Strategy

Mission to China

We travel with a Canadian trade delegation as it meets with (limited) success.

Margaret Cornish, a few weeks before stepping down as executive director of the Canada China Business Council, is in a Beijing taxi, rushing along the well-manicured, grandiose boulevards. Fluent in Mandarin, she starts chatting up the taxi driver and the conversation quickly turns to where she is from.

“Canada,” says Cornish.

“How come your government doesn’t like us?” asks the astute cab driver.

Her successor Sarah Kutulakos relates this story, from May 2007, as she sits in her Toronto office. “If the taxi drivers know this,” she says, “you can see how the country takes its cues from its senior leaders.”

Relations between the government and its Chinese counterparts have not improved much since. Stephen Harper and Chinese president Hu Jintao have traded diplomatic snubs, the most recent of which was the Prime Minister’s decision not to attend the Beijing Olympics. (In a mid-election interview with the Chinese-language newspaper Sing Tao, Harper eased his stance a little, saying, “I’m looking forward to visiting China at some point in the future.”)

The CCBC started surveying its members in 2007 about whether the chill in relations was hampering business. Initially, Kutulakos heard back that although executives believed it would, they couldn’t give any concrete examples. By January 2008, however, that had changed: deals were falling through.

With the CCBC celebrating its 30th anniversary — coinciding with the 30th anniversary of Deng Xiaoping’s rise to power and his promotion of open investment — it wanted to remedy the situation. The result? A joint trade mission with the Council of the Federation (COF), a little-known interprovincial body, which would contribute four premiers and some 100 business delegates from Quebec, Ontario, Manitoba, New Brunswick and Prince Edward Island. The CCBC brought along its own 100-odd delegation, including execs from several Canadian companies prominent in China: Power Corp., Bombardier, SNC-Lavalin, Sun Life, and Atomic Energy of Canada Ltd.

Four premiers, four days, three cities, 200 delegates. In a country of 1.3 billion that’s been booming economically but is now facing uncertainty given the financial crisis, is it enough? Or is it too little, too late? Senior writer Andrew Wahl travelled with the mission to assess where Canada stands with the world’s fastest-growing economy.

Day One: Beijing

The first gathering of dark suits begins at 8:30 a.m. on Nov. 3 in the Kerry Centre’s mirrored ballroom, under glittering chandeliers resembling inverted pyramids. Delegates began arriving over the weekend to this five-star hotel in the heart of Beijing’s Central Business District. Most arrived at the city’s expansive new international airport, and stepped onto inter-terminal shuttle trains built by Bombardier — an optimistic reminder that Canadian businesses have, in fact, had some successes in China. A handful of companies even have had long histories there.

The trade and diplomatic ties between the two countries is a theme Canadian dignitaries will return to often in speeches, desperate to overshadow the spectre of Stephen Harper. “Canada and China are old friends,” says Ontario Premier Dalton McGuinty in his opening remarks, “but even old friends have to take the time and make the effort to nurture their friendship.”

In the audience are the vice-governors of Hebei, Henan, Hunan and Shandong provinces, which together have a population of about 320 million, approximate to Canada and the U.S. combined. McGuinty, who took over as chair of the mission after Quebec Premier Jean Charest bowed out to call a snap election, reminds them that Canada was among the first western nations to recognize the People’s Republic of China and, of course, evokes Dr. Norman Bethune. “The world needs a strong, competitive China,” he says. “I believe that Canada cannot truly succeed if China does not succeed.”

McGuinty is on a roll. But he warmed up; a week earlier, he travelled north from Shanghai through Nanjing and Jinan with executives from some 30 Ontario-based environmental companies. Several of them are at the centre of the morning’s big photo op: an en masse public signing of agreements. Most are memorandums of understanding, purely ceremonial gestures of goodwill that in China signal the beginning of negotiations, although several are more concrete deals with dollar figures attached. A swarm of Chinese photographers rushes the rows of tables and then the stage as the signatories are each called up for official pictures with the premiers and vice-governors. The ballroom degenerates into noisy confusion.

