The New US-China Investment Relationship: We Can Work It Out!
In less than a year, the focus on cross-border investment between the US and China has seen a dramatic shift. Establishment of Chinese companies and brands on American soil- once widely objected to by Washington and small town USA- has found new appeal on both sides of the fence as economic interdependence between the two countries takes precedence over political conflict. And, while some American companies are still unreceptive to the idea of assisting China in launching Western-tailored brands and purchasing US assets, others are already laying the groundwork to support this change. Perhaps you believe that encouraging this shift in cross-border investment will only serve to advance China as a global power while jeopardizing more American jobs. Or, maybe you’ve concluded that Chinese investment in America will fuel job creation while positively strengthening the US-China relationship. Viewpoints aside, one thing is certain- Chinese companies are actively seeking opportunities in the US and a growing number of American enterprises are embracing the prospect.
Whether or not successful deals will be made is another story altogether and there are significant hurdles that may serve to alter the trend. To quote a question that China specialist Greg Anderson recently posed, “will the US Congress (which takes every opportunity it can to poke China in the eye) simply sit by and watch American companies be bought up by Chinese investors?” For China, acquisition of distressed US companies has thus far been a Sisyphean task- consider the political firestorm that led China oil company CNOOC to withdraw its bid for UNOCAL in 2005. Additionally, more than ever before, China has the option of taking its money elsewhere; in fact, the vast majority of the world welcomes the prospect. Why should China, which has previously tripped over America’s insecure welcome mat, trust that things will be different this time? And why should America, which has seen thousands of jobs outsourced to China, feel confident that a similar outcome will not occur again? While these are two exceptionally difficult problems to tackle, one less talked about- but no less important- challenge exists…
In seeking perspectives from both sides of the fence regarding the potential for Chinese investment and Chinese brands in the West, I have encountered two distant galaxies of thought. While it would be easy to point a finger at the usual suspects- language and cultural barriers- our now globalized world disproves this as the sole explanation. Put simply, US and Chinese leaders in business and government aren’t making a concerted effort to effectively communicate with each other. And, as with any “marriage”- particularly a Chimerican one in a very new territory- the success of the relationship is hinged upon the ability to seek common ground and at times, to compromise (even if that relationship is mainly about money and power). The following are just a few examples that highlight the soundproof wall erected between both parties in the Chinese investment conversation (or lack thereof):
Chinese perspective: We’re not entirely sure that acquiring distressed US companies is possible. While it sounds like a good opportunity considering today’s economic climate, we’ve been burned in the past.
American perspective: We’re not entirely sure that we’re ready to handle all of the (perceived) issues that come with Chinese acquisition on US soil, but we will encourage it regardless because the US economy needs a financial injection.
Chinese perspective: If we’re setting up shop on US soil, business will be largely conducted in the Chinese way.
American perspective: If China is going to set up shop on US soil, China is going to have to do things the American way. Our way or the highway!
Chinese perspective: Chinese companies in the US will need to rely most heavily on Chinese management and employees because of differences in language and business practices.
American perspective: Chinese companies in America will need to rely on American managers and employees to ensure success in the US business market.
Chinese perspective: Business relationships are formed through trust and guanxi, first and foremost.
American perspective: Business relationships are formed through the American legal system. Period.
Chinese perspective: We’re not going to pay for nebulous services like accounting, branding consultancy or legal advice. Why pay for something that isn’t visible to the naked eye? And, how do we know that you’ve actually put in the hours that you’re claiming?
American perspective: Chinese companies will never survive on US soil without the expertise that consultancy services provide. Every company in America knows that they need these services to establish, shape and protect their brands. China will have to hire American consultants whether they like it or not if Chinese businesses are going to exist in the US.
Chinese perspective: If we purchase an American company that already has a manufacturing base in China, then we’ve essentially created a 100 percent Chinese-owned and managed company. Ready to go!
American perspective: Manufacturing base in China or not, if you buy a distressed company, you are going to have to do a heck of a lot of work to make that business a success again.
Chinese perspective: If American companies aren’t willing to be flexible with us and allow full market access, then we can take our business elsewhere. China doesn’t really need America. In fact, America needs China now, more than ever.
American perspective: If China isn’t willing to be flexible, then it can take its business elsewhere. We don’t need China. (Okay, maybe we do need China, but America doesn’t compromise.)
Over the next few weeks, I will analyze each of these perspectives, further exploring the communication breakdown as a whole while pointing out specific areas for compromise and deeper cooperation. I’ll also introduce a few bridge-builders and negotiators who aim to strengthen this partnership overall. As with many new relationships, this US-China investment terrain is simultaneously alluring, complex and at times, deceptive. It also shows exceptional promise given the complementary nature of each side’s needs and the potential fruits that may come from what is undoubtedly a tempting opportunity. However, without a platform of trust, mutual confidence and effective communication, China’s bags may be packed before America has a chance to kick her out the door.
What other differences in perspectives have you seen? Can the US and China have a candid conversation about Chinese investment and brands on US soil? Or, has the relationship been doomed from the start? I want your feedback! Leave your thoughts and questions in the comments section…
good analysis for minds that take sides ..
what is the whole-systems view of this .. (i.e. looking at earth “from the moon”, as a single object) ..
what is good/better/best from that pov?
