China: Changing New Zealand forever

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China: Changing New Zealand forever
pwc.co.nz

                  China: Changing
                  New Zealand forever

PwC New Zealand
China Practice
April 2012
China: Changing New Zealand forever
China: Changing
       New Zealand forever
       The importance of changing                    businesses as China becomes more                     The rise of China is the most
                                                     open than ever before to inbound                     remarkable event of this century. China
       with the times
                                                     investment and expertise.                            has become the world’s powerhouse
                                                                                                                                                              While some commentators have talked about
       It’s an exciting time to be a New
                                                     As a country, we are very lucky
                                                                                                          economy, returning to a level of                    a real estate bubble in China, China’s housing
       Zealander. It’s been a challenging
       few years, yet we have many great
                                                     to have a strong and successful
                                                                                                          international status and influence held
                                                                                                          for centuries prior to the industrial
                                                                                                                                                              market is not central to its financial system in
       things going for us in our corner
                                                     neighbour like China on our side,
                                                                                                          revolution in the west. In 2000, China              the way housing is critical in New Zealand and
                                                     especially when China has no
       of the world.
                                                     shortage of companies and countries
                                                                                                          accounted for only 7.1% of global gross             the United States.
                                                                                                          domestic product (GDP) in purchasing
       With China’s rise as an economic              queuing up for its investment capital.
                                                                                                          power parity (PPP) terms. In 2010, the
       powerhouse, New Zealand no longer
                                                     We need to consider how we can best                  number had increased to 13.3% and by            We expect the New Zealand presence        $245 million (m). Of New Zealand’s
       has to fight to be heard from the
                                                     benefit and grow this relationship,                  2020, it is expected to reach 20.7%1.           in China to grow significantly            non-agricultural exports, 2011 saw
       outer edges of the world. We are now
                                                     by positioning our businesses and                    China is now the world’s second largest         with governments on both sides            the largest increase in value, up 37%
       firmly positioned in the centre of
                                                     planning for long term strategies that               economy, having overtaken Japan in              encouraging investment and growth,        to $2.1bn3.
       eco-political power in the Asia Pacific
       region, where many of the world’s             further build our already close ties.                2010, with Goldman Sachs estimating             yet New Zealand businesses must
                                                                                                          China’s economic output will match the          also change to embrace and enjoy the
       fasted growing economies are based,
                                                                                                          United States by 2027. It contributes
                                                                                                                                                                                                    A stable outlook?
       with China leading the charge.                                                                                                                     opportunities.
                                                                                                          about $400 billion (bn) of new wealth                                                     According to PwC’s 2011 APEC
       The Year of the Dragon is set to be a                                                              annually, double the amount of new              In this short paper, we consider the
                                                                                                                                                                                                    survey 4, Chinese CEOs have concerns
       fortunate year for us in New Zealand.                                                                                                              current relationship between China
                                                                                                          wealth creation in the United States.                                                     about inconsistent regulations
       At a time when New Zealand                                                                                                                         and New Zealand, and consider what
                                                                                                                                                          opportunities this offers to businesses   and standards, underdeveloped
       businesses have a desperate need                                                                   Yet, companies from around the globe                                                                                                  China also has plenty of capacity to
                                                                                                                                                          from both countries.                      infrastructure, restrictions in cross
       for capital investment, none more                                                                  are also targeting China, focusing                                                                                                    deal with any economic slowdown.
                                                                                                                                                                                                    border investments, talent shortages,
       so than in Christchurch, we                                                                        particularly on the opportunities                                                                                                     With national debt at less than 20%
                                                                                                                                                                                                    lack of access to capital, effects of
       are delighted China is showing a                                                                   created as a result of the growing              The numbers tell the story                climate change, inadequate and              of GDP, the Chinese Government can
       real interest.                                                                                     consumer market being generated by                                                                                                    engineer a soft landing. According to
                                                                                                                                                          According to the Ministry of Foreign      unreliable power supply, weak and
                                                                                                          China’s burgeoning middle classes.                                                                                                    the official figures, consumer price
       As you’ll read in our report, China                                                                                                                Affairs and Trade (MFAT), in the year     restricted access to consumer credit,
                                                                                                          Many of these companies already                                                                                                       inflation dropped from 5.5% in October
       is now the world’s second largest                                                                                                                  to October 2011 New Zealand’s exports     and political and regional instability.
