Shifting Chinese Demand

Shifting Chinese
Demand.
New Opportunities for Canadian Companies
At a Glance
Chinas economy is transitioning to a more consumer-led model, with demand

projected to rise for many goods and services that Canada produces competitively.
Canadas natural resources sectors, services sectors, and the food-manufacturing

sector are best positioned to meet rising Chinese demand.
The experience of three Canadian companies doing business in China shows that
firms can succeed by finding niches, having a local presence, adapting to the culture,
and developing relationships.
BRIEFING FEBRUARY 2017

Shifting Chinese Demand
Foreword
For 150 years, HSBC has been at the forefront of helping small, medium and
large companies to growconnecting them to opportunities and helping them to
compete on the international stage. Global trade is in our DNA and we are keenly
aware of the positive links between exporting more of a countrys goods and
services to global markets and greater economic growth. We also see companies
who stall by outgrowing their market and failing to expand internationally.
Statistics Canada research tells us that companies that trade internationally

grow faster over the long term. With over 50 trade and investment agreements in
place, the countrys businesses should be well positioned to take on the world.
Yet only 10per cent of Canadian companies98 per cent of which are small
and medium enterprisescurrently generate sales abroad, and just 550 firms
account for 70per cent of Canadian goods exported. By contrast, the remaining
30per cent is generated by nearly 40,000firms.
Canada has benefited from Chinas seemingly insatiable demand for natural
resources over the past decade. The value of exports to China grew at a double
digital pace, lifting it to rank second among Canadas export markets. Although
Chinas economic growth has been easing in recent years compared to its
earlier rapid growth, the country continues to be one of the largest and fastest-
growing economies in the world, offering tremendous opportunities for Canadian
companies. Opportunities that would be escalated with a possible Canada
China free trade agreement.
The historically resource-intensive trade between Canada and China is projected

to shift as China undergoes a structural transition from an investment to a
consumption-led economic model to meet the needs of a growing middle class.
Furthermore, more opportunities in services sectors will likely emerge as the
rebalancing of the Chinese economy progresses.
In order to help our customers learn and grow, we regularly produce insights
gleaned from talking to successful international businesses. In 2015 report,
Selling to the World, we asked the Conference Board of Canada to look at the
key attributes of businesses that succeed on a global stage. And in this latest in
our series of reports, we asked them to look more specifically at what industries
are best prepared to serve the Chinese market. Shifting Chinese Demand
profiles three Canadian companies that have used effective strategies to propel
their growth in China. The research not only includes what worked best, and
what could work for others, but also offers tactics to build further success for
the future.
The research identified the best sectors for Canada that have the right
combination of: high growth potential for Chinese demand; openness to foreign
commercial activities; competitiveness of the Canadian industries producing
the identified goods and services; and, capacity of these industries to increase
production. According to this research, Canadas natural resources sectors,
services sectors and the food manufacturing sector are best positioned to meet
Find Conference Board research at www.e-library.ca. 2

The Conference Board of Canada
rising Chinese demand. Others, particularly manufacturing industries such

as auto and aerospace, will need to boost their competitiveness and invest in
theircapacity.
Why should Canada look beyond its borders? Because we can. More importantly,
because doing so allows our country to regain lost ground in productivity,
innovation and competitivenessall key indicators of a healthy, prosperous
economy. The more Canadian firms tap into the worlds opportunitiesincluding
those in Chinathe greater the odds of ensuring our long term economic health.
Linda Seymour
Executive Vice President, Head of Commercial Banking

HSBC Bank Canada

Executive Summary
Although Chinas economy has grown more
slowly in recent years in comparison to its
very rapid growth in the 1990s and the 2000s,
it is still one of the largest and fastest-growing
economies in the world, offering tremendous
opportunities for Canadian companies. These
opportunities will increase if a Canada-China
free trade agreement is signed in the near future.
The historically resource-intensive trade between Canada and China is
projected to shift as China moves from an investment economic model
to a consumption-led one to meet the needs of a growing middle class.
Although commodities are still expected to account for a large share of
Chinese imports, other goods will likely represent an increasing share of
the mix. Furthermore, more opportunities in services sectors will likely
emerge as the rebalancing of the Chinese economy progresses.
Which Canadian businesses are best positioned to benefit from changing

Chinese demand for goods and services? We examined recent research
on promising Chinese opportunities for which Canadian companies are
well-positioned. We also interviewed representatives of three Canadian
companies that have faced challenges and had successes in these
areas of Chinese opportunity. Recent Conference Board of Canada
research1 looks at the sweet spots where the following intersect:
high growth potential for Chinese demand;

openness to foreign commercial activities;
competitiveness of the Canadian industries producing the identified
goods and services;
capacity of these industries to increase production.
The research shows that the most promising sectors for Canada in
China are natural resources industries (including some mining products
1 Ades, Chinese Demand; Ades, Responding to Chinese Demand.

and a number of agricultural products), business services, and the food-

manufacturing industry. (See Table 1.)
Table 1
Sweet Spot Sectors: Canadian Industries Best-Prepared to Meet
Growing Chinese Demand
Scientific research and development services
Mining
Crop production
Animal production
Fishing, hunting, and trapping
Finance and insurance services
Computer and information services
Food manufacturing
Other commercial services
Source: The Conference Board of Canada.
Although other Canadian industries with global strengthssuch as

aerospace, automotive, and wood product manufacturingcould benefit
from rising Chinese demand and more openness to foreign companies,
the research shows they need to boost capacity to take advantage of
opportunities in China.
This briefing also includes highlights of interviews with three Canadian

companiesClearwater Seafoods, Hatch, and IJW Dorweilerthat are
successfully doing business in China in four sweet spot sectors: food
manufacturing, engineering, and recreation and financial services. (See
Table 2.) These companies have the attributes identified in previous
Conference Board research as being critical to international success.2
These attributes include skilled executives with a strong vision and growth
mindset, innovation capabilities, foreign market knowledge needed to
identify opportunities, and international networks to access for support.
The insights from Clearwater and Hatch reflect these firms long-time
presence in China, whereas those from IJW Dorweiler come from a
company that recently entered the Chinese market. Having a local
presence and developing strong relationships have helped all three
2 Audet and Shaw, Selling to the World.

