Session 2010-11
Publications on the internet

To be publis hed as HC 735-v

House of COMMONS



Business, Innovation and Skills Committee

Rebalancing the Economy: Trade and Investment

Tuesday 15 February 2011

Stephen Phillips, Dr Kerry Brown AND Professor Peter Nolan

Simon Carter, Joan Turley AND Steve Young

Evidence heard in Public Questions 285 - 349



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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 15 February 2011

Members present:

Mr Adrian Bailey (Chair)

Mr Brian Binley

Paul Blomfield

Rebecca Harris

Simon Kirby

Gregg McClymont

Ian Murray

Nadhim Zahawi


Examination of Witnesses

Witnesses: Stephen Phillips, Chief Executive, China-Britain Business Council, Dr Kerry Brown, Head of Asia Programme, Chatham House, and Professor Peter Nolan, Cambridge University, gave evidence.

Q285 Chair : Good morning and thank you for agreeing to respond to our questions. Can I apologise for being slightly late? We have already had one meeting, which ran over slightly. It would be helpful if you could just start by introducing yourselves for transcription purposes, perhaps starting with Stephen.

Stephen Phillips: My name is Stephen Phillips, the Chief Executive at the China- Britain Business Council.

Dr Brown: Kerry Brown, Head of Asia Programme at Chatham House.

Professor Nolan: Peter Nolan, Judge Business School, University of Cambridge.

Q286 Chair : Thanks very much. We will start with a couple of general questions. First of all, China’s growth rate has really been sustaining the world economy. How has it managed to achieve this growth rate and is it sustainable? You do not all have to answer the same question, but do so if you feel that you can add something to anything that any other speaker has said. So who is going to lead off on it?

Dr Brown: Well I think the Chinese data say that the growth rate has been 9.5% to 10% over the last 30 years, so since 1978. There was a decent growth rate during the Maoist period, this is often forgotten, from the 1960s onwards when the fiveyear plans were first introduced-I think the first was 1953-but since 1978, it has been a very different kind of model, with the use of special economic zones, of which there were 14, and heavy industrialisation. Now the whole country is like a special economic zone.

Most people say that the imminent fiveyear plan, the draft of which is going to be introduced in March and which will be the 12th fiveyear plan, is probably going to promise less growth and go for quality of growth. The Chinese Government now knows that since entry to WTO in 2001, this really unleashed forces of productivity, which, when I was a diplomat at the time in Beijing, we didn’t expect to be so huge. It has sort of been a victim of its own success. Inflation is now nearly 5% and therefore there probably is the need to look more at issues of quality and balance of growth, rather than just being a GDP factory. Finally, the one thing you can say is that, for the last 30 years, the one thing everyone agrees with is that China has been a factory of GDP growth. There is no dispute about that.

Q287 Chair : Would it be fair to say that arising from this growth there has been a rather unequal distribution of benefits from it, which has to be addressed in future?

Stephen Phillips: Certainly there has been uneven distribution of the benefits of that growth. The vast majority of the economic growth has taken place in the eastern coastal provinces and has led to a population there that is much wealthier than those that live in the central and western provinces. It is clearly a Chinese Government priority to even out that balance of economic prosperity. There is a lot of Chinese Government policy that attracts investment to the central provinces, to the provinces in the north-east in Dongbei and to the south-west and to the north-west. What we are seeing is this migration of economic activity into the lesser developed provinces to address this very issue of unequal incomes and economic disparity.

Q288 Chair : Thank you. Was it Churchill who said socialism is the equal sharing of miseries and capitalism the unequal sharing of benefits? I have paraphrased that slightly. Here we have a communist country that seems to have managed to capture the essence of capitalism. Looking ahead to the People’s Congress in March, and you have alluded to this tangentially, what will be the implications in terms of policy decisions made there for UK trade with China?

Dr Brown: Well I think the problem in the last 10 years, and Peter knows this better than I do, is really that consumption has fallen as a proportion of GDP. I think 50% of GDP was consumption, maybe even as little as 17 years ago; now it is something like 36%. I think part of the fiveyear plan is going to address how to create more consumption to do something about these massive trade deficits, which are becoming a political problem; to start implementing the Copenhagen Agreement, so a 40% to 45% reduction of carbon emissions by 2020; and finally really to keep China on track to increase its per capita GDP to middle-income status by 2020, which would be about $6,000 to $7,000 per capita. At the moment, China’s per capita GDP is about $4,000 so that would be to quadruple it from $2,000 over 20 years by 2020 to become a middle-income country. That is the key objective but Peter knows more about this.

Professor Nolan: Right. I will try to link together the three issues about why China has grown, whether it is sustainable and what is going to happen in March. China is on a very unusual path of late development, and it is a curious fact of history that each late-developing country that gets on the escalator and is successful grows faster than the previous generation-from Britain through to America, Germany, France, Japan, Korea and now China. So the advantage of the latecomer is enormous. The ability to benefit from the information technology revolution has been fantastically important.

Chair : Could you just speak up a little?

Professor Nolan: Each latecomer country has grown faster than previous latecomers-from Britain, through to America, through to Japan, through to Korea and Taiwan and now China. Now in this case, the advantage of the latecomer for China is many-fold, but if you want to single out one, I would say the information technology revolution has had a fantastically positive impact on everything in China.

If you want a few points to encapsulate why China has grown so fast, the first point I would make is people have mostly predicted wrongly, and so we must be very careful when we think about where China is going today. It does not mean things will be bad but we should be very careful about where the herd is moving in terms of their perspectives. In the late 1980s, if you go back to the conventional wisdom about China, it was up the creek to nowhere-in the words of one famous commentator-it was a halfway house, socialist market, neither one thing nor the other and it had no prospects. That is the late 1980s. After Tiananmen, with very few exceptions, everybody thought China had no serious growth prospects at all and that the Communist Party could not survive. So the ability to get China wrong is fairly substantial.

So the question is where are we now? How has it got to where it is? Political stability is absolutely fundamental and Kerry can talk for equally as long as I can about the importance of the Party. We think about the Party in different ways but it is a very, very capable organisation and it has got more and more capable. It is intensely competitive, meritocratic in fundamental senses, and if you want a single institutional reason that is probably the most important reason.

China also has a very, very powerful capitalist tradition. People talk in Chinese economic history about what is called the "Capitalist sprouts"-it is a rather ugly term-and places that many of you have visited or will visit, places like the delta area around Shanghai, the Pearl River Delta in southern China, have for many hundreds of years been vibrant bases of capitalism. Of course, it is well known that in 1800 China’s industrial output was far greater than that of Europe and this was the basis of it: capitalism, markets and trade. Therefore, that has in a sense been allowed to flourish in the mixed economy since the 1970s.

A deeply important question is what the Nobel prize-winning columnist Arthur Lewis calls "economic development with unlimited supplies of labour", and China has, up until this point, had huge unlimited supplies of labour pulling workers into the urban areas, supplying us with cheap goods. A big question is when will this surplus army of labour dry up, and there is a lot of debate amongst Chinese economists about this. It is certainly getting to that point; how quickly and how sharply it bites is fundamentally important as it will affect the whole character of China’s political economy. The point at which China reaches the end of the Lewis development path is a huge question for debate amongst Chinese scholars and politicians.

If you look at the institutional structure of China’s business, it is very unusual. It is three intersecting segments. You have small and medium-sized enterprises, which many of you have visited or will visit, which are extremely vibrant, quasiprivate, very dynamic. You have an extremely important segment of foreign and direct investment, bringing in high technology. The third segment is China’s state-owned enterprise, and they coexist in an extraordinarily powerful interdependent, and up until this point, unique relationship. I will stop there, perhaps; I wanted to lead into the Congress in March but I do not want to speak too much.

Q289 Chair : Thanks very much. That is very helpful. You talked about quasi-SMEs-

Professor Nolan: Quasi-private. Let me give you an example; one of the many companies that I visited is a very famous company called Haier. The head of Haier is man called Zhang Ruimin. The Royal Bank has touted Haier as the exemplar of private enterprise in China. Talking to Zhang Ruimin-a bit closer than you are to me-I said, "Who owns your company?" He said, "I haven’t got a clue. I really don’t know. It is so complicated. I have so many entities. I have got plants across China. This one is owned by local government; this one is owned by a bit of this and a bit of that; so my ownership structure is extremely complicated. One of my major tasks as the leader of this powerful enterprise is to deal with the complicated ownership structure that arises from operating in this country. That is one of my skills." So there is very little successful business above a certain size that is a pure private enterprise in a Western sense.

Q290 Chair : So there must be a body of legislation that defines corporate organisations.

Professor Nolan: Absolutely.

Q291 Chair : Are you saying that the legislation is so wide-ranging and complex that people don’t understand it, or that the actual corporates that grow up don’t necessarily conform to any of those legal models?

Dr Brown: Yasheng Huang, an economist in America who is originally from China, described it as like a political pecking order. In fact, if you look at the political system, there is the Government, the state, and then there is the Party and the Constitution does not spell out where the division lies. The way you express it is that activity all happens under the leadership of the Communist Party, but there are rules that look very much like the legal system in the West. The problem is that that is under a sort of political order where that will trump any kind of legal decision.

On the role of entrepreneurs that Peter referred to and stateowned enterprises and entrepreneurial companies, in fact it was a long battle from the 1980s to the 1990s to really recognise entrepreneurs. They were in a kind of legal grey area and under the previous President and Party Secretary, Jiang Zemin, they were given a legal status so they could join the Communist Party. In fact if you look at the entrepreneurs-private business people, nonstate business people-a third of them are Party members now, which is the highest figure of any social group. For the usual supporters of the Communist Party, farmers, urban workers or professional classes, it is about 5% to 6%. Membership of the Communist Party as a whole is about 6% of China’s population, so entrepreneurs are big supporters of the Party and the idea that they will be agents of political change is probably a little naïve.

Finally, on this issue of state and nonstate, Marx said anything above eight members in an organisation was already capitalist because it would involve some kind of capital exploitation. In China, once you get beyond an enterprise of eight people, then the State will be involved by having a resident party secretary. So it is very difficult to do business without state or Party involvement, without political involvement.

Q292 Mr Binley: We are used to seeing the SME sector as the home of thrusting creativity. In this country, about 70% of Britain’s creativity comes from that particular sector. Normally, that degree of creativity presupposes a degree of independence, not least political independence. Some of the most awkward buggers in the country are small- and mediumsized business people. So I do need to try to understand what you mean by this quasi element, how that impacts upon creativity and how that relates to a degree of independence, which you suggest, because of Party involvement and so forth, does not exist, or perhaps does not exist in the same way that it does in this country.

Professor Nolan: It certainly does not exist in the same way as in this country. The answer is this is a creative combination. For example, in many people’s view Haier is the most successful business in China. I would say that is a rather exaggerated view, but it is certainly very, very successful and very creative in terms of new technology and dealing with customers. But it is a fact that a substantial part of its ownership is very difficult for the leader to identify, it is very complicated-spread across the whole country-but there is sufficient incentive left for him and for those who work for him to enable him to be creative. It is a highly creative body, even though a large body of its shareholders are various kinds of government entities across the country. There is sufficient left on the table.

After all, the manager of a global bank or a global business does not have a very large stake in ownership, just a tiny fraction. So the state is a very important part of the ownership, but there are sufficient incentives left on the table for the entrepreneurial leader and those around him or her-usually, it is him-to be very creative.

Q293 Chair : Could I just ask, which was the company you referred to?

Professor Nolan: It is a famous company called Haier. It makes white goods and is very successful. It is in Qingdao but it has branches across the whole country; it is a very interesting example, much praised by the World Bank and much written about. There is nothing secret, in that sense, about it.