                                                                                                          have significant business interests and                                                                                               to 4.2% in November 2011, suggesting
       economy, having overtaken Japan                                                                    investments in China. The Chinese               to China grew 34%, from $4.3bn to
                                                                                                                                                                                                    Experts from the region say the Chinese     the Chinese Government is taming
       in 2010, and it is estimated China’s                                                               market is enticing but competitive and          $5.8bn, and imports from China grew
                                                                                                                                                                                                    Government is aware of these issues and     inflation. Bank lending is also tightly
       economic output will match the                                                                     attracting ever increasing numbers of           13%, from $6.1bn to $6.9bn2. This was
                                                                                                                                                                                                    is moving to rectify them with various      controlled by the Chinese Government.
       United States by 2027.                                                                             international competitors.                      largely driven by a surge in two-way
                                                                                                                                                                                                    programmes, a number of which are           While some commentators have
                                                                                                                                                          trade, education and tourism, since
       China is transforming its economy at                                                                                                                                                         outlined in the Government’s 12th Five-     talked about a real estate bubble in
                                                     Bruce Hassall                                        New Zealand relies on its exports and           New Zealand signed the historic free
       breakneck speed. It will move from                                                                                                                                                           Year Plan, published in March 2011.         China, China’s housing market is not
                                                     Chief Executive Officer                              trade with the rest of the world for            trade agreement (FTA) with China in
       being the world’s workshop, into                                                                                                                                                                                                         as central to its financial system in
                                                                                                          its wealth creation and standard of             2008. With China’s economic growth        You may ask if New Zealand businesses
       an economy with a large domestic                                                                                                                                                                                                         the way housing is critical in New
                                                                                                          living. As the global economic centre of        outpacing other major countries, New      are running a risk building links with
       consumer market thanks to a rapidly                                                                                                                                                                                                      Zealand and the United States. Buyers
                                                                                                          gravity moves East, China is changing           Zealand is well placed to benefit from    China when the World Bank has
       growing middle class. This creates                                                                                                                                                                                                       are restricted to the relatively wealthy
                                                                                                          the world, creating new opportunities           Chinese growth through, amongst other     warned of a slowdown in China5. These
       enormous opportunities for all                                                                                                                                                                                                           and they generally pay in cash. There
                                                                                                          for New Zealand businesses to tap into          things, energy and resource exports.      warnings should be kept in perspective.
       New Zealanders and New Zealand                                                                                                                                                                                                           are also strict regulations, including
                                                                                                          the world’s fastest growing market.             Statistics New Zealand figures show       China is still in the early stages of its
                                                                                                                                                                                                                                                a mandatory 30% down payment
                                                                                                                                                          agricultural exports to China increased   development. China’s GDP per capita
                                                                                                                                                                                                                                                for first-time buyers and a 60%
                                                                                                                                                          by 37% and are now worth $3.5bn,          is just US$5000 and its PPP is only
                                                                                                                                                                                                                                                down payment for a second property
                                                                                                                                                          including $2.3bn in dairy exports.        US$10,000: compare this with Korea
                                                                                                                                                                                                                                                purchase (regardless of whether the
       1. Euromonitor Global Market Research blog. July 2010. Available at http://blog.euromonitor.com/2010/07/special-report-top-10-largest-economies-   Forestry exports increased                where the GDP per capita is US$20,000
          in-2020.html.                                                                                                                                                                                                                         loan for the first property has been
                                                                                                                                                          by 43% to $1.4bn, while fish and          and PPP is US$30,000.
       2. Ministry of Foreign Affairs and Trade. March 2012. Available at http://www.mfat.govt.nz/NZ-Inc/6-Opening-doors-to-China/1-New-Zealand-and-                                                                                            repaid, or the property has been
          China/1-Bilateral-relationship.php.
                                                                                                                                                          shellfish exports were up 89% to
       3. Statistics New Zealand. Global New Zealand international trade, investment, and travel profile: year ended June 2011.
       4. The future redefined, Asia Pacific at an inflection point. PwC’s 2011 APEC CEO Survey, November 2011.
       5. Marketwatch. World Bank’s Hansson sees slower China growth. November 2011. Available at http://www.marketwatch.com/story/world-banks-hansson-
          sees-slower-china-growth-2011-11-25.

