MARKETS

The forbidden city

AS MINE safety and environmental awareness in China grows along with record coal production forecasts, the next five to 10 years provide Australian mine suppliers with a wealth of opportunities. However, not all of them may be able to crack the code to this mysterious market. By <b>Brooke Showers</b>

Brooke Showers
The forbidden city

The Chinese government has been cracking down on coal mine safety and the environmental implications of coal use lately.

The next five years will continue to bring significant changes.

It also means an abundance of opportunities are available to foreign companies that can offer suitable and sustainable technology and equipment to service China’s mining needs.

The top 10 Chinese mining companies have increasingly been demonstrating a commitment to safety improvements and productivity upgrades.

China’s smaller mines, which can tend to disregard the rules and regulations, leading to fatal mine accidents, are being transformed into larger joint operations in a coal industry restructure.

In the next five years, China wants to reduce the number of its small coal mines, which make up 80% of the country’s massive 14,000 coal mines, to below 10,000.

Despite reducing the number of mines, annual production is predicted to increase to 4 billion tonnes per annum and will continue to rise until 2050.

Western products have long been recognised in China as innovative and reliable but many miners have been lured in by cheaper local copies with a much shorter service life.

If imported products are reliable, good quality and fit industry needs then the chances are they will be adopted by the big producers.

The hard parts for foreign suppliers are earning market respect, getting access to the right people, crossing language and cultural barriers and mitigating copyright risks.

The rewards are there to be reaped though. Irrespective of the broader global economy, China is going to be a major player in the resources sector for a very long time.

Austrade senior trade commissioner Alan Morrell said companies were learning that having a presence in the China market was good in itself.

“But then you can actually develop your business so you have a cost base that can help access an opportunity in Mongolia, Kazakhstan or India as well, and open up the Asian market,” he said.

Seasoned Australian manufacturers successfully operating in the Chinese space have seen many companies rise and fall and come and go.

Industrea is one of those seasoned manufacturers.

“China recognises Australia as one of the premium equipment manufacturers around the world,” Industrea deputy chief executive officer Dale McNamara said.

“Over the years, there have been many companies come into China and I call them the flavour of the month.”

At one stage, it became widely known that China needed to improve its roof strata support and everyone and anyone seemed to be looking for a piece of the action.

Many suppliers did not know what they were talking about, which China woke up to around 1998.

The rules were then laid out. If anyone wanted to sell products or equipment to Chinese coal producers they needed to buy the bid documents.

To bid meant paying 2% of the tender’s worth. The market still bids this way.

A tender for drill rigs may only receive two serious tenders these days compared to ten times that many a decade ago.

“Whether it’s a $3 million or $10 million contract, no one’s going to go in for 2% of that just to have a go,” McNamara said.

Despite the cost of bidding, Industrea has been one of the market leaders operating in China for many years.

It may even experience its biggest year in China yet in 2012 if the interest at the China Coal & Mining Expo 2011 was anything to go by.

The expo in Beijing in October attracted the largest number of stalls, displays, customers, producers and attendees ever.

As the coal industry is expanding rapidly in China, more Australian companies are expected to enter the Chinese market.

Underground mining and safety equipment is a major growth market.

“The big thing with China is the strongest industry is agriculture because there are so many people to feed,” McNamara said.

“They don’t want people out there ripping up their fields with open cut mines so underground is what they do.”

Underground mining brings its own set of safety concerns compared to large open pit operations.

There were 2400 deaths last year in China’s mines.

This is a marked improvement on the 10,000 deaths in 1995.

Clearly, though, there is room to further optimise safety techniques and machinery at Chinese underground operations.

Strong products that address the industry’s needs are not enough to break into the buoyant Chinese market though.

“It’s great to have good equipment, but your people are really your business,” McNamara said.

“It is a communist country. They like the capitalist ways but they don’t like seeing their people that are working hard getting no respect and not getting looked after properly.

“I’ve seen companies come here and go and nine times out of 10 it’s because they just don’t get it. They think if they have the equipment that no one else has, they are naturally going to sell into China, but it’s not the way.

“If the Chinese officials see that you’re disrespecting your staff, that’s not a Chinese way. They know the equipment is expensive, they know it’s a western company building it, but they also ask how they are going to be looked after.”

Commitment to the market and researching the risks before entering China is invaluable.

This mantra has been the main reason some companies have performed better than others.

“It doesn’t matter if you’re selling mining services or cupcakes,” Austrade’s Morrell said. “The companies that are doing well in China have all shown this common element – presence and commitment to the market.”

Having a local office or a person who can translate and speak Chinese at ground level is a minimum requirement for companies operating in China.

Culture plays an important role in business relationships.

Getting the blend of expatriates and locals right can pay off.

“Overseas expertise means a lot in this place,” Morrell said.

He said to be really successful though, that had to be coupled with local understanding about where China was different.

“Work with locally recruited staff to help with what the nuances of what China really is,” he suggested.

One way of value-adding an Australian product in the

Chinese market is to build in a service offering.

This is a simple way for Australian manufacturers to stop Chinese mining companies from investing in cheaper imitations.

Technical knowledge and troubleshooting solutions offer producers benefits beyond the machine or device.

It also demonstrates commitment to what is being offered to the Chinese market.

As Morrell points out though, whether people come to China or not, they may find they run the risk of product imitation anyway. “The companies that worry the most are the ones that dip their toe in the water,” he said.

Businesses tend to run into problems when they either consider dealing with China in a limited capacity or only have one person appointed to be their agent.