successfully penetrate China. Other Canadian firms will find helpful

guidance in their strategies for meeting Chinese demand and for
overcoming challenges in such a large market with a very different
language, culture, and business environment.
Table 2
Highlighted Canadian Companies
Clearwater Seafoods Hatch IJW Dorweiler
Started in China 1994 1999 2015
Differentiator Recognized globally for Offers unique, proprietary Provides content for
superior quality, food engineering technologies hockey programs
safety, and diversity of (such as those for
Provides cross-border
premium wild-caught, metallurgical processing
financial services for
eco-certified seafood and environmental
SMEs, particularly
protection)
technology companies,
in China
China strategy Local presence/ Local presence/ Local presence/
sales offices offices office
Importers Acquisitions Joint venture
and distributors
New sales channels Joint ventures Partnerships
Other key Canada, U.S., Europe, Canada, Asia/Pacific, Canada, U.S.,
markets Asia, Argentina U.S., South America, Singapore, Europe
Europe, Middle
East, Africa
Sources: The Conference Board of Canada; Clearwater; Hatch; IJWD.
Introduction
Canada has benefited from Chinas seemingly insatiable demand for
natural resources over the past decade. The value of exports to China
grew at a double-digit pace, lifting it to second place among Canadas
export markets. Although Chinas economic growth is slowing and the
economy is moving from an export- and investment-led model to a more
services- and consumption-based one, the country continues to be one
of the fastest-growing economies in the world and represented over 17
per cent of the worlds economy in 2015.3 With its growing middle class,
China may offer tremendous new opportunities for Canadian companies.
Canada and China have also launched exploratory talks on a free trade
agreement that could eventually open more doors to business in China
3 The World Bank, GDP Ranking, Purchasing Power Parity.

for Canadian firms. In this briefing, we present the highlights of recent

Conference Board research on the greatest areas of opportunity for
Canadian exporters, based on growing demand and openness to foreign
companies in China, and on Canadian strengths and capacity in these
areas. (See Table 1.) We also highlight the experience of three Canadian
companies active in Chinese market sectors with growing demand, and
share their insights and lessons learned. (See Table 2.)
The research shows that the most promising sectors in China for
Canadian companies are in the sweet spot where all of these
factors co-exist:
high growth potential for Chinese demand;

openness to foreign commercial activities;
competitiveness of the Canadian industries producing the identified
goods and services;
capacity of these industries to increase production.
The most promising sectors are found where demand and openness,
capacity, and competitiveness intersect. (See Exhibit 1.)
Exhibit 1
Success Factors: The Intersection of Demand and Openness,
Capacity, and Competitiveness
Demand and
openness
1
Success
Capacity Competitiveness

Research Findings
Shifting Demand in China

Since initiating market reforms in 1978, China has gradually shifted
from a centrally planned economy to a more market-based one and has
experienced rapid economic development.4 GDP growth averaged about
10 per cent per year in the 1980s, 1990s, and the first decade of the
2000s. Two factors drove this strong economic growth: resource-intensive
investment associated with industrialization and fast urbanization since the
1990s; and increased manufacturing exports thanks to greater openness
to global trade. Furthermore, the Chinese governments macroeconomic
stimulus during and after the global financial crisis of 200809 translated
into fast growth in residential construction and infrastructure investment,
and related manufacturing production.5
However, economic growth has been slowing over the last few years.
The stimulus generated a large oversupply of housing, which led to
slower growth in building investment. Slower investment growth is in line
with Chinas goal to move away from an investment-led growth model
toward a consumption- and services-based one. The latest five-year
plan6 (201620), released in March 2016, reinforced the commitment to
this shift. The Chinese government said it would focus on supporting
innovation, reducing excess capacity, and developing industries that
meet changing consumer demand.
A number of factorsthe aging of Chinas population, the expected

strengthening of the social safety net, more public health care spending,
and the replacement of the one-child policy by a two-children policy
in early 20167will likely support the transition from investment to
consumption.8 This transition should translate into increased demand
for a number of consumer goods.
4 International Monetary Fund, Report for Selected Countries and Subjects.

5 Roberts and others, Chinas Evolving Demand for Commodities.
6 Five-year plans outline the strategic vision and broad goals of the Chinese government for the
direction of the countrys economic and social policies.
7 The fertility rate might have declined even without the one-child policy, so the impact of the policy
change is still uncertain.
8 Zhang, Rebalancing in ChinaProgress and Prospects.

The composition of Chinas imports is projected to gradually change

More opportunities as the rebalancing of the economy progresses. Commodities are still
in services sectors expected to account for a large share of Chinese imports but consumer
will likely emerge goods, especially agricultural and food products, will likely represent an
as China continues increasing share of the mix. Furthermore, more opportunities in services
its structural sectors will likely emerge as China continues its structural transition.
transition.
Chinas Areas of Growing Demand

By analyzing data on imports, foreign direct investment, relevant
literature, and Chinese policies, weve reached three main conclusions:
1. As Chinas structural transition progresses, Chinese demand for a

number of commodities is projected to slow or even decline in the near
term. However, demand is expected to grow over the long term for
commodities such as lumber, some metals, and mineral fuels.
2. Fast growth in Chinese consumption is expected to continue in the
coming years, supported by stable employment prospects and rising
income. In particular, the rise of the Chinese middle class will support
demand for agricultural products and a number of high-quality food
items. Chinese imports of food preparation products have grown more
quickly than imports of many other products in recent years.
3. Opportunities for foreign companies to sell services may be small at
the moment but they are growing in a number of sectors, such as travel
and recreation. However, Canadian businesses may still face significant
challenges in Chinese sectors that are closed to foreign engagement.
For example, Canadas communications sector may be globally
competitive but would still face significant restrictions in China.
Specifically, the researchers found that Chinese demand for the following
goods and services is likely to rise, and that China isor is expected to
becomerelatively open to foreign businesses in these sectors:
commodities:
agricultural commodities (such as cereals, vegetables, and
live animals)
some non-agricultural commodities (such as mineral fuels, oils, and
distillation products, and precious stones and precious metals)

