China remains a hotbed for foreign investment
By Maria Pinelli
17 March 2014
China beckons — so I can't wait to head to Shanghai in May for our first EY Strategic Growth Forum™ held in China. Visiting this world-class city and meeting one of China's leading treps, Yang Lan, cofounder and chair of the Sun Media Group, not to mention former British Prime Minister Tony Blair, promises an exciting agenda and outstanding networking conversations.
Still, while opportunities for doing business in China abound, investors looking to succeed in the marketplace of the future would do well to spend more time on the "why" behind their strategy than the "how" of the transaction.
China remains a hotbed for foreign investment. This is not solely because of its appeal as a manufacturing export base to North America and Western Europe — but also owing to the sheer size of its domestic market.
And though the GDP growth rate may have slowed in recent years, China's rate of expansion still well exceeds that of most developed nations. The country is ideally situated to serve as an export and logistics base for not only the fast-growing economies throughout Asia, but also Eastern Europe, the Middle East and Oceania.
In the rush to forge a China presence, companies tend to move straight toward a transaction without performing the needed up front analysis. All too often, this results in unclear objectives and unrealistic expectations. This in turn leads to more surprises, delays, underperforming deals and disappointing results. Luckily, this scenario can be avoided by spending more time on the up front. This is outlined in a new EY publication called On the BEAM.
- Articulate a concrete strategy.
Companies need to be clear in their expectations. What do you want to accomplish? Is your vision to merely participate in China's growth to some degree or are you seeking a larger presence? Is the investment long-term oriented? Or will the ownership and board grow impatient if financial returns don't soon materialize. Be clear: what are the milestones? Ask yourself: what do we want to accomplish, by when and how?
- Accurately assess the marketplace.
How do the relevant sectors operate? Who are the primary players? What is the level of competition in each segment and where are the gaps your business strategy could fill?
In particular, spend time to understand the objectives of government officials for any given sector and how those goals might impact regulations. Note that in such a dynamic marketplace, the regulations and companies being evaluated are moving targets. Nonetheless, this work is essential, and is the best method for identifying a short list of investment prospects for still deeper pre-transaction analysis.
- Understand China-specific risks.
All transactions have risk. But China's overall risk profile is unlike that of any other nation. Take the time needed to understand the sorts of risks that will be encountered. Understanding them will aid an investor in choosing its local sectors, its counterparties – even the structuring of its investment. The truth is, not all risk can be avoided. But knowledge beforehand arms companies to make informed capital decisions and take appropriate actions to mitigate risks. In general, the greater the skill in identifying and managing risks, the greater the ability to capitalize on opportunity.
Trep tip: EY Entrepreneur Of The Year™ Liam Casey, founder and CEO of PHC International, has started no less than 12 successful businesses in China. He finds that it's better to be there as an entrepreneur than a corporation. "Being on the ground and doing your own thing really helps. It's a great place for treps since they like knowing what's going on and are comfortable doing it themselves. We did not partner or go the joint venture route. Nor did we find all that much red tape from the Chinese government." Watch our Innovation Roundtable interview with Liam Casey here.
Join us in Shanghai
I invite you to hear for yourself the latest on what companies, investors and government leaders are doing in this fast-paced market. Join us for the first-ever EY Strategic Growth Forum™ in Shanghai, China, from 22–23 May 2014. We'll have world-class speakers, superb entertainment, a celebration of the achievements of our EY Entrepreneur Of The Year alumni, and the opportunity to connect, share ideas and do business with the best of the best. I hope to see you there!