China Inc. on the Global Stage

Chinese companies’ global expansion is one of the most hot-off-the-press topics of the global economy in recent years. What are the new trends and challenges for these companies’ globalization? And how to manage the challenges to be a world-class company?

By Fang Ying, Senior Writer, China Business Knowledge @ CUHK

These issues were brought to the fore in a keynote speech delivered by Professor Anil K. Gupta, Michael D. Dingman Chair and Professor of Strategy, Globalization and Entrepreneurship, Robert H. Smith School of Business, The University of Maryland.

The keynote speech was part of the signature conference themed “China Business in the Global Economy” held by The Chinese University of Hong Kong Business School, in celebration of its 50th anniversary of MBA programs, on September 9, 2016.

Prof. Gupta is widely regarded as one of the world’s leading experts on strategy, globalization and entrepreneurship. Ranked by Thinkers50 as one of the world’s “most influential living management thinkers,” he is one of only 3 professors in the world, out of over 25000 worldwide, to have been elected by his peers as a Lifetime Fellow of all three of the most prestigious academic bodies in his field – Academy of Management, Strategic Management Society, and Academy of International Business.

With the topic “China Inc. on the Global Stage”, Prof. Gupta’s speech shed light on the past and future of Chinese companies’ outbound investment, offering his insights to some of the burning issues in the field.

Rapid Growth in China’s ODI

According to Prof. Gupta, due to China’s recent economic slowdown and the overcapacity existing in some of the industries, such as construction, infrastructure and real estate, the need for the inbound investment in China would not be able to grow at the same pace as in the past. Therefore, it makes good sense for Chinese companies to look for new growth opportunities outside of the country.

Chinese companies’ outward direct investment (ODI) activities can be dated back to late 1990s, when the Chinese government started to encourage Chinese firms to expand investment abroad to gain global competitiveness. As a result, China’s global outward investment has been on an impressive growth trajectory over the past decade and overseas acquisitions have become an increasingly important means of international expansion by some Chinese corporations.

United Nations Conference on Trade And Development (UNCTAD) statistics show that China’s ODI reached a record high of US$ 120 billion in 2015, almost the same level as its inbound foreign direct investment (FDI) (i.e., US$ 126 billion).

Prof. Gupta predicts that the rapid growth of Chinese ODI is likely to continue and may overtake its FDI by the end of this year.

“It would not be surprising to see China’s outbound investment numbers exceed the inbound investment numbers in the year 2016,” he said.

Is China Buying Up the World?

Does this impressive growth in China’s ODI mean that “China is buying up the world”, as many have commented?

The notion is a misconception and the reality is quite different, said Prof. Gupta.

He pointed out that Chinese ODI is a relatively new phenomenon. In 2015, China’s outbound investment was roughly the same, on an annual basis, as the outbound investments of Germany and Japan. However, it is worth noting that the Chinese economy is twice as large as the Japanese economy and about three times as large as the German economy, the professor explained.

“Because China is a relative newcomer on the global stage, when adjusted for GDP, there’s a huge gap between Chinese presence on the global stage versus the presence of US, Japan or Germany,” said Gupta.

“No one says that Japan, Germany or USA is buying the world, but actually their ODI stock numbers are significantly higher than that of China.” – Prof. Anil K. Gupta

In addition, compared to other large economies, China’s ODI stock, which is an effective indicator of the total level of a country’s outbound investment, is relatively small. Building on data from UNCTAD, Professor Gupta noted that China’s ODI stock was US$730 billion in 2014, which is smaller than that of Japan (US$ 1193 billion), Germany (US$1583 billion) and USA (US$ 6317 billion) in the same year.

“If you look at the raw numbers, Chinese ODI stock was around US$850 billion by the end of 2015, as compared to that of US which was somewhere near US$ 7 trillion,” said Prof. Gupta.

At the same time, China’s ODI stock as a share of GDP remains relatively small at 7.3% in 2014, as compared to Japan (26%), USA (36%) and Germany (41.1%).

“No one says that Japan, Germany or USA is buying the world, but actually their [ODI stock] numbers are significantly higher than that of China,” commented Prof. Gupta. “So I would say that the idea that “China is buying up the world” is not supported by the benchmarking data.”

However, it would be fair to predict that China’s ODI stock gap with these large economies will lessen over the next five years, and that within 10 years’ time, China will likely be number two next to US in terms of ODI stock, he said.

“It would take some time for China Inc. to have a big presence on the global economic stage,” Prof. Gupta said.

