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MEEF - Middle East Projects News & Analyses - previous page


The New China Syndrome

Who’s afraid of Chinese imports? Not Rachid Mohamed Rachid and the handful of visionaries who are convinced Egypt can not only forge a mutually profitable relationship with China, but make the Asian superpower our leading trade partner.

MORNING RUSH HOUR in Beijing comes to a screeching halt outside the gates of Tiantan Park, a sprawling, 273-acre public garden that houses the vividly colored Temple of Heaven complex at which the emperors of the Ming and Qing dynasties once worshiped.

Stepping into the park is like being transported into a sanctuary a world away from the noise and pollution that is the reality of modern-day China. Here, hundreds of Chinese, the majority of them retirees, gather every day in clusters, silently performing their morning Tai Chi. Nearby, small groups of men play traditional musical instruments or attend to their songbirds in large, old-fashioned cages.


Watching China’s elders go about their daily routine — a few of them still dressed in Mao suits — against this stunning backdrop of lush vegetation and the perfectly circular temple is almost surreal. The scene stands in stark contrast to Beijing’s immense industrial complexes just a few kilometers away. Part of China’s sprawling industrial machinery, they helped catapult the Middle Kingdom from a struggling Communist economy barely able to feed its own population in the 1970s into an economic superpower that now threatens to rival the United States.

Consider this: The Chinese economy has been growing at a startling 8% or more for the past five years, hitting an astounding 11.3% pace during the second quarter of 2006.

Earlier this year, China overtook the US as the largest exporter to Europe. Two-thirds of the world’s toys, half of all DVD players, a third of all desktop computers and a quarter of all mobile phones are made here. Anatolia, Sudan and the American Midwest have all claimed to be the “Breadbasket of the World,” but China is its undisputed factory.

And as Minister of Trade and Industry (MTI) Rachid Mohamed Rachid told me during a series of exclusive interviews in Beijing this past September, China will soon become Egypt’s undisputed number-one trade partner.

 
But being the world’s factory isn’t enough for an economy that has changed faster and on a broader scale than any other in recorded history. Economists are now cautioning that to maintain its momentum, China must embark on a strategic shift away from its manufacturing-based, export-driven growth strategy to focus on both innovation for foreign markets and the development of its domestic market.

There are signs it’s already happening: With 1.3 billion people — a fifth of the world’s population — and steadily growing per-capita wealth, it will not be long before the Chinese consumers acquire enough purchasing power to make it worthwhile for Chinese companies to manufacture for the home market. Moreover, a recent World Economic Forum report found China’s spending on research and development has grown from just 0.57% of GDP in 1995 to 1.23% in 2004, one of the highest rates among developing economies, although still far short of the Organization for Economic Cooperation and Development average of 2.26%.

“For years the Chinese have focused on manufacturing at the lowest possible cost,” says Khaled Ibrahim, chairman of Nordix, the Egyptian company that manufactures PCs under the Ghost brand name and owns CompuMe’s Egyptian retail outlets. “Unlike American and European companies, they have traditionally been unwilling to add a little bit of fat to the cost to build markets and invest in R&D. I think this is their one weakness.”

Ninety-nine percent of the products that Ibrahim sells in his retail outlets are produced in China. “Even the components, the Intel processors and the hard drives, are made in China. They have really become a dominant force in this area,” he says, “and they are continuing to grow.”

At the same time, an increasing number of Chinese enterprises are going global, following the lead of Lenovo, the Chinese computer manufacturer that recently bought IBM’s PC division. The Chinese government is not only encouraging Chinese companies to invest outside their borders, but is urging them to look to countries outside their traditional trading spheres.

With large consumer markets and the vast energy reserves for which the Chinese economy hungers, it’s no surprise that the Middle East and Africa are now on China’s radar screen. In the West, some business leaders and many politicians view China with suspicion — and sometimes downright hostility, as Chinese oil major CNOOC found when US lawmakers violently opposed its bid for US-based Unocal, to take but one example. By contrast, leaders in Middle Eastern boardrooms and governments are more willing to open up to the world’s largest manufacturer.

By this time last year, China had established more than 800 enterprises in 28 African countries and invested a total of $6 billion in sectors including construction, petrochemicals, power generation and food processing, according to figures from the Chinese Ministry of Commerce.

In 2005, Sino-African trade topped $39.7 billion, up 35% from the previous year. This year, it should ring in at more than $50 billion.

