Shanghai: opportunities and pitfalls

UK exports to China grew fourfold to £16.7bn in the decade to 2014, driven largely by sales of machinery, vehicles and raw materials. Many passed through Shanghai, but with the market rapidly changing, what opportunities lie in this huge city-region?
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HISTORIC ties between Shanghai and the UK are there for all to see.

Glance at pictures of the famous Bund area along the Huangpu River, and you could easily be looking at snaps of a western European city; the similarities with Liverpool’s waterfront are striking.

It’s unsurprising, perhaps, given the trade that burgeoned between these twin cities from the late 1800s via the world’s first regular, long-distance cargo liner service, the Blue Funnel Line. That was brought about by the establishment of the Shanghai International Settlement and opening of Shanghai’s port in the wake of Opium Wars.

People walking in the rain at Shanghai's waterfront

The early 1900s architecture, now dwarfed by the skyscrapers of Pudong across the water, might be a relic of the days when tea and silk – not tablets and laptops – were China’s primary exports. However, plenty of opportunities remain for the modern-day trader in this eastern Chinese city of more than 24 million inhabitants.

“Shanghai today is a huge city, much more metropolitan than other cities in mainland China, and is by far the most developed, Western-looking, classy, global city,” says Avi Nagel, a business adviser for the China-Britain Business Council (CBBC).

“The openness to international trade is greater in Shanghai than any other city and you have a higher percentage of people who speak English. Its infrastructure is better in terms of the subway, nice-looking areas and good schools, but what that means is that it’s attracted many other international firms and competition is fierce.

“Shanghainese aren’t really excited to see international companies any more, so there’s got to be a compelling reason to purchase your product.”

What are Shanghai’s prospects for growth?

Some 38,000 international companies have a presence in Shanghai but, even so, there are clearly gains to be made for new entrants to the market built around the world’s busiest port.

Even taking into account China’s slowing economic growth, analysis from PwC suggests Shanghai will grow 5.5% between 2015 and 2030. That figure, when combined with projections for Beijing, amounts to a quarter of GDP growth among the 30 global cities examined in its 2017 Cities of Opportunities report.

Shanghai’s modern airport, great connectivity and easy access to the central business areas mean it scores well in the City Gateway category of the report, which rates the social and economic performances of major cities.

Meanwhile for economic clout – in terms of foreign investment, employment growth and attracting Global 500 companies – Shanghai is rated seventh, below only London, New York, Beijing, San Francisco, Madrid and Sydney.

Graphic depicting Shanghai
READ: Shanghai's sectors of opportunity for UK SMEs

It’s not all positive. The city ranks badly against global competitors on liveability, ease of doing business and cost of living.

But according to Invest Shanghai, which oversees foreign trade policy, SMEs can make inroads in areas such as IT, advanced manufacturing, smart energy, high-tech marine engineering and aviation. Tech imports increased by 14% last year, while trade in services grew 5.4%.

How is the market changing?

Chris Cheung, director of the EU’s SME Centre in Beijing, says China’s shifting focus from investment and export-oriented growth towards domestic consumption, increased productivity and innovation, presents many opportunities.

“China is striving to move its industrial processes up the value chain; looking to automatise and informatise its supply chains so that its goods can be produced more efficiently,” he wrote in the journal EURObiz.

“Hand-in-hand with this move will be China’s hunger for technology required to make the change – from industry robotics, transportation equipment, to agri-equipment and their related services.”

And the CBBC’s Nagel says: “As it becomes a more middle-income country, the demand for high-end goods has huge potential for British companies.”

Shanghai's Pudong area at night

UK firms will be able to hear about many of those opportunities first-hand at next year’s International Business Festival. During a 10-day tour of China, Liverpool’s Assistant Mayor Gary Millar discussed with counterpart Xu Kunlin the prospect of Shanghai sending up to 10 trade delegations to the Festival.

He’s excited by the prospect of more than 100 companies from Shanghai arriving in Liverpool next June. And Millar says they will represent sectors across the Festival’s day-themes of Global Economics, Urbanisation and Cities, Sustainable Energy, Future Transport, Manufacturing, Global Logistics, Sport and Travel, Health and Life Sciences, and the Creative Industries.

“There are great opportunities for British companies across every single one of those nine sectors to go into China from Shanghai,” said Millar. He says businesses can use Shanghai’s Free Trade Zone (FTZ) – established to much fanfare in 2013 – as a springboard across China and Asia.

What barriers to trade exist?

Some have expressed frustration that the 120-km square FTZ – the first of 11 in the country – has failed to live up to expectations. And while the ‘negative list’ of products and services deemed off-limits to foreign investors is shorter in FTZs than the rest of China, it remains 95 items long.

That list has been trimmed from 190 to allow more foreign companies to carry out manufacturing, transportation, information, mining and scientific research. Opportunities have also opened in financial services since Aberdeen Asset Management became the first foreign investment group to be granted a licence to operate there in 2015.

In June, Ioana Kraft, general manager of the European Union Chamber of Commerce’s Shanghai office, said incentives related to port development were highly anticipated by foreign businesses. However, she urged the loosening of regulations to develop a true freeport.

Shanghai’s leaders insist they are committed to opening up further, publishing 33 initiatives to that end in April. They aim to remove remaining hurdles for foreign investment in sectors such as manufacturing, financial services, communications, energy and environmental protection.

Age restrictions will be lifted for senior professionals and highly skilled workers when applying for five-year visas, foreign investment will be permitted beyond the zone’s current boundaries, while city leaders insist that foreign investors will be treated equally in market entry, government bidding, IP protection and trading procedures.

While the rewards on offer might be tantalising, Nagel cautions that it takes time, energy and investment to be successful.

“You need to think towards the medium term,” he says. “The more you strategise up front and go out there and meet the partners you’re going to be working with, the better your chance of success.

“The one key word about being successful in China is partnership. In retail, you can’t compete on price. You need to retain your Britishness or your product isn’t interesting. If you’re too stubborn and not adapting to the local market then you’re going to fail. A good partner or distributor will advise you whether something is going to work properly or not.”

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Produced by the 2018 International Business Festival, in partnership with Wordscapes.