Siah Hwee Ang on Chinese businesses and the challenges stemming from their foray into international markets

By Siah Hwee Ang*

China’s overseas direct investment (ODI) statistics have been on the rise in the last few years - a sign of the internationalisation of the economy and of its businesses. 

In the period January-July 2015, China’s ODI jumped 20.8 percent on a year-to-year basis to US$ 63.5 billion. Eventually, these ODI statistics will surpass those of inward foreign direct investment (FDI) figures. The jury is out on when exactly that will happen. 

Expanding overseas 

Aided by various developments and incentives, Chinese businesses are flooding into international markets. 

Most prominently, recent trends are showing that Chinese manufacturers are expanding abroad and eagerly upgrading their industrial capabilities. 

To some extent, this movement is due to rising labour costs at home and in some industries due to the issue of over-capacity. A Boston Consulting Group report in 2014 has suggested that manufacturing costs in China are fast approaching those in the US. Manufacturing costs is a composite index based on wages, labour productivity, energy costs and exchange rates. 

India has become a main benefactor of the Chinese trend for manufacturers to shift some of their plants abroad. India is a significantly lower-cost alternative and also provides a large potential customer market for these Chinese businesses. Further, lower export taxes also means that India is a good platform for exporting into other adjacent markets. 

Challenges for Chinese businesses abroad

New Zealand companies in general have found the Chinese business environment to be “difficult to understand”. Part of the reason for this is the fast pace of change in the Chinese business environment, to comprehend the environment at any given time.  

We are not alone.

Chinese businesses are also facing challenges themselves as they expand abroad. Everywhere they go, they run into cultural differences in business, from the US to Australia, from India to Africa. 

As some Chinese businesses move into India, they find under-developed infrastructure to be a major challenge for their ambitions. It is unknown how far the Chinese government and businesses will go to get involved in developing the infrastructure in India to craft a sizable market. They have done so in Africa in exchange for commodity supplies. Other economies may not be as forthcoming in opening their doors in this way. 

For these reasons, the US remains the largest ODI destination for Chinese businesses. 

It is no surprise to see that even emerging markets can pose a challenge for Chinese businesses despite their home country experience, which would suggest a familiarity with less developed institutions. Institutions of transparent developed economies will continue to be a safer bet in many industries.  

Will we see more Chinese ODIs? 

The last few years have witnessed several major acquisitions conducted by Chinese businesses, for example Lenovo’s acquisition of IBM’s personal computer business and Geely’s acquisition of Volvo. 

Yet, in the grand scheme of things, these major business acquisitions by Chinese businesses are not as common as one would expect. This explains why Chinese cross-border acquisitions in the last decade still lag behind those of Japanese firms. 

Many Chinese acquisitions are also initiated by state-owned enterprises and there tends to be a focus on oil and minerals, mining, and utility and energy - commodity-based acquisitions. Financial acquisitions are on the rise. Acquisitions in industries where private enterprises have a greater presence are lagging behind though.

As the imperative for Chinese businesses to move abroad increases, there is a need to consider acquisition as a possible international entry mode despite not having the relevant experience and being led by state-owned enterprises. 

With pressures in the domestic market and the speed at which acquisitions offer opportunities for expansion, we should see more of acquisitions on the horizon.

Acquisitions or not, we are likely to see more ODIs coming from China. 

For one, there are the ‘One Belt’ and ‘One Road’ initiatives that will open up greater opportunities for trade. There’s also the 21st Century Maritime Silk Road. Then there’s an industrial upgrading exercise of “Made in China 2025”. Not to forget the enhanced free trade agreement between China and ASEAN that is likely to happen any time now. 

The sheer number and size of ODIs coming from a US$11 trillion economy will mean these will reach every parts of the globe. For a smaller country like New Zealand, it can be daunting. As we scrutinize ODIs from China, we need to realise that we are part of an eco-system in which we have to participate.

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*Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with Asia.