Are Chinese Corporations' Global Ambitions Hindered By Lack of a Homegrown Professional Services Sector?

'I get by with a little help from my friends.' 

We live in a networked age. Value is measured by contacts, allies, partners, associates and collaborators.

Chinese companies, with their scale, their financial wherewithal and their experience are venturing outside the confines of the Middle Kingdom to test their skills and resolve in global markets. They are frequently greeted warmly, especially in the tired economies of Europe and the US where sclerotic politics, self-interested compensation designs and timorous investment schemes have limited economic growth.

But even with all their advantages, the Chinese often find it slow going. And one of the reasons, as the following article explains, is the lack of a strong, sophisticated domestic professional services sector with which to partner, to share ideas and burdens and to take on the established powers in their own markets.

These services include law, accounting, advertising, public relations, insurance, management consulting, information technology, research, think tanks and investor relations, among others. When effectively established and focused, they can identify and manage specific problems, threats or opportunities that corporations and government officials are not equipped or trained to address.

Though sometimes derided in the west, which has come to take their services for granted, companies offering these kinds of expertise may provide a crucial entree to, interpretation of and acceptance by corporations and governments inclined to be suspicious as well as fearful of lost jobs and domestic criticism in the face of Chinese initiatives. Whether the absence of such service benefits will prove crucial in the long term cannot now be known. Western firms have done their best to established Chinese-staffed affiliates in China but the ownership issue remains an obstacle. Until the Chinese are more willing to partner with foreign partners or willing to invest the time and resources to create their own service sector, they will probably operate at a disadvantage to those corporations who have learned to share both responsibility and destiny. JL

Alberto Forchielli reports in Caixin:

Companies seeking to make inroads overseas will fail without the support of homegrown law firms, PR agencies and consulting partners

