There is a popular metaphor in business circles about a 19th century experiment in which researchers concluded that frogs, when thrown into a pot of boiling water, would jump out to survive; but if the frog was placed in a pot of cold water where the temperature was raised slowly, the frog would be unable to sense the small changes in temperature and would eventually boil to death.
The science behind this experiment has since then been debunked, however the “Boiling Frog” story remains a useful metaphor to describe the current situation faced by many companies in China. Not long ago, China was the world’s dominant economic powerhouse and the factory floor of the world. For decades, Chinese companies enjoyed access to low cost labor, easy bank financing, endless global purchase orders and expansion prospects with no horizons. Annual double-digit profits and growth rates were common. Companies with good connections in government and State Owned Enterprises both benefited from privileged power dynamics. The frogs in this pond were very happy.
China companies today swim in a very different pond. Many companies now find their domestic market climate to be increasingly challenging. Many domestic companies have seen their market positions eroded by rising labor and operational costs, increased borrowing and regulatory costs, the cost of corruption and government inefficiencies, and the relocation of low value added manufacturing (along with those purchase orders) to lower cost countries. The past ways to make money are not necessarily sustainable in the future. The advantages of the past seem to be gone, or slowly fading. Today, many competitors encroach upon the pond, and it is becoming increasingly difficult to survive in this new ecosystem by sticking to the traditional way of doing things.
Given this trend, bosses and leadership teams look for government guidance, and they are being encouraged to “go out” and seek opportunities overseas. As the whole world knows, companies have followed this advice, and in 2014, China’s official Outbound Direct Investment (“ODI”) amounts exceeded official Inbound Direct Foreign Investment amounts. This trend will continue for the foreseeable future.
It has become clear that for a wide variety of companies, particularly those in traditional manufacturing sectors, that ODI is a viable strategy to secure access to new markets, new revenues, management and technical talent, and new products and technologies. These are a pathway for future enterprise survival.
Few companies are able to develop an ODI strategy alone, which is understandable, since in the past they have been able to succeed and prosper by relying on their knowledge of the local market and business environment. Developing and implementing a successful ODI strategy takes input from many professionals to maximize the chance of success, and very few companies, whether in China or overseas, have the required mix of skills in-house. Faced with the daunting prospect of investing in foreign markets they do not know, smart companies have started to hire professional teams specialized in ODI to safely guide and team with them to plan and implement successful overseas investment strategies. Without such skilled teams, it is very dangerous for Chinese companies to try to go it alone without help. Chinese companies already operating overseas also need this kind of support.
In past decades, when many foreign investors came to China, it was common to hear frustrated comments from PRC executives about how the lost foreigner refused to listen to recommendations of their advisors and made negotiations or operations unnecessarily difficult. In some cases, the lost foreigner also jeopardized the viability of the project with their lack of cultural sensitivity, lack of familiarity with the local business environment; they often assumed that things should work the same way in China as they did in their home country.