"Italy and the rising Chinese Economy Possibilities of mutual growth"
Italy and the rising Chinese Economy Possibilities of mutual growth with Italian investments Authors: Giovanni Ruberto Alessandra Lena INDEX Who are we dealing with…………………………………………………………………...pag. 3 Politicians show good will to cooperate……………………………………………………pag. 3 Cooperation fields and investments sectors……………………………………………….pag. 4 Examples and study cases…………………………………………………………………..pag. 7 Challenges and changes: opinions………………………………………………………….pag. 11 Conclusions…………………………………………………………………………………..pag. 12 Bibliography and References……………………………………………………………….pag. 13 ABSTRACT China represents an opportunity for international enterprises willing and able to make investments in the same, with respect to laws, civic sense, human rights and different cultures. This opportunity could be grabbed by Italy as well, and it could be a chance to relaunch our suffering economy:let’s focus on the red elephant and on the ways Italy could help this country, and help itself in the process. 2 WHO ARE WE DEALING WITH? Before focusing on the possibilities of cooperation between Italy and China and of Italian investments in this huge country, it’s useful to say a few words on this matter. Since 1978 China has abandoned its self-sufficient, planned economy and opened its market to liberalization: since that year, the average GDP’s growth rate has been of 9,4% per year, the Country has become the sixth economic power in the world and has accessed WTO in 2001. These few data are sufficient to justify our interest in it: the destiny of its economy is going to affect companies all over the world, considering the amount of foreign investments in the country, and the size of its internal market (for example, China consumed in 2003- 30% of the world’s steel production, and 50% of the world’s cement). But who’s hiding behind this country - a giant, a monster , a tiger  so named by the international press? Certainly, GDP’s growth isn’t everything, and China isn’t lying on a bed of roses. This nation, with its population of more than 1.3 billions of people faces problems such as an unhomogeneous distribution of inhabitants, overpopulated areas, unhomogeneous income (60% of the population lives in the countryside, with less than 1 $ as daily wages, while there are around 100 millions of people who can afford a Western standard of life), unemployment, regional disparity and enduring poverty of farmers , , , . In addition to this, the success of the “one child policy”, started in the 1970s, is leading to an ageing society  (a decline of one third number of people aged under 40 over the next 20 years is estimated), and a collapse of the state health care system and pollution have been consequences of the freeing up of the economy. Politically speaking, the country is still testing its democracy: when Zhao Ziyang, a former Chinese prime minister and head of the Communist Party, died, dissidents were prevented from attending his funeral (he sided with student protesters in Tiananmen Square in 1989) and it took two weeks to negotiate an official obituary. This example, taken from a survey on China , clearly displays a country that hasn’t completely made amends with its past: however, the good will is undeniable, and projects of cooperation with the EU, and Italy in particular, are part of the plan in order to improve its economy and society. POLITICIANS SHOW GOOD WILL TO COOPERATE Cooperation between the two countries has had a good start, taking its first steps in the words of politicians and in projects signed by them and becoming a driving force for industry and private investments. In March 2003 the Italian productive activities vice-minister, Urso, announced a one-year project named “Marco Polo” to boost exchange between the two countries, in order to promote Made-in- Italy products in China and to increment Chinese tourism and investments in Italy ; during the official visit in Italy of the Chinese premier in May 2004, a common agreement to further deepen bilateral ties between the two countries was reached, and the two premiers expressed a will to establish a “stable, friendly, long-term and sustainable strategic partnership”, discussing cooperation also in the cultural and media sectors, such as film and television . To continue, our President’s Ciampi visit in China in December 2004 ended up with the signature of many documents on bilateral cooperation , . Also, Italian Vice Minister Urso recently declared the participation of Italian Companies in the Olimpic Games of Beijing 2008, not to forget the Italian support of Shanghai’s candidature for the “World Expo 2010”: both these events are gorgeous opportunities for visibility , . 