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Thursday
Jan162014

Heaven on Earth in Hangzhou

One of my favourite trips last year was the short one day visit to Hangzhou, an up and coming industry powerhouse hub in China and often known for its beauty and charms. Located in southeast China in Zhejiang province, with a population of around 8.8million, Hangzhou is the provincial capital and as such, an important hub for economics, politics and culture.

Hangzhou is a diverse and scenic city. By day, one can appreciate its diversity, from tourists and locals strolling and exercising around the iconic West Lake to the hustle and bustle of the economic and technology development zones. Hangzhou’s reputation and place in its country is illustrated by a very well-known Chinese saying, “上有天堂,下有苏杭” meaning “Heaven above, Suzhou and Hangzhou below” or, in other words, that Hangzhou (and the nearby city Suzhou) are described as “heaven on earth”.

Hangzhou is a one hour train ride Southwest from Shanghai and its location positions it as an important core city in the Yangtze River Delta. In fact, Hangzhou is home to the largest number of China’s top private enterprises including Alibaba Group (the e-commerce giant which owns C2C site, Taobao.com; B2B site, Alibaba.com, B2C site, Tmall.com). Hangzhou has also seen fast growth in other new industries including IT, heavy equipment, automotive, electrical appliances, electronics, chemicals, telecommunication and medicine. Interestingly, over 90% of Hangzhou’s GDP is made up of private enterprise.

China’s wealthiest man, Zong Qinghou is Chairman of the food and beverage conglomerate, Hangzhou Wahaha Group whose headquarters are also based in Hangzhou. Wahaha plans on building 100 malls around China in the next 3-5 years and is considering raising funds through an IPO. Wahaha manufactures a variety of products from bottled water to baby formula and in 2012 it generated $10.3billion in revenue. It currently has only one shopping centre, the Waow Plaza, based in Hangzhou which sells high-end products ranging from European furniture to children’s wear, to jewellery.

In 2012 Hangzhou was ranked the “second best city” in the Forbes list for “starting a business in Mainland China”, after Shanghai. In fact, over 5000 SMEs emerge on average in Hangzhou alone every year. Hangzhou has an abundant pool of private capital, a high quality labour force, competitive business costs and provides a favourable climate for business start-ups.

Hangzhou aspires to become the financial services hub of the southern wing of the Yangtze River Delta. There are four main drivers that are contributing the fast growth and success of the financial services industry in Hangzhou: strong retail demand, favourable policies, growing corporate demand and its innovative environment. In 2011, the added value of Hangzhou’s financial services industry reached RMB73.2billion (an increase of 20.9% from the previous year), which accounted for over 10% of Hangzhou’s GDP. Located in one of the wealthiest provinces, Zhejiang province, combined with the city’s strong savings culture, allows for an abundant supply of capital in the city, Hangzhou had over RMB1,839.7billion in savings accounts at the end of 2011. Also, Hangzhou is ranked third nationally for the number of HNWI with net worth over RMB10million.

The banking industry in Hangzhou saw 53 institutions achieve profits of CNY40.2billion in 2011 with a non-loan performing ratio of only 0.8%, one of the best in China. The insurance industry achieved profits of RMB21.1 billion in 2011 and is made up of 63 institutions and is the second pillar of Hangzhou’s financial services industry along with banking. The number of private equity and VC firms in Hangzhou increased by 36% to 403 in 2011 ranking it fourth nationally in terms of numbers. Hangzhou is a popular destination for foreign banks and foreign insurance companies with 9 and 11 present in the city in 2011. Global companies that have strategic investments in Hangzhou include IDG Capital, Citibank, Morgan Stanley, HSBC, Allianz and DBS Bank.

In 2005, the Commonwealth Bank of Australia entered into a strategic cooperation agreement with the Bank of Hangzhou (formerly Hangzhou City Commercial Bank (HZCCB)) which involved CBA purchasing 19.9% of the shareholding in HZCCB for approximately AUD100million, with Board representation. The partnership involves a structured capability transfer program whereby CBA will assist HZCCB in key areas in order to improve its competitiveness and profitability. HZCCB is ranked by assets in the top five city commercial banks in China.

Hangzhou Economic and Technological Development Area

In 1993, the Hangzhou Economic and Technological Development Area (aka HEDA) was established and is one of four Economic and Technological Development zones within the city. It now has a population of over 400,000, covers an area of approximately 105km2 and its industrial output value reached over RMB130billion (US$20.79bn) in 2010. The four dominant industries based in the area are IT, biomedicine, equipment manufacturing and food and beverages and the area ranks in the top ten development zones nationally. HEDA has comparatively relaxed regulations, offers investment and R&D incentives, and is a large and significant infrastructure development.

