Groundwork finally paying off for Canadians who invested in China long-term

In the last of a three-part series, the National Post’s John Ivison reports from Shanghai, China, on how Canadian businesses are breaking into the Chinese market.  View the article at http://fullcomment.nationalpost.com/2013/02/04/john-ivison-groundwork-finally-paying-off-for-canadians-who-invested-in-china-long-term/

You can hardly make a friend in a year, but you can easily offend one in an hour, according to an old Chinese proverb.

                                       

Stephen Harper chose not to offend the new leaders of the world’s second-largest economy by blocking the purchase of Calgary-based oil producer Nexen by state-owned China National Offshore Oil Corp.

The chill that would have settled on just about every exporter trying to build trade with China can be judged by the way Japanese firms are being frozen out of the Chinese market over the Diaoyu/Senkaku islands diplomatic spat.

As it is, Canada and China have never had it so good. John Baird, the Foreign Minister, met recently with Zhang Junsai, the Chinese ambassador in Ottawa, to invite China’s new leaders Xi Jingping and Li Keqiang to visit Canada this year, perhaps to coincide with the delivery of pandas Er Shun and Ji Li to Toronto Zoo in the spring.

Canadian business leaders in China say much of the opposition to the Nexen purchase was ill-informed. Ralph Lutes, vice-president, Asian affairs, for Vancouver-based Teck Resources, said there is a misconception all Chinese state-owned enterprises are guided by the hand of the government.

“My impression from the executives I’ve met is that they are nothing but professional, sophisticated managers, motivated by profit,” he said.

Teck’s biggest shareholder is the Chinese Investment Corp., the country’s largest sovereign wealth fund, which spent $1.7-billion buying 17% of the company in 2009. It’s a “model investor” and has been invaluable in providing knowledge of the Chinese market, Mr. Lutes said. He said turning down the Nexen deal would have been “awkward” for all Canadian businesses, but Teck is in the enviable position the Chinese will buy all the metallurgical coal and copper it can ship.

“It’s projected there will be one billion people in China’s towns and cities by 2030. Urbanization is a very metals intensive undertaking, which means demand for coal and copper,” he said.

A negative decision on Nexen would likely have had a much greater impact on Ottawa-based Plasco Energy, which is generating huge interest among municipal and provincial governments for its potentially world-beating technology to turn municipal solid waste into gas that can generate green electricity.

Plasco signed a $180-million, 20-year deal with the city of Ottawa last month to process 300 tonnes of municipal garbage a day. There remain doubts about whether the technology will work at that volume — it has operated a much smaller demonstration facility for years.

Still, the potential for Canadian green technology companies in a country that has woken up to the fact it is slowly poisoning itself can be gleaned by the interest in Plasco’s process. It has already signed contracts for more than 10 times the volume of the Ottawa plant in several Chinese provinces. The Plasco team in China says they are seeing Japanese competitors being frozen out, a fate that may well have befallen them had the Nexen decision gone the other way.

This is not to suggest the streets of China are paved with gold. Doing business remains extremely problematic. Plasco has learned to keep its distance from some potential joint-venture partners who could turn into rivals if they were able to crack its patented technology. Then, there are the bureaucratic hurdles – environmental studies and negotiations over the premium rate per kilowatt hour that will be paid for green power.

But the bottom line is China can seem like the Promised Land for Canadian businesses that can provide the Chinese with a good or service they can’t get elsewhere,.

Everett de Jong, export director of Ontario’s Pelee Island Winery, is known among his Chinese business partners as da hu zi (big beard).

“If you get a nickname, it means you’re in. But I’m here three times a year for three to four weeks,” said Mr. de Jong, who has been coming to China since 1998.

But he says it is only in the last five years the wine-drinking middle class has reached sufficient size to repay the effort of doing business in China.

Pelee Island quickly discovered the Chinese won’t buy cheap wine.

“It’s a gift-giving culture. If I give you a gift, that’s a reflection of what I think of you,” he said.

As a result, the winery’s signature cabernet franc is priced at about $50 for a wine that sells for $12 in Ontario (there are 50% import taxes on premium products). Many Canadians may still be uncomfortable with the thought of China. A recent Asia-Pacific Foundation study found one in three have a “cold” feeling toward the country.

