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Challenging South Australia’s Myths About China Key Conclusions from the Joint Research Project ‘White Paper’: “Business Engagement with China: A Strategy for South Australia’s Future?” 19 April 2011 Glen B. Wheatley, Best Solutions International Pty Ltd

Challenging South Australian Myths about China - Engaging with the Rising Economic Power

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1. ChallengingSouth Australias MythsAbout ChinaKey Conclusions from the Joint Research ProjectWhite Paper: Business Engagement with China:A Strategy for South Australias Future?19 April 2011Glen B. Wheatley, Best Solutions International Pty Ltd 2. Notes& Appreciation The Australian Bureau of Statistics (ABS) was a key data source Unfortunately the ABS cannot supply detailedstatistics for service exports and imports Goods which either departed or arrived via another state are notincluded, eg. goods destined for SA may be in NSW statistics Special thanks for their support Education Adelaide South Australian Wine Industry Association South Australian Tourism Commission South Australian Chamber of Mining and Energy Jim Wilson, Glen Stafford, Annette Wheatley & Geoff Upton 3. Key Conclusions Over 4,500 jobs in SA are dependent on China exports,mainly in mining, education & wine China is South Australias largest trading partner Top four exports: mining ($833 M), education ($328 M), wool ($69 M) & wine ($66 M) Industry leaders see Chinas importance growing,but are concerned about the future Position is fragile without strategic approach and lack of coordinated policy formulation Need to increase the value-add of SA exports Traditional manufacturing must adapt as the world globalises Without a cooperative and strategic approach,SA will become a has been with China SA as a small state can only compete on the world stage with unique value-add Together we can be powerful: SA with resources & technology; China with capital & markets 4. Myth 1: SA Buys MoreFrom China Than it SellsSince 2005 we have sold more than we have bought2005 2006 2007 2008 20091,8001,6001,4001,2001,0008006004002000Imports 624 773 1,003 1,160 994Exports 735 768 1,012 1,269 1,544SA Goods Exports 2009Total: $ 8,318 MillionSA Goods & Services Trade with Chinain M $Sources: 5368.0 International Trade in Goods andServices, Australia, Table 36d Merchandise Exports& Table 37d Merchandise Imports; ABS custom fromMay 2010; & calculations by the author 5. Myth 2: China is a Threat to SAChina trade is increasing net employment in SAJob Count 2009 All Industries Wages Earned 2009 All Industries in M$Net Positive Effect of China Trade for SA in 2009Best Case: 4,902 jobs = $ 320 Million in wages = $ 84 M in payroll taxesWorst Case: 3,293 jobs = $ 234 Million in wages = $62 M in payroll taxesApproach: Total export/import per sector divided by the average revenue per employee. Author groupedimports into those with viable local (SA/AUS) producer and those without to determine total importswhich might be replacing local jobs.Sources: ABS 6302.0 Average Weekly Earnings, Australia, TABLE 10I. Average Weekly Earnings,Industry; Series 81550DO001-200809 Australian Industry 08-09, ABS custom from May 2010; &calculations by the author 6. Myth 3: China is a Cheap Mass MarketChina has changed enormously in the last thirty years 7. Myth 3: China is a Cheap Mass Market, cont.Chinas consumer spending has changed greatly since the 70sSource: China's luxury boom - The Middle Blingdom,The Economist, 17 February 2011 . Also see points belowAustralian Wine Exports 2008Total value and average per litre pricesSource: AWBC - Wine Export Approval Report, Dec. '08Ask a well-heeled Chinese lady about her new handbag and she is quite likely topoint out that she bought it in Paris. This tells you not only that she is rich enough totravel, but also that the bag is genuine.Including Chinese purchases outside China (55%!), the nations share of the globalluxury market will triple, to 44%, by 2020 8. Myth 4: Communicatingwith Chinese is EasyCross-cultural communication can be challengingSurvey respondents whofound communicating withthe following nationalitiesdifficult or very difficultSource: Joint Research Report online survey,October-November 2010, total of 51 