China’s One Belt, One Road strategy and the 13-5 plan is changing the international investment landscape, presenting a need to understand it and the crucial opportunity for Australian businesses.
The recently announced One Belt, One Road, represents an important foundation of Chinese overseas investment policy, one that is driving a new level of outbound investment from Mainland China.
For Australian businesses, these initiatives, along with the recently introduced China-Australia Free Trade Agreement (ChAFTA), present a further opportunity to increase engagement and cooperation with Chinese enterprises.
What is the One Belt, One Road initiative?
The One Belt, One Road project is a policy from the Chinese President Xi Jinping, encompassing two different trade routes to connect China with Western Europe and the rest of the Eurasian landmass.
The first part of this project is the revival of the old Silk Road, with major infrastructure investments flowing into central Asian states to build overland transport routes between Xinjiang in China’s west and eastern Europe. The second aspect is the maritime route – the ‘belt’ of the initiative – which tracks through South East Asia and around India before reaching Africa and the Suez Canal.
Australia is not on the One Belt, One Road path. However, the project remains significant because of China’s position as the country’s largest trade partner. As the country begins to implement the One Belt, One Road policy, it will dictate consumer behaviour and also the way Chinese businesses engage with international partners.
What’s more, the One Belt, One Road initiative is a specific part of the overarching 13th Five-Year Plan. Changes introduced in this document include the decision to officially remove restrictions on Chinese couples having a second child, which will drive further consumer activity in the country.
Rising to the challenge of working in China
While trade and investment barriers that have previously prevented Australian businesses from working with Chinese firms are dropping, there are further barriers that have held back growth in this sector.
Part of the reason is the history of Australian exports to China, which have been dominated by mining and, to a lesser extent, agriculture. In both cases, Australian firms have been happy to fill a primary production role without engaging further down the supply chain.
So far, this relationship has been relatively simple and it hasn’t called for Australian companies to engage with their Chinese counterparts and with Chinese consumers in any real capacity. However, companies now have an opportunity to expand beyond these areas, with services firms representing one sector where this is certainly possible.
Beyond mining: The future of trade in services
In Australia, we have a tendency to glorify sectors of the economy such as financial services and its internationalisation to countries including China. However, this façade means that we miss an opportunity to self-reflect in order to build relationship overseas and understand other business cultures and behaviours. In many cases, companies have approached these relationships in the same way as they do with Australian firms. To this day, Australia remains one of the more conservative island nations in the eyes of China and Asia.
While Australia may have seen some success in mining, where we had a considerable share of the global market, it is going to be very different for services and agriculture. In both cases, Australia is a relatively small player in terms of market share. This makes understanding consumer dynamics even more important.
Beyond the size of these sectors, the main focus for the services sector has to be on understanding the market. What we are selling here is the expertise of Australian firms, which makes it incredibly important to understand what consumers are demanding. This can’t be achieved by trying to impose Australian business practices on a foreign country.
Bridging the business culture gap
While businesses need to change their approach to investment in China, they also need to put time into understanding the cultural issues that can arise, both with partner organisations and consumers.
Too often, we meet with Australian business owners who believe they have agreed to a deal with a Chinese partner over dinner or with a handshake. In many cases, the Chinese perspective is they have simply confirmed a willingness to work together, but are yet to negotiate commercial terms.
Our advice is always to treat these arrangements in exactly the same way as you would a local deal. No business agreement would be considered complete in Australia-based firms on a handshake or one shared dinner – both parties would only consider a deal complete when it is in writing. Chinese firms have taken time to understand and work with international firms, so there has to be this same level of professionalism and investment from Australian firms.
However, it’s equally important that companies looking to sell products and services to the Chinese domestic markets understand the unique factors that will affect purchasing decisions.
This is especially true for agriculture firms. They will need to know how Chinese consumers eat and prepare food, they need to consider what are they eating and even whether they eat as a family or not. Reaching this level of knowledge will be the only way for Australian firms looking to stand out in an increasingly crowded market.
Appealing to Chinese outbound investment
After decades of seeing strong inbound foreign direct investment, China is already becoming a major outbound investor, both in Australia and overseas. This is especially true in light of the One Belt, One Road policy, which is expected to see a considerable outflow of resources into overseas infrastructure from Chinese policy banks and business leaders.
For Australian firms to make the most of this outbound investment, the first step is to understand the underlying dynamics of this change. The core goal of the One Belt, One Road policy is ultimately to raise the living standards of Chinese citizens through improved trade ties, a core feature of the latest Five-Year Plan. Understanding how certain investments work as part of this larger goal will help Australian businesses to make the most of them.
Making the most of Australia’s advantages
Australia’s strengths as an exporter to China certainly lie in its clean, green image and in our relatively neutral political position. As China grapples with issues like pollution, capitalising on our reputation in this area can ensure Australia remains front of mind for Chinese consumers.
This also has to be tempered by the knowledge that many of the recent initiatives like the free trade agreement aren’t enough in themselves to ensure Australian products and services stand out. While ChAFTA is a major development from our perspective, it’s just one of many similar deals the Chinese government has entered into recently. Although China is Australia’s largest trading partner, there are no shortage of other countries that can make that same claim.
What will set Australian companies apart in the future is the ability to truly understand the Chinese market and combine this with the leverage that already comes from the country’s highly evolved corporate base. Achieving this balance will be a challenge, but it will be the only way to make the most of the new opportunities that projects like the One Belt, One Road policy will offer in the future.