What is coming this way from China?

Published June 23rd, 2016

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Insight from Christopher Gasson, GWI publisher

I was in Shanghai last week for the two workshops we arranged to run alongside the Aquatech China 2016 trade show. One was focused on the opportunities in industrial wastewater treatment arising from the Water Ten Rules; the other focused on how Chinese water companies could follow the One Belt, One Road policy of developing new markets along the old Silk Road. It is the first step towards a larger engagement by GWI with the Chinese market, and I came away with a few interesting learning points:

1) Chinese companies would prefer to buy their way to the world: the gulf between how China does business and how the rest of the world does business remains pretty startling. It means that from a Chinese perspective, organic growth appears difficult. Acquisitions, on the other hand, appear easy because they give a greater sense of control.

2) Chinese companies are aware of the new “China price”, but defend it as strategic. In the past, the “China price” referred to the fact that an item could be manufactured at one tenth of the cost in China. Today it refers to the fact that Chinese companies will pay ten times the price that anyone else would consider in order to acquire foreign assets. This is excused by the belief that foreign water technology companies have a double value to Chinese companies: once, in terms of the market for the technology in China, and again as a bridge for the Chinese acquiror to start competing in the international market.

3) Chinese companies will dominate the project finance sector in water, but not just yet. They have access to cheaper capital, and they have a greater appetite for risk, however they do not yet have enough experience of competing on projects to be truly lethal. In the meantime, they need partners.

4) The international financial institutions have reoriented themselves towards China as Western appetite for emerging market risk has diminished. The European Bank for Reconstruction and Development has recently taken on China as an investor; the International Finance Corporation has recently ramped up its lending to the Chinese water sector; and the Asian Development Bank is totally aligned with China’s One Belt, One Road strategy. In the background, the Asian Infrastructure Investment Bank is limbering up to enter the market. International capital flows are changing direction.

5) Foreign companies are reluctant to take the fight to China. The industrial wastewater workshop was designed to give foreign companies an opportunity to meet Chinese industrial water users looking for a solution to the new regulatory regime. In that respect, it was not successful: in the end, the audience was largely Chinese, with few foreign companies making an appearance. They missed something: the Chinese industrial water users were very interested in what foreign companies can offer in terms of new services and business models.

6) We will definitely do this again: I think that the strength of the Chinese companies in terms of appetite for risk, low manufacturing costs, and cheap energy complements what foreign water companies have to offer in terms of innovative business models, client understanding, and experience. There is probably more profit to be had from partnership than from competition.