Egypt’s share of China’s trade with the region is tiny: The two countries exchanged just $2.3 billion in goods and services last year, but officials in both Cairo and Beijing told me last month that it’s not the actual figures that count at this juncture, but the direction in which they’re moving. Senior Chinese trade officials say total bilateral trade topped $1.96 billion in the first eight months of 2005, up 47.6% from the same period last year. Chinese exports to Egypt are up 39.3% to more than $1.93 billion, while Egypt’s sales to China climbed 12.3% to net more than $211 million.

 
“The Chinese are entrepreneurs and businesspeople by nature, so once you explain to them the opportunities that Egypt holds, it’s easily understood,” Rachid tells me. It was the minister’s first official visit to China — he has been here several times before on business trips, but that was before he entered government service in 2004 — and he would head home in a few days’ time with signed memoranda of understanding for more than $2 billion in new Chinese investment in Egypt.

Still, “it’s really not about the government MOUs,” Rachid says. “What’s more important is what the private sector has done and what they are planning on doing. They know that China is the future and they intend to buy factories, seek-out joint ventures and open new export markets there. As a government, we signed only a couple of MOUs, and these were also driven by demand, rather than the pressures of ceremony.”

It’s not the first time an Egyptian government has made overtures to China — the Ebeid government tried to woo foreign investors as early as 2000 — but both business leaders and government officials say it’s the first time China has shown serious interest in Egypt.

In a striking example of the Egyptian government intuitively following the lead of the private sector, the Nazif government is now trying to build a framework that could enhance the private sector’s initiatives in China.

“It is very clear that the influence of China and their involvement in our region and in our country will increase,” Rachid says, “and thus we need to set up a new framework for economic cooperation. It has to be based on a win-win approach. We are now seeing a steady increase in the inflow of Chinese investments in Egypt. In the last three years alone, Chinese trade in the Middle East has doubled. We need to start building bridges and cross-cultural understanding so we can take our relationship with China to the next level.”

Lest the minister’s remarks be dismissed as standard “we love all our trade partners” rhetoric, consider the pace of change since Rachid returned to Cairo: During the month of Ramadan, he helped the private sector launch the Chinese-Egyptian Business Council and created a functional China desk at his ministry. This month, he heads back to Beijing, accompanying President Hosni Mubarak to the first China-Africa summit, at which more than 50 African leaders and heads of state are slated to discuss Sino-African relations.

Engaging With China

As chairman of El-Hakim Furniture and Construction, a furniture manufacturer that caters primarily to the local hotel industry, Ashraf El-Hakim recently accompanied a group of importers on a trip to China to contract a $1 million order for one of Egypt’s five-star hotels.

But El-Hakim’s main reason for visiting the Asian giant was to determine when he would be shutting down his factory. With the Egyptian market now flooded with Chinese furniture imports, his concern about the future of his business was a valid one.

“I needed to witness firsthand what I was competing with before it was too late. In the past, I have seen factories go out of business because they are unprepared for the competition,” says El-Hakim who spent a week in the coastal town of Guangzhou in southern China, the hub of China’s furniture-manufacturing industry.

“Guangzhou is the Chinese version of Damietta,” El-Hakim chuckles, “except there’s no way to compare the scale of their operations to ours — they’re just too vast. When we talk about a large Chinese factory, we are talking about a facility that is 60 times larger then our largest factory.”

El-Hakim is one of a growing number of well-known Egyptian business leaders who are now making their way eastward to ‘The Mainland.’

“Thirteen years ago, there were no tall buildings, cars or even paved roads in Guangzhou. Today, the tin shacks, dirt roads and bicycles have been replaced by skyscrapers, highways and luxury cars,” says El-Hakim. “What they have done is miraculous.”

“The initial response that we get from some business people here when they hear about plans to enhance our trade ties with China is one of concern,” says Ahmed El-Sewedy, CEO of El-Sewedy Cables, the largest manufacturer of power cables in Egypt and one of the top two in the Middle East, with facilities in Egypt, Sudan and Syria.

“Our manufacturers are concerned about the competition, but what we must realize is that facing competition from China is inevitable and healthy in the long-term because it will force us to upgrade our production a notch or two,” El-Sewedy continues. “We can learn from their experience and look for ways in which we can cooperate with them in the future.”

As the head of the newly established Chinese-Egyptian Business Council, El-Sewedy is a firm believer in China and Egypt’s compatibility as trade partners.

