Once deemed “the world’s factory,” China has transformed its modern legacy while continuing to thrive beyond expectation despite the international economic crisis. Now a global investor and capital exporter, China’s business relationship with the US is facing a shakeup, one that may encourage the establishment of major Chinese-owned enterprises on US soil and facilitate new economic opportunities for both sides of the fence. Song Jin, a veteran in private equity and management consulting, is also a New York-based investment strategy trailblazer who assists Chinese entities seeking entry into the US market through the acquisition of companies that are in some form of financial distress. This interview with Mr. Jin kicks off a blog series on Chinese investment and expansion in the US, incorporating perspectives and analysis from both sides of the fence. To learn more about why a company structured like Apple would be the perfect Chinese acquisition, where China’s current corporate ethos has room to evolve and how Mr. Jin has become a hot commodity, read on:
Let’s start with your background. You were educated in both the US and China, receiving your MBA from Washington University in St. Louis and Ph.D. from Nanyang Technological University. So, what led you to make the decision to forge a career in the US rather than returning home to China, where your educational and professional achievements are a hot commodity these days?
Yes, I was born in China and went to undergrad at Xi’an Jiaotong University before coming to the US for my MBA. Following that, I worked for Deloitte Consulting and for a couple of years now I’ve worked for a US private equity advisory firm focused on investment strategy, due diligence, and managing portfolio companies. During my time with this firm, I’ve discovered that there is a unique opportunity for Chinese companies to take advantage of the US economic crisis. A lot of US companies have good brands, good products, good engineering and pretty good design; however, they are also in some form of financial distress. On the other hand, China is like the world’s factory now. The margin each Chinese company gets from products sold overseas is actually pretty low- 3 to 5 percent- and that is because Chinese companies don’t have [strong] brands and designs. The only competitive advantage for these companies is cheap labor, and you cannot compete forever with this model. Now, there’s a great, once in a lifetime opportunity for these Chinese companies to move up by coming to the US and acquiring US companies. Through acquisition, they can easily gain access to the US market by acquiring established US brands and utilizing US marketing, R&D, and sales and distribution networks to quickly move up the supply chain.
In terms of why I haven’t returned to China…I have thought about this question a lot. Some of my friends have gone back and been very successful in China, so of course I ask this question to myself nearly every day. But, what I’ve tried to do is [examine] my strengths and weaknesses in terms of what I can offer to my future clients. If I go back to China there are only two types of opportunities I can have: I can either work for a foreign company currently operating in China or, I can go to work for a Chinese company that is trying to compete with those foreign companies already in China. The advantage that I bring to the table here is that, because of my education and working experience in the US, I have a more Westernized way of doing business, which is something that a lot of Chinese companies and foreign companies operating in China need. However, doing business in China needs connections, and because I left China more than ten years ago- even though I go back regularly to visit my family there- it is different than if I had stayed permanently. If I returned, I’d have to recreate those connections.
If I remain here in the US, there aren’t many people who have my skills that can help Chinese companies expand to the US. So, in choosing to stay here in America, I probably have less competition compared to if I returned to China.
The typical conversation about US-China business relations tends to focus on US foreign direct investment opportunities in China. But, as you pointed out, the landscape seems to be changing and Chinese companies are indeed heading west. In fact, China’s outbound investment exceeded FDI for the first time this year, shifting China’s role in the global economy. What factors do you think propelled this shift?
There are a few factors. One very key point is the trade imbalance. Over the last ten or twenty years, China has been running a surplus; they export more product than they import, so they have a huge amount of reserve money. China is now constantly seeking investment opportunities other than just buying US treasury bonds. In other words, the Chinese government now has money and they need to invest it somewhere that will generate a higher return than US treasury bonds can.
A second point to consider is China’s strategy for outbound investment. What do they need? Natural resources. China’s appetite for commodities is caused by its huge growth, and China itself does not have enough natural resources to feed its demand. So, Chinese companies are going around the world- Africa, Middle East, South America, and even Russia- to try to secure desperately needed iron ore, oil and other natural resources. Most of China’s foreign direct investment falls into this category. For political reasons and national security issues, there isn’t actually a lot of these types of transactions for US natural resources. China has attempted it in the past but was blocked by US Congress. So, now they’re being very cautious. At this point, China has partnered with almost every country except for the US in terms of natural resources.
