CHAIR (Senator Hutchins) —I declare open this meeting of the Senate Foreign Affairs, Defence and Trade References Committee and call the committee to order. Today the committee will conduct its eighth public hearing into Australia’s relationship with China. The terms of reference were referred to the committee on 8 December 2004. The committee called for submissions and has received over 75 submissions to date. The committee is due to report to the Senate on 15 September 2005. Evidence given to the committee is protected by parliamentary privilege. This means that witnesses are given broad protection from action arising from what they say and that the Senate has the power to protect them from any action which disadvantages them on account of the evidence given before the committee. I remind you that the giving of false or misleading evidence to the committee may constitute a contempt of the Senate. The committee prefers all evidence to be given in public, but should you at any stage wish to give any part of your evidence in private you may ask to do so and the committee will consider your request. I now welcome representatives of the Western Australian Branch of the Australia China Business Council to the hearing. Mr Satchwell, please state the capacity in which you appear today.

Mr Satchwell —As well as being an executive member of the board of the ACBC Western Australia I am also Executive Director of ACIL Tasman and head of ACIL Tasman’s practices in Western Australia and China.

CHAIR —I now invite you to make a brief opening statement which will be followed by questions from the committee.

Mr Calder —KPMG are one of Australia’s leading professional services firms and a major international accounting firm, part of KPMG International. In Australia we operate nationally with 14 offices, 300 partners and over 4,000 staff. In China, KPMG have been growing rapidly. In the late 1980s we had three staff in China and about 600 in Hong Kong. That had grown to about 3,000 people by 15 months ago. We are now at 4,200 people as we speak, so the growth is extremely rapid. We now have seven offices. They are in Beijing, Shanghai, Guangzhou, Shenzhen, Hong Kong, Macau, and we have recently announced the opening of an office in Hangzhou in Western Australia’s sister state of Zhejiang.

I work quite closely with our special adviser to KPMG, the Hon. Richard Court, former Premier of Western Australia, who provides a lot of guidance on key issues to do with dealing with the Chinese based on his experience as Premier. I am here to answer questions in relation to the services industry and to discuss the issues facing the services industry but also to support the submission made by the ACBC as the peak body for business here in Australia.

Mr Satchwell —I represent a firm, as well as ACBC, from the other end of the professional services spectrum. ACIL Tasman is a national firm specialising in economics, policy and strategy consulting. We have got offices in several Australian cities, plus Kuala Lumpur and a representative office in China. We have one representative in China, as distinct from KPMG’s 3,000. So we represent two ends of the spectrum of professional services firms. We have complementary, but different, experiences in developing professional services businesses in China, and also in assisting client firms in such things as market entry and assisting firms and government in economic reform, development, accounting et cetera.

We do not need to detail Western Australia’s contribution to merchandise trade with China. The statistics are very plain and, as the Western Australian government is fond of telling the federal government, Western Australia makes up one-third of Australia’s merchandise exports, and a growing chunk of that is into China. But perhaps what is not so greatly appreciated is the growth in services trade with China and the great potential for further growth. The services sector nationally, and its role in trade with China, is probably undervalued, because it is not a discrete industry sector like mining or gas; it is made up of firms in disparate industries. Data on services trade, therefore, probably does not tend to represent the full value and services are not as tangible as LNG, iron ore or widgets.

While a key focus of the negotiations in the forthcoming discussions on the China free trade agreement with Australia will focus on services, the understanding of the importance of services may suffer because the trade in services is difficult to quantify. The report of the joint feasibility study admits that it is difficult to get a handle on the trade in services with China, but it does say that annual growth has averaged around 26 per cent for the three years to 2004 and that China now ranks as Australia’s seventh largest export market for services.