It’s a note Rachid sounded a few weeks earlier in Beijing: “I think we can benefit a lot by observing what is happening in China today,” the minister said. “We need to understand very clearly that the Chinese model is not to be replicated because there are many factors which are different. The idea is rather to understand the essence of the Chinese development model and how they went about tackling their problems.”

Exports

“China is now imposing itself as the biggest trading partner of most of the nations on this planet. So whether we like it or not, our trade relations with China are growing at an average of 35%, and have been for the past three years,” says Mohamed Mansour, the new vice-minister for export development and foreign relations at the MTI — and the head of its newly established China Desk.

At present, Egypt sells China cotton, marble, plastics, petroleum products, linen, glass and cow hides, while Chinese products making their way to Egyptian consumers include data-processing equipment, tobacco, truck tires, generators, satellite decoders and radio transmission equipment.

“We know that there is a huge trade imbalance but we are really starting to push for more Egyptian exports to China,” says El-Sewedy. “We are very well positioned to export raw materials — in fact, the bulk of Egyptian exports to China right now are in the building-materials sector. China’s recent construction boom has increased their demand for marble and granite.”

El-Sewedy’s own company has been selling cables to China for two years now.

“The Chinese market represents a very big opportunity for us,” says Ahmed Ezz El-Din, managing director of Egylin, one of the nation’s largest exporters of linen fabrics, fibers and yarn. Ezz El-Din has visited China five times in the past three years and has established a strong foothold in the Chinese market.

“We have been exporting our products all over the world, mainly to the [European Union] and the US for quite some time now, but China is a new market for us. Being able to export threads and yarns there was a big breakthrough because, traditionally, they only imported raw cotton,” says Ezz El-Din. “China is the largest exporter in the world and as their industry grows, it also consumes. We may not yet be competitive in the Chinese market with our finished goods, but we can certainly provide them with raw materials. China has the industry, but lacks the raw materials.”

Egylin exports $10 million in fibers and yarns to China every year, a figure Ezz El-Din is looking to grow in the coming years.

“At this stage, we are only exporting raw materials; the next phase will be establishing a joint venture with the Chinese for textile manufacturing. We have already agreed to establish a number of factories on 200,000 square meters of land in Borg El-Arab to manufacture yarns, fabrics and ready-made garments with Chinese partners. The majority of the output from the factories will be exported to China and other Asian markets,” says Ezz El-Din.

The project proposal is currently being finalized, and Ezz El-Din expects the complex to be operational within the next year and a half.

One emerging advantage, he says: With Chinese workers now demanding higher wages, the cost of production in Egypt should be less than it is in China. “A skilled worker in China makes $200-250 dollars a month, which is more than what his Egyptian counterpart makes, but the productivity of the Chinese is two to three times higher,” says Ezz El-Din, explaining that he hopes to get around the efficiency problem by ensuring that Egyptian workers are properly trained by his Chinese partners.

“Six years ago, there was very little export awareness in Egypt,” El-Sewedy remembers. “Today everyone is looking for export opportunities, and they have learned to become much more professional about building new markets. We know now that the first step is to try and understand the markets that we are trying to penetrate.”

With China importing products worth $600 billion every year, surely some of that could be made in Egypt? Helmy Abouleish, head of MTI’s Industrial Modernization Center, has spent $1 million in the past year to expose 221 Egyptian companies to the Chinese market, helping them attend trade fairs at which they could explore opportunities to export finished products or raw materials to China.

“I think we have huge potential in the Chinese market,” says Abouleish. “We are competitive in a whole range of products. Even in the textile sector, we are competitive in some of the categories, and the same goes for fast-moving consumer goods — it’s just that we have never previously focused on developing the market in China. There will be change.”

Even if Egyptian exports to China increase in the near term, the fact that the government is simultaneously promoting the import of assets and capital goods from China means that the Egypt-China balance of trade will not be shifting in Egypt’s favor any time soon. But because assets and capital goods from China are 30-60% cheaper than they are elsewhere, Egypt will still come out ahead on its global balance of trade.

Importing Technology

Chinese machinery is already making its way into Egyptian factories. Among the first to give his full vote of confidence to Chinese innovation was Sherif Al-Gabaly, chairman and managing director of Polyserve and Abu Zaabal Fertilizers and Chemicals.

