A lesson for Chinese firms going global

• Source: The Global Times
• [08:14 June 08 2009]
• Comments

The breakdown last week of a planned $19.5 billion partnership between the State-owned Aluminum Corporation of China (Chinalco) and Australian mining giant Rio Tinto is a vivid example of the political risks and challenges faced by Chinese State-owned enterprises looking to invest abroad.

Rio announced June 5 that it was backing out of the deal, which had been in the works since February and would have represented the largest-ever foreign investment by a Chinese State-owned enterprise. Australia’s government leaders were swift to deny that the deal’s collapse was political in nature. Still, it should serve as a cautionary tale for other Chinese State-owned enterprises on the political risks inherent in expanding abroad.
 
Chinese State-owned enterprises face a special type of political risk when they seek to invest abroad: heated public reactions that can arise in countries where Chinese firms seek to purchase large stakes of domestic enterprises.

In Australia, nearly 60 percent of respondents to a Newspoll survey opposed the Chinalco-Rio deal, saying they feared China would use the State-owned Chinalco to gain control of Australian natural resources. The deal was seen by many Aussies as a threat to Australia’s national security.

This fear is one of the political pitfalls on China’s road to increased participation in the global marketplace. As Chinese firms do more and more business internationally, they will be met with results running the gamut from highly successful to abject failure; if they don’t use caution, political controversy could account for a large number of the failures.

This means that Chinese companies – particularly State-owned enterprises, which are likely to provoke the strongest fear in foreign countries – must adapt to the situation and take preemptive measures to prevent business deals from falling apart.

First, detailed planning and risk management measures need to be in place before work starts on any potential deal. Chinese firms must do due diligence and know exactly what they could be getting themselves into beforehand – and have a plan for how to cope with adverse political situations, should they arise.

Second, State-owned enterprises are going to have to accept the fact that they have a public relations problem. Fear of a Chinese government threat, even if it is irrational, could potentially derail any number of business deals that would otherwise be mutually beneficial and profitable.

It is crucial that China take a systematic and determined approach toward improving its image abroad and assuring foreign governments and the people they represent that there’s no harm in doing business with Chinese State-owned enterprises.