（Gordon Orr - Chairman, Asia at McKinsey) July 24, 2015
Globalization of Chinese business continues at pace. I was asked to describe the four major ways in which it is occurring at a recent gathering of legislators in one of China’s key trading partners. These are:
- Sourcing abroad for Chinese demand
- Selling Chinese made goods abroad
- Investing Chinese capital abroad
- Chinese citizens going abroad, creating demand for services
1. Sourcing abroad for Chinese demand
What have I seen recently?
- A major shift from rapidly growing demand for basic materials and energy to demand for agricultural products with the underlying theme that China is increasingly unable to feed itself - certainly unable to feed itself safely.
- A Chinese urban middle class want food products they can trust to be safe for their children and themselves. They have a bias for internationally sourced foodstuffs, produced outside China and delivered direct to their home using ecommerce.
- This is creating many global supply hot spots – for example: Argentina, Russia, East Africa for cereals; New Zealand, Australia, Western Europe for dairy; USA, Brazil for soya; USA, Chile for fruits; Southeast Asia for aquaculture.
- Over and above this is demand for technology to apply to agriculture in China. As large-scale farms emerge, they can afford to invest in mechanization in advanced seeds, fertilizer and irrigation. Many such firms visit countries like Israel to find the technology they need.
2. Selling Chinese made goods abroad
What have I seen recently?
- State-owned enterprises focused on infrastructure sectors increasingly see projects abroad as the way to keep their factories in China busy, as demand plateaus at home. “One Belt, One Road” and related financing initiatives provide policy and executional support. In areas such as high speed rail, power stations, roads, ports, and airports, these companies are increasingly seen to deliver a world-class solution if they are well managed.
- The more significant trend is how the best of China’s private sector companies are now growing their exports, not to stand still, but to sustain their historic high rates of growth. This spans many, many sectors including construction equipment, packaging materials, medical devices, low voltage electronics and auto components, to name a few. These are not companies that survive by being the cheapest in what they do. They have IP, they sell to multinationals in China, they are survivors of intense domestic competition, and live on cycles of extremely rapid product innovation. The majority serve business customers today, but a few in consumer electronics and mobile technology are successfully targeting consumers.
- Why are these private companies going abroad now? First and foremost because they have enormously high aspirations. They are #1 or #2 in China and want to become top 3 globally. Additionally, they feel that domestic markets have permanently become much tougher places to grow in and they perceive they are ready, having competed against multinationals in China successfully. Finally, some are seeking additional capabilities (e.g. to improve productivity, to improve design) and IP that they believe they can access more easily by being international. Only at the margin, is government encouragement a relevant factor.
- Organic expansion by these private entrepreneurs often involves setting up an international HQ, as a hub for attracting non-Chinese talent. Hong Kong is an obvious choice for many, but beyond that others look to markets outside of the region.
- Organic expansion is often seen as too slow versus the aspirations of these entrepreneurs, which leads many of them to look for acquisitions.
3. Investing Chinese capital abroad
What have I seen recently?
- Chinese capital moving abroad for several purposes – to acquire businesses, to acquire properties (by businesses and individuals) and to invest in large scale infrastructure building. In total this could be as much as US$500 billion this year.
- Chinese businesses are looking to acquire assets that will grow their international business (e.g. sales channels for product from China, service organizations) and to access IP that they can use back in China. Increasingly, they are relatively hands-off acquirers – investing in well-performing businesses that they can add to without tightly integrating them.
- Chinese PE companies are also looking to invest in businesses that they believe can be brought to China and scaled. There are many examples from Europe, spanning Israel to the UK.
- Large Chinese insurers are buying international properties, usually in first tier cities, to diversify their holdings. Ping An and Anbang are leading examples.
- In property and infrastructure, State-owned infrastructure builders bring ever more government finance behind them when they grow abroad. In addition, Chinese private sector property developers are looking for international projects to build (e.g. Vanke in residential, SOHO in office developments, CFLD in industrial parks). These Chinese developers are very strong at attracting tenants from China to fill their developments which makes them very attractive to governments in the receiving country.
4. Chinese citizens going abroad, creating demand for services inside and outside China
What have I seen recently?
- In 2014, more than 100 million Chinese tourists travelled outside China. Millions of Chinese students studied abroad. Uncounted numbers worked abroad. Their expectations are rising for services adapted to their needs. This ranges from hotels to retail services to tourist experiences. These visitors experience local products and services when they travel and often seek to buy them again when they return back to China.
- Even smaller enterprises need to identify how they can make it easy for Chinese customers when they return to China to continue to buy their services and products. China’s ecommerce champions and the new free trade zones are important aspects of this.
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If we are competitors of these Chinese companies as they globalize, we will see strong pressure on prices and profits. We will need to embrace some of the best practices of Chinese competition on eliminating what our customers don't value and delivering faster new product development cycles while retaining our traditional heritage.
If we are customers, we will need to become comfortable sourcing from a new range of suppliers.
And if we are governments, we need to tread the fine path of encouraging Chinese investment, while not abandoning our historic local champions.
Read more of my views on my blog, Gordon's View. And please follow me on Twitter.