consumer goods:
Canada has global processed foods (such as meat, fish, seafood, vegetables, fruits, nuts,
strengths in many and food products)
of the sectors non-food consumer goods (such as apparel, footwear, headgear, toys,
that align with and pharmaceutical products)
increasing Chinese manufactured goods, such as pulp and aircraft, and some
demand. automotive products
works of art, collectors pieces, and antiques
services sectors:
scientific research, technical services, and geologic prospecting
computer services
financial services
travel services
personal, cultural, and recreational services
e-commerce.
According to the research, Canada has global strengths in many of the

sectors that align with increasing Chinese demand. On the product side,
these strengths are concentrated in natural resources, in raw materials
processing, and in some advanced manufacturing products. Canada
also has global commercial strengths in cultural, recreational, technical,
financial, communications, computer, and information services. However,
not all of these Canadian sectors have sufficient capacity to increase
production. (See Table 3.)
Table 3
Benchmarking Capacity, by Industry
High capacity Moderate capacity Low capacity Minimal capacity
Architectural, engineering, and Finance and insurance services Pharmaceutical and medicine Leather and allied product
related services manufacturing manufacturing
Management services Other chemical manufacturing Aerospace product and parts Wood product manufacturing
manufacturing
Mining (except oil and gas) Transportation and government Beverage and tobacco product Textile mills
services manufacturing
Petroleum and coal product Computer and information services Printing and related support Textile product mills
manufacturing activities
Crop production Basic chemical manufacturing Plastics and rubber products Motor vehicle manufacturing
manufacturing
Animal production Travel services Other transportation Paper manufacturing
manufacturing
(continued ...)

Table 3 (contd)
Benchmarking Capacity, by Industry
High capacity Moderate capacity Low capacity Minimal capacity
Other commercial services Non-metallic mineral product Furniture and related product Computer and electronic product
manufacturing manufacturing manufacturing
Fishing, hunting, and trapping Machinery manufacturing Motor vehicle parts manufacturing
Primary metal manufacturing Clothing manufacturing
Artificial and synthetic fibres and
filaments manufacturing
Fabricated metal product
manufacturing
Miscellaneous manufacturing
Food manufacturing
Electrical equipment, appliance,
and component manufacturing
Canadian Sectors Poised for Growth

By combining demand, competitiveness, and capacity indicators, the
Conference Board analyzed which Canadian sectors are in the best
position to take advantage of a changing Chinese market. (See Table 4.)
Table 4
Canadian Industries Best- and Least-Prepared to Capitalize
on Growing Demand
Best prepared Need to increase capacity
Scientific research and development services Wood product manufacturing
Mining Aerospace product and parts manufacturing
Crop production Vehicles and parts manufacturing
Animal production
Fishing, hunting, and trapping
Finance and insurance services
Computer and information services
Food manufacturing
Other commercial services
Canadas natural resources sectors (including mining and agricultural

products), business services sectors, and the food-manufacturing sector
are best-positioned to ramp up production to meet rising demand.

In terms of capacity, food manufacturing is among the industries

best-prepared to face growing demand, though there is still room for
improvement. Canadian shellfish, for example, has a global comparative
advantage and Chinese demand for shellfish has been escalating
in recent years, due to the rise of the middle class and increased
purchasing power.
Clearwater Seafoods: A Food Manufacturing

Success Story
The experience of Nova Scotia-based Clearwater Seafoodsa company
that has invested in boosting capacityexemplifies the growing potential
in China for Canadian food exporters. As one of North Americas largest
producers and distributors of premium shellfish, including lobster, scallops,
clams, cold water shrimp, and crab, it operates from ocean to plate,
owning its own fishing quotas, vessels, and advanced processing facilities.
Clearwater has been doing business in China since 1994, starting with a
sales office in Guangzhou. It has experienced double-digit growth in China
over the last three years. Today, 20 per cent of the companys $500 million
or more in annual revenues come from sales in China.
Clearwater had a strong interest in diversifying and expanding into

different markets in the early 1990s. Demographicsincluding high
seafood consumption per person, a large population, and a growing
middle classhelped make China an attractive marketplace, particularly
for live lobster and clams. Lobster is popular in China, where it is
traditionally used for celebratory meals. This makes Clearwaters high-
quality live lobster a natural fit. Clearwater also had the necessary
logistics and handling expertise to ship live and frozen perishables
halfway around the world. Also, when Clearwater entered the Chinese
market, it was beginning to succeed in the Japanese sushi sector with
its clam products. This led to expansion into other Asian markets such
as China, where Japanese cuisine was making inroads.

Chinese consumers value brands, high-quality products and food

Clearwater has safety, says Clearwaters Greg Morency, Head of Global Markets. All
experienced of this has played a role in our growth and the halo effect of being a
double-digit growth Canadian company has also helped.
in China over the
last three years. Clearwater has a local presence through three sales offices (in Beijing,
Shanghai, and Guangzhou) and 24 employees, whose role is to educate,
influence, and create demand among distributors, restaurant chains, and
chefs, rather than take orders. The key first sale is to importers, who sell
to sub-distributors and wholesalers, but it is Clearwaters sales reps who
call on buyers and create demand. We chose this method of having
local people on the ground to help pull the product through distribution,
explains Morency. Conversant in Mandarin and English, they have great
experience with other multinationals, understand Western products that
sell for a premium, have worked with FMCG (fast-moving consumer goods)
companies, and know how to create a value proposition. Distributors do
the selling while we invest heavily in marketing and promote the products
and benefits by focusing on the value chain. Clearwater also hosts
major distributor events and culinary events to educate the market about
premium shellfish and the value offered by the company.
Morency says strong business partnerships with key customers in China

have been integral to Clearwaters growth. The company has relied on
distributors there for over 20 years. We align with those who are all about
value and creating value, who understand what we do and the kind of
customers that want premium quality. We have long-term relationships with
them and our employees, who are very loyal to our brand and company.
Demand for Services on the Rise

