China

By Helen Wong, Globe and Mail

Helen Wong is chief executive officer for Greater China at the Hongkong and Shanghai Banking Corp. Ltd. and member of the board of directors for HSBC Bank Canada.

After decades of supercharged growth, China’s economy is now growing at a more moderate pace. But given its sheer size, even less-than-rapid growth generates plenty of opportunities for Canadian corporations that cater to the changing needs of the world’s second-largest economy.

China’s economic transformation over the past 35 years has been rapid, far-reaching and multifaceted.

In 1978, the year before Beijing began to reform and open up the Chinese economy, the country was home to 22 per cent of the world’s population, but was responsible for just 5 per cent of the world’s economic output. By 2014, its share of the global population had slipped to 19 per cent, but its share of global gross domestic product had soared to 13 per cent.

Over the same period, millions in China left their farms for jobs in the cities. While agriculture’s share of the economy has fallen from around 30 per cent to less than 7 per cent, that of services has doubled to nearly 50 per cent

Many of China’s 1.36 billion citizens have become wealthier as a result. As recently as 2000, just 4 per cent of China’s urban households were considered middle-class. By 2012, that share had soared to 68 per cent.

Although Chinese private consumption as a percentage of GDP is much lower than that of most other major economies, it has been rising rapidly. Last year, U.S. online sales on Black Friday and Cyber Monday, at a combined $4.2-billion, were dwarfed by those in China on Nov. 11, better known as “Singles Day.” Chinese shoppers spent $9.3-billion that day, three times more than just two years earlier.

These changes have brought tremendous opportunities for foreign businesses, which, in the decades after China opened up to global trade and investment, seized on the country’s low-cost manufacturing prowess to source and manufacture goods for markets around the world.

From 2008 to 2013, the value of Canada’s exports to China increased at an average annual rate of 14.4 per cent, while the value of Canada’s imports from China rose an average of 4.3 per cent each year. China is now Canada’s second-largest source of imports as well as its second-largest export market. However, China-Canada bilateral trade accounts for only a small part of both countries’ total foreign trade, so there is room for growth.

Canadian commodity exporters, in particular, benefited from China’s ravenous appetite for metals and other raw materials and energy. China’s cooling growth has dulled that demand of late, but this does not mean that business opportunities have dried up.

The “new normal” in China means more realistic, sustainable expansion, where the emphasis is on the quality of growth, rather than its sheer speed. The goal is to reduce the old reliance on exports and low-value-added manufacturing, and increase the role of domestic consumption, private-sector activity and services, which now make up a bigger part of the economy than manufacturing.

While old-style manufacturing will not disappear, the government is making big efforts to move China’s manufacturing capabilities to the next level. Policies such as “Made in China 2025,” announced in May, promote advanced industries such as information technology, robotics, aerospace, railways and electric vehicles.

This presents opportunities for Canadian business.

Take urbanization. Despite the massive migration to China’s cities, the urbanization rate lags that of other countries at similar levels of development. The government’s target is to have 60 per cent of China’s population living in cities by 2020.

That means a continued, big need for investment in urban infrastructure – from subways, water-treatment systems and waste-management facilities to building technologies and airports.

Bombardier, for example, is close to sealing an order from a Chinese lessor for its biggest-ever jet. The company is forecasting the need for 2,450 commercial aircraft in China – deemed a “major opportunity” – in the 60-to-150-seat segment over the next 20 years, with deliveries to Greater China representing 19 per cent of the world’s total demand.

On the consumption front, the stars remain aligned for robust growth for many years to come.

The days of double-digit economic growth may be over, but salaries are still rising. While consumer appetite for some goods or brands may have dropped off, a lot of cash is simply shifting to other product categories or will be deployed a little later.

As Chinese consumers become wealthier, they will continue to buy iPhones, send their kids to universities in the West, travel to Toronto or Vancouver. China has emerged as Canada’s second-largest source of overseas visitors this year.

The recent stock market volatility has not put a stop to consumer spending. Retail sales data for August showed an increase of 10.8 per cent from a year earlier – more than analysts had expected.

Meanwhile, Beijing’s goal of boosting private-sector activity, increasing the service sector and raising living standards will bring new business opportunities in sectors such as financial services and health care.

Health-care spending alone is estimated to grow to $1-trillion in 2020 from $357-billion in 2011, according to McKinsey – and the government has signalled that foreign investment will have a role to play.

China is not an easy market, and the days when companies could record easy, double-digit annual growth are over. Foreign companies doing business in China have to be nimble, to be able to adapt to the constantly changing spending preferences of Chinese consumers and to be prepared to deal with periodic stock-market volatility. For those who do so, China will continue to be a must-be location and key export market.

Read more: http://www.theglobeandmail.com/report-on-business/rob-commentary/where-canadian-business-can-fit-in-chinas-new-normal/article26828551/

By The Asia Pacific Foundation of Canada

This report explores the potential for partnerships between incubators and accelerators in China and those in Canada. Its point of departure is the successful partnership between Ryerson’s Digital Media Zone incubator and Zone Startups India developed at the Bombay Stock Exchange Institute in collaboration with DMZ. Can this kind of partnership work with China?

The report looks at four models of incubators found in both China and Canada, and finds that there are already significant collaborations happening. The models include:

• large, well-funded incubators that have buildings where they strive to house numerous start-ups
• incubators and accelerators for more mature companies
• university-based incubators and unique “coffee” incubators in China
• makerspaces that house small companies and individuals who make their products in situ with high-tech equipment like 3D printers

The Government of China is placing increasing focus on incubators and accelerators as an important engine of growth for their economy. This includes significant financial support and substantive policy direction to their “incubator industry,” as well as high-profile visits of top leaders to incubators to signal their support for the sector. Canada too has been putting resources into incubators to support these innovation intermediaries — but is it enough for Canada to be a significant partner for China?