Al-Gabaly has just purchased a complete multi-million-dollar turnkey phosphate plant from China.

“This was one of the most significant private sector contracts to be signed with the Chinese,” says Al-Gabaly. “We are definitely not used to buying factories from China. Traditionally, we buy from the West because we are afraid of [China’s] quality and guarantees, but things are changing. We conducted extensive negotiations with several Chinese companies until we found the right one. There are small areas of the plant where we will still have equipment from the West — mainly digital equipment — but for the most part it is 100% Chinese.”

Chinese technicians will come to Egypt for the construction and start-up of the plant, and will then gradually be replaced by a fully Egyptian workforce. Since the beginning of 2006, Al-Gabaly has maintained a full office in China, a necessity since he is now sourcing most of his equipment from the Mainland.

“All our [equipment for] expansion and new projects will come from China, so we needed a permanent presence there. We are also starting to represent Chinese companies in the Egyptian market,” says Al-Gabaly.

He’s not the only one astonished by the quality of Chinese machinery: “My first time in China was in 1988,” El-Sewedy remembers. “The difference in the country between 1988 and today is remarkable: The factories are almost up to par with Europe. I would say that they have reached 80% of European quality in their machinery at a much lower cost, which is acceptable for us.”

Rachid inked three new agreements to establish technology-service centers for the Egyptian private sector in textiles and building materials. The first of these centers will be a joint project between the Egyptian government and the Shanghai Textile Institute to train and improve the efficiency of the technical engineers in Egyptian factories.

“We have a lot of old factories in Egypt that are unable to make huge investments to modernize their operations,” Ezz El-Din notes. “We will be receiving technical experts from China who can give us recommendations on how to modernize and upgrade without completely overhauling the operation. The Chinese are experts at doing this. They are also in a very good position to recommend the optimum technology because they are now the producers of machinery in the textile sector.”

According to El-Hakim, many Egyptian factories unaccustomed to importing Chinese technology and know-how may be initially reluctant to pay for the services that the Chinese technology centers will be providing.

“China is still in the initial phases of innovation,” he says. “Just like anyone who is starting out, they will need to promote themselves by giving would-be customers a free trial run. I think the service should be offered for free to the small and medium-sized companies, who are the ones who need it the most, at least in the initial phases. Once they have achieved some results and established a track record, they can start charging for the service.”

Ultimately, Ezz El-Din expects the cost to the private sector to be minimal: MTI is financing the land, buildings and machinery and the Chinese will come in with the know-how.

“We are very excited about the prospect of the entrance of the Chinese school of textiles into the Egyptian market. They have been very successful and we are certain that their experts in the fields of productivity, machinery upgrade and R&D will help develop the skills of Egyptian textile engineers. The technology center will also include a new testing facility for cotton fabrics and fibers,” adds Ezz El-Din.

Brand Awareness

Only a handful of prominent Chinese telecommunications and automotive companies are making names for themselves in the Egyptian market, where there is still very little brand recognition for Chinese products.

Huawei Technologies, the Shenzhen-based global telecommunications and networking company, established its Middle Eastern headquarters in Cairo in 1999. Six years, later it has become one of the top three fixed-line network solutions providers in the MENA region and the number-one CDMA-based mobile telecommunications solutions provider.

Huawei has worked with Telecom Egypt on a number of key initiatives, including the formation of the largest “national intelligent network” in the MENA region, optical network SDH rings and the CDMA WLL system designed to extend telephony to Egypt’s rural areas.

Last month, Huawei won a joint bid with Ericsson to build Egypt’s third mobile network for Etisalat, a contract worth $1.2 billion.

The Egyptian market got its first glimpse of colorful, odd-looking Chinese-made cars two years ago. With prices starting at LE 40,000, the Geely, Hafei, and Chery became the most affordable cars on the Egyptian market and sold well, despite the fact that they had zero brand recognition among Egyptian consumers.

Hafei and Chery each reported sales of nearly 1,600 units each last year.

The next step was manufacturing: In April 2005, Bavarian Auto Group, the local assembler and distributor for Germany’s BMW, entered into a joint-venture agreement with China’s Brilliance Automotive Holdings. The Brilliance Galena, a 2.0 liter luxury sedan, appeared in showrooms nationwide in February 2006. The Galena, which sells for LE 159,000, is now being marketed as a “global car” rather than a Chinese innovation, an attempt to escape perceptions of low quality that are still associated with the Chinese automotive industry.

