Sunday, July 21, 2013

Michael Komesaroff on Factors Contributing to Performance of Chinese Enterprises Abroad

Michael Komesaroff is a principal of Urandaline Investments, a consultancy specializing in China’s capital intensive industries, and a former executive in residence at the School of International Affairs, Pennsylvania State University, whose insights on Chinese economic activity has been featured here in prior posts.

 ("Secretary-General Ban Ki-moon takes part in a group photo at the 5th Ministerial Conference of the Forum on China-Africa Cooperation. UN/E. Debebe" At China-Africa meeting, Ban highlights role of South-South cooperation (July 19, 2012)).

Mr. Komesaroff recently offered nuanced insight into how Chinese companies approach doing business in Africa generally and African mining in particular during a course of an interview with Melissa T. Cook, CFA, Managing Director, Africa Investment Strategy, in "Africa Sunrise One on One," Spring 2013, available through Urandaline Investments (registration required).  This post considers some of the more interesting points made.

Mr. Komesaroff started by offering his sense of the reasons Chinese enterprises do not seem to perform as well abroad as they do within China.
I see three reasons that Chinese companies don’t produce as good outcomes outside of China as they do domestically:
-The institutional environments are different: When Chinese companies in Africa have trouble with a project, they can’t just throw more labor at the problem as they can in China. There are restrictions on the inputs of foreign labor, and workers are not as docile as in China.
-In China, a company working on a project has been nominated by a higher authority. Company leaders need only to deal with the elites in government. Outside of China, even in undemocratic countries, there are other strong institutions to be dealt with, e.g., powerful labor unions.
-In other countries, the press holds companies accountable in a way that doesn’t really happen in China, even with more press outlets these days. (Ibid).

It is perhaps useful to understand this comment not as the usual call for unlimited press freedom in China, but rather to the importance of an unfettered press as a monitor of economic activity that can focus on activity in ways that the state cannot manage. This insight is especially powerful within globalization where the ability of enterprises to evade direct government control is more likely., and the need for media supervision more central to the discipline of enterprises operating abroad.  (e.g., Backer, Larry Catá, Economic Globalization and the Rise of Efficient Systems of Global Private Lawmaking: Wal-Mart as Global Legislator. University of Connecticut Law Review, Vol. 39, No. 4, 2007).  The use of Communist Party cadres as monitors may help, to some extent, but theirs is political work and they may be less well equipped to deal with issues of economic accountability at the heart of Chinese success in operations abroad. (e.g. On the Role of the Chinese Communist Party in Overseas Chinese Companies--A Preliminary Examination, Law at the End of the Day, July 7, 2013).
Mr. Komesaroff also suggested that there might be some truth to the idea that Chinese companies were investing heavily in foreign companies in an effort, in part, to purchase their governance expertise for use in regions outside of metropolitan China.  "While that paints a negative picture of Chinese companies, at their upper levels of management there is desire to improve their governance. That’s because lack of good governance damages the Chinese brand. Buying established companies reduces that risk." (Ibid).  Mr. Komesaroff is right, of course, and the Chinese are not the first to purchase expertise (either foreign or domestic) to increase their own advantages.  The difficulty for these Chinese enterprises, like those attempting this strategy before, is one of naturalization.  Merely purchasing expertise is not the same as extracting the useful and internalizing it in Chinese operations abroad.  The failure to do that may create the danger of dual track Chinese companies and a further erosion of both efficiency and the development of Chinese expertise in operating profitably for the long term abroad.

These difficulties--of governance and economic accountability--show in the day to day operation decisions that make the difference between substantial long term success and mediocre performance.  Mr. Komesaroff noted that this problem is acute, for example, with respect to mining equipment because in this case the Chinese enterprises have a bad reputation for servicing their equipment.  "In terms of mining equipment, for very large equipment, China is not in the hunt. It doesn’t make equipment as large as Komatsu, for example. At the same time, it doesn’t offer back-up service that Cat and Komatsu offer to big companies to maintain the equipment. Effectively, they offer guaranteed operating price per hour with benchmarked performance, which Chinese equipment suppliers can’t or won’t do now." (Komesaroff interview, supra). At the same time, Chinese enterprise have the capacity to overcome these problems with attention to the underlying issues.  Mr. Komesaroff notes, for example,  that "China has an excellent name in rail equipment, and a stated goal of moving up the value chain there." (Ibid). Part of the problem is domestic.  Chinese enterprises abroad do better when there is domestic operation from which they might learn.  "They moved faster in railways because they had a domestic rail industry, so they learned how to operate railways. But the Chinese won’t move up the value scale as fast in mining because they don’t have significant mining capability domestically to serve as a training ground for applying learnings and developing capabilities." (Ibid).  Though it is precisely this lack of domestic expertise that might be driving Chinese investment abroad--to leverage investment by providing the necessary expertise that is otherwise unavailable within domestic industry.

