China: Doing Business in & with China

In the first episode of Fidinam Podcast - Unlocking China we delve into the dynamics of doing business in and with China with esteemed guests Mr. Bernardino Regazzoni, former Swiss Ambassador to Beijing, and Mr. Tommaso Colli, Managing Director of Fidinam Shanghai.

We explore the current social and business environment in China, addressing significant changes over the past decade, including economic shifts and demographic changes. Despite the complexities, China remains a key player in the global marketplace and an important hub in the competitive global supply chain.

Join us on this enlightening journey as we unravel the mysteries of China's business landscape, revealing unique opportunities for ambitious companies seeking global success.

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Transcript

Francesca: 0:17

Hello everyone and welcome to the video podcast Unlocking China, a podcast dedicated to sharing the experiences of offering companies and entrepreneurs doing business in China, as well as the day-to-Day intricacies of operations insights into what makes China business environment. And much more. I'm Francesca s from Fina Group, a Swiss private consulting firm that provides tax business, real estate, and digital advisory services to companies, entrepreneurs and individuals in more than 90 countries around the world. In the first episode, dedicated to China, we will talk about doing business in and with this giant country. In fact, we will present the current social and business environment in the country, the potential changes in dynamics over the years, and finally, the frame direct investment situation and the related opportunities related to address these topics. I'm joined today by mr. Bernardino Reni, former Ambassador of Switzerland to China, and board member of Ham Shanghai, and also by mr. to Mazuli, managing director of Ham Shanghai. Welcome to both of you. Thank you for joining this discussion. It'll be very enlightening to have you two different angles and perspectives when talking about the Chinese business environments. talking the With this in mind, I would like to begin with a brief, uh, overview of the current economic and social environments. So, to start with, over the past decades, the business landscape in, in China has changed significantly. Companies are navigating a more Complex environment marked by the uneven recovery of the Chinese economy, heightened geopolitical risks, increasing pressure to diversify supply chains, And evolving tax compliance regulations both domestically and and globally. and Now, despite these complexities, um, China stands as one of the globe's foremost consumer markets. Moreover, China not only offers unparalleled. Access to one of the worst larger consumer markets, but also it offers participation in a competitive global supply chain. So eventually companies aiming for global success cannot afford to ignore this reality. Now, given this premises and this background, Mr. Reni, how do you think western countries perceive China today and what do you think is easily misunderstood by the West, if at all?

Bernardino: 3:05

Thank you very much Francesca for this complex, question. I will try to, answer, I think we ended up having a more realistic perception of, uh, China. It remains as you, correctly stated, a very important, market. It provides, market opportunities with no comparison in size, but definitely the field. Has become more uneven. It used to be already like that. I mean, but we, ourselves, we spoke, you spoke about misperception. We had this idea of endless growth, and incremental, exponential, growth. It was the idea of pre covid idea. Of an economy with, practically no board. It was not like that before and it ended up more clearly. All these points, I think there are in the first place, as you remember. Um. Structural problems, which came out more, prominently. First and foremost, I would say the real estate market, which it was a distortion, which already existed in the past, and it came out very clearly is not to change on the short term. Real estate market is 28% of GDP. It's a huge market and it is also all savings, of the middle class. Chinese are in the realist. Data market. Therefore, it is something which is extremely, important. You remember also demographics, which is a very important problem because the shift, goes from a young, uh, economy pushed by working force and now. Other kind of problems are coming up, more social security with the aging of the population. But first and foremost, I would put forward the necessary shift to a production oriented, economy, to a consumption oriented economy. All our economies are. Consumption oriented. The level of consumption is 38% in the of GDP in the Chinese economy, which is not enough to have a developed, society. and the priorities of the government are put increasingly on security investment in manufacturing or in research, but definitely not in. Pushing consumption. And I think this is also a matter of concern to us in to sum up, of course, China remains a very, and will remain in the future as well, a very important, market, for consumption, for production, for investment. But we are increasingly aware. Of the fact that the field is uneven, so we need to know that well or to be well advised to enter such a market.

Francesca: 5:51

Thank you. Thank you very much. Uh, thank you for your, your overview. Very interesting remaining at the strategic level. In recent interview, Tomazo, you said that President third turn now focuses on domestic growth and no longer on foreign investments. Tomazo, could this mean for foreign companies eager to continue dealing with China that they might need to rethink their current business models? I mean, will businesses need to place greater emphasis in expanding the domestic market rather than simply using China as a production base? Do you have any experiences from, from your clients?

