With thousands of China-invested enterprises around the world, Ian Greaves, partner at KPMG in Birmingham, looks at the threats and opportunities of Chinese companies moving into the West Midlands... In a recent visit to Birmingham, Zha Peixin, the ambassador for China, mentioned that an increasing number of Chinese companies were looking to set up operations overseas, all with the full support of the Chinese government. He singled out Birmingham due to its manufacturing heritage and expertise, claiming there was much that we could learn from each other, especially given industrialisation is in its infancy in China. This presents local companies with a challenge. There is no doubt that the emergence of companies from China will bring new commercial opportunities such as strategic alliances or a market with new customers. However, it too will bring new pressures and will intensify competition within the regional marketplace. For some this will create nervousness and a reaction to defend their home territory. Others, meanwhile, will be looking forward to and actively seeking the opportunities it presents - it is these companies who will reap the rewards. Over the next few years the region is going to experience change as a result of this investment, and local businesses are going to have to adapt if they are to sustain their income. The Chinese do "low cost" very well. If a product or service has any labour content to it, the low-cost labour economies will undercut and out-negotiate. While the price wars have favoured Asian economies, as with the UK some time ago, it cannot form a long-term strategy to achieve competitive advantage. China is likely to have a limited period to produce high volume, low-cost goods. Demand and expectations from around the globe will force change, which means other cheaper markets will out-compete China, forcing them to find product differentiation too. As a result, for local companies to focus on price competition - a strategy which is unlikely to prove fruitful - they must also concentrate on how Chinese management teams will move their businesses forward in preparation of product differentiation. First of all, local management teams need to re-evaluate their business models and practices in order to ensure they are operating as efficiently as possible. With a leaner, more efficient operation, businesses then need to think about how they can differentiate themselves in the marketplace and move up the value chain. This is at the very heart of how local companies need to differentiate themselves. Fundamental to sustaining market position, whether looking to work with Chinese companies or focusing upon defending market share, is innovation. We are already seeing some local companies investing heavily in this area and having a clear focus on niche products and markets - a strategy that is allowing them to progress in the high end of the market. However, with the likelihood that the next five years will see a sustained assault on the European markets by China and other emerging markets, more local companies need to follow suit. The UK Government has been keen to increase innovation and one of the major ways in which it aims to achieve this is through tax incentives. In particular, local companies should be looking to take advantage of the research and development tax relief. For those companies who are keen to exploit the opportunities, working with Chinese companies can be fruitful. China is now the third largest trading nation in the world and last year imported $700 billion. Key areas of interest include automotive components which are in high demand in order to feed the country's emerging automotive export market. Furthermore with many operational and commercial obstacles to overcome within the sector, there are significant opportunities for the region's experienced manufacturers. Action needs to be taken now if these opportunities are to be realised in the next few years. No doubt there will be winners and losers, but what remains critical to survival is for companies to face these challenges head on. ..SUPL: | 