Whilst Shanghai outstrips Hangzhou by miles in terms of attracting foreign investment, it may in future draw the limelight as a place for foreign companies to do businesses and establish their China base. Currently over 33 multinational corporations among the Fortune 500 have invested in enterprises in HEDA. In addition, many iconic transnationals have also established production lines in Hangzhou, including Siemens, LG, Panasonic, Mitsubishi and Toshiba.

With the support of the state government, Hangzhou has developed a strong reputation as an international manufacturing base and ecological centre and has led the way in advanced technological development and global research & development in emerging modern industries such as energy, medicine, materials, logistics, IT and financial services.

As a fast growing second tier city in the Yangtze River Delta region, and only a short one hour train ride from Shanghai, Hangzhou is becoming an important strategic location for foreign companies looking to establish operations in eastern China. This is only highlighted by the extraordinary growth of two of China’s best known success stories, Alibaba and Wahaha, and ensures a steady growth of business visitors and tourists.

Australian business leaders, entrepreneurs and financial services professionals should add a visit to Hangzhou on their next trip to Shanghai.

Sunday
Nov172013

Innovation at Speed

In previous articles on the changing face of Innovation in China, we have highlighted China’s rapid transition from a culture of ‘copying and low cost manufacturing’, to one of ‘innovation and commercialisation’, a transformation which has surprised China’s doubters and detractors. As if this wasn’t amazing enough, we now believe that its time to point out the rapid pace at which this is happening.

China’s Government has vowed to become an “innovation-driven society by 2020”. The nation has successfully combined its manufacturing capacity and capabilities with a policy targeted at creating a “nurturing ecosystem for innovation” which will see China become the world’s leading innovator. Since 2005, China has doubled its global percentage of patents and the number of Chinese companies in Booz and Co’s “Top 1000 Global Innovators List” has grown from 23 in 2010 to 47 in 2012. PetroChina was the first Chinese company to make it to the top 100 in 2012.

Developing China’s innovation prowess is crucial to the global competitiveness of Chinese companies and will be the key domestic differentiator to measure the top performing companies. In sharp comparison to the longstanding bottlenecks and lack of capital investment into infrastructure development and start-ups in the western world, China is investing heavily in its technology and infrastructure. Innovation is therefore shifting to China for three main reasons; (i) market opportunities; (ii) abundant capital resources and (iii) Government incentives. What is different about China’s model of innovation is the speed at which products are developed, tested and launched - in a fraction of the time that it would take for a similar product to reach developed markets. In addition, whilst China’s Government actively promotes, initiates and provides finance to support innovation, their western counterparts tend to rely on an entrepreneurial culture and new start-ups to lead the way.

The Chinese model for innovation is primarily driven by the increasing speed of consumer demand and sophistication. Whilst some argue that China’s innovation potential is no match for Apple, P&G and the Microsofts of the world, China’s new model for innovation, arguably decades behind the USA, will rival the world’s leading multi-nationals in years to come. Waves of Indian executives are visiting China to observe their methods and process of innovation – the most common observation being their incredulity at how rapidly ideas or changes within an organisation are identified and executed. Whilst the West certainly has the availability of human capital and talent, which is as good and, in some instances, better than China’s on a like-for-like basis, it doesn’t have an ecosystem that unifies and delivers innovation at pace.

As a relative latecomer, China is able to leapfrog many stages of development, infrastructure and investment through which other countries have laboured for decades. In the future, three qualities will be required to differentiate successful innovators from the rest. These are:

  • an ability to break into a market and establish a strong position…..at speed
  • a culture which encourages continuous improvement, development and enhancement
  • a desire to move up the value chain, invest in the future and search for new opportunities.

China’s innovation engine is underpinned by its historic approach of “test-and-fail”. This has resulted in an industrial innovation cycle that is consumer centric and an ecosystem that is able to rapidly allocate financial and human capital. Western companies must become more aware of the indigenous innovators and ‘Shanzhai’ companies in China, and should not underestimate their low-cost Chinese competitors. As Ted Greenwald of Technology Review put it “Chinese companies iterate, build things and grow faster than their US counterparts…..Beijing compressed thirty years of start ups into five!”

Monday
Oct282013

The Free Trade Experiment

The biggest step in the liberalisation of China’s financial services sector or a damp squib?

With the recent media hype about Shanghai’s New Free Trade Zone (“FTZ”), questions are being raised as to whether the FTZ opportunity will live up to expectations or if it is a damp squib. The FTZ, another Deng Xiaoping style pilot reform strategy has the potential to be expanded and/or replicated. China’s mantra, “crossing the river by feeling the stones” is particularly pertinent to describe the FTZ experiment that, if successful will be slowly disseminated nationwide as China moves to liberalise its economy and integrate with the rest of the world. 