2   PwC New Zealand China Practice China: Changing New Zealand forever                                                                                                                                                  PwC New Zealand China Practice China: Changing New Zealand forever   3
China: Changing New Zealand forever
China is more open than ever before to inbound
                                    investment and expertise.

            Water and cultivatable land scarcity in China limit Chinese
            agricultural production, making New Zealand agribusiness an
            attractive option for Chinese food producers feeding the world’s
            biggest market.

       sold), limiting opportunities for risky           Phases of investment                               In February the New Zealand
       borrowing like the kind seen in the US                                                               Government announced its NZ Inc
       sub-prime market. While a material                New Zealand’s trade relationship                   China Strategy “Opening Doors to
       decline in property values would still            with China is now strong, but                      China”. Increasing bilateral investment
       impact the broader economy, the                   investment is not at the same level                was one of the Government’s five                The big opportunities for New Zealand business are in the
                                                         of maturity. To create permanent                   strategic goals and it identified target
       impact would not mirror the US or
       European experience. In short, any                links with China that will benefit                 sectors where it wished to grow New
                                                                                                                                                            Chinese hinterland, in the second and third tier cities.
       broad economic slowdown in China                  New Zealand, greater investment                    Zealand’s presence. One of the biggest
       is expected to be carefully managed,              is critical: trade is always more                  growth areas in the short term is food
       ensuring opportunities remain for                 temporary than investment. Chinese                 and agriculture. New Zealand food and
       New Zealand businesses both at                    investment in New Zealand stands                   agriculture, particularly dairy products,
       home and abroad.                                  at around NZ$1.8bn as of early                     meat, seafood and fruit is particularly     Finding your opportunity                 driver over the next three to five years.    grow our economic ties. As part of this
                                                         20101, with much of this due to                    attractive because of the rising demand                                              Furthermore, 79.3% said they would           focus, the Government announced
       It is important to remember China led                                                                                                            in China
                                                         investment flowing into the forestry               for quality food and products from                                                   be making their largest investment over      five strategic goals in its NZ Inc China
       the world in science and technology               sector, along with manufacturing                   a growing middle class. Water and           Chinese investment in New Zealand        the next three to five years in China.       Strategy, which included increasing
       from about the tenth century to about             and commercial construction                        cultivatable land scarcity in China limit   represents a big opportunity which                                                    bilateral collaboration, investment and
       the fifteenth century. Chinese sciences                                                                                                                                                   There are specific areas of focus:           doubling two-way goods trade with
                                                         industries.                                        Chinese agricultural production, making     will generate jobs and help create
       and technologies were concentrated                                                                                                                                                        64% nominated financial services,            China to $20bn by 2015.
                                                                                                            New Zealand agribusiness an attractive      prosperity. It will strengthen the
                                                         But we should now be moving into our                                                                                                    66.7% would be looking to develop
       in several fields, mainly material                                                                   option for the Chinese, particularly food   bilateral relationship and draw
                                                         next phase, with Chinese investment                                                                                                     managerial capabilities, and 53.8% said      Businesses that could target China
       production, transport, weaponry and                                                                  producers feeding the world’s biggest       the two countries closer together,
                                                         starting to expand into other areas.                                                                                                    they would be investing in innovation.       would include beef and seafood
       medicine. While western countries have                                                               market. China has positioned itself as      creating a valuable economic
                                                         We’re seeing increasing interest in                                                                                                                                                  suppliers, transport, financial services,
       led the way in these fields in recent                                                                the world’s biggest factory and New         alliance.                                This is significant because it suggests
                                                         real estate, food and agriculture,                                                                                                                                                   agribusiness, pharmaceuticals, health
       times, China is certainly returning to a                                                             Zealand could turn itself into a key food                                            China is more open than ever before