But it seems the Chinese have no such reservations about Canada. Mr. de Jong and Charlie Pillitteri, chief executive of Pillitteri Estates Winery, were in China as part of an agri-food and clean technology trade mission organized by the Ontario government. At the opening reception, they were given a pep talk by Dalton McGuinty, the outgoing Ontario premier, who was here for the fourth time.

“You should be proud of your nationality. It means a lot here,” he said.

Mr. Pillitteri, whose company is the world’s biggest icewine producer, agrees. “The Chinese want to buy into the Canadian lifestyle. They love everything about us,” he says.

He wonders why more firms don’t try to break into a market that is still growing by 8% a year. “We don’t show up. We need to get out more,” he said.

Peter Harder, president of the Canada China Business Council, said many big Canadian companies like Magna, Manulife and Bombardier have been in China for years and are rapidly expanding their operations here. He sits on Magna’s board and says the car-parts giant has grown from one plant to a planned 29 by the end of the year.

“That’s not just a China story, it’s a global supply-chain story,” he said.

“My concern is we need to get small and medium-sized businesses much more engaged in the China story or they’ll be shut out of the global supply chains. Too many SMEs are too conservative and too reliant on the United States.”

The healthy number of companies on the Ontario trade mission suggests that picture may be changing. Canadian Dairy Manufacturing is a new Scarborough, Ont.-based company building a factory to produce powdered infant formula, all of which will be shipped to export markets like China.

Four years after 50,000 children were sickened by poisonous plastic melamine added to formula, the Chinese-backed company has already secured $680-million in sales over five years with four different distributors.

“Canada has the best reputation for milk – we have the safest milk in the entire world,” said Bruce MacDonald, an advisory board director for CDM.

Others like Rick Glab, general manager of Lindsay, Ont.-based goat cheese producer Mariposa Dairy, are here to see whether exporting to China is even feasible.

“I understand it’s a long process. The regulations are quite stringent and it takes time to develop the infrastructure with supply chain management. But we know we need to diversify from the U.S.,” he said.

No-one on the mission is under any misapprehensions about the ease of doing business in China.

Mr. Pillitteri has been travelling here for 12 years but says it didn’t start paying off until three years ago. But since then he’s seen exports triple, mainly for an icewine that sells for $150 a bottle, compared to $50 at home.

One area that should be of great interest to Canadian companies is the liberalization of China’s service sector, which is likely to create a boom for international knowledge-based companies.

Rupert Duchesne, chief executive of Montreal-based Aimia, operator of the Aeroplan loyalty program, says Canadian service companies have accumulated knowledge capital that would take Chinese companies a long time to build. Aimia has just invested $5-million in China Rewards, a Shanghai-based retail loyalty program.

“Big retailers [in China] often have no idea who their customers are. It’s virgin territory and that’s why we invested there.”

The Chinese market is clearly not for widows or orphans. Canadian government officials say it is difficult for exporters to make a breakthrough. “The rules are not always clear or applied and it’s very bureaucratic,” said one.

The hope is the new Foreign Investment Protection Agreement Canada signed with China reduces the amount of intellectual property theft and makes doing business more predictable.

The Harper government is likely to weigh the effectiveness of the FIPA and push for more access to Chinese markets for Canadian companies before it agrees to Chinese advances to start talking about a free trade agreement. Officials say the Chinese have been reluctant to open up the financial services market to Canada’s banks because they know they are more efficient than domestic operators.

But it seems further trade talks are inevitable – the Harper government’s star is hitched to continuing to grow business in fast-growing Asian markets. Exports to China have risen from $7-billion to $17-billion in 2011, at a time when exports to the United States fell off a cliff.

A joint complementarities study last year – the first step toward free trade talks – concluded that China wants a lot of what Canada has to offer, from clean technology to uranium to expand its nuclear energy capacity.

“There is room for much growth,” it said.

Indeed. Better to light a candle than curse the darkness – and far better to share the glow with an economy growing at 8% a year, as Confucius may have said were he guiding Canada’s 21st-century trade policy.