Twists and turns for Chinese SOEs abroad

Chinese state-owned enterprises (SOEs) have learned the hard way to become internationally competitive as almost every successful overseas investment has involved a tough battle against unfamiliar legal and business environments.

Jiang Hong, an official dealing with overseas investment with the Chongqing Foreign Trade and Economic Relations Commission, told Xinhua on Thursday that it was not going to be easy to see the Municipality's 200-plus enterprises growing their business soundly overseas.

Citing the largest Chinese investment in Germany clinched between the state-owned Chongqing Light Industry & Textile Holding Group and auto part supplier SaarGummi in Berlin last June, Jiang said that the former's unfamiliarity with German laws posed a last-minute challenge to the 68-million-euro acquisition.

Under German laws, the liabilities of all subsidiaries of the company to be acquired must be taken over by the acquiring corporation. But one subsidiary of SaarGummi, assuming the parent firm's obligations, had been missed in the original acquisition agreement, said Jiang.

Chongqing Light Industry & Textile consulted their advisors with BNP Paribas and Ernst & Young, who suggested an outright purchase of the subsidiary from SaarGummi.

When SaarGummi agreed to sell it at one euro, however, Chongqing found itself unable to execute the contract because it had not been domestically endorsed to start any overseas investment, and a lack of a foreign currency account to transfer the one euro.

"If Chongqing Light Industry & Textile failed to tackle the one-euro problem, the massive acquisition contract would be a flop. So we facilitated the approval process and helped it set up its foreign currency account," said Jiang.

"When it comes to overseas investment, uncertainties might crop up anywhere. Chinese enterprises, especially the state-owned ones, must stay on high alert," said Jiang.

According to statistics from the Commerce Ministry, the direct investment made by Chinese enterprises overseas has reached 320 billion U.S. dollars so far. In 2011 alone, China invested 60 billion U.S. dollars abroad, 22 times of that in 2002. More than 80 percent of the total came from the SOEs.

FROM "WOLF COMING" TO PARTNERS

As SOEs were born from the planned economy, which dominated China for nearly 30 years until the opening up and economic reform in late 1970s, foreigners felt uneasy with Chinese SOEs venturing into their territories.

"We felt they had sounded an alarm call to say 'wolves are coming'. As time passed, more foreign enterprises recognized the value of Chinese SOEs," said Jiang.

Zhang Wenkui, deputy director of the Enterprise Research Institute under the Development Research Center of the State Council, said SOEs were no longer the implementors of the patriarchal planned economy. Thanks to gradual shareholding reform, their ownership has been diversified.

Under China's Corporate Laws, both SOEs and private enterprises must strive to maximize corporate profits while in SOEs. Management face strict performance assessments to avoid losses in state-owned assets and to fulfill corporate social responsibility, Zhang said.

BITTER LESSONS

Going global is far from a smooth trip for Chinese enterprises, as nearly 30 executives of large multinationals warned at the annual advisory meeting for the Mayor of Chongqing held on Monday.

Kim Fejfer, senior Vice-President of A.P. Moller-Maersk, told the meeting that when cultural differences were underestimated, key talent and customers might leave if they felt uncomfortable with the changes in company culture following an acquisition.

Xiang Xiaobo, president of the Chongqing-based China Silian Instrument Group, echoed Fejfer's warning with his Group's lessons from taking over a Canadian mine from America's Honeywell four years ago.

"The mine producing luminescent materials used in LED lights was supposed to sharpen our technical edge, but after the takeover, the worst scenario was surfacing as many Canadian experts were leaving," said Xiang.

"We knew something had gone wrong. We knew we were not smarter than the Canadian side, so we stayed humble to learn, to do as the Canadians do. Finally, we've managed to retain the best experts and succeeded in producing LED light materials of the same quality," said Xiang.

Also at the meeting, Michael Smith, chief executive officer of Australia and New Zealand Banking Group Limited, elaborated on the significance of getting localized with real deals.

One relates to Chongqing Grain Group (CGG), which invested in 200,000 hectares of soybean production in Brazil to help secure supply. After the first shipment of soybeans was delivered, the Brazilian government stepped in its way.

To get over the obstacle, CGG changed its strategy from merely sourcing soybeans to building a soybean industrial base in Brazil and promised to not only to buy soybeans from local producers but also manufacture soy locally to expand local employment and contribute to local fiscal revenue.

Instead of direct land purchase, the company lent money to local soybean producers at discount rates, enabling them to expand their land and upgrade their equipment. In return, it can exercise the option of buying soybeans at pre-determined rates.

According to Smith, the case illustrates how China's agriculture market players have grown up to become more attuned to local sensitivities. He said they are more integrated with international supply chains in ways similar to existing multi-nationals from developed countries.

REACHING OUT

Foreign executives also warned that creating a win-win situation may be particularly important to Chinese firms investing abroad, since many enterprises have their eyes on resources abroad, such as energy, mining, forage and metal.

Fejfer noted that a significant challenge facing Chinese companies going abroad related to bad public relations and an irrational fear of the unknown. "There is a perception that Chinese firms come here for global dominance and they can be a potential security risk."

Yang Lin, president of Chongqing Light Industry & Textile, said in closing the deal with SaarGummi, it was difficult to swing the negative perception of a Chinese takeover among the German press.

"The prejudice brought us immense trouble, but we won support of the workers' unions, the press and the original equipment manufacturers for SaarGummi in the end," he said. "We did it with a sincere attitude and feasible plans in a way that was quite German."