Economy, Talking Point

Greener pastures

Chinese firms look for new growth in ‘Going Overseas’ trend


SheIn, the Chinese app popular with clothes shoppers overseas

After launching the open-door policies and economic reforms of the late 1970s, Chinese policymakers made inward foreign investment the first priority for their economy. With China’s accession to the World Trade Organisation in 2001, ‘Going Out’ then started to become more of an objective as Beijing encouraged Chinese firms to make more investments themselves in buying natural resources or technological know-how from foreign markets.

The Going Out campaign grew in intensity, reaching a frenetic peak in 2016 with a flurry of acquisitions of overseas assets. Wanda, one of the most buccaneering buyers, even boasted that it was helping to export Chinese culture to every corner of the world. But the surge in investment worried the Chinese government because the M&A often lacked focus and much of it was backed by borrowing from state lenders. The fear was that too much capital was being risked on international deals and even that the Going Out banner was being used as camouflage for moving money offshore (and circumventing China’s capital controls).

Now after a lull in activity, lengthened in some sectors by the disruptions of the pandemic, interest in international markets has started to get more focus again.

But the buzz in the press and social media today is more about ‘Going Overseas’, a tweak on the older term that denotes a new generation of younger firms and entrepreneurs, who have set out to woo overseas customers with different products like smartphone apps and online games, as well as consumer brands in areas such as clothing and cosmetics that combine affordability with ‘good enough’ quality.

Defying regulatory hurdles and the enduring impact of Covid-19, what’s driving the Going Overseas trend and where is it strongest?

Who were the trailblazers in the earlier Going Out trend?

For decades the Going Out initiative was mostly associated with M&A and investment. In the case of China’s state-owned enterprises, much of the drive came from the country’s thirst for energy supplies and other basic commodities. There were plenty of errors along the way: Citic Pacific was an early mover but its deal for a major Australian iron ore project in 2006 turned out to be disastrous (resulting in a hefty foreign exchange loss a few years later). Eventually a bailout from state-owned parent Citic Group was needed.

CNOOC’s $18 billion bid for American oil producer Unocal a year earlier and Chinalco’s proposed $20 billion investment in Rio Tinto a few years later ran into different difficulties, when they were blocked by political resistance in the host markets.

Experiences like these saw critics at home mocking the SOEs as blundering and unsophisticated. But bidders weren’t discouraged from targeting other foreign assets. Manufacturers hunted for foreign know-how or technology that could improve their operations but otheracquirers began to purchase brands with pre-existing reputations to support the sales push into international markets.

Two trailblazers on this route were Lenovo and TCL, which also took flak at home after costly acquisitions of IBM’s ThinkPad PC business and French firm Thomson’s television-making operations respectively.

These assets were only for sale because of their faltering value in sunset sectors, naysayers argued.

Later came the likes of Wanda, HNA and Anbang Insurance, which went on wild spending sprees for trophy assets such as hotel chains, movie studios and landmark office buildings. Their swashbuckling bosses spent billions of dollars – more than $50 billion in 2016 alone, according to research firm Dealogic. However, many of the investments have suffered sharp reversals, with their acquirors struggling to stay solvent (see WiC542).

How is the focus different today?

This brief history suggests that Going Out could be a risky strategy for Chinese firms and their bosses. But in essence the trend was motivated by a hunt for things that they, and their country, needed. Typically it was a drive to invest in overseas assets and supply chains, rather than make sales to businesses or consumers.

The new generation of entrepreneurs behind the Going Overseas trend is still investing in oversea assets. But more of their focus is on making sales as well.

Indeed, their objective is almost the opposite to the Going Out generation: convince consumers in global markets to buy a range of new goods from China.

Why is that happening now?

‘Made in China’ products have been making their way to overseas markets since the early 1980s. The first generation was unbranded and low-end goods – think socks, underwear and cheaply-made toys. But as quality improved contract manufacturers making key parts for prominent international brands (such as Foxconn for Apple, and Yue Yuen for Nike) helped rake in much-needed foreign currency, bolstering Chinese forex reserves. Yet the most valuable parts of the industry chain, aka R&D and brand management, stayed tightly controlled by international firms.

The ‘Made in China’ image could be dubious too. Yes, factories churned out vast amounts of goods at cheap prices. But a constant squeeze on costs came with compromises in product quality. A shanzhai (or copycat) culture also angered fellow members of the WTO, which criticised China’s track record in enforcing anti-counterfeiting regulations and protecting intellectual property.

These lower-end activities laid the foundations for a gradual change into more developed supply chains, however, which started to produce more sophisticated goods and components.

Domestic R&D skills improved as well (countries like India and Vietnam are now going through a similar phase in their economic evolution).

That trend has been epitomised by the transformation of Shenzhen from a shanzhai marketplace to a bona fide tech hub, now home to global leaders including Huawei and DJI. The fact that Chinese firms are exporting more advanced products such as telecommunications equipment and drones, Jiemian suggests, is evidence that the manufacturers have already moved up the industrial value chain.

