MNCs in China Face Big Challenges (Part Three)
Since the early 90s, foreign direct investment (FDI) in China has grown dramatically, and, in general, consistently, year on year.
For the purpose of this discussion, let’s put aside the question of how much of this FDI was actually Chinese companies round-tripping and coming back home as foreign investors by using Hong Kong and other offshore subsidiaries or affiliated entities incorporated in the British Virgin Islands, the Caymans, etc.
My focus in this series of posts is MNCs and other international companies. The reality is, for the past 20 years or so, we have seen a continuing influx of these companies, through wholly-owned foreign enterprises (WOFEs), joint ventures, sourcing deals, rep offices, etc.
It would be a mistake to assume that this trend will continue unless the Chinese government renews the process of economic and financial reform bearing in mind the needs of local as well as foreign-invested companies.
Compared to 20 years ago, China doesn’t really need the capital of MNCs. Its needs for technology are mixed: in some fields, the appetite remains big; in others, it’s old hat. Capital and technology are relatively easy to value and price into the equation when you’re doing a joint venture or investment project.
The new wave of what China most urgently needs from MNCs is much more difficult to value, and it’s not usually for sale as a separate and distinct offering. Simply put, that is management systems and processes applicable to, and needed by, global enterprises.
There is a widespread perception of push-back against foreigners and foreign enterprises in China of late. Much of it is understandable, given many years of preferential treatment, tax incentives, etc.; and the inevitable desire among Chinese enterprises for a more level playing field.
A balanced playing field is of course a good thing, but there needs to be an effort to re-engage MNCs and other foreign investors with a renewed red carpet welcome.
As appealing, important and promising as the China market is to international companies, it is also fraught with far more risk, complexity, and competition with local champions than it was ten years ago. Complacency among policy-makers regarding the evergreen appeal of the China market to foreign investors would be a big strategic mistake.
We will see a new wave of Chinese companies with more carefully considered “going global” strategies emerge within the next few years. Their leaders will have learned lessons from the first wave of Chinese companies, many of whom failed.
Among the keys to a successful “going global” strategy for larger Chinese companies, access to sufficient capital will generally not be a big problem. The biggest challenge will be in finding, hiring, and teaming up the right talent.
Among the MNC China CEOs that I talk to, the feedback is very mixed. Some continue to be upbeat about their business prospects in China. But many more than in years past express serious concerns about their company’s viability in the current business and policy climate.
Let’s not forget, they have options.
In addition, there is an enormous structural change taking place which will strain the resources, talent, and knowledge of almost all MNCs, which is the massive shift, already well underway, whereby 40-50 Chinese cities will house roughly half of China’s affluent consumers, as a result of unprecedented ongoing mass urban migration.
This is in sharp contrast to the year 2000, when all but the most advanced fast moving consumer goods companies counted the number of their key urban markets in China on one hand (Shanghai, Shenzhen, Guangzhou, Beijing).
To tackle the new reality, most MNCs will need to change strategy as well as tactics at both the central and local level. If official foreign investment policies are not in alignment, this will further raise the level of the challenge they face.
Bottom line: what Chinese companies need from international companies is quite different from 15 years ago. But that’s very different from saying that they don’t need or want anything at all.
It’s time to decide what the new priorities are, and find ways to send a clear signal.
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