On September29 2013, China officially opened its first ever FTZ as opposed to the ‘special economic zones’ (“SEZ”) such as Qianhai. The Shanghai FTZ covers an area of 29km2 and promises to act as an experimental ground for the heterogeneous liberalisation of 18 chosen industries (the majority of which are services based – financial, shipping, business, professional, cultural and social), liberalisation of interest rates, RMB convertibility, less stringent foreign investment criteria and much more. Furthermore, the FTZ will allow foreign banks to operate without a Chinese partner and provide  access for financial institutions and qualified foreign individuals to invest and trade in Shanghai’s securities and futures markets (access was previously restricted to buying into funds regulated and restricted with quotas through either the Qualified Foreign Institutional Investor (QFII) or Qualified Domestic Institutional Investor (QDII) programs). In addition, as the world’s largest energy consumer, officials have stated plans to create an international oil futures trading platform in the FTZ to improve the nation’s commodity markets and to hedge its risk. Foreign banks who open a branch (as opposed to a representative office) in the FTZ will be offered simpler and faster regulatory requirements, specifically when applying for RMB settlement licenses. The ultimate intention being to create an international hub for financial services, shipping, law, and architecture as China takes steps towards deregulating its financial system. Particularly attractive to foreign institutions is the proposed relaxation of the Great Firewall to provide access to popular web sites like Twitter, Facebook and YouTube which are otherwise banned in China.

Shanghai’s FTZ has attracted a lot of positive and negative media attention, but there is no doubt that, should the scheme be successful, it will pave the way for China’s integration into the modern world. Labelled by some as the “third wave of economic reform” (the first being Deng Xiaoping’s policies in the 70s and 80s and the second when China entered the WTO in 2001), the Shanghai FTZ has the potential to allow the nation to, in the words of Premier Li KeQiang, reap the “dividends of opening-up”, unleash more "reform dividends" and share greater "development dividends". Strong supporters of the new FTZ see it as a momentous step away from China’s export led growth model, to a more sustainable and liberalised consumer-led growth model. As China begins to foster domestic growth, it will be crucial for its services based industries to both develop and mature to be able to compete on the world stage. In the next five years, the Shanghai FTZ is expected to contribute between 0.1 per cent to 0.75 per cent to China’s GDP each year and, more importantly, provide a new model to attract foreign investment which can be applied to other cities and provinces.

Looking further forward, the Shanghai FTZ will also stimulate a fresh wave of investment and infrastructure spending, which will offer a wide range of opportunities. Local property prices and FTZ stocks have soared since the opening of the FTZ in September, and full convertibility of the RMB in the FTZ will allow foreign companies to raise capital through derivatives trading or private share placements – a huge step forward for the local financial services industry.

Whilst the plan seems to be an overwhelmingly positive step forward for China, there are sceptics and critics of the Shanghai FTZ, who see it as a potential ‘damp squib’. Most of the criticism and scepticism stems from the lack of detail that has emerged so far, and many wonder how the Government will prevent the major changes proposed for the FTZ from spilling over into the rest of the nation.  For example, it is not clear how banks in Shanghai’s FTZ will be allowed to set different interest rates within the zone to that of the rest of the country.

At the time of writing, 25 companies and 11 financial institutions have received approval to start operating in the FTZ from a variety of sectors. Whilst it is not easy to tell, the success of the FTZ will be a long term process as reforms in China typically start slowly out of the gate. However, local government officials have confirmed their commitment to maintaining the integrity of the FTZ by erecting a “rigid and impermeable wall” around the FTZ so as to ensure nobody ‘games the system’. However, much of the details of the benefits and principles to be applied within the FTZ have yet to be confirmed.

Described as the boldest reform in decades and with the opportunity to spur investment and innovation, particularly in China’s services industry, the success of the new Shanghai Free Trade Zone is uncertain. But one thing is certain, the symbolism, reflecting a new vision of China’s leadership and a step towards a more liberal and sustainable long term growth model, is promising. For now, we can only watch and wait.

Monday
Oct282013

David Thomas in China Daily

David Thomas was recent interviewed by the China Daily Asia, and the article entitled "Opportunity Knocks" talks about his background, career history and passion to connect investors, entrepreneurs and business leaders in the Asia Pacific region. 

"....It is late afternoon and Sydney’s central business district is virtually empty. A steady stream of workers makes a beeline to bus stops, car parks and the underground railway. By 5pm, coffee shops have closed as the iron shutters come down on another day. In his third floor office David Thomas is on the phone with Citrus Australia, the major industry body representing Australia’s commercial citrus growers...."

 

 

Monday
Sep162013

China's Premium Market

The wealth management opportunity of the century!

