In her role as Orangefield ICS chairwoman and founder, Elizabeth Thomson has spent many years contributing to the opening up of the Chinese mainland market to foreign companies. Martin Evan-Jones speaks to her about finding corporate answers to trade finance, tax and profits problems.
Elizabeth Thomson likens her corporate, trust and commercial services legacy in Hong Kong to “building a ‘Lego tower”. That analogy to a child’s building toy is fitting, because the operation she built has been driven mainly through structuring and adding services that are missing, rather than resting on a grand design.
It has been a mission that, over 32 years, has helped thousands of her mainly medium and large-scale clients into ventures in the Asia Pacific markets, chiefly in China.
Catching up with her recently, Thomson, a Canadian lawyer who’s also a member of the UK and Hong Kong law societies, and a former American Chamber of Commerce Woman Entrepreneur of the Year in Hong Kong, was wrapping up her career as a business and financial services doer and shaker.
That’s after selling out to Amsterdam-based corporate and fund services group Orangefield last year; the new Hong Kong entity is Orangefield ICS, in which Thomson has served as chairwoman. Heading the firm ahead will be Orangefield veteran Vincent Bremmer, a Dutch lawyer.
The move is a final, exuberant flourish for Thomson, but the firm’s process of expansion is by no means over.
“I see Orangefield ICS expanding in China. We need to be in different cities, possibly with some extended expertise in areas such as in joint venture with Chinese companies,” Thomson comments. “That level of work could save clients about 15 trips to the mainland, so China is definitely the growth area. We recently had a client firm in [the southeastern Fujian provincial city of] Xiamen: not every client is going to Shanghai.”
Orangefield is to add its suite of fund services to current offerings, with management saying it is staying true to the model established over time.There are plenty of examples of Thomson’s “Merlin touch”. One client, a US$350mn publically traded chemical company, found it was facing a competitive threat from a Chinese mainland factory impinging on its chemicals component and technology business.
Orangefield ICS says it helped negotiate a deal to buy the China factory’s product and sell it through their established distribution network, setting up a Hong Kong firm to handle international sales and marketing, or what Orangefield ICS calls its “direct import programme”.
Thomson has very much focused on Hong Kong as the gateway to and from China and other Asian markets, particularly to mitigate risks to operations in places that are little known to companies in Europe and North America.
So, for example, Orangefield ICS says it helped a US$45mn per year tool and components firm dealing with Chinese contractors to establish and manage a Hong Kong headquarters. The Hong Kong unit was developed to handle international business and global sales, complete with financial services and banking.
Over the past two years, Thomson estimates, many more international client companies have been going the other way, aiming to capture Chinese mainland sales. A large numbers of luxury goods players have been joined by numerous other goods and services firms, for example in the specialty food and wine businesses.
In such cases, setting up a representative office or wholly foreign-owned enterprise (WFOE) has proven to be the strategy of choice for China sales. But Thomson believes an additional Hong Kong entity is also a vital factor, that is, beyond the SAR’s well-understood transparent legal system and low tax regime (at between zero and 16.5%).
“I wanted our clients to take Hong Kong structures and make them real businesses – not with only three entries in their corporate bank statements per month but with 30 and then 300 entries. If they weren’t making money in the first or second year, then I advised them to look at where they were going, at international trading; look at trade finance – and business starts to open up like a lotus flower.”
The firm’s bread-and-butter business includes corporate and trust services, setting up and managing integrated business strategies, handling client accounts, auditing statements and writing management reports – but also offering what it calls a “virtual CFO” service to advise on tax, to structure employment contracts and arrange work visas.
Orangefield is frequently an intermediary between industries and banks. “A few months ago we did a survey on how many accounts we set up with various banks and they were in the thousands,” says Thomson.
More frequently, such accounts are denominated in Renminbi (Rmb), reflecting the huge growth in Rmb deposits, dim-sum bonds and other Rmb products since the Chinese currency was offered on an offshore basis in Hong Kong in January 2004.
The Hong Kong Monetary Authority, the territory’s de facto central bank, estimates deposits in Hong Kong of mainly non-Chinese mainland corporates and individuals exceeded Rmb800bn (at US$1 to Rmb6.12) by May 2013, together with Rmb260bn in the dim sum bond market. Rmb loans offered by banks in Hong Kong totalled Rmb90bn, while aggregate Rmb remittances for cross-boundary trade in Hong Kong stood at some Rmb275bn by last April.
