Warning on China investment

Last updated 16:25 30/01/2013

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Companies investing in China need to have effective local government relations and empower local staff or they will fail, says Beijing-based Kiwi investment advisor David Mahon.

In his latest newsletter China Watch, Mahon, managing director of Mahon China Investment Management, said foreign companies could look to the coming years in China with a degree of confidence that the economy would remain strong.

But that economic strength and the growing competitiveness of its domestic companies was forcing foreign companies to reconsider the value they bring to the market, Mahon said.

‘‘Crucially foreign companies must maintain effective government relations at a local level and empower capable local staff. Failure to localise in this way results in commercial failure in China,’’ he said.

The Chinese economy would stay strong ‘‘but without the heady growth’’ of the past decade. Its strength would rely on reform of the finacial sector, ratification and then regulation of the unofficial banking system on which small and medium sized private business depended and reducing corruption at every level of government, Mahon said.

‘‘Foreign investors can expect market stability but must also be prepared for the fact that China’s domestic economy is becoming more competitive.

‘‘Being a foreign company, having a strong global balance sheet and even a trusted brand in other markets are no longer enough to ensure success in China,’’ Mahon said. No matter how opaque ‘‘or even mysterious’’ the China market appeared to outsiders, foreign companies that continued to succeed, adhered to simple principles.

‘‘Successful foreign companies estimate the rate of change in the market realistically, respect their local competitors, and devolve power to country managers in order to execute transactions quickly in China’s competitive economy.''

The two most crucial success factors were balancing expatriate and local staff in senior management and maintaining effective government relationships.

‘‘Foreign companies which manage to link local employees to long-term success _ through shares or phantom share schemes _ usually experience a substantial improvement in perofrmance and overall integration of their operations in China,’’ Mahon said.

Companies which encouraged their senior Chinese managers to participate in key strategic decisions related to China tended to make fewer mistakes and better understood their competitors, he said.

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In the recent past, maintaining good government relations was less complicated than today, he said. This was because the Chinese government had desperately needed investment and know-how from foreign companies.But now access to senior government officials often depended on the existing level of investment a company had made in China, whether China needed the company’s technology and even China’s bilateral political relationship with the company’s home country, Mahon said.

In contrast, political access at city, country and township leels was easier to achieve.Local party secretaries, magistrates and bureau chiefs had clearer economic aims and many had good business acumen. Maintaining good local relationships was usually more important to business success in China than occasionally meeting very senior leaders.

- Stuff

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