What the great economy of China means for MENA

Boosting economic ties with China is becoming increasingly important for the UAE as it plans to diversify and grow. Panelists at the HSBC Global Connections - China MENA Forum discuss the challenges and prospects offered by the world’s fastest growing economy
By Elizabeth Broomhall
Sun 22 Apr 2012 11:21 AM

As it embarks on a period of economic growth and diversification, the UAE has a long list of targets. Building unrivalled malls and theme park attractions, increasing the number of visitors, and becoming the next Gulf financial and business hub, are but a few. Behind the scenes, the country is also embarking on a programme to boost trade and investment, eyeing strategic ties with key markets. As it looks towards future growth, such a programme will not only be key in helping it move away from oil, but will also be significant in boosting overall GDP.

Looking across the new strategic markets, probably the most important is China. As the world’s fastest growing major global economy and number-one exporter to the globe, the Asian country offers a wealth of opportunities to the emerging Gulf state, both as a standalone market for UAE firms and a hub for furthering their global trade.

Speaking at the HSBC Global Connections — China MENA Forum last week, which focused on MENA links with China, the UAE’s minister for higher education and scientific research HE Sheikh Nahyan Mubarak Al Nahyan said ties between China and the Middle East were becoming ever more important.

“China has got what we need, and we have what China needs,” he said, addressing delegates. “China needs oil to support its economic growth, and the Middle East needs Chinese markets for its products and investment. As China develops industries such as aerospace, power generation and automobiles, MENA countries will also need these products.”

Figures quoted by industry experts show that China now accounts for 35 percent of oil exports from the GCC, and that trade with the UAE is up 40 percent since 2010, reaching $32bn last year. By 2015, it is estimated that bilateral trade with China could exceed $100bn (AED367.31bn). At the same time, over 3,000 Chinese companies are now registered in the UAE, a number which is only set to grow as China’s business market develops and expands its reach.

Changes in China

Taking a closer look at China, industry experts say there are some changes and risks to bear in mind. The country, whilst going through a period of political change which could have a significant impact on its business environment, also seems to have experienced a slowdown in recent years, with economic growth falling from eight to 7.5 percent in 2011. Some experts argue that this shows a change in tactic rather than a slowdown, whilst others believe it is a sign of what’s to come. In the interim era of uncertainty, businesses are urged to move with caution.

“Growth projections have come down,” says Bruce Alter, head of trade at HSBC China and a panellist at the Global Connections event. “Exports have also decreased. Growth is still there but has come down from 40 percent to fifteen percent, which could be a concern. At the same time, political change is also about to take place, and there is the issue of RMB appreciation and depreciation. These things are very key right now, and they’re on everybody’s minds.”

On the plus side, Alter adds that there are several positive changes happening in China, including a move towards a more mature business market, the internationalisation of the Chinese currency and a growth in volumes of settlement of traditional trade flows in RMB. As ties between the Middle East and China increase, Dubai could well become an offshore trade centre for the Chinese currency as the government adopts a more liberal policy when it comes to the yuan, he says.

“While most flow has been via Hong Kong up until now, Singapore-China flow is now growing and London will also follow. Dubai could possibly one day be a RMB exchange centre like Hong Kong given its perfect geographical link between London and China.”

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Mergers and acquisitions activity is also increasing, he says, and should continue as part of China’s ‘going out’ strategy. “Not only does it facilitates market access for Chinese entities, but it also enables Chinese entrepreneurs to build up their international skills as well as even brush up on English,” he adds.

At the same time, panellists believe that China is producing more high-value products in the place of low-value items, with less goods such as textiles being manufactured in the country as it progresses through the economic cycle. It is also eyeing more domestic consumption, and is seeing the volume of imports rise quickly.

Doing business in China

On the topic of doing business in China, UAE-based companies who are already working in the country say it is one of their most valuable markets. In some cases, firms believe it has completely transformed their business and/or strongly boosted their overall revenues.

“We always knew China was important,” says Rami Ghandour, the executive director of UAE-based Metito Utilities Ltd, which specialises in water desalination and wastewater treatment. “It was the biggest market for pretty much everything in the world, and we knew we had to have a presence there.” Despite a rocky start in the early 90s when the company first ventured into the country, Ghandour says Metito did not give up. In 2008, it formed a joint venture partnership with a German company and re-entered the Asian market, with a view to tapping the high demand for utilities services there.

“We increased the number of plants from two to seven and now have 200 Chinese staff. There is still significant demand in China. For us we don’t view it as an export base but as a market which we need to be in to serve in a sustainable manner.”

Another regional firm, tyre manufacturer Al Dowobi Ltd, says it has a very different relationship with China, but one which is equally beneficial to business. “Before we moved to China, our business was constrained by the fact that our distribution was only in certain markets,” says the firm’s director Harjeev Kandhari. “We needed to go global, and we needed volume. China is the only place that can give you that.”