Let’s talk about investment opportunities that China should be focusing on now.
[To address this generally], China should focus on competing with multinationals involved in low-end industries, ones that have already established manufacturing facilities in China. For example, electronic products like laptops, cell phones, digital cameras and TVs. China is the world’s number one producer of these items already. However, there are not many Chinese brands associated with these items. Consider Apple. In the last three months, Apple sold 10 million copies of their iPhone. But, those iPhones are all made in China; they’re not made in the US! It’s a Chinese export, but not a Chinese product. So, China knows how to make these products, but they don’t know how to brand them and China doesn’t necessarily have very good engineering and R&D. Some of China’s engineering and R&D is pretty sophisticated, but it isn’t the most advanced or most modern [in the world]. These types of Chinese companies that already manufacture [American] products are the ones that are in a very good position to come and make some acquisitions; they can buy within the industry that they’re already involved in. And, since these US companies already have very good brands, distribution channels, R&D and engineering- in addition to their massive manufacturing facilities in China- it would be a perfect match.
What are some of the challenges that Chinese companies face when doing business in the US? In this regard, do privatized enterprises have any advantages over state-owned enterprises (SOEs)?
That’s a very good question. There is one major challenge for every Chinese company and it is that they don’t have enough talent to manage cross-border transactions, not to mention managing a US company. In terms of China’s private sector, I would say that they have a slight advantage over the SOEs. One reason is because these privatized enterprises are market driven, and another is because their decision-making process is much faster than the SOEs. However, a state owned enterprise has a huge advantage: they are backed by the government and government-supported banks, which means that their resources are much larger than in the private sector. But, whether state-owned or private, the biggest challenge all of these companies face is lack of management talent. In the past thirty years, there has been huge growth in China. Now, a lot of middle-class individuals have cars, their own phones…If you look at China on this level, it would seem that a lot of Chinese are reaching a standard of living that is close to what you would find in a developed country.
However, management skills within Chinese companies have not become equal to management levels found in developed countries. Harvard Business Review had a good article [which explained three categories of management]. The first is the way Western managers handled uneducated, blue-collar workers in the 1930s- assembly line or construction workers. The most constructive way to manage them was by employing a foreman who wore big boots. If he saw someone who was lazy, he kicked them in the back and they went back to work. In this type of management style, if you want to make your employees work harder, you pay them more money, give them overtime and offer them raises. That’s how you motivate this type of worker. Then, when cost of living increased in the 1970s and ‘80s, a lot of people found themselves working in nice offices with [new technologies]- the work environment became much better and you could no longer kick an employee anymore, as it was illegal and they could sue you. So, how to manage and motivate people during this time? If the boss was not in the office, employees would make phone calls to their friends, read magazines and so forth. But, if they see that the boss is in the office or viewable, they will quickly go back to work. So, the best way to increase productivity in this type of environment is to constantly show the employees that the boss is nearby- the presence of the boss. Then, consider the IT dotcom stage, where companies like Microsoft and Google had a problem managing their employees because all of their employees are already millionaires. These types of employees don’t have to work- they don’t need the money anymore- and the only reason they are still working is [to attain] personal achievement. So, the best way to motivate these types of people is to take care of their needs outside of the work. You don’t have to be there and you don’t have to kick them, you just need to provide a nice environment for them to work, including giving them more vacations. Productivity becomes entirely self-motivated. We see this in the US a lot- on Wall Street- with people making at least six figure salaries. As a boss, you don’t have to be around the office to motivate employees. Instead, the boss sets a target and gives them a deadline. I would say that most of corporate America is managed this way now. But, the majority of the management styles in China’s private sector are still in the first and second phases.
In a recent article you stated that Chinese employers involved in cross-border deals can be expected to favor US-based pros who are fluent in both Chinese and English and who have some connection with China. Where are these employers recruiting and what advice would you give to mid-level and senior-level professionals who fit this profile?
