Treasury’s chief executive is discouraging New Zealand firms from diving into the Chinese market, unless they’ve well and truly done their homework.
Speaking at a Trans-Tasman Business Circle briefing in Auckland on Wednesday, Gabriel Makhlouf said New Zealand businesses had a way to go understanding the Chinese language and culture.
“Don’t go to China - because you’re going to have a language issue,” he warned.
Underlining the importance of building solid relationships with trade partners, Makhlouf suggested New Zealand firms considered tapping into the Asian market through countries like Singapore, Malaysia or the Philippines, where English is more widely spoken and the business environment isn’t as challenging as in China.
New Zealand Trade and Enterprises (NZTE) China business development adviser, Mike Arand, spoke equally as cautiously about exporting to China.
He said it’s not a matter of “don’t do it”, but rather “can you do it?”.
He said he’d witnessed a number of firms try to make it in the Chinese market and fail.
“When you looked at why they weren’t successful, a lot of it was around the companies not understanding their own capabilities and resources well enough,” Arand said.
“Tackling a market like China… with very little resources and experience, just doesn’t work.
“I think companies need to take a very good hard look inside their own companies, as well as the broader market, if they’re going to go into markets like China.”
Why China?
Makhlouf said it’s vital for firms to be clear on why they want to enter a particular Asian market.
“If people are thinking about going to China, I would focus on which city you’d like to go to, or which neighbourhood… The scale of virtually every [Asian] country we’re talking about is enormous and most of our businesses are small,” he said.
Arand supported this saying he often hears limp explanations for why New Zealand firms want to go to China.
“Very few companies can actually articulate past the, ‘because it has a population of 1.4b’ or ‘there’s 407 million households and there’s a growing middle class’,” he said
“Really companies need to be going a lot deeper than that, and asking harder questions around what consumers are wanting today and in the foreseeable future. We’re not seeing that enough – enough questioning around each market, not just China.”
Arand said there was a larger portion of New Zealand companies not doing their research to understand Asian consumers, than there was putting in the hard yards.
Makhlouf suggested New Zealand businesses make better use of the growing number of Asian people living in New Zealand, to better understand their culture and way of doing business.
“We can inform ourselves better if we just tap into the connections – the people connections, the cultural connections – which we’ve actually got here on our doorstep,” he said.
‘We underestimate competition from the rest of the world’
Arand pointed out, “I guess we have to remember too, these [Asian] consumers are spoilt for choice.
“We have to get away from thinking, we’ve got a New Zealand product and by default it’s good quality and safe and all these other things. We really have to go deeper into understanding what’s driving consumers if we want to be successful in these markets.”
Both Arand and Makhlouf agreed the ‘New Zealand Inc’ brand was just the start of the conversation.
“The NZ brand opens the door, but at the end of the day, what’s the product? And that’s the key thing,” Makhlouf said.
“We underestimate competition from the rest of the world.”
He mentioned how worrying it was hearing his Irish counterpart talk about Ireland’s infant formula to China in the same way we talk about our infant formula exports in New Zealand.
He said New Zealand’s long-term prosperity depended on productivity growth, which hinges on international connectivity – the movement of people and capital, as well as trade.
“Trade is the beginning of a continuum which should be followed – all things equal – by greater investment.
“Our trade with Asia is not reflected in the investment flows. The biggest investors into New Zealand are Australia and the US – old countries as opposed to new ones. The future should see the change in that. It has to happen if we’re really going to seize the opportunities [in Asia].”
FTAs only the beginning
Regulation was another barrier Arand and Makhlouf said New Zealand firms entering, particularly the Chinese market, stumbled on.
For example Arand noted how quickly regulations in China changed, and that rules were implemented differently at different Chinese ports.
“All businesses going outside New Zealand should be very careful about assuming that the regulatory environment outside of here is the same as here. More often than not, it’s going to be quite different,” Makhlouf said.
“We negotiate free-trade agreements – and everyone celebrates once the thing’s signed – but actually that’s just the beginning of the process where we’re giving opportunities to firms but understanding the barriers behind the border that can arise.
