Chinese companies are increasingly going abroad, for a large variety of reasons, and with an even larger variety of success and failure, says Joel Backaler in Knowledge CKGSB. The author of China Goes West: Everything You Need to Know About Chinese Companies Going Global looks at Huawei, Lenovo, Baidu, Xiaomi and TCL.
Chinese technology companies are looking for a variety of things in their investments and acquisitions abroad. They may take controlling stakes or minority stakes in foreign companies to access new markets, to acquire useful technologies, capabilities or talented personnel, or just to diversify their investment portfolios.
Of all these goals, accessing new markets typically offers both the highest risks and highest returns. As Joel Backaler, the author of China Goes West and a director at Frontier Strategy Group, says, “There [are] some very real business reasons why these Chinese companies, particularly tech companies, are going out. The market [especially for smartphones or consumer electronics] is highly competitive within China. Therefore if you can take that kind of product and adapt it for other markets, it can be a good way to diversify your business and maintain your margins.”
Chinese companies have tried their hands at both developed and developing countries. Companies operating in the former, such as Huawei, the telecoms manufacturer, and Wanxiang, an automotive parts maker, have had success focusing on hardware. While Baidu and Xiaomi, a company best known for its smartphones, have targeted the latter, with Baidu focusing on Southeast Asia, the Middle East, North Africa and Latin America….
Backaler points out that many of China’s early failed acquisitions were the result of Chinese companies with plenty of money going after assets that were failing for complex reasons. Chinese companies like TCL Corporation “weren’t necessarily in a position to go overseas, let alone to bring a company facing tough times back to life,” he says. He also cites Huawei as another Chinese company that failed to listen to the market, made mistakes in managing its image, and now is essentially barred from doing some types of business in the US.
On the positive side, Backaler says that Lenovo has done a great job of managing its US-based acquisitions. By retaining the acquired company’s management and staff, and only gradually making changes to the business model, Lenovo has convinced its American employees at IBM and Motorola Mobility that it was ready to learn from their experiences and dedicated to managing the company for the long haul.
There are other obstacles to Chinese outbound investments: hurdles to financing and approvals within China, or potential security threats with high-tech investments. However, the biggest obstacle to Chinese outbound investment appears to be connecting interested Chinese companies with potential targets. Very often, investors and investees just don’t know how to find each other.
“I think it’s challenging, because on one hand there is tremendous interest on the Chinese side to go out, and then if you’re looking from the American perspective there’s a strong desire for that investment, however there’s a really big gap in between,” says Backaler. Typically, interested Chinese investors go on tours or attend conferences where they can meet investment targets, and foreign states, cities and other local governments set up organizations inside China to recruit investment. However, both methods fall short of connecting all the interested parties.