In the aftermath of World War II, the corporations of a victorious America were largely untouched by the fighting. Among the few left in a condition to rebuild, they were certainly the strongest. In the decades that followed, the great American industrial corporations invested heavily all over the world, but they did not do it alone.
As they expanded into new markets and territories, companies brought with them a formidable service infrastructure to support their activities. Citibank and Bank of America provided banking; Baker & McKenzie and Skadden, Arps legal counsel; AIG and Cigna insurance; Fleishman-Hillard and Hill & Knowlton public relations; Kroll security; Honeywell and IBM IT services; Moody's and S&P credit ratings; McKinsey and Arthur D. Little management consulting; and Deloitte and Touch Ross auditing. These are just a few examples, and the list goes on.
With all of their familiar partners localizing in foreign countries, setting up shop alongside and taking on the responsibility of interfacing with local authorities and acting as service providers, American companies enjoyed the advantages of doing business in much the same way as they did at home. Just like in the war that was still fresh in everyone's minds, the frontline forces were only able to advance when they had a strong logistical structure to cater to the needs of the fighting men.
U.S. companies going abroad also had the support of think tanks like Rand and the Brookings Institution, whose experts helped them with strategy and policy in their new markets. But the phenomenon of American postwar expansion is not easily duplicated. Even an economic superpower like China has only its embassies, offices of the Ministry of Commerce, and Confucius Institutes to rival American institutions. However, they are inadequate and serve completely different purposes.
China does, however, have a strong banking and governmental support system for investment in less developed regions like Africa, Southeast Asia and, to some extent, Latin America. China's involvement in these areas goes beyond simple strategic necessity. Incoming Chinese developers enjoy a clean slate, unlike the former European colonial powers. As a country still on the road to industrialization, China understands the specific challenges faced by Third World countries, issues that it was facing just a few decades ago.
Its banking establishment is more experienced and adaptive in development lending than its Western counterparts, and better integration with its government gives Chinese lenders more room to maneuver when working with foreign authorities. China also has historic diplomatic ties to developing regions, established by Zhou Enlai in the early 1950s. Culturally, Chinese expeditionary workers and staff are better suited than pampered Americans and Europeans for difficult local living conditions and are more adaptive and tolerant of local cultures.
But as successful as Chinese companies may be in making inroads to the developing world, their true test is breaking into the more advanced markets in Europe and the United States. Acquiring Western brands and know-how is not only an imperative for their global positioning, it is also critical for strengthening their domestic operations. Gaining a foothold in the highly developed European Union and U.S. markets, however, is nothing like buying a mine or drilling rights in a developing nation. Buying and running an EU- or U.S.-based company means a lot of complexity in both the due diligence process and the post-acquisition management.
Moreover since most acquisitions are in manufacturing, Chinese can't use their own managers to run a sizeable local team. The most difficult part lies in understanding the local management team and managing the integration between widely different cultures. Having local information channels with reliable local partners and using consulting services to overcome cultural differences and integrate the team to work is a key success factor.
But when Chinese companies look to invest in Europe or the United States, they often find themselves completely unprepared and defenseless without a local support structure. They lack experience with finance, government relationships, local labor laws and dealing with unions, all skills that are fundamental for closing and managing potential acquisitions and projects. They are then forced to rely on the usual service providers they use in China, who are usually big U.S. names anyway, but compounding the lack of understanding is an unwillingness to relinquish power to their local contractors.
By not integrating the local agencies into their organization, Chinese investors show a lack of trust and transparency, a serious obstacle for any investment. In some cases, the incoming Chinese company may overlook some crucial elements entirely; in China, for example, the media is controlled by the government and may not necessarily be important for a company's image, but in the United States the media is one of the most powerful tools for influencing public opinion. Miscalculating public relations, especially for a foreign-backed entity, can be fatal.
The world's more developed markets are highly competitive, and Chinese companies venturing into Europe have been involved in more than a few blunders over the years. Chinese TCL bought French television maker Thomson in 2004, but that business was focused on old cathode ray tube technology and sales have taken a nosedive as today's consumers demand flat panels. Taiwanese BenQ failed to do its homework before buying the mobile phone unit of Germany's Siemens group in 2005, and it closed its European operations only two years later amid culture clashes and massive losses.
In 2009, Covec, a Chinese construction group, was contracted to build a stretch of the new highway from Warsaw to Berlin. With most of their previous experience in Africa, the Chinese builders were ill prepared for EU rules and regulations, and did not seek enough local help to compensate. The project stalled, and now Covec has been banned from bidding on public contracts in Poland. Chinese solar panel giant Suntech, the largest in the world, faces embarrassment and massive losses after a fraudulent solar field project came to light last summer, involving fake German government bonds, an SEC investigation and class-action lawsuit in the United States, and the seizure of most of the fields by Italian anti-mafia authorities. As Chinese companies are being beat up abroad, not only does it make for bad business, but it is dealing a heavy blow to corporate China's image.
After an initial wave of enthusiasm, no doubt heightened by the global economic crisis and the need for fresh investment, Europeans are becoming more wary of Chinese investors. The Chinese way of doing business is, for them, too slow and opaque. The Chinese arrive unprepared and are unreliable, and can be too volatile during the bidding process. The result is that Chinese investors miss out on the best deals; they are literally shut out. Whatever deals they are able to close end up costing them a premium of 20 to 40 percent, and they are often stuck with the companies that nobody in the domestic market wanted.
Despite these challenges, China's Western markets are critical for its development. Europe and especially the Unites States are the source of much of the world's innovation and technology. They are masters of branding and marketing, both areas of great interest for Chinese companies. China also has much to learn from the extensive service and distribution infrastructures in Europe and North America. China's thirst for sophisticated technology and know-how is becoming insatiable as its economy develops; its workforce is aging, and the country needs to add value to its production to keep up with rising salaries necessary to boost domestic consumption. As the cost of labor increases, Chinese manufacturing needs to focus on higher productivity and efficiency.
But with a long line of failed ventures behind them, it is a mistake for industrial China to think they can go abroad without a developed service sector. They need the security of being able to rely on Chinese investment banks, law firms, PR agencies, insurance brokers, and consulting partners that they can trust and have knowledge of how they operate. Going forward alone would be like landing an invasion without air cover – the Chinese will take casualties in the form of monetary losses, wasted resources and bad PR, setting off a vicious cycle that will only stop when China pulls back to end the massacre.