How to invest in China and succeed



China remains a prime investment opportunity for Australian companies despite the ongoing US-China trade stoush adding another layer of complexity to an already challenging market.

While the opportunity is large, there is also a long list of businesses – including global corporations – whose China ambitions have stumbled over cultural and regulatory differences.

Icon Group's Group CEO & Executive Director, Mark Middleton, said it had taken 3½ years and 38 visits for the healthcare business to set the foundations for its push into China. In the early days, potential partners would falsely claim they owned hospitals.

"Some of those people I was meeting were actually going off and saying, 'I met with Icon' and that's how they would raise funds to invest in hospitals. So, like all things, you want to find legitimate partners, people who have the experience, the backing and the resources to actually make things happen."

That long road led to a formal partnership with China’s Sanbo Brain Hospital Management Group (Sanbo) in early-2019, with Icon set to treat its first cancer patients in October. China faces a healthcare epidemic with a lack of top-notch care for the estimated four million people diagnosed with cancer each year.

"The reality is if we don't do that, cancer incidents in China are going to increase by 70%. In the next two decades, we're facing a public health catastrophe."

Fashion company Brand Collective, which has manufactured its own brands in China for two decades, is also now expanding into the retail market after a local celebrity was photographed wearing Brand Collective's Volley shoes three years ago, spiking local demand.

"The reality is that every single Chinese province has an economy larger than Australia's economy and there's enormous diversity, expertise, and relationships," Brand Collective CEO, Martin Matthews, said. "It isn't as simple as finding the one business that knows how to do retail in China."

Brand Collective partnered with an Australian-based Daigou company as its master distributor and online partner. It has mitigated risk by initially setting up arrangements where it is paid on supply rather than sale of the product through brick and mortar retailers.

SB China Venture Capital Managing Partner & CFO, Kathy Chen, said the interests of Australian companies and local partners have to be complimentary. A recent trend is for greater cooperation between partners as Chinese firms look for help exporting their own products.

"It has to be a win-win situation," she said.

Adapting to different ways of doing business

While Icon runs comprehensive cancer centres in Australia, its foray into China is initially focused on radiation therapy, which presents a high-cost barrier to entry. The technology can be run and managed remotely, allowing it to turn off access if its intellectual property (IP) is breached.

Middleton also said companies in China tended to operate with a more hierarchical structure, which he calls the "theatre of leadership", underpinned by the strength of personal relationships.

"You will go through meetings and meetings and you wonder why haven't we got a decision? And you won't have got a decision because there may be a group of leaders who aren't ready to take that decision to the absolute decision maker. And that takes some time. Just when you think you've got all the answers, they change the questions."

Matthews said Brand Collective’s international partnerships were governed by formal contracts but they acted more as "bookends of the relationship that you hope you never have to enforce".

"There's a lot less defined commercially in our relationship in China than it is in other markets and so a lot more room for flexibility and adaptability. That creates greater risk as well."

Brand Collective faced its own IP issues as local firms produced counterfeit Volleys early into its China expansion, but its local partners and government quickly cracked down on the issue.

Chen said the healthcare sector was more hierarchical than fast-moving sectors such as fashion and there were often fewer regulations compared to western countries, but the country's court system was now more transparent. "I do have confidence in that," she said.

US trade dispute creates challenges

Matthews said the China-US trade stand-off had created new challenges for Brand Collective. US companies are quickly shifting manufacturing to countries such as Vietnam and Indonesia and, with the bulk of Volley shoes manufactured in China, those factories are choosing to close down.

"It creates a significant operational challenge there for us to resource the volumes."

The US has so far imposed tariffs on more than US$360 billion of Chinese goods, prompting China to retaliate with tariffs on more than US$110 billion of US products.

The trade dispute is also a key factor behind China's slowing economic growth, which dipped to 6.2% in the second quarter . While growth is expected to decline further, Matthews remains undeterred.

"I think the opportunity for Australia is to hopefully see through that and continue to invest in building our businesses in China," he said. "Because no matter what the outcome of this trade war is, China is going to be the world's largest economy."

China easily ranks as Australia's largest trading partner with the value of goods and services traded between the two countries rising almost 17% to $214.6 billion last year, according to the Department of Foreign Affairs and Trade .

Chen said global investment activity into China had reduced over the last year as large US corporates such as Microsoft withdrew, although the activity of local Chinese technology companies such as Huawei was picking up.

Middleton said Chinese businesses remain very receptive to Australian businesses, which tend to be more agile than some other western nations.

"Certainly, in healthcare we don't go and tell people what to do. We go with a collaborative approach and I think that's what sets Australians apart."