Western Australia’s service sector has grown very strongly in recent years, in large part on the back of resources sector growth but also in response to demand from other sectors. There is now a diverse and a very solid services sector capability here in Western Australia and, of course, in the rest of Australia. Many firms, such as KPMG and my own firm, are exporting our home-grown services to China, some of which directly complement our trade in goods. This is an important point. There is my own firm’s example. We work in wool technologies promoting the sale of Australian and Western Australian wool, which is somewhat differentiated, into China. We conduct LNG and gas market studies in China and in Australia. We undertake gas market training for Chinese gas executives, and we conduct market entry studies for Australian companies. KPMG no doubt have some other examples of the sort of work that they do that is related to our trade in goods.

Mr Calder —Similar to ACIL Tasman, we do a lot of market entry strategy advisory work. We provide advice to government on high-level issues—for example, on the establishment of taxation regimes. We provide expertise on the delivery of financial advisory services as part of teams there; for example, in relation to the privatisation, or corporatisation, of state owned enterprises, investigations of fraud and other forensic issues—computer security issues and those types of products.

Mr Satchwell —So you can see that, in this way, Australia is leveraging its growing trade in goods into complementary growth in the services sector and, at the same time, we like to think that the services sector is enhancing market prospects for our trade in goods. That is a key point that we would like to make. We think, therefore, that a really good understanding of the Australian services sector should be a priority for government. As I said earlier, because of the problem of collecting good statistics on the services sector, the sector is arguably undervalued. Before we complete our opening statements, we would like to talk about impediments to greater trade in services. I will defer to my colleague to outline some of the impediments that need to be addressed in the FTA negotiations.

Mr Calder —I will just talk about the general picture, because with accounting firms it is slightly different from some of these smaller firms. For example, KPMG in China have 4,200 people, largely run out of Hong Kong. We have a lot of locally born, educated and trained partners in the practice, so some of the issues we face are not quite as specific as those that, say, Australian legal firms, or Ian’s firm, are facing.

Senator HOGG —Can I stop you there. Are you saying you have structured your staffing arrangements to, in effect, suit the local climate over a period of time, rather than trying to bring people in?

Mr Calder —KPMG was the first of the international accounting firms to go into China and get a joint venture licence out of the Ministry of Finance and the Ministry of Commerce in China. That was back in 1992, and it has been evolving and growing since then—that is easier to do when you are part of an international organisation.

Firms generally do face some real difficulties going in there. There is an intricacy of different interpretations of procedures and regulations. I hear a lot of evidence of people thinking they have opened the door and understood the law who then find there is another layer of regulation that sits behind that. Things may be approved but they may never happen, because of frustration with delays. There are restrictive regulations in relation to business scope and the registering of capital requirements for foreign investment enterprises that can cause some difficulties there as well.

Australian firms in the service industry have internationally competitive skills and obviously they are all keen to deploy them through the region. We believe that, where possible, we should seek equal treatment in China with Chinese firms—we think that is not necessarily the case now—and then we could seize those opportunities to our benefit.

Mr Satchwell —I would like to identify some other priorities for attention. Duncan mentioned scope of business, and I will talk about that a bit more. For a company to register in China it must specify the area of business in which it intends to operate, and then the company is only allowed to undertake business activities in the specified sectors or fields. If new market opportunities open up it is difficult for the company to move outside its specified scope of services, and that inhibits the easy development of foreign firms, in particular, in China. A priority for the FTA negotiations should be to have the Chinese government relax such restrictions, as we have in Australia.

The difficulties that legal firms have in China are well documented. They have some major limitations placed on their ability to service clients doing business in China and they would like, for example, to be able to hire Chinese lawyers in China and to form joint ventures or economic associations with Chinese law firms. Current laws severely restrict their ability to do that.

Another issue is the mutual recognition of professional qualifications gained outside China. Of course, the flip side of that is recognition of Chinese qualifications in Australia. In particular, mutual recognition of graduate qualifications from accredited universities is highly desirable for the services sector. It would advantage Australia by providing access to a large number of skilled graduates from China and it would enable China to have better access to skilled Australians in relevant fields. Duncan Calder may have some comments on the qualities of Chinese staff; I think KPMG has had some wonderful experience in that area.

