Feature Article February 2011

Harmonious Society, Harmonious Handover?

A CBI perspective on China and its new leadership post-2012, and implications for UK business

British firms must redouble their efforts to do business in China, as forthcoming regulatory changes and the intricacies of domestic politics threaten to stifle foreign involvement in the world’s second biggest economy. That was the warning issued by Guy Dru Drury, the Confederation of British Industry’s (CBI) chief representative in China, during a BCCJ luncheon on 26 January.

Dru Drury cited several firms, including Tesco plc, Rolls-Royce Group plc and the design company Arup as shining examples of British success stories in China. But, he added, concern is growing among foreign investors over new “restrictive” patent laws and other regulations that could put Chinese businesses at an advantage.

“We respect the right of China to nurture its own business leaders of the future, but at the same time we see the contribution of foreign direct investment and business as instrumental [in China’s development].
“Equally, there’s concern about the lack of transparency in the regulations. Are they benevolent rules to benefit all and help China raise itself up the value chain, or are they rules to force foreign businesses to give up their key proprietary technologies and put themselves at a competitive disadvantage to local businesses that don’t necessarily have to observe the same rules?

“Because of the power play behind the scenes, no senior government officials are going to push hard to implement laws and regulations that are seen to be supporting foreign business over domestic business”.
Despite those concerns, firms such as Tesco have proved that, with the right preparation, it is possible to succeed in China. The insurance sector has also made impressive advances, strengthening the reputation of British firms as providers of high-quality financial and other services.

“Although they have a very small market share in China, they’re still bringing business processes into China from which the local financial services sector is going to benefit”, Dru Drury said in an interview with ACUMEN. Firms such as Arup, Airbus and Jaguar-Land Rover “are making big investments and are ultimately supplying the Chinese consumer who can pay in real money for goods and services”.

He said he hoped China would avoid the situation in Japan, which invests heavily in the UK, but has done little to attract inward investment to its own shores.

“At the UK government level there’s a real drive to increase direct exports to China to avoid that imbalance. When UK companies do business in China, they do it well. They have high credibility in terms of delivery, governance, due diligence, and respecting contracts and agreements.

“We’re held up as a highly respected trading nation, but we’re very bad at the marketing and the follow-up”. British businesses, particularly those in the service sector, must take a more proactive approach towards marketing themselves in China, he said. “Chinese firms won’t wait for us to come and offer it to them; we have to be in the middle of that cut and thrust now. On a practical level these things are happening, but at snail’s pace”.

Dru Drury, who opened the CBI’s Beijing office in 2006 and is one of three full-time members of staff there, said there was a close link between the broader business environment and “power plays” within the current Chinese leadership. President Hu Jintao and Prime Minister Wen Jiabao are expected to make way for a new generation of leaders this year.

“It’s all about legacy building”, he said. “Their advisers will be telling them to go softly-softly, with one year to go. To sustain itself over the next five to 10 years, the party needs to secure the loyalty of the middle classes, while growing the economy in a sustainable manner”.

The British government demonstrated its commitment in November, when Prime Minister David Cameron led a delegation of 50 firms to Beijing. Britain is the largest European investor in China.

China, meanwhile, accounts for just 2% of total EU overseas investment. “There remain, as always, huge opportunities and challenges; for every success story there’s a failure”, Dru Drury said.