Communication is often the biggest hurdle for Chinese investors as they buy companies and set up factories in the South.
That was the message from manufacturers and service providers that help facilitate the anticipated wave of Chinese companies arriving in the region at the recent Symposium on Asia-U.S. Partnership Opportunities in Atlanta.
In some cases, the South can compete with China on costs, especially on products sold on this side of the world that can be made in highly automated factories. The nation once known as the world’s factory floor no longer has the labor cost advantages it once did.
Making in the U.S. allows companies to cut logistics costs, and many Chinese firms are already availing themselves of the South’s low unionization rates, affordable land, relatively cheap energy and responsive governments.
But they’ve inevitably hit cultural hurdles that have rankled some communities — even those where Chinese firms are creating hundreds of manufacturing jobs.
Finding Bridges
Golden Dragon Precise Copper Tube Group had been operating in China’s Henan province and globally for decades before setting up shop in Pine Hill, Ala., to great fanfare in 2014.
While promising more than 300 jobs in the economically challenged area, the company brought over more than 80 Chinese trainers and technicians to get the operations started.
In a town of 1,500 people, that was perceived as amounting to a “Chinese invasion,” said K.C. Pang, a Malaysian-born Chinese-American who was hired to bridge the substantial cultural gap.
“When I first joined the company two and a half years ago, I had to resolve a lot of issues between Chinese and Americans, and 99 percent of them are misunderstandings,” Mr. Pang said.
Within the factory, workers complained of poor communication from management, according to a Wall Street Journal story examining the integration. Partly as a result, the workforce narrowly voted to unionize in an area of the country where unions are rare. The company reportedly faced a $200,000 OSHA fine for failing to provide safety gear in 2016.
[pullquote]Why are the Chinese managers fighting with each other and yelling at us all the time? [/pullquote]
Mr. Pang illustrated the cultural challenge through a question one of the American workers asked: Why are the Chinese managers fighting with each other and yelling at us all the time?
“We Chinese are very passionate people. We talked loud, fast with hand motions. That doesn’t mean that we are mad at you. That doesn’t mean we are fighting. That’s how we communicate,” Mr. Pang said.
The work culture is also different: Chinese manufacturers, he said, learn by trial-and-error, while Americans prefer to plan in advance. Chinese trainers teach on the job, while Americans train more academically.
More than 70 Chinese still live in dorms on the factory property, but Mr. Pang insists that this is a temporary necessity as they transfer knowledge about the high-tech production process to the American workers, which requires some patience on the U.S. side, he said.
“How many companies will hand over $100 million investment to a group of employees and managers who don’t know this business well? American companies don’t do that. I worked for FedEx in Asia. They don’t do that.”
“They are not here to stay,” Mr. Pang said of the Chinese managers. “They are going home.”
According to GD Copper’s China website, the Chinese staff is being offered English language classes and educational opportunities at American universities.
Finding Service Providers
As for avoiding such pitfalls, Mr. Pang said it’s essential to hire people with experience in both cultures to serve as “bridges” for business. It’s also key to have a good lawyer, since America is a “rule of law” country, he said.
One problem, though, is that paying for consultants on issues like site selection and legal matters isn’t something Chinese companies are accustomed to. And trust is not easy to build quickly.
Chinese firms are getting more sophisticated, but they still sometimes rely too heavily on existing relationships as they perform due diligence.
“The question still remains: Those relationships that led to that adviser — are those the qualified experts for these particular tasks?” said Sandy Chu, national leader for the China business group at Grant Thornton LLP.
Springna Zhao, a special adviser to the Alabama governor’s office who has worked to bring Chinese firms to the state, agreed that the biggest challenge for Chinese companies is culture.
But a Chinese firm’s willingness to get the right help is an indicator of how serious it is about investing in the U.S., she said.
“If they are willing to pay the consultants and follow the guidelines and Western standards, I think they are truly open to investing here,” said Ms. Zhao, whose Club Washington brought multiple Chinese companies to the SAUPO conference.
Sometimes, Chinese firms flush with cash end up paying a premium for deals as they rush to market, which ultimately lengthens the time it takes for a venture to make a profit, Ms. Chu’s said.
“When we deal with the Chinese company, they never really ask about how much it costs, they really focus on getting through the process, getting the formality done so they can move on and acquire,” she added.
They sometimes fail to think about the management structure they’re going to put in place post-merger, at a time when existing staff will be full of questions about what life after the integration looks like.
“I think you have have a lot of effort on the front end to identify your management team who can bridge that gap. You need someone who lives in both worlds, and those people are not easy to find,” said Betsy Bulat Turner, an attorney at Martenson Hasbrouck & Simon LLP who deals often with international mergers.
Ms. Turner added that the fears can be amplified when it’s a foreign buyer, especially a state-owned enterprise.
“Here in the U.S. we don’t have a lot of institutional knowledge about Chinese business. We just don’t know enough about it to know whether our fears are founded or not.” Ms. Turner said.
Momentum Stalling?
Last year was a record for Chinese investment into the United States, according to the Rhodium Group consultancy’s Chinese investment monitor.
Huge acquisitions in entertainment, hospitality, technology and real estate tripled the previous annual growth total to $45.6 billion and pushed the cumulative total of Chinese investments in the U.S. to more than $100 billion in 2016.
It’s unclear, however, whether that momentum will continue given short-term uncertainty in the U.S. regulatory environment and cloudy relations with China. China itself has also tightened the reins on capital outflows as it seeks to shore up the value of the yuan.
But Rhodium believes the underlying fundamentals point to enhanced Chinese FDI growth:
Economic fundamentals suggest further expansion of Chinese FDI in the US in coming years: The Chinese economy is slowing and companies are keen to diversify; pressure on Chinese companies to upgrade technology and build out brands and local consumer presence is only increasing; the US growth outlook is brighter than in Europe and other advanced economies; and anticipation of further US dollar appreciation against the Chinese Yuan further increases the rationale for adding US assets.
More from Rhodium here.
Learn more about SAUPO here.
The Pendleton Group is the presenting sponsor of Global Atlanta's Economic Development Channel. Subscribe here for monthly Economic Development newsletters.
