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