Singaporean Business in China, a Continuing Partnership

August 11, 2009 Posted by China Briefing Reading Time: 4 minutes

Merlion by flickr user tianhua1993 under the creative commons license By Emma Xu

SHANGHAI, Aug. 11 – Singaporeans have a long history of doing business in China. Formal diplomatic relations between China and Singapore began in 1990 and helped further enhance this relationship as the Chinese market became more open to Singaporean companies.

China has been Singapore’s top foreign direct investment (FDI) destination for the past twelve years, with annual investment increasing year by year. According to the Chinese embassy in Singapore, the cumulative FDI from Singapore has reaching US$37.62 billion by the end of 2008.

Cooperation between the two countries has created more opportunities for Singaporean companies to invest in China. For example, the Suzhou Industry Park (SIP) founded by Singapore and China in 1994 attracted 360 Singapore companies between 1994 and 2007. The total investment made by these companies amounted to approximately US$33.4 billion.

The Broadway Industrial Group Limited, a Singaporean small medium enterprise (SME) specializing in producing expandable foam plastics for packaging and insulation, started its China business back in 1993. Owning eight branches in China, the Broadway Group eventually shifted its main manufacturing facilities to the eastern and southern parts of the country.

Lee Kong Kee, Executive Director of Shanghai Broadway Packaging & Insulation Materials told China Briefing that his company had successfully maintained a 40 percent annual growth for the past five years.

The company’s open and fair culture, precise short-term and long-term business planning, and customized business strategies developed together with its partners are vital to Broadway’s growth in China, Mr. Lee said. He was confident that Broadway would find opportunities to develop its China business further even in this global economic downturn. Mr. Lee believes that successful partnerships with local Chinese companies would not only expand Broadway’s business to the rest of China but also help its partners upgrade their technology capability.

China’s lower labor cost and relatively well-developed infrastructure has helped it become a manufacturing hub for the world. However, foreign investors have to know certain issues about China in order to succeed here. There are many instances of unsuccessful foreign investments because their management team did not acquire necessary information.

Singapore photo by Chris Wei Steven Joo, the president of the Shanghai Singapore Business Association-Singapore Club Shanghai (SSBA-SCS), speaking to China Briefing during its business networking event, that foreign companies must know about three factors when investing in China: culture, government regulations, and market situation.

In addition to the manufacturing sector, Singaporean companies have also established a presence in China’s financial services sector. Singapore-based banks – the Development Bank of Singapore, the Oversea-Chinese Banking Corporation Limited, and the United Overseas Bank – have branches in China that have incorporated locally in recent years.

Foreign banks have to overcome several challenges in order to succeed in China. Strong government support of domestic banks and their wide network make it harder for foreign banks to compete for customers. As with other industries, the Chinese government has set a limit on the number of local branches a foreign bank can have.

Moreover, the development of a foreign bank depends also on a country’s technical infrastructure. China is quick to develop its hardware but is still working on its long-term goal to develop a world-class system to support financial services in the future.

Foreign banks must then rely on its advantage of credibility, quality of service, and global network to compete. China is such a huge market that there are still many opportunities for both local and foreign banks.

Property investment from Singapore is also strong in China. Keppel Land, a large Singaporean property company, has a land bank of about 3.7 million square meters in China on top of its involvement in the Sino-Singapore Tianjin Eco-City project, another ongoing large cooperation between China and Singapore after Suzhou Industry Park.

Mr. Joo told China Briefing that Eco-City project as well as other projects between the two countries provides an opportunity for Singaporean companies to demonstrate their skills. Moreover, it would be difficult to do these projects in Singapore where land is scarce.

Despite the market being volatile during the downturn, China remains to be a popular investment destination. Mr. Yew Sung Pei, Assistant CEO of IE Singapore, wrote in an emailed response to China Briefing that Singapore “companies continue to show strong interest in China.”

Mr. Yew indicated that the downturn did not drastically affect the economy of China’s inland provinces, where investment potential still exists because of high domestic demand. He added that many Singaporean companies are gradually considering China’s West, Central, and Northeast regions.

With nine offices across China, IE Singapore helps Singapore-based enterprises to enter and develop by providing market information and connections. In 1993, IE Singapore established the Singapore-Shandong Business Council in order to work closely with the provincial government to enhance business collaboration.

IE Singapore later established six other business councils of the same kind with Sichuan, Liaoning, Zhejiang, Tianjin, Jiangsu and Guangdong. Through business councils, Singaporean enterprises can be better supported in these regions.

IE Singapore advises that companies operating overseas should know about the local market conditions, niche markets in addition to choosing the best way to enter the market. Depending on a company’s needs, it may need to employ local staff, redesign products and services, and collaborate with local partners to enter the market more efficiently.

Meanwhile, China will need to improve several sectors in order to continuously make the country an attractive investment destination. One area is China’s fast-changing and complicated tax system. Both Mr. Joo and Mr. Lee acknowledged that the tax system needs to be improved in terms of transparency.

Lower tax rates would make the Chinese market more accessible to Singaporean companies. Mr. Joo said that many Singaporean companies are still benefiting from China’s corporate income tax breaks, however, big changes are bound to happen to these companies once the breaks are no longer there.