Timely post on a subject that’s going to get increasing visibility. Generally speaking, I anticipate that the American perspective will be perhaps more conservative or protectionist than noted, while the Chinese perspective will be fairly straight forward and driven by business objectives.
For example, the recently announced 600MW / $1.5B Texas wind farm has already drawn sharp criticism in America for its use of Chinese turbine technology and its role in Chinese job creation. Also, the emergence of China’s Geely as the preferred bidder for the sale of Volvo by Ford has resulted in skepticism from the American (and EU) perspective. Specifically, observers question Geely’s commitment to IP safeguards and ability to manage a ‘sophisticated’ brand. Geely has noted that it plans to keep much of Volvo’s management team intact and is working to address IP concerns through ongoing contract negotiations. The optics in both of these deals do seem to point towards a more conservative/protectionist American perspective vis-a-vis a rather straight forward Chinese perspective.
That being said, China-US bilateral investment issues may be something of a red herring for a potentially more substantive change in global trade, investment and development. Specifically, China’s role in the developing world is changing quickly; a lot of this change is driven by private or state investment into the developing world. Ben Simpfendorfer, writing in the NY Times (http://bit.ly/2PYLSz) and elsewhere (http://bit.ly/3uJqN)notes economist Xu Shanda’s vision for a Chinese ‘Marshall Plan’ to significantly boost demand for Chinese goods in the developing world. China’s development activities in the developing world will arguably have a far greater impact ultimately on foreign policy and the role of China in the world. It’s worth noting that while the reaction in America to Chinese investment in the US may dominate news cycles and political leaders with a focus on protectionism and related issues, China will be busy developing new ties in the developing world founded on trade and economic policy. To quote Simpfendorfer, “…it is within the emerging (developing) world itself that the bigger surprises from China will lie.”
Last fall I visited a state of the art precision die cast factory in Southern China. I would estimate they have a turnover of ~USD$400MM. This facility had two specialized and top government clearance machines that were designed and manufactured by the Japanese that could essentially be used for highly technical military products although they were simply utilizing these for their automation in making automotive (carburator) parts. After a long lunch, the owner took us to their R&D building where they had devised…a turkey fryer. That’s right. They had devised a turkey fryer that uses 80% less oil than deep frying. Already they had made prototypes for doing french fries. Now this story might seem to be digressing a bit, but in their keen marketing studies, they had deduced there was no similar Western device on the market. It just so happened to be November and thus the American holiday of Thanksgiving was right around the corner. This factory had a business plan in place, knew their total market universe of people in the U.S. who deep fried turkeys vs oven baked, and even knew this was a particularly strong activity in the South. In fact, they had deducted that their distribution channel likely needed to be HSN or QVC then evolve into traditional retail.
What they didn’t have is a contact in the U.S. to assist with the launch nor did they know anyone who could introduce them into this market. What if however, they partnered up with a strong cookware company or better yet someone who was already doing infomercials? Could they hit the $50-100MM in sales they felt was possible?
If you take this story out of the realm of turkey fryers, the Chinese are innovating every day but will rely on marketing expertise here to be successful. Likewise, there are Western companies who will require the next generation of innovation to maintain and gain market share. This commentary doesn’t even scrape the surface of potential cross boarder M&A activity that could and likely will commence as Eastern entities establish beachheads in the U.S. The typical hurdle rates that private equity and investment banking firms require to do deals will be cast aside by Chinese courtiers who seek to incorporate their intellectual property with U.S. brands.
It is truly a global community that does not have to be protectionist.
I really like the idea behind this article and I feel that most of the points are valid. However being in the position I am in and working for a company that has a counterpart in the US (Chinese owned and recently acquired) I feel that there is still a long ways to go in regards to the compatibility of Chinese business models being implemented in the US.
In the post above there is talk about ‘Chinese innovation’. Now lets be honest, innovation isn’t something that China is known for, and its that mentality thats holding China back in many economic aspects. The Chinese have perfected the art of replication, and because of this are now stuck at the cusp of what could catapult them to be the #1 economy in the world. When people think China they think masses of people and they think cheap. Now whether this is the case or not isn’t the point, but the fact that China has been ‘branded’ this has made things ever more difficult for them.
I know I’m all over the place this this comment and I apologize for that, but the main point I’m trying to make is that the degree’s of separation within China’s economy are so great that until there is a realized need for innovation on a personal level China will always be viewed as one big factory. Its elite (the ones who view the system from an external view) will remain elite and its masses will remain masses. I feel the effects of this everyday and until the time comes where China allows its internal system (from which the Chinese mentality is built upon) to be ‘cracked’ by outside influences it will remain a means to an end.
“The Chineese Way”
I interviewed for a job with a Chineese Company (against my better judgement) Operating in the Chicago area as a sales person who essentially sold outsourced manufacturing to American companies. I was offered the job and was asked to work for two weeks for free so they could get a handle on how I operated and for me to see how the company operated. I refused the offer 1) because selling out America goes against everything holy to me & 2) I don’t work for free.