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Trade with China
Feature: 3/10/2004

Report on joint director-e and Emcat seminar

The recent director-e and Emcat co-sponsored seminar ‘Trade with China’ proved a huge success with its high-level audience at Derby’s Pride Park.

Examining all aspects of doing business with China, delegates were presented with what amounted to a road map for success when working with China in the post-quota era that begins next year.

A team of expert and erudite speakers covered everything from legal matters to joint ventures and production opportunities to ethical considerations.

Quota removal and China
Opening the seminar, Grant Mosedale of the DTI began his presentation by explaining the background to the abolition of quotas on 1 January 2005. “This will be the first time that there has been a truly liberalised world trade regime since 1959”, he said.

He said that China, as a full member of the WTO would be able to export freely after that date. “From the DTI point of view we agreed to remove all quotas from China and they will remove their import restrictions”, he said.

He commented that China is the main supplier to the EU – 16 percent by value, 14 percent by volume. In monetary terms this meant that the EU exports €650 million to China, while China exports €11 billion to the EU.

Grant Mosedale referred to an anomaly between the DTI and the EU over the date of quota removal. “In March the DTI issued a notice to manufacturers in which we said that any goods arriving in the UK from China after 1 January will be quota free”, he said.

“But the EC has said anything shipped from China in 2004 and arriving in 2005 will be subject to quota”, he told the audience. The discrepancy has yet to be resolved.

“Smaller countries have been asking for an extension of quotas on Chinese exports, but the UK, EU and US have said no, because to grant these would be like opening up a Pandora’s Box”, he said.

He concluded his presentation by describing what measures still exist to protect countries from damage from imports. “For China we have two specific measures”, he said. One allows the re-introduction of quotas until 2008; the other is a product specific mechanism that runs from 2008 to 2013, with quotas as a last resort.

“The EC has undertaken not to use quota controls during the period. In the UK we will look at each case on its merits, but the UK is traditionally against safeguards”, Grant Mosedale said.

Doing business overseas
John Wilson, senior international trade advisor at UK Trade and Investment, discussed what UK companies could do to develop business overseas, including China.

“My role is to explore ways that companies can export indirectly to overseas countries and one of these ways is through joint ventures”, he said, giving the following reasons to consider joint ventures – size, skills, R&D, production, marketing, economies of scale, protectionist barriers, more control, better technology protection, and more market share more quickly.

He said companies should take into consideration the size of market and its growth potential, competition, risk, cost factors, distribution channels and local media.

Suggesting ways of achieving their aims, he said companies should appoint one person in overall charge of a joint venture and provide full company backing; use all possible internal and external resources; don’t assume business is done the same way overseas as it is in the UK; accept that you need help; go and see for yourself.

John Wilson said it was vital to understand the legal system and financial arrangements in the country and to be aware of cultural issues and employment practices.

He said companies should develop an achievable business plan and business strategy and find local banking, legal and accountancy organisations with links to the UK.

“Remember it’s as different for them as it is for you”, he stressed. “Ensure that in any joint venture there is benefit for both sides; have an exit strategy worked out; and have a joint venture charter as well as a joint venture agreement”.

John Wilson listed some alternatives to a joint venture – including dealing on a customer/supplier basis; manufacturing under licence; franchising; selling technology; setting up a branch or company in the country; or buying a local company.

“I leave you with one final thought”, John Wilson said. “Be flexible”.

A view of China
John Smith, chairman of international events at The Textile Institute and chairman of JTS Consultants, presented a visual impression of China to the seminar, using photographs taken during a recent TI visit.

Wide ranging in content, this included images of the country itself as well as pictures taken inside a number of textile factories.

He asked his audience: “Are you ready? Think of the opportunities, not just the threats. China is moving very fast and by comparison the UK is crawling – but other EU countries are worse”, he said.

Stressing the importance of textiles to China, he said a new University had been established in Shanghai. It had 100,000 students – and 25,000 of them were textile students.

“There are opportunities for the West in textile design”, John Smith said. “Quality is the key to success and China’s philosophy is very simple: prevent problems, don’t correct mistakes – get it right first time”.

