Author: Mei Ling Tan

With a theme of risk takers and growth makers it was inevitable that anecdotes about Australian business and China would feature heavily at The Australian Financial Review Business Summit, presented by BHP Billiton.

China presents risks that are beyond the pale for boards of directors of most S&P ASX 200 companies and for many influential equity fund managers.

Insurance Australia Group’s decision to pull the plug on a $1 billion investment in China said a lot about risk aversion on major company boards. The Telstra decision to not invest $1 billion in the Philippines suggests that capital will not be deployed in China even though the country wants to open up its telco market to competition.

Risks in China that are rarely found in Australia include sudden regulatory changes, the blatant stealing of intellectual property and government decisions tied to China’s increasingly aggressive foreign policy.

But the growth opportunities on offer in the world’s fastest-growing economy are so extraordinary that many smaller companies believe the rewards far outweigh the risks.

That was the clear message from a range of speakers and panellists on the first day of the Financial Review Business Summit in Melbourne on Tuesday.

Power of social media

The most stunning anecdote came from Richard Henfrey, chief operating officer of Blackmores, the vitamins company which has stormed the Chinese market thanks to its “clean and green” image.

Henfrey says sales of a Blackmores Vitamin E cream were running at about 3000 tubes a month when Chinese film star, Fan Bingbing, was photographed with a tube in her handbag.

The photo was shared on social media and within weeks sales of the cream soared to 100,000 tubes a month. Today sales are running at about 500,000 tubes a month and still growing.

Henfrey says the incident highlighted the power of social media in China. Blackmores has not had to pay the film star any money for her public endorsement of the product.

But when asked by Chanticleer about the expansion of other Australian companies in China, Henfrey expressed surprised that others had not followed in the footsteps of Blackmores.

He says other Australian vitamins companies had not invested in people and infrastructure inside the country.

Blackmores has 25 people in its office in Shanghai and Henfrey is confident that staff numbers will grow to more than 100 within a year. He says Australians need to get over their fear of investing on the ground in China.

In carving out a profitable niche in the Chinese vitamins market, Blackmores has had to navigate through tricky government regulations.

Its success is partly due to bypassing tough government regulations in relation to medicines. Many of its vitamins are classified as food rather than medicines and this has helped to clear the way to its sales success.

Its products are sold in about 10 per cent of the 50,000 pharmacies in China.

Free trade zone a catalyst

Henfrey says the establishment of the Shanghai Free Trade Zone had delivered a significant increase in sales because Blackmores could now used bonded stores to directly import products not covered by local regulations.

This carries a strong message for other companies in Australia pondering expansion into China. The Shanghai Free Trade Zone, which was established on a pilot basis in 2013, presents growth opportunities for financial services companies.

These opportunities were outlined in a recent paper by Jeff Schubert on behalf of the Australian Chamber of Commerce in Shanghai.

However, the focus of discussion at the summit on Tuesday was in relation to food, tourism, education and property transactions.

The enormous opportunities for Australian food companies in China were laid out in compelling presentation by Shaun Rein, managing director of China Market Research Group.

Rein meticulously dissected the major drivers of consumer demand in China ranging from the impact of pollution on shopping habits to the shift in luxury purchasing habits from Louis Vuitton bags to international travel.

He provided several embarrassing examples of international firms that had attempted to crack the Chinese market with ill-thought through advertising campaigns that showed a total misunderstanding for local consumer culture.

Rein says CMR research showed that Polo Ralph Lauren totally missed the mark with its ads featuring blonde American models. These turned off Chinese buyers who thought the clothes would not fit.

GAP made the same mistake by using a male model with tattoos, which are normally associated with Triad gangsters.

He says one high-profile global manufacturer of fast moving consumer goods had made a grievous error by lowering its production standards in its Chinese factories with the inclusion of carcinogens banned in the United States.

Pollution huge issue

Pollution, according to Rein, is the single biggest issue transforming shopping habits in China. The air in Beijing and to a lesser extent Shanghai is often so toxic that it has forced an increasing number of people to shop online.

Rein says that switch in consumer behaviour has not necessarily been reflected in the retail sales numbers published in China. He says traditional retail sales measures underestimate the strength of demand.

Rein said research by CMR of people in China with a minimum of $10 million in assets showed that at least 60 per cent were making preparations to leave China, partly because of the fear that the pollution problem would get much worse.

Pollution, says Rein, is one reason why Chinese do not trust products made in their own country. It is this distrust which is driving the demand for Australian beef, dairy and honey products.

Raymond Yeung, a senior economist, Greater China Economics with ANZ Banking Group, told the summit that consumers now accounted for more than half of economic growth in China. He agreed with Rein that tourism presented a good opportunity for Australia.

Australia must welcome Chinese tourists

About 5 million Chinese visited Japan last year, about 6 million visited Korea but  only 1 million visited Australia.

Simon Henry, the co-chief executive and founder of the top international real estate website in China, Juwai.com, says he is horrified at the low number of Chinese tourists visiting Australia.

Juwai.com facilitated an estimated US$4.2 billion ($5.5 billion) in Chinese international real estate purchases in the 2013 calendar year, according to Henry.

Henry’s contribution to the discussion related mainly to China’s insatiable appetite for foreign real estate. He has not found any lessening in demand despite the gradual decline in China’s economic growth.

Demand for foreign property, according to Henry, has risen from $US5 billion in 2010 to $US52 billion in 2015. He says demand will reach $US220 billion by 2020.

He says there are only two assets that are trusted by China’s “mum and dad” investors – gold and property. That is why the recent stock market gyrations had no impact upon demand for property.

Yeung from ANZ provided a sobering assessment of the likely Chinese response to the possible election of Donald Trump as president of the United States.

He says it is no surprise that China’s international priority over the past two years has been the One Belt, One Road infrastructure strategy. This policy focuses on Chinese investment in infrastructure in about 65 countries, most of which are to the west of the country.

In fact that One Belt One Road strategy presents partnership opportunities for Australia’s major construction and engineering companies based on the experience of General Electric.

John Rice, vice chairman of GE, told Chanticleer that GE did a deal at the end of last year in Pakistan which involved a Chinese electric power company, Chinese financing and a gas turbine from France.

“The EPC was a Chinese company we have done business with for 20 years – Harbin – so we can bring partnerships we have established over decades in some cases to bear to win deals along the One Belt, One Road,” he said.

“It was good for GE, good for the customer in Pakistan and good for China.”