Russian-Chinese economic relations demand further adjustment and diversification

Director General of Shanghai Electric E&A Industrial Development Co., Ltd Wang Yunsyan is confident that the main objective of meetings such as RBC's 14th international conference held in Shanghai dedicated to Russian-Chinese business relations is to bridge the gap between the Russian and Chinese business visions. When asked what he considered the biggest difference between the national visions, Wang who recently arrived from Russia, stated: "China has developed a customer-oriented market, whereas Russia still encourages a product-oriented one." He illustrated his statement with a personal example: When he tried to place an order with a St. Petersburg machine-building plant for $10m worth of power equipment, he failed. He found that the reason was because the St. Petersburg company's top executives had refused to produce the equipment according to the customer's needs. The Russians persistently wanted to make the order in compliance with the Russian GOST (national code of standards). It struck Wang as highly unusual, as 13 years earlier the same plant had filled a Shanghai order without any objections to their technical specifications. We asked Wang: "Who has higher standards?" and he answered that the Chinese do, but he is assured that the St. Petersburg producers were capable of meeting the Chinese standards. "Why don't they want to comply with your requirements? Don't they need the order?" - "Sure, they do. But they're unwilling because they believe that their standards are higher."While trying to get a better understanding of the unusual matter of the "Great Russian national pride", we found that the issue laid with the St. Petersburg company's ownership. The plant used to be a private joint-stock company in the 1990s, before a controlling stake was bought by the state. This shed some light on the matter, but, unfortunately, Wang refused to name the Russian company.

Dmitry Yurenkov, Director of the Russian company Rink, overheard the end of our conversation and offered a counterpoint. His firm has recently made an attempt to purchase a brass lot in China, but the Chinese company refused to ensure Chinese (not even Russian!) quality standards in the contract. It seemed as though this unwillingness to comply stemmed from the Chinese company's intentions to place the order with a subcontractor (most likely, a small, uncertified province-based plant) that deals in scrap metal processing, and therefore could not guarantee a crucial condition in the contract that required maintaining a low level of lead. A common thread seemed to develop from the two stories: small firms that place orders sporadically shouldn't count on brilliant performance from their counterparts, or, in larger terms, that both countries have quite a long way to go before they can consider each other primary partners and introduce the law of big numbers into business relations instead of playing by give-away rules.

From counterfeits to brand names

At the RBC conference, Evgeny Kolesov, General Director of China-based Optim Consult Firm, explained the tricks of the trade that are popular among many Chinese businessmen. "Milk'em for all they're worth, strike a deal and squeeze another 10-15 percent out of 'em- that's China to a T," he revealed. In his opinion, the biggest issue faced by companies that place orders in China is quality assurance, followed by the Chinese company's ability to meet deadlines (the Chinese often land more orders than they can fill) and the ongoing problem that, more often than not, Chinese producers will offer outright counterfeits. (although quite a few Russian partners are perfectly willing buy counterfeits; they've been known to place orders for fake items, modelled on brand samples from European boutiques.)

However, there are some reputable international market-oriented Chinese producers that have made their name by copycatting - an accepted practice in developing countries. According to Kolesov, one thriving Chinese tire-maker that has been successfully producing counterfeits of Japanese and Korean brands has been looking to enter the Russian market. The knock-off tires they produce are of such high quality that they are in no way inferior to the original.

The Chinese are not content to simply copy other trademarks, but are intent on creating their own global trends. Anticipating the emergence of their own national brands, Chinese companies are striving to gain a foothold in the market segments of Russia and the CIS, with the goal of creating their own vending outlets, primarily adapted to sell Chinese goods.

Productivity vs raw materials

There's no denying that Russian companies are gradually losing ground to their Chinese counterparts. According to Builders Association of Russia Vice President Leonid Kazinets, the Heavenly Empire has been winning the price-quality game within the building market lately: it is the Chinese who are building Russia's tallest skyscraper, a 93-story giant known as the Federation Tower.

"They bring not only the workforce, but the cement and metal fixtures, too," Kazinets gushes; "Our cement is more expensive even though we have cheaper electricity." The manager sadly admits that almost all Russian tenders will soon be held between Chinese and Turkish contractors, although the Turkish are being edged out by their competitor's excellent organisation and management (something the ruling communist party is quite particular about), as well as productivity and, strange as it might seem, the cutting-edge technologies they have at their disposal.

"In the developing relationship between Russia and China, the key issue is being able to meet the expectations of their partners in addition to an interest in mutual market expansion. It goes without saying that both the Russian and Chinese markets have enormous growth potential and a massive consumer audience. One of the key issues is providing high-quality products at competitive prices, something at which China is particularly proficient, I believe," remarked another RBC conference participant, Robert May, Corporate Development Director for Philip Morris International in Russia.

Where are Chinese investments going?

International statistics from recent years have made the Russian government increasingly anxious, as machine and equipment exports have fallen from over 20 percent in 2000 to 2 percent last year (2007 has seen an even further decline). Currently, machines are imported from China and the country's share of technology imports exceeds 20 percent.

In his speech at the third Russian-Chinese forum in Beijing following the RBC conference, Deputy Prime Minister Zhukov said that Russia is pinning high hopes on Chinese investment in its special economic zones. "We are hopeful that most of the investment flow will be directed towards the production of modern high-technology and the collaborative acquisition of cutting-edge technologies," he said optimistically. Russian Economy Minister German Gref was more down to earth: "Chinese investment can be poured into areas of consumer electronics, such as video, TV sets, and refrigerators. We encourage investment plans for developing electronics production in Russia." According to Gref, one of the largest trends in Russian-Chinese business relations is forestry, as the Chinese are realizing more than 60 logging projects on Russian soil. Both sides have agreed to shift the focus from tree-felling to deep wood processing, and related China-sponsored firms are now emerging in Eastern Siberia and the Far East.

Today, the total sum from contractual Chinese investment in Russia amounts to approximately $1bn, and the number of collaborative Russian-Chinese projects already exceeds 600. But China accounts for as little as 1 percent of Russia's cumulative foreign investment. According to Deputy Prime Minister Alexander Zhukov, Russia wants to attract Chinese investment in the Russian economy and the $12bn barrier set by the leaders of both countries could be reached by 2010 instead of 2020.

The question remains as to whether Chinese investment is more interested in the long-term strengthening of the Russian economy or simply tapping into Russian resources to satisfy China's increasing appetite for raw materials and fuel. "We're building a strategic partnership, nurturing plans, but it's all about playing the geopolitical game and the outcome isn't clear yet," confided one of the conference guests in the conference lobby.

At a reception in the elite Shanghai Okura restaurant, Ilya Lagutenko sang a famous romantic ballad by Vadim Kozin with the following lines "Laugh, laugh more merrily still, lovely creature. How light-hearted you are, but my heart bleeds..." Our personal impression is that it is China that is laughing...

Shanghai-Beijing-Moscow