China firms should go for win-win in overseas ventures

By Frank-Jürgen Richter

Business Times, December 14, 2011

In looking at China’s economy, one of the notable trends in recent years is that it is increasingly looking outside its national borders for new growth. But such ventures hold new perils for China that it needs to manage.

China has had considerable success with two forms of globalisation – becoming a global exporter, and more recently by undertaking overseas direct investment (ODI) through which the next wave of Chinese companies will embrace corporate globalisation.

Chinese companies will need to overcome four major challenges in pursuing this type of globalisation. First, they will have to develop world-class financial skills and risk management; second, they have to develop the human skills needed to manage information flows in horizontal organisations which currently are not recognised in their hierarchical command and control systems; third, the new firms will have to compete through product differentiation, not only on low costs; and fourth, they will have to overcome political barriers to global acquisitions since outsiders perceive the real owner of the Chinese firm to be the state and so will be reluctant to cede control to a foreign government.

Peter Buckley, a British professor, undertook a persuasive analysis of the behaviour of Chinese firms. The results may seem critical of China, but are not meant to be; they simply reflect the fact that China is distinctive from other emerging economies due partly to many of its multinational enterprises remaining in state hands – even though they are corporatised in order to focus on commercial objectives.

State direction means that these firms still align their operations, whether at home or abroad, with the country’s five-year plans and national imperatives. This is a model that is not prevalent in any of the other leading emerging economies.

Noting this fact, critics point out that Chinese firms are able to enter markets deemed risky only because they have ‘infinite’ financial backing from the state. At a recent meeting organised by Horasis in Valencia in early November, we heard that the manner of Chinese ODI is sometimes unsettling to African managers. They note that the Chinese essentially offer a barter plan – for example, building roads and hospitals in return for extracting raw materials.

There is also a lot of angst about the fact that Chinese firms tend to employ mostly Chinese workers instead of helping develop local skills.If the Chinese use equipment that is dismantled at home and re-assembled overseas, it is highly likely they need Chinese operators to do the job, especially if the instructions are written in Chinese. Nevertheless, the deployment of too many Chinese operators is meeting with opposition in host countries.

In some industries, such as banking, where there is considerable local talent, the reliance of Chinese entities on Chinese staff is a matter of particular concern to locals. Françoise Nicolas, a French professor, concluded from a study of Chinese firms in France that ‘ . . . Chinese enterprises are still at a trial and error stage in their foreign ventures’. ‘They are still learning, sometimes the hard way, and cross-border acquisitions remain daunting to many Chinese companies. Most of their executives have little experience with M&A, and even less trying to manage across cultures . . . they also lack experience in assessing the potential costs and benefits of a cross-border acquisition.’ And Valeria Gattai, a professor from Italy, found that Chinese companies in Italy ‘. . . lament (the) cultural distance, bureaucracy and the lack of flexibility in the Italian market’. Thus, successful ODI is not simply a matter of money. The human side is also important, as is the capacity to adapt to local cultures. As Buckley noted, the Chinese ODI seems to concentrate on regions that have similar characteristics to China – which are unconstrained by the ethical and governance obligations that are expected of western firms investing abroad.

However, unlike western firms, Chinese firms are comfortable operating in highly regulated and controlled local markets (as they do back in China). While Chinese firms are in many ways successful with their ODI, they need to be more sensitive to the fact that they cannot ride rough-shod over local systems and cultures simply because a host country is looking for inward investment. Their ventures abroad are joint ventures and need to be pursued in a spirit of partnership in which both Chinese firms and their hosts are winners, and seen to be so.

The writer is founder and chairman of Horasis, which hosts the annual Global China Business Meeting