Lessons from China

“Be scared, be very scared” was the rather chilling advice that ended my trade trip to China last month. The question I had asked of the British Chamber of Commerce in Shanghai was “What advice would you give to me to give to SME’s in Hyndburn?”

Low value added manufacturing may still be backbone of the Chinese economy, but high-end high value-added is China’s future, something made clear to us by the Shanghai Communist Party. They were clear about the country’s needs: they want a high skilled, high added value economy.

British CEOs were very quick to dispel the myth that Chinese manufacturing is inferior. Some of the most hi-tech, innovative manufacturing facilities already exist in China and ‘lesser’ facilities are being consolidated into the bigger companies.

One senior British CEO at the Chamber of Commerce meeting  repeated a maxim held by Chamber members that “if British companies don’t find China, the Chinese will find them” meaning that the rate of Chinese acquisitions will gather greater pace and there will no hiding place for hi-tech UK firms from Chinese entrepreneurs and rich Chinese investors. If you are a hi-tech company, in the next decade you will be in some way be linked to the China market.

High profile European acquisitions have caused heads to turn. MG is now owned by a chinese brand and in March of 2010, the Chinese carmaker Geely paid $1.8 billion for Ford’s ailing Volvo unit. In Sweden – Volvo’s homeland – the acquisition triggered some negative comments in the media about China’s acquisition of a European icon.

They have bought a 60% share in Weetabix not to sell more Weetabix, or even sell Weetabix in China, but to buy the high-end marketing and branding parts of the business. Scottish whisky manufacturers Johnny Walker have opened a small retail unit which has had a £3million fit out. Bentley are selling 2 cars a day and at three times the European price, and there are 2 five star hotels being built every day in China. 38 of the last 40 vineyards in France have been sold to the Chinese.

With a market of some 1.4 billion people, China seems to have less interest in small businesses in comparatively small markets. If a UK company can sell 100,000 of its products, the sales in China would be several million or more.

During our visit we visited a shopping mall that highlighted the scale of Chinese development. It was remarkable how identical it looked to the Trafford Centre in Manchester but then it shouldn’t be a surprise at all, the Chinese employed the same architects and demanded at least as good a retail emporium. It is twice the size of the Trafford Centre over 6 floors, has twice as many visitors and is full of the same European high end retailers, Gucci, Louis Vuitton, Marks and Spencer’s etc. Chinese shoppers appear to adore quality European names. It was like being back in Manchester, just bigger. The owner, Mr Ding, said he had plans to build 6 more and the frightening reality is he was just one of many developers building such large shopping malls.

What China is seeking is the transfer of European and American innovation and knowledge to China. Buying companies or part of companies to build up their knowledge base; and they are not short of money to do so. China is spending trillions buying and building assets across the globe from mining interests, to western government debt, to property, to hi-tech companies.

On the visit we saw at first-hand UK firms operating successfully China who had research and development facilities in China. However with no intellectual property laws, copying in China is rife and a challenge for British businesses. Enough to put off British companies, but when we put that question, it was clear from both from the companies we visited and the British businessmen in China that the only answer to such theft was innovation and added value through support and service.

Another successful British company explained that Chinese consumers are very discerning and that the answer is to embrace China. Leading Chinese firms want innovative partners and suppliers who build in customer support in order that Chinese companies can beat their competitive rivals. Whether British companies trade in China or not, Chinese companies will always reverse engineer British products and staying out of the Chinese market only assists the copiers in the long term.

It was clear from my visit that heads of top UK companies in China at the Shanghai British Chamber of Commerce felt the UK (and UK companies) is unaware of the scale of change that is coming, unlike for instance the Germans or French.

All innovative British companies need to make an assessment as to whether they could make the leap to China because as they markedly pointed out, the one way to insulate British interests are joint ventures in China where relationships are struck up and mutual self interest protects the UK’s national interest.

I flew back with fellow MPs including my Dudley North colleague Ian Austin, and we agreed that with constituencies full of innovative but vulnerable SMEs it is imperative that the opportunities and challenges of China are widely discussed in our business communities if we are to protect jobs and businesses.

To me it was absolutely clear that that not only is the single European market vital, but that a free trade agreement with the USA is vital too. The EU and the USA together are minnows in terms of population to China. On the visit we met Chinese IT analysts who highlighted the advantages of Chinese IT firms who could have 500 million customers just within Chinese borders within months of setting up.

It leaves me one final issue: Britain’s sense of direction – to be part of the European Union, to save ourselves, or to pull up the drawbridge and accept long term decline. As Chinese globalised companies with an insatiable hi-tech appetite get larger, more powerful and more knowledgeable what are we to do: pull up the protectionist drawbridge and accept a future of small companies producing more expensive products?

I am having this important conversation with local companies as I meet them.

Graham Jones is the Labour MP for Hyndburn