Q294 Chair : You have spoken about the fairly unusual interlocking of the private sector and politicians-the Party structure. Logically, if there is a change in leadership in 2012, how do you think that could affect business relations with the UK?

Stephen Phillips: Perhaps I could build upon some of the answers and also address the point, if that is okay. Everything that my colleagues have said is absolutely true. Looking at it from a more pragmatic, business point of view in dealing with these organisations-whether they are large stateowned enterprises or, indeed, genuine SMEs in the context that we think of them-you are dealing with businesses that behave in a very commercial way, and in a way that is very familiar to UK businesses. Behind what you see on the surface is this political dynamic going on, but I would say that it is not that alien to a business dealing with a Chinese business on a day-to-day basis.

In terms of the likely change of leadership, all indications are at the moment that there will be a continuation of the continued opening up and reform of China, which will continue to offer increasing opportunities for collaboration. There will be a change of emphasis; China won’t be looking to attract the type of investment that it has been looking for in the past and there will be much more focus on cleantech, hightech industries and so forth. So there is going to be a changing shape in the opportunity for business but that opportunity will continue to exist.

Dr Brown: I think America has gone to the WTO in the last couple of days about credit card payments because at the moment only one organisation, UnionPay, is allowed to take credit card payments in China.

Chair : Just on this issue, I was going to invite Nadhim Zahawi to come in. To a certain extent, you have anticipated our next question.

Q295 Nadhim Zahawi: Thank you very much. That is precisely my question: how well do you think China is keeping up with its WTO commitments?

Dr Brown: Well, I think it has fulfilled them all and managed to protect what it wants to protect completely legally. These will be big battles in the WTO because it is not entirely clear that they violated any of their conditions, and I think they have scrupulously fulfilled them. I have to say, I was in the Embassy in Beijing as a diplomat when the WTO agreement was signed and if remember rightly at the time, 10 years ago in November 2001, we were kind of sceptical that China would be able to meet its obligations. We did not think it would be able to do much on retail banking. We thought it would expose its stateowned enterprises to fierce international competition. We thought five years for the implementation of most of the commitments was pretty ambitious. Well, like it has with the Millennium Goals, it has reached these much earlier than we expected and it has fulfilled them.

The problem really now is that it has become the victim of its own success, in a way, because it has surpassed what it promised. It is getting into very technical areas at a time when it is also having to look at-as the FiveYear Plan is probably going to cover-all sorts of more gritty areas of social and political change, which I do not think the Party has got a very clear route to deal with. The problem is it is in a transitional phase, as Peter referred to, where the economy has in a sense been successful but political change, the changes between the state and the Party and political structures-how to deal with having contention in society; how to deal with having independent unions; how to deal with having a proper legal status for civil society; how to deal with political opposition in a more creative way than just banging people up-is becoming much more of a priority. It is more difficult to build consensus there.

The Standing Committee of the Politburo, the nine members, exists for one reason: to create consensus. Therefore, as we move towards 2012, the issue is that each of the people on that must have a clear political role to look after certain constituencies and also a clear political role to look after certain economic constituencies, including stateowned oil companies, certain monopolies like the tobacco monopoly, and certain areas of economic activity, including provincial economic activity-Guangdong, for instance, is about 20% of China’s GDP. You follow the money. With the Politburo, you look at each person who is likely to come on to it, you look at their economic function, their political function and the constituency they look after. There is the consensus and there is the political and economic roadmap for China for the next five years. It is all about individuals.

Q296 Nadhim Zahawi: How important is China’s control of the rare earth metals to the world economy and ultimately to UK growth?

Stephen Phillips: Perhaps if I can just answer from the UK perspective. Obviously this is a hot topic, certainly in terms of the media. I have checked with the CBBC network of 20 offices and also the British Chamber across China and as far as I know, we have not had one single inquiry about this issue from UK companies. That perhaps puts it in the context of the UK. Clearly for other countries, it is a much more serious issue, and certainly if you look at countries like Taiwan, Korea, Japan, it is a much hotter issue. But from the UK point of view at the moment, it does not seem to be a major issue.

Q297 Nadhim Zahawi: Stephen, a question for you: in your submission you say that "the level of understanding and awareness of modern China in the UK is not as good as it needs to be," but isn’t it your job to improve the situation?

Stephen Phillips: Of course that is part of our job, and for that reason we run something like 200 events across the UK every year to raise awareness amongst the big business community of modern China and what it means for companies by way of opportunity. However, more fundamentally in the UK, our education system doesn’t support young people getting a good knowledge of what is going on in China and, indeed, Asia more generally, and that needs to be addressed at an earlier stage.

It would also be helpful if there was more coverage in the UK media about what is going on in Asia and indeed in China. A lot of the coverage tends to be on the negative side as opposed to actually setting out what is going on in the country. It may be rather silly to think that the media would pick up that they have a responsibility to address this. Generally speaking, however, from the companies that we see coming to this, their level of knowledge is incredibly basic to begin with and it is a risk to the UK if UK business people do not understand what is going on in the second largest economy in the world. Somehow, through many different means-and I think it is through multiple means-we have got to improve the knowledge of what is going on in China and Asia more generally in our country.

Q298 Nadhim Zahawi: Do you concur with that view?

Dr Brown: We have a problem because in a relatively short space of time the dynamics have changed quite a lot in the UK and China. The priority up until 1997 was the hand-back of Hong Kong. This was a huge, contentious issue and we dealt with it, but since 1997 China’s economy has grown exponentially and the UK has become a relatively small partner, in some ways, for what China is. That means that going through the EU for a lot of issues is important, and there we do do a lot of negotiation multilaterally and that is just going to have to continue.

Secondly, it means a lot of the tools for our diplomatic dialogue with China have got to become much more sophisticated. We need to have pretty knowledgeable people to interact with China. As a final example, the life of a politician in China is one where you are highly trained. You end up as a Minister after many, many years of going through provinces, going through specific technical departments. These are very formidable negotiators-very, very formidable-as we learnt at Copenhagen, and as you well know, for a British politician, the path is different: it is very diverse. I am not saying one is better than the other but it just means that, in a sense, a politician from China and a politician from a Western democracy are quite different; they can be quite different.

Q299 Nadhim Zahawi: So are you saying that we are paying the price for Hong Kong?

Dr Brown: Well no, not at all. I don’t think we are. We are still the brand carrier for colonisation and imperialism, and we get beaten over the head by that and there is a big historic grievance. But in the end, the policy is very pragmatic where we are of use to China and its enormous internal needs. That is the bottom line.

Professor Nolan: We have a big problem about populations’ understanding and perceptions and the role of the mass media. This hysterical, widely read article in the American magazine Fortune is a very good example: "China buys the World". People reading that, just seeing the headline, would think China is buying the world. They would not have any understanding at all of the role of multinational companies in China or, in fact, how limited China’s outflow of direct investment is. The media serve us very, very badly, I regret to say.

The fact is, if we go back to the question about where China stands in terms of fulfilling its WTO commitments, the US in the 19th century, Britain in the 18th century, Japan right through to the present day, Korea and Taiwan: none of them remotely would meet WTO commitments today. China has met its WTO commitments. Kerry was in the middle of the discussion in the Foreign Office, I was part of the wider network of discussions around that issue, and today it is an extraordinary reality that China is the most deeply engaged of all latecomer countries in world trade. Exports plus imports are nearly 70% of GDP-that is a fantastic depth of integration.

Even less well understood is the role of multinational companies in China. Foreign direct investment in China has increased from less than $30 billion in the year 2000, just before China entered the WTO, to $500 billion today. Last year it increased by $106 billion. Foreign-invested enterprises in China, foreign firms in China, account for 55% of China’s exports, so who are we? Who are China? Who are they that are exporting to us when we think about trade imbalances? Some 55% of China’s exports come from foreign firms in China and most of these are exports that are based around processed goods from imported components. Two thirds of China’s hightechnology outputs-things like electronic goods, medical equipment-come from foreign-invested enterprises in China. If you look at China’s exports of hightechnology products, 90%-plus come from foreign firms in China: East Asian, European and American.

So when we think about who they are and try to understand them, the media have a very, very high duty and we have a duty in our different roles-in the business sector; in government; and in my own job, in universities-continually to put things in balance and explain just exactly where China is on this path of development. One of the important issues is how open it has been and I entirely concur with Kerry’s view.

Q300 Mr Binley: I think your comments there, Professor, lead nicely on to my concern. We talk glibly about the middle class and we have a perception of the middle class that is both cultural and economic and may even be a wider perception in many respects. Yet we note that there are 300 million people defined as middle class in China. How does our perception and the reality of that group of people merge? Is it the same thing or are we talking about different things?

Professor Nolan: Well it is quite curious to come here today because I am reading Barnaby Rudge at the moment, and in 1780 we had a very interesting event that took place in these buildings in the centre of London. We have our own complicated political evolution and the position of the middle class in that is quite an interesting one. Just to remind people, in June 1780, we had our own Tiananmen in this country and up to 900 people were mown down by troops as the prelude to our industrialisation, so we should keep that in mind when we think about our values and the role of the middle class. The middle class were very unhappy indeed, and didn’t give people the vote for over 100 years.

So where does China stand? The first thing is, when we define the Chinese middle class, we should be very, very careful. The Chinese Premier came to my university, the University of Cambridge, and he gave a speech almost two years ago, which ended catastrophically and said all sorts of things about many things. The title of his speech was Looking at China from the Angle of Development, and in terms of the global standard of the middle class, China does not have 300 million people. It may have 100 million people; it may grow to 1.3 billion people, but that is entirely speculative. Today it is still a relatively small middle class and prospects are good and one hopes it does grow but China is still a poor country.

When we talk about China catching up, the Chinese middle class and how China views the world, we should remember some very simple facts. China probably produces more chocolate than Belgium-I am not sure about that-and it may produce more cuckoo clocks that Switzerland; that is almost certainly true, but those are not very interesting comparisons. The fact is China has 1.3 billion people and when we talk about China catching up, the role of the Chinese middle class in the world, we should remember that we, the whole of the high-income countries, have 1 billion people or less. China has 1.3 billion people.

If you look at China’s gross national income in purchasing power parity-which I still think overestimates China’s national product because so many products are of low standard-it is less than one fifth of that of the highincome countries, and that is probably an exaggeration. It is growing faster but we can all speculate about the future. China’s household consumption, because China’s household consumption share is relatively low and stands at less than the total volume of household consumption in purchasing power parity dollars, which is rather questionable and maybe overstates it, is less than one tenth of us in the highincome countries.

So the middle classes are growing and that is good news for everybody and it is good news for this country, but we should bear in mind the Premier’s speech, Looking at China from the Angle of Development. It still has a long, long way to go. There are 800 million people in China who are by any Western standards very poor people.

Q301 Mr Binley: Thank you for that because it is easy to take into your head socalled facts that do not really relate, and that is why I wanted to ask that question. Let me then go on because it seems to me that Britain’s export potential is not totally but well weighted towards middle-class consumption, and this leads me on to the real thrust of my question. Given that the middle class is not the glib size that we have just talked about-I have just put that to you and it has been destroyed-how difficult does that make it for British industry and British export to take advantage of that particular sector, bearing in mind the reliance upon middle-class consumption?

Professor Nolan: I am happy to talk about it but I think my colleagues should have a further comment.

Stephen Phillips: A middle class of 300 million people is not an insubstantial customer base.

Q302 Mr Binley: But we know it is not 300 million people. That is the very point.

