Will China Bring Your Firm New Owners, Partners, or Competitors?
Harvard Business Review
Consumers in the United States are used to buying products that are made in China. American multinational firms are accustomed to selling to Chinese customers within China. But what happens when China goes West? What are the implications for corporate America when Chinese firms begin doing business in the U.S. and other developed markets?
You may think this is an issue for tomorrow—when Chinese firms are known for being innovators instead of imitators, and when their overseas investments are not limited to natural resources in Africa and Latin America. But Chinese companies of all sizes are already operating in the U.S. in a big way. More than 80% of last year’s special U.S. visas for immigrant entrepreneurs were issued to individuals from China. U.S. corporations are placing orders for Lenovo-made laptops, while American workers are driving cars made by Chinese-owned Volvo to the office and feeding their families bacon produced by Shuanghui International, the new owner of Virginia-based Smithfield Foods. In total, Chinese companies invested $90.2 billion internationally last year, according to official Ministry of Commerce statistics.
The rise of Chinese investments in the U.S. offers very tangible benefits for the U.S. economy, but it is also changing the traditional dynamics of our domestic competitive landscape. How should corporate America respond? The answer to this question varies depending on whether an American firm is considering new ownership, seeking new partners, or responding to new competitors from China.
For American companies seeking strategic investment, Chinese ownership presents a new alternative to the traditional routes of private equity investment or acquisition by a larger domestic industry incumbent. A top concern among firms taking on private equity investment is who becomes the ultimate decision maker. Under private equity investment, the CEO—formerly the top decision maker in the company—has to answer to the representative assigned by the private equity firm. Chinese ownership can remove this concern from the equation. Moreover, Chinese owners may even be in a position to inject additional capital into a firm after a first round of investment, which would be almost unheard-of under private equity ownership.
During the global financial crisis, Robert Remenar, CEO of Nexteer, a Michigan-based automotive steering firm, deliberately searched for potential new Chinese owners. His firm required significant capital investment, but he knew that the fundamentals of Nexteer’s business were working well. In 2010, Chinese firm AVIC Automotive purchased Nexteer for $465 million. Under the new ownership, Remenar retained his entire management team and was allowed decision-making authority from the new owners to implement an effective strategy to get the firm back on track.
For American firms partnering with Chinese companies, access to new international markets, especially in China, is an obvious gain. In theory, this might sound like an ideal relationship: the American partner possesses technical know-how or a world-class brand while the Chinese partner brings capital and new market access. But what are the broader implications for industry standards? Western companies should consider the long-term implications of partnerships with Chinese firms, in particular the issues of intellectual property and technology transfer.
To cite just one prominent example, Hollywood studios and directors are now forming partnerships with Chinese production houses at a rapid pace—from DreamWorks Animation to Titanic director James Cameron. As collaboration between Hollywood and Chinese firms deepens over time, it will be interesting to see the impact these partnerships have on the Chinese movie production industry. Will Chinese production houses be able to close the knowledge gap and begin producing international blockbuster films of their own? Or will they remain reliant on experienced Hollywood experts for the long term?
Finally, a common misconception of Chinese investment in the U.S. is that the poor product quality, food safety issues, or corrupt business practices that may be present in firms’ China operations will carry over. This assumption is false. When a Chinese company operates in the U.S., it must do so in accordance with local regulations and business practices—or else face the legal consequences. For example, Sinovel, a Chinese wind turbine producer, had to divest its U.S. operations last July after it was charged in federal court with stealing trade secrets from its former U.S. supplier.
However, there may be cases when Chinese firms receive special incentives from the Chinese government (particularly state-owned enterprises), which could enable them to compete at unfair price points or extend contract terms to their customers at less than market value. In the U.S., the Department of Justice and Federal Trade Commission are both involved in the deal review process to monitor such anti-competitive concerns. American firms operating in the same industry as Chinese competitors should remain vigilant and work together to lobby relevant regulators and government bodies to prevent any anti-competitive business practices from taking place.