respondentsPoor preparation could cost SA$53 Million annuallyApproach: Total SA exports and imports multiplied by potentialefficiency increase due to better cross-cultural and languagepreparation. Similarly lost time and energy due tomisunderstandings assumed to be 2 workdays per year. 9. Myth 5: SA has a Clear China StrategyCollectively, we could be better in: Analysing, interpreting & planningwe have had insufficient transparent information and interpretation Setting China as a priority Coordinating our efforts betweencompanies, industry groups & government Identifying our true strengths and highest value-addand taking a sustainable approach to business Formulating state and national policy to supportour shared goals & strategy 10. Investing in Our Future with ChinaDo we just milk the cow or do we invest in its health?Estimated Net Return from2009 SA Exports to ChinaTotal: $200 MSuggested Re-Investmentof Part of Return in M$Suggested Investments in SAs China FutureCross-cultural & language training, market analysis & strategy,manufacturing & service innovation,entrepreneurship & investment attraction, communication & promotionApproach: Total calculatory wages multiplied by an average 25% income tax (15% forsuperannuation payments). Corporate profits were assumed to be 7.5% of revenue,which was then taxed at 30%. 11. Learn From the Fable ofFred the Manufacturer Perfect World of Oz (?) Fred makes toasters in his company Toastmasters He is happy that the high walls around Oz protect him Life is easy without much competitive pressure Threat Looms from Overseas Somebody in Emerald City lets in toasters with the sticker made in China The toasters are OK, but Fred knows his are better and continues his ways Fred notices that sales are dropping, blames the Chinese, but continues his ways Generation V-A (Value-Add) Enters Despite Freds protests, his son Frank learns Chinese & goes on an exchange program Frank is modern and develops a really smart new toaster with a cool design Fred is worried about the raw material and assembly costs of the new toaster F&F Focus on Core Strengths Frank imports the commodity bits from China but keeps the brain of the toaster in Oz F&F listen to their customers and do smart marketing, so sales boom F&F start exporting, becoming fans of globalisation F&F invest more & more in R&D, always introducing the next best kitchen gadget Toastmasters becomes the world standard and is now sold in 30 countries 12. Silly Story?Think Again Its Just like Breville!Development of Underlying Earnings* at HWI/Breville in % of Revenue16%14%12%10%8%6%4%2%0%HWI Chairman, June 2005:PI was aware that significantchange was needed and inevitable....HWI will emerge as a very strongglobal participant in our industry..."FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 HY11*Underlying Earnings before interest, tax, depreciation & amortisation (Underlying EBITDA)Sources: HWI/Breville Group Annual Reports 2001 to 2010 and Breville Half Year Results toDecember 2010.Breville Chairman, June 2010:"...underlying and reported profit after tax for theyearPincreasing by 65% and 92.1% respectively.The progress achievedPre-affirms the group's strategyof focusing on the development of innovative productsand leveraging those products across multiplegeographies. 13. So What CanEach of Us Do? Increase your knowledge about China and encouragethose around you to do the same Ask yourself "How could China's development affect meand how can I constructively become engaged? Share & discuss the White Paper and this presentationwith people around you Ask your leader What is our China strategy?" Find out for yourself: Speak with Chinese here in SAor travel to China Build up a China-focused team in your organisation andconstantly increase its understanding of China Take an active role in the interface between SA & Chinaby joining ACBC and similar groups 14. Thank You for Your Attention!Please feel free to approach us with comments, questions or ideas!Confucius Institute at the University of AdelaideAnnette Wheatley, Business Program ManagerT: 8303 4798E: [email protected] China Business Council (SA)Sean Keenihan, PresidentT: 8223 6808E: [email protected] Solutions International Pty LtdGlen B. Wheatley, DirectorT: 8338 6299E: [email protected]