Five insights on doing business with China

Know thy market, the Canadian Council of Chief Executives urges

April 30, 2012

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Prime Minister Stephen Harper is pretty sweet on Asia (China in particular). And no wonder. The country has 1.3 billion people and has had double-digit economic growth for three decades. That kind of activity can’t be sustained without a lot of resources, namely lumber, iron ore, coal and oil and gas. Thus, Canadian companies in the oil and gas sector are salivating at the chance to sell their products to the Chinese. However, as a recent report by the Canadian Council of Chief Executives (CCCE) points out, being successful in this market requires intimate knowledge of how business works in the Middle Kingdom.

1

Local Yokels

There is a belief that the central government is the puppet master of the Chinese economy. In fact, it is far too large to be controlled by Beijing. The CCCE notes that provincial and municipal officials exercise a high degree of discretion in attracting investment, and applying many regulatory requirements. It’s not just Chinese Premier Wen Jiabao Canadian firms need to curry favor with.

2

Crony Capitalism

One of the downsides of China’s central government ceding authority to provincial and municipal officials to attract foreign investment is that it blurs the distinction between private enterprise and the state. It also leads to an inconsistent and unreliable application of rules and policies. The best business plans can fail if relevant politicians – either in Beijing or locally – turn against them.

3

Flagged

Sinopec Ltd.’s decision in the fall of 2011 to pay $2.2 billion for Daylight Energy was the latest example of China’s zeal to gain a foothold in the Canadian oil patch. But while state-owned firms dominate the landscape in China’s domestic petroleum industry, they are profit-driven and are not looking to lock up reserves solely for domestic use. It’s a fact Canadian firms must keep in mind when dealing with the Chinese.

4

Big Pond

As Canada struggles to build infrastructure to export oil and natural gas to China, Australia is eating away at the country’s market share. But China’s economy is large and so is its appetite for oil and gas. “The Chinese economy is large enough to provide room for Canadian traders and investors, despite early gains of Australians and others,” writes the CCCE.

5

Subtle Shift

Chinese leaders no longer view being the “factory of the world” as the key to future development. Instead, its leaders are trying to reposition the country as an innovation hub and develop its own technologies and industries. The changing nature of the Chinese economy means it will require more oil and gas than ever. Canadian companies can capitalize on this shift.

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