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China Companies Going Outward. Where Are They?

By Dan Harris on Posted in China Business

A few weeks ago, I had a great conversation with a very sophisticated Chinese businessperson on Chinese companies coming to the United States. His company is in the United States and he told me that Chinese companies very much want to come to the United States, for the following reasons:

  1. They have heard about and want the high margins;
  2. If they can make it in the United States, that is a huge selling point in China;
  3. There is the view that if you can make it in the United States, you can make it anywhere.

But then he said that, when push comes to shove, most Chinese companies are “scared to death” of the United States both because they do not know the first thing about doing business in the United States and because about all they do know is that the rules there generally do need to be followed. He said that he had worked with two Chinese companies that were all set to go into the United States and then, at the very last minute, they got cold feet.

I thought of that conversation today while reading an article a reader sent me on how Bright Foods had discontinued its talks to buy General Nutrition Center (GNC) in what the Financial Times said “underlined the difficulties of sealing deals with emerging market buyers.” 

The reader had this to say about Chinese companies going overseas:

It is a internal contradiction in China. The government is pushing these companies to “go out”. The companies then discover that even though they have the money, money on its own is not sufficient. They need expertise and a Chinese legal environment that allows them to act quickly. Buying 100% of a real company in the U.S. is much different than buying a minority stake in a mining company in South Africa. The question is: will they ever learn?

I think the question is somewhat unfair since some Chinese companies have already learned, but at the same time. 

But what is going on here? Why do Chinese companies so often seem to walk away from their U.S. deals? And when will a Chinese consumer company really succeed in the United States? 

UPDATE: Check out this infographic on Shanghaiist, showing China’s overseas investments in 2010 and how little went to the United States, as compared to the rest of the world.

  • Twofish

    Dan: But what is going on here? Why do Chinese companies so often seem to walk away from their U.S. deals?
    Because they don’t see themselves making money from them. That simple.
    Dan: And when will a Chinese consumer company really succeed in the United States?
    I don’t think it’s going to happen for a long time. The problem is that if you do business in China or India or the Middle East, you are seeing economies that are growing at 6-10% per year, with people that are buying various products for the first time. The pie is growing.
    In the US, you have a developed and mature economy, which means to get market share, you have to knock an established player out, and that’s very, very hard.

  • andreas moeller

    They would need to hire senior staff from the country they consider operating in – just like you need local expertise to build up a business in China you will need local expertise for any other consumer market. This is improving and some expat staff is hired by Chinese MNC’s now – but according to my knowledge mostly in technical positions – not in senior management of business operations. I guess there are still a high level of “internal” China matters on the agenda on the executive level in most Chinese MNC’s – in particular the state-owned of course. However, Party members can be found in private MNC’s too.

  • Twofish

    There’s a silver lining in these deals not going through and that’s that business people in China are acting like business people. Even though there are government incentives to go outward, what’s happening is that Chinese business people are looking at the deals carefully and asking themselves “Am I going to make money from this?” and walking away if the answer is no.
    The other thing is what is happening a lot is that what Chinese businesses really want is a place to store cash, which means that I’ve seen a lot of passive investment where Chinese entities are buying small passive stakes in existing companies. If I want to park my money, buying Exxon-Mobil stock isn’t a bad way to do. The only reason I’d want to *run* Exxon-Mobil is if I thought I could do a better job than the current managers, which I can’t.
    I think it’s going to work out well.

  • http://www.silkroadintl.net David

    Despite all the failures of foreigners in China, I think that it is much easier to go from a highly structured, info-intensive business culture to a looser more relationship-based one. The reason being is that all the things that you do in the US still need to be done in CHina–you just have to add in some more cultural specific practices as well (and of course many things are not as easy). But going from China to the US is not only a new culture. It requires an entirely different education, background and skill set. You can’t learn US legal-culture on the fly. You can’t buy your way out of problems in courts and you can’t pull strings to get past regs and requirements while you’re getting started like you can in China.
    I’ve spoken to many Chinese factory owners who went to the US and had ideas of instant wealth. They come over on vacation, they see the margins, they know how they’ve over charged foreigners in China and they can’t believe that business in the US is anything but a money grab. But as soon as they start listing out start up costs, employee costs, marketing, insurance, legal fees, rent, taxes, etc. they quickly realize that it’s a) not cheap, and b) more complicated than they expected. This is even before they ever consider market/product analysis, branding, et al. And I’ve never ever spoken to a Chinese considering the move tot he US/EU that thinks they need to pay for all the professional services that business in the US typically requires.
    But I believe that they are coming. And coming in large numbers and with deep pockets. Money won’t solve all their problems and won’t give them experience, but they will quickly learn that money can buy/hire others to solve the problems and who have experience. And as soon as Chinese companies, en mass, start paying to get things done right, watch out!

  • outcast

    I think a major source of the problem is the Chinese decision making process itself, which usually follows one of two paths:
    1.) Agree to a deal, then find all kinds of BS excuses to run away from it
    2.) Dither endlessly and after weeks of indecision finally come around to an answer of “no”.
    The western assumption here is that Chinese in general are reasonable, but unfortunately with very few exceptions that isn’t the case.

  • http://daninbusiness.com Dan Welygan

    What about Haier? They have carved a niche for themselves in the home appliances space and seem to be working their way up the value chain. I happened to notice last weekend that Macy’s is carrying some of their microwaves, big box stores carry their air conditioners, and their wine refrigerators have been in major retail for over 10 years, no?
    It is probably just a matter of time before more Chinese companies start entering the US and having more success; I’m guessing ~5-10 years (erring sooner than later).
    I think that overseas-educated youth and people with strong English skills that are in entry-level bridging positions currently (and are getting the ‘in the trenches’ international business experience) will be coming of age to spearhead & support US & international business expansions for China more effectively than the present generation. It’s probably 5 -10 years before there’s a critical mass of such people that have ‘graduated’ into positions of influence.
    Still hard to say if it will be a few superstar companies that really make it or if there will be viable competitors sprouting in various industries across the board.