He underlined some of the points made by the previous speaker and said: “China is changing, and changing rapidly”. Even so, referring to internal logistics, he said “Forty percent of goods are transported by canal and what lorries are used are old”.

He concluded: “So, are you ready? Doing nothing is not an option”.

Challenge for SMEs
China Link, based in Liverpool, is a business link between Britain and China with a Scouse accent, said Dr Kegang Wu, director of China Link.

“My presentation is on the challenge facing SMEs in China”, he said, as he asked his audience three simple questions. “How many of you here are already trading with China?” About half the audience raised their hands. “How many are manufacturing in China?” About a dozen responded in the affirmative. “And how many are SMEs?” Almost everyone present.

“There are two problems. Why are there so few UK brand names in China? And where are the British manufacturers in China? The UK is well down the list”, he said.

Dr Kegang Wu asked one more question. “How can UK companies set up in China without compromising their position in the UK?”

He presented the audience with three scenarios: originally it was UK companies trading through the UK; then it changed to Chinese companies making for UK and other western companies; now it is Chinese companies using their increasing self-capacity for Internet growth.

As an example of what an SME can achieve, he described a small company that had set up a joint venture in China with the help of China Link. That company had just been voted the fastest growing in the top 100 SMEs.

“There are two thought I would like to put to you”, Dr Kegang Wu said. “The UK is very strong in supply chains and China Link, as an independent agency, would be very happy to work with any company in this room”.

A manufacturing case study
To give delegates a practical example of what manufacturing in China entails, Deling Cheng, general manager of Nantong Honesty Industrial and Trading Company, described how his company works.

“We design, manufacture and deliver corporate wear, workwear and PPE garments in our 3,000 square feet factory, which is ISO 9000 certified”, said Deling Cheng. “We also make bespoke clothing and we employ 1,000 people”.

Stressing the importance of quality to the operation, he said: “We pay particular attention to fabric quality and we now source entirely in China. And all the fabrics we use meet all current international quality standards”.

Nantong Honesty works with DuPont, Invista, 3M and Ciba, as well as other international companies and its main customers are to be found in America and Australia – including American Uniform, Landau, Alsco and Yaka.

The European market is becoming increasingly important to the Chinese manufacturer and to strengthen this sector, Nantong Honesty opened a sales and marketing office in Derby in April of this year.

“I believe we can be a reliable supply chain partner to UK organisations”, Deling Cheng told the seminar.

Global sourcing is hard work
Expert advice and market information is vital to any company looking into the possibility of doing business in China and Alan Russell of Pera Neville Clark assessed what a firm needed to know before embarking on any project.

Pera runs its ‘information4innovation’ service from its headquarters in Melton Mowbray and has recently worked with M&S to implement a global sourcing policy that has transformed the way that the retailer works with its suppliers.

Alan Russell pointed out that global sourcing is not new – the Ford Motor Company started it at the beginning of the last century.

“The truth is, it’s hard work”, said Alan Russell. “As an example, Dyson vowed three years ago to keep his business in the UK, but in the end he had no choice. But crucially, when he moved his manufacturing abroad he retained ownership of the product.

“The key is that when we place a product in a country, we need to ask which is the best country in terms of raw materials, cost, quality, manufacturing facilities etc.

“But are we talking just about sourcing, or could we envisage opening up a market for our product in that country?” he asked. “So it’s vital to hold on to your product, differentiate it from the competition and keep control”.

Alan Russell said that five years ago, an overseas source was chosen solely on cost, but now there are many other factors to consider. “China is not the cheapest – Thailand is cheaper – but skills, quality and many other things come into it”, he said.

“That’s what makes it hard work, but it can be really positive”, he added, pointing out that lower level products had already moved overseas as far as manufacturing was concerned, and now higher level products are being outsourced.

“It’s not as simple as finding the right country, supplier, quality and delivery, you now have to think about ethics – and if you are an international brand then that is a real consideration”, Alan Russell said.