Slowly, order is regained, but many delegates, including the dignitaries, have slipped out to mingle. What they miss is an armchair discussion on what Canada and China both face as the global financial crisis seeps into their economies. Jayson Myers, president of Canadian Manufacturers & Exporters, weighs in, including a dark prediction that Canadian exports will decline 15% next year, and GDP will retract 1% to 2% — and that’s if the credit markets stabilize.

For a perspective on China, the forum turns to Fan Gang, a Beijing-based liberal economist who is director of the National Economic Research Institute and adviser to the State Council. He optimistically argues that consumer confidence in China is not so badly battered, because even among the wealthy few who have invested in the stock market — down about 60% over the past year — the bubble was short-lived, lasting less than two years, and the paper gains never stimulated unsustainable consumer spending. Still, Fan acknowledges that the Chinese save too much — about 51% of GDP last year — for health care and retirement. And spurring greater domestic demand to counter a decline in exports is not as simple as lowering exchange rates, he adds. He points to a larger structural issue in China’s economy: how income, particularly corporate earnings, is distributed. Too much, he argues, is retained in the coffers of corporations and state-owned enterprises — and boosting domestic consumption boils down to increasing household income. Some 70% of Chinese continue to spend nearly all their incomes on daily consumption, and 40% of the labour force still works in agriculture. China is only a little over half way on its road to industrialization, Fan says, and needs to finish its transition to a modern economy. Through that process, the domestic market will grow fast. Fan ducks making economic predictions more than one year out, but says he thinks Chinese GDP will grow 9% in 2008, despite flat exports, and about 8% next year. (Six days later, on Nov. 9, Beijing announced a US$586-billion injection into domestic infrastructure spending to prop up its economy.)

Within the first two hours, the underlying theme of the trade mission is set: Canada needs China.

But there are some in China interested in the Canadians, too. Outside the ballroom, Jody Williston is trying to catch his breath. As marketing director for Theriault & Hachey Peat Moss Ltd. of Baie Sainte-Anne, N.B., he’s on his first trip to China, and the aggressiveness of some of the 200 Chinese delegates bowls him over. “It’s like speed dating,” he says of the abrupt business-card exchanges and probing conversations in broken English that establish if companies are in the same field. “Is there a match? No. Then move on.” Williston is more optimistic the pre-arranged one-on-one meetings later in the afternoon will help him land a reseller for at least part of China.

After a formal luncheon, most delegates will attend break-out sessions that focus on sectors such as aerospace and environmental services, followed by business matchmaking. The likelihood that the exercise yields anything more than another stack of business cards, however, is low.

Of course, several executives have their MOUs or other agreements in hand, and are already making plans to catch flights out of Beijing. Late in the afternoon, Gitanjali DasGupta, director of Mississauga, Ont.–based Electrovaya’s electric vehicle division (and daughter of company founder and CEO Sankar DasGupta), is hastily trying to arrange with the registration desk to leave her invitation to the gala banquet for someone else. Having traipsed around with McGuinty and the rest of Ontario’s environment-sector-focused delegation for a week, she is ready to head to Vancouver.

Electrovaya (TSX: EFL), an R&D-driven operation focused on electric battery systems, signed three MOUs earlier in the day. The most important one was with Chana International Corp. — a.k.a. Changan, the Chongqing-based automaker, China’s fourth-largest, an existing joint-venture partner with Ford, Mazda and Suzuki — to develop zero-emission electric vehicles for the North American car market. “They’re bringing a beautiful car, a lovely glider, with seats and beautifully finished doors and windows, excellent interior, nice wheels, nice hub caps,” says DasGupta. “We’re bringing the rest of it,” notably the all-electric powertrain. It will be called the Maya-300.

DasGupta says Electrovaya has been talking to Chinese companies for a couple of years, in the belief that as newcomers to the automotive industry, they are better positioned to take a whole new approach to making cars. “China is moving really quickly, and it, more than any other place, understands that the environmental consequences of achieving a hundred years’ worth of industrialization in 30 years are tremendous,” she says. “And they have both the industrial and political leadership to make things happen at an accelerated pace.”