3 COOPERATION FIELDS AND INVESTMENTS SECTORS There are two sets of factors driving China's restless efforts in attracting FDI: the first set is standard, and has to do with introducing technology, acquiring management know-how and expanding export markets; the second set is unique in China. There are institutional barriers for State-owned enterprises (SOEs) to operate based on the market mechanism. To set up joint ventures becomes a way of enjoying both preferential treatments and economic freedom. Most of the companies appear to prefer the second option. Considering market researches and evaluating the Chinese reality, it’s clear that there are a lot of possibilites for joint ventures: however, we need to hurry up, because these years (up to 2008, Olimpic Games’ year) will probably be the best to try out the Chinese adventure. Of course, investing in China for Italian entrepreneurs must not represent merely an opportunity to exploit lower workforce’s and raw materials’ costs to produce goods destined to international markets, but should be able to produce a long-term benefit to the Chinese society, offering goods to its domestic market. Italy is looking for regulations to protect its products and creativity everywhere, and it has already obtained important results as far as bilateral ties are concerned in the following fields: 1. Reconnaization of geographical origin, even for products different from alcoholics and wine; 2. Institution of a standard of arbitral conciliation for the resolution of commercial causes and the protection of intellectual rights; 3. Fiscal cooperation agreements; 4. Resolution of causes related to SPS’ matters. Italy renewed the invitation to Chinese specialists to visit Italian industries and verify our checking and quality testing procedures. It seems China and Italy have discovered they have a liking for each other, and the boosting of Italian investments in China is favoured: however, Italy still lags behind other countries as far as investments, and in 2003 ranked 18th in the Chinese market , . According to data published by Istat, the dimensions of the interchange between the countries have reached a stop in 2004, and Italy is importing more than what it sells; however Chinese data are different, and the truth is likely to be in between (see fig. 1). Interscambio commerciale Italia-Cina - Fonte ISTAT (Milioni di Euro) 1999 2000 2001 2002 2003 Esportazioni italiane 1.842 1.834 2.380 3.275 4.016 3.852 Variazione percentuale -17,0% -0,4% 29,8% 37,6% 22,6% -4,1% Importazioni italiane 4.342 5.001 7.028 7.484 8.306 9.546 Variazione percentuale 11,9% 15,2% 40,5% 6,5% 11,0% 14,9% Saldo -2.500 -3.167 -4.648 -4.209 -4.290 -5.694 Interscambio 6.184 6.835 9.408 10.759 12.322 13.398 Fonte: Istat. Elaborazione Ufficio Economico e Commerciale dell’Ambasciata d’Italia a Pechino Interscambio commerciale Italia-Cina – Fonte: China National Bureau of Statistics (Milioni di USD) 4 1998 1999 2000 2001 2002 2003 Esportazioni italiane 2277 2686 3078 3.789 4.320 5.080 Variazione percentuale -7,1% 18,0% 14,6% 23,1% 14,0% 17,6% Importazioni italiane 2577 2929 3802 3.993 4.828 6.653 Variazione percentuale 15,2% 13,7% 29,8% 5,0% 20,9% 37,8% Saldo -300 -243 -724 -203 -508 -1.573 Interscambio 4.854 5.615 6.880 7.782 9.148 11.733 Fonte: China National Bureau of Statistics. Elaborazione Ufficio Economico e Commerciale dell’Ambasciata d’Italia a Pechino Figure 1 – Data from  Italian investments in joint ventures in China are displayed in fig.2. Investimenti italiani in joint ventures in Cina 19% 1 2 54% 3 27% 1.projects with majority of Chinese capitals 2.projects with majority of Italian capitals 3.projects wih 50% of Chinese capitals and 50% of Italian capitals Figure 2 - From interpolation of Istat data and Chinese statistics The investments come from different Italian sources, mainly huge companies and groups: the situation is displayed in fig. 3. 5 Sorgenti in percentuale dell' investimento italiano complessivo in Cina 15% 10% 1 2 3 75% 1.Big national groups and enterprises 2.SMEs 3.Other Figure 3 – Sources of investments in China Italian investments are much diversified, with significant percentages in the automobile, mechanics, chemical, and textile sectors. Banks, delivery services, legal and technical consultancy services are on the increase, and we’ll give some more detailed examples as we go on. However, Italy’s top range products still belong entirely to the old-economy, and textile, clothing, handicraft and furniture industries, together with agroindustry and food conservation are still the most renowned, contributing to the majority of Italy’s exportations. We could describe the Italian investments in China, according to the requests of both nations, as follows. SECTORS FOR INVESTMENTS IN CHINA PROPOSED BY ITALY - ENVIRONMENT PROTECTION - BIOPHARMACEUTICS - CREATION OF TECHNOLOGY AND SCIENCE LOCATIONS – UNIVERSITIES (as a possibility to incentivate R&D) - RESTORATION WORKS SECTORS FOR INVESTMENTS IN CHINA PROPOSED BY CHINA - NANOTECHNOLOGIES - ENERGY – PROVISIONING AND ELABORATION OF COAL, PETROL AND NATURAL GAS - AGROINDUSTRIAL SECTOR - TRANSPORTS - MACHINERY OTHER SECTORS FOR INVESTMENTS IN CHINA PROPOSED BY ITALIAN COMPANIES - TECHNICAL ASSISTANCE 6 - LEGAL CONSULTANCY The main reasons for an Italian company to invest in China are: - lower production costs, that suggest a delocalization of production - reduction of