“We’re seeing a great deal more financing in Rmb not only for sales but for the expenses part of the balance sheet. So, for example, we have US customers that pay their suppliers in Rmb from Hong Kong,” says Thomson. “Retailing or wholesaling, they are selling in Rmb; when they repatriate profits from [the Chinese mainland] to Hong Kong, they repatriate Rmb (to a Hong Kong Rmb account).”
While cities such as Toronto and London offer themselves as offshore Rmb centres she prefers Hong Kong, given its proximity to the Chinese mainland market. “We don’t want to send Rmb from Hong Kong to Toronto – you just have to do the foreign exchange calculation. There are so many banks in Hong Kong handling the Rmb that they can shop the rate around.”
Recent moves to further open China’s capital account by offering Rmb benchmark interbank lending rates in Hong Kong are also seen as creating greater transparency and boosting confidence among financial institutions – and that itself can help increase volumes of Rmb-denominated transactions.
The acquisition of Thomson’s firm ICS Trust by Orangefield last summer, she says, has brought an additional range of business and private client service offerings around the world, including offices in Shanghai and Singapore. Orangefield has been on an acquisition spree, with further expansion on the cards this year and next.
On regional strategy, Thomson detects a change in the relationship between Hong Kong and Shanghai. “It became clear to me that as some airlines by-passed Hong Kong to connect to Shanghai that there is a new direction; now, the meeting or plan often happens in Shanghai and then it needs a Hong Kong corporate structure to support a representative office or WFOE back in China.”
Her point: companies are now tending to invest directly into the mainland and could miss the benefits of establishing a Hong Kong company first and then a mainland structure. Thomson says: “They are doing this because they are either ill-advised or they fly to Shanghai and no one in Shanghai mentions to them the benefits of a Hong Kong structure first.”
But for her, globalisation has shifted company operations more broadly, which is why an effective business services firm needs to provide international capacity. She describes business services as sitting cheek-by-jowl with financial products, saying: “We are a net giver of business to trade finance firms.”
In fact, the pace of demand for financial and corporate services on the mainland is quickening. In June, the acting governor of Shandong Province in eastern China led a delegation to Hong Kong to encourage development of services firms, holding a conference with leading players such as Blackstone Group and Goldman Sachs (Asia).
In the previous month, the specialist services area of Qianhai in Shenzhen, across the boundary from Hong Kong, opened its stock exchange, with over 1,000 international companies reportedly expected to join, far more than expected. As to foreign commercial firms, many Orangefield clients are product traders, but Thomson sees services firms making a greater impact, also requiring trade finance.
She particularly points to education – which is currently a restricted industry on the mainland – and firms offering executive development. Legal firms, whether based in Hong Kong or around the world, are also tackling considerable work on the Chinese mainland, and that trend seems set to soar.
There are still significant challenges, not least for commercial traders. “One client provides products for the automobile industry and so has six WFOE-controlled manufacturing plants. If such clients are on the Chinese mainland we want to be sure that they are ‘driving their own car’: they have to be in charge of their futures rather than leaving their fate in the hands of agents. For them, it’s vital to know who works in their factory, how it operates and who their competitors are.”
Another client, a family trading business producing pet toys and accessories for the US and Canadian markets, was sourcing through Chinese mainland contractors; the proprietor spent late nights and early mornings “fighting on the phone with factories over shipping times and coordinating with freight forwarders”, as the pet product business suddenly took off, with attendant delivery pressures. It didn’t help that the proprietor knew little of dealing with letters of credit.
The solution was to set up a Hong Kong subsidiary, with a “virtual office” for the company’s international sales and marketing, and a back office for arranging those letters of credit.
Thomson also sees Asian countries other than China receiving more attention from trading companies in North America and Europe – in particular, Vietnam and Bangladesh.She encouraged a footwear manufacturer from the US to look at Vietnam from a Hong Kong perspective, “not so that he should jump into manufacturing there immediately, but to consider it in case he had a bad shock in China”.
China’s move to discourage reliance on primary industries such as garments and footwear and drive higher technology operations is a key consideration. Thomson describes the development of her trade services as being logical and simple. “We don’t do anything that relates to quality control,” she says. Likewise she soon exited the product-sourcing business; her clients were better at that business themselves.