The report concludes with Considerations for governments in both China and Canada in formulating new policies and financial priorities, and Considerations for any incubators or accelerators that are considering entering into partnerships with counterparts in the other country, or deepening partnerships that they already have.  This is an emerging vehicle for innovation in both countries, and an opportunity for incubators and start-ups — under the right conditions.

Read the full report. 

By Brent Jagg, The Globe and Mail

China invested $12-billion in Canada in 2012, placing ninth-highest in a ranking of foreign direct investment.

By contrast, the United States topped the list of major investor countries in Canada, dominating with $326.1-billion, or 51.5 per cent of the total, according to a study released Monday by the Asia Pacific Foundation of Canada.

“Despite recent large inflows of Chinese investment, we cannot take for granted that Canada is an attractive destination for Chinese companies, whether state-owned enterprises or private companies,” Vancouver-based foundation president Yuen Pau Woo said in a statement.

Mr. Woo said the scale of Chinese investment over the next decade will be huge. “Canada has to compete for its share, and this will require concerted effort from different levels of government as well as from the business community,” he said.

The Netherlands invested $61.4-billion in Canada last year, or 9.7 per cent of the total, said the foundation, which conducted the study with the China Council for the Promotion of International Trade and Simon Fraser University’s Jack Austin Centre for Asia Pacific Studies.

The United Kingdom ranked third on the list, followed by Luxembourg, Switzerland, Japan, Brazil, France, China and Germany.

Read more: http://www.theglobeandmail.com/news/world/canada-must-compete-for-chinese-investment-foundation-head-says/article15258357/

By Quentin Casey, Financial Post

Stephen Jones has only sold three units in China thus far. But he’s convinced the country represents his company’s biggest market.

The Halifax-based company, Resolution Optics Inc., produces 3D microscopes, some of which are submersible in water. With China spending billions to monitor and restore its lakes and rivers, many of which are “massively polluted,” Mr. Jones sees huge potential for this equipment.

Although he’s only sold a few of the $35,000-microscopes in China, he contends that a recent agreement with one of China’s State Key Laboratories could boost sales significantly — perhaps up to 300 units in the next five years.

Mr. Jones is not walking blindly into the Chinese market, having previously developed Chinese sales for a medical research equipment company. That experience gave him an introduction to the nuances of Chinese business culture, which helped him secure a local distributor to sell his company’s microscopes. “It’s almost impossible to sell a product in China without having a Chinese distributor to represent you,” he said.

But one distributor is not enough. For reasons he does not fully grasp, customers in Hong Kong are reluctant to purchase from distributors in Mainland China. So he is teamed with two distributors: one in Hong Kong and one on the Mainland.

Mr. Jones’s previous China experience also exposed him to the weight Chinese business leaders place on personal relationships. “It’s expected for me to make multiple trips over there, and it’s expected for me to give a guest lecture,” said Mr. Jones, who holds a PhD in physiology and biophysics. “It’s expected that the relationship is about more than a financial transaction.”

Gerry Pond, one of Canada’s top angel investors, says that many Canadian companies lack the international sales expertise to properly crack international markets, including China.

His Saint John, N.B.-based software company, Mariner Partners, now has sales offices in Paris, Istanbul, London and Dallas. But it wasn’t until recently that the company broke into international markets. The key move involved hiring five Canadian ex-pats who had worked in sales departments at big U.S. software firms.

“We struggled hard with international sales — until last year,” Mr. Pond said. “It’s meant a huge jump in customers… Our revenues this year are going to be the best ever.”

Mr. Pond, a prolific investor in East Coast startups, found that many of his investment companies were in need of international sales help. To help bridge the gap, he brought in a consultant. He is also trying to remedy the situation more broadly, by setting up an institute dedicated to training international sales and marketing specialists. Universities, at least in Atlantic Canada, have largely overlooked international sales training. So he’s willing to help fund an institute to fix the situation.

“I have to put money where my mouth is,” he said. “It would be the best investment I’ve made.”

Meantime, Frank Pho, vice-president of global expansion at the Business Development Bank of Canada in Vancouver, says Canadian companies must commit time and money to understanding the countries they want to enter. That’s particularly true in China, he added, where a “paradigm shift” has changed how foreign companies must approach that market.

The old Chinese sales model involved taking an established North American product and adapting it to the Chinese market, often by lowering the quality to make it less expensive.

Now, successful companies are tailoring their products for the Chinese middle class, which totals 300 million people. “That is 10 times the population in Canada. So why would I start by developing a product for 35 million people and then reinvent it to address a 300-million person market?” Mr. Pho says.

“That’s the paradigm shift. If you can take advantage of that, then you can become a powerhouse.”

He pointed to Samsung Electronics’s growing share of global mobile phone sales. The South Korean manufacturer is stealing market share from Apple, in part, by succeeding in foreign markets such as China.

“It’s a fundamental shift,” he says. “The Japanese and the Koreans understand that. But we are still behind that reality.”

Mr. Pho also notes that large-scale urbanization in China offers opportunity for clean tech companies, such as those focused on drinking water and wastewater.

That’s exactly what Mr. Jones is hoping for. “China will probably turn out to be our largest market,” says the Resolution Optics chief executive. “If we can prove our worth and if we can get on the right side of the government, then we have a pretty good chance.”

Read more: http://business.financialpost.com/entrepreneur/the-chinese-market-is-changing-but-are-canadian-companies-adapting