Mr Calder —Generally, the calibre of applications is mind-boggling. For fairly modest remuneration, people with quite an outstanding work ethic—they work unbelievable hours—and amazing degrees are clamouring at the door to get opportunities. In the long term, when those people improve their language skills to go with the technical skills, the potential for them to provide inbound labour from China to Australia is quite significant and could assist us with some of our shortages.

Mr Satchwell —In conclusion, the ACBC believes that an effectively negotiated FTA with China will be of lasting benefit to Australia in many ways. We are very pleased that Australia and China have agreed that all sectors must be included in the negotiations. As I said earlier, one of the many challenges facing negotiators is fully understanding the contribution of all those sectors, including the services sector, to Australia-China trade. We look forward to aiding better understanding of the role of the services sector in future Australia-China relations.

CHAIR —On those final points, we foreshadowed our interest in what appear to be the impediments. What would you put down as being the reasons for a number of these impediments in light of the PRC’s intention to move to a market economy? Is it the fact that, in your professional or private opinions, they have not sold the concept to the next level of cadres? Is that the problem? Or is it that there is still resistance to ‘creeping Westernisation’, if I can call it that?

Mr Satchwell —I think it is a lot of things. It is a work in progress. There have been tremendous improvements to facilitation of trade and business investment since China’s accession to the WTO in particular. But, as we have identified, there is still a lot to do. The opportunity for Australia in negotiating the first FTA with China is to have some first-mover advantage in ensuring that Australian firms get some preferential treatment. In terms of the thrust of your question, I am not sure; it goes to a lot of things, but mostly it is about the enormous transition that China is undergoing in all of its institutions and in all of the ways that it does business. You can see the change happening almost in real time, so I would not want to peg it on any one reason as to why there are still some major impediments.

Mr Calder —From Australia, I think it is very hard to appreciate the pace, rate and scale of change in a country with a population as vast as China’s. What might take 10 years to achieve here happens in one year in China. So where you might have a problem, you can go back two months later and the rules have changed. And you may know, but everyone else may not necessarily know, how everything is changing. It is just a question of filtering that knowledge down. The pace of change really is phenomenal. If you go anywhere in China and then go back six months later the change is always immensely visible—and that is physical changes. In terms of regulations and laws the rate of change is, I think, even quicker.

CHAIR —So you do not think there is a resistance to change?

Mr Calder —I think all human beings at some point have a resistance to change. I do not think it is codified. I do not think it is locked into the mindset of the central government. Some people, at various layers of government, are always going to find it hard to understand and respond to the rate and pace of change.

CHAIR —How would a central government overcome that, even with its willingness and desire to do so?

Mr Calder —With the passage of time and the will to gradually address major issues as they emerge.

CHAIR —Has it been difficult for the council to get the Australian government and the sectors generally to recognise the service sector as an independent sector in negotiations? It is so much easier to look at iron ore, manufacturing or something like that. Do you feel it is something you are having some success at in getting policy makers to recognise?

Mr Satchwell —The FTA feasibility study recognised the growth in services as a very important section of the facilitation of services trade. But, as I said earlier, it is a data problem as much as anything—not understanding the breadth and depth of our services; our services exports to China and the potential for further exports; the growing linkages, particularly in places like Western Australia; and the synergies with our trade in goods and how we can leverage the trade in goods into greater trade in services and at the same time facilitate further trade in goods.

I can give you one further example—LNG trade. The Western Australian government with the government of its sister state, Zhejiang—there is a Western Australian delegation over there at the moment—set up a joint feasibility study on gas and LNG using external consultants. ACIL Tasman was one and Worley engineers was another. Providing our expertise in global LNG trade and also in gas market analysis in China helps, we believe, place Western Australia in a better position for the negotiation of another LNG contract with China, specifically this time with Zhejiang. That gives you one example. At the same time it opens up, we hope, the market for further gas market analysis in China and to that end there are eight Chinese gas utility executives in Western Australia for six months undertaking detailed training in modern business operation and in particular the operation of competitive gas markets. Again, ACIL Tasman is involved with the University of Western Australia, Curtin University and other firms. We hope that will in the long term position Australia much better for the future sales of LNG.

