there and ready to be taken, actually securing and delivering on these lucrative export and business deals requires ongoing support and guidance. There is a real danger that the excitement, support, and hype around ChAFTA will dissipate as the Government moves onto the next FTA and, from some accounts, this has already started happening. There is also a danger that other countries will begin negotiating their own FTAs to rival Australia’s and to replicate some of the concessions and provisions which Australia has been able to secure under ChAFTA. Without high-level commitment, support and encouragement at all levels, Australian businesses could miss this once in a generation opportunity.

Better use of Government time and resources

In April 2016 Prime Minister Malcolm Turnbull led the largest ever business Mission to China. Nearly 1000 delegates from 750 businesses attended the 4 day Mission, showing the high-level commitment of both Government and the corporate sector to the Australia-China relationship. 

However, one record-breaking business and trade mission to China is not sufficient to move the relationship forward. Whilst the Mission was officially deemed a success, it was a huge drain on Government staff and resources and placed a very heavy burden on their budget. And the number of deals signed (albeit important deals) were not reflective of the 1000-delegate strong Mission. Also it would seem much of the momentum has been lost as any talk about the Mission or China has seemingly disappeared from the public debate. 

A country doing a good job of leveraging trade missions and high-level government engagement is Germany. Chancellor Angela Merkel has visited China more times than any other foreign head of state and, according to reports, takes a delegation of businesses with her to China at least twice a year. It is clear Germany isn’t resting on its laurels – they’ve recognised that not only high-level but ongoing commitment at all levels is essential to being “front of mind” in China.

Creating our own luck

Luckily for us, there is very little guesswork involved about where China will be investing next – they have already told us in the 13th Five Year Plan (healthcare, education, tourism, food and environmental protection). And luckily, these represent all of our great strengths. Australians are now left with a choice. We can either sit back and wait for the next mining boom (which is unlikely) or we can proactively welcome and seek out the vast opportunities China presents to our economy, society and culture. No prizes for guessing what I think!  

Think Global, Act Local

Walking around outside my office in the southern end of Sydney’s CBD, it’s hard not to notice the growing numbers of Chinese tourists, migrants and students. Australia’s relationship with China is one of our oldest, with the earliest recorded Chinese migrants arriving in Australia during the Gold Rush of the mid-1800s when around 40,000 Chinese migrants flocked to the gold fields, representing 3.3% of the Australian population at the time – the most it has ever represented!  Whilst the ‘White Australia’ Policy halted Chinese immigration for a number of years, Chinese arrivals in Australia have been growing exponentially over the past two decades and represent an important and vibrant part of the Australian community. 

Whilst there has been much progress and focus on the opening up of China to Australian exporters, the wave of inbound students, tourists, migrants, entrepreneurs and investors is expected to provide an immense opportunity for Australian businesses, organisations and institutions. 

However, we believe there is still a long way to go for Australian businesses to fully embrace this opportunity.

The numbers

The explosion in the number of Chinese tourists has gained much media attention over the past two years. In the year ending November 2015, Australia received just over 1 million tourists, a milestone that Tourism Australia predicted to be reached in 2020. It is now anticipated that by 2020, Australia will receive 3 million tourists each year; that’s around the equivalent of the populations of Perth and Adelaide combined. 

Chinese tourists are also spending more than ever before. By May 2015, Chinese tourists generated AUD$6.4 billion in revenue, up from AUD$5.7 billion at the end of 2014. And it’s predicted that by 2020 they will generate more than double this to $13 billion. Chinese international students have also flocked to Australia in large numbers – in 2015 around 150,000 Chinese international students were enrolled at Australian universities.  

The Chinese community in Australia has also experienced similar growth. According to the Australian Bureau of Statistics, the number of Chinese-born Australians has doubled over the past 10 years to reach 480,000 and represents around 2% of Australia’s population with 650,000 Australians speaking Chinese as their first language. 

Despite the end of the mining boom, which brought in a record USD$16 billion in 2008 alone, Chinese investment and business has been propped up by a growing interest in our property development, healthcare and education industries and as widely reported, purchases of off-the-plan units in apartment blocks. In 2015, the University of Sydney and KPMG recorded that Australia received USD$11.1 billion in investment, up 30% over the previous 12 months, which mostly consisted of transactions in real estate, healthcare and renewable energy. Investment isn’t expected to slow either – China’s Ministry of Finance and Commerce (MOFCOM) has announced that their global foreign direct investment will grow by 10% each year.  

