The Abacus

Ample Opportunities with Challenges for Australian Businesses in China

By: KPMG
07-11-2018

7 November 2018

Two-thirds of Australian businesses operating in China plan to increase their investments in China, even while navigating a raft of shifting market challenges, according to the 2018 Doing Business in China report arising from a recent survey of members from AustCham China and the Australia China Business Council (ACBC). 

The report, compiled by the University of Melbourne and with the support of KPMG Australia, shows an encouraging level of optimism despite new challenges which have emerged. The survey indicates that companies are overall expansionary, though future success is conditional upon the ability for taking long term perspectives while displaying short term agility in China’s rapidly evolving market.

Key findings of the research include:

  • As well as two thirds of companies continuing to increase their investments in China, 60 percent are expecting to increase their headcount in the near term
  • Profitability remains strong as does the outlook for the next two years with less than 20 percent of respondents having a negative outlook
  • Key growth opportunities identified were the rise of the middle class, sustained economic growth and the Belt and Road Initiative. 
  • Just under half of respondents have seen an increase in attention or engagement by Chinese authorities, as China remains a challenging place for 72 percent of respondents to conduct their business
  • 83 percent of respondents flagged human resources a top cost concern when doing business in or with China
  • Tensions in Sino-Australian relations emerged as the largest risk going forward, with 75 percent believing media reporting had an adverse effect on relations and over 50 percent indicating their business had been negatively affected. 28 percent said that the US/China trade sanctions have negatively impacted their business with only 12 percent saying it has had a positive impact.
  • 66 percent of businesses believe that the China Australia Free Trade Agreement (ChAFTA) has had a positive impact on Australian businesses in China.
     

China's business climate

One year on from the inaugural Doing Business in China survey, two way trade between Australia and China is at record levels and, in dollar value, China is now two and a half times as large an export destination for Australia as the next largest, Japan. While exports of minerals remain a significant cornerstone of Australia’s export earnings, Australian service exports to China have grown at 15 percent per annum.

There is a notable increase in the rating of China being difficult for doing business (72 percent). There remains a bias that the business environment in China is challenging. However, education and resources continue to be among the sectors that consider doing business to be easier. In terms of profitability, more than two thirds of respondents reported being profitable or breaking even. Education and finance appear to be the most profitable sectors, with healthcare showing mixed results.

Tensions in Sino-Australian relations emerged as the largest risk that businesses faced in China, followed by the risk from an overall Chinese economic slowdown and increased protectionism, then rising labour costs. Almost a third reported a negative impact as collateral effects from the bilateral US-China trade sanctions. Just under a half of respondents have seen an increase in attention by Chinese authorities. Respondents reporting rising operational costs as a top concern.

Vaughn Barber, Chair of AustCham Beijing said: “The results of this survey show that Australian companies doing business in and with China have a positive view about the opportunities and are planning to increase their investments in China to capture them. Almost half the respondents reported an improvement in financial performance in China this year compared with last, with a further 27 percent expecting comparable profitability, suggesting that Australian companies are adapting to changes in the business environment and managing the impacts of emerging risks.”

Investment environment

For Australian companies currently operating in China, the country is a major focus of their investments globally. In fact 81 percent indicate that it is in their top three priorities, with just under half (45 percent) stating that China was their top priority. Of the 66 percent of companies increasing their investment in China, the great majority (75 percent) are doing so to prepare for future growth opportunities. This will translate in increased hiring, with 60 percent of businesses in China expecting to increase headcount.

Despite the vote of confidence in the future of the Chinese market, changed marked demands, unclear laws, rising labour costs and market access are still of concern. Local partner requirements have dropped significantly as a primary concern.

Conditions in China’s inbound investment environment have stabilised, with 39 percent of businesses seeing no change; 37 percent seeing improvement; while 24 percent considered the environment had deteriorated.

John Brumby, National President of ACBC commented: “Many Australian businesses are waking up to the fact that no other market compares now, or in the future to the opportunity of China. It’s vital for companies looking to enter China to understand it is a fast changing and highly competitive market – with many cultural, regulatory, political and environmental factors to consider. To succeed in China, Australian companies must see China as a strategic long-term priority, dedicate appropriate senior resources and invest with a medium to long-term view.”

Economic and policy

The report shows that, in the minds of Australian businesses, there was a significant reshuffling of risks since 2017. Low consumer demand has risen to be the highest risk, followed by new asset bubbles and insufficient government policy support having much higher priorities. Increased economic volatility is no longer viewed as the highest risk by Australian companies operating abroad. Significant drops in perceived risk were recorded in geopolitical instability, overcapacity in certain industries and debt in the public sector.

Two-thirds of surveyed businesses were positive about profitability potential for domestic market growth in China. Key opportunities remain the rise of middle class and sustained economic growth. Also notable was that half of respondents ranked the Belt & Road Initiative as either the first or second highest business opportunity.

Professor Paul Kofman, Sidney Myer Chair of Commerce and Dean, Faculty of Business and Economics, The University of Melbourne, said: “China’s real GDP growth may have tapered from 7.8 percent in 2013 to an anticipated 6.6 percent in 2018, but the slowdown is quite moderate and seems carefully managed to control domestic economic policy variables - in particular inflation and unemployment. That evolution of the economy suits China’s trading partners, by avoiding speculative bubbles and trade flow volatility.”

Bilateral Relations

Over 80 percent of companies believe the Australia-China relationship has an impact on business. Tellingly, 56 percent believe that the recent turbulence has had a direct negative impact on their business. 75 percent of companies believe that media reporting has had an adverse effect on bilateral relations, and over half of Australian companies consider there to be a negative impact from that reporting on their business. These effects have been compounded by the negative collateral effects on Sino-US trade disputes. The threat to free trade undermines business confidence in further trade liberalisation in China.

The results show continued optimism about the potential benefits of the China-Australia Free Trade Agreement (ChAFTA), with 57 percent of respondents citing a positive impact on their own business. Most Australian businesses (84 percent) said that bilateral relations had a strong or moderate impact on trade between to the two countries, while just over half (54 percent) said that this impact was negatively affecting their business.

Doug Ferguson, Partner-in-Charge, Asia and International Markets, KPMG Australia commented: “The past year has seen much public debate on the impact of bilateral relations between Australia and China. We should pay close attention to the opinions of Australian business people leading companies in rapidly changing and challenging Chinese markets.”

“To them, stable diplomatic relations between Australia and China and a balanced public debate are critical factors that directly impact their operating environment. Fortunately, in recent months we are seeing encouraging signals of improved relations, with this week’s commercial activities at CIIE in Shanghai an important step forward.”

About the survey

The 2018 Doing Business in China report follows the survey of members of the China-Australia Chamber of Commerce (AustCham) and the Australian China Business Council (ACBC) and was conducted in Q3 2018. The respondents comprised Australian businesses operating in or doing business with China and responses were received from 165 companies across a range of sectors.

The report is a joint research initiative of AustCham China, Australia China Business Council, KPMG Australia and the University of Melbourne.

To access the report, please click here

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