On June 17, the Flanders-China Chamber of Commerce (FCCC) and Flanders Investment & Trade organized a webinar on “Opportunities and challenges for tech scale-ups in China”.
Ms Gwenn Sonck, Executive Director of the Flanders-China Chamber of Commerce (FCCC) and of the EU-China Business Association (EUCBA) welcomed the participants to the webinar. In the first four months of this year, actual EU investment in China reached USD1.95 billion, up 12.4%, while China's direct investment in the EU reached USD1.69 billion, up 70%. According to a recent survey of EU companies in China, European companies state that they continue to see China as a top or top-3 destination for investment. According to the IMF, China's growth will be 8.2% this year, which would be the highest in 10 years. China overtook the U.S. and regained the title of the world's top destination for FDI and will also be one of the main drivers of the world's growth this year.
Mr Peter Tanghe, Science and Technology Counselor, Flanders Investment & Trade, Guangzhou, is responsible for supporting Flemish tech companies to enter and expand on the Chinese market, as well as for attracting investments from Chinese tech companies in Flanders. After having worked in the United States for National Instruments, he was responsible for high tech and communications clients at Accenture, first in West Europe and from 2008 till 2017 in China. He lived and worked in Beijing and Shenzhen, where he was leading digital transformation and market collaboration projects with large Chinese tech clients like Huawei and Lenovo. From 2018 till 2020 he was based in Ghent, Flanders and through his company SmarterEdge, supported tech scale-ups to internationalize and grow on the Chinese market, in close collaboration with imec.istart. He will be based in Guangzhou, Greater Bay Area, from August this year.
Mr Tanghe explained that the China opportunity is still there with a huge market scale combined with fast technology adoption. An example is the electric vehicle (EV) market. In 2019 China had as many EVs on the streets as the U.S. and Europe combined. In 2020, China played catch-up with hybrids, but China is still by far the largest market in the world for electric vehicles. Tesla decided to build its first EV factory outside the U.S. in China, despite the ongoing trade war. This year it is expected to realize one-third of its sales in China. Besides the market's scale, there is also fast technology adoption, especially in the B2C area, such as mobile payments, shared bicycles, online streaming and virtual education. These trends follow a similar pattern of a consistent use case at scale, market launch with “good enough” tech and fast scaling, resulting in fierce competition and fast product adaption with few winners, while the government is supportive or tolerant and only stepping in later with regulations. This has resulted in a market where consumers and more and more companies are willing to early adopt the risks of technology.
China's growth in the past 10 to 20 years has been consistently higher than in the U.S., but China is still faced with a big gap in terms of income per capita. China is determined to raise this to the level of a medium-developed country by 2035. Therefore, China needs to double its GDP again so the bulk of global growth is still going to come from China in the coming years. There is a good chance that China will overtake the U.S. as the leading economic power in the world. This has resulted in the U.S. counter-strategy and technology decoupling, and trying to contain the growth of Chinese technology companies such as Huawei. U.S. President Biden's objective is to prevent China from becoming the world's leading country and he is also trying to get Europe on board.
Looking at the priorities of the 14th Five Year Plan we can discern the opportunities. Growth will be based on the dual circulation economy of strong domestic market demand and supply combined with export through advanced manufacturing. A second important theme is technological self-reliance. This has been accelerated by the actions of the U.S. The target is to grow R&D spending by 7% a year. Seven “Frontier” technology sectors have been identified for long-term investment, including artificial intelligence and integrated circuits. Balanced growth is also quite important as there is still a big inequality in China between the developed eastern coastal areas and the West of the country which is less developed. Finally, there are also the climate-related objectives, such as achieving climate neutrality by 2060. In the coming years China will focus more on reducing the carbon intensity of its GDP.
What does this mean for companies in Europe and Flanders and more specifically for SME scale-ups? B2B is a market where China is dominating with a lot of local players, but there continue to be opportunities. China wants to use technology to close the productivity gap with Europe in the traditional industries. They are very good in physical infrastructure investments in terms of real estate, rail infrastructure and airlines. Now China is investing in digital infrastructure such as the digital currency and also infrastructure for EVs. But they still lack experience and expertise for automating the traditional industries, such as manufacturing and banking where there is an obvious productivity gap. They are now looking at also digitizing B2B applications where they still need the help of foreign companies. The decoupling from U.S. technology is not only a challenge for us in terms of compliance with export controls but it is also an opportunity because Chinese companies want to get rid of U. S. IP. Over the past 10 years EU high-tech exports to China have nearly tripled.