Rather than setting up a factory in China, Al Dowobi opted for contract manufacturing, which it says worked well. Not only has the company been able to expand into new geographical markets, but it has also been able to enter new product sectors. “It transformed our business and allowed us to become a global tyre player,” says Kandhari. “We now have a three percent market share in the UK that would not have been possible [without China], and we have also now have low cost Chinese-made products which have allowed us to go into segments we were not in before.”

Asked about the challenges of working in the country, both companies cite a changing attitude of Chinese workers and rising costs of doing business.

“I think it is a common misconception that China is a low-cost country,” Ghandour says. “It is moving up the value chain, the cost [of operating a company] is rising and price points are also increasing. Local competition is catching up. We are diversifying and trying to be ahead of the game, but the last thing we want is to be in a price war situation. That said, there is still phenomenal growth and demand, which is keeping everybody busy.”

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Kandhari adds that the expectations of the Chinese workforce are changing, with many demanding better working hours and pay packages. There are also occasions when employees don’t turn up for work, which can be challenging for companies where large numbers of staff abandon their posts.

A final challenge referred to by panellists was inflation in the country, dubbed as a “very big concern”. However, the Chinese government seemingly wants to keep control of inflation, and is doing everything in its power to check prices. As a result, lending costs seem to have come down in recent months, whilst there is now more liquidity in the market, experts say.

China’s move into Middle East

As for China’s move into the Middle East, experts say this is a natural trend, as Chinese companies seek to grow and expand outside of their home country. In the near future, the region is expected to see more Chinese companies and brands entering the market, not to mention a surge in the number of tourists from the country.

Panellist Dong Wu, the vice president of enterprise business for the Middle East at Huawei, said his company had entered the Middle East ten years ago, which proved difficult but ultimately valuable. Starting with just two or three people, the firm has now grown its Middle East operations to a massive 3,500 employees.

“We met with a lot of challenges,” he explains. “The first was to overcome the image of China, and the second was to manage such a big multi-national team. We also had a lot of challenges after the economic crisis.”

For some companies, difficulties stemmed from not researching the market properly, he adds. Products are often unsuitable for the climate and advertising campaigns neglect to appreciate the idiosyncrasies of the Arab world, such as right to left reading.

Separate is the growth of Chinese tourists. According to trade figures, approximately 25 percent of luxury goods in Dubai are purchased by Chinese customers, whilst figures from Dubai’s Department of Tourism and Commerce Marketing cite how more than 150,000 Chinese people visited the emirate in 2010, up 41 percent on 2009.

The flood of Chinese tourists to the Gulf country has also been noticed by Dubai Duty Free, where Chinese shoppers already rank alongside those from Russia and Europe as the company’s biggest spenders, and where cigarette brands from China represent around fourteen percent of DDF’s entire tobacco sales. Top-selling label Chungwa alone accounts for one tenth of tobacco revenues, DDF said, and drew in as much as AED15.9m in the first half of 2011. By 2015, China expects 100 million people to venture abroad, making it the world’s biggest outbound tourism market. Travel experts believe a mix of tour operators, iconic hotel chains, airlines and retailers are all in a position to profit.

“For us the Chinese market took us by surprise a few years ago,” says Bernard Creed, vice president of finance at DDF. “It’s a very important sector for us.”

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He adds that in a bid to capitalise on the high spending, DDF has begun hiring large numbers of Chinese staff and encouraging its non-Chinese employees to learn basic phrases in Chinese. It has also put up Chinese signage around the airport and now accepts the Chinese credit card UnionPay.

“Currently we have 229 staff who are Chinese, we’ve just recruited another 194 more, and at the end of this year we’ll add another 200,” Creed says. “So by the end of this year, out of our 4,000 staff, 650 will be Chinese.

“But hiring Chinese staff is becoming more and more difficult. Usually people come to Dubai for economic reasons, but the Chinese are coming here just to learn English, and they stay for two years and then they leave after that. The salaries being offered by duty free [firms] in China are also becoming more and more competitive and harder [to beat].”

Iyad Malas, the CEO of Majid Al Futtaim Holdings, agrees that for retailers and mall owners, the biggest hurdle in the future will be trying to cater for Chinese market. He says it is irrelevant as to whether the firm is domestic or global.

“Even a domestic company in the Gulf needs to consider China. We have seen a huge increase in tourists from China — for a business like ours that is extremely important.”

The Middle East is also likely to see an inflow of retail brands from the Asian state, he says, as well as more institutional investors spending on government securities.

“Over the next few years we should see what China comes up with and be in a position to attract brands. At the moment there is a comparatively small amount of Chinese banking influence, so there is also a need to build this up over the coming years.”

All in all, the panellists agreed that China is becoming increasingly important, and that the Middle East needs to work hard to accommodate this rise if it wants to bear witness to any return. Not only will opportunities in the Asia Pacific begin to grow, but those in our own markets could also see a turn for the better.

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