“Government needs to be in pretty close touch with business and vice-versa to understand what else needs fixing. A free-trade agreement is a very important thing, but it’s not the whole thing.”
Services sector’s where it’s at
Arand and Makhlouf said there were huge opportunities for New Zealand exporters in the services sector.
Makhlouf said export education and tourism were the reason New Zealand’s exports increased in dollar terms last year.
While our economy has traditionally focussed on exporting physical goods, the services sector is outstripping manufacturing in China.
Chinese exports fell by more than 20% in February, compared to February last year, while imports fell more than -8%. Its trade surplus halved from January, and is half what it was the same month a year ago.
Makhlouf said trade is down because firms are developing products in different ways, using new technology.
“There’s been a big structural shift in the way Chinese firms are organising themselves. A lot more activity is happening within China, as opposed to products being imported,” he said.
“Digitalisation gives us in New Zealand enormous opportunity, whether it’s professional services or whatever, it attacks head on one of our main weaknesses, which is our distance from markets.”
As for the Asian students graduating from our tertiary education providers, Arand said New Zealanders should be capitalising more on the links these graduates have to markets overseas.
He said it isn’t just a matter of getting these students through the education system, but utilising them once they’ve qualified.
9 Comments
But John Key has pushed the China & Dairy export strategy strongly for years
"The China Strategy, launched by Prime Minister John Key in February 2012, sets an ambitious five-year plan for our relationship with China. This includes stronger political ties, doubling trade in goods, growing tourism by at least 60% and education by 20%, improving investment opportunities ..."
https://www.mfat.govt.nz/en/countries-and-regions/north-asia/china/
And JK was extolling the sole dairy export strategy on CNBC
To be fair Key 'forgets' an awful lot of important statements he's made. It's likely he 'doesn't recall' saying those things, and besides, 'it's not important' to remember these statements as 'New Zealanders aren't really bothered and don't care' about the upcoming financial strife.
We should focus on more important things like his our new flag.
It's that aspirational vision thing - he's good at that
It's dangerous making statements you have no control over
Can't find the report now, but, in one of AndrewJ's links a couple of weeks ago, which published volume imports of milk products by consuming nations showed that China's imports from NZ had dropped dramatically while imports from the EU bloc had risen dramatically
But, hey, that's business - there are no friends in business
Invest in China? You would have to be completely unhinged Gabriel.
David Stockman explains: China is the rotten epicenter of the world’s two decade long plunge into an immense central bank fostered monetary fraud and credit explosion that has deformed and destabilized the very warp and woof of the global economy.
But in China the financial madness has gone to a unfathomable extreme because in the early 1990s a desperate oligarchy of despots who ruled with machine guns discovered a better means to stay in power. That is, the printing press in the basement of the PBOC—-and just in the nick of time (for them).
Print they did. Buying in dollars, euros and other currencies hand-over-fist in order to peg their own money and lubricate Mr. Deng’s export factories, the PBOC expanded its balance sheet from $40 billion to $4 trillion during the course of a mere two decades. There is nothing like that in the history of central banking—–nor even in economists’ most febrile imagings about its possibilities.
The PBOC’s red hot printing press, in turn, emitted high-powered credit fuel. In the mid-1990s China had about $500 billion of public and private credit outstanding—hardly 1.0X its rickety GDP. Today that number is $30 trillion or even more.
Yet nothing in this economic world, or the next, can grow at 60X in only 20 years and live to tell about it. Most especially, not in a system built on a tissue of top-down edicts, illusions, lies and impossibilities, and which sports not even a semblance of financial discipline, political accountability or free public speech.
To wit, China is a witches brew of Keynes and Lenin. It’s the financial tempest which will slam the world’s great bloated edifice of central bank fostered faux prosperity.