Mr Calder —I think you are right when you say it is largely a data issue. There are two reasons for that. There are many SMEs going up there to target services and they are not necessarily recording the information or they are not part of a body that collates it. Larger organisations like KPMG may not necessarily record its income in such a way as to enable this to be tracked. We may be advising one of the major financial services companies as they penetrate the market over there but it goes down as financial services income; it is not necessarily flagged as China income. So it is not always easy for the various parties to see. So to a certain extent we are not helping ourselves in quantifying numbers in a coordinated manner.

Mr Satchwell —We have suggested to the FTA secretariat that an early part of the FTA negotiations and data gathering should be to get a better understanding of the services sector. There may be a need for some specific studies to better understand it. ABS data does not really do it justice.

Senator JOHNSTON —Thank you, gentlemen, for coming along. Is there a Chinese consulate here in Western Australia?

Mr Calder —Yes.

Senator JOHNSTON —How responsive do you think they are to constructive advice as to how to make doing business in China more efficient?

Mr Calder —I find them very responsive in terms of interacting. They are very proactive in coming out to the marketplace. We regularly hold events—for example, tomorrow lunchtime we have Kevin Rudd speaking at KPMG to an exclusive group of people—and we invite the consulate. The commercial consular officials always come along and engage to take on board people’s comments and they feed it back. Because of the nature of government, it is hard to know when it goes back how well received it is, but in terms of acting as a conduit for information and being open eared, we have found the Chinese here to be extraordinarily helpful. They open their doors to host the council members from the ACBC on a regular basis to hear what our issues are.

Senator JOHNSTON —Good. I recall that there was a favoured company status flowing from Hong Kong—if you had been doing business in Hong Kong, you got an automatic entree to mainland China. Did KPMG get the benefit of that? Do you know what I am talking about? What was it called?

Mr Calder —I think it may be slightly different, but there is no doubt that by virtue of our Hong Kong office and having a large number of Mandarin speakers there of mainland origin that that helped us proactively deal with the Ministry of Finance. But whether or not that was done through relationships or through—

Senator JOHNSTON —I am just trying to think of the scheme. I cannot remember name of the scheme, but it was in existence about three or four years ago and it was a very good scheme for a lot of accountants and legal firms.

Mr Calder —I think we predated that.

Senator JOHNSTON —Education is the big thing in Western Australia. We have a number of colleges and universities that are benefiting substantially from the export—if we can say that even though it is onshore—of our educational expertise. How do you perceive that is going, given the feedback I am getting that it is very hard for visa applications to get through? It is a good opportunity for us now to hear the sort of feedback you are getting from people who want to come down here and acquire the necessary skills. How easy is it? What is the status? My reading is that it is very difficult and we are putting barriers in the way.

Mr Calder —I think there are three issues. The first is ease of visa access, and that may include for parental visits to support children. The second is that the rate of growth means sometimes there are questions on the quality. You may have group of students coming down here particularly to get feeder training into university and find that they do not actually make the grade for the university.

Senator JOHNSTON —That is a problem for us?

Mr Calder —That is a problem for us. Then there is the issue of making sure that there is appropriate pastoral care of those students. We are not necessarily structured to deal with that. I agree that the opportunity is massive, but it is a massive opportunity all around the world and it may be that other countries are paying greater attention to some of these fine details than perhaps we are, which could put us at a competitive disadvantage long term. We may not see it in the numbers, because there is such a huge growth in numbers that you will still see growth, but whether or not you maintain your market share will become a different issue.

Senator JOHNSTON —So KPMG is very aware of the issue and is keen to see some of the problems surrounding the opportunity, if you like, resolved?

Mr Calder —Certainly. Also some of our clients in that industry that we are looking to advise, particularly the universities and other private educational institutions, are keen to resolve these issues, because they do not want to threaten what is probably their largest upside and one of their most secure revenue streams.

Senator JOHNSTON —Thank you.

Senator KIRK —Thank you very much for your submission. I was interested in what you had to say about graduates coming to Australia and being highly skilled at the like. In which areas are you seeking to gain Chinese graduates? I suppose you are talking from your personal experience, so I am assuming it is accountants.

