As foreign capital continues to pour into China, relatively little attention is being paid to the small but growing stream of Chinese overseas direct investment (ODI) that has begun to flow in the opposite direction, including into North America. What was just a promise at the turn of the century has now become a genuine opportunity for economic developers to increase their share of Chinese investment in the consumer electronics, automotive, technology, natural resources and other strategic business sectors. However, those who prepare now – the early movers – will earn the greatest rewards.
In this article, we attempt to provide a ‘road map’ to this new Chinese ODI, including some background on the subject, a description of the challenges facing pioneering Chinese companies, and our recommendations for responders who want to secure an early and fair share of new Chinese investment.
First, some perspective. There has been a dramatic increase in Chinese ODI since the country joined the World Trade Organization and policymakers lifted financial controls and caps. The result has been a sharp increase in ODI from $1bn in 2001 to $16.1bn in 2006. China’s Ministry of Commerce optimistically predicts that ODI will maintain an average annual growth rate of more than 22% over the next four years, reaching $60bn dollars by 2010.
Not satisfied to be manufacturers of inexpensive goods for Western companies alone, Chinese firms are vying to become global brands as recognisable to world consumers as Coca-Cola, Sony or Mercedes Benz. The effects are now being seen on American shores. From Haier refrigerators to MG Rover coupés, a growing amount of Chinese-brand merchandise is being (or will soon be) built, marketed and sold by Chinese firms operating in the US. Although some of those investments have been greenfield, the majority of the ODI has resulted from mergers and acquisitions.
This is not China’s first appearance in the global marketplace, although it may represent the most concerted effort to date (see box below).
Despite positive trends, the Chinese are learning that going global is not without its challenges. It has been a particularly hard lesson for companies with strong ties to the state and those making high-profile acquisitions. Unease about China’s growing economic power, internal politics and reputation for corruption can turn US public opinion and policymakers against Chinese ODI. Failed acquisition attempts, such as the China Offshore Oil Corporation’s bid for Unocal, attest that these problems are not trivial.
Also, Chinese investments are often plagued by post-acquisition integration problems, including those involved with bridging cultural differences, hiring staff, developing markets, and navigating regulatory regimes in unfamiliar places. In general, Chinese companies are relatively unsophisticated, lack international experience, and are less familiar with developed markets and the system of private sector-government interaction.
Dealing with a country as vastly different and new to the world stage as China requires organisations in North America to be well prepared if they are to participate in this intriguing new source of ODI. A self-evaluation is needed in order to help understand and respond to the motivations of Chinese foreign investors.
For example, establishing operations in North America can bewilder Chinese companies and creates a ‘safety in numbers’ mentality that favours cluster development. Such clustering weighs heavily in Chinese firms’ decisions on location and suggests a number of potential
industry targeting strategies, including logistics (Chinese companies are known to want to control their own logistics). Because Chinese investments in North America are also driven by a need for intellectual capital, regions with a large IT or R&D presence might target similar companies.
The right attractions
Chinese business leaders value the types of long-term relationships that can help them to succeed. Economic developers who have taken the time to create and nurture relationships in China will be able to capitalise on the goodwill that they have built and will have a competitive advantage over the latecomers. A good example is South Carolina, which has a long-standing office in Shanghai and mounts one of the most established investment attraction efforts in China. This year, South Carolina is set to clear about $100m in Chinese greenfield investment.
However, most organisations, particularly smaller, regional investment promotion agencies, lack the staffing and budgetary resources to make a similar commitment. Opening a representative office in China can require an initial investment of $250,000, often more, and carries a high opportunity cost because it diverts resources from projects, which may have a higher rate of return.
Resourceful developers employ a variety of strategies to help manage these challenges. Some North American economic development organisations share representation in China, including staff, office space and other overheads. Such arrangements usually rely on so-called Chinese walls (no pun intended) to ensure confidentiality and to minimise or prevent the appearance of any conflict of interest. Shared services can cut the cost of having a China representative by 75% compared with opening an office independently.
Organisations for which a full-time presence in China is not feasible often opt to hire a short-term in-country consultant who is responsible for projects of limited scope, such as arranging trade missions, identifying leads, or distributing marketing materials. A cost-effective alternative is to collaborate with Chinese companies and economic development entities to provide a presence in the country. Some organisations have learned to co-sponsor marketing events with Chinese companies, sharing the costs, the effort and the leads. Others attempt to identify and approach Chinese economic development zones whose industrial mix is similar to that in their own communities. Chinese zone officials are eager to work with their American counterparts and can be an excellent advisory resource on the business environment in China. The higher quality zones feature some of China’s largest companies and are an excellent source of potential targets.
Chinese ODI in North America will reach critical mass in a few years. Attracting this exciting new trade will require knowledge, networks and creativity. To be able to compete, North American economic developers should plan to build capacity now and, like the Chinese, be persistent.
Nan Yin is a consultant at Biggins lacy Shapiro & Co in Princeton, NJ. James Ku is a manager in the Shanghai office of Tractus-Asia Ltd.
Competitiveness drives investment
Since 1986, China has undergone four waves of overseas mergers and acquisitions (M&A). The most recent coincided with the country’s accession to the World Trade Organization. Many of China’s M&A transactions abroad have been in the natural resources (mainly in developing nations) and technology sectors.
The state has played an integral role: the Chinese government has created a $200bn investment fund earmarked for overseas direct investment (ODI) and has encouraged domestic firms to pursue investments abroad by reducing bureaucratic oversight.
Another impetus to Chinese ODI, particularly in higher margin industries, has been the widespread piracy of intellectual property in China, and as yet immature domestic capabilities in the areas of management, innovation and advanced technology.
To maintain global competitiveness, Chinese companies are investing abroad to build worldwide brand recognition as a way of acquiring the status conferred by higher end products. Chinese manufacturers are also opening greenfield manufacturing operations in the US .