We are still at the beginning of the phenomenon of China going West. The number of Chinese companies operating in the U.S. as well as the amounts of their investments will continue to increase dramatically in the months and years ahead. Understanding what this means for American business is critical to ensure U.S. firms and the public can capitalize on new opportunities while avoiding or minimizing potential business risks.
You may think this is an issue for tomorrow—when Chinese firms are known for being innovators instead of imitators, and when their overseas investments are not limited to natural resources in Africa and Latin America. But Chinese companies of all sizes are already operating in the U.S. in a big way. More than 80% of last year’s special U.S. visas for immigrant entrepreneurs were issued to individuals from China. U.S. corporations are placing orders for Lenovo-made laptops, while American workers are driving cars made by Chinese-owned Volvo to the office and feeding their families bacon produced by Shuanghui International, the new owner of Virginia-based Smithfield Foods. In total, Chinese companies invested $90.2 billion internationally last year, according to official Ministry of Commerce statistics.
The rise of Chinese investments in the U.S. offers very tangible benefits for the U.S. economy, but it is also changing the traditional dynamics of our domestic competitive landscape. How should corporate America respond? The answer to this question varies depending on whether an American firm is considering new ownership, seeking new partners, or responding to new competitors from China.
For American companies seeking strategic investment, Chinese ownership presents a new alternative to the traditional routes of private equity investment or acquisition by a larger domestic industry incumbent. A top concern among firms taking on private equity investment is who becomes the ultimate decision maker. Under private equity investment, the CEO—formerly the top decision maker in the company—has to answer to the representative assigned by the private equity firm. Chinese ownership can remove this concern from the equation. Moreover, Chinese owners may even be in a position to inject additional capital into a firm after a first round of investment, which would be almost unheard-of under private equity ownership.
During the global financial crisis, Robert Remenar, CEO of Nexteer, a Michigan-based automotive steering firm, deliberately searched for potential new Chinese owners. His firm required significant capital investment, but he knew that the fundamentals of Nexteer’s business were working well. In 2010, Chinese firm AVIC Automotive purchased Nexteer for $465 million. Under the new ownership, Remenar retained his entire management team and was allowed decision-making authority from the new owners to implement an effective strategy to get the firm back on track.
For American firms partnering with Chinese companies, access to new international markets, especially in China, is an obvious gain. In theory, this might sound like an ideal relationship: the American partner possesses technical know-how or a world-class brand while the Chinese partner brings capital and new market access. But what are the broader implications for industry standards? Western companies should consider the long-term implications of partnerships with Chinese firms, in particular the issues of intellectual property and technology transfer.
To cite just one prominent example, Hollywood studios and directors are now forming partnerships with Chinese production houses at a rapid pace—from DreamWorks Animation to Titanic director James Cameron. As collaboration between Hollywood and Chinese firms deepens over time, it will be interesting to see the impact these partnerships have on the Chinese movie production industry. Will Chinese production houses be able to close the knowledge gap and begin producing international blockbuster films of their own? Or will they remain reliant on experienced Hollywood experts for the long term?
Finally, a common misconception of Chinese investment in the U.S. is that the poor product quality, food safety issues, or corrupt business practices that may be present in firms’ China operations will carry over. This assumption is false. When a Chinese company operates in the U.S., it must do so in accordance with local regulations and business practices—or else face the legal consequences. For example, Sinovel, a Chinese wind turbine producer, had to divest its U.S. operations last July after it was charged in federal court with stealing trade secrets from its former U.S. supplier.
However, there may be cases when Chinese firms receive special incentives from the Chinese government (particularly state-owned enterprises), which could enable them to compete at unfair price points or extend contract terms to their customers at less than market value. In the U.S., the Department of Justice and Federal Trade Commission are both involved in the deal review process to monitor such anti-competitive concerns. American firms operating in the same industry as Chinese competitors should remain vigilant and work together to lobby relevant regulators and government bodies to prevent any anti-competitive business practices from taking place.
We are still at the beginning of the phenomenon of China going West. The number of Chinese companies operating in the U.S. as well as the amounts of their investments will continue to increase dramatically in the months and years ahead. Understanding what this means for American business is critical to ensure U.S. firms and the public can capitalize on new opportunities while avoiding or minimizing potential business risks.
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