Chery Automotive followed suit with an agreement to launch its own local assembly line in cooperation with Daewoo Motors Egypt. Chery now manufactures two lines of sedans with 1.6 and 2.0 liter engines that sell under the brand name Speranza.

“Chinese automotives are destined to boom,” El-Hakim predicts. “When Japan first started manufacturing cars, we used to look down on Toyotas and Hondas as very low-quality compared to European and American cars. The same thing happened later with Korean cars, and now they are among the top-selling cars on the Egyptian market. We can expect a similar cycle with the Chinese automotive industry, only at the pace in which they are moving it won’t take 20 years to match Japanese quality like it took the Koreans.”

Industry analysts give China another five years before it starts selling competitive, good-quality, low-end cars in international markets excluding North America, where most believe it will be another eight to 10 years before Chinese models make an appearance, due largely to stricter quality standards.

Luring Investment

China is only the twenty-ninth largest investor in Egypt, with joint ventures totaling a paltry LE 406.7 million.

Low brand awareness for Chinese products has been a barrier to entry of manufacturing concerns that could have boosted that number, as has China’s (until recent) lack of interest in Egypt. That said, Egypt still needs to make its case.

“I think we have a lot to offer the Chinese in terms of investment,” says El-Sewedy. “Our energy costs are more affordable, our labor — provided they get the necessary training — has become cheaper, and the Industrial Development Authority is practically offering up land for free.”

Still, it will take more than a free piece of desert to attract the kinds of Chinese investors Rachid is hoping to lure in the near future.

“The mind set in China today is clearly that of growth,” the minister says. “They have also adopted a new outward strategy for investment and overseas expansion, but they have many choices. Every country in the region today is trying to attract FDI from China, so they have opportunities to expand in different directions and sectors.

“They are genuinely interested in Egypt because they can make use of our basket of preferential trade agreements and our optimal geographic location. If we play our cards right, Egypt can be China’s gateway to the Middle East, Africa and Europe. All they want is the assurance that when they come to Egypt they can move with the same speed that they have become accustomed to at home. They want to make sure that the environment, regulations and business elements are suitable. We are currently doing our best to provide that environment,” Rachid says. “We are aware that there have been mistakes in the past with projects like the development of the Suez Economic Zone [a $10 million Chinese investment made in 2003 that has not lived up to expectations] and we are trying to adjust that as well as make sure that it doesn’t happen again.”

Among the projects Rachid landed during his September visit: a deal with China’s National Chemical Engineering Group, the largest state-owned construction company, to set up a 500,000 square-meter industrial zone in Sixth of October City, which will accommodate Egyptian-Chinese joint ventures in light industries such as textiles, footwear and pharmaceuticals. And CITIC Group, another one of China’s largest state-owned companies, has pledged to build an $800 million aluminum smelter in Egypt.

According to Ahmed Alfi, the new CEO of EFG-Hermes’ private equity division and a member of the Chinese-Egyptian Business Council, “Egypt is a great fit for China. Of all the countries outside their immediate region, Egypt is the most logical choice. Investing in Egypt will give them good access to labor, energy sources as well as preferential trade agreements. I think it is basically the advantage of our trade agreements, including QIZ [Qualified Industrial Zones] and the FTA we have with Turkey, that will cinch the deal with the Chinese.”

“Making use of these agreements would give Chinese exporters an average of 20–30% customs advantage and, more importantly, it would raise their quotas,” adds the IMC’s Abouleish. “China’s textile exports to the US now stand at $17 billion annually. They could save about $2.5 billion if they made use of the QIZ, so there is a real business case there,” he adds.

“I see tremendous potential for more Chinese investments in the manufacturing sector, too,” notes Alfi, who has been traveling to China regularly for the past four years. “There is no doubt that we will be seeing more and more joint ventures transpire in the coming period. EFG-Hermes Private Equity is interested in promoting and participating in Chinese-Egyptian investments in the future. We will be looking at projects as they present themselves on a case-by-case basis.

“China is a dynamic, growing economy that has the ability to expand and grow internationally,” he notes. “There is no doubt that its future and Egypt’s will become more closely linked in the years to come.”

tFrom Russia, With Love

China isn’t the only easterly country to have caught the attention of Minister of Trade and Industry Rachid Mohamed Rachid in recent weeks.

