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China firms spread wings, no champions for now

By: | at 08:00 PM | Channel(s): International Trade  

Chinese firms are fanning protectionist flames with their drive to buy companies abroad, but they are a long way off from becoming global champions.

From oil major CNOOC to appliance maker Haier and two auto firms, China is reviving the same fears of job losses and of national icons falling into foreign hands that Japan’s corporate expansion sparked in the 1980s.

But business experts say inexperience, weak branding and technological shortcomings mean China Inc. is bound to trip as Beijing prods often poorly run firms to seek resources, markets or know-how abroad. Few are marked for success any time soon.

“Levels of overseas investment and strategic planning and management standards are comparatively low,” concedes Xing Houyuan, dean at the Chinese Academy of International Trade and Economic Cooperation, a think-tank under the Commerce Ministry. “Failure is par for the course.”

The statistics are telling.

Since China embarked on a “Going Out” strategy to balance soaring inward investment a decade ago, China has invested $37 billion abroad—two percent of the global sum and just over half what China receives in foreign direct investment each year.

Much has been undertaken by mainly uncompetitive state-linked firms that have overpaid for assets thanks to subsidized loans from state-owned banks. Many acquisitions have yet to pay off. Chinese TV and cellphone maker TC L, for example, is struggling to turn around French assets it acquired.

On the plus side, more and more Chinese firms are starting to compete globally, said Andrew Grant, who heads McKinsey’s Greater China practice. Technology firms such as ZTE and Huawei Technologies are already making names for themselves overseas.

“What has been underreported has been the emergence of some incredibly impressive Chinese private companies,” Grant said.

New breed

The consensus among experts is that if China wants to make the most of its foreign forays it needs to unleash the dynamism of a new breed of young entrepreneurs by allowing them equal access to financing, alongside state firms.

Private firms accounted for just 10% of China’s accumulated investment abroad at the end of 2003, official figures show, but Xing said that share may rise to half by 2010.

Chinese manufacturers, keen to crack new markets as demand at home cools, are also making headlines. Nanjing Automobile beat rival Shanghai Automotive Corp. last month to scoop up the assets of bankrupt British auto maker MG Rover.

Some point to computer maker Lenovo’s use of three US.private equity firms to help finance the $1.25 billion acquisition of IBM’s personal computer business this year as a sign of increased savvy. Lenovo also kept the upper echelons of IBM’s western management in place.

Analysts have also been encouraged that Haier dropped out of a bidding war for US appliance maker Maytag, rather than risk overpaying—although they fear CNOOC may fall into that trap in its eagerness to snare US oil firm Unocal .

Long way to go

Skeptics say it could take up to a decade, or longer, before China Inc’s presence is tangible beyond China’s borders.

“There is no record of Chinese companies successfully acquiring overseas companies over the past 10 years,” said a Chinese analyst at a leading investment bank.

“It could take five years for us to see global Chinese champions because, by then, they should have the expertise,” she said. “But building global brand names will take longer.”

China itself acknowledges it has a long way to go before its firms become a beacon for the rest of the world.

“Although we have some successful cases, investment levels are very low and some firms have become a breeding ground for corruption,” said Li Haiyan, a senior official from the powerful National Development and Reform Commission.

“We need to improve our companies to develop big brands and ensure more private companies go abroad,” he told a seminar. (Reuters)