International Trade Documentation and Publications

Trading with China: Special Report

Created: 12 May 2017

Brexit has created an unprecedented interest in trading with the world’s most powerfully emerging market. In April upwards of 400 delegates from all sections of the Sino-British accord convened in Westminster to hear how they can work together more effectively. 

The event, organised by the China-Britain Business Council (CBBC), aimed to inform British traders on how to address the Chinese market, examined the attractiveness of the UK for Chinese investment and explored marketing trends.

Speaking at the event, CBBC chair Lord Sassoon outlined Chinese Premier Li Keqiang’s vision of a more open Chinese future. “Premier Li has said that China must not protect an outdated domestic service industry,” said Sassoon. In a statement UK Prime Minister Theresa May urged business leaders to help strengthen the UK-China relationship.

The agendas for both nations includes a number of national events for this year as the UK strives to be a freer and more open nation under Brexit.

The prospects for investment capital from China have never been better, Giles Blackburne, Associate Professor at Leeds University, told the conference. His report for CBBC report detailed 21 case studies of UK-China cooperation in 10 countries in 2016. Collectively these projects are worth $21 billion.

“London has always been a centre in raising capital for global projects and will continue to be so,” added Simon Wilde, Senior MD at global investment bank Macquarie. At the event Jiang Sunan, Minister-Counsellor at the Chinese Embassy in London unveiled the 3-step plan that that, he said, will see China “become a world power in science and technology by 2050”.

“More capital was raised in China than  the US in 2016,” said Tom Butterworth, Director of Early Stage Banking at Silicon Valley Bank in the UK. In 2006 three technology firms received Chinese investment in the UK but by 2016 the number of comparable deals was 66.

Meanwhile, more evidence emerged this month that Britain is gearing up for much stronger trade trade links with China. In April Heathrow Airport confirmed that China Southern Airlines will be operating a second daily departure between the UK hub and the Chinese port of Guangzhou with effect from 1 June this year.

The airline’s twice-daily service is the only direct connection between the UK and the southern Chinese city. Tier Two cities, says a report quoted below, are the fastest growing economies in China. The new daily service will boost trade capacity to this booming city, by doubling the space for British exports to up to 8760 metric tonnes a year, says Heathrow Chief Executive John Holland-Kaye.

In 2016, more than 1.1 million passengers used Heathrow to fly to and from Chinese destinations, an increase of 7.3% over the previous year.

Meanwhile, the first UK to China export train left the DP World London Gateway in April, making the inaugural 7500 mile, three-week-long journey, from South Essex to Yiwu in the Zhejiang province in eastern China. Products on board include soft drinks, vitamins, pharmaceuticals and baby products.

Container operator OneTwoThree Logistics is overseeing the transport and booking of cargo for the UK/China rail freight trains, in conjunction with Yiwu Timex Industrial Investment Co, which is running the service with China Railway Container.

The ‘Silk Rail’ service is part of China’s One Belt, One Road programme and is cheaper and less restrictive than air freight and faster than going by sea, according to Greg Hands, Minister of State in the Department for International Trade (DIT). “This shows the huge global demand for quality UK goods and is a great step for DP World’s £1.5 billion London Gateway Port,” said Hands.

There are three major factors to consider before addressing the Chinese market: research, location and communication.

Importers need to be vigilant, a report from the EC has warned. Over half of the dangerous goods imported into the UK came from China, according to the latest results of the EU’s Rapid Alert System consumer protection system.

Despite progress in tackling these dangerous goods China still accounted for 53% of notifications made under the Rapid Alert System in 2016. However, that figure is an improvement on 2016 when 62% of dangerous goods came from there.

Last year, the most notified product categories were: toys (26%); motor vehicles (18%); and clothing, textiles and fashion items (13%). Risk of injury (25%) and from chemicals (23%) were the most notified dangers.

A growing problem is that dangerous products are increasingly sold online. In response, the Commission has stepped up its co-operation with Amazon, eBay and Alibaba, all of which have agreed to increase their efforts to remove notified products from their websites.

Intellectual property (IP) protection is another danger area, since by reputation Chinese companies are not great respecters of copyright. According to global IP consultancy Rouse, this is not the problem it used to be. “There is no reason why you need to have IP nightmares in China,” said Tim Smith, an IP specialist at Rouse and member of the China-Britain Business Council. China has made remarkable progress with regards to intellectual property and an effective IP strategy is now both critical and affordable for companies entering the China market, according to Smith. CBBC now offers a range of IP services including its own specially devised Innovation & Joint R&D in China tool kit.

Choosing the right location is another critical decision. The best known cities such as Shanghai, Beijing and Guangzhou are the major business, government, and industrial centres. However, the fastest growing regions in the Chinese economies are places few British companies will have knowledge of, such as Wuhan, Kunming and Zhuhai. These are just three of the 14 second-tier cities identified by China's National Bureau of Statistics, that are growing the fastest in China’s booming economy. The GDP of these regions are expanding two per cent faster than the national average. Just 8 percent of the country's total population lives in these second tier cities but they represent 19 percent of China’s total GDP.

