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Worldcrunch

A Few Simple Tips For Chinese Companies With Global Ambitions

Chinese multinationals are growing faster than their competitors anywhere else in the world, but they still have a long road ahead until they can become truly global.

Article illustrative image Partner logo China's business capital (Mike Behnken)

SHANGHAI - Ten years after joining the World Trade Organization, foreign investments by Chinese firms total $312.4 billion, with an annual average increase of $60 billion over the past four years. This has made China’s multinationals the world's fastest-growing.

However, the Chinese multinationals still have a long, hard road ahead before they can transform themselves from “transnational” to truly “global” and the lasting success that comes with it. The challenges they are facing are four-fold:

1. An investment strategy adapted to globalization
According to the World Investment Report 2012, the average Trans-Nationality Index (TNI - an economic measure of how much of the business is done outside the home country) for the top 100 trans-national corporations (TNCs) in the non-financial category is around 60%. Nine Chinese TNCs made their way onto the list, but their average TNI is only 24.5%. This means, in comparison with advanced countries’ global giants, Chinese companies’ ratios of their foreign assets, foreign sales, as well as foreign employment are still very low. This is basically because they lack the ability to adopt a clear and long-term global operating strategy.

2. Adapting the management structure for a global operation
Since the 1990s, the ownership structure of multinationals around the world has changed. While their overseas shareholders have gradually increased, their international stakes rise continuously. In terms of corporate governance structure, many multinationals have established an international board of directors. As for management structure, many global companies have adopted an international network management. This sort of managing structure creates an effective balance between centralization, decentralization and coordination, so it can respond in a more timely manner to the changing market.

In China though, multinationals remain mostly in a centralized management mode.

3. Ethics
In this century, responsible business is very important. Apart from maximizing shareholder value, it’s expected that transnational companies take some responsibility for the society and the environment they operate in, whatever the country.    

Compliance and anti-corruption policies are fundamental. Business ethics are the primary responsibility of a business. Though many Chinese multinationals are taking their responsibilities seriously, many others indulge in fraud, bribery, corruption and are also lacking in safety and environmental issues.   

4. High-risk areas
Many cases have shown that Chinese overseas investments can suffer from unexpected circumstances and that Chinese companies aren't prepared for these circumstances. In January, rebels in the Sudan kidnapped 29 Chinese employees. Four days later, another 25 employees were hijacked by armed tribes in Egypt.

Major projects have been forced to stop due to political conflicts. For instance the Myitsone Dam project in Myanmar was halted in September 2011 due to Myanmar's changing political situation.

High-risk areas are often underdeveloped and have rich natural resources. Chinese companies are usually too dependent on the support of the ruling authority while possessing insufficient understanding or paying little attention to local interest groups. This puts them and their workers subject to regional or political conflicts.

So what is the key to success? Through a series of interviews and surveys, we found that some Chinese firms had been quite successful in their foreign expansion. These are four lessons we can learn from them:

1. Controllable risks
High-risk areas are often the places where the best business opportunities lie, where local authorities often lack legitimacy and where corruption prevails and the nation is polarized.

It is therefore particularly important for firms interested in investing in potentially risky areas to undertake sufficient risk assessment. Not only is it necessary to understand and to be capable of dealing with the local authority, but also with the local non-governmental organizations, forces or even opposition.

If it’s impossible to control and defuse the potential risks, the investment should be vetoed. But if the investment is green lighted, it is highly important to adhere to responsible guidelines. Bribery of the local authorities should be avoided and it is also vital to maintain good relations with local NGOs and powers.    

A win-win attitude
Economic globalization in full swing means that international conditions for foreign investment have undergone fundamental changes. The era where established multinationals could plunder resources through force or unfair trade is long gone. In this new era, TNCs can succeed only if they follow responsible commercial behaviors and implement the win-win principle.

Nowadays, it would be difficult for a host country to accept a foreign investor who is only considering its own economic interests.

Joint-ventures
Developing new technology and products as well as building a global industrial supply chain has become increasingly important. Chinese multinationals need to enhance cooperation with each other as well as with foreign firms, whatever the sector.

Several successful examples in recent years, such as the joint venture between Shanghai Automotive and General Motors, as well the one between Chinalco and Anglo-Australian mining giant Rio Tinto, show that mutual cooperation can be a most effective strategy. Not only does the cooperation make up for China’s lack of experience in international investments, it also defuses other countries’ resistance to Chinese state-owned companies’ investment.

Cultural integration
Chinese companies have to integrate into the world. How well a firm is integrated locally is the biggest challenge -- and biggest opportunity -- when going global.

In 2008, Zoomlion, the Chinese manufacturer of construction machinery and sanitation equipment acquired Italian machinery manufacturer CIFA. Last year, the Italian President awarded the Leonardo Award to Zoomlion in recognition of the company’s contribution to Italy. The Italians realized that the Chinese were neither an “expeditionary force,” nor there to build another Chinatown. 

This example demonstrates that Chinese companies have to follow international rules, integrate with the local culture and become a localized business.

To this end, they have to be inclusive in respecting the local culture, to understand the local business language and bridge the cultural differences between East and West with an open mind.

International investment is not economic colonization. Only if the multinationals share a common vision and establish a common interest with the host countries, can they be integrated harmoniously and achieve true development.

*The author is the Director of Beijing New Century Academy on Transnational Corporations

Read the full article in Chinese in Caixin. The English version has been condensed and edited.

Photo - Mike Behnken

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About this article source Website: http://www.caixin.com/

Caixin is a hub for financial and economic news in China. Serving high-quality and original content, Caixin.cn focuses on key financial and economic information.

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