In mid-October, Rachid led a large delegation of business leaders and government officials to Moscow for three days of meetings and talks aimed at boosting bilateral trade and investment between the one-time Cold War allies.

During the visit, Rachid also pursued talks for an Egypt-Russia Free Trade Agreement.

“We have traditionally given a lot of weight to our Western trading partners,” says Sherif El-Maghraby, chairman of MAFA, one of the largest agricultural exporters in Egypt. “But the potential of the Eastern countries, particularly China and Russia, is now huge. Neither the business community nor the government has given China and Russia the attention that reflects that potential on two fronts: bilateral trade and investment.”

El-Maghraby, who also heads the Ministry of Trade and Industry’s Agricultural Export Council and is a member of the Chinese Egyptian Business Council, is hoping that attitude will change in the months ahead.

Two new country desks have been created at MTI to handle Russian and Chinese affairs, both of them headed by Mohamed Mansour, the new vice-minister for export development and foreign relations. Mansour is fresh private sector recruit and was formerly head of Johnson Wax in Dubai.

“We believe that we have an opportunity to quadruple our trade with Russia in the coming four years,” says Mansour.

Bilateral trade between Egypt and Russia currently stands at $2.5 billion. Imports from Russia are at $1.1 million (mainly wood, wooden products, iron, steel wheat and paper) while Egypt is selling the formerly Red giant a mere $77 million worth of goods, the majority of which are agricultural products including fresh fruits and vegetables, cereals, oil seeds, herbs, spices and essential oils.

The aim is to hit the $500 million mark in agricultural exports within the next five years.

“We are now trying to create a ‘green corridor’ between Egypt and Russia to expedite inspection procedures and quarantines, which are now considered non-tariff barriers to the entry of agricultural products into Russia,” says Mansour.

The green corridor would involve having representatives of the arrival authority at the country of origin to streamline operations and certify that goods are safe.

According to El-Maghraby, Egypt has traditionally exported potatoes, onions, citrus and rice to Russia. But changes in the market have opened up opportunities for new produce including lettuce, which is now in heavy demand because of the entry of fast food chains like McDonald’s. Fresh herbs and strawberries are also new Egyptian entrants into the Russian market.

“I think we have a very big advantage in Russia because we are coming onto virgin shelves, unlike places such as England where we have to compete for shelf space. Having strawberries in the winter is very new to Russia,” says El-Maghraby.

“Today, there is a new Russia that is very different from the Russia of the 1970s that we are accustomed to. They are now hungry and desperate for many different products from all over the world,” says Mansour. “We have already carried out a few preliminary studies to determine which non-agricultural products we can be competitive in. White goods came in at the top of the list [Egypt currently exports $3-4 million in white goods to Russia. The goal is to reach $30-40 million by 2011].

“We have the capacity and capability to produce quality products at very competitive prices relative to the current Russian imports. We just need time and a bit of marketing, positioning and promotion,” adds Mansour.

The Next Invasion

  According to World Tourism Organization figures, 150 million tourists will be coming out of China and India by the year 2020, and Egyptian Minister of Tourism Zohair Garana is already taking steps to attract more Chinese tourists to Egypt.

“As China’s economy continues to boom and the population gets richer, more Chinese are starting to travel abroad and many have listed Egypt as a destination of choice because of its ancient civilization,” Garana recently told reporters.

According to the Ministry of Tourism, 35,000 Chinese tourists visited Egypt in 2005. In the first nine months of this year, 34,813 tourists arrived here, an increase of 39% over the same period the previous year.

“We expect 65,000 Chinese tourists to visit Egypt by year’s end,” said Garana, who says his ministry has been working to provide special service to the Chinese, including Chinese-speaking tour guides and special Chinese menus in the hotels.

Garana will go on his first official visit to China in November to meet with officials from the Chinese government and discuss ways in which the two countries can cooperate to promote Egyptian tourism among the Chinese.

Doing Businesswith the Chinese

The difference between Western and Chinese business cultures can be best summed up with the story of George He’s distaste for cocktail parties.

He, the chief technology officer for Lenovo, the leading Chinese computer manufacturer which recently bought IBM’s PC division, is driven nuts by the cocktail receptions that precede the business dinners he must now endure as part of his monthly visits to Lenovo’s new global headquarters in Raleigh, North Carolina.

“We just stand there and talk to each other,” He told Time magazine. “That’s just not our style, the Chinese people.”