Mr Calder —Across all of the big four accounting firms our income is largely constrained at the moment in this environment by securing appropriate, high-quality resources to advise clients. The calibre of available resources out of China long term is very exciting. As with translating from Australia into China, I could send just about my entire work force from Australia up to work in China and it would be fully deployed tomorrow, if they spoke Mandarin. That is the issue.

Senator KIRK —There is a skills shortage here, is there, in that area and that is the reason for employing people from overseas?

Mr Calder —Yes. I think there always will be periodically in Western Australia because of the cyclical nature of our industry. When there is a down cycle perhaps people do not invest as much in apprentices and training, then when there is a boom the growth is so rapid that you simply cannot accommodate it from within the state.

Senator KIRK —So there are not enough coming out of universities here; is that what you are saying?

Mr Calder —When it is in a boom cycle, there probably is simply not enough of a population to cope.

Senator KIRK —Are people attracted from other states of Australia to Western Australia?

Mr Calder —Slowly. I do not know why it is not faster.

Senator KIRK —It is such a beautiful place.

Mr Calder —That is right—it is just a long way.

Senator KIRK —What is the transition time for these individuals who are coming from China? You talk about the language difficulty, which is obvious.

Mr Calder —It varies between individuals. It can be from as little as six months to never.

Senator KIRK —Is the mutual recognition of degrees across the board? Are you referring to all types of degrees, not just those in accountancy, law and engineering?

Mr Calder —We are probably thinking of the professional services, but that does not mean there is not a case for the other areas. We probably simply have not focused attention on those areas.

Mr Satchwell —It is important that mutual recognition is built into a framework of accreditation of universities both ways. To that end, it is quite interesting that certainly from Western Australia and no doubt from other states there are partnerships being developed between universities here and in China. That is going to aid universities and take us towards mutual recognition. With gas training, for example, that is done both in China and in Western Australia.

Senator KIRK —Is there very much demand, or perhaps I should say enthusiasm, for Australian graduates to go and work in China?

Mr Calder —What I am noticing is that there are a lot of Singaporean, Malaysian and Taiwanese students here who may be Australian born who may be distanced from their heritage over time but are re-engaging actively as a result of the strengthening and the growing importance of China in the world. They are keen to improve their Mandarin skills and leverage their connections and some of their families’ connections.

Senator KIRK —Less so from Australian-born Australian citizens, I guess.

Mr Calder —Australian-born Australians who have the language skills are keen to go up there, because the ones who go up there are doing extremely well financially. But there just are not that many people who speak the language, and it is not that easy to learn.

Senator KIRK —That is right. You suggest that perhaps there should be more focus on languages in that sense in universities in order to train people up so that they can speak Mandarin and then take up the opportunities that are available in China.

Mr Calder —And in schools. But the reaction from schools is: ‘It takes four times as long to teach Chinese as it does to teach Indonesian. We already have Indonesian teachers, so we’ll stick with the status quo.’ I am not sure that is always as proactive as it could be. Also it may be a short-term window, because the pace of language development in China amongst Chinese students is phenomenal.

Senator HOGG —You were talking about the data problem. Is that a problem with the Australian Bureau of Statistics as such or is it wider than that?

Mr Satchwell —It is not a case of pointing the finger at the ABS.

Senator HOGG —I was not trying to blame them; I was just trying to find out where the logjam is.

Mr Satchwell —It is an issue of the logistics. Because the services sector covers everything from soup to nuts in services, it is a very broad sector that falls into quite a number of industry categories. So the data on services is captured, but often in an industry category that does not immediately look like services.

Senator HOGG —How should that problem be overcome?