Which segments are attractive for Flanders' tech scale-ups? China used to be a manufacturing “giant” just based on the volumes that were manufactured in China due to the comparative advantage of low labor cost. China wants to evolve into a manufacturing power. Focus industries are automation and robotics, automation of agriculture and new energy vehicles. Healthcare is also important. China wants to provide universal quality healthcare but not at the cost in the U.S. Specific areas of interest are primary care, elderly care, prevention and monitoring of chronic diseases and innovative medicine and medical devices. Concerning green development, Guangdong province will be asked to provide the biggest contribution to reduce carbon emissions. Resource recycling and combating pollution is where there is a need for foreign expertise. Chinese companies need to continue to grow in the European market through the application of Chinese technologies. Finally, there is also the IC supply chain. The big tech clusters and landing places are the same as the big industrial areas: Beijing/Tianjin; Shanghai and the Yangtze River Delta and the Greater Bay Area in Guangdong. There are also some other areas such as Chongqing/Chengdu; Wuhan, Xi'an and Xiamen/Fuzhou.
What are the challenges for foreign tech companies in China? The language and business culture is a challenge, although more and more young people can speak English. A second challenge is to adapt your products to their use in China, regulations and tech platforms, which are different from abroad. Local competition is still a key concern and there is the trade and tech war. In terms of business culture we talk a lot about guanxi to understand your business and build a level of trust. To make an effective pitch in China you need to communicate clearly and to the point, including the benefits of your product and the specific collaboration proposal that you have. Make sure the message comes across and do your homework in advance. A second point is to get feedback, which is difficult now because we can't go on site. Doing it online is quite difficult so the most appropriate way is to have somebody from your own company or from FIT at the other side. After the pitch it is still quite important to develop the relationship. Many companies rely on their online presence and content marketing, but China is difficult, for example Google cannot be used in China. Search engine optimization will have to be adapted to Baidu and Sogou or you can make a Chinese version of your site. Chinese people don't use email very often, they use WeChat. LinkedIn is still a tool that you can use in China. The main channel is still industry specific trade shows and conferences. They still happen in China but for a Chinese audience.
Local competition is very important to consider. In the past entrepreneurs feared about being copied, but today the legal framework is in place to be able to get protection, but you still face the risk of being outcompeted. Competitors can copy the concept of your product and outcompete you. It is important to have and protect your “unfair advantage” as a foreign company. What makes you different from Chinese competitors can be in the product IP but also in expertise or the experience of the industry or in the brand. In most cases you will still need a local business partner who can provide market access and knowledge, but it is important to choose the right partner.
The China-U.S. trade war is mostly about compliance. There is the EU dual use regulation and export controls for military-civil use cases. U.S. export controls also impact us. If you have more than 25% U.S.-controlled content in the product you also need to comply with U.S. export controls.
The main qualifiers for success in China are:
• Understand and test your product market fit and competitiveness with prospective Chinese business partners and customers.
• Know and protect your “unfair advantage” against local competitors.
• Identify the right business partner and recruit Chinese in your team.
• Be responsive to your Chinese customers and adapt your approach, value proposition and product as needed.
The decision to go to China is a strategic and deliberate one, not an opportunistic one.
B2B market entry approaches are following your EU customers, a distribution agreement or Chinese e-commerce channels and in a second step you can set up your wholly foreign owned enterprise or negotiate a license agreement. The ultimate step can still be a joint venture with a Chinese partner.
Mr Tanghe will be based in Guangzhou but cover the whole of China and can offer one-to-one advice; participation in on-site, virtual and hybrid events; China business missions and B2B programs with potential business partners and customers. FIT is also providing subsidies.