Mr. Komesaroff also noted the common misconceptions about Chinese business practices in Africa.
-The most widespread and offensive misperception is that China is sending prison labor to work on projects in Africa. That falsehood reflects differences in working cultures more than any hard evidence. . . . 
-Another misperception is that China is looking to do business solely in resources. That’s not true—China also sells into African consumer markets. African consumers are less sensitive to brand names than consumers in more developed economies. So an African consumer will buy a Chinese TV set or DVD player purely on the basis of price, nothing else. Western companies don’t offer much competition here, either not having penetrated an African country’s electronics market yet or having
products that are too expensive. . . .
-There are 53-54 countries in sub-Saharan Africa, which represent an important political bloc in organizations like the UN. China wants to be on their side, which holds a number of advantages for China. (Komesaroff interview, supra). 
Mr. Komesaroff is correct to discount the calumny of Chinese prison labor and is also right that there are political as well as economic motivations underlying Chinese investment policies in Africa, especially for its state owned enterprises.  It is also true that U.S. and European companies have been less than diligent in penetrating consumer markets in Africa--the reasons for which may be as varied as the talents and prejudices of the people and societies from which these enterprises originate. Yet the issue of African taste for brand names, especially if brand is a substitute or proxy for quality, remains controversial. (e.g., Damien Hattingh, Bill Russo, Ade Sun-Basorun, and Arend von Warnelen, The Rise of the African Consumer, McKinsey & Co., Oct. 2012, pp. 5-7). Whether or not true, the Chinese have a large challenge to overcome in some pockets of local belief that China is using Africa as a dumping ground for inferior quality goods (irrespective of the brand). (e.g., John Chinumhu, Zimbabwe is gateway for China’s colonization of Africa, Zimeye, Oct. 24, 2009; "The Chinese have courted controversy after taking over most retail outlets vacated by their Western owners who fled persecution by Mugabe. ‘Zhing zhong’ is a derogatory term referring to the flood of second-rate and fake Chinese goods flooding the Zimbabwean market.").

The quality problem may in part be a function of the dynamics of migration and private investment in the wake of the larger and more official state sector investment.  Mr. Komesaroff noted the connection between Chinese investment, the influx of Chinese migrants, and the effect of these migrants on the character of investment.
Another point is that there’s an awful large influx of Chinese nationals into Africa, an estimated 1 million Chinese across the continent. Most are small-scale businessmen, often sent in as part of a larger SOE group doing contract work. When contracts end and companies go home, many people have remained behind, often illegally, to start up small import businesses. They grow into importers of bigger products, focusing on individual components or products. I think that’s how a lot of small-scale consumer products get into African markets from Chinese suppliers. (Komesaroff interview, supra).
These individuals, Komesaroff, suggest, may to some large extent, be the source of China's image problem with respect to Chinese treatment of local workers and the quality of goods issue. Komesaroff, though is optimistic.
It’s a repetition of the learning curve of SOEs. They weren’t very good when they started going to China,  It's only when they were held to a higher standard by both the host country and the government in China that they things changed. They realized that China's brand was being damaged, started to improve, and in some cases performed better than in their own country. (Ibid).
This issue ties into another--one that sounds in the governance responsibilities of host and home  states--the approach to economic development may play a significant role in the extent that the benefits of development reach all social sectors. Mr. Kmesaroff is particularly negative, as have many before him, on the cultivation of dependent on a few commodities as a structural foundation for national economic development.  That, of course, is a lesson that many states learned a generation ago when they sought to enter global markets on the basis of a single commodity--sugar, bananas, guano, etc.  Neither that tendency, nor its perils, have diminished int he years since.  Lamentably the temptation to fall into that trap remains strong. That creates a problem for China, not as a victim but as a potential exploiter state.
Lastly, Mr. Komesaroff was also quite honest about a topic that Western states, and the elites that serve them, tend to fail to understand:  China, like the United States before it, is quickly becoming a global model of successful political governance. "I think the Chinese do tell African governments what to do, but I suspect that it’s done in a quieter way. And it’s a message that African countries probably want to hear given that it’s coming from an authoritarian, one-party state that’s been very successful. They want to hear how they can be as successful. But the advice is given behind closed doors." (Komesaroff Interview, supra). African states may be as interested in a state organized along Party-State lines as they were, a generation ago, interested in Western style democratic institutions.  If China's political system works, and if it has greater resonance with cultural or societal needs, then it is possible that African states will more often consider China as a model, not just for economic, but also for political, structures. Where once the allure of Soviet style socialism was less legitimate because of Soviet failure to adjust their governance systems to evolving models of constitutionalism and incorporate rule of law concepts into the institutionalization of power structures, Chinese Marxist Leninist State Party structures may not have those problems. (e.g., Larry Catá Backer, Towards a Robust Theory of the Chinese Constitutional State: Between Formalism and Legitimacy in Jiang Shigong's Constitutionalism (May 8, 2013). Penn State Law Research Paper No. 25-2013; Backer, Larry Catá, Party, People, Government, and State: On Constitutional Values and the Legitimacy of the Chinese State-Party Rule of Law System (January 12, 2012). Boston University International Law Journal, Vol. 30, 2012).

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