Tapping China's vast market for services

The rapid construction of skyscrapers, apartments and roads in Chinese cities required hundreds of millions of tonnes of the metal, sparking a rush to extract and ship as much iron ore and coal as possible.

But the recent slump in commodity prices has intensified the focus on what non-mining products we can offer the economies in our region.

Speaking from an office in Hong Kong, the chief executive of law firm King & Wood Mallesons, Stuart Fuller, has some ideas. He is eyeing some very different growth markets to what we normally associate with China.

As well as doing the type of work you might expect, such as advising on mining mergers, the firm is focusing on China's burgeoning market for complex financial products.

With state-owned banks supplying the vast majority of corporate credit through traditional loans, Fuller says there are big opportunities advising on more exotic products like capital raising or securitisation deals.

"As the market matures, clients look at concepts like debt capital markets, securitisation, asset finance, leveraged finance, or any number of those products," he says.

The firm - the result of a merger in March between Australia's Mallesons Stephen Jaques and Hong Kong's King & Wood - boasts it is the only firm with approval to deal in both Chinese and international law. That niche has given it a lucrative piece of the market advising Chinese firms on what global high finance can offer them.

As the mining boom slows, politicians are increasingly latching onto stories like this, of selling services to Asia. By 2020, Asia's middle-class consumption outside Japan is predicted to jump by 185 per cent to $US12 trillion, and the region will boast more middle-class shoppers than the rest of the world combined. This is trend is already unleashing demand for everything from legal services to overseas holidays.

The Prime Minister, Julia Gillard, said this week the economy was "more than just mining", arguing that Australia's long term-future lay in selling to Asia's middle classes.

"Once you've sold them concrete and steel, iron and gas they buy wine and movies and music, retirement financial products and bespoke tourism experiences," Ms Gillard said in New York.

"The big unanswered question facing countries like ours isn't the growth rate of China's economy later next year. It is what the basket of consumer goods and services will be for middle class Asian consumers later this century."

It's an argument that has obvious appeal to politicians. More than 80 per cent of the electorate is employed in service industries, and consumer confidence surveys suggest the mining boom so far has failed to impress many households.

Professional services jobs tend to pay well. Research from the University of NSW's J W Neville fellow in economics, Tim Harcourt, has found that on average exporters pay 60 per cent higher wages and have more job security than non-exporters.

However, mining exports to China dwarf those of services.

Just as it is the biggest buyer of commodities, China is also Australia's biggest services export market. But while iron ore alone was worth $44 billion last year, services sold to China were worth 12 per cent of this - $5.6 billion.

So why has the services trade lagged behind the mining bonanza? And what may need to change for Australians firms to meet Asia's huge demand for services - a boom for the rest of us?

The potential for selling non-mining products to Asia is staggering. A report released this month by Asialink estimated a small increase in non-mining resources would add $60 billion to $115 billion to the economy in the next decade.

So far, however, the services industries accounted for just 11 per cent of exports to Asia in 2011.

The rapid growth in mining has been inflated by huge price rises for commodities, of course. But if services firms are to make the most of Asia's middle-class boom, experts say a major mindset change will be required in Australia businesses.

As the former Treasury boss, Ken Henry, put it last month: "It is one thing to sell a homogenous minerals commodity to a minerals hungry industrialist in China, and another thing entirely to design and market a sophisticated personal service to someone living in that culture."

Australia's strength in selling resources came from our natural endowments and the low cost of extracting and shipping them. These advantages are less evident in our pursuit of the newly emerging Asian middle class.

The deputy director in the Asia and Pacific Department of the International Monetary Fund, Masahiko Takeda, last week said it would be "very difficult" for Australia to take advantage of Asia's rise, because of fierce competition from culturally closer nations such as Japan and Korea.

"Asia's income is rising, its middle class expanding, but of course the supply side is strengthening as well," he told economists in Canberra.

"So that means for you to penetrate into the Asian market you really have to be skilled there. This is going to be a very difficult proposition for you to penetrate and take advantage of Asia's rise."

Rather than competing on price, Australian businesses targeting Asian demand for services markets will need to become much more "Asia-literate". But this is an area where local firms have been found lacking.

A survey of 380 major businesses by Asialink and the Australian Industry Group last year found less than half of senior executives or board members had significant experience in the region or spoke an Asian language.

The ANZ chief executive, Mike Smith, said this month a separate study had identified many areas of critical skills underdevelopment in Australia "that are fast becoming an impediment to fully realising the Asia opportunity".

Jason Chang, the chief executive of EMR Capital, says this lack of experience often causes opportunities to go begging when he has advised boards on Asia expansion.

With little experience working in Asia and a vocal debate in the media about Chinese investment, he says many executives fall back on simplistic stereotypes, and this has been a fatal blow for some potential cross-border mergers.

"How do you know that they don't have a more sinister motive that they will steal our brand, or they will spy on us?" he says some executives ask themselves when contemplating a big transaction with a state-owned firm. "There's a huge fear factor, because there's a lack of knowledge."

Such caution is reflected in Australia's lopsided investment relationship with China, Chang says. The stock of Australia's foreign direct investment in China is $6.3 billion, roughly half the $13.4 billion China has invested here.

"The growth of a country like China is really unprecedented. Therefore we haven't had the sort of management and skills preparation anywhere near like what we've had with other countries."

So what may need to change for more Australian exporters outside of mining to benefit from the region's growth?

Smith says businesses "urgently" need more experience working in Asia and more exposure to the region's cultures.

Lawyers at King & Wood Mallesons, for instance, are trained in everything from Chinese business card etiquette (always present the card with two hands) to what drinks should be served in a meeting (include hot water, a common drink in China).

In a similar vein, Australian hotels that are popular with Chinese guests are putting congee on the breakfast menu and are trying to hire Mandarin-speaking staff.

Dr Henry has signalled that his Australia in the Asian Century white paper, expected next month, will include a focus on building the economy's "Asia-relevant capabilities."

Despite this need to change, it must also be said that many firms are successfully taking the plunge and selling to Asian consumers. Elders, Leighton Asia, ANZ Bank and IAG all have services operations in Asia.

The University of NSW's Tim Harcourt says the number of small to medium businesses expanding into Asia has also shot up dramatically in the past 10 years.

Business services exports - things like accounting and architecture - have more than doubled to $1.9 billion in the decade, mainly to mature markets such as Singapore and Hong Kong. He says seven of the top 10 markets for SMEs that look overseas are in Asia, a big change from a decade ago.

"Ten years ago if you went to Asia it might be Hong Kong or Singapore, but now it's well dispersed around ASEAN [the Association of Southeast Asian Nations]," he says.

Although the public perception of the Asia relationship is still dominated by iron ore ships, Harcourt says, Australian engineering, building or architecture firms are also doing well from the region's industrialisation.

"As I travel through ASEAN or western China or rural India I notice that we may be selling iron ore, but we're also building the civil buildings and the airports and the roads and the schools," he says.

But just as it took a long time for Australian firms to crack into markets such as Japan, the cultural changes required in the business community will also be gradual, Harcourt says.

"Japan started by taking our iron ore and coal when they were industrialising, then slowly we embedded ourselves in the Japanese economy as they became more affluent.

"Now I think China, India and ASEAN countries have taken the place of Japan."