                                                         and tourism sectors by smaller Chinese                                                         Still, Chinese investment in New                                                      products, and niche IT technologies. Yet,
       stronger global position once more. It’s                                                             provider. China is rapidly running out of                                            to inbound investment and expertise.
                                                         investors. The Government has                                                                  Zealand will be heavily influenced by                                                 opportunities may exist for any company
       important to recognise this long history                                                             farmland and its population is growing                                               And with Europe and the US economies
                                                                                                                                                        the focus of Chinese companies on                                                     with ambition.
       of industrial and economic strength               identified the following sectors as                and getting richer. New Zealand, by                                                  still convulsing from the impact of the
       means the Chinese Government takes                being of potential interest: food and              way of contrast, has plenty of water.       their domestic market, and that offers   global recession, New Zealand is well        Other opportunities are emerging with
       a long-term perspective on economic               beverage, natural resources, cleantech,            New Zealand also has strict rules about     New Zealand businesses significant       positioned to offer good partnership         Chinese planners trying to transform
                                                         high-value manufacturing, IT,                      growing crops and stringent regulations     investment opportunities in China.       opportunities for China. New Zealand’s       China from being just the world’s
       cycles. There will be rises and dips, but
                                                         and infrastructure.                                about animal welfare and food               In PwC’s 2011 APEC survey, Chinese       strong historical relationship presents a    factory. In China’s 12th Five-Year Plan
       the trend to growth will continue. With
                                                                                                            production to ensure a high quality and     CEOs revealed of the investments         great advantage, but how should New          preferential tax, fiscal and procurement
       a population of 1.4bn, no other country
                                                                                                            safe product. New Zealand also does         being made over the next three to        Zealand businesses make the most of it?      policies have been introduced to develop
       is in a position to replace China as the
                                                                                                            not have the same sort of contamination     five years, 88.5% said they would be                                                  seven strategic emerging industries:
       world’s factory. China has the world’s                                                                                                           investing in domestic manufacturing      To make the most of Chinese
                                                                                                            issues found in other markets. Already,                                                                                           biotechnology, new energy, high-end
       largest manufacturing workforce,                                                                                                                 and 75% said they would be making        opportunities, New Zealand businesses
                                                                                                            China is New Zealand’s largest market                                                                                             equipment manufacturing, energy
       estimated at more than 112m people.                                                                                                              investments to meet domestic demand.     need to be prepared to invest and
                                                                                                            for exported milk powder: this could                                                                                              conservation and environmental
                                                                                                                                                        According to the survey, Chinese CEOs    collaborate alongside Chinese partners       protection, clean energy vehicles, new
                                                                                                            be just the beginning.                                                               to generate commercial opportunities.
                                                                                                                                                        remain heavily focused on domestic                                                    materials and next generation IT. For
                                                                                                                                                        demand with 34.4% seeing it as the       The New Zealand Government has               New Zealand businesses with expertise
                                                                                                                                                        main growth opportunity, and 51.7%       recognised this need for greater             in these areas, China’s plans represent a
                                                                                                                                                        saying they see their domestic market    investment and collaboration by
                                                                                                                                                                                                                                              big opportunity.
                                                                                                                                                        as the most important investment         committing resources to formally
       1. Ministry of Foreign Affairs and Trade. March 2012. Available at http://www.mfat.govt.nz/NZ-Inc/6-Opening-doors-to-China/1-New-Zealand-and-
          China/1-Bilateral-relationship.php.