Mr Etienne Charlier, Partner, Riverbanks Investments, is an “old China Hand” with lots of experience. He has been living in Shanghai for more than 26 years. He started as General Manager and Vice President at Alcatel in Shanghai and later as Founder of ProcurAsia. He is experienced in several of China's most dynamic industries, including artificial intelligence, cleantech and the wide range of solutions for manufacturing. Today he is one of the partners of Riverbank Investments and a Founding Partner of Sinnolabs. Through these platforms he focuses on assisting companies developing their business between China and Europe. He has a master in electrical engineering and a bachelor in philosophy from UCL as well as an MBA from MIT Sloan School of Management.
Mr Charlier went through a few successful scenarios of going to the East. If you want to be successful in China you need to convince yourself that there is no shortcut into the Chinese market. But the journey is worth it.You will need a minimum local infrastructure early on in the project. You cannot just duplicate a solution you have in Europe or the U.S. even with global clients or you will not be sustainably successful. What was possible 10 or 15 years ago is now no longer the case. However, the Chinese market is most often worth all the effort it requires. There are different ways companies enter China, for example a request from global customers. The focus will then be on how to serve this client. A second way is the realization that China is a big part of the world market and if you look at growth, the share of China is even bigger, so you want to get local customers. Another way is a request by an Asian distributor, which is tempting because your effort in the beginning may be limited. The key question is how to identify and manage a good partner. The three general scenarios are: follow the momentum; venture to the core and tempting way out.
In the case of your business following global customers, the first step is to build the minimum local infrastructure. You will need to set up a legal entity or you will not be able to operate. It requires answering a few strategic questions. The full process is clear but very detailed and should not be rushed. This stage could take three to five months. From the technical side you need to migrate your solution to China, to adapt it to local requirements and to get ready with support and services. So far everything was driven from headquarters, working with a trusted party and no local staff. What will happen fairly quickly is that the client's China management will start to resist, and new demands will arise. At this point you need to send or recruit someone to handle the China management in China. You are starting your China business development. You strengthen your position with global customers and you can gradually extend your local team and transfer competences for local support. After a few years you will have China references, which is very important to convince Chinese customers to buy from you. You have cashflow, core staff and firsthand experience in China as well as a local infrastructure. Now you can start new business development by attracting global companies that are not yet customers outside China and of course also domestic customers.
If you are focussed on the local market it is much harder in the beginning because you need to develop customers and build your initial infrastructure. Once you build one or two local references, you will get more knowledge on how to evaluate and manage those partners. The first steps in China are costly, but the potential of the market is such that when you prepare well you can follow the growth. It takes time and energy to get operational but it will give results. Chinese customers are more and more evaluating your commitment to China because they want you for the long term. There are options to help you with a soft landing, one of them is Sinnolabs. Mr Charlier next showed an introductory video of Sinnolabs (www.sinnolabs.com).
Q&A: Chinese business culture is all about trust. How can you build up trust if you can't meet your business partner face-to-face? Mr Tanghe: This is a definitive drawback today. You can work with a person who can represent you in China, but eventually you need to go and meet each other. However, Chinese citizens can still travel to China today. Mr Charlier: Even if you cannot have a dinner, you can show your commitment online. A relationship is not only built through dinners.
What changes are needed in the EU headquarters? Mr Tanghe: In the case of SMEs the China project needs to be carried by the CEO or one of the founders and also the Board of Directors needs to be “on board”. Mr Charlier: You will need the support of the Board and the shareholders.
When will travel to China be allowed again for Belgian residents? Ms Sonck: I heart it will probably be sometime later next year. But you can have a Chinese employee going to China. There are still possibilities to go, but you will need to pass two to three weeks in quarantine.
Would you advice tech scale-ups to go to first-tier or second-tier cities? Mr Charlier: It depends on your kind of business and where the customers are. Going deep into China creates new challenges as the ways of doing business change. I would advise to stay in tier-1 or almost tier-1 cities. Mr Tanghe: Look at your segment and see what is most relevant.
To what extent will the political situation affect doing business in China? Mr Charlier: I believe it will become a bit worse before getting better. You need to be sensitive to the environment in terms of positioning of products and so on. The situation can also offer opportunities. This is the right time for European companies to position themselves and be the right guy. Mr Tanghe: Try to avoid contested areas.
