Making better use of domestic and overseas markets and resources. Becoming more dynamic and influential in the world economy. These purposes underlie China’s One Belt One Road initiative (BRI), which links China and Europe via Asia and Africa, both on land and by sea, as Peking University National School of Development professor Justin Yifu Lin explains in his commentary in this issue of ChinaReport (page 72).
The Asian Infrastructure Investment Bank (AIIB) officially launched on December 25, 2015. On that day, 17 founding members, who hold more than half of the bank’s shares, ratified the Articles of Agreement of the AIIB, which was signed on June 29 by 57 founding members, including some developed countries. The AIIB, as a Chinese initiative with China as the largest shareholder, has been regarded as a good beginning for the BRI and a diplomatic success for China in 2015.
High risks come with high returns. It is Chinese companies that will take on the risks in their daily operations, meaning not only normal business risks, but also political and social risks in a still underdeveloped market. The BRI market is challenging even for Western multinationals that have abundant experience in managing a global presence. What preparations should Chinese companies and government officials undertake to explore this untapped potential as new players in the international arena?
Wei Jianguo, executive deputy director of the China Centre for International Economic Exchanges and former deputy minister of commerce, and Yuan Dongming, a research fellow with the Development Research Centre of the State Council, share their thoughts with ChinaReport on the One Belt, One Road initiative.
ChinaReport: Terrorism is a threat to countries along the Belt and Road. Do you think this is an impediment for Chinese companies planning to expand there?
Wei Jianguo: I don’t think Chinese companies should be deterred from entering countries with a large potential market because of political instability. The opportunity may be lost if they wait until the situation is ideal enough that competitors from other countries start to swarm in.
Now is the best time for Chinese enterprises to go abroad. The BRI, being a national initiative, is backed by the Chinese government. The US and countries in Europe have their hands full with issues of refugees, worker strikes and terrorist attacks. They don’t have the spare time and tools to help their companies expand overseas.
However, it is not wise for any company to enter a market regardless of the cost and risks. It is a test of a company’s competence to analyse risks and deal with them.
CR: For Chinese companies interested in taking advantage of the BRI to go abroad, what particular market risks will they face?
WJ: Chinese companies must think about three issues before going abroad: how to integrate their own business plan into the industrial strategy of the host countries, how to adapt themselves to the local markets and how to work together with the right partners who are in line with the policies of host countries.
For example, if a Chinese motorcycle manufacturer wants to enter a market along the Belt or Road, it needs to do its research on the appropriate type of engine, the size of the motorcycle, the potential for local consumption and the possibility of exporting to third-party countries. Chinese companies do not have previous experience of doing such thorough research in this regard.
Special industrial parks and favourable policies for overseas investors are additional attractions in some host countries. Information like this is also very helpful for Chinese companies when making business decisions.
Chinese companies have a strong desire and ambition to expand their market along the Belt and Road. However, they have little idea about how to go about it.
CR: What should the BRI’s first step be in 2016?
WJ: The Chinese government should provide basic, sector-by-sector information on the business environment in One Belt, One Road countries.
Also, a more feasible approach, I think, is to start the implementation of BRI in 2016 with, say, about 10 countries in which market conditions are favourable and there is a strong willingness to cooperate with China. If landmark joint projects can break ground there early, as a ‘first harvest,’ they can serve as good examples for other endeavours. The Gwadar port project in Pakistan is probably just such an example. [The port is located at the mouth of the Persian Gulf. China built it from 2002-2006, took over operational rights from Singapore in early 2013, and made it a part of the US$46 billion China-Pakistan Economic Corridor plan that was announced in April 2015. ]
Cooperating with international financial institutions and multinationals, either from the US, Europe or countries along the Belt and Road, is another good strategy for Chinese companies to subscribe to in their joint projects with host countries.
CR: What kind of help can Chinese companies expect from the Chinese government?
WJ: China can work together with host countries to issue a catalogue listing industries with the most local potential. It can also propose a timetable and a roadmap detailing when and where to go first. It can enact favourable policies as well.
Besides the Chinese government, intermediaries like trade associations have a crucial role to play. They have two main tasks. Firstly, they are the bridge between enterprises and government bodies. Secondly, they can help avoid undercutting and unfair tactics among competing Chinese businesses [which are not uncommon among Chinese companies undergoing bidding processes overseas].
CR: What kind of trade organisations can perform all of these functions?