Chinas plan to move from an export- and investment-led growth model
toward a services- and consumption-based economy could generate
opportunities for Canadas services industries. Our analysis found that
Canada has global commercial strengths in a number of services that
are projected to face rising Chinese demand:
personal, cultural, and recreational services

technical services
financial services
computer and information services

Services industries such as engineering and architecture are in a very

good position to take advantage of rising Chinese demand. Indeed,
Canadas architectural, engineering, and other technical services sector
has increased its investment in physical and human capital over the
past 20 years. Firms in this sector have seen big increases in their profit
margins and are in a strong capacity position.
However, Canadian businesses may still face significant challenges,

as many Chinese services sectors are closed to foreign engagement.
The Chinese populations cultural and linguistic characteristics and
preferences may require Canadian businesses to customize their
services to succeed in the Chinese market.
Hatch Ltd.: An Engineering Success Story

A global engineering and professional services firm, Hatch is a good
example of a large services provider that has been operating in China for
many years. Since 1999, the firm has provided a full range of services
including business consulting, engineering, procurement, construction
management, and technologyto the Chinese market, focusing on the
metallurgical and infrastructure sectors.
Hatch entered the market by acquiring the engineering arm of an

international mining firm with a presence in China. Then it broadened
its focus and began pursuing other business there, seeing the potential
in the country. Today, Hatch has offices in Beijing, Shanghai, and
Shenyang, and about 200 employeesmostly local hires, supported
by specialists from overseas when required. A significant percentage of
the sales of this global giant, which topped $1.7 billion in 2015,9 can be
attributed to China.
Hatch has solidified and grown its business in China by acquiring an

engineering firm (known as a design institute in China) in northeast
China in 2012 and by establishing four joint ventures. The most recent
one, in 2016between Zhongshe Baiqi Joint Investment Development
Co. Ltd. and Hatchcreated Hatch Beijing Environment and Technology
Ltd. It combines Zhongshes financial strength with Hatchs deep
technical expertise and decades of environmental experience in the
9 Business.FinancialPost.com, The FP500.

resources, energy, infrastructure, and municipal sectors. Together, the

firms plan to target serious environmental issues facing China today.
Hatch finds its joint venture partners through networks and relationships.
It looks for firms with complementary but distinct skills and/or markets, as
well as a compatible business approach and objectives.
Business in China is all about developing personal relationships and

networks that then bring new opportunities and help build results, says
Joe Lombard, Managing Director, Metals. People refer you based on
those relationships; partnerships are a broader way of formalizing them.
You can go to a million trade shows but, if you dont make friends in
China, youll get nowhere.
These methods differ from those Hatch uses to grow business in other
international markets. In some markets, we dont need a permanent
presence and can just establish on a project basis, but in China, it is
essential to have a local presence, explains Lombard. The emphasis on
partnerships in China is stronger and brings greater benefits in terms of
more referrals and opportunities. Its still necessary to create a concrete
initiative, but the connections are the important catalyst for that.
One of the important things the firm has learned is that Chinese clients
place greater value on products than on services. We had to change
the way professional services are presented because the market
for professional services is less mature in China than in some other
countries, says Lombard. In Canada, we might help a client design
something new based on a range of possibilities; in China, the emphasis
needs to be changed to one that shows we are bringing a technology to
bear that addresses the clients needs but is not otherwise available.
In the face of strong competition from Chinese design institutes and

other international engineering firms, Hatchs biggest differentiator is not
low cost but rather its unique proprietary technologiesfor example,
technologies for metallurgical processing and environmental protection.
It also has a Class A design licence from Chinese authorities, proving
it has the same status as other Chinese design institutes and allowing
the firm to work on the largest projects without limit. Hatch obtained the
licence in 2012 by acquiring a Chinese firm that held the licence.

Along with over six decades of business and technical experience in

Business in the mining, energy, and infrastructure sectors, Hatch also maintains a
China is all competitive edge by being agile and innovative. It has a defined internal
about developing R&D expenditure target that is a percentage of sales. But viewed
personal more broadly, much of the work we do on projects with clients is also
relationships and innovative and developmental to help them face their unique challenges,
networks. and much of this effort is actually R&D, notes Lombard.
We have to be innovative in our business practices and relationships

because the level of sophistication and the type of government policies
are constantly changing, with an emphasis on improving, he adds. Its
necessary to keep ahead of the changes and respond with solutions
that are smart, efficient, and innovative. For example, Hatchs innovative
technology was used to develop the QSLIC industrial complex, Chinas
largest producer of potash. The facility in Qinghai features the worlds
largest, state-of-the-art magnesium and calcium carbide smelters.
More Canadian Services Strength

IJW Dorweiler Ltd.
The offerings of Hong Kong-based IJW Dorweiler Ltd. (IJWD) tie in
well with the rising demand for recreational services and entertainment
identified in the Conference Board research, and with the growth in
middle-class incomes in China. This recent start-up boutique firm
focuses both on providing hockey development expertise to grow the
sport at the grassroots level in China and on cross-border financial
services for small and medium-sized enterprises (SMEs) in China to
bridge the gap between Asia and Canada.
IJWD is the subsidiary of two mergers and acquisitions (M&A) and

business valuation boutique firms based in Canada, Dartmouth Partners
and IJW & Co. It opened a Hong Kong office in 2015 and expects China
to comprise a significant share of revenues by 2017. Drew Dorweiler
of Dartmouth specializes in business valuation and litigation support,
with particular expertise in the entertainment and sports fields and in
intellectual property. Ian Wooden of IJW & Co. has M&A transaction
advisory, valuation, and technology expertise. The initial catalyst
for these two partners to form IJWD and branch into the Chinese

