with David Olsson, Chairman, Australian Chamber of Commerce in China
The AustCham is celebrating 15 years of existence this year, since its founding in 1996. As Chairman, how would you say the Chamber serves as a successful champion of the business interests of its members, and what are the chief items on your agenda?
AustCham is one of the few Chambers of Commerce that is fully integrated around China, Hong Kong and Macau. We have just under 2,000 members within Greater China—this includes Hong Kong, Beijing, Shanghai, Guangzhou, and several other epicenters throughout the region. We represent a very strong and diverse section of the Australian community in China.
Our objective is to provide support and service for Australian companies operating on the Chinese market. We have been doing that for 15 years. The market has developed very rapidly; as a result, we have a very different membership base to that which we had a number of years ago. When we first started, our membership was largely comprised of a number of Australian manufacturing companies and importers/exporters of goods. Today, we are very heavily dominated by service providers—there is now a significant drive to export Australian quality services into China, in alignment with the Chinese 12th 5-Year Plan.
Our membership is very broad and diverse: we have a strong education component, professional services, legal, accounting, business services; we have many members involved in urban design, that are actively participating in the design of large cities around China. We have companies that offer technology associated with the development of infrastructure, online education and environmental services.
We have a number of mining and resources companies as members, including the major Australian resource companies. I will comment further on this later, but I must say that in large part, those companies are not particularly active in the China market because of the limited opportunities presented to them here. Nonetheless, they utilize membership in our organization as a way of connecting with the Chinese community. AustCham provides a range of services. For example, we provide networking opportunities; we provide forums through which members can join together to express common concerns and issues; we have created a number of white papers in recent years to highlight areas of specific interest to Australian businesses. We have produced white papers on topics ranging from finance, to social security law and green technology. We use this as a form of outreach to the Chinese government—we use it as a mechanism for engaging in dialogue about issues of concern, and potential mutual benefits.
A final component of our activities is general advocacy. We seek to be the voice of Australian business on the ground in China. The views that are expressed are not necessarily the views that come from the head offices of Australian companies—these are the views of the people who are doing the job, day in and day out, who must deal with the issues associated with running an operation in China. Sometimes the concerns are aligned with head offices in Australia and the viewpoints of the Australian government, and sometimes they are not. Ours is another voice to add to ongoing, multifaceted discussions.
China and Australia have a very fruitful trading relationship, approaching a total volume of A$85.1Bn in 2009. China represents both Australia’s largest import and export market. You mentioned the evolution of the type of Australian company operating in China. Can you more specifically speak to the synergies between these two economies?
It’s a complementary equation. The figures for 2010 are actually A$110Bn, in two-way trade with China—a very significant figure. Just ten years ago, Australia exported only 5% of its total export product to China, and, as you have mentioned, this country is now our number one export partner. Trade has been expanding rapidly.
We are looking at very rapid escalation! This has been driven by the powerful expansion of China’s economy. China cannot urbanize, nor industrialize, without access to raw materials and commodities—iron ore, coal, nickel, and copper, in particular, have been the mainstay of outbound export by Australian companies to China. Even if China’s GDP growth rate slowed down to 7-8%, we are still talking about a very large increase year-on-year for the foreseeable future. Experts are projecting continued expansion of export in these resources and commodities.
We are also seeing a big increase in the export of gas to China. Just a few years ago, China did not purchase any Australian gas product. However, since 2009, China has come in and we have witnessed several absolutely massive export contracts for LNG. We are now expanding to coal seam gas and other forms. This phenomenon has coincided with China’s desire to find an alternative energy source that is more environmentally appropriate, so that it can meet the energy targets delineated in the 5-Year Plan.
Other major service exports are education and tourism. Chinese tourists are now the largest inward tourism sector for Australia. We also have more Chinese students studying in Australia than any other foreign nationality. These are extraordinary changes, relative to the position just three or five years ago.
While China is Australia’s principal trading partner, Australia is only the seventh largest trading partner for China. Does this disparity create any economic tension, or an inconsistency of interests?
To be China’s 7th largest trading partner is still quite significant, and should not be underestimated. Having said that, as AustCham, we would still like to see the volume of investment into China increase. Currently, Australian FDI into China is only about 2% of China’s overall inward investment—this number is indeed quite small. The absolute volume of two-way trade and export is significantly higher.
We do not see the fact that we are only the 7th largest market for Chinese companies as a problem. It is simply a reflection of the size of the Australian economy compared to China. We would like to build on it, and we see the opportunities ahead.
Why is the level of FDI so small? To quantify, the Australian Embassy notes that in 2008, total Australian FDI into China reached only A$6.9Bn, making China Australia’s 14th largest investment destination.