The opportunities

With this kind of growth, Australian businesses are in a unique position to engage in the ‘China opportunity’ without actually leaving Australia. As an example, luxury hotels, retailers and high-end food and beverage providers can expect a boom in business since Australia overtook France as the number 1 international luxury destination for Chinese tourists at the end of 2014. The Chinese community also provides an effective testing ground for Australian products before exporting to China. And businesses may not actually need to export their products as the ‘daigou’ phenomenon has seen hundreds of Chinese nationals and international students opening their own ‘export businesses’ by purchasing and shipping Australian products back to China. In the services space, small and micro businesses can develop tailor-made services targeting the wealthy Chinese in Australia. I recently met with the owner of a small family-run beautician in Sydney which was providing specific skin treatments to the wealthy Chinese living in their local area. Similarly, I also came across a small restaurant in Sydney which had developed a website hosted in China to advertise their business after they saw a rise in interest from Chinese tourists.

There is still some way to go…

Despite the opportunities in exporting and selling Australian products and services, the local Chinese community are still not fully engaged by Australian businesses. In 2014 the Diversity Council of Australia released a report which found that whilst the Australian labour force is 9.3% Asian born, only 4.9% make it to senior executive level. In ASX 200 companies, only 1.9% of executives have Asian heritage. These percentages would be even smaller if we just looked at those with Chinese heritage. If Australian companies continue this pattern, they are in danger of creating a precedence which locks Chinese people out of senior management positions, disincentivising staff to pursue leadership opportunities or even migration opportunities. Australian companies are also very reluctant to hire Chinese international students as interns and to recruit and sponsor them after graduating.
We predict that the Chinese community in Australia will eventually become the “bridge” for Australian businesses wanting to engage fully with the Chinese market. However, businesses need to realise that China’s inbound activities in Australia do not only present an opportunity for selling and exporting products and services. Chinese migrants, entrepreneurs, students and tourists come with connections through family, friends and colleagues to open the door to invaluable business and investment opportunities in China, without needing to book a plane ticket! 

From Silicon Valley to Silicon Dragon

David Thomas at Alibaba HQ in Hangzhou, China

David Thomas at Alibaba HQ in Hangzhou, China

In previous articles, I have written about China’s rapid transition from a culture of ‘copying and low cost manufacturing’, to one of ‘innovation and commercialisation’. Recent developments in high-tech, fintech and e-commerce have positioned China at the forefront of innovation in Asia and is starting to rival and disrupt the traditional centres of technology and innovation around the world. However, throughout this year’s Federal election campaign and the bipartisan support for an “ideas boom”, there was a deafening silence around China’s potential role in Australia’s efforts to build a national plan for innovation. Instead, we are looking towards the usual sites like Silicon Valley and start-up hubs around London as a source of inspiration, support and investment. China is not only closer to Australia than Europe and America, but has more capital and a bigger incentive to invest overseas, particularly in Australia which has seen substantial investment flows, particularly into mining, property and infrastructure. 

Why China?

China’s innovation story is not so unlike that of the Silicon Valley’s – the increasing speed of consumer demand, sophistication and education coupled with the crucial imperative to be globally competitive and move up the supply value chain, has created the impetus for more focus on innovation. However, what is different about China’s model of innovation is the level of Government support. Whilst China’s Government actively promotes, initiates and provides finance to support innovation, their western counterparts tend to rely on an entrepreneurial culture, new start-ups and private capital to lead the way. China’s huge market (a population of over 1 billion), combined with government support and abundant capital resources means that products are developed, tested and launched in a fraction of the time that it takes for a similar product to reach developed markets.

‘Innovation-driven development’ has become the key theme of the Chinese Government’s 13th Five Year Plan (2016-2020). The ambitious targets and strategies documented in the Plan highlight their seriousness, and past experience suggests that they can be relied on to implement their plans! The Government has claimed that their R&D budget will account for 2.5% of their GDP by 2020 and, whilst this number may seem small compared to say manufacturing (which accounts for 40%of GDP), they have made some big announcements of intended investments (eg RMB 6-10 trillion into environmental initiatives) and infrastructure projects (the expansion of their high-speed railway to cover more than 80% of major cities). Another initiative worth following is the “Made in China 2025” plan which is intended to completely transform their manufacturing industry and has identified ten priority sectors for investment including new-energy vehicles and equipment, IT, agricultural equipment and advanced medical products.