So the right approach to the horrible danger at hand is not to dissect the pronouncements of Beijing in the manner of the old kremlinologists. The occupants of the latter were destined to fail in the long run, but they at least knew what they were doing tactically in the here and now; it was worth the time to parse their word clouds and seating arrangements at state parades.
By contrast, and not to mix a metaphor, the Red Suzerains of Beijing have built a Potemkin Village. But they actually believe its real because they do not have even a passing acquaintanceship with the requisites and routines of a real capitalist economy.
Ever since the aging oligarch(s) who run China were delivered from Mao’s hideous dystopia by Mr. Deng’s chance discovery of printing press prosperity, they have lived in an ever expanding bubble that is so economically unreal that it would make the Truman Show envious. Any rulers with even a modicum of economic literacy would have recognized long ago that the Chinese economy is booby-trapped everywhere with waste, excess and unsustainability.
That is, the Red Ponzi is not indicative of a just a giddy boom; its evidence of a system that has gone mad digging, hauling, staging and constructing because there was unlimited credit available to finance the outpouring of China’s runaway construction machine. The fact that China consumed more cement in three years than did the US during the entire 20th Century is just one indicator of its madcap excess.
The point is that the great paving and construction tsunami did not happen in a vacuum. All that cement consumption required the production of hundreds of thousands of cement trucks, for example, which in turned required the fabrication of of truck mounted cement mixers in even greater numbers.
But when China’s frenzy of pyramid building finally slowed—–to say nothing of stopped—here is what was left behind. That is, a vast empty cement mixer factory with unfinished product at far as the eye can see.
Old fashioned free market economists used to call that malinvestment. Yes, it is.
Empty factories like the above—–and China is crawling with them—–are a screaming marker of an economic doomsday machine. They bespeak an inherently unsustainable and unstable simulacrum of capitalism where the purpose of credit is to fund state mandated GDP quota’s, not finance efficient investments with calculable risks and returns. The relentless growth of its aluminum production is just one more example.
But the mother of all malinvestments sprang up in China’s steel industry. From about 70 million tons of production in the early 1990s, it exploded to 825 million tons in 2014. Beyond that, it is the capacity build-out behind the chart below which tells the full story.
To wit, Beijing’s tsunami of cheap credit enabled China’s state-owned steel companies to build new capacity at an even more fevered pace than the breakneck growth of annual production. Consequently, annual crude steel capacity now stands at nearly 1.2 billion tons, and nearly all of that capacity—-about 65% of the world total—— was built in the last ten years.
Needless to say, it’s a sheer impossibility to expand efficiently the heaviest of heavy industries by 17X in a quarter century.
This means that China’s aberrationally massive steel industry expansion created a significant increment of demand for its own products. That is, plate, structural and other steel shapes that go into blast furnaces, BOF works, rolling mills, fabrication plants, iron ore loading and storage facilities, as well as into plate and other steel products for shipyards where new bulk carriers were built and into the massive equipment and infrastructure used at the iron ore mines and ports.
That is to say, the Chinese steel industry has been chasing its own tail, but the merry-go-round has now stopped. For the first time in three decades, steel production in 2015 was down 2-3% from 2014’s peak of 825 million tons and is projected to drop to 750 million tons next year, even by the lights of the China miracle believers.
The fact is, China will be lucky to have 500 million tons of true sell-through demand—-that is, on-going domestic demand for sheet steel to go into cars and appliances and for rebar and structural steel to be used in replacement construction once the current one-time building binge finally expires.
For instance, China’s vaunted auto industry uses only 45 million tons of steel per year, and consumer appliances consume far less. So its difficult to see how China will ever have steady-state demand for even 500 million tons annually, yet that’s just 40% of its massive capacity investment.
And it is also evident that it will not be in a position to dump its massive surplus on the rest of the world. Already trade barriers against last year’s 110 million tons of exports are being thrown up in Europe, North America, Japan and nearly everywhere else.
This not only means that China has upwards of a half-billion tons of excess capacity that will crush prices and profits, but, more importantly, that the one-time steel demand for steel industry CapEx is over and done. And that means shipyards and mining equipment, too.