Naturally, some oddities remain, especially in commercial clusters around the country that specialise in a particular product: 90% of the coffins sold in Japan are made in China’s Cao county, the news portal noted. But many of the best-selling products from China are coming from sectors that didn’t really exist a decade ago, such as smartphone apps and mobile games. TikTok – a huge hit with consumers in Western countries – is locking horns in the United States with Meta (formerly Facebook) to emerge as the most popular social media app for young people, for instance. Other smaller but fast-growing e-commerce firms are emerging as challengers to other American giants as well.

What are the challenges for some of the companies Going Overseas?

Chinese firms trying to reach consumers in international markets aren’t always being welcomed, of course. India, an important market for companies looking for growth, banned the sale of more than 200 Chinese apps in 2020. Reportedly the Indian government is considering an extension of these restrictions to other made-in-China products including smartphones on national security grounds. In the US internet platforms including TikTok and WeChat have also been threatened with potential sanctions by Washington for similar reasons.

Chinese companies selling through e-commerce platforms like Amazon have been less contentious in political terms. But the American giant also launched an unprecedented campaign last year against fake reviews or the dark art known as ‘brushing’ in China’s e-commerce sector. Thousands of stores owned by Chinese firms on Amazon’s retail platform were closed.

Then there is Covid. Since the coronavirus was first reported in Wuhan in November 2019, it has made international travel in and out of China nearly impossible for lengthy periods. This is still the case for the so-called chuhai ren (literally ‘people who go overseas’, or the legion of salespeople and business executives tasked with generating international opportunities) because the government has been enforcing strict quarantine controls. As a result many of the chuhai ren haven’t been able to return to their home base, working instead from hotel rooms in places such as Cambodia or Dubai for the past two or three years, according to a documentary series on Phoenix TV last year.

Where are Going Overseas sales getting most momentum?

It’s not just personal travel that has been disrupted by Covid. Goods flows have been fractured too by the pandemic, with supply chain sclerosis in China’s container ports forcing up freight prices to unprecedented levels.

Sales of apps and online games are less affected by this kind of disruption, of course. And here Chinese companies have made major strides. TikTok has held the crown of the world’s most downloaded app for a while. But the annual Top 52 Publisher, a list released in April by American analytics company, found that 17 of the world’s most popular apps were developed by Chinese firms.

Made-in-China apps also lead the online gaming sector, where Chinese firms accounted for 23% of global sales in the first half of 2021. Companies like Tencent have been setting the pace in the gaming sector for a while. But other internet platforms and gaming firms are putting more focus on their overseas sales as well, especially after a long period of closer scrutiny by regulators in the domestic market has chilled their operations at home.

Alibaba and Tencent have made big pushes, for example, into Southeast Asia, for instance, particularly in cloud services and data management.

Where else is the impetus coming from?

Although cross-border trade has been constrained by Covid, Chinese e-commerce platforms have survived the worst of the downturn. In fact, the sector tapped into demand from locked-down consumers elsewhere in the world last year, serving as a key driver of Chinese export growth. According to the country’s customs service, merchants in China exported more than Rmb1.1 trillion worth of goods through e-commerce channels in 2020, a 40% rise from the year earlier. The sector continued to report 28% growth on the year during the first half of 2021.

Apparel retailer SheIn is probably the best example of the new era. Such is the success of the fast-fashion firm that it was valued at more than $100 billion in its latest fundraising round. That’s mostly driven by business in international markets – it doesn’t prioritise sales to consumers in China.

Of course, until recently China hadn’t produced many consumer brands with genuinely global appeal. Many firms lacked marketing know-how or balked at the investment required to build brands of global scale.

Today, new brands are emerging at rapid pace. SheIn was largely unknown just five years ago and other up-and-coming brands want to make the same progress, including NewBornTown, miHoYo and Anker. If you have not heard these names, you probably will soon, reckons.

Or take Florasis. The cosmetic brand caused a sensation after opening its first virtual store on Amazon Japan in March last year. According to Jing Daily, many Korean and Japanese cosmetics firms have been losing market shares to similar brands from China.

As more Chinese brands start to gain favour with overseas consumers, there’s another contrast with some of the older strategies of China’s leading companies, which have often chosen to buy recognised brands in other markets rather than launch their own.

Haier – one of the world’s biggest retailers of white goods – chose not to sell products under its own brand in many markets, for instance, buying foreign marques like General Electric in the US and AQUA in Japan instead. Geely, a leading carmaker in China, has done something similar in acquiring Volvo and Lotus.

This too seems likely to change as Chinese firms set more of the pace in fast-emerging industries such as electric vehicles. As the Chinese EV makers start to set new sales records at home it seems inevitable that they will want to make more of a transition from domestic sales into international ones, promoting their own brands proudly. The leading Chinese battery firms expect that as well, which is why they are investing in new plants in Europe, closer to their prospective customers.

“Each company going overseas is also a representative of ‘Made in China’,” Ma Guangyuan, an economist and influencer on social media, claimed on his WeChat account this month. “In the international market nothing is more important than brands.”

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