Mind you, the MOU with Changan took 18 months — and the deadline pressure of the premiers’ trade mission — to get it done. “The contractual process is going on in the background,” DasGupta explains. “It’s just easier to sign an MOU here, because the other one is a much more legal process, and it takes a while for the lawyers to dot the i’s and cross the t’s.” But what about protecting Electrovaya’s intellectual property, a concern for many small Canadian tech companies doing business in China? “We’ll cross that bridge when we get there,” DasGupta says. The next day, Reuters reports that an anonymous Changan executive expects 30 vehicles to be in Canada by the end of the year — details DasGupta would not confirm. Electrovaya will be responsible for distributing the electric cars, according to the unnamed executive, and they will be based on Changan’s hot-selling Ben Ben model, but assembled in Canada — for the time being, that is. Eventually, Changan wants to develop and ship made-in-China clean-energy cars to North America, although no time frame is set.

By skipping the evening banquet — a 500-seat, $5,000-per-table-affair that disappointed Canadian attendees with an underwhelming entrée of beef and steamed vegetables — DasGupta missed clinking glasses with Nicholas Sonntag. He’s Westport Innovations’ executive vice-president for corporate development and president of its Asian division. Sonntag, who walked across the street from his Beijing office to represent his company at the banquet’s business excellence awards (it was second runner-up to Manulife and BMO Financial for Outstanding Achievement) is experienced in the ways of Chinese business. He spent three years heading up CH2M Hill’s environmentally conscious engineering consulting efforts in China until 2005. After a brief stint back in Canada consulting for Vancouver-based Westport, he joined the company in October 2006, and happily relocated to Beijing.

Sonntag has witnessed big changes in China, as companies gain experience, open up to new ways of doing business and build confidence in their ability to be successful abroad. Ten years ago, China was eager for access to good technology and good people, but especially western money, he says. Today, the Chinese have money, and a lot of technology. Western management is still valued, however, and there is a greater sense that intellectual property, along with better laws and regulations, matter (even if they’re not always enforced).

The Chinese are notoriously tough negotiators — and it’s getting even harder to make deals happen. It takes time and demonstrated commitment, usually in the form of a company representative working full-time in China. “There’s a certain and growing confidence in China that if they can’t get a deal worked out with you, they’ll go to the company next door or they’ll do it themselves,” says Sonntag. It took over three years for Westport, which develops technologies to convert engines to clean-burning natural gas or hydrogen, to establish a joint venture with Weichai Power, a deal announced only in July. (Westport also has a joint venture with Beijing Tianhai Industry Co. to market and sell on-board natural-gas tanks for tractor-trailers.) Despite an MOU with Weichai, the partnership didn’t gel until the companies put ink to paper on a formal framework agreement that laid out firm details. Intellectual property was a matter of much discussion, Sonntag says, and it came down to establishing very clear expectations about creating a world-class IP-management system. But the best defence, he advises, is to forge a partnership that can only be a win-win or an outright loss for both parties, so defending IP is in everyone’s interests.

Getting to those win-win scenarios, though, is not so easy. “There are fewer opportunities to set up relationships than there once were,” says Sonntag. “Time is passing.”

Day two: Beijing

For many top executives, Nov. 4 begins on the 38th floor in the Kerry’s breakfast lounge, chewing over the events of the previous day. As an exercise in getting the attention of the Chinese government and large businesses, it was only a modest success. As one CEO puts it, having the CCBC as a focal point for relations between the countries helps, because Canada is not a Tier 1 country, in the eyes of the Chinese: “We need to get their attention, rather than the other way around.” Still, Chinese officials sent a pretty clear message by having vice-governors of nearby provinces attend yesterday’s ceremonies, and Wang Chao, the assistant minister of commerce, made brief remarks at the gala banquet.

Privately, the premiers’ access to senior officials is better, with meetings today with Li Xieyong, party secretary and vice-minister of science and technology, and, in a first for a group of Canadian premiers, foreign affairs minister Yang Jiechi.

By mid-afternoon, the business and political delegations are on flights to Chongqing in China’s southwestern Sichuan Basin. They arrive in darkness. Trevor Taylor is among them, waiting wearily for his luggage, watching as boxes of Nunavut soapstone sculptures glide past on a baggage carousel — gifts, presumably. “We brought Zippos and ice wine on a previous trip,” Taylor says. “Something like two-thirds of Chinese smoke at least once a day.”