“People will know about your product or service, but if you are not here and not committed to it, then they will see that as an opportunity to develop that potential the Australian company is not developing,” Morrell said.

“Showing commitment is one of the best ways of managing the intellectual property risks.”

Companies that come in with their eyes open, understand the market, know the risks and take a measured approach about the steps they can take to protect their intellectual property do well.

Get these factors right and the benefits of dealing in the China coal industry were “size, scale and potential”, Morrell said.

The big Chinese coal producers in China have a lot of Australian products and are getting exceptional money for their coal so they choose to mine it with reliable equipment.

They will pay premium prices for quality equipment that lasts.

China National Coal Association vice president Wang Guangde told Australia’s Mining Monthly that automatic coal mining equipment and energy saving and environmentally friendly technology were what was needed most in China.

There is a high demand among Chinese mining companies for Australian safety standard-compliant devices such as dust monitors and hydraulics.

There is also a big push to automate the workforce, removing workers from hazardous areas.

“We think there are bright prospects in cooperations between China and Australia,” Wang said.

“We have good cooperation experience with New South Wales.

“There is a successful example of the Yangquan Group, which have outbound investment in Australia.

There is so much interest to cooperate with Australia and we think there is a very bright future.”

Two of the largest mines in China, Shandong and Shenhua, are so big they produce more coal on their own than the whole of New South Wales’ Hunter Valley.

Coal mining activities in the Hunter have played an active role in influencing activities at Chinese mines.

Wang recently met the NSW Member for Newcastle Tim Owen in Beijing to discuss what technical assistance could be offered to Chinese mining companies to help improve mine safety.

Owen presented at a mine safety conference there that primarily focused on methane management, fugitive emissions and outburst management.

“We’re doing some very good work and there a number of mining companies doing some work with the China Australia Mining Development Alliance, which bridges the gap between the Australian mining industry and the Chinese mining industry,” he said.

CAMDA has an office in the Hunter and in Beijing. Its primary job is promoting mine safety in the Chinese market.

Owen said he was committed to how Australia could help Chinese mine operations.

“Firstly it’s about the safety of humans and saving lives and secondly about how we handle fugitive emissions for underground and in an environmentally friendly sense,”he said.

“And more importantly, how do we garner that energy from those fugitive emissions.”

This is an area of equal importance in Australia within the context of the carbon tax.

“I think there is some very good work going on and CAMDA and some of their partners are doing some good work in China,” Owen said.

“I think it’s a really great opportunity for Australian business and mining companies, which are technically very advanced in this area.”

Owen said NSW was probably the strongest mining area in Australia in terms of some of the advancements it was making in underground operations.

Fugitive gas emissions are a big concern in China, which presents a great opportunity for Australian companies such as Newcastle-based company Corky’s, which attended the expo to promote its VAM product that helps manage methane and fugitive gases in mines.

Wang said the next five years were going to be a period of massive change for the Chinese mining industry.

This rapid growth will affect how coal is used and mined to prevent pollution and how mine practices can reduce tragedies on site.

“The Chinese mining industry turns to western countries such as Australia and the United States to learn about safety measures and improvements,” Wang said.

“We learn a lot from Australia and the US about safe coal mining and safe coal producing and we try to take this coal mine safety in China to a world level.”

KH Equipment is another Australian company smelling success in the Chinese mining market. It has been indirectly involved in the Chinese mining scene for 23 years and specialises in a non-electric starting system, called Austart.

Austart’s entry to the market began with providing safe starter motors for the original equipment manufacturers operating in China’s underground mines.

From there, the business leveraged off recommendations from those OEMs.

The China Coal & Mining Expo 2011 provided an opportunity for KH Equipment to brand itself as the manufacturers of Austart.

“This gives us an opportunity to show we are willing to deal with customer enquiries directly for people who require more technical advice,” KH Equipment marketing director David Howard said.

There are a number of Chinese manufacturers producing similar products that are about a third the cost of Austart systems.

“The nature of our product being incredibly reliable and also being powerful stands us well ahead of our competitors,” Howard said.

“The local product here is not built to last or be reliable. They can get three months out of it; ours go three years.”

Many Chinese miners are wary of the “quick fix”.

They prefer to invest in equipment that will do the job, increase productivity and save time and money later down the track.

In recent years, KH Equipment has set up stands at China expos as the products have become more widespread, and is growing the business to offer aftermarket support.

“You get that involvement and support, you work with them on an engineering level and get a very strong bond with the company,” Howard said.

Although KH Equipment has equipment spread all over the nation, cracking the mining market initially in China presented its own set of challenges.

Probably the biggest was trying to set up meetings with the right people.

“China is a very difficult market,” Howard said. “If you come over here to buy, you’ll be treated differently than if you come over here to sell.”

Howard admitted doing business in China was a learning curve.

“When I came here 10 years ago, I probably broke every custom, every rule,” he said.

“Everything you shouldn’t have done, I probably did.

“However, we come here with such passion for what we do and what we are and such honesty, I think some of the big businesses overlooked some of the things we did wrong and thought, ‘These people are honest’

“Because we have these relationships built with these companies, they appreciate that we are open and tell the truth and facts.

“We have really done our best to build relationships and honestly help these people.

“I think that is rare in the market place, so that’s been a big strength for us.”

“Showing commitment is one of the best ways of managing the intellectual property risks.”

Breaking into the Chinese market is possible. It is knowing how to crack the code that is the trick.

Published in the January 2012 edition of Australia’s Mining Monthly

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