marketplace was the partners trip to the Asian Financial Forum in Hong
Kong in 2012. The degree of business connections was unparalleled,
says Dorweiler.
He was subsequently asked to speak to a group of finance ministers and

private individuals in Beijing about valuation standards and ways to value
a business, since such standards are more rudimentary in China. Its
fascinating how one big break like that can open up so many doors and
contacts, notes Dorweiler. One of the resulting meetings led directly to
an introduction to a Chinese sports executive. He became one of IJWDs
partners in a hockey development project to fulfill the China Winter
Dream, a nationwide initiative to build 1,000 ice rinks and get 300 million
people playing winter sports before the 2022 Olympics.
Passionate about hockey and convinced that Beijing would clinch the
hosting of the 2022 Winter Olympics, Dorweiler had already been
networking to sell his vision for growing the sport in China. Through his
Chinese contacts, he was introduced to CTC Groupanother company
with roots in Canada, but in the refrigeration and rink infrastructure
business. They forged a joint venture called Canadome, with CTC
building rinks for the China initiative andtogether with IJWD
developing Chinas hockey content at the grassroots level through
schools and youth programs, including CanadaChina tournaments
and an exchange program. It was a stroke of luck that this match with
CTC was made, since it has a turnkey solution and a strong pipeline
in Asia with the Canada brand, emphasizes Dorweiler, who brought in
Woodens company to help in fundraising and round out the team.
IJWDs core activities in China are business valuation, litigation support,

M&A transaction advisory services, and corporate finance for SMEs.
It also subsidizes tech start-ups in Hong Kong and mainland China,
offering discounts on M&A transaction, strategic advisory, and valuation
services when the start-ups are looking to raise capital. IJWD is using
this strategy to develop long-lasting relationships with them.
The decision to open an office in Hong Kong reflects the need to have
a local presence in order to do their kind of business effectively. The
success ratio in getting an initial meeting with potential clients in North
America is 50 per cent; in Hong Kong and mainland China, its 95 per

cent. Asian business people are willing to listen and explore how to work
Business people together, notes Dorweiler.
in China want to
learn more about Developing relationships with venture capitalists and other firms is
you and trust another method for growing business. Its quite different to do business in
you before doing China, says Dorweiler. You rarely get rapid decisions in China and Asia.
business with you. Business people in China want to learn more about you and trust you
before doing business with you, so its important to develop relationships
first. Weve had great success because weve been back and forth
sufficiently in the last five years to cultivate these relationships, which
leads to people making introductions for us and giving referrals. Even
though it is just a start-up, IJWD has already been honoured with the Hong
KongCanada Business Association 2016 Business Leader Award and
named the Hong Kong Forum Success Story of the Year for 2016.
Least-Prepared Sectors
Unlike these sectors that are well-prepared to meet rising Chinese
demand, other sectors lack some capacity to meet future demand.
According to the Conference Board analysis, manufacturing industries
such as wood products manufacturing, vehicles and parts manufacturing,
and aerospace industrieswill need to invest in capacity expansion
(plant, machinery, and/or labour) and boost competitiveness to benefit
from the expected increase in demand from China. In the case of
Canadian wood products, for example, firms had to use all their physical
capital in recent years to meet rising demand from the U.S. They will
need to make additional investments to take advantage of Chinese
demand, since they do not have much spare capacity to increase
production in the short term.
Faced with rising competition from Mexico, which benefits from a cost
advantage, the vehicles and parts manufacturing industry has been
struggling to remain competitive. Companies will need to find the right
product mix to secure a market niche in China.

Capitalizing on Chinese Demand

Exhibiting strong global mindsets and innovative approaches, each of the
companies profiled in this briefing has a competitive edge in the Chinese
market. (See Global Competitive Advantage.) Previous Conference
Board of Canada research10 identified four core resources that are
critical to success in international markets: skilled executives, foreign
market knowledge, innovation capabilities, and international networks.
(See Exhibit 2.) These attributes are visible in the success of Hatch,
Clearwater Seafoods, and IJWD in China. (See Table 5.)
Global Competitive Advantage

To succeed on the international stage, a company needs a global competitive
advantage (GCA), which refers to the ability to create more value for foreign
customers than its global rivals do. Here are the unique differentiators of our
profiled firms.
Clearwater Seafoods
It has a laser focus on premium quality and food safety. Its highly valued brand
has kept it strong and growing despite the competition. Its local sales reps
focus on technical education of distributors and chefs, teaching them about
proper product handling and preparation. Also, it hires executive chefs to work
with other chefs to position Clearwater products for local cuisine. Another
distinguishing feature is an innovation group that develops new products.
Hatch
It brings over six decades of international business and technical experience in
the mining, energy, and infrastructure sectors, in more than 150 countries. Rather
than focusing on low cost and repetition of previous solutions, like many other
engineering firms do, it emphasizes innovative solutions and improved technology.
Its biggest differentiators are its unique proprietary technologiesfor example,
technologies for metallurgical processing and environmental protection.
10 Audet and Shaw, Selling to the World.

IJWD
It is unique in providing a hockey content development service that leverages
Canadas brand in the sport. It also provides transactional and strategic advisory
services that do not compete with those of large institutions; cross-border
exposure to tech start-ups in Hong Kong and China; and discounted professional
services to build long-term relationships with the start-up companies as they grow.
Exhibit 2
Key Resources for Building a Global Competitive Advantage
Skilled executives Foreign market knowledge

Entrepreneurial leaders Market orientation
Commitment to international growth Local presence
International experience Prioritizing foreign markets
Adapting to client needs
Skilled Foreign market

executives knowledge
Global
competitive
advantage
International Innovation
networks capabilities
International networks Innovation capabilities

Existing customers New and improved products
Local distributors R&D investment
Government contacts Adopting new technology
Professional service firms Innovative processes