  • Aaron

    I wonder if there is a negative perception of foreign businesses from the Chinese perspective.
    There have been some high profile business disputes between Chinese companies and Foreign companies, sometimes involving “kidnapping” of foreign businessmen in China, as in the article “How Not To Get Kidnapped In China”.
    I think the Chinese companies are skittish about potential disputes with foreign businesses, because foreign companies often prefer to use foreign jurisdiction to settle the disputes, and the Chinese companies do not believe that they would be fairly treated in foreign jurisdictions.
    There is a certain amount of political factors in this, because even some large Chinese businesses have been excluded out of deals in US and Europe and Australia, merely because they are Chinese, (and have suspected ties to the Chinese government, but what Chinese company doesn’t have ties to the Chinese government).
    Consider the Chinese oil companies who tried to buy US oil stakes, Chinese mineral companies who tried to buy Australian stakes, Hutchinson Whampoa (which is actually a HK company) who tried to buy stake in US ports, Huawei (telecom) who got shot down for multiple deals in US, Britain, Australia.
    -On top of that, US, Canada, Europe are known to be favored destinations for Chinese business men or officials who embezzle or cheat. (and Chinese government has long history of difficulties in extraditing these people back to China).
    Undoubtedly, the benefits of US market is tempting, but I think the perception is reality.
    Chinese companies don’t just resort to the “kidnapping” for debts on foreign business people, just because they don’t understand US legal systems (or are afraid to hire US legal reps).
    I think fundamentally, they don’t believe that US legal system would be fair to Chinese businesses.
    -Of course, one can argue that their perception is wrong or unreasonable, but that’s perception, (which often makes reality).
    And the distrust is also mutual. Afterall, how many US companies are willing to voluntarily submit themselves to Chinese jurisdiction in a dispute?
    Hence, often no deal, or occasionally, deal and “kidnapping”.

  • Ben Shobert

    Two thoughts come to mind regarding the question of why Chinese firms walk away from these deals.
    First, I would suggest that valuation many times becomes a bigger problem once the final negotiated deal is on the table and, as part of this coming sharply into focus, the underlying operating costs of the business being acquired present themselves. Even if the latter are entirely justified from a Western POV, they typically represent cost levels Chinese firms are not comfortable with.
    It might also help to distinguish between Chinese outbound investment that is tied to the state’s priorities (i.e. natural resources) from those that are less nationalistic in scope. While the latter is certainly growing, as are the monetary resources these firms have at their disposal, outbound investment from China into – as an example – consumer goods companies or non-strategic manufacturing, remains small.
    Twofish makes the second point I would suggest this all culminates in: once the purchase price and operating expenses are equally visible to Chinese businessman, I believe many back away from the deal because they feel they can deploy that capital elsewhere and get a better return. China’s presence in Africa makes for an interesting geo-political story for sure, but the ubiquity of their brands in Africa’s open-air markets and nascent consumer staple distribution channels may suggest where Chinese firms feel they can be most successful.
    China’s outbound FDI may never look like what Japan’s did, as much as that historical parallel is what everyone anticipates. Rather, they may be able to focus much more on their own domestic markets, and those foreign markets they can get into most easily, which aren’t always in the US or Europe.

  • Tony

    ZWSOFT. They make an AutoCAD clone, ZWCAD, based on ITC code. 2D CAD is facing a lot of cost pressure (since there are two excellent free AutoCAD clones, DoubleCAD and DraftSight), so ZWSOFT got into 3D CAD by buying VX CAD/CAM, an American company based in Florida.
    My guess: ZWSOFT will pick up enough new customers to make the acquisition pay, but I doubt they’ll overtake the market leaders (DS SolidWorks, PTC Pro/E/Creo, Autodesk Inventor, Siemens SolidEdge). So far they’re treating their existing customers well, which is a good start.

  • Twofish

    Q: What about Haier? They have carved a niche for themselves in the home appliances space and seem to be working their way up the value chain. I happened to notice last weekend that Macy’s is carrying some of their microwaves, big box stores carry their air conditioners, and their wine refrigerators have been in major retail for over 10 years, no?
    Haier is a very good example of my point. The US was not the first destination for Haier, but rather they went first into Africa and the Middle East in the early 1990′s and only after establishing businesses there did they move into the United States in 1999. Chery is doing thing same thing right now. They are avoiding the US market for now and focusing on Latin America and the Middle East.

  • http://www.dragonrecruiting.com James Galvin

    I am a recruiter who specializes in finding candidates for China based companies for expansion internationally, especially the Americas and I say that often times they really dont have any idea about how to go about the process.
    I will say most of the clients we have picked out have been great but they still make some hiring choices which are flat out illegal and we have to direct them to the ramifications of it. Only hiring white people, only hiring people under 40 years of age, not hiring Chinese (no ABCs) because they want an international face.
    I think they are learning, but since many of them would rather fail than spend some money to hire some proper legal/market entry/ misc. industry consultants and make sure their products do well. I have noticed a fair amount of paranoia among those we approach that their “secrets” will get out, and therefore have been reluctant to look for outside help. I think many of these companies real advantages stemmed from their cost-control efforts and insider knowledge in China and a lot of it wont translate to the international markets, but we will see.