Guess what, they're not coming
By Benjamin A Shobert
Most evenings, American business leaders go to bed wondering if tomorrow will
be the day they awake to news of an iconic brand that at long last has been
sold to the Chinese. It is an interesting psychology which drives such
thoughts: part fear, part validation and part relief. In whatever form Chinese
competition presents itself, American businesses harbor an element of fear that
China will begin to move up the value chain, bringing its low-cost
sensibilities to more than just production costs, product development,
marketing and sales channels.
Yet these same US companies desire validation of their world view where the
general contour of competitive threats are knowable; for all the mystery that
is China, at least the nature of
its competitive threat is widely understood.
But most unusual may be the relief such an announcement would bring: it was not
lost on anyone that the moment GM's once-mighty Hummer brand went on the
selling block last week, popular sentiment assumed one of the final courters
would be a Chinese company. Whatever disquieting thoughts China's ascendancy
might force on the American consciousness, in our moment of corporate or
governmental need we breathe much easier knowing China is interested and
invested in our affairs.
Regardless which of these serves as a foundation, it is widely assumed the next
level of China's evolution will involve the same sort of upwards integration,
as was seen in Japan and South Korea. As ideas go, this is sufficiently
straightforward, and at face value seems reasonable enough; however, the idea
that China's way up the economic ladder will parallel those it is
geographically closest to may mistake proximity for similarity.
Ways in which China is dissimilar are all too often overlooked in the raw
excitement of tapping into its vast marketplace. The dissimilarities also lie
at the root of many misunderstandings about the intent and scope of China's
outbound direct investment (ODI).
The country's demographic challenge, not only its change in median age and size
over the next decade, is frequently highlighted as one of the major issues
Beijing faces. While demographics remains an enormous challenge, the larger
point may be that China's economic expansion does not have the luxury of moving
in tandem with territorial or population growth.
America's demographics expanded geographically in concert with the country's
economic and technologic development. Waiting in the undeveloped American West
was little more than potential, something which may not be said of China's
western frontier. It may well be that our way of conceptualizing the
citizen-state contract, or the relationship between business and society, is
not sustainable at the scale and immediacy China demands. Consequently, its
domestic needs will remain the most pressing application of the country's
savings for the foreseeable future.
Past American sensibilities, now becoming increasingly diffuse in the face of
the current economic crisis, have elevated the role of the private sector in
dealing with many public needs. This tradition, coupled to the historical and
on-going role of the Chinese state and its ownership of domestic businesses,
skews how many US policy makers view China's ODI. Where the same investment
might be made - on one hand the act of a multinational corporation and on the
other a Chinese state-owned enterprise - the matter takes on more than the
significance of an economic transaction, it becomes a question of China's
projection of "soft" power. The fact that most available data on China's ODI
shows its heavy weighting towards raw materials and commodities reinforces the
unease that some in Washington feel about China's motives.
Beijing seems to be aware of this, as recent changes to China's ODI framework
suggest. Thilo Hanemann, a China analyst at Rhodium Group, said of the most
recent moves, "... changes in the ODI regime are a straightforward continuation
of the reform process that started around 2000. This process has two important
characteristics: first, as in other areas of the economy, the role of
government is shifting from direct guidance toward independent regulation ...
Second, decentralization: much of the approval authority has been transferred
form the central level to local SAFE [State Administration of Foreign Exchange]
and MOFCOM [Ministry of Commerce] officials over the past years." Given the
many criticisms of SAFE, in particular from US some congressional committees,
moves on Beijing's part to empower local government are no small adjustment.
Chinese businesses still lack many of the intangible skill sets necessary to
identify and execute an overseas investment opportunity, let alone to manage
the newly acquired entity. Considering the ongoing difficulties Chinese
business people have traveling to the US on extended business, their ability to
be comfortable understanding North American culture roughly parallels the same
struggles faced by Americans whose exposure to China is occasional and highly
managed. Additionally, the boundaries of acceptable professional behavior
remain profoundly different between cultures. Lost in discussions about guanxi,
or relationships, are the realities that how business is done in China -
whether the use of influence through gifts or long evenings at the ubiquitous
karaoke parlors - are largely frowned upon in the West.
Even when a Chinese company can successfully identify a target for ODI,
differences in human resource practices remain a large obstacle to integrating
operations. The repeatedly used darlings of business school publications,
companies such as Haier and Huawei which are believed to constitute China's
future success stories, continue to struggle with bringing together their two
different cultures. Authors of The Haier Way, Jeannie Yi and Shawn Ye,
write of Haier's human resource practices within its China factories that:
Haier
is known to be very tough on its middle-level managers. There is a rule at
Haier that, if a manager receives three written criticisms ... within a year,
that manager has 30 days to make improvements. If no improvement is made within
that period, the manager should be demoted or released from his managerial
position. After a manager has received two written criticisms or the
corresponding oral ones, the Haier News will carry an article in the form of a
warning on behalf of the Group President to that manager, whose name is
released. (p125)
This use of public shame as a means of
motivating managers might work in China, but it would be poorly received in the
US. Mitigating China's management class from learning how to handle
human-resource issues is not only training, but the implicit reality of how
such an unfathomably large domestic labor market prevents certain
human-resource practices from being perceived as relevant or necessary.
For Chinese companies, the cost-benefit relationship between investing in
foreign operations versus expanding their product line in order to capture more
of their domestic market remains a critical question. The regulatory issues of
the past 18 months in many export markets has forced this question even deeper
into the minds of China's business leadership: as their export markets become
increasingly fragile economically, subject to protectionist headwinds, and
facing new regulatory obligations, they must ask where they can get the best
return on their investment - through ODI or paying closer attention to their
domestic customer?
China's leaders - both its political membership in Beijing and the
entrepreneurs spread throughout the entire country - understand what it is they
do not understand. And this may well be the very reason the country's
investment in American government debt remains so significant.
The likelihood that Chinese business is going to evolve, at least in the short-
to mid-term, to a point where it views investing in foreign companies as
critical to future success remains remote. What ODI does occur is likely to
continue to be dominated by China's state-owned enterprises in pursuit of
natural resources and processed commodities essential to the country's economic
independence and political stability. This leaves Beijing with few good options
when it comes to ODI: invest through entities such as SAFE and direct purchases
of US government debt instruments, or do nothing and risk the criticism of
disengagement from its global trade partners.
As much as many in Washington fear this relationship - Senator John McCain's
recent comments on the US weekend TV show Meet the Press are just one
example of this latent concern - the ongoing purchase of American bonds may be
the only meaningful way China can stay invested in the global economy. The
deeper truth may well be that the Chinese do not really want to come to the US
as business owners quite yet - and when they do it will not be to make "ego"
purchases as the Japanese often did, but to seek income-producing companies
fundamental to the American economy. While China does not really want to come
over through ODI, truthfully the US does not want them to go the US this way
either.
Ownership of semi-anonymous blocks of debt is one thing, easy to rationalize as
part of how China stays engaged in globalization, but the US is not any more
ready for China to purchase Hummer than China is to own and manage Hummer's
business and dealer network. Pundits may point to China's lack of business ODI
as signs of its immaturity, but knowing what the country can - and can not - do
well is likely the exact opposite.
Benjamin A Shobert is the managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated to helping 'n businesses
bring innovative technologies into the North American market. (Copyright
2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us
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