Mr Satchwell —I think it needs some cross-cutting statistical work. The Australian Services Roundtable has done some preliminary studies into the economic impact of services in Australia and the importance of services in trade, but it needs some cross-cutting analysis to better understand it. Also, as the FTA negotiations proceed, our experience with the USFTA negotiations indicates that there is a need not only for a better understanding of certain industry sectors but, built on that understanding, some real-time discussion on the detail of the negotiations with certain elements of the services sector to ensure that what comes out of the FTA negotiations is indeed what the Australian services sector or elements of it need to better do business in China. It is about better understanding and, on the back of that understanding, it is also about building good links between the negotiators and the services sector so that we have a good ‘team Australia’ approach, particularly around services, to what some very specific matters within the FTA negotiations will mean for us—positive and potentially negative.

Mr Calder —Quantifying services income as such is not necessarily a valuable end in itself. It is more important that there is acceptance that it is a significant market sector and does not get forgotten in the negotiations than actually quantifying how many people have sold professional architectural services or how many people have advised people how to build swimming pools appropriately for the Olympics et cetera. There is such a disparity when businesses total their information together in aggregate. It is not necessarily useful information, other than it identifies the fact that it is a sector that should not be forgotten about.

Senator HOGG —Most of what you have said here today focuses on the negotiation of the FTA with China and you used the comparison with the United States. I think that is interesting because, in a sense, the United States FTA was done in almost record time. But there was good reason for that in that there is a reasonably solid basis of a rural floor and an operational floor within that country, as there is here, whereas there is a more confused state, I am led to believe, within China. That may well see—not that I am wishing it—the negotiations on the China FTA take a little bit longer, which I think the pundits acknowledge, than maybe the negotiations on the free trade agreement with the USA took. What other forums should we be looking to, given that it may take some time to negotiate a free trade agreement—on a bilateral basis, of course? Should we be looking to other forums to break down trade facilitation issues and what forums should they be, in your view?

Mr Satchwell —First of all, we should not hang everything on the FTA because, as you quite rightly identified, the negotiation of the FTA is likely to take some time and even the Prime Minister has recognised that. Given that things are moving apace in China and there is ongoing and real-time change, we should look to grab some of the low-hanging fruit of change and encourage ongoing relaxation of business regulation and harmonisation of business regulation outside the FTA negotiations. We should not lose sight of doing that whenever we can. Secondly, bilateral free trade agreements are good things but they are the second-best option to multilateral trade agreements. China’s accession to the WTO, as I said earlier, has resulted in enormous change already and that, again, as I said, is a work in progress. Working through the multilateral WTO process to further encourage China to open up for foreign investment and foreign businesses is a very important forum.

Senator HOGG —This committee undertook an inquiry some time ago into the role of APEC. APEC seems to have gone off the boil to a certain extent. I am not exactly sure why, but it seems to me that within APEC a fair amount of work was being done in trade facilitation, breaking down the impediments and the barriers that were there. Are you still actively working through the APEC forums to try to improve trade facilitation with places like China, or has that ground to a halt?

Mr Satchwell —Specifically in relation to services, I am not aware of detailed work going on within APEC. However, on 1 and 2 September there will be an APEC forum held in Perth on cross-border trade in gas, which is a very important gas trade facilitation and get to know you event between Australia and many of its potential gas customers in APEC forums. That, as we highlighted earlier, may well have some spin-off effects for our trade in services. So on gas it seems—if you like the metaphor—that APEC is on the boil, specifically on services we are not aware of APEC discussions. That is not to say that they are not under way.

Senator HOGG —That goes to the heart of another issue: our membership of ASEAN and ASEAN+3 and what can be achieved through such groups. Do you see that as a way of facilitating an earlier entry into the marketplace than might otherwise be achieved? If we are waiting for the WTO, we might be waiting a while. If we are waiting for an FTA, we might be waiting a while. But it may well be that in those other forums there are alternatives for us. Should we be looking at those?

Mr Calder —I think we should be exploring all avenues. There is no downside to doing that. I personally think the FTA is the main game. The opportunity for a small country like Australia to have privileged arrangements with the world’s existing superpower and the world’s next superpower really puts Australia in an enormously privileged position compared to many other countries.