The opportunities

With the focus on entrepreneurialism, innovation and technology in Australia, we should be including China as our strategic partner.  China’s 13th Five Year Plan also includes an extension of their ‘Going Out’ Policy to identify and invest into companies, technologies and projects in target industries. Australia’s agricultural science, healthcare (particularly aged care) and cleantech sectors have seen increasing levels of interest from Chinese investors (both state-owned enterprises, private companies and entrepreneurs). Whilst Australia’s National Innovation and Science Agenda (NISA) has drawn attention to the above sectors, it has remained silent on China’s role in helping to bolster innovation, design and the production capabilities of relevant start up companies.

However, there is a misconception that only large Australian companies or institutions are attractive to Chinese investors which often deter SMEs from engaging with China.  From my work with Australian SMEs over the past decade, I know that businesses with innovative products and services are just as appealing and we are currently working on a number of China-Australia projects involving small, flexible and ambitious companies in the food, healthcare, engineering and cleantech sectors.

Another avenue for Australian businesses to consider is Alibaba. In early 2016, it was announced that they would establish their first Australian office by the end of the year. The office will work with Australian partners and merchants to provide better support and more opportunities for local companies to sell their products to the 407 million active Alibaba users. However, we should expect that their innovations in fintech, specifically mobile payments and e-commerce, could enter and potentially disrupt the Australian market. 

For Australian companies looking to enter the Chinese market, the cities of Hangzhou and Shenzhen cannot be overlooked. Hangzhou, the birthplace of Alibaba, has consistently been ranked as one of China’s top cities for start up businesses with an abundant pool of private capital, a highly educated labour force and competitive business costs (an average of new 5,000 SMEs emerge each year).

And in Shenzhen, its old industrial and manufacturing factories have been replaced by flashy tech companies, start-up hubs and incubators, churning out some of the country’s most innovative and advanced technologies and products. According to its Mayor, in 2015, emerging industries such as information technology, biotech, green energy and new materials accounted for approximately 40% of the city’s economic output. As China’s first city to be ‘opened up’ it has a well-developed international-based economy that welcomes foreign talent, ideas and capital.

As China rapidly moves up the value chain, Australia needs to pivot our innovation-centred policies away from America and Europe and towards China. As Ted Greenwald of Technology Review puts it “Chinese companies iterate, build things and grow faster than their US counterparts… Beijing compressed thirty years of start ups into five!” As Australia enters a new phase of innovation, ideas and inventions, who better to learn from (and partner with) than our largest trading partner and emerging economic super-power on our doorstep? 

Open letter to the new Government of Australia

Dear Next Government,

Congratulations on your election triumph! We hope that the result gives you the mandate you need for strong management and leadership of our economy for next three years. To help with your post-election action plan we thought it timely to set out our thoughts and ideas for you to capitalise in Australia’s role in the Asian century, particularly in relation to China. We have set out our ideas under five headings and invite you to consider these carefully. 

1. Innovation, investment and our services sector

It has long been touted that Australia’s greatest offer to China are our services and “smarts”. As our mining industry has been declining, our exports in services like education, healthcare, renewable technology and financial services have been growing. However, we still have a long way to go. According to the recent ‘Demystifying Chinese Investment in Australia’ Report by KPMG and the University of Sydney, the dollar amount of Chinese investment into our healthcare, renewable energy and agribusiness sectors have been growing. But this has largely been due to a small number of mega-sized deals with large Australian companies which included State Power Investment Corporation’s acquisition of Pacific Hydro for $3 billion and Biostime’s acquisition of the Swisse Wellness brand for $1.38 billion.

In my opinion, there is still a long way to go before we see more deals made with the smaller end of town. If we want to see investment across the board in our services industry, we need to remain as innovative and globally competitive as possible. Under their ‘Going Out’ Strategy, China is going around the world looking for the best technology and capabilities in which to invest and bring back to China. If our SMEs are not encouraged to innovate and have the necessary support to develop their capabilities, services and technology, we are likely to be overlooked and left behind. The raft of initiatives - such as funding for start-up incubators and increasing collaboration between industry and researchers - proposed in the Government’s new National Innovation and Science Agenda are a good start. However, these plans need to be matched with the necessary investment, funding and support if we are truly serious about attracting more Chinese investment into our services sector.

