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Swedish companies face massive business opportunities in China as demand for high-quality products and green innovations boom in the Middle Kingdom, according to the Swedish Trade Council and a new report by Swedbank. But China’s high-tech innovative capabilities are growing quickly.

“The most important consequence of China's new growth model, with its increased emphasis on quality, is that it will benefit Swedish industry”, Cecilia Hermansson, chief economist at Swedbank, said in a its China Analysis. “Swedish products should benefit from China’s new growth model”.

China’s new five-year-plan (2011-2015) clearly wants to create to shift from an export-led economy to domestic consumption led-growth with greater emphasis on higher value-added production and quality. It will also drive the development of green technologies and products to meet the growing demand for ecological solutions.

This is good news for Swedish companies. For export managers and business leaders it will now become even more important to offer higher quality products, which China will slowly but surely demand more of. At the same time Chinese companies are facing increasing pressure to maintain high corporate social responsibility standard, something that also will gain Swedish companies.

Mats Bergman, Trade Commissioner at the Swedish Trade Council in Beijing, points out that Swedish companies selling high-tech environmentally friendly products, cleantech innovations or products for energy efficiency enjoy opportunities as China tries to curb its carbon footprint and slash souring energy costs.

“There is an increasing interest for Swedish cleantech solutions in China, but it is hard to say how large the increased in demand really is. Sweden is recognized in China for having innovative solutions in this area and there are several Chinese companies wanting to know more. With more and more Swedish reference projects in China, the likelihood of more Swedish business of course increases”, he told The Swedish Wire.

Companies that sell solutions with relatively faster return on investment or otherwise high cost efficient have a large potential in China, Mats Bergman said.

“The companies that are working with energy efficiency will find several opportunities, particularly in the industrial energy efficiency sectors such as waste heat recovery, energy saving retrofit, gasification, etcetera. These are profitable solutions and Chinese policies will support them more and more”.

However, doing business in China is far from a quick fix. Entry barriers are high -- and rising -- as the government aims to support homegrown expansion. Besides, local brands are often more popular than foreign as have considerably better distribution systems.

“China presents a huge market with plenty of opportunities, but the threshold for entering is also high. Swedish companies that want to do business in China and tap into this increasing demand needs to be quick to respond to potential Chinese partners, active and flexible”, Mats Bergman said. “Besides, if you want to be successful in China you need to be established in the market, it is hard to manage the business from Sweden if you are to be able to respond quickly to opportunities”.

China’s growing consumer markets will initially have the most impact on Western companies and growth. But China’s innovative capabilities are growing quickly, even though Western multinationals still maintain an advantage – but not much longer.

“The domestic industry is developing fast and in many cleantech sectors the Chinese technology is getting very competitive. It is the same trend as in other sectors, that if a new technology comes to market and shows profitability, Chinese manufactures will learn fast and start out producing cheap but less technically advanced products. After a few years, the performance will normally improve and become more competitive”, Mats Bergman said.

The key to success in China is, as on all markets, to consider both threats and opportunities, Swedbank points out. Bigger consumer markets and a higher standard of living for millions of Chinese will mean greater sales opportunities for Swedish companies that do their homework. At the same time competition is growing significantly in higher value-added production.

At the same time, those that manufacture in China can expect costs to rise and profit margins to shrink. New labour laws are contributing to higher wages, which is also desirable, since it will speed up the transition to the new growth model. A gradually more consumer-led growth model in China would probably also raise global prices and interest rates. Production with lower knowledge content will move to Vietnam, Bangladesh, Africa and eventually North Korea – all countries that will increasingly export input goods to China, Swedbank said.

The country’s economy is expected to expand by more than 10 percent this year and same 8 percent during both next year and 2012, Swedbank said in its outlook. The slower growth is a result of the new five-year-plan and tighter monetary policy. But the West is also slowing China’s rampaging.

“China is concerned about developments in the US and Europe, since weaker demand reduces Chinese growth and will force it to more quickly transition to a new growth model”, Cecilia Hermansson wrote.