Comment: Investing in NZ-China relationship more important than ever

New Zealand needs to maintain a strong trade relationship with China. Photo/Getty Images.

COMMENT:

The government's rejection of Spark's proposal to use Huawei equipment in its 5G network rollout remains front and centre in the continued hand-wringing around the state of our relationship with China.

Rather than adding to the growing number of opinions on that decision, as an accountant, I prefer to take a practical approach. So, given the current state of affairs, what are the real issues now facing New Zealand companies doing business with China?

Already we have seen a deterioration in the relationship with our largest trading partner and number one export destination. An official article was published in China's People's Daily discouraging tourism to New Zealand, our joint Year of Tourism launch at Te Papa has been postponed and Prime Minister Ardern's visit to Beijing has been put on hold. In addition, the turning back of an Air New Zealand flight to Shanghai, and reported problems for seafood exporter Sanford getting their salmon exports cleared, are two more examples of how the cooling of relations is a cause for concern for Kiwi business.

It is fair to say that there are many rules that exporters doing business with China need to follow. They are largely principle-based and subject to interpretation but China seems to be applying them more strictly at the moment. This may be causing unexpected issues for some New Zealand companies. But this isn't new. Some may recall the difficulties our meat exporters went through in 2013, with customs paperwork requirements causing millions of dollars' worth of meat to be blocked at the border.

So what can New Zealand businesses do in the current environment?

To start, our exporters should take greater care and err on the side of caution. It will be necessary to follow China's rules more carefully, complete documentation more precisely and confirm all transaction details. This could also include the greater use of external assistance.

In addition, Kiwi businesses would be wise to take a more conservative approach to preparing their China business plans. For example, plans to invest in new plant and equipment, or a new product line, with the expectation of increased exports to China should be reviewed. Diversifying business assets in hopes of a high sale price to a Chinese investor may not go so smoothly. And growth in occupancy rates may be lower than predicted, affecting plans for new hiring in the tourism industry. These are just a few examples that could affect us in the short-term.

There are also important cultural differences to keep in mind that may be contributing to the cooling of relations at present. An illustrative example is the different approaches that Chinese and Kiwis take to negotiating contracts. From a Chinese point of view, demonstrating goodwill early in negotiations is an important part of the process, with expectations that this goodwill will be returned in due course. Instead, New Zealanders often maintain a hard-line approach throughout negotiations, thinking it a sign of strength and expecting the same from the other side. This can often lead to a misalignment in expectations.

All relationships come down to managing expectations. And clearly, cultural differences can make this harder. Applying this cultural lens to the Huawei 5G case may shed some new light on the situation. It is likely that Huawei understood it would be difficult for the Government to approve the use of its equipment given today's geopolitical environment. And

therefore they only chose to bid to supply the radio access network (RAN) equipment for Spark's 5G rollout, opting not to bid to supply the core transmission equipment. Could it be that this show of consideration was their way of demonstrating goodwill? And that they were expecting for this show of goodwill to be reciprocated?

The key point here is that Chinese are often willing to start a relationship with goodwill and we need to keep this top of mind with our Chinese counterparts. There is a common understanding that "the Chinese way of doing business" is largely based on relationships. But this should be taken a step further to highlight the importance that Chinese place on "investing in relationships first".

In any case, the Government's recent attempts to turn around any tensions with China including during the Prime Minister's recent visit to Beijing will be welcomed by New Zealand businesses who have a huge stake in this important relationship.

- Jenny Liu is a Deloitte New Zealand tax partner and leader of Deloitte's China Services Group