I have been having a lot of conversations in recent weeks across the space and have picked up on a number of trends have emerged from those conversations. One of which is China! I have heard more about China and commodity trading this last two weeks than ever before perhaps partly due to LME week that has just happened. LME is of course part of the Hong Kong Exchanges and Clearing Ltd Group these days and actually welcomed the Chinese Vice Premier back in June. Apparently, a session during LME was well attended by Asian firms particularly those from China. Interestingly, ComTech is itself involved in China with a presence at the 2019 China Enterprise Risk Management Forum albeit via a video introduction and our role will be in an advisory capacity going forward. However, we hear from a number of people that China is increasingly active and several vendors have set their sights on the country often via Singapore. Our own market outlook to be released in the next several weeks will also emphasize growth in Asian markets and it has this to say about China,
The Asia-Pacific region, driven by high demand for commodities to meet rapidly expanding economies has continued to be an active and growing market for CTRM vendor supplied products, particularly those for managing oil and oil products, LNG, agriculturals, softs and industrial metals and ores. Western based vendors have found continuing success selling products into the Asian markets, particularly in Singapore, Hong Kong and mainline Chinese markets, with national oil companies and large metals and agricultural trading companies (including food and beverage) being particularly active buyers of vendor systems. In previous years, cultural and language differences outside of the major trading centers in the region made it more difficult for western-oriented CTRM vendors to sell their products within the borders of the largest economies in the region, particularly China and Japan, and custom developed solutions have been common. However, several of those US and European based vendors have been successful in developing partnerships with local consulting firms and are finding new clients for their products. Other vendors, such as Enuit, have developed local knowledge and have hired local resources to assist them in the sales process and in developing industry knowledgeable support teams in the region. With this continuing investment and experience in the Asian markets, ComTech is forecasting CTRM product sales in the region to set an all time high in 2019, despite the protracted trade dispute between China and the US that captured headlines for much of the year.
But what does it mean that China is increasingly important in the commodities industry? Plainly, Chinese demand has been the story driving many commodities for around a decade or more. Yet, in terms of Chinese firms playing an increasing role, procuring software and taking training around issues like risk management, while there has been interest, it hadn’t seemed to solidify beyond a few higher profile entities with overseas subsidiaries. Now we are hearing that there is an increased interest in learning and in procuring across the Chinese industry. The first thing is that the Chinese appear very keen to learn – about anything and everything commodities but notably around CTRM software, risk management and business processes. That’s good but does it translate into a new market for CTRM vendors and consultants etc.?
Well, China has a reputation already for seeking cheaper solutions without a long-term commitment so that something can be swapped out easily if there is a cheaper offer somewhere. But many questions need to be answered before China can realistically be seen as the next big CTRM software market even though it might appear that way now. For example,
- Will Chinese firms buy from foreign vendors or will they prefer to help create and sustain a local supplier base? We have seen markets like Germany and Central & Eastern Europe, for example, were local firms have the cultural, cost and language advantage sufficiently down pat to keep out foreign competitors in all but the top tier firms. Perhaps, China will seed a new set of Asian CTRM vendors on next generation technology?
- If it choses to go for foreign vendors, what will licensing or usage agreements look like? Will Chinese firms require T+C’s that more fit local culture and business practice meaning legal difficulties for vendors trying to serve the market – perhaps around IP, for example?
- Pricing – Will price expectations be radically different resulting in a disconnect between expectations for the market versus reality?
- Will language prove to be a barrier that needs to be addressed via new UI’s?
- What about local representation and setting up of new entities in China? – A new set of employment and legal corporate risks as well as more FX issues?
There are many more questions that need to be resolved before China can be viewed as anything but a potential CTRM marketplace….. Which is why I called this blog “Visions of China”, a song by Japan from the Tin Drum album…. well worth listening to.