Stephen Phillips: It may or not be 300 million people; it may be 100 million people. The reality from a business point of view is there is a middle class and a consumer class that is buying luxury goods, quality goods, quality services from Western enterprises. There is a very real market there and it is growing substantially. For instance, if we just look at the last 12 months of car sales in China, certainly some of the companies I have spoken to have seen growth of between 50% and 70%. Clearly that is not sustainable but it is real and that includes truly luxury car brands. As you go round Chinese second and third-tier cities, you will see branded shops selling European highquality goods that you do not see in cities across Europe. That is real; people are buying these goods in China.

So whether or not it is 100 million, 300 million or 500 million people, there is a class of consumer who is buying stuff from the UK, and that is only going to increase in the future. That does not get away from the point, though, that the UK is still, at least on the surface, underperforming in China: second largest economy, but only the ninth largest export market. What balances that out a little bit is that the UK, compared with Germany for instance, has invested as much money in China as Germany has. Therefore, on a per capita basis, to a certain extent the UK has put its money where its mouth is in China, in a way that perhaps other countries from Europe have not. It is quite a complicated picture.

Chair : Yes, we are going to come on to that in a moment.

Q303 Simon Kirby: Are you aware of any discussion within Government about replacing the existing Framework for Engagement strategy, and if a new strategy were to be created, what do you think should be in it?

Dr Brown: Do you meant the one from 2009?

Simon Kirby: Yes, that’s right.

Dr Brown: That set out three or four benchmarks, such as helping China with its internal reform, increasing economic co-operation, and educational tourism, and I doubt whether they would be changed. The current Government has said that it will stick to the policy of the previous Labour Government because it was successful engagement, and what is the alternative? You cannot really have disengagement, so I think it is unlikely it would change.

However, the battleground still remains to really attract more Chinese investment to the UK. As an example, when Li Keqiang, who is likely to be the replacement of Wen Jiabao as Premier, came to the UK in January, he bought Eurobonds in Spain and so maybe $6 billion worth of investment, in Germany I think it was $9 billion, and in the UK I think we signed deals of $2.4 billion. Of course there are still a lot of other things going on and in fact the UK is still the largest destination for Chinese investment. That is the real battleground.

The second thing is that we have two strategies. I suppose we can say that we go through the EU as trade partners, and the EU and China are the biggest trade partners in the world-bigger than the US and China-so we can go that route, but at the end of the day we still have to fight bilaterally for job creation in our countries and it is very, very tough. The EU can fight generic battles, like whether we get proper market access for key strategic areas, and for the UK it is obviously financial services that we feel we are locked out of at the moment. However, it is unlikely we are going to be able to hold hands about manufacturing, more because Germany still has a big advantage there. Stephen mentioned car manufacturing, and Germany’s exports of cars to China are still pretty significant.

It is a pretty competitive market within the EU to export to China, and we are at a disadvantage because the things that we may want to export, like financial services, are not quite there at the moment. But I do not think it is the wrong strategy for us to hope that there will be very viable financial services markets in China with an emerging professional, urban class that is pretty significant and has quite a lot of purchasing power.

Professor Nolan: Obviously, in some important senses we are a part of Europe, but in other important senses we are not. We are not in the Eurozone and we are perceived by China as being a very different animal, obviously, from the United States and also from Continental Europe, and that is to our advantage. The nature of our political economy and of our business system has evolved in a very different way from that of France, and particularly from that of Germany. We have gone down a different path and the possibility for engaging with this country in wider issues of mutual benefit and of common interest for the whole world puts the United Kingdom in an interesting position. We are by the far the most open of all the highincome countries. If we have time, perhaps we can talk a bit more later about the degree of our openness. Just today, GE has bought Wood, which is one of the most important manufacturers in its niche in the oilfield services sector. Every day there is a story of this kind, which is not a good or a bad thing, but it differentiates us sharply from Germany and to some degree from France.

In terms of this Framework for Engagement that you are talking about, business needs to be seen within a wider context of relationship to China, one in which the Foreign Office and our Government fully appreciate that China still is a developing country. When we talk about what is going to happen in the Congress in March, issues of how China becomes more efficient in its use of energy, how Chinese people can live in more pleasant urban environments and how the living standards of poor Chinese people can be raised are central questions.

I applaud the Framework for Engagement because it goes beyond the mentality of pigs and troughs and is a wonderful opportunity for us to clean up in China. We must have profit and benefit from our businesses, but we can have a most fruitful relationship for China in a wider context of political relationship, and we are in a very advantageous position because of our history, both past and recent. The Framework for Engagement is good and China perceives us as an important part of the story of trying to establish a sustainable development path for itself and for the world. For example, we still face a crisis in the global financial system, which we can argue was caused to a considerable degree by policies originating in this country, but we are at the forefront of efforts to try to correct that to improve the regulation of the global financial system.

In other words, we are in a position to co-operate with China on issues of financial regulation, issues of dealing with climate change, issues of dealing with our natural environment. We face the prospect, as Edward Wilson puts it, of an "age of loneliness" because we are destroying our species at such a wild rate. All these senses should situate business in a wider context of a longer-term relationship with China, which goes beyond the last 30 years of what I would call wild capitalism-or whatever you want to call it-into a more intelligently regulated capitalism. As the document for engagement outlines in a very interesting way, China views us as a very important partner in that endeavour.

Q304 Mr Binley: I just want to ask a very quick question because you did say we had some advantage and that was based on history. Was the work in Hong Kong and the changeover pretty important in that respect?

Professor Nolan: It was important; it was part of that tapestry of trust and relationship. For example, Chris Patten is a welcome speaker at the Party School, and that was a very important part of trust. It was not the only thing.

Q305 Mr Binley: But it is that sort of thing, is it, that you think helps to create-

Professor Nolan: It does help and, to be blunt, the tradition of our universities, the tradition of the English language and globalisation all help as well. I do not want to speak too much, but I hope that later on in the discussion we will have time to talk about some common challenges in terms of their business structure when we come to talk about foreign direct investment. I think in some curious ways, there are a lot of symmetries in the challenges that China faces in its large business sector with those that we face, and that are rather different from those of Germany, America and France.

Q306 Simon Kirby: Professor Nolan, if, as you say, the UK is in an advantageous position and if, as you say, Dr Brown, both a bilateral and multilateral twin-pronged approach is working, why is it that Germany does so much better than us? They export five times, possibly six times, as much as we do. How can you square that?

Dr Brown: As I said before, the UK’s economic strengths as I understand it are really in things that China is not quite ready for. There are things where we have been successful, which Stephen will know about better than me. In certain carbon-capture technology areas or hightech areas and education provision we have been very successful, but our focus has really been on financial services and banking, and that is still being developed in China.

Germany has put a lot of effort in. Its political relations with China were good. Chancellor Schröeder went there every year, while I think Tony Blair only went there twice in 10 years. So there was a difference in political emphasis, but I have to say that the previous Prime Minister, Gordon Brown, and now David Cameron have been going there annually, and they have put a lot of political effort into it. Goodness knows how many ministerial visits there are to China each year, so the politics since 1997 is straightforward. It is not all about one issue.

The perception of the UK in China is quite ambiguous. On the one hand, we are obviously successful in getting Chinese students to come here; about 100,000 are here, which is almost as much or maybe more than America. We have been tremendously successful, although it will be very important to look at the impact of tuition fees on that as it might be a huge negative area. However, despite many years of effort by the British Council, the British Embassy and many others, the UK is regarded as being a conservative, oldfashioned, traditional place where you can maybe come for a holiday; there has been an increase in tourism to about 175,000. Finally, for Chinese visitors to the UK, of course it is a big problem that they cannot get a unified EU visa-they have to get separate visas-and there are restrictions on that, so these perceptions are quite difficult to shift.

Stephen Phillips: Perhaps I could just add a few points to that. In terms of why Germany has outperformed the UK, the reality is Germany has been making what China has needed as it has gone through a rapid period of industrialisation. It manufactures the kit and the machines that China has needed to build the factories that have allowed China to develop rapidly.

One of the things that the UK has is very advanced engineering but, from a Chinese point of view, what that means is that the UK makes something that tends to go into somebody else’s kit, so they do not see the UK element. What China wants overall is turnkey solutions, and the UK isn’t great at offering that. Other countries tend to be a little bit better about giving an end-customer in China the whole kit that they’re looking for.

Picking up on one point that you mentioned, Kerry, another thing that I hear quite frequently when I go around China, from both Government officials and from businesses, is that UK businesses do not come across as being as hungry for business as their counterparts from the US, other parts of Continental Europe and other parts of Asia. There is an issue, perhaps, in the way in which UK businesses are a little more low-key; if they were a bit pushier, they might get a bit more traction.

Professor Nolan: The global business system has gone through an extraordinary revolution in the last 30 years and in my evaluation, which I think is just unarguable, at the head of the global business system in almost every sector is a small group of oligopolists, basically, who are giant global systems integrators.

The path of development, for very complicated reasons of history in recent decades, has left Germany in the enviable position that it has a mighty group of very, very powerful industrial manufacturing systems integrators. I was in Siemens last Friday, and one of my PhD students is studying the evolution of the value chain at Siemens as an example. Companies such as Daimler, Siemens, VW, BMW, ThyssenKrupp, BASF-the list goes on and on and it is a very long list indeed-have engineering, manufacturing, and systems integration prowess. They connect very closely with the Mittelstand, the small and medium-sized enterprises in Germany, which connects with the German education system, its technical school system and many other features of the German political economy. We have sold almost all of our systems integrators to companies from other countries, and that is neither good nor bad but that is a reality.

German firms do not just export to China; they produce in China in huge volumes. Those firms that are capable of doing it-and many are-have taken with them their SMEs within their supply chain. We have a problem in the disconnect between our own firms and global systems integrators. It is very hard for something like CBBC or another branch of Government policy to say that we will do something to resolve that. It relates to the fundamental structure of our political economy, and Germany has evolved out of the last 20 or 30 years with a huge advantage in that respect in terms of high-technology systems integrators, their predominantly German supply chain and the incentives for people to attend university or technical school and become engineers and work in those companies.

My own view, which I have thought about a great deal in terms of where our country is going, is that we cannot reinvent the wheel; we are where we are. As Charles Powell and Mrs Thatcher put it, we have become a mercantile society, and we are jolly good at it and our companies have very high market capitalisations. We have to think of a way of engaging with an economy where the commanding heights are services, retail, banking, media and marketing. We have to accept that and find a way of finding our place in the world, not by reinventing German or French style manufacturing but by building on that uniqueness and that difference, and engaging with China around that foundation that we have, which is very different from that of Germany.

Q307 Chair : Just a couple of follow-up questions. First of all, and I think this has been alluded to, we may be exporting far more manufacturing to China than the statistics would convey because in fact we manufacture a part of finished goods that are denominated as coming from other countries. Is this a reasonable observation, and could anybody give a rough estimate of what sort of additional wealth is created by that? My second question is: do we know how many German firms are operating in China as compared with British firms?

Professor Nolan: There are 5,000 German companies operating and producing things in China.

Q308 Chair : And British?

Professor Nolan: I don’t know. If you asked me to guess, I would say 500.

Chair : Right.

Professor Nolan: It is just a wild guess.

Stephen Phillips: I think the MOFCOM statistics say that there are 6,500 UK companies operating in China, but that may include things like BVIs.

Professor Nolan: It needs to be carefully investigated.

Chair : Could you project your voice this way? I am having difficulty hearing.

Stephen Phillips: Yes. I think statistics from MOFCOM, the Chinese Ministry of Commerce, show there are about 6,500 UK-registered companies operating in China, but that needs to be taken with a pinch of salt and would need delving into.

