• The Chinese government is heavily promoting entrepreneurship and there is a natural drive towards innovation as the country’s economy moves into a new phase.
• China is quickly becoming known for high-quality innovation, and the creation of new ideas and technology out of what already exists.
• China’s history as a manufacturer of the world’s goods has allowed the country to expand on its history as a producer of low quality products made with cheap labour towards more specialised high-value products.

“It is easier to find skilled talent in China than anywhere else in the world. The quality of software engineers is equal to anywhere else, but the cost is one-third the price in China, compared to hiring staff in Silicon Valley.” – Derrick Xiong

Derrick Xiong from Ehang Inc. began his presentation at the Tripartite Economic Summit with an old Chinese saying – “timing, location, and people”.

Ehang Inc. launched the world’s first autonomous air vehicle earlier this year. The mega-drone can carry an individual for about 30 kilometres. Recently Ehang Inc. made an announcement with US company United Therapeutic – a public company with a US$5 billion valuation. The two companies are working together to develop a new system that will transport human organs for transplant patients.

Xiong referred back to the Chinese saying. “It is lucky,” he said, “that China has managed to tie all these things together.” Seemingly by sheer luck, China has got the mix of timing, location, and people right, which has allowed companies like Ehang Inc. to be part of the rapidly growing drone industry in China – the “new era of made in China”.

Timing

There is a national drive towards innovation in China and the Chinese government is heavily promoting entrepreneurship as the country’s economy moves into a new phase.

There are many startups emerging in China every day, and plenty of capital flowing around the China market to fund them. “It is very common now to see graduates exploring innovation as an opportunity,” said Xiong. “The most exciting part is that it’s no longer the best option for graduates to go and work in a big cooperation. Choosing an alternative route and working in a start-up or founding a company has become a great opportunity.”

Xiong admitted that when people think of ‘made in China’, they tend to think of low-quality products made with cheap labour. However, things are changing rapidly. The history of ‘made in China’ has given China a strong base to grow from, and allowed them to expand on their existing manufacturing facilities and skills.

Location

Xiong estimates that the amount of time his company spent prototyping their drones would be only one-third of the time spent by other drone companies based outside China.

“This is China’s big advantage,” he said. Companies in France and the United States are announcing they will shut down their consumer drone business, which Xiong attributes to how hard it has become to catch up and compete with the rapid pace of development in China.

People

Over the past decade, mobile internet has changed the way people live, work, connect, and trade. This hasn’t been ignored by China, and along with the many apps being created and launched from there, a huge pool and demand for talented software creators has been established.

Although hardware companies like Ehang Inc. focus on hardware, they also need to utilise the skills of software engineers. “It is easier to find skilled talent in China than anywhere else in the world,” said Xiong. “The quality of software engineers is equal to anywhere else, but the cost is one-third the price in China, compared to hiring staff in Silicon Valley.”

In the end, Xiong said, there will be a new definition for ‘made in China’. It will be about high-quality innovation, and the creation of new ideas and technology out of what already exists. “China’s combination of timing, location, and people will transform the way we all live in the world.”

Tax and other changes have been made, but greater affluence and the rapid rise of e-commerce create more opportunities for New Zealand exporters to China, writes Tim McCready.

It used to be said that the biggest challenges to doing business in China were language, culture, and the sheer scale of the market. Now, throw in the rapid pace of change.

Over the past month, a raft of changes to regulations and tax have been introduced by the Chinese government. E-commerce is also evolving at a pace never seen before, and New Zealand’s access to online channels have never been easier.

Though some of these changes are likely to cause price increases, the premium customers New Zealand exporters target tend to make shopping decisions far less based on price and are prepared to pay for the safety and reassurance that comes with the New Zealand brand.

Research by The Boston Consulting Group and AliResearch, the research arm of Chinese e-commerce giant Alibaba, found the increasingly powerful role of e-commerce is rapidly reshaping China’s economy and consumer market.

China has now overtaken the United States to become the world’s largest e-commerce market. In 2010, online transactions made up only 3 per cent of Chinese private consumption. Since then, the number of online shoppers has nearly tripled, with online transactions now accounting for 9 per cent of private consumption.

This growth is expected to continue. China’s Ministry of Commerce expects the country’s cross border e-commerce trade to reach 6.5 trillion yuan (about NZ$1.5 trillion) this year.

Coupled with an increasing demand from Chinese consumers for quality and safe products, it is no surprise this transformation presents an enormous opportunity to New Zealand exporters.

The evolution of e-commerce products in China means that it has never been easier than now for exporters to take advantage of the platform.