Egyptian businessmen long-accustomed to doing business with the West have suddenly found themselves confronted with the difficult task of negotiating with counterparts who come from a culture that is, quite simply, alien. Some find the Chinese’ abrupt, no-frills attitude towards doing business comforting, while others consider it daunting.

“Doing business with the Chinese is not easy,” says Ahmed Ezz El-Din, managing director of Egylin, an Egyptian textiles manufacturer that is now doing strong business with China. “They are very slow and cautious in making decisions, yet their abrupt personal natures often leads to spats and quarrels. Once they do make a decision, however, they tend to move very quickly. It is the initial approach and negotiation phase that is difficult,” he adds.

“Today, negotiating a joint venture with a European company is becoming increasingly difficult,” says Ahmed El-Sewedy, CEO of El-Sewedy Cables and head of the new Chinese-Egyptian Business Council. “It takes lots of time and the Europeans tend to look down upon us. With the Chinese, you feel more like you are negotiating with an equal. It is true that their culture is very different from ours, and it’s one that we are not yet familiar with in the way that we know Europe and the US, but I really don’t see that as an obstacle.

“Europe is becoming more and more protectionist,” he says, “so if there is indeed a culture-clash between ourselves and the Chinese, then we are the ones who need to change to accommodate them.”

In an effort to bridge those cultural differences, the Chinese Ministry of Education has just signed a letter of intent with Cairo University to establish a Confucius Institute, at which Egyptian students will be taught the Chinese language and study Chinese culture, history and art. Cairo University has had a Chinese language department since 2004.

Of Knock-Offs and Maalesh

When you think of Chinese products, what are the first things that come to mind? A walking, talking, singing fanoos Ramadan, disposable toys, hot pink cars, fake Louis Vuitton bags?

Well, you’re not alone. Most Egyptian consumers still associate Chinese products with tacky, low-quality, low-cost imitations that don’t last. “Do you want the original or El-Sini El-Madroub [the Chinese Knock-off],” is an expression still common in Cairo when shopping for everything from handbags to consumer electronics.

What most consumers don’t realize, however, is that the reality of the “New China” is very different. Sure, the second-rate factories and cheap knock-offs still exist, but they are a relatively small subsector of an economy that is becoming increasingly quality-oriented and legitimate.

“Most of the Chinese products that we see today in the Egyptian market are very low-quality goods that are being imported by small merchants,” says Ashraf El-Hakim, who heads El-Hakim Furniture and Construction and has taken a strong interest in China, including study trips to scope out the competition he knows is coming his way from Chinese manufacturers. “These importers, some with as little money as $3,000, go to trade fairs in China to collect anything and everything they can find: lanterns, useless gadgets, toys, cheap clothing. They will then find other similar-profile importers split the cost of a container two, three or four ways and then smuggle the goods into Egypt. These types of products often find their way to rural markets and low-cost retail outlets in Cairo,” he explains.

According to El-Hakim, a second, slightly more professional category of importer is the one who goes to Chinese factories and asks them to produce a lower-cost product than the one that they normally manufacture.

“If the factory makes a product that costs, say, $10, they will ask them to produce it for $1 by using low-cost materials. For the most part, these are the types of products that are making their way into Egypt,” El-Hakim says.

In a bid to clamp down on profligate violations of intellectual-property rights laws and put a stop to the low-quality manufacturing that is hindering China’s image, the Chinese government is now starting to crack down on such operations. “What has been happening is very unfortunate, because this kind of low-caliber trade is giving both Egypt and China a bad image,” says Ahmed El-Sewedy, CEO of El-Sewedy Cables and head of the new Chinese-Egyptian Business Council.

El-Sewedy also admits that in the past Chinese investors have had bad experiences in Egypt. “This is mostly due to the fact that they were either coming on their own into an unfamiliar territory or partnering with the wrong people. There was no entity in place to direct the Chinese investor towards the proper channels.”

According to El-Sewedy, the damage caused by the misconceptions of the past is not irreversible.

“Both Egypt and China have respectable business leaders and companies that can do business together,” he says. “If we can just manage to coordinate and get the two sides together it will be a win-win situation. This is part of what the Chinese -Egyptian Business Council is aiming to do. We want Egyptian companies who have a sizeable business with China — like Bavaria with their Brilliance Automotive joint venture, for example — to become more visible so that it becomes clear that we have high-caliber Egyptian businessmen and not just the nickel and dime importers of the past.” bt

 

 

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