Dr Brown: I did research this about five years ago. If you go to provinces, they will give you lists of joint ventures. For instance, in Inner Mongolia I think there are 44 official UK investments including the TaiwanLondon Cake Factory. They are offshore so there are probably about two authentic British investments of that 44, so I think the figure is right-6,500 joint ventures.

About the components, if you think of Airbus, obviously a part of Airbuses are British-maybe 20% to 30% sometimes-and if they have Rolls-Royce engines then it might be 50%, but the engines and the wings are put on our exports to Germany and then the complete plane is put on German statistics, so that is a huge amount. That is the real cream of your export figures, and they go on Germany’s, and there are a lot other examples that do not go on our figures.

Q309 Chair : It obviously distorts the figures. I do not know how many Rolls-Royce cars are actually exported to China, maybe none. They are obviously German-owned but British-built. How does that figure in the statistics?

Dr Brown: Bentley has been much more successful, and I have not got a clue about Rolls-Royce, but there are some really odd things. For example, the world’s biggest Louis Vuitton shop is in Tai’an, which is in the middle of China, but it is subsidised by the local government as a flag carrier. The luxury trades area is pretty complicated and, as I say, I think Bentley sell out within an hour of taking their stuff over there, but does that really contribute a huge amount?

Q310 Mr Binley: I seek clarification really. I have been in business all my life, it is my prime interest and I have been selling for most of my life. You made a strange comment about Britain not being pushy enough, and yet we were told that you only do business with China if they like you. There is actually a bit of a dichotomy there, and I want therefore to know a little more about what you really mean at the coalface about how we can be more successful at selling.

Stephen Phillips: That is a very fair point and obviously building a relationship is absolutely critical to doing successful business in China. I was merely reporting what I hear very frequently as I go round China. One of the questions I ask quite often of people I meet is, "What could the UK do better?" One of the most common answers I get back is that UK business people could be hungrier for business, and they are making the comparison with American or German salespeople.

Q311 Mr Binley: Okay. Without prolonging the discussion, it seems to me this is a pretty important point that really matters. Could you come back to us with a more considered view of how we could improve that situation?

Stephen Phillips: Certainly. When I go round I will ask further probing questions as to exactly what these people mean. Yes, of course.

Q312 Simon Kirby: Those were fascinating answers about the mismatch between the sectors that China is interested in and perhaps the sectors that the UK can provide. That having been said, do you think the Prime Minister’s Trade Mission-where he prioritised sectors of highend manufacturing, advanced manufacturing, financial services, which you say are still developing in China, low-carbon urban development and digital media-prioritised the right sectors, and where does that leave the other sectors in the UK?

Dr Brown: It is really important to have senior political leaders from the UK open doors. That is still important and that is really why the CBBC has an important function, because it has political leverage. You have to pick your battles, really, so to have those sectors there is realistic. We are not going to be able to export certain manufactured objects, because they make 70% of the world’s toys or something. We are not going to succeed unless we are really, really careful about what we choose to engage in.

The only point about trying to do business in China is, obviously, it is a long way away, it has a very different culture and it takes a lot of time, and I guess a lot of SMEs do not have that time. It is a pretty big choice for them to go and do it; they must be sure that they are going to succeed before they go, or have a good likelihood of success, and the question I would ask is whether the Government should not do more now to support small and medium-sized enterprises in this battle. I am sure that the big boys like BP and Rolls-Royce and all the rest will be okay-they will be able to fight their battles-but SMEs need quite a lot of help. It is there that certainly the British Government and the European Union have a lot that they can do to help them.

Stephen Phillips: Mr Chairman, might I add something to that? CBBC was very actively involved in the Prime Minister’s visit and the business delegation. The choice of those sectors was actually really driven by needing a focus for an event, so you get the right businesses to meet the right businesses. If you just try to take a very scattergun approach in terms of tackling all sectors of the economy, then it is very difficult to get businesses from one sector to meet businesses from the same sector in China. That is why there was a focus on particular sectors. The sectors chosen were ones where we believe there is genuine potential. What I would say is that, throughout the year, there is a whole range of activity that goes on, either from UKTI, the CBBC or a whole range of other organisations, covering every sector of the UK economy. Certainly from work at CBBC, I can assure you that it is very, very broadly based. We touch almost every sector of the economy across the whole of the UK.

Chair : This is a very important issue and we are pre-empting the questions I know Rebecca Harris is going to ask. We will just go on and deal with intellectual property before I come to Rebecca’s questions.

Q313 Paul Blomfield: We have heard in the course of this inquiry that there are specific concerns in relation to intellectual property rights, and they are often cited as a barrier or as a contributing factor to caution from British business in engaging with China. Do you think those are real concerns?

Stephen Phillips: Perhaps I can take that in the first instance. IP concerns are legitimate, they are real. Perhaps the perception of the issue in the marketplace is lagging the reality. China has made a great deal of progress, as it has around WTO commitments for instance, in terms of improving the environment in China. Certainly the legal framework is very well developed now; the biggest issue is the enforcement of IP judgments. It is very notable, though, that in excess of 90% of IP cases in China are Chinese against Chinese, and as China moves further up the value curve there is a vested interest in China having an environment that is supportive of developing IP. It is quite a rapidly changing situation but it is a legitimate concern.

There are lots of legal and commercial ways in which companies can tackle IP risk. You can keep certain elements of your technology offshore; you can keep certain bits of your technology in Hong Kong, for instance, if you want something very close to the mainland market. There are lots of ways to overcome the issue. What we see at CBBC is that there is almost a presumption by every business that they have an IP issue, when perhaps businesses do not even have IP to protect.

Q314 Paul Blomfield: I think you have probably answered the question I was going to ask you about the submission comments you made to us about interior improvements over the last decade. So the material improvements are that the legal framework is getting better, and the weakness remains enforcement. It is a very interesting point you make about the internal dynamic leading to a requirement to tackle the issue, because that is certainly not the perception we have heard from some of those who have given evidence to us.

Stephen Phillips: I think maybe, if I could add to it, that there is an absolute commitment by the central Government to getting this right. The further you go away from Beijing, the more diluted it becomes and the more local vested interest-which goes back to the early comments about Government being connected to business-comes into play when actual cases get heard in the judicial system.

Paul Blomfield: Okay. Thank you.

Professor Nolan: Again, I am very fond of the now late historian Christopher Hill, who wrote a book called The World Turned Upside Down. I think we have continually to balance our own legitimate interests and hopes against looking at things from China’s angle, and how they see the world. China is a large country in population terms and it is growing very fast, but one of the most useful pieces of research that the Government has conducted in this country, and which is sadly now to be stopped, is the Department for Business, Innovation and Skills annual report on the top 1,400 companies in the world by research and development. It is an exceptionally useful document.

In the last 30 years the process of concentration of research and development in the hands of a very small number of immensely powerful and capable global companies has been palpable. They report that the top 1,400 companies spend $600 billion per year on R and D. That is all the intellectual property. That is the core of the world’s intellectual property. The top 100 companies, according to the BIS estimate, have 60% of the expenditure of the top 1,400 companies. These are the companies that we all know: Siemens, GE, RollsRoyce, Boeing-it just goes on. There are no Chinese companies among that at all-not one. If you go further down the list, there are a tiny handful of Chinese companies.

If you look at international competition in hightechnology products, Chinese firms are really nowhere. They are selling lots and lots of things to developing countries-low-end mobile phones, maybe there’s an IP issue there, but it is lowend. It is not the top end. There is a famous study of the iPod. It is a tiny proportion of value-added in China. Out of $244, something like $3 is added in China through assembly. In the statistics, it appears like a Chinese hightech export, but it is not. The high technology is all embedded in multinational companies, in investment in research and development. Global companies fight: they do not just have to think about IP in China; they have to think about Western companies trying to capture their knowledge. It is one thing to get a blueprint, and another thing to produce a product. I think that China is a long, long way behind. It is making progress, but it has a long, long way to go. We ought to look at things from their angle, and then that will help us to have a more fruitful conversation.

Chair : Can I just move on to Rebecca Harris on SMEs and inward investment?

Q315 Rebecca Harris: Yes, as the Chairman said, we are starting to pick up on those. What sort of specific recommendations would you have for how we can encourage more SMEs to engage with investing in China and Chinese companies, and do you think this is a role for Government to do more, or for trade associations?

Professor Nolan: Is this us going into China-our firms going into China? I have a different view from most people. I think that the most successful SMEs going into China are going into China because they are successful in the value chain of existing global companies. Let me give you two examples, although they may not be strictly SMEs; they have grown into something else.

Take for example Rexam. Most people here are familiar with Rexam. It is a UKbased/headquartered company, a very high-technology company indeed, producing beverage cans. They produced a few beverage cans last year-65 billion beverage cans. Most people are unaware of that. It is a UKbased company, but it produces almost nothing in the UK. However, it is part of the value chain of CocaCola, PepsiCo, AnheuserBusch InBev, as it now is, and SAB Miller. We cannot help them. It is beyond an SME. However, their relationship does not depend on the UK Government or another Government. It depends on their relationship with a leading global company.

Q316 Rebecca Harris: You are saying we cannot encourage-

Professor Nolan: I think it is quite difficult-

Rebecca Harris: -to come in on the tails of-

Professor Nolan: I think it is quite difficult. The most important function of Government is in a wider discourse with China about the broad pattern and direction of development. There is a limited amount that the Government can do, given the nature of the global business system. IMI makes postmix machines for fizzy drinks, but the Government cannot say, "We will help you go into China." It is, I think, technically a mediumsized enterprise, but its advance into the world economy, which is very successful, producing across the world, including in China, comes not because the Government has helped it but because it has built, on its own, a powerful relationship with CocaCola and PepsiCo and other global soft drinks producers.

I think the Government’s most important functions are what it does in the wider context here, especially education, in providing a place that global companies want to come and produce in, have their headquarters activity, their R and D, their procurement functions, their branding functions, and that is something where the Government can be really crucial. We have such a disconnect between the global business system and systems integrators and SMEs. There is obviously not nothing, but there is less that the Government can do than one might imagine.

Stephen Phillips: The supply chain is obviously an important route for SMEs to get into the market, but it is not the only route. There are many companies that CBBC have worked with that have gone in direct. The fast-changing nature of the Chinese economy, the emergence of private-sector SMEs in China, does mean that there are new opportunities almost to create markets that do not exist.

One example is a company from Hampshire that we have worked with, who were actually found on the internet. They have sludge treatment equipment, and they are now manufacturing that under licence in Shenyang. That is a microbusiness-fewer than 10 employees. They have done this in a period of less than 10 months, and are now doing good business. Another company with which we have worked is now selling software to Chinese hospitals to track MRSA in hospitals. Again, it is a microcompany. There are opportunities.

I think the biggest challenge for SMEs is the lack of resource in the broader sense: both money and number of hours in the day. SME business owners tend to be pulled in multiple directions. That is the biggest challenge in the context of China, because it is a long way away and it costs a great deal of money to develop the market. You do need to build those relationships that were mentioned earlier, and that requires a huge amount of investment, both timewise and capitalwise. There are good opportunities, however.

Dr Brown: Just a very specific thing, but Government procurement in China is very important. The state is a big buyer. One of the battles, both through the WTO and also through the EU, is to get fair treatment in Government procurement. This is something that German companies, when they were with Angela Merkel last year, complained about-including BASF and I think BMW-to Wen Jiabao, the Chinese Premier. There is not a lot of transparency, and there is a suspicion that Government procurement tender processes in China are not entirely easy. They are very weighted against foreign companies, but they are huge and they are sometimes hospitals, sometimes education provision, sometimes big projects for infrastructure. They are really the commanding heights of the economy, and to have a fair procurement procedure would be pretty important. At the moment there is a lot of evidence that that is not the case.

