Overseas investment, a risk worth taking
By Song Quan (China Daily)
Updated: 2005-04-23 06:01

When Chinese company Hai'er set up a factory in South Carolina to produce white goods for the American market, many observers said it was an overly expensive and foolish step.

Considering the low manufacturing costs in China, there was no need for Chinese companies to build factories abroad, particularly not in advanced countries like the United States, they said.

Similar comments were also levelled when Lenovo announced its acquisition of IBM's PC business. Many said it was a hasty, risky move but others insisted it was too early to judge.

What is agreed, however, is that although Chinese companies' investment activities are gaining steam and becoming increasingly sophisticated, they have a long way to go before they are internationally viewed as shrewd and influential global investors.

Chinese companies with plans to invest overseas need to develop stronger capabilities for formulating investment strategies and establishing brand names. And, according to Karin Finkelston, director of the International Finance Corp's China operations, they also need to work on research and development (R&D), build marketing and distributing networks and improve human resources management. China has become one of the leading outward investors among developing countries, but is still not in the same league as the major global players.

China's total outward foreign direct investment (FDI) has averaged more than US$3 billion annually over the past 5 years, a level comparable to that of Ireland or South Korea.

According to the Ministry of Commerce, China's outward FDI in 2004 totalled US$3.6 billion. The figure, which does not include Lenovo's buyout of IBM's PC business, makes up less than 1 per cent of the world's total.

Hong Kong, the rest of Asia and tax havens remain the main destinations, but France, the United States and Germany are attracting more and more Chinese companies.

There are quite a few success stories. Shenzhen-based telecommunication equipment maker Huawei is now able to challenge big name companies such as Ericsson in the international market.

But failures also abound. Chongqing-based motorcycle maker Jialing ventured out into the Southeast Asian market as early as 1982. But its attempt to establish itself in the market fell apart. In recent years, home appliance makers Konka and TCL have had similar experiences.

Experts said the companies were driven overseas by cut-throat competition in the domestic market.

But most enterprises to have ventured outside China have done so with no clear strategy. Companies have been massively underprepared for operating in overseas markets, said Xing Houyuan, a researcher with the China Academy of International Trade and Economic Co-operation, a think tank under the Ministry of Commerce.

Almost all underestimated the operational difficulties of working in overseas markets, she said.

However, according to Joseph Battat, programme co-ordinator for China with the World Bank's foreign investment advisory service, these failings are the inevitable price paid by foreign investment pioneers.

"You are going on a learning curve. that's fine. When you are going on a learning curve, you make mistakes and you learn from your mistakes," Battat said. "If you look at American companies investing overseas in the 1950s and 1960s, they faced similar issues that Chinese companies face today."

However, Battat said, cultural differences could be a particular challenge for Chinese enterprises operating overseas.

The average Chinese businessperson, unlike his\\her western counterpart, is not so much attuned to cultural differences because they are generally not exposed to different cultures.

That could be a problem in issues such as human resources management and product adaptation.

(China Daily 04/23/2005 page2)

Close