How boards can plan for geopolitical uncertainty

Thursday, 01 April 2021


    Australian exporters are taking positive steps to mitigate risks and maximise opportunities in the trade war with China, writes Adam Courtenay.

    There has been a nasty pettiness about coverage of Australia-Chinese relations over the past six months, which belies the true state of business affairs between the two countries. Subjected to lurid headlines, many may have thought cordial relations between the two countries might never return — stories of insults flying via Twitter, an image sent over diplomatic channels of an Australian soldier about to cut a child’s throat; flailing lobsters dying on the tarmac in Shanghai; and ministerial phone calls snubbed by their Chinese counterparts.

    And yet amid the media’s obsession with the tariffs and bans placed on primary industries such as timber, coal, lobsters, wine and barley, the good news has sometimes seeped through, albeit reticently — namely that exports to China, as a share of total exports, have never been higher.

    Just under 40 per cent of the dollar value of all goods exported by Australia went to China last year. Despite the trade imbroglio, this was a rise in percentage terms on the previous year. Australian Bureau of Statistics (ABS) numbers show the value of merchandise exports to the Chinese market totalled $150b for 2019–20, dwarfing the next largest export destination, Japan.

    Of course, there is no getting away from reality: if iron ore exports to China were stripped out, Australian trade to China would have markedly decreased from the previous year. But what a difference a month makes. In December, the Australian goods trade surplus of $9b was up $7.4b on November, according to the ABS, which noted, “Exports of metalliferous ores and cereals are the strongest in history, resulting in the fourth highest goods trade surplus on record”.

    By the numbers

    $2.9b The total export figure for Australia’s wine industry. China accounts for about $1.2b of that

    $500m Estimated annual loss of the Chinese market to the Australian barley industry

    33% of Australian wool products go to China

    40% of the dollar value of all goods exported by Australia went to China last year

    Source: Australian Bureau of Statistics

    But when the January figures were published in late February, the tune was less enthusiastic. Exports had dropped by nine per cent ($3b) driven by a 10 per cent ($1.5b) decline in metalliferous ores. But it’s all relative. “Despite the decline, exports of metalliferous ores are the second highest on record behind December 2020,” the ABS said.

    Iron ore does not tell the full story. The Chinese still need other things from us. The Department of Foreign affairs and Trade (DFAT) was trumpeting the news in January that China would raise its import quota on Australian wool for 2021.

    “Australian wool producers are gaining increased access to China through the China-Australia Free Trade Agreement,” DFAT proudly stated. China, which takes a third of Australia’s wool exports, will raise the duty-free quota from 36,465 tonnes last year to 38,288 tonnes in 2021.

    Mitchell Taylor FAICD, CEO of South Australian Clare Valley winery Taylors Wines, knows there will eventually be a thawing of relations, but it will take time. “They love Australian wine, and they are in love with the premium product — the best we have to offer,” he says. China is a new market without old-world affectations or biases, he says. “The Chinese know the best quality when they taste it.”

    But this is not a blip, he warns. “I wear another hat as a marketing director for our trade association, Wine Australia. This is a crisis for the industry and will probably last for at least another five years.”

    CBH Group, Australia’s largest exporter of grains, is similarly hunkering down for the long term. “It’s hard to say how long this will last,” says Jimmy Wilson, CBH chief executive. “But we are prepared that this will take time to resolve.”

    Mike Henry, CEO of BHP, has also intimated this is a problem for the coal industry for the long term. “We’re certainly not banking on any near-term resetting of that [China’s] policy,” he said in February.

    When the Chinese slapped a tariff on Australian wine, Taylor immediately intercepted several containers of wine en route to China at Singapore and returned them home. The cost, plus re-labeling and re-packaging, was not negligible.

    Taylors had been marketing to high-end Chinese businessmen. Its best wines such as the Legacy fetched up to $1000 a bottle. With the new Chinese duties on wine ranging from 107 per cent to 212 per cent, that same bottle of wine is now virtually unaffordable, at around $3000.

    Wine is not like grain, which farmers can choose to grow in any given year, according to demand. Production has to be planned over at least a five-year period, and the Chinese crackdown will have a deleterious effect on the company’s future earnings. Taylor estimates a reduction in turnover at his winery of 10–15 per cent next year, which he says could translate to anything from $500,000 to $1m off the company’s bottom line. “We had anticipated growth on the back of China sales to rise fourfold over the next five years. We don’t any more.”

    Time will tell

    Nobody is suggesting that China’s decision to impose tariffs and restrictions on important Australian exports is a fair and justifiable one — nor that Australian political leaders have not shown the necessary caution in dealing intelligently with macro political issues that divide the two countries. None of the affected industries are implicated in the political disputes and most have always enjoyed strong connections with their Chinese distributors.