Table 5
Key Success Factors for Market Penetration in China
Hatch Clearwater Seafoods IJWD
1. Skilled Executives Has a global vision, operating in all Has an export-driven mindset, Has over 50 years of
(knowledgeable, global growth- continents except Antarctica continuously seeking new growth professional experience in
minded leaders, willing to take risks) Has executives who have lived opportunities in different markets serving international clients.
around the world and worked in Has a CEO and management
all markets team very steeped in international Wants to grow its Hong Kong
Is willing to take risks and focus on business, who travel extensively office as a gateway to Asia and
the long term Takes prudent risks Australia and India
Has executives who travel
overseas monthly
2. Foreign Market Knowledge (ability Has a long-established global Has had a strong interest since Focused exclusively on Hong
to prioritize the foreign markets to focus, with 65 offices around the 1990s in diversifying and Kong and mainland China
pursue, and to adapt products and the world expanding into different markets at inception
approach to local market needs)
Develops deep local knowledge where there is demand for Is targeting Singapore and
by hiring local managers, wild, sustainably sourced, and then, potentially, Japan, India,
supported by culturally savvy premium seafood products and Australia
foreign managers Ranks Asia-Pacific as its largest Offers cross-border play
Changed the way it presents its and most important region for SMEs in China and Asia
professional services in China Uses reps to educate and unfamiliar with financing
to focus on technology solutions influence the market in China, resources overseas
not to sell directly
3. Innovation Has a defined R&D expenditure Developed from sea to plate Uses Canadian hockey
Capabilities target that is a percentage of process to ensure lobsters expertise and talent to help
(develop unique products or sales, which is unusual for an shipped overseas reach popularize the sport in China
processing methods for product or
engineering firm destination at peak of perfection Developed a start-up program
service differentiation)
Develops and offers unique Is a global leader in sustainable to perform financial modelling
proprietary technologies seafood excellence and valuation services at a
Carries out ongoing innovative Has an innovation group that discount for smaller technology
and developmental project develops products; marketing firms in China and Asia
work that helps clients staff also focus on new
face challenges product development
4. International Establishes joint ventures with Taps into services of Canadian Uses Canadian and Chinese
Networks Chinese firms for large projects consulates abroad government resources and
(identify new opportunities, secure contacts, including consulates,
Draws on global resources, Seeks assistance from Canada
financing, tackle regulations, and build
contacts, and expertise of 9,000 China Business Council on trade commissioners,
a reputation)
employees with experience in regulatory matters and Hong Kong Trade
more than 150 countries Development Council
Collaborates with partners
and leverages relationship
with Hong Kong-Canada
Business Association
Sources: The Conference Board of Canada.

Identifying Growth Opportunities

Although the three featured companies use a variety of methods to find
opportunities for growth in China, one common approach involves using
their networks and building relationships. This is particularly important
for service providers, such as IJWD. Travelling to China almost monthly,
Dorweiler and his business partner, Wooden, have joined local business
organizations to become better known, network, make presentations to
the local business community, and provide and receive referrals. They
have built close relationships with the Hong KongCanada Business
Association and the Hong Kong Trade Development Council (HKTDC),
which have helped them validate the market, identify opportunities, set
up their business properly, and get referrals for clients and even partners
for their Canadian clients.
IJWD also taps into Canadas Trade Commissioner Service, in both

Hong Kong and mainland China. Theyve been extremely helpful in
assisting with research, making introductions, and arranging meetings,
notes Dorweiler.
Hatch is big enough to use a variety of ways to identify opportunities,

including networks, trade shows, trade missions, and data about
potential markets and customers. Most important is closely monitoring
policy announcements to identify major investment trends. The Chinese
government sets the agenda for development of much of the economy,
and when they say they want improved environmental protection, for
example, they mean it, explains Lombard. We have to be attentive to
those announcements. But when it comes to turning major trends into
concrete business opportunities, personal networks help identify the
particular projects.
Members of Clearwaters executive team, including its CEO, frequently

visit its China sales offices to work with staff, participate in industry
events, and meet with prospective and key customers to identify new
opportunities. Tactically, its sales reps seek the right customer fit, looking
for high-quality places that would value Clearwater products.
The company also monitors growth trends and new sales channels
to understand how they relate to its business and how to leverage

them. Morency also credits Clearwaters network, including Canadian

One common consulates and the Canada China Business Council (CCBC), for
approach contributing to its expansion in China. Although our relationship with
involves using CCBC is relatively new, they have already provided us with assistance in
their networks a variety of regulatory matters.
and building
relationships.
Capitalizing on Current Demand and Opportunities
In our interviews, people from the three featured companies shared
their approaches for capitalizing on current demand in China and finding
opportunities to fuel their growth.
1. Demand:
Opportunity for Clearwater: As the middle class and disposable
income have grown in China, seafood consumption per capita has
increased from 35 kilograms per person five years ago to 41 kilograms
per person now.
Strategies
Geographic expansion: Clearwater is focused on bringing products into
Tier 2 cities.
E-commerce and retail channels: The company has a new focus on retail
and e-commerce channels as efficient ways of extending its business. It
recently started a partnership with Tmall, a major e-commerce platform,
so people can buy live lobster.
Supply expansion: Thats one of the reasons Clearwater acquired a
Scottish company, Macduff Shellfish, in late 2015. It has about 7,000
tonnes of product to sell beyond Europe, particularly to China.
Expanded product offering: Clearwater is introducing a wider breadth of
products, such as brown crab from Macduff.
Smart investment: Clearwater invests heavily in people and in vessels
to support products that end up in the AsiaPacific region, especially
China, and have put resources behind the clam business.
Future: With Chinas expanding middle class fuelling discretionary
spending and an affluent consumer segment, Clearwater will continue
to capitalize on the growing demand for premium seafood in this
marketplace well into the future, says Morency.