4   PwC New Zealand China Practice China: Changing New Zealand forever                                                                                                                                                PwC New Zealand China Practice China: Changing New Zealand forever   5
China: Changing New Zealand forever
Perhaps the greatest opportunities               The importance                              Others would prefer to go in on             In summary                          PwC welcomes the New Zealand Government’s
       for New Zealand businesses are                                                               their own, working with locals to
       in the Chinese hinterland, in the
                                                        of relationships
                                                                                                    build relationships. To do that, the        China is becoming the global
                                                                                                                                                                                    ‘NZ Inc China Strategy’
       second and third tier Chinese cities             Relationships are very important to the     business needs to identify key decision
                                                                                                    makers; keeping in mind Chinese
                                                                                                                                                economic centre of gravity
       like Huangshan, Shaoxing, Wuzhen                 success of a product or service in China.
       and Chengdu: the capital of Sichuan              If the relationship is solid and the        organisational structures are often         for the next generation. Over
       province in southwest China which has            product or service is good, the company     rigidly hierarchical. In New Zealand,       many years New Zealand has          We welcome the New Zealand                Our firm believes New Zealand has
       a population of 14m (2010), out of a             is in a strong position. Sometimes, even    companies can build connections by          positioned itself well to benefit   Government's NZ Inc China                 benefited from China being our
                                                                                                    developing relationships with entities                                          Strategy that was launched on             second largest trading partner. China
       total of 80m across Sichuan. China is            if the relationship is strong but the
                                                                                                    and managers at the coal face. Once
                                                                                                                                                from this change. Yet, New          3 February by Prime Minister              has continued to grow strongly
       much more than Beijing, Shanghai and             product or service is not top line, the                                                 Zealand must be prepared to
       other internationally recognised cities.         company can still do good business.
                                                                                                    those relationships are well established,                                       Hon John Key.                             when most of the rest of the world
                                                                                                    the business can make contact with the      invest in order to secure long                                                has faltered. The Government has
                                                                                                    people running the company and the                                              Indeed, we confirm our support for
       European and American companies                  In China, the quality of relationships                                                  term meaningful benefit from        the Government’s policy directions
                                                                                                                                                                                                                              recognised the importance of the
       have been in Beijing and Shanghai for            can make or break a business. In            owners. In China, it works the other                                                                                      relationship with China for the
                                                                                                    way. The connection needs to be made
                                                                                                                                                this relationship. China’s          and partnership objectives it
       30 years. They are well entrenched in            New Zealand, you win a contract                                                                                                                                       future economic prosperity of New
       those markets and they have already              and develop a relationship from             with the decision makers first.             long economic history means         identified across five key areas:         Zealand, and is committing resources
       built strong relationships. Without a            there on. In China, if you don’t have                                                   business and government             1. Retain and build a strong resilient    to take economic ties with China to a
                                                                                                    Cold calling in that kind of market
       unique product, it can be difficult for          a solid relationship to start with, you     does not work. Instead, New Zealand         counterparts think long                political relationship with China      new level.
       New Zealand companies to break into              are probably wasting your time. But         businesses need to find people either       term, and are less focused on       2. Double two-way goods trade with        Our firm and its people have been
       those markets.                                   building relationships takes time and       in their own organisation, or through       short term economic hurdles.           China from $10bn to $20bn by
                                                        there are different approaches to doing                                                                                                                               working hard to facilitate closer
                                                                                                    their business networks, who know and       To succeed, New Zealand                2015
       New Zealand companies on the other               it, much of it would depend on the                                                                                                                                    relationships between China
                                                                                                    have access to the decision makers and
       hand could pick up business with the             industry and the products and services      establish links from there. This requires   companies need to plan their        3. Grow services trade with China by      and New Zealand for mutual
       continued growth of the second and               being offered. Some companies may                                                       own long term strategy, do             2015 (education by 20%, tourism        benefit - as shown by the China
                                                                                                    a lot of time and research. For many
       third tier cities. Over the next three to                                                                                                                                       by at least 60% and other services     Development Bank’s recent signing
       five years, China will have the entire
                                                        choose to enter a joint venture with a      companies, it could take two years to       their research, and build                                                     of a Memorandum of Understanding
                                                        Chinese company.                            build relationships before they even                                               trade)
       infrastructure it needs in tier two and                                                                                                  relationships. For many New                                                   with PwC.
                                                                                                    start making money.                                                             4. Increase bilateral investment to
       three cities, a massive opportunity for                                                                                                  Zealand businesses this long
                                                                                                                                                                                       levels that reflect the growing
       New Zealand companies.                                                                       There are also tremendous                   term perspective requires a            commercial relationship with
                                                                                                    opportunities for Chinese expertise in
                                                                                                    building New Zealand infrastructure.
                                                                                                                                                change in mindset. It is critical      China
                                                                                                    Infrastructure development in New           New Zealand businesses              5. Grow high quality science and
                                                                                                    Zealand takes years, but the Chinese        ensure they have a long                technology collaborations with
           A New Zealand China Council will                                                         have shown the world they can
                                                                                                    build cities quickly. Through the
                                                                                                                                                term alignment of interests,           China to generate commercial
                                                                                                                                                however the business venture           opportunities.
           bring together leaders in business,                                                      China Development Bank, China has
                                                                                                                                                is structured. China is not a
           the public sector and academia.                                                          offered to help with the rebuilding of
                                                                                                    Christchurch. The relationship between      market for the short term.
           It will be charged with leading a                                                        New Zealand and Chinese businesses
                                                                                                    is a work in progress and governments
           high-level bilateral partnership                                                         on both sides are investing heavily in
           forum with Chinese counterparts.                                                         building those connections over the
                                                                                                    next few years, to keep things on track
                                                                                                    and make the most of our existing
                                                                                                    strong platform.

6   PwC Australia China Practice China: Changing Australia forever                                                                                                                                 PwC New Zealand China Practice China: Changing New Zealand forever   7
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Contacts

Colum Rice                              Craig Armitage                          Scott Kerse

Partner                                 Partner                                 Partner
Auckland                                Christchurch                            Auckland

T: +64 9 355 8094                       T: +64 3 374 3052                       T: +64 9 355 8433
E: colum.rice@nz.pwc.com                E: craig.armitage@nz.pwc.com            E: scott.kerse@nz.pwc.com

Mandarin & Cantonese queries            Mandarin queries

Michael Tan                             Wendy Wang

Senior Manager                          Manager
Auckland                                Auckland

T: +64 9 355 8770                       Tel: +64 9 355 8774
E: michael.s.tan@nz.pwc.com             E: wendy.yun.wang@nz.pwc.com

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