The word ganxi might not mean much to many people outside China but, for Rolls-Royce, it translates as the key to business contracts worth billions.

Ganxi, or relationship, means much more than its literal meaning and is a fundamental part of the culture of doing business in China.

Steve Miller, vice-president of Rolls-Royce's civil aerospace operations in China, said: "It means relationship but has a far deeper meaning. "It signifies personal trust, is about credibility and is as essential in government-to-government negotiations, with high-ranking officials, as with everyone you do business with in China."

Mr Miller is responsible for 16 Rolls-Royce offices across China and about 600 staff, including those working as part of joint ventures. He spends about half of his time in China and it is largely his responsibility to ensure that personal relationships that exist between decision- makers at Chinese airlines and the aerospace giant continue to provide the foundations for multi-million-dollar deals.

China is an enormous growth market for civil aerospace and the potential for Rolls-Royce is mind-boggling, notwithstanding the £1.5bn worth of new contracts signed this year alone. By way of explanation, Mr Miller compares China to the United States.

He said: "In the States, there are 8,000 aircraft to support a population of 340 million, whereas in China at the moment, there are only 1,000 aircraft supporting a population of 1.3 billion. An additional 7,000 aircraft represents potential business for our civil aerospace division of 65bn."

It will take a good few decades for the number of aircraft operating in China to match the 8,000 in use in the US but the determination of the Chinese government to develop air travel can be seen throughout the nation. "Terminal three at Beijing Airport is 20% bigger than the whole of Heathrow, despite moving only a fraction of the number of passengers," said Mr Miller.

"The Chinese government recognises that, given the country's economic growth, it makes sense to build for the future rather than build an airport and extend it as passenger numbers increase. They are future-proofing their airports. You fly out to places in the middle of nowhere and they have enormous brand new airports which might handle only a couple of flights a day.

"China is such a vast country, with many mountainous areas ill-suited to road or rail links, and that means laying down three miles of Tarmac and building an airport makes more long-term sense. Furthermore, with huge currency reserves, the Chinese government has both the financial clout and the political power to make it happen."

In addition to developing the nation into an economic powerhouse, there are social reasons for developing air travel in China. The industrialisation of China has attracted millions from the interior to the more developed eastern edge of the country.

Each Chinese new year, hundreds of millions of people return to their home towns and villages to be with their families. Building more airports and running more flights will reduce the phenomenal congestion that this causes each year.

Though this is a tradition likely to benefit Rolls-Royce's long-term civil aerospace strategy, there is one part of the culture that has proved a stumbling block.

Said Mr Miller: "In the West, people look at life-cycle costs, whereas in Asia there is a tendency to focus on acquisition cost and this has been the case in China. Without a long-term service agreement, we would only make money when the engines that we sold went wrong and it was an art to guess how much an engine would cost over its life cycle. Things are changing, though, and now the market is seeing the benefits, as most of the engines sold to the Chinese market are sold alongside 10-year, 12-year or 15-year Total Care packages."

This is a cultural shift that is hugely significant for Rolls-Royce and means the company is locking in business for decades to come in a market it already dominates.

To put things in perspective, Rolls-Royce has 52% of the market for engines for the A330, sharing it with rivals General Electric and Pratt & Whitney. In China, there are 143 A330s in use and every single one is powered by Derby-built Trent 700 engines. Likewise, 100% of the A380s flown in China are powered by Trent 900 engines.

When chief executive Sir John Rose addressed investors at the London Stock Exchange last month, he reported that 40% of new civil aerospace orders came from Asia. He also told investors that, in 1997, there were 41 planes powered by Rolls-Royce engines in China and that by 2010 there would be 507.

Rolls-Royce has traditionally had an unusual relationship with the Stock Exchange. The accusation from the markets was that the company always promised great things but never quite delivered. Mr Miller believes China is changing that: "The stock is repositioning as a safe haven with embedded value because the civil, marine and aerospace divisions succeed under different circumstances and the market for each of our divisions is huge in China. When the oil price goes up, civil aerospace might take a hit while exploration becomes more profitable and the marine business goes through the roof."

One might well expect singular confidence in the Chinese market from the man responsible for Rolls-Royce's civil aerospace operation in China.

That said, China has often demonstrated just as much confidence in Rolls-Royce. In 1949, when the People's Air Force was formed by the Communist Party in China, every plane was powered by Merlin engines built by Rolls-Royce.

At the height of the Cold War, Rolls-Royce was selling engines to China, developing relationships and trust with people at all levels of the civil aviation administration. Some of those people have risen through the ranks to become senior officials with the power to make billion-dollar decisions. Though Rolls-Royce engine sales to China have surged over the past 10 years, it is partly as a result of decades of ganxi.

Source: Derby Evening Telegraph

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