    “I’ve heard talk about the Chinese putting tariffs on bananas from the Philippines, on Norwegian salmon and on Japanese rare earth materials,” says Professor James Laurenceson, who heads the Australia-China Relations Institute at the University of Technology Sydney. “But nothing comes close to this. No other country has experienced this degree of economic punishment from China, ever.”

    The most optimistic are saying this is just a shot across the bows, albeit a salvo that has shaken the ship. Yet Australia and China have not severed formal trade ties. The two countries still have a free trade agreement in place. The most valuable trade relationships have not been affected. Iron ore exports to China, as evidenced in the ABS figures, remain strong. Dairy exports have been unaffected. Wool exports are up and there is no indication that when the pandemic abates, China will retaliate with bans on tourism or higher education.

    Laurenceson believes the Chinese will ultimately lose most out of this impasse, because it has forced Australian commodities exporters away from their China addiction and back into the wider world.

    “Aussie companies have been pretty effective at handling this shock — they’re not dismissing it, and they’re looking at new markets, probably something they should have been doing well before,” he says. “When it comes to beef, barley and coal, all the numbers suggest they’re playing successfully in other markets. China’s reputation will take a massive hit from this — and not just here. Other countries, looking at this, will jack up their risk premiums when they’re dealing with the Chinese.”

    While much of the media talk has been negative, Stuart Crockett GAICD, believes that far from being broken, trade relations between Australia and China stand on the threshold of being better than ever. He believes opportunities for trade and investment by Australian companies in China are as strong as ever.

    Crockett, a former WA trade ambassador to China who has just founded his own turnkey trade and investment consultancy, International Channel Partners, says synergies exist in new energy collaborations such as hydrogen and renewables, and in high-tech mining, engineering, downstream processing and manufacturing.

    “We can work with them in health services and aged care as well as medical tech and education training,” says Crockett. “We only have 25 million people. They have 1.4 billion. We’re great at new ideas and they’re great at scaling. We can partner with them and take ideas around the world.”

    Many of the old trading relationships remain undamaged, at least on a business-to-business level. The Australian grain industry’s relationship with its Chinese producers is at least 50 years old and many in the industry believe this kind of impasse, while deadly serious, is by no means irreversible. Nor is the wine ban a fait accompli that must be carried forever — the Chinese wine market remains an important growth industry for Australia.

    How long do the Chinese think this will last? Diane Hu, assistant professor and deputy director of the Australian Studies Centre at Beijing Foreign Studies University, agrees that this will not resolve itself “without concrete moves”.

    Hu says much of this is about the Chinese undergoing “investigations” and trying to find “trade remedies”. China, she intimates, is an ingénue in global trade, swamped by foreign goods, its industries and trade bodies yet to fully grasp World Trade Organization (WTO) rules. “A large number of our own industries have not yet learned enough about international trading rules to protect themselves,” she says.

    China lacks the natural export savvy of other countries, including Australia, says Hu, which accords with what many think — that there is clearly a protectionist element within the dispute.

    Crockett agrees with this diagnosis. “They’re looking after their own industries,” he says. “China has its own grain, coal and wine, and we know that the previous five-year plan talks about food and energy security. And they want to diversify their markets — they’re doing exactly what we’re doing.”

    China trade 101

    Stuart Crockett GAICD, former WA China trade commissioner, has words of advice for Australian companies still hoping to make an impact in China. Chinese business has become far more sophisticated than it used to be. The days of going in and “selling blue sky” are over.

    “You really need to articulate the true investment opportunity being put forward as succinctly as possible, turning it into an ROI proposition as humanly possible. Make it clear what’s in it for them. Really articulate this.

    For companies that are already in China, look at your entire structure and position. China has gone through changes around free-trade zones and ports, and the movement of capital. Distribution channels are changing enormously — multiple new ones are coming on-stream. How are you going to market?

    Chinese businesses are surpassing Western brands when it comes to listening to their clients, and putting out products truly demanded by the Chinese community. Have a look at messaging and the distribution model. Make the soul and spirit of your business Australian, but create the messaging in China by Chinese people for Chinese consumers.

    Chinese tastes and predilections change so fast. People always say that, but when you live it and see it first-hand, it is mind-blowing. Listen and be engaged. You can [be engaged to that extent] by having your systems and structure geared towards obtaining immediate feedback.

    Look at using the digital platforms, online purchasing or mobile — it’s just mind-blowing. Australian companies need to consider how that is being done, decide what the best channels are — and use them.