Stephen Phillips: Mr Chairman, may I just make one more point? I think that there is also another issue for SMEs. When you think about where the UK has got strengths-in hightech, in very innovative products-one of the challenges is that most of the buyers of those in China tend to be very large companies: SOEs. The stateowned enterprises tend to have a desire to deal with Fortune 500 companies. For an SME that has something that these companies really need, getting a foot in the door is actually quite hard. That is an area where the Government and CBBC can help and does help, because it does require convincing these organisations that this titchy little company has something of tremendous value. The natural inclination, however, is, "If they are not Fortune 500 then I do not want to talk to them."

Q317 Rebecca Harris: You have identified that there are opportunities there, and you have particularly referenced some firms that you have supported recently. How do we try and encourage more UK firms, given their time constraints or whatever, to look at it as a business opportunity and to get involved? Do we need the trade associations to help them with the problems they might have, with the amount of time they could commit, or is it a role for Government?

Stephen Phillips: It has to be multipronged. Obviously there is a huge SME base in the UK. Government touches a proportion of that, but only a relatively small proportion. CBBC itself touches a small proportion. We work very closely with CBI, the IOD-organisations like that-and then trade associations as well, to get the message out to help companies understand what it means for them. I genuinely think that we have to use as many routes to market as possible. In my written submission I also mentioned that I wrote to all MPs after the election, just to let you know that we exist. I genuinely believe that we need people on the ground, across the country, making companies aware that there is support available to help them.

Q318 Rebecca Harris: The flip side of that is, how do we encourage more investment from China into the UK economy?

Dr Brown: We decide what we want. It has been a constant problem to have a clear policy from the UK about what kind of investments are wanted and where they go. I think Japan invests something like $100 billion into the UK, and China at the moment invests about $1 billion. It is a very small amount. In terms of job creation, as Peter said, the fact that China, from a low base, has increased its overseas investment by a huge amount is true. It is probably now some $250 billion globally, and $50 billion of that was added in the last year.

If you look at where it goes, a huge amount goes to Hong Kong, because that is still considered an overseas territory for investment figures. Some 90% of it is statedirected, central money, so we are dealing with the state as an investor. Of course, in the United States that has caused huge political problems-do you want a Chinese company to buy an energy company, as was thought to have nearly happened in 2005? In the UK the biggest investor from China so far is Huawei, which is a telecoms company. There have been issues of security and issues of state involvement. It is pretty complicated.

At the end of the day I think countries have to have pretty clear policies for engaging with this money from China, because it can be problematic. It can have all sorts of political issues, and yet, of course, it is a pretty inevitable trajectory when you have $2.6 trillion of central reserves, most of which is in foreign debt at the moment. That needs to be deployed. I think the biggest investment in Europe at the moment is Volvo-basically, buying equity investment in Volvo. It is not a huge amount so far.

Professor Nolan: Just to start at the end, which is China’s $2.6 trillion foreign exchange reserves, the total assets under management by global asset management companies-principally, but not exclusively banks-is $63 trillion. It can move at the drop of a hat anywhere in the world. China’s foreign exchange reserves cannot. They have to be managed very carefully. Global banks, and entities such as Blackstone, can just move their money at the drop of a hat. They are far more damaging to global stability than China’s foreign exchange reserves. That is just to pick up on the final point.

When we come to China’s position in the world, China’s companies are nowhere in building global systems. Shell has over $200 billion of global assets. BP has about $200 billion. Vodafone has $200 billion. Those are just companies. Excluding Hong Kong, which is a very special case-or even including that-China has $56 billion of foreign direct investment, which is very small. The United States has $4.3 trillion. We have $1.7 trillion. In other words, even in our little country, with 60 million people compared with 1.3 billion, we have more than 10 times China’s total stock of FDI. China is nowhere, as Kerry correctly says. China’s foreign direct investment in highincome countries totals $27 billion. That is a couple of transactions-or one transaction from a single multinational. They are nowhere. If you look at their FDI in America, it is $3 trillion. In Europe, it is $9 trillion. In the UK, as Kerry says, it is $1 billion.

The central question for us is, what do we want? How do we understand them? What is our relationship, especially with the giant 70 or 80 potentially globally competitive enterprises? Do we welcome them? Do we want them to buy, for example, our startup hightech companies through venture capital? We have a lot of those around Cambridge. Do we welcome that? We have not made up our mind. Marconi told Huawei, "You cannot come in," and so Ericsson bought it because it is white and Finnish and good, and China is considered not to be. We have to make up our mind.

Do we want Chinese companies to do share exchanges with British companies? I have heard a private discussion between a leading Chinese company and a leading UK business, saying, "Can we please exchange shares? Can we buy 10% of you and you buy 10% of us?" The answer was no. I am not going even to disclose who it was. Do we want it or do we not?

Do we want our businesses to co-operate with Chinese businesses in other parts of the world? The main exports we have to China are not actually principally through Boeing or Airbus. They are principally what we dig out of the ground and out of the sea around the world-Shell, BP, Rio Tinto, BHP Billiton, AngloAmerican. We dig it up and then sell it to China. That is our main export to China.

Q319 Chair : Can I just stop you there? I am intrigued with the thrust of what you are saying. Are you implying that there is some sort of national aversion to this? Companies quite happily swap shares with Russian companies, shall we say, but not with China? Are you saying it is a cultural attitude amongst British business?

Professor Nolan: It is not British business; it is a wider context of apprehension on the part of the Chinese Government, with good reason. A Chinese firm attempted to buy Unocal. There was a storm of political animosity. Huawei attempted to buy 3Com, or partially buy 3Com. There was a storm of political hostility. Huawei very quietly, but in the semipublic gaze, tried to buy Marconi. "No, you cannot do it." We have to make up our minds. Do we encourage it? I had a conversation with someone in this building-

Q320 Chair : You said: "No, they cannot do it." Who blocked them?

Professor Nolan: You would have to ask who blocked Marconi. In America we know it was the relevant Committee. China does not want to be whacked across the face. These are stateowned enterprises. It is very humiliating. I had a discussion in this building with a senior technologist who said, "We have to think carefully about this. Let us suppose, for example, that in Nottingham University, Imperial College, Oxford and Cambridge, Chinese companies were to say, ‘We are trying to solve the future problems of the world-transport systems, building technologies, energy efficiency, all these issues. Our 70 or 80 stateowned companies will be working together like a giant version of Siemens or GE.’ Let us say they said: ‘We would like to partner your researchers. We would like to build research facilities in Nottingham, in Imperial, in Oxford, in Cambridge, share the IP and inject it into our giant companies to solve our future and our common problems.’" We have not made up our minds on that. It would be great for my University, but is this something we want? We had better make up our minds.

I welcome it. I think we are different from Germany, France or America politically and in terms of the structure of our business. We cannot reinvent the wheel. We have no choice. We are a mercantile culture. We are very successful at it, and we must be open. That is my personal view. We have a great opportunity to connect with China, but we cannot have one foot in-you know, the hokeycokey. We have to make up our minds: are we in or out?

Q321 Chair : I think we have got the message. We need to move on, but is there any further question you want to ask, Rebecca? Stephen?

Stephen Phillips: From a practical business point of view, we need to recognise that Chinese companies, when they are looking at the UK, have exactly the same fears that British companies have when they are looking at China. Addressing those issues is key. Because the Government is so important in business in China, the UK Government’s role in attracting Chinese investment to the UK is absolutely and utterly critical and vital. The demise of the RDAs does leave, in the business community, a question mark as to how this is going to be fulfilled until the new structures are put in place. There is a concern in the marketplace at the moment.

Chair : Can I thank you very much for your contribution? There is plenty of food for thought there. If we have not asked a question that you think we ought to know the answer to, feel free to write in and tell us. Similarly, if, in retrospect, we think of anything that we did not ask you but should have, we will contact you. Thank you very much.

Examination of Witnesses

Witnesses: Simon Carter, fashion designer, Joan Turley, author, and Steve Young, Head of Business Development and Sales, Surrey Satellite Technology Ltd, gave evidence.

Q322 Chair: Thank you for waiting patiently. I am sorry we are a little late; we have been here since nine-thirty and lost a few minutes en route. Can I welcome you and thank you for agreeing to speak to us? If you could just introduce yourselves for transcription purposes before we get into the questions.

Steve Young: My name is Steve Young. I am the Head of Business Development and Sales for Surrey Satellite Technology Ltd.

Simon Carter: My name is Simon Carter. I own the menswear brand also called Simon Carter.

Joan Turley: My name is Joan Turley. I am a business author specialising in how relationships assist the creation of success with China.

Chair: Yes, we have already impacted on your subject area to a certain extent.

Joan Turley : Yes, quite.

Q323 Ian Murray: Welcome to the Committee. I was very interested in reading in the part of the brief that you wrote, Mr Carter, that, "I believe that it is a far harder market to trade with than many people believe, and comparisons with Japan are unhelpful." In that context, in terms of what we have heard from the previous speakers this morning, in your experience how difficult is it for UK firms to do business in China? What are the main barriers?

Simon Carter: I think it was interesting hearing the previous speakers and there was some debate and discussion around the real significance of the Chinese middle class. I think that a lot of people are saying-this is what I refer to in my point-that China is perhaps like Japan was 20 years ago in terms of opening up an interest in Western brands, particularly in my field of clothing and accessories. My experience and that of my contemporaries in my own area is that it is not the case. There are increasing amounts of wealth and disposable income in China, but the Chinese are at this stage relatively unsophisticated in terms of how and what they spend that money on.

One of the witnesses commented that the biggest Louis Vuitton shop in the world is in the middle of China. Our experience has been that at this stage the Chinese are very much interested in what I would call trophy brands; the things that have a global resonance and that they understand without actually having to travel and explore. So someone said Bentley sells extremely well and in my field it is all the very, very big global brand names such as Prada, Gucci and Louis Vuitton. The Chinese at this stage are not particularly inquiring of what they are purchasing; they are more interested in the brand and the values associated with that.

The analogy that I would give is Paul Smith. In terms of my brand positioning, we sit a little bit below Paul Smith and where the great Paul Smith goes, we hope to follow. He has just one store in China, whereas he has, I think, over 100 in Japan. That is a measure of how hard it is for relatively unknown brands such as mine to do business in China. I think there is a lot of education to do; the Chinese consumer will become much more sophisticated, but it is a question of time. Brands such as mine are not in any great hurry to get into China. There are problems and issues that were covered to do with intellectual property that are a concern, and brands such as mine are exploring the market far more; we are looking for trading partners to take us in there and I think that will be the route to market for us.

Q324 Ian Murray: So essentially in that answer, is it a trust issue or is it being, as you say, unsophisticated about products that may benefit them? So they know the Louis Vuittons of this world but they do not know your product, so they might be a little bit less trusting of using it. Is that a fair assessment?

Simon Carter: I think it is a reasonable assessment, yes. If you look in, say, Selfridges, the biggest queues at all the international stores within that are Chinese at the moment. We have a store in Mayfair. Our biggest proportion of overseas visitors is from Japan; after that, America and Canada and then Russia. I do not think we have ever had any Chinese visitors. Obviously we want to do business in China, but it has to be right in terms of protecting our intellectual property, and there is a separate trust issue there from the one I think you were getting at. As I said, it will come in time. We are currently talking to two of our Japanese trading partners, both of whom have extensive business interests in China; they are two of the very big trading houses. That is a very accepted and secure route to the Chinese market. I think anyone who plans to do it alone and do their own thing may run into problems in terms of what happens to their brand once it is out of sight. Regrettably, I think there are stories of that; we have certainly been a victim of having our designs copied in China.