That is a good question. There have been a number of surveys of Australian organizations to try to work out the answer, and it seems that there is no one reason. Partly, it is a reflection of the number of investment opportunities that exist within China for Australian companies. China is a large market, but if we look at what Australia is good at, we come to the conclusion that its primary strength is in services. The services sector does not necessarily require significant investment—you do not need bricks and mortar to provide international services. You might need a warehouse or basic facilities, but you do not need huge factories. We do not, for example, have a large automotive industry, so we do not need those factories; we do not have a large airline construction sector; etc. Therefore, it is perhaps not surprising that the actual level of investment is small.
I think that another reason is that there are perceived to be a number of barriers to entry into the Chinese market. When you are investing abroad, there are multiple opportunities to invest, and a sound commercial reasoning will say, “Go to those jurisdictions where you feel most comfortable, and where the investment environment is best.” This is not to say that the barriers here are insurmountable—all countries have investment barriers. However, when you combine restrictions in various sectors, qualifications regarding what you can do, language challenges, and a general unfamiliarity with the Chinese system, it makes investment challenging.
Australia has also not had a long investment history in China, unlike a number of European nations. Technically, it goes back hundreds of years, but it is only recently—since the 1970s and the dawn of ‘reform and opening up’—that we have started to see Australian investment come into China in earnest. Other streams of international investment have been present before the Cultural Revolution.
In our interviews with your peers at the British and European Chambers, we have heard that in China, protectionism is actually on the rise, and competition in many industries is getting increasingly difficult. Do you agree with this sentiment?
Each sector is different. Many Australian companies are operating in sectors that are actively encouraged (e.g. in areas such as high-tech environmental services and clean coal technology) but there are indications from our members that the operating environment is becoming more challenging generally. For instance, we have recently seen the introduction of the new social security law. By itself, it is not a major piece of legislation—but it is another level of bureaucracy, and another cost of operating in this environment. Many laws are passed without appropriate consultation with stakeholders. We think China is doing very well in many ways, but in some key areas, we would like to engage in more widespread consultation before the actual implementation of changes .
In areas such as financial services and mining, there remain a number of regulatory hurdles that make investment challenging.
Despite such challenges, what are you seeing from your members? Are they expanding operations? Are more and more Australian companies entering the market?
We are seeing a rapid increase in the number of Australian companies coming into China. Our membership has grown quite significantly all around the region. Our members are operating not only in major cities, but in the remote areas, as well—we are seeing significant growth in the second- and third-tier cities, where there is a real need for expertise in urban design, environmental remediation, water and waste management, etc.
In terms of some of the growth areas, I would cite the financial services sector. The four major Australian banks, as well as Macquarie Bank, are all represented in China. One of them, ANZ, has made it very clear that it wants to become a major player in the Chinese market, and is expanding its operations rapidly throughout the entire country. The other banks are similarly pursuing expansion strategies.
The number of educational institutions that are heading here is also very significant. AustCham members recently attended the annual Australia China Alumni Association dinner with a number of Australian universities alumni working in China. There must be about 30 Australian universities that have some physical presence here in China, providing services on the ground.
Let’s consider market entry a bit more closely. As a Partner of the Australian – Chinese law firm King & Wood Mallesons, one of your specialties is in the field of market entry, and overcoming the inherent challenges faced by Australian organizations making their initial foray into China. What, in your view, is the correct strategy to take to successfully enter the market here?
The starting point for any investment into China is understanding and awareness. This market is very unique, and very different. At AustCham, we would generally recommend that potential investors have spent time in the country—that they put their ‘toe in the water’ in a small way, to start to develop relationships and understand the market. We have seen many, many delegations from companies come to this region, see the sheer size of the market, decide that they must have part of it, set up a rep office… and then look around and say, “What do we do next?” or collaborate with a joint venture partner that turns out to be the wrong kind of partner for their needs.
Beyond understanding and awareness, organizations should seek advice. This advice should be sought from a range of sources. You need to develop trusted relationships with external advisors—lawyers, accountants, business advisors, etc.
You need to have good people on the ground in China: people that you can trust to provide appropriate information back to your head office about the operating environment. Sometimes, those people will be local—Chinese nationals—and sometimes, they will be foreigners with Chinese market experience.
You also need to understand the culture, and how business is done: for instance, the role of government, and the role of the party, is very important.
It is not until you have these broad understandings that you should invest very heavily here.
At King & Wood Mallesons, another of your specialties is outbound Chinese investment and M&A, particularly in the energy and resource sectors. China has been busy in this sense, investing an overall A$60Bn into Australian businesses between 2007 and 2010—a drive which has itself focused on the resources sector. Resources, as we have mentioned, have also traditionally been Australia’s main export to China. What opportunities does this scenario create for Australian-Chinese partnership and mutual cooperation?
The short answer is that the opportunities are very significant.