Future Trends for China’s ODI

When it comes to the key motivations driving China’s ODI activities, people often say that the need to control natural resources needed by the Chinese economy has been one of the biggest factors. However, Prof. Gupta refuted the notion.

“There is no way China Inc. could acquire all or even a significant share of the natural resources that China as a country needs,” he said, noting it can only acquire a fraction of those resources. “It’s like acquiring a beach for fear of not being able to swim anywhere in the world. The acquisition of natural resources was driven less by strategic logic than by the fact that state-owned enterprises had a lot of cash and were eager to do something with that money burning a hole in the pocket,” Gupta noted.

According to Prof. Gupta, over the last two years, the key drivers behind China’s ODI investment have shifted and now include access to markets, technologies and brands, as well as strategies to scale up for global success and national security needs.

Speaking of the trends in China’s overseas investment, he said that from 2005 until about 2014, the bulk of Chinese outbound investment went into sectors such as natural resources, real estate, and agriculture.

But the trend has now changed, said Prof. Gupta.

“Over the last two or three years, the game has shifted rapidly towards acquiring technologies, and brands, and so on. These acquisitions require much more complex organizational skills,” said Prof. Gupta.

This means bigger organizational challenges for Chinese companies, who are still working to manage them.

In terms of the destinations of China’s outbound investment, Prof. Gupta believes that as the target sectors are shifting from natural resources to technologies and others, there is also a significant shift of target regions moving away from developing and emerging economies to the developed economies in US and Europe.

For example, according to South China Morning Post, Chinese investment in Europe increased by 44% in 2015 and could jump dramatically this year.

However, Prof. Gupta noted that in some sectors, there are barriers which prevent China accessing the US and Europe markets. He cited technology companies such as Alibaba and Baidu as examples. While dominant in China, these companies are finding it difficult to make their way into established markets outside of the country.

So these corporate giants are planning to expand internationally by acquiring in India, a market often touted by the media to be the next China. In September 2015, Alibaba Group and affiliate Ant Financial invested about US$680 million in Paytm, one of India’s largest e-commerce companies, acquiring a stake close to 40%.

Facing a Steep Learning Curve

Nevertheless, global expansion through mergers and acquisitions (M&A) presents a considerable challenge for Chinese companies, whether private or state-owned enterprises (SOEs), according to Prof. Gupta.

“Broadly speaking, across all M&A deals globally, including those by American, European and Japanese companies, what percentage end up being successful? Less than 50%. And, the success rate for cross-border M&As is even less. When you’re doing cross-border M&As, you know less about the things you are buying, so the risk of buying a wrong company, buying it at a wrong price, and not being able to integrate and manage it effectively post-merger goes up,” said Prof. Gupta. “China is relatively new to cross-border M&As, which raises some serious questions, particularly for SOEs,” he said.

“These SOEs have the financial capital, but do they have the organizational capital?” he asked.

Prof. Gupta further highlighted several challenges that Chinese companies would face when going global, such as organizational and culture due diligence, cross-border post-merger integration, managing across diversity and information transparency, and political sensitives in host countries.

To that end, Prof. Gupta shared four guidelines for Chinese companies to overcome their lack of experience and improve the low odds of success in cross-border M&As.

Go Slow with Acquisitions in Technology or Brand-Intensive Sectors

Chinese companies should go slow with their acquisitions in technology or brand-intensive sectors, which require highly developed organizational skills at managing a distributed global enterprise.

Learn to Walk Before Running

They should build skills at managing a distributed global enterprise before making acquisitions in technology or brand-intensive sectors.

Learn Via Partnering and Start with Non-Controlling Minority Stake

Companies should use fine-grained analysis of the value chain to figure out the low risk-high return opportunity; and convert intra-China partnership with foreign MNCs into global partnerships.

Induct Highly Experienced Chinese Returnees into the Leadership Team

Chinese companies should cultivate and leverage senior executives in acquired companies to lead globalization efforts.

Building on these ideas, Prof. Gupta believes that more Chinese companies would eventually grow into world-class companies.

Cited Huawei as a positive example of how a Chinese company built systematic capabilities to compete on the global stage, he said: “Huawei started to go global in late 1990s. They have built pretty strong organizational skills… I would say that 90% of its moves are right moves rather than wrong moves.”

“Of course, over the coming decade, I expect that there would be more Chinese companies following Huawei to develop their capabilities and to be important players on the global stage,” concluded Prof. Gupta.