Mature engagement vital as China trade develops

The nature of doing business with China is changing as our economies become more enmeshed.

HAVING done business with China for two decades, veteran dealmaker George Jones says things are changing in the way the Chinese look at investment opportunities and trade.

“They are becoming much more sophisticated about Western ways,” Mr Jones told WA Business News.

“They have always been fairly patient but they are becoming more patient and much more focused on value outcomes.”

Mr Jones’s views are echoed by others experienced in dealing with China and the evidence of foreign investment, which suggests the rush to grab strategic positions has ended and a great deal more caution is being used to ensure the right purchases are being made.

As the accompanying graph shows, annual direct investment in Australia by China peaked years ago as the country raced to put its foot on the resources it needed to expand. Trade, of course, particularly out of Western Australia, has risen.

However a series of mistakes and mishandled investments, along with changing global economics and internal Chinese politics, appear to have prompted reflection in recent years, resulting in a change of tack.

CITIC Pacific’s Sino Iron project in the Pilbara is cited as the most obvious example of a Chinese investment going wrong. Hong Kong-listed group CITIC Pacific, in partnership with Metallurgical Corp of China, agreed to the project in January 2007 at an estimated cost of $1.1 billion. The cost is now expected to be $8 billion after a series of spectacular delays and blowouts.

Another Chinese firm, Sinosteel, suspended work on its $2 billion Weld Range iron ore mining project near Geraldton due to setbacks in developing port and rail infrastructure.

These setbacks have reportedly tarnished the reputation of some high level Chinese officials.

A report by KPMG and the University of Sydney, titled ‘Demystifying China’, said Chinese companies had come under increasing commercial pressures recently, with political considerations of secondary importance to significant profit margins.

The caution is not just about outward investment by Chinese companies and state-owned enterprises, however. Growth within China is slowing, which means there is less urgency to take control of resources such as iron ore and energy.

Deloitte WA managing partner Keith Jones said this was reflected in the stock market, where WA-listed companies, which are heavily leveraged to China, have struggled.

Deloitte research shows the market capitalisation of WA-listed companies at June 30 2012 was $140.7 billion, a 23.2 per cent fall in a year.

In reflecting on that fall, Deloitte said there were signs that commodity demand growth from China was entering a more mature phase. 

Commodity prices had fallen from their 2011 highs, Mr Jones said, and the costs of development and operation in WA, especially in the Pilbara, had risen relative to competing mining provinces. 

“The end result is that some miners are signalling this surge in investment, which has been driving Western Australia’s growth outperformance, is not permanent,” he said.

The Beijing Axis managing director, Kobus van der Wath, said that while the local resources sector was going through a turbulent time, China would remain the most important driver of resource demand even if growth slowed from recent high rates.

“What is different is that it is no longer about winning the capex race,” Mr van der Wath said. “It is about holistic business strategy.

“It is about good operations, good cost management, good geology, and good financial planning; but above all else about good marketing strategies, good risk management and good strategic customer and strategic relationship management.”

Mr van der Wath said those wanting to do business with China needed to understand the market was more important than ever.

He said things had changed from six or seven years ago when it would be normal for a product to be sold several times before it arrived at its final destination.

“It therefore means they [business owners] should travel to China, they should understand who the consumers are, what blend of product they prefer, what their buying behaviour is and what sales support would make them more competitive,” Mr van der Wath said.

George Jones’s experience in dealing with Chinese business goes back nearly 20 years when he struck a deal with Ansteel in the mid-1990s to become a joint venture partner in an iron ore project led by Portman Mining, which he ran.

In China in those days language barriers were high, trust of foreigners was low and the streets were full of uniformed personnel. 

Many years later, as chair of Gindalbie Metals, Mr Jones again negotiated deals with Ansteel, which backed a joint venture development of Gindalbie’s Karara project in the Mid West signed in the presence of President Hu Jintao in 2007 before extending a $US1.2 billion project loan facility as the GFC bruised the sector.

He signalled that China’s change came from greater interaction with foreign business and better understanding of commercial life outside the Middle Kingdom.

The widespread knowledge of English has helped prompt change.

“They welcome business now,” Mr Jones said.

“You can get access to people and departments that would have been impossible 10 years ago. Travelling in China is vastly improved; both the standard and accessibility of everything.

“They want to do business with the rest of the world.”

Mr Jones has observed the rise in interest from China for investment outside resources, including agriculture.

“Tastes and range of food they eat are changing,” he said.

“Their demand for food is increasing; their population is still increasing and their arable land is decreasing.”

The KPMG/University of Sydney ‘Demystifying China’ report shows that agricultural investment is increasing, as is the purchase of food-processing assets. 

But investment in agriculture is a touchy point in Australia, where Chinese investment in general has become a political issue and buying farms the most controversial of all.

Debate around Chinese investment has spooked many in the business community who believe the federal government under Labor leaders Kevin Rudd and Julia Gillard have botched Australia’s relationship with the nation’s biggest customer; federal opposition leader Tony Abbott has also been politicking recently on the subject of Chinese direct investment. 

Poor diplomatic decisions and political posturing, including the vagaries of the Foreign Investment Review Board guidelines overseen by federal Treasury, have simply added to other concerns such as rising costs of doing business in Australia, making it less competitive with other investment jurisdictions in Africa and Canada.

Given this environment, some in business have sought to develop more direct links to China’s leadership. A proposed Sino-Australian Business Leaders Partnership Initiative is reportedly being launched soon.

It is understood the initiative was discussed last week when senior business figures including Business Council of Australia president Tony Shepherd, Fortescue Metals Group chairman Andrew Forrest, Woodside chairman Michael Chaney, and ANZ chief executive Mike Smith had a rare audience with Chinese Vice-Premier Wang Qishan.

“It is one of the most important bilateral relationships in the world and going forward it will affect the standard of living of every Australian and to a lesser extent every Chinese, so we have no option but to get it right,” Mr Forrest reportedly stated after the meeting.

“If enterprises can cooperate well together then political process can work together.”

Former Australian ambassador to China Geoff Raby is working on an options paper to scope who could be involved and who would drive the projects derived from the initiative.