This was highlighted last month during Prime Minister John Key’s visit to China. New Zealand Trade & Enterprise and Alibaba signed a memorandum of understanding aimed at developing opportunities for New Zealand businesses to enter China’s consumer market through e-commerce channels and potentially providing access to millions of new customers.

In 2014 New Zealand Post launched an online store for New Zealand products on Alibaba’s Tmall Global. Chinese banks operating in New Zealand also see the importance of e-commerce, and are beginning to introduce their own online shopping malls.

ICBC New Zealand, China Construction Bank, and Bank of China are all actively promoting their own e-platforms and e-commerce consulting services to their clients.

In the wake of the explosive growth of online shopping, China’s Ministry of Finance, the General Administration of Customs and the State Administration of Taxation introduced new tariffs on cross-border e-commerce, effective April 8, 2016.

Online purchases will no longer be eligible for the lower personal tax rate of 10 per cent on parcels worth less than 1000 yuan (NZ$224), or no tax on parcels worth less than 50 yuan (NZ$11.20). Instead, imported products purchased online will be treated as imported goods, and are required to include an 11.9 per cent tax.

Under the current system, many products have been entering China with minimal tax. Although some have reported this tax as a crackdown, others consider it the closing of a loophole in regulation.

Eliminating the tax advantage offshore sellers have over locals helps level the playing field, and makes up part of a pledge by the Chinese Government to protect domestic retailers.

On April 7 all major government bodies in China involved in food and drug control, customs and tax, and business trading, jointly published a cross-border e-commerce retail list of imported goods.

This so-called “positive list” outlines products that are allowed to enter the country via free trade zones. Running to 23 pages, the list initially included wine and infant formula, but omitted adult milk powder and long-life UHT milk – though it has since been revised to allow both.

In addition to the list of prescribed products, China has begun imposing tougher regulations on infant formula products sold online.

Forming part of China’s revision on food safety laws, all foreign infant formula companies will be required to apply for new product registration with the China Food and Drug Administration if they want to continue to sell through cross-border e-commerce platforms.

Companies have until January 1, 2018 to comply, but in the meantime can continue to sell without certification.

Speaking at The Global Food Forum held in Australia last month, Gary Helou, former managing director of Murray Goulburn (Australia’s largest processor of milk and largest exporter of processed food), said that although he is surprised at the “clunky way” regulatory changes are occurring in China, food companies must prepare themselves for more sudden regulatory changes.

Helou’s comments were made in light of media, stock market analysts and investors reacting quickly to the changes in China.

Company valuations – particularly those in the dairy or natural health sector – have recently climbed to new highs. This has been dubbed the “Blackmores effect” after its stock soared more than 500 per cent last year in response to the opportunity in China.

However, confusion over the impact regulatory changes on the bottom line of businesses has resulted in a sell-off in stocks.

Australian health supplements producer Blackmores fell as much as 19 per cent in one day. NZX-listed premium dairy and infant formula marketer, a2 Milk, fell 6.3 per cent.

“Daigou” is the Chinese term given to buying items overseas on behalf of others. Products are purchased by Chinese tourists, smuggled into the country through professional “personal shoppers” or bought through online channels – with international students often acting as the intermediary.

With prices of manuka honey running as high as 1789 renminbi (NZ$400) for a 500g jar in Shanghai, it is often much cheaper to buy products directly out of New Zealand.

Furthermore, there is still a deep concern in China about the safety of products – something that was already in place when the country experienced its melamine scandal a few years ago.

Instead, Chinese consumers seek out products directly from somewhere or somebody they trust.

The grey market is a multibillion-dollar business. It can be argued that daigou can help put innovative new products on the radar.

Some brands estimate daigou is responsible for a significant percentage of sales into China. Imported products can be personally promoted to friends and families, which is undeniably an excellent marketing method – particularly in China.

Recent changes, however, have seen authorities tighten up on the practice. A maximum value of 2000 yuan (NZ$450) per single cross-border transaction has been introduced, as well as an annual cap of 20,000 yuan (NZ$4500) per customer before paying an import duty.

To ensure this is monitored, logistics companies are requiring consumers to register online before they will deliver products.

Furthermore, Chinese authorities are tightening up on inspections of goods entering China through airports.

There have been reports of two-hour delays in Shanghai’s largest airport – and products being dumped at the border – as customs officials inspect luggage and charge tax on items worth more than 5000 yuan (NZ$1120).

China is evolving on a daily basis. Managing that, as well as the more traditional challenge of doing business in China is not easy. But greater affluence and the rapid rise of e-commerce is creating more opportunity than ever.

Assuming New Zealand companies continue to have patience, comply with changes as they occur, and get their products across the border, the opportunities in China for New Zealand businesses continue to be almost limitless.