We know Chinese firms are expanding overseas at an unprecedented rate, but what is driving them them to do so?
It is well established that Chinese companies are investing abroad in ever greater numbers, but many would question the reasoning for this when China remains a booming market, enjoying rocketing growth and with many underdeveloped regions in the west of the country, and as a lower middle income country has plenty of “room” for further growth before reaching western levels of prosperity. Below I examine the carrots and sticks which are influencing Chinese firms in their quest for new markets.
Offshoring: for so long China has been the beneficiary of this trend, now rising wages in China mean that firms particularly in the textile and footwear industries or “low-tech” industries are looking to relocate to less expensive regions. Books like The End of Cheap China by Shaun Rein have made clear that the days of dirt cheap labour and low cost manufacturing goods are over. Even with large numbers of rural workers ready to work in factories, the rising wealth of the country means it is unacceptable to pay people so poorly. At the same time the Chinese government wants to move away from “low-tech” manufacturing to move to the more advanced version. Offshoring means that the company and value remain Chinese, even if the work is not done in the country. As wages and costs rise in China it will mean certain industries considering relocating to cheaper climes.
Technology and brands: ten or even five years ago Chinese exporters and manufacturers would have been primarily concerned with keeping prices low and ensuring costs were kept to a minimum, now there is a feeling prices are going to rise and managers, CEOs and captains of industry are looking to innovate products and build a brand, all with the aim of developing long term revenues. However innovation and brand building is a long and difficult process, as well as highly uncertain. Thus far no major Chinese firms have an international track record in this specialised area. Chinese firms have a fantastic record in size and scale, but have failed to develop any world class brands. But they do have cash and so it is often much easier for firms to go out and buy a brand in Europe and the USA than spend years in the uncertain hope of doing it yourself, recent recessions in the west have conveniently lowered prices and created bargains for Chinese firms across the markets of North America and Europe.
Competition at home: while economic growth in China is still high, so is competition, a newly empowered population has unleashed its entrepreneurial spirit which has meant new businesses constantly starting up and disrupting the market, good for consumers, but this hothouse environment makes it difficult to make a profit or increase market share as result. Going abroad can be easier, other markets, particularly in Africa and emerging Asia are undertapped by western competition and for a Chinese business offer higher returns even once political risk factors are taken into consideration. Chinese companies often find overlooked new markets and reap the rewards of an open field, helped by easy access to supplies from home.
China’s demand for resources: this is the one of the original reasons for Chinese ventures going abroad, copper, oil and coal are all in big demand and the government want to gain access to these vital resources. Although some commentators have posited that the Chinese government want to “control” resources, this is an exaggerated fear as so much of the world’s commodity trade is done by private companies, it would be difficult in the extreme for any Chinese companies to gain an overwhelming market share in any commodity to “control it”. However, that does not mean they do not want some influence over the price and supply of key resources, naturally buying access to the commodity is the best way to do that.
Empire building: Wang Jianlin founder of the Dalian Wanda Group spoke openly of his desire to develop a worldwide empire, interestingly he said that targets and growth would be easier at home but that he relished the challenge of going global and holding assets in multiple territories. This statement underscores the fact that company CEOs are naturally ambitious and once you have been a huge success at home then of course going international is the next big challenge. Of course there might well be good reasons to expand abroad to widen potential market share, purchase companies which can be synergised with your own, but the glory of having a globe spanning, 24/7 business empire is an underestimated factor in the growth of large companies.
Risk Management: going overseas is also a hedge against downturns at home, there is always the fear lurking in the minds of investors in China and overseas economic observers that China will have a “hard landing” (in other words very slow growth) or worse; and this thought must be at the back of the mind of many Chinese business people as well, even if it was not always expressed openly. In any case for any large company, sticking to a single country, even one as big as China is poor strategy in the long run and diversifying your asset base across multiple countries makes sense in terms of “not putting all your eggs in one basket”. So the growth of Chinese companies will naturally lead them to spread their wings and avoid geographical over-concentration.
As a developing country China has been a trailblazer in expanding abroad while still a relatively poor country, but where they have led, expect others to follow, we can expect to see more overseas investment activity from Indian, Vietnamese and Malaysian companies in the coming years.
Reblogged this on EMerging Equity.