2. Demands
High-quality seafood.
Environmental improvement, as the nature of Chinese investment
changes from building heavy industry and public infrastructure to
focusing on environmental improvement and promotion of a more
services-oriented consumer economy.
Outbound Chinese investment, as investors increasingly look to diversify
in other markets.
Opportunities for Hatch: Carrying out environmental projects in China

and helping Chinese companies invest overseas are growth areas. The
current emphasis on improved quality and environmental performance
means that our differentiation is of greater value, says Lombard.
Strategies
Project teams: As a project-focused organization, Hatch rapidly creates
strong project teams around an existing core team for each assignment.
For example, the firm grew its Shenyang office from 100 to 200 people
in a few months. It had to hire, train, and integrate these people to
deliver on a specific project related to the QSLIC magnesium smelter
dehydration plant in Qinghai.
Proprietary technologies: Hatch develops new technologies, such as
clean technologies for environmental remediation.
R&D initiatives: Hatch has a target R&D expenditure.
Acquisitions and joint ventures/partnerships: Hatch uses these methods
to gain access to complementary expertise.
Future: We absolutely see increasing demand for Hatchs services in the
next few years and have the capacity to deliver through our 9,000-person
organization, particularly in supporting outbound investment,
says Lombard.
3. Demands:
Recreation services for the growing middle class.
Increasing Chinese outbound investment.
Opportunities for IJWD: Dorweiler believes the world is on the cusp of

a wave of M&A transactions originating in Asia and flowing through Hong

Kong, with buyers wanting to diversify and invest overseas. Canada is

Doing business perceived as a welcoming and inexpensive place to do business, so our
in China does not Hong Kong office is an ideal conduit for facilitating trade into Canada.
come without its The Chinese want a trusted one-stop shop when expanding, and we
challenges. have the bandwidth in our staff and network to deliver that.
Strategies
Legal: IJWD is formalizing incorporation with CTC on the
hockey initiative.
Financing: The firm is creating a fund to finance Canadome ice rinks
and related hockey content projects through capital markets in Canada,
targeting institutions to participate, and setting up a parallel fund in Hong
Kong through investment bankers and its regional network. It has also
hired a capital markets expert in Canada to help.
Hiring: IJWD wants to bring on board Mandarin-speaking business
development support staff to successfully reach into mainland China and
help build its brand in Asia.
Future: Seeing the huge advantage of Hong Kong as a gateway to Asia,
IJWD wants to grow its office there in terms of clients, revenues, and
employees. It has already relocated its office in Hong Kong to be closer
to the financial hub. We expect our Asian operations in five years will be
five times the size of our Canadian business.
Key Challenges and Mitigation Strategies

Despite the opportunities, doing business in China does not come
without its challenges.Legal, cultural, and time differences are practical
considerations that can present barriers.Our featured firms have found
ways to minimize these and other potential obstacles.
Language, culture, and legal system: Chinas linguistic and cultural

differences can make doing business there more complex.Its a very
different market, society, culture, and legal system than in Canada, and
deep local knowledge of the practicalities of working there is needed,
says Lombard. Hatch has developed that knowledge by having local
management, as well as some foreign contribution, but foreign managers
need to develop their own local knowledge.

Dorweiler of IJWD considers language in mainland China to be the

biggest challenge.Few places have signs in English, so its a must to
have aguide and interpreter if you are travelling on your own and dont
speak Mandarin.
All three of our profiled companies hire locally to facilitate outreach to non-
English-speaking people.Their executives also understand the importance
of being culturally savvy to succeed there.They all emphasize the need to
be attuned to and respectful of cultural differences (for example, you wont
get a quick yes or no, so patience is required) and to take time to build
relationships first.This is an area where Canadians possess a greater
advantage by having more of that sensitivity than other international
competitors, says Lombard. It will be extremely rewarding financially and
personally if you put effort into this, adds Dorweiler.
Competition: As Lombard says, China has been and will always

remain a highly competitive marketplace. Every level of product and
service is already available in general, so finding niches to differentiate
yourself is the biggest challenge, and then you must make the
necessary connections to find those interested. He anticipates even
more competition in the future. There will be plenty of work, but its not
necessarily easy to win. Hatch will continue to market its differentiators
and niche expertise in metallurgical engineering, public infrastructure,
and environmental engineering technology.
Clearwater sets itself apart from its many competitors by focusing on the
quality its become known for and for which people are willing to pay a
premium.Its differentiators include an industry designation guaranteeing
sustainability, a special band on lobsters to ensure authenticity, frozen-
at-sea products, technical education on proper seafood handling and
preparation, and an innovation group for new product development.
Because IJWDs main differentiator of its financial services is a focus

on small tech start-ups, it has carved out a niche that does not compete
with large global investment banks or smaller players. As we grow our
network, we meet small investment banks, M&A boutiques, and valuation
firms, and they understand were not trying to steal their clients, explains
Dorweiler. These firms are very regional in their focus and what we

bring is help for their clients who want to expand overseas, find a partner,
Its a very different or get a valuation if they want to sell.
market, society,
culture, and legal Intellectual property (IP) protection: Safeguarding IP is a common
system than in concern for companies doing business in China, especially those
Canada. selling technology.According to Hatch, its a concern everywhere. We

have systems for protecting our IP, including protection of specialized
manufacturing techniques and encryption of specialized control systems,
says Lombard.Choosing partners carefully also helps.
Counterfeiting: As the Clearwater brand became more popular in the

Chinese marketplace, the company started to experience counterfeiting
issues. It is constantly vigilant to identify and thwart this problem, and to
educate customers on the differences between authentic and counterfeit
products.It is also developing an anti-counterfeiting mechanism on all
Arctic Surf Clam packaging destined for the Chinese market to mitigate
challenges related to counterfeit surf clams being sold under the
Clearwater brand.
Selling services: Hatch believes it can be difficult to export services

to China and that products are valued more.To overcome this, the firm
markets itself as a company that provides a technology solution, which is
perceived as more of a product.
Lessons Learned in Penetrating the

Chinese Market
As global players, the featured companies are very enthusiastic about doing
business in China and about the growing opportunities for them. They share
some perceptions based on their experience in this market.

