What investors should look for in Aussie companies eyeing a China strategy

China’s attributes from a business standpoint — the world’s second largest economy with a 400 million-strong middle class — have been well documented.

But so are its challenges, which include language barriers and a different legal system.

For investors, successful China export strategies can often result in lucrative returns. So for our latest look at the space, Stockhead spoke with a number of companies that have executed on different distribution models, to get their insights on what it takes.

Both of the listed small caps we spoke to said taking a partnership approach to distribution was crucial in the early going. And more broadly, another core (and perhaps not surprising) theme emerged about accessing the Chinese market; it’s not easy.

Patience is a virtue

For Rob Phillips, founder of medtech company Uscom Limited (ASX:UCM), the company’s China strategy has been more than 10 years in the making.

Uscom’s (stands for Ultra-Sonic Cardiac Output Monitors) core product is a diagnostic device which monitors cardiovascular functions, using Doppler ultrasound to detect abnormalities.

Having first listed the company in 2003, Phillips said Uscom made its foray into China in 2008-09.

“It’s been quite a while, and I think that’s the key to it all — you have to be persistent and develop the partnerships,” Phillips said.

“You’ve either got to spend the time there, or you form a full-time partnership to offload some of that distribution responsibility.”

Uscom chose the partnership route in the first instance, and has now established its own subsidiary in Beijing. Phillips said the company was also licensed by China’s National Medical Products Administration (NMPA) to distribute other medical products.

“Across a population of 1.4 billion you’ve got thousands of hospitals, and it’s also about getting access to departments within each hospital. So the scale of opportunity is huge but it is competitive,” Phillips said.

“A lot of big (and competent) international companies have gone into China and done very badly, with the wrong attitude and the wrong strategy.”

Know thyself

Turning from medtech to food products, Australian dairy producer Grass Fed Milk is another company that has leveraged Australia’s reputation as a premium producer to launch a China distribution strategy.

However, CEO Kevin Bush said it formed a complement to the company’s core focus on the Australian market, rather than a strategic priority.

“(China distribution) is certainly a complicated area, and it’s not easy to successfully execute,” Bush told Stockhead.

“You have to be clear on what your vision is; is it building an Australian business with some exports into China? Or is it strictly building a Chinese export business?”

Bush said Grass Fed Milk fell into the former category, with a responsibility to provide a healthy alternative in the local market.

“All of our competitors are either large multinationals, or owned by Chinese companies (wholly or partially),” he said.

“And a major focus for retailers in our industry over the last five to seven years has been on selling more to China. But you have to be clear on which category your business falls into and why, and stay focused on executing that strategy.”

Partnerships are key

Organic honey producer EVE Investments (ASX:EVE) is another ASX player that’s managed to get a foot in the door in China. And like Uscom, it kicked things off via the partnership route.

“The difficulty a lot of Australian companies face in terms of getting product into China is finding the right partner that can get your product broad distribution, rather than just one location,” EVE CEO Bill Fry told Stockhead.

“So in that sense, what we set about doing was trying to find a distribution partner that had the reach and network with the right channels. But the important thing for us was strategic alignment with us and the program we were trying to roll out.”

Fry said it was a common problem when a smaller player chose a larger distribution partner. “Once you start moving a lot of product through them, you get margin erosion because they have leverage as your product distributor,” he said.

To align its interests, EVE completed a two-tranche capital raising which saw Hong Kong based distribution company Jusheng Bolang Technology Co take a strategic 17 per cent stake in the business.

“What we’ve agreed is they’ll accept the standard price we charge any other distributor,” Fry said.

“So there’s no preferential treatment, but as an equity holder they benefit from the growth in the company.”

Since completing the deal, Fry said Jusheng had been active in getting the company’s products moving through its multi-channel distribution network.

“The important thing for us is they manage it at their end because they know the China market. Effectively we hand over custody of our product here in Australia, and they’re responsible for all the logistics thereafter.”

A keen focus on strong partnerships has also defined Nutritional Growth Solutions, the Israel-headquartered company which makes clinically-tested nutritional products for children with growth issues.

Speaking with Stockhead, CEO Liron Fendell said the company recently partnered with a state-owned distribution partner as it prepared a China launch in the coming weeks.

But she added the company had spent more than a year getting the right market fit, in terms of both product and distribution.

“I’d say first of all, it’s not easy. Part of the challenge is realising that what works in Australia or the US won’t necessarily work for China,” Fendell said.

“So you have to respect the differences in that market and make sure you can reach it with a product and an offer that resonates. You need to do some regulatory preparation work, adjusting the value proposition and even make adjustments to the product itself.

“Then once you have good market fit, it’s a lot easier to attract distribution partners.”

For Fry at EVE Investments, that process took closer to two years, and he said having access to public capital markets was important from a resources perspective.

“It didn’t come easily and the process can be expensive and time consuming, but we ultimately got the right partner to work with us,” he said.

“I think ultimately the key point is being clear about your product and the attributes it has, and how that resonates within the Chinese market.

“We took the view early that because traditional Chinese medicine is big business, we had to focus on medicinal attributes of our honey products.

“So it was very targeted. If you try and go in with a view you can supply the whole country, you’re not going to get there, you’ve got to be much more targeted. Understanding your product and your target market is very important as a starting point.”