Why you can't afford to ignore China

China is a land of opportunity for UK businesses

According to the Organisation for Economic Co-operation and Development (OECD), China has undergone “one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years”.

Ten years of double-digit growth means China is set to be the world’s largest economy within two decades. A more liberal business and investment climate in China, including the country’s accession to the World Trade Organisation (WTO), coincided with better transport, communications and information technology.

As a result, China and Hong Kong’s vast industrial capacity is more open than ever to Western companies looking for cost-effective suppliers. But to view China and Hong Kong solely as a source of low-cost manufacturing greatly underestimates their potential. The next wave of growth will come from China’s internal market of 1.3 billion people.

“In the next few years, China's economy will shift away from growth based largely on exports and towards growth based on domestic demand,” says Ira Kalish from professional services firm Deloitte.

“Consumer-related industries, such as retailing, will be well positioned,” he continues. “Healthcare should also do well. In addition, as China moves up the value chain, more growth will come from services rather than the production of goods. Business services, travel and leisure, and retail financial services will all be growth sectors.”

This will bring additional opportunities for UK companies. In manufacturing, growth will come increasingly from more complex sectors, such as consumer electronics and pharmaceuticals, where local R&D expertise will be as important as labour productivity.

That expertise also lies behind a growing number of partnerships between Chinese and Western companies. China’s pharma-ceutical sector is growing by more than 15 per cent annually, according to estimates by AstraZeneca. The company achieved sales of US$328m in China in 2006, making it AstraZeneca’s third-largest market globally, after the US and Japan.

The company will invest in excess of US$100m in R&D in China over the next three years. “China will be one of the most advanced scientific research centres outside of the UK, Sweden and USA,” says CEO David Brennan.

The trend is similar in technology. In 2004, Chinese computer maker Lenovo provoked headlines when it emerged it was buying the personal computer division of IBM. In semiconductors, China’s share of the global market has gone from 5 per cent in 2001 to 22 per cent, according to Dr Jun Tan, president of China for semiconductor firm ARM.

But the greatest opportunity of all is set to come from selling goods, and especially services, in Hong Kong and China.

B&Q, a past winner of the Cathay Pacific Business Awards, estimates its target home improvement market is already worth £27bn and is growing fast. “As the emerging Chinese middle class becomes increasingly interested in improving their homes, we believe the future is very promising,” says Steve Gilman, CEO of B&Q Asia.

With 60 stores in Hong Kong and China, but just 2 per cent of the market, the real growth has yet to come for B&Q and other firms putting China at the heart of their future strategy.