China plc needs new foreign formula

By Gavin Stamp Business reporter, BBC News

Under Hu Jintao's leadership, China is looking abroad but faces obstacles

When Lenovo bought IBM's PC operation in 2005, it was seen as a landmark deal in Chinese corporate history.

Lenovo was far from the first Chinese firm to plant its flag on foreign territory.

But unlike other firms' overseas forays, Lenovo took control of a multinational, hi-tech giant with global brand recognition.

In the intervening period, such corporate raids have become familiar, with China's booming economy and quest for energy resources providing the impetus for a succession of big-money deals.

Chinese companies remain in a hurry to expand abroad.

"Chinese firms are saying we want to be world-class and we want to do it tomorrow," says Edward Tse, head of Booz Allen Hamilton's Chinese management consultancy practice, who has been advising leading Chinese companies for 15 years.

But their hunger has not always been matched by their capacity to get what they want.

US oil giant Unocal's rejection of CNOOC's $18.5bn bid in 2005, amid fierce political opposition, was the most public slap in the face for China's global corporate ambitions.

It led to soul-searching among politicians and business leaders about how their companies should go about spreading their wings.

"The depth of opposition it had come across obviously took the Chinese government aback," says Dr Kerry Brown, head of the Asia programme at Chatham House.

"Money, and lots of money at that, was not enough. To be an investor, at least in these sectors in the US, one has to be seen as a friend."

'Soft power'

Among the challenges that China plc needs to grasp, experts argue, is how to use "soft power" to its advantage.

This concept has tended to more be familiar in diplomatic than commercial circles.

When the New York Philharmonic Orchestra played a concert in North Korea earlier this year, it was heralded by many as a victory for soft power - the triumph of non-partisan but symbolic cultural exchange over overt and forceful economic pressure.

CHINESE FIRMS ABROAD 1990s: Government selects 100 firms which it hopes to transform into global players 2000: China joins the World Trade Organization 2005: Lenovo buys IBM's PC division for $1.7bn; SAIC snaps up remains of MG Rover for $87m 2006: CNOOC buys $2.3bn stake in Nigerian oil field 2007: China Mobile buys Paktel for $460m; China Development Bank buys $3bn stake in Barclays 2008: Carmaker Chery says exports doubled last year; Aluminium firm Chinalco buys stake in Rio Tinto

In business terms, Chinese firms are not short of the basic attributes associated with so-called "hard power".

Indeed, their foundations are built upon strengths such as production scale, an endless labour pool, relentless drive for cost competitiveness and vast public expenditure.

This infrastructure, and the benefits it has brought, have turned China into an economic powerhouse but, Mr Tse argues, will not help it to replicate its domestic growth abroad.

For this to happen, China will need to follow a different path.

It must, among other things, win allies by building brands that consumers can emotionally identify with, become a responsible corporate citizen and shift technological paradigms.

"China is lacking in soft power," he says. "Brands and innovation are part of that, but so are values."

China's image has taken a public battering recently, following the violence in Tibet and the farcical scenes surrounding the Olympic torch relay.

Although there has been little evidence of people shunning Chinese goods in response, business leaders will be aware that their companies' own reputations are at risk of being tarnished by general anger against their homeland.

For instance, Lenovo's decision to design the Olympic torch may have seemed like a perfect example of the benefits of soft power, but has now arguably backfired.

Long road

How Chinese firms communicate their achievements and wider social contribution, starting with the Olympics in Beijing this summer, will be vital to their growth in key overseas markets such as the US. Mr Tse warns that it will take a long time for them to succeed.

Chinese firms like carmaker Chery are making their presence felt across Asia

Toyota, he adds, took more than 50 years to progress from being an "unknown giant" outside Japan to becoming a global leader which is transforming its industry.

"Most Chinese firms do not have the required capabilities now, but the ambition is there. Some may not do it - and some may do it, but take a long time.

"China says we want to get there and we want to get there as fast as possible. Even Japan and South Korea took several decades."

There is huge pressure on the bosses of state-owned industrial firms to deliver rapid overseas growth.

However, few either have the magnetism to pull this off, or the independence from political pressure or respect in the eyes of the public to survive setbacks.

The bottom line is that Chinese companies abroad do have an image problem Dr Kerry Brown, Chatham House

There are no business gurus, Edward Tse argues, in the mould of Bill Gates or Steve Jobs to put Chinese corporate culture on the map.

"One of the things Chinese firms most lack is what one would call management mystique. These kind of people represent the company and have some kind of mystique about them.

"The Chinese don't have that yet. There are not charismatic business leaders coming up."

But there is no shortage of ambitious and risk-taking entrepreneurs outside the state sector, some of whom, like Alibaba founder Jack Ma, have become famous, rich and courted.

At work in Africa

The line China treads between hard and soft power, or what Edward Tse characterises as the search for either dominance or influence, is being played out most publicly in Africa.

Some see China's pervasive presence there as an example of hard power at its worst.

China has clout in Africa but there are reservations about its motives.

For them, China is happy to import a quarter of its oil from Africa, but stands accused of ignoring humanitarian disasters in Sudan and Zimbabwe in pursuit of commercial self-interest.

Others take a different view.

They argue China's willingness to offer unconditional aid to governments and to build roads, hotels, and football stadiums across the continent shows it understands it must align its own commercial goals with the everyday needs of local people.

Dr Brown says China's investment history in Africa, as elsewhere, is decidedly mixed with its record on corporate governance and environmental issues leaving much to be desired.

Much greater openness and accountability will be needed if Chinese firms are to emerge from the long shadow of the Chinese state, he says, although he sees shrewd recent investments in firms such as Barclays as evidence of progress.

"The perception of Chinese companies is both positive and negative," he says. "But the bottom line is that Chinese companies abroad do have an image problem."

Yet this is a problem that China and its critics will have to resolve.

"China has no other option to go global," Dr Brown argues.

"The era of China as a major overseas investor is already here. The question is not how to stop it but to work out what to do with it."

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