Brave new world
Article Date: Mar 03 2006
Swathes of UK businesses are shunning established overseas expansion routes and breaking new ground in emerging markets. So, beyond the headlines and the hype, do the tantalising rewards really outweigh the obvious challenges? GrowthBusiness investigates new opportunities in China, India and beyond.
Companies large and small are asking how they can break profitably into markets that were once exotic, if not dangerous, but are increasingly being seen as the engines of present and future world growth. China, India, Russia, parts of South America and even more politically sensitive areas such as Iraq and Iran may look tempting because of their economic growth prospects, vast emerging consumer markets and natural resources, but how can a young, ambitious company hope to make money there?
That there are potentially rich pickings in these markets is beyond doubt. China, with a population of around 1.3 billion, is fast turning itself into the new ‘workshop of the world’ and generating a consumption-minded middle class in the process. As the third largest European exporter to China, the UK boosted exports there 28 per cent in 2004 to £2.4 billion, while imports rose 28 per cent to £10.6 billion. India’s population is on a similar path and is expected to overtake China’s in ten years, with trade between the UK and India running at around £4.5 billion a year.
Growth beyond compare
China’s economy grew at 10.5 per cent in 2004 and last year’s growth is expected to have been in the same order. India is growing at around seven per cent a year. Russia, with a smaller population of 148 million but busily building itself into a resource-rich powerhouse, has seen its economy expand more than six per cent a year and UK exports there reached £1.4 billion in 2004.
Latin America is also rich in resources, with countries such as Brazil striving to flex their economic muscles. Oil-rich Iraq offers the potential of a huge reconstruction programme when (and if) the military situation eases. Iran, despite exchange controls and ever-present political animosity, is keen to rebuild a resource-rich economy with significant local technical skills.
By contrast, the USA, though still the world’s largest economy, is showing economic growth of less than four per cent and slowing. The Eurozone and the UK have been crawling along at less than two per cent annual growth.
Whether you want to export, invest, set up production facilities or form a joint venture, those who have established themselves in new overseas markets say profits can be hard to come by, but are well worth the effort once achieved. You need to take account of currency movements, the costs of trading instruments such as letters of credit, insuring against ‘country risk’ and the usually higher banking charges involved.
But Ian Moore, head of international propositions at HSBC, a bank with strong representation in most of these markets, speaks for many in insisting expansion opportunities in these areas are not only the preserve of big multinationals. ‘Young and small companies are by no means ruled out,’ he insists, ‘just don’t expect to land your biggest order on your first visit.’
Before putting a foot on the expansion ladder, be prepared to adjust your company culture, business strategy and even products or services, to accommodate the idiosyncrasies of doing business in each of these countries.
Mind your manners
James Holmes, chairman of Europasia Education, is developing English language and other education and professional training institutions for a Chinese population thirsty for Western knowledge. He believes, ‘China is a very exciting market, but only if you enter carefully and choose your partners with care.
‘The Chinese see it as very prestigious to team up with a Western group. In fact, businesses are under so much pressure to do so that employee promotions can depend upon it. But you need to tread very carefully, preferably with local staff and a local office. Don’t think you can go over for a fortnight and do the rest by phone and email. There is truth to the notion that the Chinese prefer to do business face-to-face.’
Holmes contends it is helpful to have outside advisers, backers, suppliers or even creditors from Hong Kong, Singapore, the UK or USA, as well as local friends. In what remains the Communist People’s Republic of China, he points out that, ‘Chinese business combines an entrepreneurial, market–driven approach with strict regulation, so deals often need the approval of local authorities after they have been signed.’
Protocol is all-important. ‘Manners and how you relate are vital, and seemingly small gestures matter a great deal,’ argues Holmes. ‘Traditionalist Chinese business leaders will give a slight bow and you must do the same. Then hand them your business card with both hands. Using one hand is rude.’
Initial meetings are likely to be with people who are not the decision-makers, says Holmes. ‘They will agree to everything you propose, but the real decision will be taken at the meal afterwards.’
These meals are crucial. ‘That’s when the real issues are raised. You must accept a drink and you must be ready to exchange presents.’ Holmes says these gifts should not be too cheap nor so lavish as to look like bribes. ‘They should be tokens but not tacky ones.’
You can expect an agreement to be signed ‘at a surprisingly early stage,’ continues Homes, ‘but that is only the beginning of negotiations. It means, "We want to work together and we have agreed the outlines, now we shall negotiate the details".’
At this stage, it’s advantageous to draw on the skills of knowledgeable outsiders, familiar with Chinese accounting and other systems. If your deal involves making an investment in China, you must set up what is called a ‘wholly owned foreign enterprise’
in China and ensure you obtain all the appropriate licences, which ‘are needed for everything,’ says Holmes.