To speak first to Chinese outbound investment: we have seen a very rapid increase in China’s desire to invest abroad. Australia has really been at the forefront of much of Chinese investment for the last five years, and has attracted a good deal of this first outbound wave. As you stated, this has been primarily around minerals, metals, and resource projects generally, with LNG now a major area of interest.
China is one of the largest investors into the Australian resource sector, and we do not see that slowing down. China is also driven by the need to feed its people, and we are now witnessing the second wave of investment, which is into non-resources: agriculture, food, and agri-services. Already, we have seen Chinese companies investing into food technology, and services related to the efficient management of crops. Australia is a very arid, dry country, so some of the farming technologies that we have developed are directly relevant to farming in China.
There is also much investment by China into technology companies. For instance, China recently acquired an automotive transmission company in Australia, in order to acquire the technology for automatic transmissions that are now being used in car manufacturing here.
There is also an increasingly different quality of investment. In the first round of Chinese FDI, particularly in the resources sector, it was all about “I have to buy 100% of the asset. I have to buy the mine, and I have to buy the company, in order to secure the resources I need.” A very rapid increase in the number of such investments caused some concern in the Australian community. Some said that China was beginning to buy up Australia! There was an issue with the management of public perception.
However, following that public and political reaction, and following several less-than-successful deals, China has gone back and reflected on its investment strategy, and we are now seeing a much more sophisticated approach. Chinese players are looking at investment up and down the value chain, and realizing that you do not have to own 100% of the asset to get the results you want, which is ultimately secure access to resources. This can be secured via joint venture, or a minority interest in an asset.
Therefore, various partnering opportunities are arising. Today, there is a discussion within China of the “Japanese model”. The Japanese model of investment into Australia was dominated by JVs—taking a smaller interest in a large project, and working together with partners in order to secure output or another economic result. We are now starting to see a number of Chinese companies looking to operate in that manner. Particularly in the LNG sector, if we consider the major projects, many of them are being done via joint venture structures. The AustCham views that as an evolving and developing trend. It is also a trend that is more favorably perceived by the Australian Foreign Investment Board when it reviews proposals.
Has China turned to JVs, as opposed to 100% acquisition, simply because of the public perception problem?
No, I would not say this is the only reason. There are a number of legitimate business reasons for it. For example, there are examples of Chinese companies buying 100% of an Australian enterprise, and bringing in their own management team. Many of these companies floundered, because they did not understand the local operating environment. Core local expertise disappeared; there were cultural issues, etc. Economically, it simply did not work.
There was also a realization, in many cases, that in order to operate successfully in Australia, you must engage with the local community. That social obligation is not something that is typically seen in state-owned enterprises here in China. Here, the state itself looks after those obligations on the part of its companies. In Australia, particularly in the remote parts where we find Aboriginal, indigenous communities, Chinese companies came in and did not fully recognize that they need to understand and relate to the indigenous societies.
An interesting example cited by the former Australian ambassador to China is the following: a comment was made to a chairman of one Chinese company, suggesting that if he wanted his business to operate more successfully in the Australian environment, the organization should support the local community—perhaps to provide money to build the local fire station. The chairman of the Chinese company said, “So bribery is permitted here, then!”
For us, it is a different way of thinking. It is not bribery, but rather outreach to the local community. The mere fact that you are reaching out does not necessarily give you a commercial outcome, but it is a way of working better at building trust. This is particularly relevant for coal seam gas, because there have been multiple intrusions in places around the Australian countryside that have given rise to public concerns, and have called for tokens of goodwill to balance the equation. Today, I believe Chinese companies investing into Australia are increasingly appreciating that fact.
The Australia-China relationship is critically important—not only here in China, but regionally, and globally. Without the resources that Australia is supplying to enable the Chinese economy to grow and urbanize, China would have difficulty in finding the fuel necessary to keep the engine of growth going. That, in itself, is very, very important. What’s good for China is, these days, increasingly good for the world.
Also, in terms of the greater global environment in which we are now operating, everything is interconnected. The growth is coming out of this part of the world. Australia is seeking to take a greater leadership position, generally, in terms of creating an operating environment for companies, communities, and countries to operate effectively and in harmony.
All of the AustCham’s engagement, at the business level, and at the people-to-people level, is part of the continuing effort that is critical to making all of this happen. And, of course, it must happen between China and the U.S., and China and Europe, and etc. I am just doing what I believe is my part, and I am very fortunate to be in this position and be able to do it.
What is your final message to the international readers of Oil & Gas Financial Journal?
There remain huge opportunities to continue to develop the relationship between China and Australia in the energy and resources sector. We can operate together with China, and assist China in meeting its objectives under the 12th 5-Year Plan. We can work with China abroad in both Australia and third markets like Africa and South America, to undertake operations that, individually, would be difficult for either nation.