Chair: Yes, we will be coming on to that in just one moment.

Q325 Mr Binley: I wish to pursue the question that I raised in terms of gaining business at the coalface and that "pushy" bit. I particularly wanted to ask Ms Turley, but I would like others’ input too. It seems to me that we can talk at that level, when all of the action is actually down here and sometimes reports of this kind miss where the action really is. I made the point about the difference between trying to be pushier and the need to be liked, and it seems to me that there is a dichotomy there. I want to know how I would sell in China. I want to know what I do at the coalface. Can you just give me some insight into that?

Joan Turley: Yes. First, that is an excellent question-right to the heart of the thing, if I may say so. Essentially, doing business in China is relationship-based. This is a relationship-centric culture and relationships are the things that open doors; they are the things that facilitate and oil the momentum of a business dialogue; and they are the things that protect the deals when they get done and guarantee the safety of those deals thereafter. They are absolutely at the core of the skill set we should be trying to communicate and transmit to our companies.

In terms of your question, let us take this right down to how we should be on the day. First, with the Chinese the concept of our not being pushy enough is, I believe, a reticence that comes from the fact that the businesses we are sending out there have not been prepared interculturally in terms of what to expect, how to communicate and how to signal the right things about their business, about their proposition and-equally important to the Chinese-about themselves. "Are these people we can do business with? Will they maintain our reputation? Will they keep our public face well?" These are central issues to the Chinese. They are deal-makers or deal-breakers. So when the Chinese look at you, it is assumed that if you are in front of them, you have a very good business proposition, you have done your research and you have come with something that China wants to buy. But who are you? How well is your company underpinned? Do you understand the rules of partnering a Chinese company well? Will you be an active, savvy and relationship-knowledgeable partner who will always create and maintain their reputation? Reputation, public face and the whole concept of how you appear to others is bottom-line collateral in China.

Chair: Very interesting.

Q326 Mr Binley: Thank you. I think it is important we have that on the record, because I think we are often, as I say, up here and not down there.

Steve Young: If I may, Chair, we have had our business relationship in China for approximately 10 years and I would absolutely support what Joan said about it being fundamentally relationship-based. The side of that where there is some reticence, which has been talked about, is where we have to show that not only do we have a company that has the right capability and right products that they want, but also that we have the support from the UK Government when we are doing business there. The Chinese companies and authorities want to see that we are a reputable company that will support them and have a long-term relationship that will maintain that face. If we do not have that overt Government support when we go into China, we find it very, very difficult to continue that relationship.

Q327 Ian Murray: There is a complex matrix of what you have to do to get into the Chinese market, and some of the information you have already provided to us shows many different ways in. Mr Carter, I think you mentioned that you are looking for trust bag-carriers from Japan to be able to get you entry to the market until you are established. I think SSTL are very similar. But in saying that, what lessons have been learnt? I think you said you have been there for 10 years. What lessons have you learned and what could we be doing in the report that we produce in terms of exporting into the Chinese market to produce a set of lessons that people can learn? Particularly for SMEs, it must take a tremendous amount of time and risk to get there. So what could be learnt to help them through that process?

Steve Young: Perhaps I might start there. It is a lot about trust in China and there is no question but that it takes a lot of time, resource and effort to set up the relationships and build those relationships to the point where the Chinese companies and authorities will trust you to do business. It depends on how large they are, but for SMEs that is a significant investment. What is required is not only a long-term plan from their perspective, but also knowledge and a relationship with the UK agencies and support networks-part of the Government-that help SMEs do that. For example, the activities of the embassies in countries, some of the elements of UKTI and so on can provide that support. They need to be readily accessible and, more importantly, responsive to those SMEs’ needs. Time is a factor. There is also an issue about commitment, whereby if you have that information beforehand and then you go into China, that commitment from the UK Government agencies must come with it and be there for the long term.

Simon Carter: Yes, I totally echo that point about it being a very long-term process. Having said that analogies with Japan are perhaps unfair, I think in terms of starting a business-which we did in Japan 23 years ago-we did that really with the support of the British Government. They sponsored a series of trade missions out there with a trade organisation that I think is now defunct and it was very heavily subsidised. It was the only way we could afford to show there. Coming back to Steve’s point, it was essential for the Japanese to see you there not once, not twice-maybe on the third occasion they might order, on the fourth occasion they might order a little bit more and on your sixth visit they might talk about establishing a distribution agreement.

I think one of the issues that we have now is that there are some trade organisations and trade missions available, but over recent years they seem to have become somewhat the victim of political football and there does not seem to be any long-term certainty about those missions. I am talking about my own sector. They are absolutely essential to keep going and maintaining. Sometimes small companies like mine will be eligible for one, maybe two grants and then no more. Sometimes they were indefinite, but there was no framework of certainty after a certain point, and I think that makes it extremely hard for firms to plan a slow, gradual entry into a complicated market like China, where partnerships are essential, whether direct or indirect, perhaps routing through Japan.

Joan Turley: I would echo that. I think the most important thing here is that it is very important to establish that you have something that China wants. It seems obvious, but I have dealt with a number of companies that are in China when there really is not a need, or there is a need but they have not taken the time to think about how they could communicate what they are offering, aligned with the distinctly Chinese preferences-the way in which they like to buy or consume that particular thing. Again, we come back to starting with an understanding of the culture and making that an aspect of your preparation and research. It is so neglected and so critical.

Beyond that, the timelines in China are not quick. One could say this is of course potentially a problem for SMEs, but that depends. It depends how supported they are. What the Chinese want to see is that an SME comes in a good, solid condition with something that they want to buy and is able to participate sincerely and intensely in the business relationship for the long term. That means that they want to see whether those SMEs are really supported. Do they have real stakeholder mandate? Do they have the right kind of backing and funding? They like these prolonged timelines for a very good reason, because in China if you choose the wrong partner, it will have such an important effect on your reputation, on your brand and on your whole personal and professional collateral in business that the implications are beyond anything we are used to having to imagine in the West. So the long timelines are a kind of extended due diligence, really, in advance, on not just the business proposition but the quality of the company.

China refer to what they call briefcase companies, and they have been quite bitten in the gold rush mentality that we had a few years ago by companies that came out and were not financially underpinned to be doing business in China, and wasted its time. There was a trust issue there, and I think we all keep coming back to this point that trust is critical in a society and a culture that does business based on relationships and character. So we have an opportunity, I believe, to support our SMEs, to make them look credible and to explain the timelines that are involved.

I have seen SMEs achieve incredible things in China. I watched one SME within a very short time have the opportunity to sign a joint venture with the largest media company in the north of China, having arrived in that area as relative unknowns. But they were culturally prepared, they were well underpinned, they had good stakeholder backing, they had prepared their stakeholders for the time that it might take for this extended getting-to-know process, so they could participate well in the model, and they had given all the right signals to the Chinese in the way that they built both relationships and joint reputation.

So there are incredible opportunities. There is an almost pioneer-type atmosphere in some sectors still, but if we come with the right tools and, dare I say, the right skills-these skills, this independent variable that makes all the difference, lie in the area of relationships. At the moment, we provide incredibly patchy training. So that lack of pushiness from our very brave and talented entrepreneurs and SME leaders that we are sending out to China I think comes from the knowledge that they have not got this very important skills base. They feel it almost from when they arrive. That makes them perhaps more reticent in the selling process and that gives others who are more prepared a competitive edge. This is important in China, which is now one of the most highly solicited markets in the world. So let us give our companies that edge.

Q328 Chair: How do we do it?

Joan Turley: Well, I was delighted to hear the Chief Executive of the CBBC say that this has to be a multipronged approach. We do a very good job with the early stages of preparing our companies for China. The CBBC, UKTI and the commercial departments of our embassies provide wonderful information and analysis to help companies know whether they really should be in China. That is crucial, because when we send companies out there who should not be there, we also lose face. It harms the dialogue; it harms the seriousness and gravitas with which we are perceived.

But I think that we also need to think about the skills for when it really matters on the ground, because at a certain point that particular business man will not have the CBBC representative or the UKTI trade adviser beside him and it will become all about how he communicates his character, how he develops trust with his potential Chinese partners, distributors or suppliers and how he communicates that he understands the way the Chinese built the business relationships.

Now I think that instead of all the road shows that talk about widgets-because we are very good at that-we need to be talking about relationship skills. Let’s get road shows out there with people who are passionate about the chances of British business in China and wanting to make them absolutely top flight, people who write about this, people who want to speak about it and people who have been there and let’s share those experiences in a way that is practical and accessible. Let’s put those literally into distillations-dos and don’ts-not just of behaviour, but also explaining a little bit why the Chinese are that way. When you transfer knowledge with the correct cultural explanation, it readily becomes a skill because people understand it. They see exactly what to do, why they need to do it and how they need to do it. Then you have buyin for the engagement that you need.

Q329 Nadhim Zahawi: Just before I ask my question, I want to pick up on the point that the panel has made that this is an issue of trust. I do not think we have delved into this particularly deeply today, but it is a question I want to ask the practitioners-the people on the ground. We heard in an earlier evidence session that the complexity of the ownership of corporates in China is one of the things you have to live with. We have heard about how we should treat Chinese companies. In my own experience-I spent 11 years in business-companies that have gone over to China have found that complexity difficult, but more importantly there was an element of corruption around it that was difficult for them to deal with and actually put them off-i.e. they got back on a plane and came back thinking, "I cannot quite touch how this thing works." I just want to hear what your experience is on the ground of corruption that is partly caused by that complexity of who owns what in China.

Simon Carter: Well, speaking of my own example, I have had no specific instances of coming face to face with corruption within business in China, because as I have explained previously, our strategy is a little bit arm’s length, a little bit third party, in that the Japanese companies that we are working with-one is a division of Toyota, the other one that we have had discussions with is ITOCHU-have massive either joint or totally owned companies that roll out stores under licence and franchise manufacturing within China. So the trust issues are more to do with how you interface there with the Japanese. I am talking about relationships-and, as you say, how valuable they are-that I have already got and built over a number of years.

My firsthand experience of some intellectual property issues in China, which are a little bit offputting, is that we have become well known for our designs of cufflinks over the years and every now and then-about every six months or so-we have to look at somebody who is selling a load of our cufflinks that have been copied in China. Actually, research has shown that it is not someone taking them out to China; it is a Chinese factory that is copying them and selling them to anyone who wants to buy them.

Q330 Nadhim Zahawi: You have obviously anticipated my next question, which is, does that give you a problem with intellectual rights?

Simon Carter: It does. It is a headache more than a real disaster and as often as not, when you point it out to the companies concerned-whether it is here or in the States, where we had a couple-they are very understanding and a stern letter from an expensive lawyer usually focuses their mind. But really we have been advised it is almost impractical to try to take action at the source of this problem, which is the factory itself in China.

Steve Young: Perhaps I might come in on the intellectual property question there. From our perspective, we are operating in a very high-value, very high-technology sector-the space industry. Our intellectual property really is core to our business and the value of our business, but it is also part of the differentiator of how we can win business competitively in the export market and particularly in China.

We look at it in terms of the currentness of that intellectual property. If you are looking at intellectual property from five or 10 years ago and you are concerned about where that might end up now, then you are probably looking in the wrong place, because it is the IP that you develop now that is of value to you in the future and that is absolutely reliant on how much research and development you do now to develop that IP. So we can use that IP essentially as part of training and development for Chinese customers-because as we have heard from the earlier panel, they are not necessarily in the same place we are at the moment-but while retaining our cutting edge IP with our R and D to make sure we are ahead of the game.

