AFTER a year of travel in search of overseas venues for his water equipment business, William Hong came away with two words at top of mind: “localisation” and “altruism”.
The denizen of Dongguan – China’s southern manufacturing hub – has been on a journey spanning continents, with stops in Africa, Central Asia, South Asia and South America. But no matter where he went, even countries with warm official relations, worries over Chinese investment and products were omnipresent.
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“Export value alone can no longer make overseas markets open to such a large number of Chinese companies and products,” said Hong, who began his career as an emigrant labourer before starting Dongguan Aimeike Valve, a producer of technologically enabled water and electricity meters.
“We need to change our thinking and bring an ‘altruistic’ approach to foreign trade,” he added. “It used to be an empty slogan, but after spending time on the ground, I have come to realise its truth.”
As the country maintains heavy production of goods even while trade barriers appear poised to intensify, many of China’s small and medium-sized enterprises (SMEs) like Aimeike must step out of their comfort zone. Previously content to enjoy the dividends from China’s undisputed status as the “world’s factory”, they are seeking new fortunes overseas.
And on their adventures abroad, they are realising the importance of integrating into local ecosystems. This requires letting go of a big slice of profits to keep things running smoothly – a lesson from their Japanese peers, learned in that country’s expansion wave beginning in the 1980s.
Hong said many of the failures he faced in overseas bidding came from not making offers in tune with local needs.
“Countries not only want you to provide products, but also help build infrastructure,” he said. “This is a big challenge for Chinese SMEs.”
Japan – which went through a similar economic growth pattern to China a generation ago – has, through five decades of its enterprises “going global”, accumulated rich experience on the matter.
Of particular relevance to China is the surge in overseas expansion from Japan’s SMEs, researchers from the China Europe International Business School (CEIBS) said in a report in September.
Through international investment, Japan has managed to create the equivalent of almost half of its economy outside its borders, a scale the researchers noted would serve as a vital reference point for Chinese enterprises.
Firms should learn from Japan’s “produce-where-you-sell” model, the report said, and adopt a “holistic strategy” that emphasises “creating value for the local community”.
Hong, the Dongguan businessman, treasures what might for many be a bad memory: a failure to secure orders worth millions in Mozambique in 2022.
The local government preferred joint ventures that could create local jobs over simple importers. Ultimately, the contract went to a competitor with an established branch in Africa.
“Honestly, I was frustrated at the time,” he said. “But I also realised that if Chinese companies, especially SMEs, don’t change their traditional mindset of only selling products, they won’t be able to establish a foothold in overseas markets. Being part of local supply chains is the path forward.”
The sudden onset of trade tensions between China and the US – particularly the restricted supply of core components like high-end computer chips – limited capacity for mass production and forced Hong to take a look at markets outside the US, especially emerging economies.
“These markets do not have as strong a demand for cutting-edge technologies as Europe and the US, but they do have a need for mid-range intelligent products,” he said. “We can find new opportunities there.”
Liu Kaiming, founder of the Institute of Contemporary Observation – a non-governmental organisation which works with global brands to supervise supply chain conditions in hundreds of China’s factories – said when it comes to developing countries, “if Chinese companies fail to create wealth and job opportunities for local communities but instead disrupt existing economic ecosystems and lifestyles, it often leads to dissatisfaction and even resistance.”
To succeed in the global market, he added, Chinese companies need to pay significant “tuition fees” to transform their long-held perceptions and experiences rooted in the conditions of the domestic market.
“A well-known Chinese cross-border e-commerce company formed a team of over 400 people last year to address ethical and legal issues in overseas markets,” Liu said. “This shows Chinese companies are still in the early stages of investing overseas, and generally face challenges adapting to the international business environment. When venturing abroad, companies need to adapt to different cultures, systems and rules.”
According to a survey conducted last year by the Hong Kong Trade Development Council, nearly 90 per cent of polled enterprises from mainland China indicated they plan to “go global” in the next three years, with more than 70 per cent expressing an interest in emerging markets.
Many named countries and regions involved with the Regional Comprehensive Economic Partnership trade deal and China’s Belt and Road Initiative for greater connectivity through infrastructure as areas rife with opportunity.
But according to Hong, Chinese companies were still not the first choice for potential partners. “Even in Central Asia, which I thought was very friendly and close to China, customers remain quite cautious about Chinese companies,” he said.
For instance, Hong said, customers in Kyrgyzstan tend to favour products from neighbouring Kazakhstan and are hesitant about importing Chinese goods, fearing it might undermine local industries.
“Before meeting me, the customers contacted many globally recognised companies, but the offer was either too high or [the companies] were not interested in smaller business,” he said. “In the end, only our products and technology fit their needs best.”
That was Hong’s conclusion after carrying dozens of kilograms in samples from China’s southern Guangdong province across Central Asia last month, sweating profusely while meeting with prospective customers.
There are more than 52 million MSEs like Hong’s in China, according to the country’s Ministry of Industry and Information Technology, and Chinese tech news outlet 36kr reported more than 750,000 of the country’s enterprises have launched overseas operations.
Going global with Chinese capital but leaving behind Chinese habits is essential for companies to thrive overseas, said Gao Zhendong, a supply chain specialist and secretary-in-general of the China-Vietnam Industrial Service Alliance.
Those that integrate deeply into local supply chains have a higher chance of success, he said.
Hong said his many years of travel have led to a shift in strategy.
“Instead of focusing solely on selling products, we aimed to become their ally to ease their worries that Chinese production capacity might dominate their markets,” he said. “If customers want to scale up their operations in the local market but lack a strong supply chain, we position ourselves as that backbone, not just an importer.”
He said his business philosophy can be expressed in simple mathematical terms: for every million his customer earns, his company would ask for only 10 or 20 per cent, with the remainder going to the local client in full.
This, he said, helps build trust and partnerships – and is what he credits for winning bids on several projects.
“We must downplay ourselves to empower local businesses. This is how we can establish deep roots overseas.”
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