Private power

Integration challenge

Though challenges are aplenty for Chinese companies, many of the younger players often find it difficult to properly integrate resources in the global arena, as they grow in scale.

"In many cases, even if the Chinese companies get all the required approval for the acquisition, they find it difficult to effectively integrate the resources globally. This is a major obstacle for global expansion," says Liang Xinjun, CEO and vice-chairman of Fosun group, one of China's largest privately owned conglomerates.

Liang says that many foreign companies can allocate resources globally in an economical and profitable manner, such as choosing some countries where production costs are quite low as a manufacturing base, and selling products to the most profitable markets.

For most of the Chinese companies the overseas expansion starts with investment in overseas projects, followed by posting of Chinese employees and then repatriating the finished products to China for global sales. This is not exactly what one would call as "going global" or integration, he says.

He says what distinguishes Fosun from other companies is that it not only invests in overseas companies but also brings the foreign brands to China.

"This automatically raises the company's global brand recognition. Because of our deep understanding and the attraction of domestic market to foreign companies, this model of international cooperation has a higher possibility of success," Liang says.

The philosophy behind such moves is to marry China's growth momentum with the world's resources, he says.

"The European debt crisis has dented market confidence. But it has also provided us with much confidence to invest in overseas markets at reasonable prices," he says, adding that European and US companies that are in innovative fields such as pharmaceuticals research could be possible M&A targets.

Liang says Fosun has helped Club Med attract more tourists and raise its profile by encouraging affiliate companies and clients to spend holidays at Club Med resorts. Club Med made a profit of 2 million euros globally last year. In 2010, it suffered a loss of 14 million euros.

Lu with UIBE says that to be successful in the global market, companies should have full understanding of the local market, laws and regulations, strong product competence and distribution competence.

"One should not be afraid to do as the Romans do. It is a good way to go hand-in-hand with foreign companies in the domestic market, as China is endowed with a fast growing middle class and growing consumption power. In the domestic market, the risks are relatively less than going to unfamiliar foreign markets."

The rising Chinese private companies are also confronted with other severe challenges such as rising raw material and labor costs as well as shrinking market demand.

These challenges, coupled with a bleak global financial situation and tight monetary policies in the domestic market, have been a temporary setback for some private companies, especially the SMEs.

Wenzhou, a city in East China's Zhejiang province known for its booming private sector, was one of the regions that was severely affected by the recent private debt crisis. Last year, about 100 leaders of private companies in the city were reported to have committed suicide or declared bankruptcy, leaving behind debts of about 10 billion yuan.

Jin Zhimian, 32, former president of Wenzhou Jinkang Optics, says the business climate in Wenzhou, especially for the SMEs, has become gloomier this year.

During an earlier interview, Jin had said that he had to lay off nearly half of his employees due to the uncertain market conditions. In July, he was forced to shut down operations after barely scraping though during the first six months.

"It is probably the most difficult period I have ever experienced in my life. It is just too hard to survive," says Jin.

New direction

But the bleak situation is also a strong impetus and a great opportunity for Chinese companies to reshape themselves and move up the value chain, something that is essential for China's future transformation, analysts say.

"Times have passed when Chinese enterprises could win market share with lower prices. Only those enterprises that can move up the value chain and provide more value-added products will survive the hard times and reap the benefits," says Xu Xiao-nian, a professor at the China Europe International Business School.

Private enterprises have already embarked on this journey and there has been a steady increase in the number of patents owned by such companies. The top 500 Chinese private companies so far own 74,631 patents this year, a 58.4 percent growth over the same period in 2010. The list also shows that 163 private companies in the top 500 have investments in new and environmentally friendly industries such as green energy.

Changsha-based construction machinery maker Sunward Equipment Group is one of the companies that is actively exploring the overseas markets as part of its efforts to further expand business. He Qinghua, founder and chairman of Sunward Equipment Group, says that the group is already in active talks with several European companies for possible merger and acquisition opportunities. "The deals will help boost Sunward's R&D capabilities and after-sales network.'

The company has also upgraded its entire product line with an eye on the export markets. The company now has more than 100 types of high-quality products for exports such as excavators, skid steer loaders, rotary drill machines, piling machinery and forklifts. According to He, Sunward's annual sales are expected to hit 20 billion yuan by 2015, with 15 to 20 percent of the revenue coming from the overseas market.

Talent shortage is another issue that has often derailed the expansion plans of many private entrepreneurs. "The talent shortage and general preference for being employed in State-owned enterprises have made it difficult for many private companies to find the right candidates for key managerial positions. In overseas markets, the problem is even more acute due to the cultural differences," Liu from Lenovo said.

For many Chinese companies, the transformation might be long and painful, as in most cases it involves huge investments and no positive effects in the short term, says Steve Tappin, a British CEO coach and the author of The Secrets of CEOs, which tracks management skills of more than 200 CEOs from across the globe.

"Take a look at the Apple outlet in Beijing's Sanlitun area. So many customers visit the shop every day. I strongly believe that soon we will see Chinese brands that are as popular as Apple in the future. But it needs patience to foster and wait. It is an unavoidable and unique way for Chinese companies to move ahead in the global stage, if they want to become the Apple of the eye for customers worldwide."

huhaiyan@chinadaily.com.cn

(China Daily 10/26/2012 page1)