When China Goes West

In many industries, Western firms’ length of experience can exceed their Chinese competitors by decades or even a century. In contrast, Chinese firms’ rapid growth trajectory means that they are learning how to do international business while transforming into global industry giants at the same time. As a result, the majority of Chinese companies that aspire to “go global” may not yet have the internal capabilities to do so.

2. Success in the American Business Environment Requires Adaptation  

I moderated a panel last month at the University of Chicago’s Booth School of Business on the topic of Chinese companies going global. Panelist Stephen Markscheid, a former senior vice president at GE Capital, described a cross-border M&A consultancy his friend recently started in China. “He told me that they had built a team which included several prominent former American diplomats and government officials. When I told him that government does not play as big a role in business in the US as it does in China, he said, ‘I know, but our Chinese clients still think it does. It helps us win business.’”

Building a successful business in China does not necessarily translate to success in the US market. Chinese executives have a lot to learn about doing business in the United States, from knowing where to go for advice about market entry to understanding the local regulatory environment.

Chinese firms have had trouble adapting to the US regulatory environment. Take the case of Sinovel, a Chinese wind turbine producer that divested its US operations last July after it was charged in federal court with stealing trade secrets from its former US supplier. Chinese firms are bound by the same regulations and oversight in the US market that American firms must follow.

3. Chinese Companies Lack Global Perspective

One of the most critical areas for Chinese companies entering the United States is transforming from Chinese-centric to global organizations. For many firms, this transition can be accomplished with the local personnel they hire, but it requires a shift in mindset at the corporate center that many Chinese firms are not yet prepared to make.

Senior executives at Chinese multinationals tend to lack personal experience working in the United States. Without understanding the American business operating environment at the executive level, conflicts can arise with the company’s US-based leadership. Mark McMillan, former director of design engineering at Chinese athletic company Li-Ning, was one of the founding team members of its US operations. In September 2010, one and a half years after McMillan started working for Li-Ning, his US-based boss offered him a promotion to a global product development role based in Beijing. However, the Beijing management team did not agree with the decision and withdrew the offer two months after McMillan accepted and the promotion had already been communicated to his colleagues in Oregon. Multiple general managers of North America from Chinese companies told me they began their roles excited and optimistic, only to reconnect with me several months later complaining they had virtually zero decision making authority and the corporate office in China had highly unrealistic expectations for the American business.

Until Chinese firms are able to attract and retain top international talent over the long-term and US-based teams are empowered to make business decisions, it is unlikely Chinese firms will pose a competitive threat to American businesses at home.

The Time to Understand This Phenomenon is Now 

Whether American firms are affected by Chinese competition varies by industry. In the internet and biotechnology industries, where the entire global industry is relatively new, Chinese firms are also competing with American firms in the United States. Two of China’s largest Internet companies, Tencent and Alibaba, operate in the United States with offerings targeted for an American audience, such as WeChat (Tencent) and AliExpress and Alibaba.com (Alibaba). Wuxi Apptec, a leading biotechnology and pharmaceutical outsourcing company, acquired St. Paul, Minnesota-based AppTec Laboratory Services for $151 million in 2008 and has operations in four other states.

The time is now to understand the impact on American business of the increased presence of Chinese companies in the United States. While there is little to worry about in the short term, Chinese companies are developing and adapting quickly. Ultimately, many are likely to overcome challenges related to their lack of international experience.

The vast majority of Chinese firms today are certainly not where they need to be, but don’t expect this to be the case for long. Today’s boom in Chinese outbound tourism and international MBA education will boost the English skills and internationalization of future Chinese executives. Moreover, the dramatic increase in the number of Chinese companies entering the United States is providing valuable case studies of practices to adopt and avoid for other Chinese firms thinking about expanding into the United States. American companies and executives should seek to understand the implications of this trend for their business and identify potential Chinese players in their industry to ensure their competitiveness in the future.

[author] Joel Backaler is author of China Goes West: Everything You Need to Know About Chinese Companies Going Global (Palgrave Macmillan, May 2014).  He is a director at Frontier Strategy Group, a Forbes contributor and a member of the National Committee on United States–China Relations. Follow him on Twitter @JoelBackaler. [/author]

(Photo by Marisa Nelson via Flickr)