    Aussie companies need to hunt as a pack. Tier 1 cities such as Beijing or Shanghai are some of the most competitive on the planet. If we go in collectively, we will get more oxygen and will be seen as not just representing a country, but as representing a sector. The consumer will decide. It will get us a bigger profile and get businesses into the market more quickly.

    Don’t aim at just Tier 1 and 2 cities. Emerging growing markets are Tier 3 and 4 cities, so travel the path less trodden, but with significant opportunities. It’s crowded — and your story, positioning and entry points are critical.”

    Seizing new opportunities

    Western Australia and South Australia, home to much of Australia’s grain, fishery and wine industries, have suffered most at the hands of the inter-governmental spat — yet few of the companies affected have complained.

    The total export figure for Australia’s wine industry is around $2.9b. China accounts for about $1.2b of that. The duties have effectively killed off the market. December export figures to China were only two per cent of the corresponding December numbers in 2019. It is estimated that the wine industry will lose between $50m and $100m from the previous year.

    Taylor says Australia’s wine industry — and his own company — are strongly resolved to redouble their efforts in more mature markets such as the US, UK and parts of Asia — and have been busy organising virtual trade shows and wine tastings — “Australian Wine Connect”. Australian wine, particularly in the US, is seen as good value, but Taylor wants it to be seen as “up there with the best US and European wines”. It will be positioning Australian wine as a premium, high-class product, just as it did in China.

    Wilson at CBH says the China anti-dumping ban will be a heavy hit to the grain industry. It is estimated the value of the loss of the Chinese market for the entire Australian barley industry is approximately $500m per year.

    “Growers have not been able to achieve the standard premium for malt barley, which can be anywhere between $30–$50 per tonne,” says Wilson. “Much of the good barley is currently being sold at traditionally feed barley values.”

    That said, the company has just executed its first malt barley shipment to Mexico, after the implementation of the Chinese tariffs. That market can be grown — as can markets in Japan, Vietnam and Korea, says Wilson, even if sales to these countries currently equate to just 10 per cent of what was being sold to China. “We will continue to work with these markets, and also other market destinations such as India.”

    So, how will this stand-off end? One of the two trading partners has to blink — and from the look of it, it won’t be the Chinese. “I’m afraid it will mean Australia doing the navigating through these geopolitical tensions and moving towards more mature and consistent strategic choices,” says Hu. “The Australian government... has to go beyond the immediate electoral benefits of appealing to nationalistic sentiment. Ultimately, it is about how Australia positions itself in a fast-changing world.”

    Crockett says the relationship will be repaired, in time. “There’s a saying in China: you should know someone for 1000 days before you become partners with them,” he says. However, there are no Chinese sayings about how long it takes for former friends to get back to being old buddies again. That’s a question many Australians would dearly like to know.

    The need for symmetry

    Both sides know the real elephant in the room is the asymmetrical nature of their trading relationship. The Chinese know Australia needs them far more than they need us. Australia shipped 800 million tonnes of iron ore to China in 2020, while the rest of the world shipped just 460m tonnes overall. Before COVID-19, China accounted for over 30 per cent of Australia’s education exports, valued at nearly $13b. Chinese students represent more than our next four largest foreign student markets combined.

    There’s no quid pro quo here. Australia consumes less than two per cent of Chinese exports worldwide.

    CBH CEO Jimmy Wilson says the company deals with more than 200 customers from 30 different countries across all its grain commodities, but when it comes to its premium malt barley product, it has been hooked to Chinese consumption. Barley exports to China outweigh wheat exports sixfold. The Chinese have now added an 80.25 per cent tariff on malt barley, rendering it unsaleable there.

    “Around 80 per cent of WA production has been going to China in recent years,” says Wilson. “Alternative markets are not readily available for this volume of malt barley.”

    Stories like these prompt Russell Thomas, CEO of the Australia China Business Council, to warn Australian governments and business leaders to tread more lightly. While he says nobody can justify the sanctions over the past year, the lopsided natured of the relationship means Australia can’t afford a deepening chasm. “Trade and investment in China has built Australia’s national capacity in a number of areas,” says Thomas.

    Without it, he believes, we could never have developed other industries. “Mining, energy, high-tech, food, technology and agribusiness are all linked. We may talk about the need for diversification, but we’re actually a stronger economy and have the wherewithal to tap other markets because of China’s trade and investment. We need to bear this in mind.”

    Stuart Crockett GAICD says much the same: “How many Australian companies have made a lot of money through engaging with the Chinese? There has been massive investment coming through the resources sector. Our universities are better off, we have more creative industries and a better standard of living because of our relationship with China in the resources sector.”

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