from Eurobiz Magazine

November 2009 issue

by Bill Dodson

It had been more than two years since I had seen or heard from my dear Swedish friend Wille. He had returned to Sweden after living and working in China for nearly four years, first in Guangzhou, then in Suzhou. “So what have you been up to these years?” I asked my friend over a Skype call. “Working for a Chinese company,” he said, and laughed. The response took me by surprise. Chinese companies investing in Sweden? My friend managing Chinese investors? “What’s it been like?” I asked him. “Chinese investors,” he said, “seem to be more willing to invest in high risk areas, but are also ready to take out the plug fast.” And “Chinese have in general a higher working pace and serious work attitude, a great sense of entrepreneurship, [and of] setting targets. This must be a wake up call for a western country, such as Sweden!” he added.

The Chinese central government has been encouraging domestic companies to reach beyond China’s shores to invest in operations in other countries. Chinese officials refer to the initiative as Overseas Direct Investment (ODI). Chinese net ODI in 2008 was $55.91 billion, up 111 percent from the previous year, out of a total of nearly US$185 billion, according to the China Daily (September 8, 2009). More than 8,500 domestic investors set up overseas projects, with corporate assets of $1 trillion. China’s backyard, southeast Asia, is a favorite destination for ODI, as well as Europe. The United States and Australia have proven more resistant to Chinese high-profile ODI. Some of the motivations for Chinese ODI include technology acquisition and the development of international distribution networks. The acquisition of natural resource and energy production assets have been top of the news, though. China sees the deals as a way to hedge against price inflation of the base materials and energy currency the country so desperately needs to continue its drive to modernization. The big-ticket acquisitions have also been a way for China’s State Administration for Foreign Exchange (SAFE) to better diversify the US$2 trillion in foreign reserves it oversees, over half of which is tied up in U.S. Treasury bills. The central government is greatly concerned about the threat of inflation in the United States eating away at the small returns the T-bills generate.

Another friend named Dave, an American, is managing the Chinese manufacturing end of an ODI project that is developing distribution networks in the United States, Canada, Europe and Russia. Dave told me, “There is a decided lack of clear communication of direction. It seems that a Chinese investor prefers that you develop a plan and present it, but he is not inclined to provide you with clear, well-defined requirements in advance. Therefore, with a lack of front-loaded information the plan often fails to meet investor expectation.”

He continued, a bit frustrated, “It is almost as if there is an expectation that you should be able to read the investor’s mind and divine the requirements without any input. I believe that this has something to do with the cultural expectation that you should pick up on subtleties in conversation and integrate that into the requirements. Unfortunately, much of these subtleties are lost in translation and the requirements go unspoken, leaving you with little recourse but to guess what those requirements may be. The trouble here is that a Chinese investor’s requirements are in accordance with their business experience – not with the international business practices that a western executive is most familiar with.” The mindset many Chinese investors who made it big in the Chinese domestic market seem to have is: If it worked in Ningbo, it’ll work in Newcastle.

Managing ODI investor expectations is a lot like ordering and eating Chinese food: serving up multiple dishes from which an investor can pick and choose what to digest. Dave suggested developing multiple scenarios for every plan a Western manager works on. “First, it gives the investor the feeling that your plan has been very thoroughly thought through and each option has been vetted for viability,” he said. “Second, it increases the chance that your presentation will find the sweet spot for the investor, even if you are guessing at what the requirements may be. Lastly, it is likely to save time going back and forth after the meeting trying to decipher the requirements to arrive at a viable plan.” In some instances, the management team will clearly be unable to implement some of the options.

But then, it’s always polite at the Chinese dinner table to leave some of the meal untouched.

Copyright ©William R. Dodson, 2009