delivery periods for products destined for Chinese local market - possibility of guaranteeing better quality, post-sales assistance Sectors that have already opened branches in China and delocalized their production are mainly related to mechanical and pharmaceutical industries, together with the automobilistic (Fiat), the textile (Benetton), and the furnishing ones , . EXAMPLES AND STUDY CASES Let’s now focus our attention on examples of companies that have opened successfully offices and factories in China and enterprises that, in our opinion, could invest in China with positive returns. We’ll shift from huge companies and groups to SMEs, in order to display the variety of cases and possibilities that China can offer us. Tecnimed S.r.l Thermofocus is the first clinical thermometer in the world that’s able to measure a body’s temperature without touching it. It has been used in airports all over the world to face the SARS menace, and Tecnimed S.r.l. , a company settled in Vedano (Varese), is the only producer of this innovative product. The company is recently under expansion, and according to us, could easily invest in China, where SARS started, because this is a case in which “good enough” isn’t sufficient, and the best is required. Thermofocus is presently considered by the International Scientific Community as the best, most secure instrument used to measure the body’s temperature. It is possible to buy it online (e-commerce) for 68 euros: this price, which is more than ten times the price of a classical thermometer, is repaid by the product’s utility. It can save lives: so, which doctor wouldn’t give anything to have it?  Figure 4 - Thermofocus used in an Asian airport and in a Chinese medical center United Colours of Benetton From the newspaper “Sole 24 Ore”, we’ve come to learn that Benetton is going to open 40 new sales outlets in China, forecasting an achievement of 200 stores in that country within 2008. It seems Benetton has understood how to increment its profits: the delocalization of production in China has already started as well, and even though most of the production won’t be destined for the domestic market, Benetton has promised to guarantee avantgarde working conditions for Chinese standards, and this would help changing the same standards in a long-time perspective. 7 Legal consultancy: Birindelli & Associates Investing in China can still represent a problem for the foreigner, not only because of the different language and commercial habits, but also because of a different juridical regulation. In order to assist Italian investors in China, “Birindelli & Associates” has opened the first law firm in Beijing in 1993, in collaboration with a local lawyers’ office, and it has been one among the first foreign law firms in China to obtain an official approval to work independently from the Ministry of Justice in 1996. Following this first success, “Birindelli & Associates” has opened branches in Shanghai (obtaining – together with only ten other international law firms – the second approval from the Chinese government) and Hong Kong.  Technical assistance: Beijing Tanli Information C.S. Beijing Tanli Information C.S. is a company, settled in Beijing, that introduces and supports Italian companies in China and Chinese companies in Italy, and it has become one of the most appreciated in this field. It offers any kind of information about commercial, productive collaboration between the two nations, and it relies on Italian, Chinese-speaking contacts in our country. The Tanli Information Company also cooperates with one of the biggest trading companies of government capital, “Gwitech China”, that exports almost any kind of goods and mainly imports machinery for measurements (see fig. 5).  8 Figure 5 - Some examples of goods that people can buy with the technical consulence of Tanli Information A huge nation’s needs: cooperation in the energy and environment protection fields China, as we previously said, is facing the problems that a country of its size must face, that is provisioning and distribution of energy and raw materials; also, due to the recent economic boom, pollution has become a problem that in the biggest centres has reached tremendous levels. It’s nice to say that Italy’s cooperation to solve these problems is real, reliable and highly qualified. 