Tommaso: 6:36

Sure thing and allow me to say that like, I. Sort of was hoping that the concept of China as a production base was, long gone in the minds of, of, of everyone.'cause, China has, has been expensive on any regard for a long, long time. So, since my, my first experiences here in China almost, a dozen years ago, China was already, a market. Place where you come to serve the local market and partially, but not even, for, uh, let's say cheap production for export. Of course, there China is still, let's say, a strong manufacturing, uh, country, but it's more so in the matter of, let's say a more, refined, production. I think what companies should do is they should consider. The relevance of China, as a market, as a market itself, as a market for, export. If that's the case, as a market for let's say, as I was, saying earlier of high level products. I mean, let's. Not forget that even if, like Apple, for instance, has moved, uh, a lot of production out of China, but like the main producer of iPhones is still, Foxcon is still here in China. There's issues and whatnot, but it's still. Here, the, it's recent news that BYD, topped Tesla in the production of, uh, ev. So we have a lot of champions and a lot of opportunities, in China simply because China is China. China is a huge country. China is a country that has like, had a tremendous growth in the past. 30 years and no matter what, even if China offers 4% GDP growth, 3%, 2%, we are talking about a huge number that like most countries in the world would dream about. Some would dream about us. Such a percentage. Some others would dream about the amount in absolute terms. So that said, like, yes, the strategy with China has to change every day pretty much because we face different challenges and, and a lot of different changes. But that doesn't mean uh, China's no longer, a place to be. And, that also doesn't mean that it's no longer providing, Opportunities for, individuals, for entrepreneurs, for companies and whatever, uh, it's present in the marketplace.

Francesca: 9:07

Thanks for sharing Tomazo. Very interesting. Um, building on that and looking at China's position in the global supply chain, we hear a lot about the coupling, the risk. In China plus one, which are all terms and concepts that reflect the strategy of international companies, decreasing dependency from from China. These concepts seem to be gaining more and more power, but in this respect, Mr. Rega, along this concept, do you think that. The opposite strategy. So, in China, for China, we'll continue to gain momentum in the coming years or or not. What is your perception in that?

Bernardino: 9:52

In China for China, how many times I've been repeating this mantra, which is a quite fascinating, expression, but. What does it mean? Actually, I think that it means two things. One is the organizational value chains, on the other hand, is a corporate governance strategy. As of the first, I much agree with Thomas in the sense that this thing about Delocalizing production for cheap products, it's over for a long time over now, if you produce in China, you produce relatively high level technology products. therefore, it is no longer a strategy based on producing in China for exporting to the west. But you produce mainly, and this is the situation for many companies in China and for China, just a description, but to produce in China and for China has also increasing. Prices. Why the, um, the emphasis is put now, for instance, on security. You have just an example, difficulties in exporting, data related, issues re regarding your group. And it is not a theoretical thing or a political thing. But think about, uh, sensors, data related to sensors. Data related to genetics as well, or the behavior. Of your clients, if you are in the insurance sector, all these things are more difficult to be exported or to be shared within a global, uh, group. And therefore, given this difficulty, you have, you are in China and for China, but you have higher prices because you have to, need to have two. Pools of, of data, which cannot, uh, cannot, entirely, be exchanged. Just an example. So in China, and for China, it has a sense, but it have, may have increasing costs on the we saw that the second meaning. kind of organization of governance, of global groups. The tenants, which has been very strongly pushed by the during covid times to have two different governance, the global governance, the global business and the China business. The just being in contact at the top level, top governance, global level. of course, during Covid it was a necessity, but, uh, increasingly. It is a, a attendance which remained after covid, which has another kind of price because how many times within global groups we are repeating, share the same values and the same culture. But in if actually you have two different businesses, which are practically, virtually in no contact, but at the top level on the midterm. On the midterm, we will have also corporate culture, problem also. Different kinds of compliance given this, relative separation of the two, uh, businesses, which is also related to a problem. So therefore, China, in China for China will remain a valid strategy, but we must be aware that it is related to costs. Additionally, in my final point, you remembered. De-risking, diversifying and so on. I think it's going to be attendance in the past. I remember, in my first answer, just an incremental strategy that's over. Now. You have to, to diversify your, your risk given also a geopolitical situation. You cannot. Ignore. because in the past earnings were reinvested immediately into Chinese business in China. For China. Now they are not withdrawn back home, but they are invested in other places, therefore also. So-called China plus one strategy. I think it is an approach. Which is not alternative to, it's a China plus one is not alternative to in China and for China, but it is in a way makes that more, more izing this, this approach of the past.