As director of sales for PCI Geomatics, a company based in Toronto that makes specialized software and systems for geospatial satellite imaging applications, Taylor doesn’t really have to be here. He already signed two “letters of agreement” — more significant than dime-a-dozen MOUs because they establish the framework for a final contract, and can be assigned financial value. He also officially opened a Beijing office in order to sell to government agencies. But Taylor is being politic: the trade mission helped to set a deadline to finalize the agreements, and having the Ontario premier out to cut the ribbon at the new office impressed his business partners. PCI Geomatics wasn’t just a small Canadian company anymore, it was well-connected. Besides, it never hurts to give McGuinty another photo op and let him include the size of the PCI Geomatics deal in the $600-million figure the province boasts it helped make happen in a press release.

Sounds cynical, but Taylor is genuinely supportive of trade missions. While the public often questions their value, he thinks Canada needs to be more aggressive opening up new export markets for its goods and services. “We have to get out there,” he says. PCI Geomatics, a private company, gets 75% of its revenues outside North America.

Like many delegates, Taylor has never been to Chongqing, although his company has been active in China off-and-on for about 15 years under his stewardship. Outside the new airport, he and other delegates are welcomed by a row of short towers emblazoned with flashing neon lights. But the shuttle bus ride to downtown Chongqing is shrouded in darkness, along windy, hilly roads lined with lush trees, beyond which are endless blocks of unlit apartment-style towers. The tour leader, a local, explains that more than 1,000 buildings, 20 floors or higher, have been constructed in the past eight years, and clearly, more are in the works.

Chongqing, a city covering 82,400 square kilometres with a population of more than 31 million, is the growth epicentre of China’s mountainous southwest region, a microcosm of the rapid urbanization and industrialization of rural farmers across the country. Its downtown is crowded with tall, neon-lit buildings rising up from the hilly peninsula formed by the Jialing and Yangtze rivers.

The bus rolls past vine-covered walls, darkened storefronts and winding staircases, and stops at the sleek InterContinental Hotel, where the delegates get some much-needed sleep.

Day Three: Chongqing

Another city, another welcoming ceremony in a ballroom with speeches of friendship and opportunity, followed by a series of presentations and a networking lunch. But on this day, the most eye-opening event happens outside the confines of the hotel.

Delegates clamber aboard two coach buses to tour Chongqing’s New North Zone (NNZ), a vivid demonstration of China’s outsized visions of economic development — with hints of some of the underlying and unacknowledged challenges posed by the global financial crisis. NNZ is a 157.5-square-kilometre economic development area with industrial parks and real-estate development — high-end villas with golf courses, as well as low-rent apartment blocks — but the first stop is the Cuntan Inland Port. Located almost 2,500 km up the Yangtze River from Shanghai, Chongqing is slated to become a key transportation hub, particularly for shipping manufactured goods to the east coast and beyond. For the first nine months of 2008, Chongqing’s GDP growth was 15.3%, but by 2012, the local government hopes to have doubled it to nearly $175 billion.

At Cuntan, delegates crowd around two large models of what eventually will be built, with coloured lights demarcating various stages of development. The scale, like so many things in China, is hard to fathom. Only a small part of the model represents what exists now, but the port already handles about 700,000 TEUs a year. (Twenty-foot equivalent unit is a standard measure of the cargo capacity of container ships.) The plan calls for it to eventually handle eight million TEUs. (By comparison, Prince Rupert, B.C., handles half a million TEUs.)

Jayson Myers, of Canadian Exporters & Manufacturers (CME), asks how many of the roughly 6,000 outbound container ships a year return up the Yangtze empty. The answer: about half. “We should put some stuff on a few of those 3,000 ships,” he muses.

After returning to the buses, the delegates make their way, with police escort, to one of NNZ’s four automotive industrial park areas. For several kilometres, the convoy passes new glass towers rising next to low-slung shacks and rubble-strewn lots. “As you know, China is building a harmonious society,” says the tour guide, evoking leader Hu Jintao’s catchphrase for his socio-economic vision and the ultimate goal of the Communist Party. He motions out the window to a block of modern buildings. “These are apartments for farmers after we take use of their land, and also provide job training.”

Disembarking at the Ford-Changan JV auto plant, André Desmarais, president and co-CEO of Power Corp., tells delegates, “Just so you know, everything you just saw wasn’t built eight years ago. It was all farmland.”