9 Air Quality Monitoring System A very interesting project of air quality monitoring has started in the city of Suzhou in 2002, thanks to the cooperation of the Italian Ministry of Environment (IME) with SEPA. It’s called AQMS (Air Quality Monitoring System) and its first phase investment is of 3.14 m euro. All the equipment used will be provided by Italy, while the investment will rely mainly on donations and foreign funds. Quoting the article : “The IME will invest 2.3m euro[s] (2.16m US dollars) in the project's first phase, and the Italian National Research Council Institute for Atmospheric Pollution, together with two Italian firms, will provide equipment worth 471,000 euro[s] (442,740 US dollars) and relevant personnel training, Yang said. The project will help improve Suzhou's air quality and benefit the city's economic, social and environmental development, she said, adding that the success of the pilot project will also provide valuable experience for air pollution control in other Chinese cities.” AQMS is a wonderful example of our capability to sell knowledge, experience and technology, and is a step forward in the process of the China evolution. Iveco’s buses Recently our President Ciampi proudly offered to the Municipality of Beijing 300 Iveco natural gas buses, with lower pollution impact than petrol fuelled buses. And this is likely to be only the beginning. Socotherm Socotherm, an Italian society settled in Vicenza and specialized in the provisioning and trasportation of energy, and China Petroleum Pipeline Bureau (Ccp), builder of oil pipelines, gas pipelines and district heating networks, have signed a partnership to develop projects of mutual interest in China and in the rest of the world. Enel’s joint venture to sell natural gas Another interesting proposal of a joint venture in China is tempting Enel, the Italian Energy Company, to sell natural gas in China, together with the Beijing National Group. Enel SpA is discussing whether to invest more than 100 million euros in this joint venture to sell gas to homes in Chinese cities. Enel Chief Operating Officer Cannatelli declared : “"They're looking for technical support and managerial support. In Italy, Enel is rolling out advanced technologies like remote meter reading and the ability to open and shut the flow of gas to a given household without having to despatch a serviceman. We'll be sending to China several of our key people for the design and implementation" of gas-distribution systems”. This is another example of Italy selling its know-how and highly skilled technical experience. It doesn’t only mean an improvement of the life standard in Chinese cities, but it’s also a great deal for the Italian company. Quoting from the article : “Enel faces the same problem that many of its European peers face. It generates lots of cash selling electricity, but it is blocked by regulations from further expanding in most of the Italian utility 10 sector. Consequently, it has been looking for opportunities abroad, such as managing power plants and buying into power grids. So far, it has bought assets in Spain, Russia, Bulgaria and Romania. Many of these deals have been in small markets and involve small assets. Enel's total international portfolio accounts for less than 5% of its revenue. Moving into China could potentially represent deals on an entirely different scale for the company.” Of course, it also implies some risks, since the country’s gas distribution sector is structured in an uneven and highly localized way, and local governments may arbitrarily alter gas prices, but it’s a promising business. CHALLENGES AND CHANCES: OPINIONS We’re now presenting some opinions of different people, industrialists and businessmen that describe interesting, shareable fears and expectations about China and its liberalization, in order to highlight hopes and concerns of a social class that has to deal with globalization . Mix Consulting Network and Prato Consortium’s limits “Io che faccio consulenza tra le piccole e medie imprese del manifatturiero e agroalimentare italiano sto vivendo il dramma del disorientamento degli imprenditori – says Giampaolo Pacini from Mix Consulting Network — Sono disorientati e quindi non hanno più coraggio e non rischiano più”. From his point of view, the demand and the challenges for SMEs are too heavy to be satifisfied, if Industrialists Associations and Institutions won’t act directly on their part promoting aggregation among enterprises with concrete initiatives. He brings out an example related to his city, Prato, where the Industrialists’ Union has proposed a common holding company for textile industries: 30 companies have agreed on investing in the holding company, but they have refused any aggregation. This displays a limit of Italian enterprises, traditional and individual, and in order to overcome it it’s useful to think again of the idea of the company and change its mangement. The following examples are related to this issue. Businessmen and consultants’ opinion Massimo Braglia, Managing Director of Sportswear International says : “Se l’impresa italiana, che così com’è adesso è vecchia, venisse ripensata avremmo meno paura della Cina. […] Quello di cui ancora si parla poco in Italia è che bisogna rinnovare non i prodotti, ma il processo produttivo. C’è bisogno di un nuovo modo di fare industria. Oggi non è il prodotto che fa la differenza, ma un’azienda che dà un servizio e un valore aggiunto al cliente» . This is a very interesting trend, that in some fields though is hard to be implemented (like in the textile industry). Oscar Marcheggiani, from the Arthur D Little, a consultancy enterprise, says skeptically: “Sono ancora molti gli imprenditori italiani che hanno il coltello dalla parte del manico, ma bisogna vedere se hanno la forza di andare avanti”. Shakespeare would say “That’s the rub!”: in our opinion, for sure China is a giant, but our weakness resides first of all in our internal system of small and medium enterprises: rich proprietors are more willing to sell the family’s business than to take on the risk of a new adventure, and competition becomes still harder, considering the umbeatable Chinese prices. 