Francesca: 13:47

Thank you very much indeed. We will see then which kind of approach will gain more power in, in the coming years. Now talking more about. foreign direct investments, Mr. Rega Soni, do you think, and building on what you have just said, do you think that, China will still remain an attractive market for ambition companies, that are seeking global success in the medium and and long term? And if yes what are the country's unique opportunities that can be leveraged?

Bernardino: 14:20

I think that nevertheless, there will be scope for foreign companies to invest in China. But the point is, for which reasons? So, already from before the, the Covid, it was not for level of salaries, level of salaries in China. He's more or less Czech Republic, more or less. So there is no direct attraction anymore from this point of view, but we already discussed this point. But definitely sector wise, there might be, interest to continue investment one. First and foremost, I would say automotive sector. It is a sector where China has an advance in comparison to. All other countries in the world, batteries, as well, one indication, the, um, European automotive sector is producing its own cars in electric cars in China. That's very significant. Then the European Commission comes and says, ho, but this is heavily subsidized. Yes or not, this is going to be also very important. uh, indication we will have. During this year, but sector wise and where a higher level of development of products is involved, I think that China is very strong. Perhaps not in basic research, but definitely in the R&D in the D part of the thing. China is very strong. It depends. There is no unique answer, besides the size of the market which remains there, and I would say unique in the world. Then the answer about, uh, if to invest or not is a sector driven, uh, answer. And I provided an example with the automotive, but there are also other sectors which remain attractive for foreign investments.

Francesca: 16:10

to Mazo. Still to conclude building on what you have just said, do you have any key messages, especially for foreign entrepreneurs doing business? In and with China. In your opinion, what should they consider before entering the market or to kind of staying there?

Tommaso: 16:25

Yes, definitely be patient. consider what are the key advantages or, what the country itself can offer. And first and foremost, don't be scared. Or, I mean, as much as we had periods in which like companies thought like. I'm gonna go to China and I'm gonna make, billions in, in five days. And it was never the case because it was still a fast growing market, but a complicated one. Now it's not so fast growing anymore, it's still growing and it's still very complicated. So we don't need to run away, we just need to understand how, to do business. In a better way, and how to maximize every effort in a situation that is, has changed profoundly. But it's not like a, a lost hope. I mean, again, we are talking about a very relevant, country and a very relevant economy. I mean, when everybody was eager, maybe people were too eager. Now. Most people are scared. Let's try not to be so scared. Let's try to be rational and let's try to get the most out of it, especially because I know, that like we should avoid the, so-called escalation of commitment. But at the same time, we should not like waste all the efforts of decades of, of work and of investments.

Francesca: 17:48

Thank you very much. Absolutely important. Mr. Do you also have some messages to give to foreign entrepreneurs?

Bernardino: 17:57

Much has been said, so well, so I have, not much to add, if you are in China, you already know what we're going, what we're been discussing. Now the problem is that there are very few people, at the moment, and I think it's not going to be in increased from abroad. I'm saying. so if you have still the idea, which was never true of, the. Past, let's say, of 10 years ago, I go to China, I will make a, a huge profits with, uh, uh, small effort in very short time. Forget about China. It was not the case before. It is not going to be in the, in the future. But this incremental approach, as I mentioned, that was very present until shortly before the Covid, if you are thinking about, going, to China I think you miss, but must be aware that, the field is going to be bumpy, is not to be, going to be easy. You need a lot of additional knowledge. So in a world, be well advised, say look for advice. Those who have experience of that market will provide you with a map, uh, about how to deal in, in such a country which remains extremely. Interesting. I remember several times already, the sites or for other, or the level, simply the level of integration in, in global, value chains. But, be aware that, the field is not, is not easy, so be very well advised and there are people around which, who can provide you with, such an advice.

Francesca: 19:27

Perfect. Thank you very much for these wise, uh, final words. Thank you both for your valuable insights. You could definitely provide interesting, points of thoughts and, and Also to all of you, thank you for for listening. I. If you have any questions in the description section, you will find our contact information. We would be very happy to get in touch with you and also have an introduction call. You will also find the link to, to download our business guide, to familiarize yourself with some technical aspects of doing business in, uh, in the country. More episodes to come. So stay tuned and until then, take care. Thank you.