So I do detect a nervousness or a reticence-quite broad-ranging and quite often from the UK Government-when we talk about approvals processes and export licensing and that sort of activity, around exactly what it is we are transferring. When we look at what we are transferring, it is often the case that the concerns are founded on an understanding of the IP as it was, not as it now is, because the technology sector has moved on so quickly. So it really is a case of currentness of the IP.

Joan Turley: Could I come in on this IP issue? Stop me if I go on too long, but this is such an important issue. This has become this insidious bête noire, really-in many people’s minds, the impediment to serious success with China. I think it is putting off a lot of companies that might just be beginning their journey usefully for this economy. Of course, as ever, only the negative stuff gets publicised. First of all, I think it is very important to understand where the problem comes from. If I may, I will just take this back to the cultural roots of this problem, because they are rarely touched on and it helps to take the sensitivity out of the issue.

Essentially, if we think of Confucius-"I transmit rather than create"-the Chinese believe that knowledge is a universal value, something that exists for the good of people, and that when knowledge is valued, it should be communicated widely. This is the 5,000-year cultural root that has this benevolent, sharing concept of knowledge. We in the West have perhaps gone down a different path, where knowledge and knowledge ownership tends to define us and to define our competitive edge and our differentiators. Now the thing is, therefore, that the Chinese are very often interested in the transmission of knowledge rather than attributed sources or the protection of provenance of knowledge. So there is a cultural shift to be made.

But since China has realised how important this is for us to make us feel safe as trading partners, it has done things in such a structured and magnificent way and I think we can begin by making this more widely known to take some of the fear around this issue, because I think the climate is going to become a lot better for our businesses. They have tackled it on three levels: legislation, what you call administration, and education. This is how seriously they have taken it.

First of all, the State Council’s national IP strategy in 2008 sought to tackle the creation of IP, to bring in stronger measures against IP abuses and to nurture a respect for intellectual property. So the legislation has also become much more willing to widen its area so that before it was just a question of a trademark; now it is much wider than that. It is brand image; it is domain names. They are really looking at much, much more of a protective net and attacking this really seriously. They have found in favour in some very high-profile cases of IP infringement-one thinks of Yamaha, $1 million; and Starbucks-where trademarks have been seriously infringed and they have publicised them to make them a deterrent. So they are working really hard on legislation to say, "This has to change."

They are working much more as well on the enforcement-the implementation, if you like-of the things that they have decided. But more importantly in China, they are trying to change the entire mindset. So in provinces such as Guangdong, they are actually teaching IP respect at primary and middle-school level through projects. The notion is child, family, society-that if they can get the children to understand why IP is important and why it is an important value in terms of respect for people you trade with in the world, they are taking this home to their family and that is then influencing the wider society. So that is creating a whole new level of understanding and respect on more of the Western model, perhaps, of what IP represents and how to protect it.

Then-and I think there is something very big for us to learn here-in conjunction with people like Philips, they have set up IP academies in some of the most important universities in the country-Fudan, Tshinghua, Renmin-and they are actually training the next generation of business thinkers and administrators to respect this and to know how to deal with it in a way that makes us feel safe in three, five, 10 years. This is the next generation of people who will be responsible for making sure that the climate is right on IP for our British businesses.

Now this is a serious, structured, comprehensive response to our concerns. Does that always mean that someone like Simon’s goods are kept safe in rural areas? No. But here is the difference. My experience has been that there is something else that we can bring that we do terribly well that helps IP protection: relationships. Relationships help protect your IP. In almost all the cases where I saw IP infringements in mature dialogues, it was often where the relationship had been badly made or had broken down. Let me explain why. If you build a reputation and have a public partnership with a Chinese partner, supplier or distributor, you have become part of their public face-the single most important value to the Chinese: their reputation and the maintenance of their reputation and dignity. They will often not risk such an important thing for that extra bit of IP if it has been well made, if it has been a matter of record and if it has been truly nurtured. I hope I am communicating the point but it is something that people often do not take account of. Relationships tell you the progress of your work in China, and they are the best guarantors of anything that you have that is precious to you within the trading arena.

Q331 Chair: That brings me on to my next question. In terms of the support that UKTI and the CBBC give to businesses, are there any formal or indeed informal processes by which the importance of relationships and any training element that might be given to British businesses hoping to operate in China is incorporated into the package of support that is given?

Simon Carter: If I could again draw on my own experience, when we first began exporting to Japan there was a lot of background information. You had to attend a briefing session all about etiquette and, in fact, relationship establishment before you were allowed to participate in the mission. That was extremely helpful for first-time visitors such as us to go to Japan, and we really found that very useful.

I have also found the support from the embassy absolutely invaluable. They have such great local knowledge and they are so highly respected. I think there may be a danger, as we move into an age where everything has to have a price tag attached to it, of losing sight of the value of some of this stuff, because you cannot actually put a price on the fact that you have got a lady in the Japanese Commercial Section in Tokyo who is a legend and has been there for 35 years and knows everybody. When my licensees chose to launch Simon Carter clothing in Japan, the venue they chose was the British Embassy; they could not think of anywhere more prestigious, and that would give it more authority.

So it is not quite answering your question-I am sorry-but I wanted just to get that point in. In terms of the support, I am not sure what current training is available-I can only draw on my own experience-but I did find it was there and it was extremely invaluable.

Q332 Mr Binley: Can I pursue that just a little? Are we really talking about the structure of sales presentation and "closing", recognising this important cultural difference? I really am talking about the very coalface, because if you go along and your presentation does not work, you are in serious trouble; that is the end and there is no chance of pulling the sort of people we are talking about back. If I can link that with my second concern, that UKTI is about process, not outcomes-that’s why I mentioned the word "closing"-is UKTI well-versed in taking people to the coalface in an effective way?

Steve Young: First, we get fantastic support from UKTI and from all the embassies around the world that we do business with. There are some fantastic people there and as Simon has said, the knowledge incountry is absolutely invaluable to us. That in itself, when you go and get a briefing from those people before you start doing business-or even while you are doing business in that country-is absolutely fundamental to helping you achieve success. There may not be some of the-as you put it-coalface business people who are used to closing commercial deals, but if the goal of those organisations is to help create the environment within which British companies can achieve success within the marketplace, the expertise some of those people have is absolutely fundamental to helping us.

Q333 Mr Binley: Is it staffed with people who know the game at the coalface? Are the personnel in UKTI geared up to provide that level of information and help?

Steve Young: From our experience, we have found it is very much down to an individual level. There are some individuals who do; there are some who do not; those who have had the industry experience, more so.

Q334 Mr Binley: So if there is a business background there, that is very helpful to you.

Steve Young: Yes.

Q335 Mr Binley: And it is not quite so helpful if that does not exist.

Steve Young: If it does not exist, then it is much more about the cultural understanding and the incountry knowledge about what is happening and how you treat people and so on, as opposed to the other aspects.

Mr Binley: I am grateful for that.

Joan Turley: I think we need to look at our provision in terms of how it relates to different stages of the business journey, so I really appreciate your question. UKTI and CBBC in my experience do an absolutely fantastic job in analysing and adapting the business offer for China. They also do an amazing job in terms of what one might call a soft landing for businesses-absolutely critical in China, where being seen to be backed by Government and having credibility and status behind you already gives your reputation some weight; then, one can begin the dialogue already being taken more seriously. As a local route map and connections on the ground this is terribly important, particularly the commercial departments of our embassies who are there all the time, who speak Mandarin, who have guanxi and who have networks of connections. Remember that in China, wealth is defined as the networks of people that you know and that you possess, because that is how business will largely be done. So those are all wonderful, wonderful provisions, but now we are in business and we are doing China.

Yes, in my experience there are some excellent initial briefings to prepare people for the contrast in business culture, protocol and so on. I would suggest humbly that there is room to add to that and complement that with some truly indepth and rigorous training on what happens for the next stages of your business journey. The negotiating skills, the ability to not just build relationships but nurture them for the length of time you need in the right way in order to close the deal, and communicating Chinese definitions of what things are, like partnership, accountability and all of these factors that will become part of the daytoday success of that business journey for that individual company-these are not difficult skills to transfer, but they do have to become skills. We cannot simply pass over a list and say, "There you are. You now know how to be in China"; we have to actually take that knowledge and by role-playing it, by discussing it, by giving live models and by actually practising it in depth, ensure that that knowledge has been transferred as a workable business skill as important as your knowledge of your proposition, and as important as the credibility that you bring with you. It will be increasingly the thing that differentiates our success, or the lack of it.

Q336 Chair: You just touched on what my next question was going to be. What can be done to improve support? What is absent from the present offer that should be there? You have obviously just spoken about that. Is there anything else? Would other speakers like to complement that?

Steve Young: The word "process" was brought up earlier and that is a necessary part of the way UKTI functions; and the other elements of the UK Government support British business exporting-there has to be a process in place. From our experience, that process functions but it is at or close to capacity in terms of the time it often takes to get the necessary approvals and so on that we need to proceed in the marketplace. If we want as a company to engage more with countries like China and grow our export activity, we need to look at that process and make sure that it is fit for future purpose.

Q337 Chair: Is there any provision in the UK for getting wouldbe exporters or potential joint venture operators on a course in an academy or something to get this sort of training?

Steve Young: There is one aspect we come across fairly regularly that UKTI do, which is essentially an open day where they have their experts in a particular venue and you can come and hear them speak all day and then have onetoone sessions with them. It is usually "Doing business in…" a particular country. For SMEs or companies that have not engaged in a particular market yet or are just about to-or just a small part-those sessions are often very, very useful because it is a way of introducing you both to the market and to the people in UKTI that deal within those markets.

Simon Carter: I would definitely support that. At our level, our organisation is called UKFT-UK Fashion and Textiles-and they have a wealth of experience within that organisation of people within different sectors of export. Where they feel they need to beef it up, they will often bring an external speaker in and have a day’s seminar on a particular country. I was a guest speaker on the Japan day seminar, for instance, but they do them country specific. I would totally support what Steve says; I think those are completely invaluable, whether or not they go as far as the specific relationshipbuilding courses. One could argue that that would be a great skill to layer on top of that, but in terms of briefing, talking to people who have already done it-which I think is absolutely critical; it is fine to theorise, but if you talk to people who have done it, they tell you what went wrong as well as what went right-to me has been absolutely invaluable.

Joan Turley: I would second that. There is in fact one of these "Doing business in…" events tomorrow in China led by Lord Powell. They are incredibly well organised, great for awarenessraising, fantastic in providing access to prominent advisers within UKTI, and certainly in my experience particularly wonderful at introducing some of the unsung heroes who are our commercial teams on the ground in China. The clinics where one had a chance to meet them were absolutely fascinating last year, and I would like to see more of that potential direct contact as well.

But once again, if these sorts of things do their jobs well, then what do we have? Well, we have a number of people leaving the room that day passionate about doing business in China. Where is the next level of skill? I am not talking about the trade advice-

Chair: Can I just stop you there, because I really want to bring in Paul Blomfield to explore this.

Q338 Paul Blomfield: Thank you, Chair. In the evidence that Simon Carter submitted to us, you talked about the enormous importance that you placed on trade fairs for SME penetration in the Chinese market, but at the same time implied that there was not enough support for participation in those trade fairs, and you said that in relation to your sector, you were not aware of an opportunity that existed for a company like yours. I just wondered if you could develop that point and how far those points were shared.