Senator HOGG —The other issue that I want to briefly touch on is Austrade. You have not mentioned Austrade, which surprised me. You must have skipped over it. I hold Austrade in high regard, and I am not saying that you do not but I am just wondering about this. When it comes to the difficulties that you are speaking about in the services industry, what role are Austrade playing given the disparateness that exists within the industry? As you say, it is easy to market in China an LNG seller or an iron ore seller and it is easy to open a major firm like KPMG in China. Are Austrade fulfilling their role? If there are other things that Austrade should be doing, what could they be doing to improve facilitation of the services sector in getting into the Chinese market?

Mr Satchwell —From the perspective of a smaller professional services firm such as ACIL Tasman, Austrade have been enormously helpful in all of the offshore markets that we have been active in. They are very responsive to our requests for information, our requests for introductions and our requests for some strategic advice. We think very highly of Austrade and we also think very highly of the rest of the Australian missions overseas because Austrade and the ambassadors and their various counsellors, particularly the economic counsellors, work very closely with us and have been very helpful. Austrade and the Australian missions in China were very closely involved in the joint ACBC/AustCham trade event held in Beijing and Shanghai late last year. That was a very good example of a joint activity between business and government agencies. It went very well. It was a great opportunity to showcase Australia in China and for businesses to network with each other and to network with government.

Senator HOGG —But in trying to pull together the disparate services sector, is there something that Austrade can do by way of facilitation? Austrade might not even be the vehicle for doing that. Is there some other vehicle that might not exist currently that is necessary to complement or supplement what Austrade are doing?

Mr Satchwell —I do not think we need another layer. Austrade is doing a very good job. I think, as Duncan said earlier, it is a data issue. One of the things that might help Austrade and our Australian missions and Australia’s general trade interests is to get a better understanding of the role of the services sector and the activity across all of the different elements of the services sector, be they accounting, economic, architectural, health or education services. It is a data issue. Austrade could always do with more resources, I suppose, but they are already doing an excellent job.

Senator HOGG —I think what I am really heading to is trying to find out who will be the collector of the necessary data that you are talking about. Otherwise, it seems to me as if we are going to limp along with the data just hanging out there without anyone having as precise a knowledge of the sector as one could reasonably expect.

Mr Satchwell —Austrade has done some studies on this, but I am yet to see any broad-ranging or definitive studies. Perhaps it is a role for Austrade or perhaps it is a role for a special commission for ABS because that is their core business: better understanding what is going on.

Mr Calder —As a general comment, regarding Australian businesses going up there, Austrade, Invest Australia, the investment attraction arms of each of the state governments and the consul generals like Sam Gerovich, are extraordinarily helpful in terms of acting as an interface between the local community and the Australians going up there.

Senator HOGG —I am glad you raised that; I was not going to ask that question, but is there enough coordination between the federal units and the state units in terms of their operating in places such as China?

Mr Calder —Yes, I think it is easy in the same way that it is easier to coordinate a small office. It is a fairly small group of people up in China; they all talk to each other regularly. It is a family atmosphere, so I think this actually does work very well.

Mr Satchwell —This is one area where we see good cooperation between states in joint missions. Each state is prosecuting its own interests, but we have seen several joint delegations which have also included Commonwealth people. That is to be commended.

Senator JOHNSTON —Do we have enough missions in China? Now is your chance to tell us, gentlemen, if there is any difficulty or anything you want to get on the record.

Mr Calder —I think probably we do at the moment, but I think that is because we are blessed with the quality of some of our people in China, with the likes of BJ Zhuang. If we were to lose someone like that then we might need to revisit it.

CHAIR —I have a quote here from a Western academic who is at a university in Beijing, and he says that relationship building in China is absolutely essential to success and that, in his experience—the fellow’s name is John Thornton—too many Western companies are skipping that step or are doing it very badly. I was wondering if you would like to comment on Mr Thornton’s observation.