One woman comments, “Terrifying, in a way.”

But several delegates note that while many buildings have been built, more than a few look eerily quiet, even empty, and that cranes poised over unfinished buildings are not moving.

Inside the Ford-Changan plant, its manager acknowledges that production of its Ford, Mazda and Volvo models has been curtailed somewhat. But in the next breath, he adds, “We only produce for the domestic market, and I can’t talk about our future plans.” McGuinty, whose province’s auto sector is cratering, stoically maintains a pleasant expression, although his thin smile looks a little tight.

Already known for its auto production, Chongqing plans to continue expanding its manufacturing capacity in the NNZ. But it’s not all heavy industry. Software development outsourcing is also a focus, as is the biomedical industry, and electronics.

But what lays bare China’s rapid advance in science and technology is the tour’s next stop: Haifu. The medical research firm has patents on a promising ultrasound therapeutic system that, it claims, destroys certain cancerous tumours. As the delegation follows a spokesperson through the building’s futuristic lobby, they’re told the procedure doesn’t yet meet western standards — but only because it requires more clinical trials, which are now underway in the U.S. and U.K. The prospect of a made-in-China medical breakthrough created in Chongqing seems baffling — until the tour guide mentions the 57 universities that graduate some 150,000 students every year.

On the way back to the InterContinental, delegates thumb through a glossy, preposterously idyllic brochure for the NNZ. Thirty-two Fortune 500 companies have invested nearly a US$1 trillion there. Of the logos printed in the promotional material, none are Canadian.

Day Four: Shanghai

Flights leave Chongqing before dawn and touch down in Shanghai’s oppressive fog. The relentless schedule is beginning to wear on the group. As planned, the Ontario delegation has departed for home, further thinning the ranks. Banquet fatigue has set in, although the previous night’s speech by Bo Xilai, Communist Party Committee Secretary for Chongqing, inspires hope that the trade mission is being noticed.

Over lunch on the eastern Pudong banks of the HuangpuRiver, watching old battered ships cruise by, the CME’s Myers contemplates what he’s seen. “One of the reasons I wanted to come here was just to figure out what’s going on in the economy and see what the impact of the financial crisis is,” he says. “And from what I’m seeing, it’s not positive. I was expecting a lot more activity, frankly.”

But maybe, Myers adds, there is an opportunity for Canadians otherwise late to the game. “If things are slowing down here, the Chinese will be looking just like Canadian companies at developing new markets and new partnerships,” he says.

Inside the conference centre at the base of the lavish Jin Mao tower, China’s second-tallest building and a Shanghai landmark, the final afternoon sessions of the trade mission are winding up. A few business-card speed-daters still circulate, and delegates continue to grind out a few more meetings before heading to the final evening’s banquet.

In a quiet lounge, David Fung barely contains his exasperation. As CEO of Vancouver-based private holding company ACDEG International, he has a wide array of commercial interests — from agri-foods to waste recycling — many of them operating in China. After decades of doing business here, he still sees far too few Canadians making the effort — trade mission aside. “The Chinese continue to be surprised that Canada is not aggressively trying to maintain their market share in China,” he says. “The Chinese cannot understand it. Many times, the Chinese want to do business with Canada, but the typical Canadian’s instant response is that it is too difficult, and to stay home.” As chairman of the CME, Fung is openly frustrated by many of its members bellyaching over the state of their sectors, but continuing to ignore the Chinese market. “It’s so obvious,” he says. “The lack of urgency and the continued reliance on someone else to offer them salvation is really discouraging.”

Fung took part in the trade mission to help show China that Canada is still serious about doing business — and to try to re-establish the strong relationship the two countries had 10 years ago when Prime Minister Jean Chrétien led “Team Canada” trips there. Unfortunately, he figures many Canadian businesses may have already missed the best windows of opportunity. “If we continue to stay home, though, we’ll miss the rest,” Fung explains. “We need to encourage more Canadian business people to just get on the plane, see for themselves what China is like.”

Fung rises from his lounge chair and heads off to one final banquet. Tomorrow, he and the rest of the trade mission get on planes and return to Canada. But only for the time being.