SMEs finding China a challenge

China may be the top trade destination for many major Western Australian businesses but securing a foothold in the rapidly expanding market is not always easy for smaller operators.

Large resource companies, such as BHP Billiton and ChevronTexaco, may be enjoying China’s economic coming-of-age – having secured deals worth billions – but what’s not often addressed are the investments of decades of time and substantial amounts of money into fostering trade links.

Apart from raw materials, China is seeking out Western technology that businesses in China are combining with the country’s huge, inexpensive manufacturing base to produce cheap but modern products.

The fact remains, however, that while China can be an extremely lucrative market due to its sheer size, this fact is no secret. The competition for a piece of the action, therefore, is intense.

Publicly listed Advanced Engine Components is one Western Australian company which, although says it has two Chinese deals in place, has been struggling to raise $3.5m at home to fund its Chinese aspirations. 

The capital raising would pay for AEC’s expansion into China where it is proposing to take its electronic fuel injection and engine management system – earmarked for a fleet of Beijing buses.

In the past three months, however, AEC has been forced to extend the deadline for the raising three times, as well as issuing a supplementary prospectus.

AEC managing director Anthony Middleton puts this down to something he calls the “China syndrome”.

While he is confident of getting the raising over the line, Mr Middleton said Australian investors, including institutional investors, won’t accept a deal in China until products were rolling out of the factory.

“That is an understandable reticence that they have. I guess there is a history of a lot of other Western countries going in there and not being able to make it work,” Mr Middleton said.

“I think every day people read about things happening in China and often you read that nothing ever came of an MoU or some sort of an initiative. The market is big, but  … because the market has the potential to be so lucrative, it is also pretty competitive.

“Getting to crack it is almost impossible.”

Capel-based cooperative Challenge Dairy is a case in point.

Although announcing the development of a new venture in Singapore, Challenge was forced to dismantle a $25 million joint venture with a Chinese dairy company, Sanyuan, last year after the Chinese company had a change in management.

The new management was unwilling to increase its stake in the venture, which was tipped to generate $200 million in exports, to make it profitable and it was dismantled after a year.

Despite this AEC recently won two contracts in China against a variety of international firms, including the large German multinational manufacturer Bosch.

Mr Middleton said AEC had an edge with its Chinese connections.

“If I were a small Australian company without any connections or support in China I would agree with what I am referring to as the ‘China syndrome’,” he said.

A major investor in AEC is the Hong Kong based investment fund 698 Capital, which is an investment arm of a Taiwanese Koo family.

“What they have been able to do for us is what most small Australian companies can’t do; that is get serious acceptance in China,” Mr Middleton said. “In our case we have contracts which are not MoUs and we are dealing with very reputable manufacturers.”

Titan Resources is another Western Australian company eyeing the Chinese market. The Perth-based junior WA mining company recently signed an MoU with a Chinese company to develop stockpiles of copper in China with Titan’s technology, Bioheap Ltd.

A Titan Resources spokesperson was not available for comment, however in an earlier interview with WA Business News BioHeap technical director Colin Hunter said the business had been in China for more than four years looking at opportunities.

Allens Arthur Robinson partner Angus Jones, who specialises in resources and energy projects,  said it was hard to generalise about the Chinese market because it was so large.

While with any export market it was vital to invest time to learn the market and understand one’s counterpart, he said, this was especially true for China.

“The major  exporters  have invested  many  years  getting to know China,” Mr Jones said.

He said the regulatory and other approvals required by the Chinese Government often created time  delays.

But he dismissed the idea that China in general was a risky market, saying it very much depended on the project.

“People are able to raise money for  good projects in  all parts of the world, including places renowned for political or other types of risk  not necessarily present in China.”