This article will share some examples to help Chinese company leaders think about the preparations needed. The article is intended to raise the right questions, but does not try to provide all the answers, since these will vary greatly for each individual case. Getting the right questions will help management teams to set the right direction to obtain the desired outcomes.
Wind in The Tower Warns of Storms in the Mountains: Coming Troubles Cast Their Shadows before Them.
––Tang Dynasty Poem.
Several recent events and trends have slowly undermined the efficiency, confidence and cost competitiveness of many Chinese companies. Such trends and events include:
- Slower growth at home
- Rising costs of labor
- Fading competitive advantage
- Profit-margin-eroding currency devaluation
- Limited understanding of overseas markets and consumer tastes
- Tendency to neglect global value chains
- Lack of domestic bank financing for private sector growth
- Widespread corruption and trust deficit
The prolonged policy of allocating bank resources to non-efficient but policy or politically privileged sectors and companies has hurt job creation, value creation and profit generation nationwide. Many of these storms in far-away mountains have led smart Chinese management teams to consider investing in or expanding their investment in foreign markets. That has led them to think about the kinds of resources and talents needed to develop a systematic and scalable approach to venture out across the windy mountains in search of calmer and more welcoming pastures.
Many Chinese companies are unprepared to operate successfully in overseas business cultures. This article will share some examples to help Chinese company leaders think about the preparations needed. The article is intended to raise the right questions, but does not try to provide all the answers, since these will vary greatly for each individual case. Getting the right questions will help management teams to set the right direction to obtain the desired outcomes. This is an important first step, since getting the wrong questions will certainly produce very costly wrong answers and necessary corrective remedies.
Chinese companies are accustomed to a one party state where political connections are sometimes the key to a successful business. In other places, there are multi-party states, independent judiciaries, rule of law, trade unions which protect workers’ rights, journalists and NGO’s that protect the public interest. While these institutions are by no means perfect, and individual stakeholders sometimes try to further their own self serving agendas, foreign business ecosystems and business values will likely be unfamiliar to Chinese companies. The strategies that enabled them to succeed in China may not be effective there. Western business culture in general demands checks and balances to ensure transparency, full disclosure in corporate actions and corporate governance mechanisms to protect shareholder rights. Centralized isolated decision-making, as prevalent in many Chinese organizations, is viewed as an archaic and undesirable approach.
Chinese companies that fail to implement systems to deal with these cultural differences are likely to face many difficulties operating overseas. For example, it is critical for Chinese companies investing overseas to develop a habit to manage all business relationships and transactions through written contracts instead of personal deals made by fiat, since this approach overseas can result in very costly crisis response and damage control scenarios whether in legal forums or the public consciousness or in the news.
Given the development of their local ecosystem in last decades, Chinese companies often find it difficult to deal with the regulatory realities of doing business overseas, such as:
- Foreign labor laws and benefits schemes
- Banking and accounting practices
- Advertising and fair trade issues
- Fair competition legislation
- Union rules
- Environmental rules
- Employee, minority and women’s rights against discrimination
These issues seldom arise while running a Chinese company in China. The regulatory environments are very different overseas, and professionals are needed to avoid and resolve existing conditions before they result in potentially life-threatening consequences for the company. In some countries for example, for certain environmental liabilities, companies can be exposed to triple penalties rising all the way to the ultimate parent entity.
The recent RMB devaluation increased the flow of RMB capital abroad, making it more expensive for the Peoples Bank of China to maintain the currency exchange rate. It also pushed up the cost of overseas acquisitions, payments for strategic materials such as steel, munitions, and food, external supply chain payments, and national debt payments. Also importantly, it raised the costs for Chinese companies considering to invest in or expand their overseas operations.
In 2014, official outbound investment was reported at USD 103 billion, which is a 14% increase over the prior year. Outbound direct investment has surpassed inbound investment and the trajectory indicates that in 2015 the ODI investment amounts will rise at a faster rate.
China’s “One Belt, One Road” global investment program continues to push infrastructure investment overseas in energy, transport and other key sectors. These State Owned Enterprise initiatives are the bulldozer opening markets where private companies will follow. Coastal private companies, many of which have cross-border experience, are looking for ways to evolve from low value manufacturing relations with foreign parties into more sophisticated cooperative arrangements.
When China companies go abroad, they need to learn the ways of the local market and invest in their relationships, build a trust and relational network, and become part of the community, rather than stand aloof. Engagement in a community to learn and share common values is an invaluable process that each Chinese company going abroad should study. Learning about the issues that cause locals to be concerned is very valuable in the long term.
Posturing and hubris can sometimes be effective in a Chinese business context, but overseas, using your eyes and two ears to watch, listen, and learn about the local market is far more valuable than loud talking. If you expect to be welcomed in a foreign country, it would be advisable to be prepared to invest and commit to that community. That calculus is not based on money. Think about your own attitudes about foreigners in China. Would you prefer to deal with a boisterous and culturally insensitive group that constantly complains about the way things are different to their home country? Or would you tell that group to “go home” and work instead with people who make the effort to understand your culture, learn your language, and respect cultural differences while finding ways to achieve effective ways to cooperate? You can be either type of foreigner when you invest overseas. The results will be different in either case. The choice is yours.