Innovation Nation
The days of profiting from cheap exports in China are ending,
but there are still plenty of opportunities to be had if you
approach the market with a fresh vision. Venessa Wong reports.
No matter how many product
recalls, corruption scandals and
trade disputes emerge from China,
corporate managers can’t seem
to walk away from this alluring
market. Even at this stage – 30
years after China opened its doors to foreign trade
– new opportunities are brewing.
For Mika Heikinheimo, founder of Finnish IT
services company Flander, opportunity came in the
form of mobile software services. Just eight years
after opening, Flander came to the People’s Republic
of China in September 2005. Heikinheimo quickly
made China a core element in his company’s growth
plan, with the number of software professionals in
its Beijing office jumping from five to 110 in one
year. “I do not see cooling in the short run,” says
Heikinheimo, who now serves as managing director
for Flander China. The firm expects Chinese revenue
to grow by 100%, compared to 30% globally, and will
open another site this year.
Heikinheimo is certainly not alone in having big
hopes for China. Over the past two decades, thousands
of companies have made their fortunes here, where
GDP last year expanded by 11.4%. Heavyweights
across industries are doing tremendous business: for
2007, Heidrick & Struggles reported Chinese revenues
of €14m, Novartis China earned €220m, and Siemens
ended the year with a jaw-dropping €5.2bn.
A good portion of foreign business in China is
new. According to the 2007 Business Confidence
Survey, conducted by the European Union Chamber of
Commerce in China (EUCCC), 50% of EU investment
into China has occurred over the past five years, with
foreign direct investment stock reaching €35bn in
2006. Respondents in the Chamber’s survey almost
unanimously believe their business sectors will enjoy
further growth. EUCCC Secretary General Michael
O’Sullivan says their optimism “is mostly based on the
continuing fast pace of China’s economic development
and the resulting growth in domestic consumption.”
While fairy-tale success is tempting, Charles-
Edouard Bouée, managing director in China for Roland
Berger Strategy Consultants, says managers looking at
China must stay focused. “Look to see if China really
wants you,” he advises.
So the question, naturally, is: What does China
want? Today, as the country begins to move away
from cheap exports, prospects are improving for
companies in the innovation industries. Among the
pillars set by central government in the 11th Five
Year Guideline (2006-2010) is the development of
high-tech capability, building an environmentally
sustainable economy and enhancing quality of life
for China’s 1.3 billion citizens. President Hu Jintao
hopes to transform the country into an “innovationoriented”
economy by 2020 to improve its long-term
competitiveness. Incentives such as preferential tax
rates are being provided to companies involved in
the environmental protection, high-tech and venture
capital fields to support these initiatives.
“To compete on cost and expect to win in China is a
very unlikely scenario,” says Steven Ganster, managing
director of Technomic Asia and author of The China
Ready Company. This is especially true as a stronger
renminbi and rising production costs squeeze margins.
China is no longer just looking for investment;
it now wants to ensure that any foreign investment
will help the domestic economy and not merely
translate into low-cost exports. Companies must
have a solid “value proposition,” Ganster says. “This
means they have to bring something of value and
differentiation to the game. For small- to mid-size
firms this often means technology, a strong brand and
attractive customer base.”
Among the strongest value propositions is
technology transfer, and European companies are
playing a vital role. China imported €6.56bn-worth
of technology from the EU in 2006, nearly 40% of
global technology transfer that year, says EUCCC.
Within the Chinese market, European enterprises
have already positioned themselves as leaders in
China’s petrochemicals, telecoms, finance, insurance,
pharmaceuticals, retail and environmental industries.
“The Chinese government encourages cooperation,
joint efforts and knowledge-sharing between foreign
companies and local companies and communities,”
comments Jiang Weiming, president of Dutch biotechnology
and life sciences company DSM China.
The company, which recorded €613m in revenue last
year, has been actively seeking cooperation with local
businesses and education and research institutions. It
has already set up a research and development centre
and a joint lab with Fudan University, one of China’s
most prestigious universities. “Establishing this R&D
footprint in China gives us the opportunity to
better integrate with China’s science and technology
community and become embedded with the Chinese
business value chain,” says Jiang Weiming.
R&D is not the only thing China is after. French
industrial services company SUEZ Environment aims
to add value by “bringing innovative technology and
management experience that improves the welfare of
people, protects the environment and contributes to
sustainable development.”A subsidiary, Sino-French
Water Development, provides drinking water and
sewage treatment services to more than 13.5 million
residents across China; its second subsidiary, Swire
SITA operates a hazardous waste incineration plant
at Shanghai Chemical Industry Park that is “a pioneer
for China in terms of size and technology, meeting
EU emission standards.” If China demonstrates a
continued need for its services – which it surely
will – SUEZ’s outlook for China should be quite
positive. Frédéric Grivel, executive director of SUEZ
Environment China and general manager of SCIP Swire
SITA Waste Services Co, says that the changes taking
place in China “are going in the right direction for us.”
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