Private Chinese Companies Struggle to Invest in America, Expert Says

01.17.2014 11:47

Private Chinese Companies Struggle to Invest in America, Expert Says

Executive at company that advises Chinese firms says 90 out of 100 that were interested in going to U.S. saw their attempts fail

By intern reporter Ge Qing

(Beijing) – Investments by private companies into the United States rose last year, but one expert says a large number of firms are seeing their attempts to head to America fail.In 2012, direct investment made by private Chinese firms for the first time outpaced that by their state-owned counterparts in terms of value. In 2013, total investment by private firms into the U.S. again increased by US$ 5 billion to about US$ 9 billion.

Despite the surge, a large number of private Chinese firms are seeing their attempts to tap the U.S. market fail. Data from the SoZo Group, a Hong Kong company that provided investment expertise to businesses in China, shows that 90 percent of Chinese private enterprises’ attempts at setting up manufacturing in the United States or Europe fail.

Raymond Cheng, an executive at SoZo Group, said that in 2013 more than 100 firms came to his company’s for help on direct investment in the United States, but after evaluation only about 10 were suitable for setting up plants.

Cheng warned that only if labor costs account for less than 25 percent of the total cost can an enterprise successfully settle in the United States. He said that although Chinese companies are getting more mature on both the technological and environmental protection fronts, not all U.S. states are suitable for Chinese manufacturers.

He warned against China’s business leaders “flashing their money about” with reckless foreign investments.

“Certain businessmen have the wrong ideas about what investment in America is all about,” Cheng said. “For example, those who invest in order to emigrate to America, most of them have failed due to a lack of preparation.”

Technology Transfers

Many Chinese companies do not realize how different producing goods in China and in America is, Cheng said. Others think that just because they have relatives living in America, they’ll help take care of operations there. Some planned to transfer a whole team from China to the United States, which doesn’t create any employment opportunities.

“This probably explains why certain Chinese companies are not welcomed by the locals,” Cheng said.

Companies in America are subject to federal, state and local laws, and China and America have very different accounting systems and management methods. Then there is the language barrier. Investment in the United States has to be assessed comprehensively, Cheng warned.

Choosing a location is another issue. For instance, southern U.S. states are attractive to Chinese investors thanks to cheaper energy prices, lower tax rates and weak labor unions. Yet if a company sets up a factory in the state of Texas while its clients are mainly in the Pacific Northwest, transportation costs must obviously be taken into consideration.

While many people assume that Chinese firms set up branches in America simply to acquire advanced technology know-how, Cheng says most are actually driven by reducing costs.