The key is to make sure you have relationships in place that are strong,
capable, and built on trust, and that can be leveraged over the long term.
Never underestimate the value of these relationships.
Greg Morency, Clearwater Seafoods

Its no secret that there is a vigorous anti-corruption campaign going on in

China, so one would be very unwise to have business practices contrary
to that. Be very mindful of that when starting out in China. Having a
differentiated product that sells itself, rather than a differentiated sales
methodology, is best.
Joe Lombard, Hatch
I was really struck with the welcoming and receptive nature of the
business climate. The people we meet withincluding senior managers,
and partners of VC, private equity, and legal firmsare serious about
doing business and spend quality time with us.
Drew Dorweiler, IJWD
Conclusion
China has long represented great potential for Canadian exporters,
particularly those in the commodities sector. However, as Chinese
economic growth decreases from its previous heights and China shifts
from an investment to a consumption modeldriven by its burgeoning
middle classthe countrys demands for goods and services are
gradually changing. Although commodities are still expected to account
for a large share of Chinese imports, other goodsespecially agricultural
and high-quality food productswill likely represent an increasing share
of the mix. More opportunities in services sectors are also projected
to emerge as Chinas structural transition progresses, if China opens
its services sectors to foreign direct investment. The rebalancing of
the Chinese economy presents many potential new opportunities for
Canadian companies.
Canada has proven global strengths in a number of areas where

Chinese demand is expected to rise, including some natural resources,
such as mineral fuels and oils, and precious metals; agricultural
products, such as meat, seafood, and cereals; certain manufactured

products, such as aircraft and vehicles; and commercial services, such

as technical and financial services. However, just because Canada is not
strong in some sectors does not mean it cannot succeed in related supply
chains. Canadian businesses will need to be creative, be innovative,
and think strategically to identify market niches where they could build a
Chinese presence, as well as any investments they need to make.
Chinese and foreign firms in China are rapidly upgrading their

technology, a trend that will likely continue in the coming years. For
Canadas globally successful manufacturing industries to maintain their
competitive edge, they will have to make technological upgrading a
priority. The speed at which companies are able and willing to adjust
their operations will be vital to keeping Canada competitive in an
increasingly globalized marketplace.
As our research and the experiences of our three illustrative firms

indicate, a local presence is often necessary to take advantage of the
Chinese market. Canadian companies cannot simply rely on shipping
their products or selling their services electronically. They will need
to invest directly in offices or personnel in China. The experience of
the executives we interviewed also reveals that forming joint ventures
with well-connected, established local firms can accelerate Chinese
market penetration.
Although there are challenges to doing business in China, such as

cultural and linguistic differences, and sectors that are relatively closed
to foreign companies, all three illustrative companies have shown these
can be largely overcome by being culturally attuned and patient, by hiring
locally, and by understanding that the real key to success in China is
building relationships first.

APPENDIX A
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Shifting Chinese Demand: New Opportunities for Canadian Companies

Susan Baka
To cite this briefing: Baka, Susan. Shifting Chinese Demand: New Opportunities for Canadian Companies.
Ottawa: The Conference Board of Canada, 2017.
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Shifting Chinese

Chinas economy is transitioning to a more consumer-led model, with demand

Canadas natural resources sectors, services sectors, and the food-manufacturing

BRIEFING FEBRUARY 2017

Statistics Canada research tells us that companies that trade internationally

The historically resource-intensive trade between Canada and China is projected

Find Conference Board research at www.e-library.ca. 2

rising Chinese demand. Others, particularly manufacturing industries such

Executive Vice President, Head of Commercial Banking

Find Conference Board research at www.e-library.ca. 3

Which Canadian businesses are best positioned to benefit from changing

high growth potential for Chinese demand;

1 Ades, Chinese Demand; Ades, Responding to Chinese Demand.

Find Conference Board research at www.e-library.ca. 4

and a number of agricultural products), business services, and the food-

Source: The Conference Board of Canada.

Although other Canadian industries with global strengthssuch as

This briefing also includes highlights of interviews with three Canadian

2 Audet and Shaw, Selling to the World.

Find Conference Board research at www.e-library.ca. 5

successfully penetrate China. Other Canadian firms will find helpful

Sources: The Conference Board of Canada; Clearwater; Hatch; IJWD.

3 The World Bank, GDP Ranking, Purchasing Power Parity.

Find Conference Board research at www.e-library.ca. 6

for Canadian firms. In this briefing, we present the highlights of recent

high growth potential for Chinese demand;

Source: The Conference Board of Canada.

Find Conference Board research at www.e-library.ca. 7

Shifting Demand in China

A number of factorsthe aging of Chinas population, the expected

4 International Monetary Fund, Report for Selected Countries and Subjects.

Find Conference Board research at www.e-library.ca. 8

The composition of Chinas imports is projected to gradually change

Chinas Areas of Growing Demand

1. As Chinas structural transition progresses, Chinese demand for a

Find Conference Board research at www.e-library.ca. 9

According to the research, Canada has global strengths in many of the

Find Conference Board research at www.e-library.ca. 10

Source: The Conference Board of Canada.

Canadian Sectors Poised for Growth

Source: The Conference Board of Canada.

Canadas natural resources sectors (including mining and agricultural

Find Conference Board research at www.e-library.ca. 11

In terms of capacity, food manufacturing is among the industries

Clearwater Seafoods: A Food Manufacturing

Clearwater had a strong interest in diversifying and expanding into

Find Conference Board research at www.e-library.ca. 12

Chinese consumers value brands, high-quality products and food

Morency says strong business partnerships with key customers in China

Demand for Services on the Rise

personal, cultural, and recreational services

Find Conference Board research at www.e-library.ca. 13

Services industries such as engineering and architecture are in a very

However, Canadian businesses may still face significant challenges,

Hatch Ltd.: An Engineering Success Story

Hatch entered the market by acquiring the engineering arm of an

Hatch has solidified and grown its business in China by acquiring an

9 Business.FinancialPost.com, The FP500.

Find Conference Board research at www.e-library.ca. 14

resources, energy, infrastructure, and municipal sectors. Together, the

Business in China is all about developing personal relationships and

In the face of strong competition from Chinese design institutes and

Find Conference Board research at www.e-library.ca. 15

Along with over six decades of business and technical experience in