Innovation Nation

The days of profiting from cheap exports in China are ending, but there are still plenty of opportunities to be had if you approach the market with a fresh vision. Venessa Wong reports.

No matter how many product recalls, corruption scandals and trade disputes emerge from China, corporate managers can’t seem to walk away from this alluring market. Even at this stage – 30 years after China opened its doors to foreign trade – new opportunities are brewing.

For Mika Heikinheimo, founder of Finnish IT services company Flander, opportunity came in the form of mobile software services. Just eight years after opening, Flander came to the People’s Republic of China in September 2005. Heikinheimo quickly made China a core element in his company’s growth plan, with the number of software professionals in its Beijing office jumping from five to 110 in one year. “I do not see cooling in the short run,” says Heikinheimo, who now serves as managing director for Flander China. The firm expects Chinese revenue to grow by 100%, compared to 30% globally, and will open another site this year.

Heikinheimo is certainly not alone in having big hopes for China. Over the past two decades, thousands of companies have made their fortunes here, where GDP last year expanded by 11.4%. Heavyweights across industries are doing tremendous business: for 2007, Heidrick & Struggles reported Chinese revenues of €14m, Novartis China earned €220m, and Siemens ended the year with a jaw-dropping €5.2bn.

A good portion of foreign business in China is new. According to the 2007 Business Confidence Survey, conducted by the European Union Chamber of Commerce in China (EUCCC), 50% of EU investment into China has occurred over the past five years, with foreign direct investment stock reaching €35bn in 2006. Respondents in the Chamber’s survey almost unanimously believe their business sectors will enjoy further growth. EUCCC Secretary General Michael O’Sullivan says their optimism “is mostly based on the continuing fast pace of China’s economic development and the resulting growth in domestic consumption.”

While fairy-tale success is tempting, Charles- Edouard Bouée, managing director in China for Roland Berger Strategy Consultants, says managers looking at China must stay focused. “Look to see if China really wants you,” he advises.

So the question, naturally, is: What does China want? Today, as the country begins to move away from cheap exports, prospects are improving for companies in the innovation industries. Among the pillars set by central government in the 11th Five Year Guideline (2006-2010) is the development of high-tech capability, building an environmentally sustainable economy and enhancing quality of life for China’s 1.3 billion citizens. President Hu Jintao hopes to transform the country into an “innovationoriented” economy by 2020 to improve its long-term competitiveness. Incentives such as preferential tax rates are being provided to companies involved in the environmental protection, high-tech and venture capital fields to support these initiatives.

“To compete on cost and expect to win in China is a very unlikely scenario,” says Steven Ganster, managing director of Technomic Asia and author of The China Ready Company. This is especially true as a stronger renminbi and rising production costs squeeze margins.

China is no longer just looking for investment; it now wants to ensure that any foreign investment will help the domestic economy and not merely translate into low-cost exports. Companies must have a solid “value proposition,” Ganster says. “This means they have to bring something of value and differentiation to the game. For small- to mid-size firms this often means technology, a strong brand and attractive customer base.”

Among the strongest value propositions is technology transfer, and European companies are playing a vital role. China imported €6.56bn-worth of technology from the EU in 2006, nearly 40% of global technology transfer that year, says EUCCC. Within the Chinese market, European enterprises have already positioned themselves as leaders in China’s petrochemicals, telecoms, finance, insurance, pharmaceuticals, retail and environmental industries.

“The Chinese government encourages cooperation, joint efforts and knowledge-sharing between foreign companies and local companies and communities,” comments Jiang Weiming, president of Dutch biotechnology and life sciences company DSM China. The company, which recorded €613m in revenue last year, has been actively seeking cooperation with local businesses and education and research institutions. It has already set up a research and development centre and a joint lab with Fudan University, one of China’s most prestigious universities. “Establishing this R&D footprint in China gives us the opportunity to better integrate with China’s science and technology community and become embedded with the Chinese business value chain,” says Jiang Weiming.

R&D is not the only thing China is after. French industrial services company SUEZ Environment aims to add value by “bringing innovative technology and management experience that improves the welfare of people, protects the environment and contributes to sustainable development.”A subsidiary, Sino-French Water Development, provides drinking water and sewage treatment services to more than 13.5 million residents across China; its second subsidiary, Swire SITA operates a hazardous waste incineration plant at Shanghai Chemical Industry Park that is “a pioneer for China in terms of size and technology, meeting EU emission standards.” If China demonstrates a continued need for its services – which it surely will – SUEZ’s outlook for China should be quite positive. Frédéric Grivel, executive director of SUEZ Environment China and general manager of SCIP Swire SITA Waste Services Co, says that the changes taking place in China “are going in the right direction for us.”