Michael Sainsbury
July 1, 2015

ChAFTA: Handle with great care

ChAFTA: Handle with great care

China dreams: Where challenges are as big as the opportunity

The title of Taiwanese film director Ang Lee’s Shanghai-set thriller Lust, Caution aptly encapsulates the attitude that many Australian companies and entrepreneurs have, or at least should have, towards the Chinese market.

It is with lustful eyes, dollar signs twirling, that people gaze towards a market of 1.3 billion people.

The Communist Party leaders promise the world there is to be a “rebalancing” from China’s investment-, manufacturing- and exports-driven economy to one that is based more sustainably on domestic consumption.

But it is with the utmost caution that people and companies – both big and small – should approach the Chinese market, and in no sector is this more pertinent than technology.

The ChAFTA – or China Australia Free Trade Agreement – completes a historic trifecta of trade agreements with our top three export markets, accounting for more than 55 per cent of our total goods and services exports.

Together, these agreements will enhance our vital trade and investment relationships in the region, assist the process of reform, and foster greater prosperity.

But while these agreements paint a rosy picture for our traditional export industries, it is not yet clear how effective these will be in relation to new-generation tech and tech-enabled business models. And the jury is similarly out on its potential for tech services.

The technology market in China moves at light speed. People-wise, it is the most connected market on earth with 689 million internet users, almost all using mobile devices to access the China Wide Web.

There have been plenty of motherhood in the free trade agreement, reams of it in fact, about both sides ensuring there are minimal barriers to market entry, fair rules to new entrants, et cetera, et cetera.

But just as on the Australian side we have immutable and long-standing business rules about things like patenting trademarks, company structures, accountability and transparency … China has its own set of domestic arrangement. These can be time-consuming and expensive to come to grips with. And like our rules, these will remain, FTA or no FTA.

China has its own more substantial hurdles, if eager market entrants can get past the difficult language barrier.  To that end spoken and written Chinese – or at the very least an intimately trusted adviser who has language – is an essential pre-requisite.

Hire someone you don’t know and you run the risk of clutching a viper to your bosom and having them take off – sometimes years later – with your business. This is real. It happens in every sector, in every city across the country. China is expensive and difficult to get a foothold, and requires extreme caution.

It is China’s multi-layered bureaucracy that could trip up technology companies at the very start. China has any number of different ministries, starting with the Ministry of Industry and Information Technology and Ministry of Commerce, which regulate technology companies, and then there are a whole host of different regulators.

This regulatory maze is repeated at the provincial level in China’s 31 provinces and municipalities (making up its four big cities Beijing, Shanghai, Chongqing and Tianjin – three of which have populations greater than Australia).

Above all beware of straight out replication of your intellectual property. This threat cannot be exaggerated; do not believe people who say ‘things are getting better.’ The correct response is ‘better than what?’

The China model for decades has been to let new technology in, mimic it and then freeze out overseas competition. This has been done to technology giants ranging from Google, Twitter and Facebook, as well as infrastructure companies like Ericsson, Alcatel and Cisco Systems.

And there are some signs that IBM and even Microsoft, the most Communist Party-compliant of all the tech giants, are also coming under the gun.

As well, people who have long operated in the Chinese market say that the development cycle for software and applications is noticeably quicker. That is, replication times are getting faster.

The legal system in relation to business is by no means mature. Like many countries where this is the case, China is built far more on trusted relationships, known broadly as ‘guanxi’. This is a necessity when there is little redress to the courts to solve business. Without these there are years of blood, sweat and plenty tears ahead.

Bryan Carr, chief executive of ASX-listed Australian technology group SmartTrans Limited admits his group has dabbled in a number of technologies, applications and services in an effort to find a sustained position in the Chinese market.

Now the company is turning a buck in China, albeit fairly small beer and early days. But the SmartTrans group’s relationship established with China Mobile over many years and many long and boozy Chinese business dinners that were the key, and which they will continue to leverage.

“Technology can be replicated very quickly,” he warns, while “relationships can’t.” And that’s the point in relation to building a viable China foothold.

The other barrier to entry for technology companies in China is one that can be found in many markets, and that is the dominance of tech behemoths that occupy large tracts of the online world.

Like its counterpart in the US, China is dominated by a clutch of players large dominant in their various corners of the market, and forever trying to encroach on those of their rivals. Think Google, Facebook, Microsoft, AWS.

In China there is the online sourcing giant Alibaba which also owns Taobao, the China equivalent to eBay. The company also owns China’s dominant online payments gateway, called Alipay.

Baidu dominates search in China in the same way Google does across much of the rest of the world, while Tencent was an online games king that has now found breathtaking success with its online chat application Weixin/Wechat. And then there is Sina Corp, whose Weibo is China’s answer to Twitter and is the online news king.

These companies control relationships across the online sector. It is very often the case where you play by their rules – the ones where they cream most of profit – or you get squashed like a bug.

Of course technology is not just about the more traditional so-called pure play ICT. Tech-enabled business models are now found across all business sectors and is increasingly responsible for the once-in-a-generation disruption that is now atomising long-standing business models.

This is very relevant to the FTA, which is heavily focused on agribusiness opportunities for Australia, which has traditionally been very strong in agricultural technology.

Applications in other potentially hot China areas such as health services, pharmaceuticals, clean tech, green architecture and education are also attractive for Australian businesses will to take a punt on China expansion. Needless to say, beware of replication.

Still. It is worth having a go. As SmartTrans’ Bryan Carr notes wryly, you had better have a very, very compelling product or prototype to make it worthwhile, one that won’t require millions of dollars to convince people they need it.

And perhaps above all, go in with eyes wide open and have the right people with you.

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