ChallengingSouth 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

Notes& Appreciation

• The Australian Bureau of Statistics (ABS) was a key data source

• Unfortunately the ABS cannot supply detailed statistics for service exports and imports

• Goods which either departed or arrived via another state are not included, 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

Key Conclusions

• Over 4,500 jobs in SA are dependent on China exports, mainly in mining, education & wine

• China is South Australia’s largest trading partner

• Top four exports: mining ($833 M), education ($328 M), wool ($69 M) & wine ($66 M)

• Industry leaders see China’s 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

Myth 1: SA Buys More From China Than it Sells

Since 2005 we have sold more than we have bought

2005 2006 2007 2008 2009

Imports 624 773 1,003 1,160 994

Exports 735 768 1,012 1,269 1,544

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SA Goods Exports 2009Total: $ 8,318 Million

SA Goods & Services Trade with Chinain M $

Sources: 5368.0 International Trade in Goods and Services, Australia, Table 36d Merchandise Exports & Table 37d Merchandise Imports; ABS custom from May 2010; & calculations by the author

Myth 2: China is a Threat to SA

China trade is increasing net employment in SA

Approach: Total export/import per sector divided by the average revenue per employee. Author grouped imports into those with viable local (SA/AUS) producer and those without to determine total imports which 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

Net Positive Effect of China Trade for SA in 2009

Best Case: 4,902 jobs = $ 320 Million in wages = $ 84 M in payroll taxes

Worst Case: 3,293 jobs = $ 234 Million in wages = $62 M in payroll taxes

Job Count 2009 – All Industries Wages Earned 2009– All Industries in M$

Myth 3: China is a Cheap Mass Market

China has changed enormously in the last thirty years

Myth 3: China is a Cheap Mass Market, cont.

China’s consumer spending has changed greatly since the ‘70s

Source: “China's luxury boom - The Middle Blingdom”, The Economist, 17 February 2011 . Also see points below

“Ask a well-heeled Chinese lady about her new handbag and she is quite likely to point out that she bought it in Paris. This tells you not only that she is rich enough to travel, but also that the bag is genuine.”

Including Chinese purchases outside China (55%!), the nation’s share of the global luxury market will triple, to 44%, by 2020

Source: AWBC - Wine Export Approval Report, Dec. '08

Australian Wine Exports 2008Total value and average per litre prices

Myth 4: Communicating with Chinese is Easy

Cross-cultural communication can be challenging

Survey respondents who found communicating with the following nationalities

difficult or very difficult

Source: Joint Research Report online survey, October-November 2010, total of 51 respondents

Approach: Total SA exports and imports multiplied by potential efficiency increase due to better cross-cultural and language preparation. Similarly lost time and energy due to misunderstandings assumed to be 2 workdays per year.

Poor preparation could cost SA $53 Million annually

Myth 5: SA has a Clear China Strategy

Collectively, we could be better in:

• Analysing, interpreting & planningwe have had insufficient transparent information and interpretation

• Setting China as a priority

• Coordinating our efforts between companies, industry groups & government

• Identifying our true strengths and highest value-add and taking a sustainable approach to business

• Formulating state and national policy to support our shared goals & strategy

Investing in Our Future with China

Do we just milk the cow or do we invest in its health?

Estimated Net Return from2009 SA Exports to China

Total: $200 M

Suggested Re-Investment of Part of Return in M$

Suggested Investments in SA’s China Future

Cross-cultural & language training, market analysis & strategy, manufacturing & service innovation,

entrepreneurship & investment attraction, communication & promotion

Approach: Total calculatory wages multiplied by an average 25% income tax (15% for superannuation payments). Corporate profits were assumed to be 7.5% of revenue, which was then taxed at 30%.

Learn From the Fable of Fred 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 Fred’s 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

Silly Story?Think Again – It’s Just like Breville!

0%

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FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 HY11

Development of Underlying Earnings* at HWI/Breville in % of Revenue

*Underlying Earnings before interest, tax, depreciation & amortisation (Underlying EBITDA)Sources: HWI/Breville Group Annual Reports 2001 to 2010 and Breville Half Year Results to December 2010.

HWI Chairman, June 2005: “PI was aware that significant change was needed and inevitable. ...HWI will emerge as a very strong global participant in our industry..."

Breville Chairman, June 2010:"...underlying and reported profit after tax for the yearPincreasing by 65% and 92.1% respectively. The progress achievedPre-affirms the group's strategy of focusing on the development of innovative products and leveraging those products across multiple geographies.”

So What Can Each of Us Do?

• Increase your knowledge about China and encourage those around you to do the same

• Ask yourself "How could China's development affect me and how can I constructively become engaged?

• Share & discuss the White Paper and this presentation with people around you

• Ask your leader “What is our China strategy?"

• Find out for yourself: Speak with Chinese here in SA or travel to China

• Build up a China-focused team in your organisation and constantly increase its understanding of China

• Take an active role in the interface between SA & China by joining ACBC and similar groups

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 Manager

T: 8303 4798E: confucius.institute@adelaide.edu.au

Australia China Business Council (SA)Sean Keenihan, President

T: 8223 6808E: acbcsa@acbc.com.au

Best Solutions International Pty LtdGlen B. Wheatley, Director

T: 8338 6299E: glen.wheatley@bestsolutionsintl.com