September 23rd, 2010 | Eyes Abroad
A bustle of Chinese business people roams the vast exhibition hall of the China International Fair for Investment & Trade (CIFIT) looking for opportunities to build cross-border scale. Among them is Zhou Meimei, Business Development Manager of the Shanghai Yiyang Electric Machinery Co. Ltd., a manufacturer of mufflers and ventilation equipment. Although this was her first time attending the fair, Zhou did not go home empty-handed.
“We reached an initial agreement with the Zimbabwe Investment Authority to build a machinery production line in their country by year’s end,” she told Beijing Review.
Aside from the African continent’s advantages in terms of resources and labor, it’s much easier for Chinese companies to gain a foothold in these developing economies where the consumer markets have yet to be entrenched, she said.
Chinese companies, Zhou’s included, are scrambling to go global, and the CIFIT, now in its 14th year, provides the perfect springboard to dive into foreign markets.
The CIFIT, held September 8-11 in Xiamen, a coastal city of southeast China’s Fujian Province, is the ultimate matchmaker for investors and traders worldwide—this year it witnessed 639 deals worth $22.4 billion, up 41.5 percent from last year.
For decades, the Chinese economy has been firing ahead at turbo speed, but the gleaming wealth boom has been overshadowed by the fact that few Chinese brands enjoy global recognition. Many domestic enterprises have yet to step onto the world stage, with most either unprepared for international competition or fearful of the challenge of multinational management.
But the dynamics are changing fast. China’s outward direct investment reached a dizzying $56.53 billion in 2009, the largest among developing countries, said a recent Ministry of Commerce (MOFCOM) report.
By the end of last year, Chinese enterprises had established at least 13,000 companies in 177 countries, said Shen Danyang, CIFIT spokesman and a MOFCOM official.
The manufacturing industry was the most coveted area for Chinese investment, followed by the wholesale and retail sector, and tenancy and business services, said Shen.
The tide of investment going out is expected to roar ahead in the next few years and will receive a boost from the domestic economic take-off, said Shen.
Acute industrial overcapacity at home is also adding to the forces pushing Chinese capital offshore. In addition, the financial meltdown in the developed world, coupled with a stronger yuan, has left the door open for mergers and acquisitions (M&A)—a shortcut into markets across the globe.
Meanwhile, policymakers have realized that going out is a more promising strategy than staying at home. The MOFCOM has established more than 200 commercial counselor offices across the globe, providing information about local businesses and legal environments for Chinese investors.
A welcome move
As Chinese firms try to graduate from mere low-cost manufacturers and expand their geographic scope, their efforts are warmly greeted by the rest of the world. Italy and France, among those countries vying for the attention of Chinese capital, even launched massive promotion campaigns at this year’s CIFIT.
“Chinese investments are welcome in Italy as they can breathe fresh life into our economy,” said Barbara Gasperi, Trade Officer of the Italian Trade Commission’s Shanghai office.
A string of Chinese companies have taken root in manufacturing, industrial design, as well as renewable energy businesses in Italy. Among them were the China Energy Conservation and Environmental Protection Group that recently completed a solar power project in Puglia, southeast Italy.
“Our government offers generous incentives for green energy investors, including cash subsidies and favorable feed-in tariffs to name a few,” said Gasperi.
“We try to attract more Chinese investors as we believe they have great potential of growth overseas,” said Francois Dutriez, Project Manager of Nord France eXperts, a development agency for the Lille region of France. “To help them succeed, our agency provides a handful of free services, including business location proposals, talent training and financial services.”
But this does not mean the path overseas is clear cut and worry free. The slowdown in Western economies has caused many Chinese companies to be cautious with their outbound forays. Despite the attraction of global reputations, Chinese companies don’t want to face waning demands in markets that they don’t understand.
For now, it may be wise for Chinese firms to focus on the home market, and invest in foreign countries with the best prospect of recovery, Balasubramanian Muthuraman, Vice Chairman of the Indian conglomerate Tata Group, told Beijing Review on the sidelines of the fair.
The China Council for the Promotion of International Trade (CCPIT) released results of a survey of its 1,377 member companies in April 2010. Of the 344 firms with an overseas presence, 61 percent were only involved in minor investments valued at less than $1 million.
Acquiring financing has been the major impediment to expansion, said Zhao Xiaodi, Director of Economic Information Department of the CCPIT.
But efforts to soothe the financial woes are already on the way as banks extend a helping hand.
Wang Chen, a manager at the Corporate Banking Department of the Industrial and Commercial Bank of China, said the bank is enhancing supportive services to the firms developing beyond China’s border, including export credit, funds management and risk management of currency exchange.
“Meanwhile, the bank is also expanding global networks of its own in a bid to reach more Chinese corporate clients overseas,” said Wang.
A long way to go
While the stream of Chinese investment grows, success is far from guaranteed. The obstacles that Chinese firms must overcome are immense—a lack of managerial and cross-cultural experiences needed to build a multinational with operations and brands spanning the globe.
Indeed, for Chinese manufacturers, managing a global supply chain with complex tax regimes, import-export requirements and cross-border logistics requires much broader expertise than simply producing goods with cheap labor. Not to mention the challenges of dealing with local government and unions, and the intricacies of marketing to sophisticated consumers.
After acquiring IBM’s laptop business in 2005, China’s PC maker Lenovo geared up to venture abroad. But the global downturn led to deep losses and prompted the company to turn its attention back to the Chinese market. In another case, the Shanghai Automotive Industry Corp. (SAIC) acquired a 48.9-percent interest in the South Korean automaker Ssangyong Motor Co. But the SAIC has almost given up the investment as its tense relations with Ssangyong’s labor unions drained life from the venture.
“Chinese firms must be clear about target customers and advantages in the overseas market, and be sensitive to the local culture,” said Alan Turley, Vice President for International Affairs in Asia Pacific for FedEx Express. “This will be a prolonged learning process for them.”
The Chinese refrigerator maker Haier, for example, is faring well in the U.S. market with its keenly priced mini-refrigerators becoming a big hit in student dormitories. In the 1990s, its exports enjoyed a solid customer base. But the company did not set up a subsidiary in the United States until 1999 when it had three years of experience operating in the Philippines and Malaysia.
But expansion strategies vary in different industries and market situations, and sometimes, M&As could effectively clear the way for globalization, said Turley. “FedEx, for instance, acquired the Singaporean airlines Flying Tiger in 1989, and gained access to the Asian market,” he said.
Compared to ambitious M&A deals, organic expansion is probably a better way to go, especially in emerging Asian markets where competition is less fierce, said Muthuraman of Tata Group.
In addition, it would be easier to recruit ethnic Chinese there who can help bridge the culture and language gap. After all, talent is the most important element of cross-border management, he added.
By HU YUE