Simon Carter: Yes, very much so. I touched on it earlier in answer to Ian’s question, in that I felt that the trade fairs were a fantastic platform for selling. One follows on from the other: you go to the briefing, you get interested in the market, you speak to people with experience, you see if you have got the skills and the product and then you go on the trade fair. The problem was we were in a slightly happier time in the late 1980s, when I think the finance was a bit more secure, but later on it became very hit-and-miss as to whether you would or would not qualify. For companies my size, even now but certainly then, that difference of a £1,500 travel grant or £1,000 subsidy for the show would make all the difference.

I think the continuity-I know I have said this once, but I will repeat it-in terms of trade fair support and clarity on how long you will be able to show for is absolutely essential, particularly for companies like mine or smaller, where it is an enormous commitment to do these things in terms of manpower, resources and finance. Yes, the fairs were very well documented to Japan; they still go on, albeit in a slightly more modest way. But I am not aware of a trade fair programme in the same way targeting China for my product areas, which might perhaps principally be in menswear or men’s accessories. Now if I am not aware of it-and we are a reasonably established player-it suggests that it is not being marketed properly. I have a feeling it is probably not there, but whether it is not there because of the reasons I said earlier, in that we may be just a little bit early into this sort of market and it might not be productive to do it, is another very interesting question.

Q339 Paul Blomfield: I wonder if Steve and Joan also have reflections on that point, and whether it applies to other sectors. Obviously we are talking about a relatively niche sector, but is there a bigger problem of patchy provision?

Steve Young: There is no question but that going to trade fairs anywhere in the world is expensive. What we tend to see where there are exhibitions we have decided are not of value, or which we do not have the resources to go to, is there is often a UKTI presence that we can then draw upon. For example, there is an export support team in the DSO, which is part of UKTI as I am sure you know, and we often have the opportunity to train those people and then send models or brochures or examples of our capability out, which then go on essentially a UKTI stand or presence at that exhibition. That is essential to us. The capability that gives us in terms of our market penetration, market access and market exposure, for the amount of money it costs us, is fantastic.

Joan Turley: Trade fairs, yes; in China they are the beginning, and beginnings are important in China. So yes, in my experience there is quite an active programme of trade fairs to China, organised and very, very well supported by UKTI and with some very savvy advisers who set them up and accompany. So that is wonderful. But I come back to the fact that it is only a beginning and as a beginning, it has to be handled with great care. It is very important for people who go on those trade fairs, because they are being accompanied by trade advisers, for that not to replace some really good cultural training so that they can make a strong impact in their own right, because they are the ones who are going to be going off and talking to prospective partners, buyers, suppliers or distributors. It is also extremely important to leave time when you do these in China. I have seen people come in to trade fairs-not come in early for them-be at the fair and then leave, leaving no time in the day to develop potential relationships with people they have met, which is one of the most critical elements of planning trade fair participation in China.

Secondly, it is very important in China that you come with as much firepower as possible. So if you have got people you can deploy who are quite senior there, if you have got people who were the science behind the thing that you make, bring them. This is an opportunity to impress, and people miss this a lot in China. That is what trade fairs are; they are great celebrations of knowledge and expertise. But they are only as good as what one does next, and what one does next in China is make sure that within a relatively short period of time, you are back there-back there to take the business dialogue further and more seriously. But as a window, as an opportunity to make a very good beginning and as an opportunity to source the beginnings of crucial relationships that will support your business dialogue, they are very important. But they are only important if they are handled with an understanding of why the way we handle them has to be slightly different in China than in other markets.

Steve Young: If I may just add to that, Chair, the point Joan made there highlights a very good point about commitment. There is a very real need to show commitment to the Chinese market. We talk a lot about relationships, we talk about exhibitions being the starting point and yes, absolutely, you have to take in senior people and so on. That commitment does not just come from the company by going there regularly, sending out your important people, showing that you want to be there and you want to do business with China and get to know them and so on; it also requires the commitment from the UK-the UK Government has to be showing that it wants this too.

The professor on the panel earlier talked about the UK needing to make up its mind about whether we are in or whether we are out. We would absolutely support that view. We very much want to be in and we also would need HMG transmitting the same message so that there is not a mixed message going to the Chinese market, because the Chinese market is interwoven with the state in China as well. So if one part of it is getting one message, that we are hungry to do business with you, and another part is getting a slightly different message, for whatever reason-maybe that is the responsiveness of some of the licensing processes or whatever it might be-then confusion is created regarding exactly what the UK is about.

Joan Turley: Can I just add very briefly that this notion of commitment is absolutely crucial. The attitudes we are showing and the climate we are creating in respect of China are what will make all the difference on the ground for our British businesses. Hu Jintao, in his recent state visit to the US, said that China now wished to create partnerships that were based on mutual respect and mutual benefit, which for me personally was extremely gratifying because I had to fight very hard for that to be the subtitle of my book last year on China. There is something very fundamental here: if we communicate that we are here in a new spirit of really strong mutual benefit, that we understand the rules of partnership, that we are there to create value, that we know how to signal respect and build these relationships, which the Chinese value above all else, we will create an incredibly comforting terrain for businesses arriving. We will already have been the precursor; we will have done some of the work.

Then, if, in the way that we train our businesses, we can find a way to communicate and behave to show some of that in their intentions-like Philips getting involved in the creation of the solutions to the IP problem-can you imagine China’s gratitude? Hence the wonderful record Philips has in China. From here on in, we can be part of the solution rather than the problem in China, and we can change the prevailing attitudes of dare I say rather fearful apprehension and stereotyping that has gone on uncomfortably in regard to China and say, "We have a new beginning here." If we bring with us the right kind of attitudes and skills, our businesses will find the doors open, and that, with respect, is when we will do the same trading figures as Germany. That is the thing that is going to make the difference.

Q340 Chair: Thanks very much. I need to move on-time is running out-but I have got a few questions on trade finance, because I think this was an issue raised by you, Steve. I gather you have had problems accessing trade finance for exporting to China.

Steve Young: Yes. It is not specifically China but broader as well. What we see when we look around the world at our competitors, which are largely nationally based-European countries, American countries, China itself-is that they seem to have much more ready access to Governmentsupported finance mechanisms than we do. Now we have the ECGD and in some respects that can be very helpful, but really that is more about insurance on finance terms, as opposed to being able to provide finance itself directly. In some instances, we have actually found we have lost business because a competitor from a different country has had ready access to Governmentsupplied preferential finance mechanisms, which ultimately have gone into contract value and therefore been paid for, but we do have difficulty in getting access to that. So levelling the playing field in a number of areas would be of huge benefit to us.

Joan Turley: They are in the early stages of getting ready for China, particularly in terms of some of the export market research grants and things that I have come across, and this may well have moved on, but certainly within the last couple of years I saw a number of companies struggle with the fact that they had to spend and then be reimbursed. There were caveats that made it really very difficult for some of our SMEs. With respect, this is the kind of joined-up thinking that might result in our putting the support where it is needed and effective, and perhaps looking at the distribution of where we spend our money in supporting businesses in China.

Q341 Mr Binley: Therein lies a conundrum. SMEs in particular have not got the level of finance that they can shove up front in the hope that they are going to get it back. Isn’t that true?

Joan Turley: Yes.

Steve Young: Yes. I would also say that if you look at some of the current export financing arrangements we have got in place-ECGD, for example-the perception is that there is a particular contract size that is required before it is worth their getting involved. Now I do understand that they have recently been making a lot of effort to see what they can do to help support SMEs, because when you look at the number of SMEs together-group that as a whole-that is a substantial sum and is then worthy of that finance consideration. So although I would agree that there is a scale at which, at one end, it would be difficult because the cost in itself is not as high as the value-

Q342 Mr Binley: Can I stop you? I do not want it to be difficult. I do not want that cost not to be of value. I am saying I want the whole situation to be not easier in terms of viability, but certainly easier in terms of having the money up front so that they are not stopped by not having that finance to allow them to go forward.

Q343 Chair: Obviously the Government is now aware of this issue and is trying to address it.

Joan Turley: Yes.

Q344 Chair: Last week we had the announcement of changes in support for trade finance. Do you think these are going to address the problem?

Steve Young: I think they will go a long way towards it, but we are going to need time. The idea of making it easier-absolutely, we have got to do that. It is all about the responsiveness and making it fit for purpose and so on, and if we are at a point where the current system is probably at or near capacity, then we have to look at what that is going to be like in the future. For us it comes down to an alignment of policy. You cannot look at any one of these things in isolation. If you look at ECGD, you have also got to look at things like BIS and what we are doing in terms of export licensing-this even goes to export funding, FCO activity, DFID and foreign development aid. If all those aspects are aligned with a similar drive to want to achieve export success in a particular market-in this case China-then we are much more likely to do so. Where these are separate or not quite aligned, then we have this mixed message within Government and within the marketplace, and it is that much more difficult to succeed.

Q345 Chair: One of the issues raised by the British Exporters Association was where bonds are issued-in effect, the splitting of the risk between the wouldbe exporter and the bank. Now in the proposals last week, that was specified as what they were going to do, but the British Exporters Association said this was actually a deterrent. Could you give me your opinion?

Steve Young: Yes. The bond issue is significant to our company and I suspect to many smaller companies, because it is often quite a large value and there is risk in place associated with that. It is not unheard of for a company not to pursue business because it does not want to have that risk. Therefore, from our perspective, any support we can get to help us with that issue-if there is a risk share agreement or some other mechanism in place-we would welcome.

Q346 Chair: Do you think it goes far enough, the 50:50 split?

Steve Young: The answer has probably got to be no, but then we would always want it to be at one end of the scale. But there has got to be a balance and if this is where we start, then we would support that.

Q347 Chair: There is a perfectly legitimate argument that if a company finds it too risky to be prepared to underwrite it, why should the public or the bank do so?

Steve Young: Yes. But there is no question but that the idea of a company going in with what essentially is the backing of the British Government, even if that is in a risk share agreement, is a very powerful message to the Chinese market.

Joan Turley: And it offsets much of the risk already, because of the credibility and the public face attached.

Q348 Mr Binley: But isn’t the truth of the matter that growth costs money and small businesses cannot get money for growth anyway? So that has to be specifically taken into account.

Steve Young: Absolutely, yes.

Joan Turley: Could I also ask whether we might invite our banks to support our companies better on China? I am sure you have already got this covered, but-

Chair: Yes, you are straying into a much bigger debate, which-

Joan Turley: But my experience has been that it was not just a matter of the stakeholders-the folks back home. It was the business bank not understanding Chinese timelines and so on. I have seen-and really it is heartbreaking-people snatching failure from the jaws of success for the sake of a month of more solid underpinning from their business bank.

Q349 Mr Binley: Could we have a letter from you to that effect, with a list of examples?

Joan Turley: Yes of course, with pleasure.

Chair: That would be helpful.

Steve Young: Can I just make one last point, on the point about investment then coming on to wider business? Ten years ago or thereabouts, it was UK Government investment through what was then the British National Space Council that directly led to one of our first major contracts in China, which has subsequently led to a recent very large contract for us. You can trace it right back. Now unfortunately, that investment has not happened since, but the return on it has been more than tenfold when you actually look at the numbers. So the benefit to the UK economy from that initial investment has been huge. It has not happened again since.

Chair: Thank you-very useful. On that note we will conclude and I thank you and repeat what I said to the previous panel: if you feel that there is anything else you would like to say to us, please write in; we will be pleased to receive it. Similarly, if we feel there is anything we did not ask you but should have, we may well do so in a written form. Thank you very much. That was much appreciated and very useful.

Steve Young: Thank you for the opportunity.