WJ: Only those that specialise in serving and coordinating with their members are able to fulfil these duties. They are knowledgeable about enterprises within their industries, and based on that can come up with proposals for the government. The performance of these trade groups even underlies to a large extent the results of Chinese enterprises’ and industries’ ventures along the Belt and Road.
Given this, industrial organisations themselves could probably go through a reshuffling in their participation in the BRI. Those with bad services that are unpopular among their members will be phased out. Many Chinese trade associations are still more like secondary government agencies. They should learn something from their international peers, which are selected, funded and led by enterprises of the industries they represent. Chinese chambers of commerce and guilds engaged in One Belt, One Road projects have to be reassessed and rebuilt to improve their services.
CR: What major risks and challenges will Chinese enterprises face when they expand into One Belt, One Road markets?
Yuan Dongming: There are four major challenges. Mutual trust with host countries and security come first. Civil wars and attacks by extremists and terrorists in the Middle East and Africa have already caused significant damage to Chinese enterprises operating there. China has yet to build strategic mutual trust with some One Belt, One Road countries. Trade protectionism and nationalism have been rearing up due to the global economic downturn. All of these pose mounting risks to the security of personnel and assets of Chinese enterprises investing abroad.
There are also a lot of concerns among other countries over China’s ‘go global’ strategy. They are worried that Chinese enterprises may take control of their strategic resources, including energy, minerals and port facilities, or take away core technologies through large mergers and acquisitions, or that Chinese State-owned enterprises may enjoy unfair support from the Chinese government through capital, favourable taxation and market access. China’s rapid rise to major global trader and investor status is another source of anxiety for some countries.
Secondly, some domestic policies currently hinder Chinese enterprises from going global. A lot of policies have been adopted to encourage Chinese enterprises to go global, however, they are too fragmented to help Chinese enterprises as much as expected. Restrictions remain in capital control, foreign payments and investment protection, although the overseas investment system has become much more relaxed.
The government needs to improve its ability to analyse the investment environments of other countries, and to cooperate with international institutions. Intermediaries and trade associations have not provided proper coordination and advisory services, as independent third parties should.
Thirdly, Chinese enterprises still rely too much on lending through financial intermediaries [mainly banks, which are more difficult and expensive to use than direct financing through equities and bonds]. It is particularly challenging for private Chinese enterprises to fund their overseas investments. In addition, it is not easy for Chinese companies to find a Chinese bank in overseas markets.
Fourthly, Chinese enterprises themselves have a lot of homework to do. Some in the mining industry have reported huge losses in their overseas investments due to their lack of understanding of the industry and international experience. Some do not have enough awareness of political, legal, environmental and social risks in host countries, nor the competency to deal with these risks. Also, it is not uncommon for Chinese enterprises to undercut each other’s prices or use vicious competitive tactics. As a result, Chinese companies are generally not very profitable in their overseas ventures.
CR: How can these issues be addressed?
YD: A risk-control system based on the joint efforts of the Chinese government, enterprises and third parties is urgently needed to get prepared for the quickly increasing business, political, security, legal, environmental and social risks in One Belt, One Road projects.
The government should speed up writing legislation on overseas investment and building an insurance system for said investment. It is responsible for creating a secure investment environment through diplomatic efforts and information disclosure.
Chinese companies operating overseas need to install internal risk control and build good relationships with local communities by observing local laws, respecting local religions and customs, and engaging in corporate social responsibility.
Third parties like intermediaries, chambers and think tanks can provide professional services in risk assessment and prevention.
CR: What are your suggestions for Chinese enterprises about which areas and strategies they should prioritise to get a foothold in One Belt, One Road countries?
YD: Infrastructure to connect One Belt, One Road countries has already been identified as the initiative’s priority. Chinese companies can focus on the construction of railways, roads, ports and airports, or public utilities like electricity, power grids and telecommunications networks. These projects can also boost China’s domestic investment in mining and manufacturing, in areas such as steel, construction materials, and oil and gas extraction and refining.
It is an opportunity for China to develop a global supply chain led by Chinese enterprises. This can be made possible through pairing up Chinese enterprises’ technology, capital and industrial edge with One Belt, One Road countries’ local markets and resources. Big Chinese companies can jointly build industrial, tech or trade parks with foreign governments or industries in One Belt, One Road countries. This will also facilitate the going abroad process for small and medium-sized Chinese businesses, which in turn will help forge a global supply chain integrated by Chinese multinationals.