Challenges and Opportunities for Chinese Investment in the U.S.
by Joel Backaler
Despite a series of recent headlines citing the various challenges underlying the Chinese economy, China’s executives and entrepreneurs are more interested in investment opportunities in the United States than ever before. I have heard as much during recent travels to China from executives at Chinese companies like Baidu, Wanxiang, Huawei and Xiaomi. The highlight of these travels was a closed-door executive forum for more than 200 Chinese senior executives. The participants were primarily executives from Chinese companies who were either planning to invest overseas or had existing operations in international markets.
While they did not seem alarmed by slowing GDP growth, what was intriguing was discussions about the impact of current economic conditions on their overseas investment plans. In the past, I have most often heard Chinese executives express their desire to expand overseas in order to gain access to advanced capabilities (i.e. technology, talent, management know-how) or get closer to customers in international markets. But during this recent trip, many of the participants named “market diversification,” i.e. beginning to lessen their reliance on the domestic market, as a key reason why they sought international opportunities in markets like the U.S.
The U.S. is Open for Business
Their investment is welcome. At the state level, American governors greet Chinese investment with open arms, hoping to fuel job growth, increase tax revenues, and improve local infrastructure. Federal authorities are generally open to Chinese investment with efforts led by SelectUSA, but there will always be questions on Capitol Hill about potential national security, cyber-security or anti-competitive concerns. As a result, many Chinese executives fear that their investment plans may face scrutiny from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee authorized to review transactions that could result in control of a U.S. business by a foreign person. The previous cases of Huawei, Sanyand and CNOOC are often cited as justification for these concerns. However, Chinese firms are much more likely to face challenges in the U.S. for reasons of their own making than government intervention.
Challenges to Overcome
At a basic level, Chinese companies lack the decades of international business experience that competitors from markets like the U.S., EU and Japan enjoy. Many Chinese companies are quite large domestically – 95 companies on the Fortune Global 500 ranking originate from China – yet very few operate truly global businesses with operations outside of China. Chinese firms’ general lack of international business experience often leads to costly missteps that can damage their reputation and waste millions in investment capital. Some of the more common missteps include (i) overemphasis on short-term sales performance above all else (ii.) failure to empower overseas management to make important decisions, (iii.) reluctance to hire overseas advisors in critical areas such as legal, management consulting and financial services and (iv.) unwillingness to invest in public relations, marketing, and advertising to build their global brand. There are certainly others, but the four listed above are some of the most common pitfalls regardless of industry or location of investment.
Solutions to the Problem
There are several actions that Chinese companies should take to improve their likelihood of success as they expand to the U.S. First, fill senior management roles at their U.S. subsidiary with experienced international managers. Expat Chinese general managers are often preferred to run the operation, but the Chinese GM should be surrounded by a team with a proven track record of building businesses in the U.S.
Second, hire professional services firms to understand where to invest and how to set up and operate the overseas entity. Many Chinese firms incorrectly turn to the government for advice on where to invest. In the U.S., the Foreign Commercial Service and SelectUSA are legally obliged to remain neutral and cannot recommend investment opportunities in one state over another. State governors and local government investment recruitment offices are incentivized to attract investment only to their state. An unbiased third party such as a professional services firm is the only way Chinese companies can get the advice and guidance they need.
Third, Chinese companies should invest in long-term oriented brand-building activities to proactively shape and manage their reputations so that government, media, and the general public clearly see the benefits of their investment. A singular focus on short-term sales – competing on price alone without a strong brand and corporate reputation – leaves Chinese firms open to anti-Chinese sentiment and the politicization of future investments.
Close the Gap
Chinese companies have a tremendous opportunity to invest in the U.S. and strike a natural “win-win” where they can profit and also contribute to positive economic and social outcomes. However, the general lack of international experience means that Chinese companies cannot do it alone. They need a proven team on the ground, savvy local advisors and a nuanced management approach to take into account the unique characteristics of doing business in the U.S. market. Without taking into account these considerations, Chinese companies will struggle to transform their ambitious plans into thriving global businesses.
About the Author
Joel Backaler is Author of China Goes West: Everything You Need to Know About Chinese Companies Going Global. He is also a Forbes columnist, Associate Vice President at Frontier Strategy Group, and a member of the National Committee on United States-China Relations. Follow him on Twitter @JoelBackaler.