11 Federmacchine’s point of view Lega Lombarda party, in the past, was asking for customs duties in order to compete with Chinese products: we don’t think this is a good solution, especially in a long-term perspective. Riello, President of Federmacchine and the Chief of the Industrialists’ Union in Veneto, seems to agree with us, by saying : "il nostro settore è rimasto leader mondiale perché ha non solo il fattore competizione nel processo, ma anche quello sul prodotto." Italian mechanical industries are actually competitive in the world: maybe, then, duties aren’t necessary. Riello urges enterprises to focus on quality to be avantgarde in their products. We suggest that companies should definitely take the risk and run the competition: especially as far as the expansion towards China is concerned, these years are probably the best for investments, because of the obvious advantages of the first new entries in the market . As we described previously, there are companies that have already made their first steps in China, and often with considerable efforts and capitals. CONCLUSIONS We’ve tried to give a general perspective of the enormous possibilities and challenges that globalization together with the opening to the Chinese market could be given to Italian industries willing to invest. In order to do this, we’ve mostly focused our attention in the market sectors that would be more interested in joint ventures, highlighting the needs of the two countries and making some examples of companies and SMEs that have already started this strategy, or that, in our opinion, could positively start it: also, we’ve reported some opinions related to the matter, to better understand fears and expectations. We’ve chosen to deal with innovative and important (as far as products or size) proposals, that do not merely choose a delocalization of production that exploits the working situation and the availability of workforce in China: we believe, infact, that these kinds of investments aren’t sustainable on a long-term basis. We wanted to show that it’s possible to sell know-how (AQMS), experience (ENEL), assistance (Tanli and “Birindelli & Associates”) and top quality products (Thermofocus), having positive returns for our economy and improving the Chinese economy and society, together with its standard quality of life (distribution of natural gas to houses, less pollution). Also, it’s possible to sell creativity and quality (Benetton), because “Made In Italy” is one of our greatest wealth, in China as in the rest of the world: of course, as Riello said, we’ve to keep proposing and innovating, in order to be avantgarde in what we offer. 12 BIBLIOGRAPHY AND REFERENCES  : The Economist, 5/03/2005, Survey “The Tiger in front” : The Economist, 26/02/2005, “Business: China's golden oldies; Business in China” : The Economist, 21/08/2004, “Leaders: China’s growing pains- The pains of rapid growing” : The Economist, 20/03/2004, Survey: “Behind the mask” : The Economist, 15/02/2003, Special Report: “Is the wakening giant a monster?” : Jonathan Woetzel, Across the Board, New York, Jan/Feb 2004: “Play to win, not play to play” : Released from the Italian embassy in China: “Analisi dell’interscambio in base ai dati ISTAT” nell’anno 2003 : A. Ardemagni, F. Mambretti, G. Silvera, “Geografia Regionale”, C.Editrice Principato : INTERNET: http://www.cronologia.it/storia/mondiale/cina000.htm : Nury Vittachy, Far Eastern Economic Review, 28/11/2002, “Asia lifestyles” : Xinhua News Agency-CEIS, 30/03/2004, “Italy to launch “Marco Polo” project to increase exchange with China” : Xinhua News Agency-CEIS, 7/05/2004, “Wrap-up: China, Italy to establish stable, long-term comprehensive strategic partnership” : Xinhua News Agency-CEIS, 7/12/2004, “China willing to improve economic ties with Italy: vice premier” : BBC Monitoring Asia Pacific, 7/12/2004, “Chinese, Italian leaders sign agreements on health, cultural exchanges” : BBC Monitoring Asia Pacific, 19/06/2002, “China, Italy launch air quality monitoring programme in Suzhou city” : The Wall Street Journal, 7/12/2004, “Italy’s Enel discusses joint venture in China to sell natural gas” : INTERNET, http://www.mincomes.it : INTERNET, http://www.mincomes.it/missioniUrso2002 : INTERNET, http://www.italasia.it : INTERNET, http://www.italianembassy.org : INTERNET, http://www.italiacina.org 13 : “Made-In-Italy” Calendario 2004 : INTERNET, http://www.tecnimed.it : La Repubblica, Affari e Finanza : INTERNET, http://www.Fiatgroup.com : INTERNET, http://www.federmacchine.it : INTERNET, http://beijing.tsf.it : INTERNET, http://www.socotherm.it : INTERNET, http://www.bea-law.com : INTERNET, http://www.tanli.9cy.com 14