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An abrupt end to the U.S.-China trade war unlikely

China is different now, says Bernard Wong, Senior Advisor/Operating Director for Hafnium Hafaway Private Equity Investment and Chair/CEO Coach for Vistage Asia Connect. Speaking at the Asian Lubricant Manufacturers Union (ALMU) Dinner at the Raffles Town Club in Singapore on 26 November 2019, the former Asia Pacific region head of global additives maker Lubrizol outlined a market that has changed and is maturing. No longer is the focus solely on producing cheap products and generating GDP growth. China’s economy has consolidated and is transforming with high technology innovation.

This consolidation includes the chemical industry. The low-tier local chemical companies have been consolidating, and remaining businesses are improving efforts in terms of safety, besides selling on value, says Wong. Wong spent 19 years in China, 3.5 years with BP-Castrol in Shanghai, 4.5 years in Hangzhou with the BP-Sinopec retail joint venture and the last 11 years back in Shanghai with Lubrizol, and is appropriately skilled to provide a perspective on “Doing Business in China and The Impact of the US-China Trade War.

Whether you are based in China with manufacturing assets and/or trading, or simply selling through distributors, agents or licensees, doing business in China still comes with significant challenges, says Wong. His presentation identified the primary obstacles and how to overcome these to achieve sustainable and profitable growth.

Wong cited the role of authorities as a significant obstacle to business expansion, emphasising three different levels of government, each with different agenda and vested interests, and an approach that is unconventional. Understanding the market and business practices in China is complex and takes time. Operators cannot simply go in and expect things to happen swiftly, he says.

When operating in China, businesses must develop strong business contingency plans to prepare for all eventualities. Overseas head offices often have a misguided understanding of Chinese business practices, he says. For multinationals, ethics is an enduring issue. Wong cited facilitation payments – remuneration for tasks officials are required to perform – as a specific ethical dilemma. Failure to entertain these payments can result in a difficult and lengthy approval process. Several years ago, most MNCs stopped facilitation payments, as a result, they have to work harder to gain approvals etc.

Often overseas companies enter the region on the misunderstanding that China is just one large market. It’s not, says Wong. China has many different markets with distinct preferences in different regions that require a unique product mix.

China is a huge, vibrant market; though, it is not easy to get the right people, he adds. While the level of talent continues to improve, talent acquisition and retention are major hurdles – particularly at mid- and senior levels.

Intellectual Property (IP) protection remains a contentious issue in China and has been identified as a key component in the United States and China’s continuing trade dispute. The importance of IP has resulted in an obsession over the generation of secrets in recent times, says Wong. While he admits there is a basis for IP protection concerns in China, IP security in the region continues to improve. Over the last few years, you can see some Chinese companies suing another Chinese company over IP infringements.

The highly volatile U.S-China trade dispute is more than just a trade war, he suggests. It is an innovation war – a war on technology. China used to rely on the U.S. for technology; suddenly, the world’s most populous region is realising the muscle it has developed in recent years. Today, China has become highly advanced in technology. Whether you like it or not, in China you must embrace technology and innovate to make things simpler, faster or lower costs, he says. The country is moving from low-cost producer to high-value, high-technology products and services. The speed of disruption and change in the industry is remarkable, he adds.

The trade war is real, and the U.S. does not want to relinquish its position as the ultimate global power, says Wong. In similar battles with Russia and Japan in the past, the U.S. has come out on top, he says. However, this trade war is likely to be long, perhaps 10-15 years, and media reports about a quick resolution may be overly optimistic. China and the U.S. are both going to be hurt by it, he believes.

While reports on the impact of this “skirmish” vary, Wong suggests confidence is down, and businesses are becoming more cautious, many pausing planned and future investments. We have already seen a slowing in car sales growth in China, the largest automotive market in the world, and China is looking to control economic growth through restructuring and policy adjustments. A trade war can only be solved if one party is prepared to give in. If both parties are equally strong and equally proud, a compromise becomes delicate. The world is in dangerous hands, and a lot is at stake if it is not managed properly, says Wong.

From a lubricant’s perspective, Wong’s keynote highlighted on electric vehicles (EV) with a large future decline in engine oils and driveline lubricants, with government legislation a key driver of this change in China. He also signalled a continued shift to higher-quality, higher-margin synthetic lubricants and bio-lubricants. Businesses operating in China must change to survive and need to be very resourceful. Taking risks is a necessary evil to achieving success in the world’s largest market. Wong also emphasised the merits of expanding into younger economies such as Southeast Asia for future growth.

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