2. Top-down rather than bottom-up

In 2013, I worked with Citrus Australia to take a group of citrus growers to China to attend a number of trade shows and meet with local importers and premium supermarkets. At the beginning of the trip, many of the growers worked independently – chasing leads, having private conversations with importers and hiding confidential information from everyone else. However, after a few conversations, the growers learnt that the demand for their produce from China was so large that they could not possibly supply it alone. The growers realised that in order to meet the demand, they all had to work together under the Citrus Australia banner. Presenting a collective, united and collaborative front was also more effective in attracting attention as the Chinese recognised ‘Brand Australia’ more easily than the brands of each individual farm. This led to the group securing some lucrative contracts and since then, citrus exports to China have been doubling year on year.

I believe this is occurring across other industries, with businesses competing against each other for a cut of the pie which is, more often than not, too large for them to grapple with by themselves. Whilst the presence of Austrade and other agencies have been consistently strong in China, industry associations now need to get involved and receive the encouragement and support necessary to represent their businesses in China, just like Citrus Australia. Without a united and national brand, businesses will be dwarfed by the demand of China’s emerging middle class.

3. Are we really a multicultural nation?

We have always claimed that Australia is one of the most multicultural nations in the world – with nearly 30% of our population born overseas. But do our businesses, organisations and institutions, and more importantly, executive boards, reflect this multiculturalism? The short answer is ‘no’. In 2014 the Diversity Council of Australia released a report in which they found that whilst the Australian labour force is 9.3% Asian born, only 4.9% make it to senior executive level and in ASX 200 companies, only 1.9% of executives have Asian heritage. These percentages would be even smaller if we just looked at those with Chinese heritage. Also, many Australians who have lived and worked in Asia for a long period of time often return back to find that their knowledge, skills and experience are under-utilised and under-valued. And what about in Government? How many Asian faces do we see sitting in the Upper and Lower Houses? When dealing with a market as complex, diverse and challenging as China, we need to promote Chinese and Asian staff into roles where they can use their cultural background and knowledge to make the big decisions about China.  

Of course we cannot expect the Government to elect people into executive board roles or parliamentary seats. But we do hope that a commitment can be made to make finding feasible solutions a priority.

4. ChAFTA – Just the beginning

The signing of ChAFTA was a watershed moment in the Australia-China relationship and represents a real commitment on a Government level to further the relationship. However, I believe that ChAFTA only marks the beginning of the next chapter in the relationship. In order to fully take advantage of ChAFTA, the Government has the responsibility to educate the business community and the community at large about the opportunities and benefits China represents to Australia and what it means for our economic growth and the creation of new jobs. Without this, there is a big risk that businesses will not be mobilised and energised and will miss out on these opportunities. Chinese businesses and institutions are already taking advantage of ChAFTA – as seen by the increase in investment deals and infrastructure projects and will continue to do so. If we do not educate the greater community and provide the necessary support to businesses, organisations and institutions, there is a strong possibility that the agreement will be unbalanced with the Chinese getting more out of it than us. And if we were to look back in 10 years’ time, we would consider this missed opportunity a great shame.   

5. Education overhaul

From Hawke to Keating to Rudd to Abbott, it seems that every government since the late 1980s has promised an education overhaul to encourage more students to undertake learning an Asian language. Whilst Hawke and Keating were somewhat successful, every plan since then has been shelved due to funding issues and changing priorities. And since the year 2000, student enrolments into Asian languages have been on the decline. If our next generation grows up without an appreciation for Asian cultures and languages, how can we expect them to engage with, let alone understand, our Asian neighbours? If Australia is serious about growing its relationship with Asia and China, a sufficiently-funded national program encouraging schools to offer more Asian languages and encouraging students to study should be at the top of the new government’s priority list.

One of the things I admire about China is their 5 year planning cycle and how this has been effective in lifting thousands of people out of poverty, building world-class infrastructure and transforming their economy. Whilst I appreciate a 5 year planning cycle doesn’t quite fit in with our 3 year election cycle, I hope the Government can consider the possibility of a 5 year ‘Asian Engagement Plan’ to fully embrace the opportunities of the Asian Century.

Yours sincerely,

David Thomas & Katya Dobinson