Legal aspects of business with China
The legal aspects of quota elimination are complex and crucial and one of the EU’s most experienced lawyers in the field is Vassiliki Avgoustidi, a partner in the Brussels law firm Gide Loyrette Nouel and a contributor to director-e on textile and manufacturing legal matters.

Her presentation to the seminar looked at two aspects: “what can you do to protect your business from a Chinese upsurge? And what can you do to work with China?”

“China is the second largest trading partner of the EU after the US and is the largest single supplier of textiles and clothing to the EU”, Vassiliki said. “The elimination of quotas is good news for China, but it could face action from the US and EU.

“It must also take into consideration the EU’s Generalised System of Preferences (GSP). It’s most likely that China will lose its GSP benefits from next January”.

Vassiliki Avgoustidi suggested that the UK and EU should monitor the Chinese market and its production conditions – and use trade Defence Instruments should it become necessary.

“Currently action is being taken against China on anti-dumping charges”, she said. “Dumping is when export prices are below domestic prices in the exporting country or when goods are sold at5 a loss.

“At present, the EU has declined to give China Market Economy Status and this could impact on China’s defence of anti-dumping charges.

She explained what defence measures could be taken, if it became necessary.

“Countervailing Duties can be applied when there’s a subsidy on exports”, Vassiliki said. “And Safeguard Measures can be taken if the industry in the UK, for example, feels that there’s a surge in exports from China causing hurt and damage to the domestic industry.

Safeguard Measures cannot be taken directly by the industry, but only through a Member State applying to the EC”, she added.

For EU companies manufacturing in China, there is the Trade Barrier Regulation. “This ensures that technical regulations in a country – in this case China – don’t act as a barrier to manufacturing in that country”.

Vassiliki Avgoustidi explained the business regulations applying to the setting up of a business, whether through direct investment, joint venture, or wholly foreign owned. She also covered the workings of the tax laws in China – their advantages and disadvantages – and detailed what tax preferences are available.

Vassiliki Avgoustidi made a highly complex subject appear eminently clear and intelligible in a paper that set out the legal situation for defending the UK’s domestic market and for opening up the Chinese market to British business.

Systems to make it work
In the final presentation at the director-e and Emcat seminar, Martin Rath, a founding director of Datel, put the case for having systems in place to make a manufacturing business with China – or any other country – work.

Describing Datel’s management information systems, he said: “It’s important to have the right systems in place to enable you to achieve the necessary lead times and profit margins.

“Those systems provide all the back up you need for global communication, e-commerce and the benefits of integration into the back end of your business.

“The key is integration – with your own internal systems and your supply chains”, Martin Rath emphasised.

To demonstrate how this works in practice, he detailed case histories for Rainbow Corporatewear and Burberry, showing how Datel had set up the relevant software for complex supply change programmes.

Martin Rath concluded his presentation with a series of key elements that companies should put into place.

“Integrate your base systems and ensure you have a working internal infrastructure”, he said. “Decide on a business process and ensure that your supplier buys in to the system; and set up a browser interface.

“One final piece of advice”, Martin said. “Start small . . . “

This is just the beginning
Concluding the event, director-e founder-director Yvette Ashby said: “This seminar was conceived because we were continually receiving e-mails asking what was going to happen with China in 2005.

“So we got together with Emcat to work out the details and I hope we have managed to answer some of the questions you have been asking”.

But, as Yvette pointed out: “It doesn’t end here. This is just the beginning: 2005 isn’t going to go away and we, together with the speakers you have heard today, can help”.

Confirming the success of the event, one of the most frequently voiced requests to Yvette from delegates in the immediate aftermath of the seminar was: “When are you going to do another one?”

"I would like to congratulate EMCAT and director-e for responding efficiently to the growing demand of the UK textile and clothing industry for complete and responsible consultation in trade matters. The organisation of the seminar was impeccable. Moreover, all the delegates were business people who already face the challenge of trading with China and who had a lot of interesting questions in regards to their legal protection both in EU as well as in China".

Vassiliki Avgoustidi, Associate Lawyer , Gide Loyrette Nouel
Author: John Gibbon
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