Working and Winning Together with Local Partnerships

Security and the Speed of Change Balancing Growth and Impact

Helping your organisation grow in China3 whitepapers to help you understand the challenges you may face

BT China Thought Leadership 1

Helping your organisation grow in China

Working and Winning Together with Local Partnerships

In the 10 years since China joined the World Trade Organisation (WTO), the economy has grown significantly as a result of widespread market reforms. Membership of the WTO and deeper integration into the global economy have been associated with rising levels of prosperity and ongoing development. Over the past decade, GDP has grown at an average 9 percent per year, fuelling domestic consumption. Foreign direct investment is projected to reach another record high this year, expected by the Government to exceed US$106 billion, up from US$71 billion in 2001.

All this stands China in good stead to weather well the current global economic storm. And it strengthens the incentives for foreign businesses to build opportunities both in China and also with Chinese brands as they go global. Intelligent ‘win-win’ partnerships are the key to success in sectors such as retail, pharmaceuticals, financial services, ICT, natural resources, as well as electric and hybrid vehicles.

The influential World Investment Report from the United Nations Committee on Trade and Development (UNCTAD) in July 2011 confirmed China continued to receive the most Foreign Direct Investment (FDI) among developing economies and was second in volume only to the US. Reflecting on this, the Ministry of Commerce committed to further open the world’s most populous market. The services sector would be subject to further liberalization, procedures simplified and approval authority devolved to local governments. These are welcome steps forward for international businesses operating in China a decade on from joining the WTO.

Success in China for multinationals

Foreign direct investment is projected

to exceed US$106 billion

this year, up from US$71

billion in 2001

BT China Thought Leadership2

In the post-financial crisis world, China has been a bright spot for companies operating internationally, providing higher levels of profit and revenue growth this year according to a survey by the American Chamber of Commerce in China, which also reported confidence levels topping pre-2008 levels.

Ongoing market opening is crucial for China’s continued economic growth, businesses operating internationally and the global economy. A number of factors will encourage further opening: the prospects for the renminbi, China’s currency, to become a reserve currency alongside the likes of the US dollar, yen and Euro sometime in the future; competitive challenges from other BRIC economies; Russia’s likely accession to the WTO soon; and the growth of bilateral trade deals especially as the Doha round has faltered eg US and EU with Korea as well as India and possibly Japan.

On the ground in China, the picture for multinational companies is more mixed and complex. Approval for acquisitions or investments in Chinese companies cannot be taken for granted, and concerns have been expressed about policy, regulatory and funding advantages for domestic firms as well as FDI caps and Intellectual Property Right (IPR) issues in some areas. Whatever the reality is, in terms of government treatment of Chinese and international companies, there can be no doubt that competition is intensifying in a growing market.

The key to success for multi-nationals in China can be described as global and local coexistence - an approach which aligns with the Chinese concept of “Yin Yang” where polar opposites seem contrary forces but are actually interconnected and interdependent on each other. Some call this ‘glocalisation’.

Foreign companies operating in China need to ask themselves: how can we work and win together with local partnerships? They can ask: what is our unique selling point? How does our product, technology or business model differentiate us in a competitive market or provide opportunities to partner with local companies? And can local partnerships be built outside China?

BT’s approach to the China opportunity is based on cooperation, not competition. Our most significant partnerships involve sourcing equipment for customers’ networks around the globe from Huawei and ZTE. We are working with China Unicom and China Telecom to serve MNCs in China with ICT services offering tailored solutions (eg for Thomson Reuters, DHL and financial services providers) and to help them serve Chinese MNCs around the world with our unique global network scale.

The need for glocalisation

China has been a bright spot

for companies operating

internationally, providing higher

levels of profit and revenue

growth this year

Our most significant

partnerships involve sourcing

equipment for customers’

networks around the globe from

Huawei and ZTE

BT China Thought Leadership 3

These enable MNCs to get closer to local networks while remaining global.

The formation of strategic partnerships as well as joint ventures, and the establishment of wholly foreign owned foreign enterprises or investments involve complex calculations and decisions. Much of the uncertainty though on the regulatory front can be minimised through proactive, informal discussions with government authorities, particularly the Ministry of Commerce. Institutions and public servants are still developing insights about the approaches and processes which best facilitate foreign investment for the benefit of local and overseas interests. A consistent, constructive and long term outlook is key.

Foreign investment in China appears set to continue growing given the appeal of a market with 1.3 billion consumers while global economic growth remains lacklustre generally. At the same time, China remains open to investment from abroad and the inflow of capital is no longer the overriding imperative for officials to consider. China has a strong appetite for the soft skills required to develop management and brand expertise, which MNCs are transferring to the market, in order to propel the swelling wave of Chinese companies seeking to go global.

Chinese officials are expressing increasing discomfort with MNCs which continue to treat China as a place for cheap labour and production. There are increasing signs that technology transfers, R&D and innovation are expected to occur in the China market.

There is likely to be a shift soon in innovation which will challenge many of the existing assumptions about foreign and local expertise. While product innovation has until now largely been driven by MNCs’ investments in design and R&D, growing numbers of local experts with a passion for innovation and creativity are emerging from Chinese universities. For examples of Chinese innovation, just look at the rise of Huawei which is the world’s largest provider of telecom equipment and a leader in 4G mobile phone technology, Suntech Power with its breakthrough solar power technology, BYD with cutting-edge batteries as well as electric and hybrid cars, and Baidu with its massive search engine . MNCs which can build relationships with universities, particularly graduate programmes, will benefit from healthier R&D pipelines and stronger design in future for local-born products which blend the best of East and West, a winning formula for 21st Century consumerist China.

Effective partnerships and engagement on the ground in China will provide the basis for a sustainable, long-term ‘win-win’ for MNCs. The size of the opportunity is staggering, according to PwC’s estimates which indicate China will have the world’s largest market by 2020.

Strategic partnerships with Chinese firms are vital

Innovation at the heart of China

Foreign investment in China appears

set to continue growing given

the appeal of a market with 1.3

billion consumers

According to PwC’s estimates China will have

the world’s largest market

by 2020

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