That is already evident in the vanishing order book for China’s giant shipbuilding industry. The latter is focussed almost exclusively on dry bulk carriers——-the very capital item that delivered into China’s vast industrial maw the massive tonnages of iron ore, coking coal and other raw materials. But within in a year or two most of China’s shipyards will be closed as its backlog rapidly vanishes under a crushing surplus of dry bulk capacity that has no precedent, and which has driven the Baltic shipping rate index to historic lows.
Accordingly, the outward forms of capitalism are belied by the substance of statist control and central planning. For example, there is no legitimate banking system in China—just giant state bureaus which are effectively run by party operatives.
Their modus operandi amounts to parceling out quotas for national GDP and credit growth from the top, and then water-falling them down a vast chain of command to the counties, townships and villages below. There have never been any legitimate financial prices in China—all interest rates and FX rates have been pegged and regulated to the decimal point; nor has there ever been any honest financial accounting either—-loans have been perpetual options to extend and pretend.
Thus, we now have the absurdity of China’s state shipping company (Cosco) ordering 11 massive containerships that it can’t possibly need (China’s year-to-date exports are down 20%) in order to keep its vastly overbuilt shipyards in new orders. And those wasteful new orders, in turn will take plate from China’s white elephant steel mills:
This and other state-owned shipyards are being kept busy by China Ocean Shipping Group, better known as Cosco, the country’s largest shipper by carrying capacity, which ordered 11 huge container ships last year. Caixin, the financial magazine, reported that the three ships ordered from Waigaoqiao would be able to carry 20,000 20ft containers, making them the world’s largest.
The weakening yuan and China’s waning appetite for raw materials have come around to bite the country’s shipbuilders, raising the odds that more shipyards will soon be shuttered.
About 140 yards in the world’s second-biggest shipbuilding nation have gone out of business since 2010, and more are expected to close in the next two years after only 69 won orders for vessels last year, JPMorgan Chase & Co. analysts Sokje Lee and Minsung Lee wrote in a Jan. 6 report. That compares with 126 shipyards that fielded orders in 2014 and 147 in 2013.
Total orders at Chinese shipyards tumbled 59 percent in the first 11 months of 2015, according to data released Dec. 15 by the China Association of the National Shipbuilding Industry. Builders have sought government support as excess vessel capacity drives down shipping rates and prompts customers to cancel contracts. Zhoushan Wuzhou Ship Repairing & Building Co. last month became the first state-owned shipbuilder to go bankrupt in a decade.
It is not surprising that China’s massive shipbuilding industry is in distress and that it is attempting to export its troubles to the rest of the world. Yet subsidizing new builds will eventually add more downward pressure to global shipping rates—-rates which are already at all time lows. And as the world’s shipping companies are driven into insolvency, they will take the European banks which have financed them down the drink, as well.
Still, the fact that China is exporting yet another downward deflationary spiral to the world economy is not at all surprising. After all, China’s shipbuilding output rose by 11X in 10 years!
Folks, this doesn’t happen in a world anchored in economic sanity.
But there is a larger picture. This is not just an “economic trainwreck in one country”, to paraphrase the edict of Joseph Stalin, that doesn’t matter to the rest of the world.
The astonishing foolishness of the Beijing regime has now become a clear and present danger to the entire global economy. It is a veritable fount of deflationary tidal waves that are being exported to the rest of the world and which are bringing about a global CapEx depression and a thundering collapse of profits throughout the global chain of industrial production.
As Donald Trump speeds toward the White House, the mainstream media will soon be gumming vigorously about how American politics became so unhinged.
They need look no further than the Red Suzerains of Beijing. It is their monumental foolishness that has made The Donald possible.
http://davidstockmanscontracorner.com/the-world-economy-wreckers-of-bei…
When will NZ wake up and realize what John Key, Judith Collins etc have done to this country. Once Key has gone we will look back and shake our heads - he has been the single worst leader we have ever had - it's time this smile and wave pony tail puller was moved on!
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