Mr Calder —I would agree with that totally; however, I would say that relationships are of fundamental importance in any market you go into. I think there are three key issues in China. This sounds a bit trendy, but they are PRC—like People’s Republic of China—patience; relationships; cultural sensitivities. You have to have patience because of the difference in cultural sensitivities. You need to have relationships. Relationships can be more important because of the different importance of legal agreements. I often hear the phrase: ‘A contract is merely the start of the negotiations.’ When you have that sort of arrangement in place, I think it is important that you do not take the approach sometimes taken by Western companies: ‘I have a contract and therefore, if it is in your interest or not, I am going to hold you to it.’ I think there is more of an expectation of working to mutual advantage in Chinese culture. That requires a strong relationship focus throughout the term of that relationship, and not just falling back on documentation.

CHAIR —Do your organisations train people to say that a contract is just the beginning of a negotiation? In Western thought contracts are quite binding; it is the end of a process rather than the commencement of one.

Mr Calder —Yes, we do. Our clients are similarly advised. All of the experienced Australian lawyers operating in China are very familiar with these issues. It is not necessarily a negative as long as you know the game you are playing.

CHAIR —Is it a key to success for Australian or Western companies in China to understand ‘PRC’? Was that what you called it?

Mr Calder —Yes, PRC: patience, relationships and cultural sensitivity.

CHAIR —All things being equal, is that a key to success in your opinion?

Mr Calder —Yes.

CHAIR —And is that a reason for some companies failing?

Mr Calder —I think so, yes. I think China is littered with the carcasses of foreign companies that have paid no attention to the issues of cultural sensitivity, and have tried to sell the Chinese what they think the Chinese need instead of listening to the Chinese and selling them what they want.

CHAIR —Can you outline for us what you mean by ‘cultural sensitivity’? What is it that people should, I suppose, be on the lookout for? Can you give us an example? I am not expecting a thesis.

Mr Calder —How you interact with people is very important. For example, I might find myself trying to communicate with someone and trying to be firm, saying: ‘This relationship is not developing to the extent I would like. These are the things you are not doing. Can you address them?’ But my translator might translate that as: ‘Things are going fine. There are no problems. This is a great relationship,’ because of their lack of willingness to directly achieve confrontation. So I am nodding, thinking things are going well, and they are nodding, thinking things are going well, and we have had two completely different conversations. And suddenly, when you get out of the room, someone else who was there tells you that your translator did not say what you said. It is the whole issue of preserving face, having respect, dealing with people at the right levels of organisations, and not belittling people when you do not realise that they do not have the power to make decisions. All those factors are, I think, very important.

CHAIR —What about the other way? Do they have an idea about how Australians negotiate? Or is it one-way traffic?

Mr Calder —I think it is both ways. In the same way, when we first had dealings with the Japanese it took a long time. We have been dealing with the Japanese for 40 or 50 years now, so obviously aspects of their and our negotiation skills are better aligned, and we better understand where each other is coming from. We do not fully understand the Chinese way of doing business, and the Chinese do not fully understand the Western way of doing business. But the rate of pace of change is phenomenal because there are so many deals going on. The nature of Chinese organisations in often having one effective shareholder means that knowledge gained by one company is very quickly able to be shared and disseminated throughout their organisation—more so, perhaps, than in a privately controlled economy such as Australia’s, where one company from one industry sector may be less willing to share the lessons it learns with a competitor.

CHAIR —You were talking about translators. Do you have your own translators in China or are you expected to have a semi-official one in the conduct of business? If Mr Hutchins were there translating for you as negotiations were going on, why wouldn’t he say it as it is rather than try to save face?

Mr Calder —It may be that your translator is not translating something the way you say it because they are embarrassed to say that in such a way to someone that is held in such high regard, because they consider it would be a loss of face for them and for you. Their view might be that the way to raise that is not in a forum in front of so many people.

CHAIR —So it is sometimes more about the way you conduct business?

Mr Calder —Yes—where and how.

Senator JOHNSTON —It is very similar to the Japanese situation. Not the same, but very similar.

Mr Calder —Yes. I think the Japanese like to deal with the Japanese. The Chinese are more open, if anything, to dealing with Australians directly.

CHAIR —Thank you very much, Mr Satchwell and Mr Calder.

[9.03 am]