Correct, these employers tend to favor Chinese who were born in China but who have studied and worked in the US for several years, and who speak both Chinese and English. One reason they favor this type of person is that most Chinese entrepreneurs, CEOs, and managers don’t speak English. So, they need someone who can speak Chinese, someone who has no problem communicating with them. At the same time, they need these mid- and senior-level professionals to act as a proxy for them in talking to American counterparties. As I said before, in China business is about relationships. So normally, they look for someone they “know” by asking their friends and getting recommendations. They tend not to use professional recruiting services, unlike US companies. If a US company goes to China and they need to fill ten positions, that US company will normally hire a professional headhunter or search agent. But, Chinese companies don’t like to use this type of service to help them search talent.
In China, people like to do business with friends. They like to get dinner together first, get to know each other and feel comfortable with having a conversation. Then, after [trust is established], they can start doing business. For Chinese, establishing a friendship comes before business relations. In the US, if there’s business to do and money to make, we hire a lawyer to draw up a contract and everyone follows the rules. It’s pure business- very professional. In China, friendship comes first.
Let’s address a rather contentious issue- the US’s massive trade deficit and declining value of the dollar. How will this impact trade with China and more specifically, Chinese investment into the US?
Ironically, it has actually had a positive impact in terms of Chinese FDI- coming to the US to make some acquisitions. China still thinks that the US dollar is overvalued and because of the US government’s current deficit, they are not 100 percent sure how this is going to be repaid. So, one of the things that China is trying to do is diversify their huge reserves by looking for new investments, other than US treasury bonds. One new investment type is to acquire some US companies.
So, what advice could you offer to heads of Chinese companies who want to expand to the US?
This is a very new idea for them, and many Chinese companies aren’t even aware that this is an option. When I talk to CEOs and managers in China, they often say “oh, I didn’t realize we can do this! But, this is interesting- can we talk more? Can you provide more information on how to do this?” My advice to them is that, this is an option and it’s not even that difficult. I understand their concerns- it’s a new, unknown territory operating in a different language with different business practices. But, whoever takes the leap first…there’s a huge opportunity. Think about all the foreign companies that went to China after China opened its doors. The foreign companies that established themselves there first gained [incredible] presence. It’s what we call “first-mover advantage.” If a Chinese company can successfully make one acquisition and integrate it with its current operation in China, it will be a huge competitive advantage. Chinese companies need to think about doing this. Every risk is associated with a huge reward.
Because of the current economic crisis, many educated and business-savvy Westerners who have been unable to advance their careers at home are now looking to China for opportunities. What’s your take on this?
It’s definitely a good international experience for these professionals to have. Most of them will probably be able to find work in the big cities- Beijing, Shenzhen, Shanghai, and Hong Kong. China is still a manufacturing base- 80 percent of GDP comes from manufacturing and only 20 percent comes from the service sector. So, there’s a huge need for Westerners in China’s service sector- [foreigners] who can bring their expertise and experience in the areas of finance, marketing, IT, and customer relations. The pay will be slightly lower than what they earn in Europe or America- probably- but I think it depends. In China, what I’ve noticed in the past few years is that the pay comes out to be pretty close now.
Last question: what’s next for you?
I’m constantly looking for Chinese companies who want to take advantage of this once in a lifetime opportunity to enter the US market and help them find good investment targets, manage the cross-border acquisition transactions, and hopefully to help these companies establish their presence in the US successfully. These are my goals.
Song Jin is a China-born and US-trained veteran in private equity and management consulting who currently works at a boutique private equity firm in New York City. He speaks frequently at conferences and with Chinese media outlets on topics relating to Chinese investment strategies, joint venture structures, intellectual property protection, and building government relationships. To learn more about Song Jin, please visit his LinkedIn profile. Thoughts or questions? Leave your feedback in the comments section.
Interviews
china, Chinese FDI, Chinese outbound investment, distressed companies, M&A, management consulting, private equity, Song Jin
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