Economy

Why 9 Of 10 Chinese Businesses That Go American Fail

A new study says some 90 percent of investments by China's businesses in American operations don't succeed. Chinese experts explain.

China's big American ambitions
China's big American ambitions
Ge Qing

BEIJING — Investments by private Chinese companies into the United States rose last year, but a disproportionately large number of firms continue to see their attempts to head to America fail.

In 2012, direct investment made by private Chinese firms outpaced that by their state-owned counterparts in terms of value for the first time. In 2013, total investment by private firms into the U.S. again increased by $5 billion to about $9 billion.

But despite the surge, a large number of private Chinese companies are seeing their attempts to tap the U.S. market fail. Data from the SoZo Group, a Hong Kong company that provides investment expertise to businesses in China, show that 90% of Chinese private enterprises’ attempts at manufacturing in the United States or Europe fail.

Raymond Cheng, an executive at SoZo Group, says that in 2013 more than 100 firms came to his company for help with direct investment in the United States, but after evaluation only about 10 were suitable for setting up plants.

Cheng warns that only if labor costs account for less than 25% of total expenses can an enterprise successfully settle in the United States. He said that although Chinese companies are becoming more mature on both the technological and environmental protection fronts, not all U.S. states are suitable for Chinese manufacturers.

He warns against China’s business leaders “flashing their money about” with reckless foreign investments.

“Certain businessmen have the wrong ideas about what investment in America is all about,” Cheng says. “For example, of those who invest in order to emigrate to America, most of them have failed due to a lack of preparation.”

Technology transfers

Many Chinese companies don’t realize the vast differences between manufacturing in China and the United States, Cheng says. Others think that just because they have relatives living in America, they’ll help take care of operations there. Some have planned to transfer entire teams from China to the United States, which doesn’t create employment opportunities.

“This probably explains why certain Chinese companies are not welcomed by the locals,” he says.

U.S. companies are subject to federal, state and local laws, and China and America have very different accounting systems and management methods. Then there is the language barrier. Investment in the United States has to be assessed comprehensively, Cheng warns.

Choosing a location is another issue. For instance, southern U.S. states are attractive to Chinese investors because of cheaper energy prices, lower tax rates and weak labor unions. But if a company sets up a factory in Texas while its clients are mainly in the Pacific Northwest, transportation costs must obviously be considered.

While many people assume that Chinese companies set up branches in the U.S. simply to acquire advanced technology know-how, Cheng says most are actually driven by reducing costs.


Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
THE LATEST
FOCUS
TRENDING TOPICS
MOST READ