Being a nation that values egalitarianism, Australia offers scant recognition for the premium consumer, a market that will provide the next wave of opportunity and demand from emerging nations, such as China. The premium class of consumers are part of a new market of ultra high net worth individuals (UHNWI) who make up a market that is truly out of reach for the majority. To be clear, this opportunity is different from the “mass affluent” market. Mass affluent refers to exclusive goods and services that can be accessed by the masses (e.g. Chanel bags, Louboutin shoes, first class airfares etc.) if they put their mind to it.  On the other hand, the “premium market” is unattainable to 99.9% of the population, invitation only experiences and events that offer exclusive personal experiences that are both hard to imitate and discrete. If Australia is to remain competitive as an international destination of choice for the world’s elite, it must, in both business and tourism, redesign the delivery and experience of the products and services it provides. Australian businesses and marketers must move quickly to keep pace with the rapidly changing taste and demand of China’s wealthiest consumers.

China’s new wealth has the potential to accelerate growth in the private banking and wealth management sectors for those who can provide tailored services and fully understand the needs of the premium market. According to official numbers (which may understate the actual position) China has over one million millionaires and 122 billionaires (second only to the USA) and it will have the world’s fourth largest concentration of wealthy people in the next two years. Currently, China is the largest market for luxury goods in the world and by 2015 will account for one third of all luxury good purchases. China’s top 500 wealthiest have a combined wealth of almost US$600billion and an average net worth of US$1.2billion. With such fast growing wealth, there is enormous potential for those in the private banking and wealth management sectors to tailor their services and capabilities to cater for the wide range of needs of wealthy Chinese individuals.

China’s premium consumers have a diverse range of needs to be met as they look to diversify, invest and restructure their investments, both domestically and overseas. This growing number of individuals will need exclusive advice, support and services to manage their wealth and assets offshore. The Australian “Significant Investment Visa Program” (subclass 888 visa) is one mechanism for wealth managers to facilitate this investment opportunity, specifically targeting those with plans to emigrate, and therefore with long term interests in Australia. It would be amiss for wealth managers to fail to fully embrace this premium market so as to start developing and investing in relationships with China’s wealthy. Building access and a healthy reputation amongst the network of China’s wealthiest will give access to a rapidly deepening pool of wealth at a rate of growth we won’t see in the West in the near future. 

With most premium consumers relatively new to the consumer market and wealth, their consumer behaviour is very different from their international and middle class counterparts. In fact, more than half of China’s wealthy today were not wealthy five years ago and more than half of those who will be wealthy in the next five years are not wealthy today. China has many “rags-to-riches” stories, and perhaps most famously, Mr Zong, the 67 year old CEO who was born into a poor rural family, and prior to starting his own business selling soda and iceblocks at 42, he worked on a farm, as a factory worker and salesman. Mr Zong’s company, Hangzhou Wahaha Group is now the largest beverage company in China, worth US$4.88billion, it employs over 30,000 employees and Mr Zong’s estimated wealth is around US$11billion. Most Chinese billionaires have emerged from total poverty, where there was not enough to eat, as opposed to those who have risen from the relative poverty of a typical middle class family in the West. Furthermore, most of China’s wealthiest were born in the 1970s and were involved in finance, trade or manufacturing.

Australia must welcome and engage with China’s elite to compete with the USA, Canada and Europe and remain a top emigration, business and investment destination for China’s wealthy.  Interestingly, over 70 per cent of China’s wealthiest have emigrated or are in the process of emigrating. This presents a huge opportunity for Australia to attract the brightest, wealthiest and most entrepreneurial minds to our shores.

The three main drivers behind this trend are:

(i) Asset Protection

Many of China’s high net worth individuals are seeking a legitimate means to move their assets offshore for the purposes of asset protection, particularly in terms of cross-border structuring, tax mitigation and long term investment planning.

(ii) Retirement and succession planning

Many of the children of high net worth individuals choose to study and live abroad and require advice and assistance with retirement, succession planning and the long term growth and protection of their family’s wealth.

(iii) Diversification

Wealthy entrepreneurs and high net worth individuals are looking to diversify their assets across a variety of markets, currencies, industries and sectors that they cannot access in China. Australia has a wide array of safe and viable opportunities that, with the right advice, service and support, provide access to attractive investment opportunities overseas.

There is an overwhelming opportunity for Australian financial services (and other) businesses to provide elite and exclusive experiences for those who can easily afford it. There are already a large group of wealthy families and ‘second generation’ sons and daughters living in Australia whose demands and needs are simply not being met as they seek to accumulate their wealth out of the spotlight. Wealth Management and Private Banking businesses which can seize this opportunity will be handsomely rewarded. Money is not the issue here - experience, service and discretion is paramount. Whilst Australians by no means undervalue the importance and achievement of success, it remains to be seen whether a nation plagued with the “tall poppy” syndrome has the will to respect, serve and value the time, expectations and demands of the world’s elite. 

 

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