A driving factor is that the Chinese government is moving its development focus away from the coastal metropolises of Shanghai and Beijing, and directing its investment inland. With $125 billion budgeted to be spent on roads and up to $200 billion on railways, the government is encouraging a mass migration from the countryside to these boom towns. This creates a huge demand for any goods and services that support the process of building out the infrastructure.

Meanwhile, retailers who can meet the rising demand for consumer goods will be well placed.

China has cut back its number of economic development zones and narrowed the attention to 50 areas. That has worked out well for the second tier cities, many of which are in those zones, which means entrepreneurs can enjoy preferential rates on government utilities and land usage and less competition.

Communication is the crucial third pillar of your China trading strategy, according to CBBC. That means adopting the right platform for making connections and finding local partners to really bed your company in to the local trading culture.

Social network Wechat is now part of the fabric of daily life for Chinese people, most of whom were daily active internet users. It’s like a one stop social media stop,  as it incorporates chat rooms, information sharing and online payment functions. This makes it the perfect marketing channel for Chinese customer oriented UK companies and for new entrants to the China market. There are one million financial transactions per minute in Wechat, according to Andrea Ghizzoni, Europe Director of WeChat.

However, it doesn’t operate in a similar way to Western social media - being more laborious in establishing mass audiences, since the Chinese authorities are wary of this. Getting up to speed on WeChat will be a challenge that UK companies need to address.

Toy store Hamley’s, which has made inroads into the Chinese market, could not have achieved this without trusting Chinese partners to take over the reigns locally. Gudjon Reynisson, CEO of Hamleys, says it is vital that companies to have a strong local partner to be a success in China as they bring you network and local knowledge. “As a British brand coming into China, you have to be humble and accept that what’s popular in central London may not work in Nanjing,” says Reynisson. Guidance on logistics, customs and management of stock was indispensable for running his retail business in China.

Everything is being turned upside down and there are huge opportunities in China, says Antoaneta Becker, Director of Food & Drink Sector from CBBC, who has lived there for two decades and knows the changing taste of Chinese consumers.

However, food exporters face a complex, highly regulated market, arriving to Tim Render, Director of Food and Farming of DEFRA. While the UK government is working to build relationships with the Chinese officials to create the best regulatory environment for UK business, export guidance will be vital, he says. Keep watching this space. 

Tech start-ups enjoying boom in European venture capital options

Created: 28 February 2017

Never been a better time to start a technology export business

Brexit has not dampened the chances of UK companies getting venture capital from Europe, it seems. In fact, more ventures seem to be going “through to the next round” in the new series of The Brexit Factor.
London-based Atomico announced in February that it has raised a £613 million ($765 million) in funding for speculation (AKA investment) in the European technology startup sector.

In total Atomico has now raised a total of £1.2 billion ($1.5 billion) in order to seed fund UK and European companies across Europe with the hope that at least one of them may grow into a billion dollar business.

CEO Niklas Zennström founded the company 10 years ago after leaving Skype. He now claims it is the largest fund of its kind in Europe. With its HQ in Mayfair, London, Europe’s largest source of venture capital funds offers a distinct advantage to UK companies seeking funding from the EU.

Atomico raises the new capital from the traditionally risk-averse wealthy family offices and pension funds of Europe, where startups have long-struggled to scale to the same size as their US rivals thanks to restricted diet of capital, according to Zennström. Meanwhile institutional investors in the US are much keener to punt their billions into venture capital.

"If the European pension funds allocated half a percent of their assets to European venture, that funding gap would disappear," said Zennström. "We have all the ingredients here and we don't need to raise money from the US. There is plenty of capital here."

In September Zennström told the press he believes the next Facebook will come from Europe because there is an increasing level of funding available. Five of the world's top 10 computer science institutions can now be found in Europe, namely ETH, Oxford, Imperial, EPF, and TU Munich. There are also more professional engineers in Europe (4.7 million) now than there are in the US (4.1 million). There's also an increasing number of business development managers for start-ups to hire.

"When I was recruiting people to Skype, it was hard to find experience at a fast-growing start-up so you had to hire people from the US to come," said Zennström. Today, there will be a legacy of people working for Skype, Spotify, lastminute.com, King or Zoopla. There are many more people who've learned the skills to scale a fast growing company.

Zennström is reported to have a net worth of $1.3 billion (£890 million).

Europe has never created an exporter like Apple or an Amazon-sized tech company and the nearest equivalent in Britain, Cambridge chip designer ARM, was acquired last year by SoftBank for £26 billion. However, Zennström says the time could be coming for a resurgence in UK vendors, because the talent pool is wider and inventors are emerging outside of the traditional tech hubs of London and Cambridge.
Atomico has invested in 85 companies to date. The new Atomico IV fund

will be used to back approximately 25 start-ups across all stages over the next three to four years. Nine companies have already received funding, including Austria-based Lilium Aviation which is developing a flying car.
"We like to back entrepreneurs who have big ambition. But also when they are about to scale," said Zennström. "So we would come in when they have achieved a product market fit and the company needs to shift focus from innovation to scaling. That means we're investing in Series A or later, say B or C."

Meanwhile, more funds are coming on the European market. Rocket Internet raised an £800 million fund in January and Japanese tech giant SoftBank announced an £80 billion tech fund last October. Other venture capital firms with European start up funds include Index and Balderton. Atomic IV is the largest to date. 

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