As Chinese businesses become increasingly assertive in evaluating and executing investments overseas, they are learning lessons critical to managing supply chains across borders. These lessons highlight not only the existing weaknesses of Chinese supply chains but also their growing strengths, and serve to illustrate the very real need for China's supply chain managers to understand how global trade, security, regulation, and development intersect in their areas of operations.
Two recent articles in the Wall Street Journal and New York Times provide excellent examples of this dynamic, both focused on aspects of China's intense effort to invest in and develop commodity resources overseas. The first, by the WSJ's Alex Wilson, is titled "As Commodity Prices Rebound, Australia Limits Foreign Investors" and reports on Australia's effort to slow the pace of Chinese investment in Australian companies in the mining industry.
Chinese businesses focused on the import and development of the various commodities that feed into its high-growth, manufacturing engine have taken advantage of the Global Financial Crisis to execute deals with overseas suppliers in multiple countries. They have done so by making wholesale acquisitions or by injecting significant amounts of cash in companies that were short of revenue and hungry for sources of capital to simply remain in business, or continue with the capital-intensive investments so common in the mining industry. This has been a boon for Australia's mining-rich economy, sitting in China's immediate backyard.
As the WSJ article mentions, Australia's quick rebound in the resources sector has resulted in a greater confidence within the mining industry and government alike that they can take a stronger stance on China's increasing appetite for investment with reduced risk to the economy:
"A strong rebound in commodity prices and thawing debt markets this year have led to a recovery in the Australian resources sector, with fewer distressed miners seeking foreign cash to shore up their balance sheets or to fund projects.
"This has emboldened Australian regulators to take a tougher stance against foreign investment that has been entering the country.
"Australia's resources industry needs foreign investment to develop new projects, however, and the government is keen not to shun interest. The government has been able to firmly enforce its preference for foreign investors to take minority stakes rather than opt for a takeover."
The article goes on to show how Chinese investors have initially reacted to the increased scrutiny by the Australia government on various deals:
"Market participants say this has been the government message behind the scenes for some time, and Chinese investors now seem to have acknowledged it by tailoring deals over the past year to meet the government's preference for stakes in Australian miners to under 50%.
"But recently China pitched a number of deals above the 50% mark, and one investment banker said FIRB's comments may be Australia's attempt to send a message to China that it won't approve any more of these deals.
""They have been saying it privately to the Chinese and the Chinese keep bringing [deals that require more than a 50% stake], so maybe they have decided now to make it public to try to convince them not to do it," said the banker.
"For Chinese investors, the FIRB's comments provide some clarity on a foreign-investment-review process that has been criticized by some for its uncertainty and lack of transparency."
I believe the above hints at the sophistication Chinese business investors are developing in making overseas investments, probing markets for the best deal until regulation becomes additionally restrictive, and then looking for the best deals within the new legal framework. The absence of rash decisions or a highly reactive backlash provides a sense of how integrated and sensitive Chinese supply chains have become in the globalized economy. This will only serve to drive further progress in supply chain relations and innovation.
The second article, by Timothy Williams, is titled "China Oil Deal is New Source of Strife Among Iraqis" and reports on China's struggle in moving forward with its Iraqi oil field development while maintaining peace with local Iraqi communities:
"When China’s biggest oil company signed the first post-invasion oil field development contract in Iraq last year, the deal was seen as a test of Iraq’s willingness to open an industry that had previously prohibited foreign investment.
"One year later, the China National Petroleum Corporation has struck oil at the Ahdab field in Wasit Province, southeast of Baghdad. And while the relationship between the company and the Iraqi government has gone smoothly, the presence of a foreign company with vast resources drilling for oil in this poor, rural corner of Iraq has awakened a wave of discontent here.
""We get nothing directly from the Chinese company, and we are suffering," said Mahmoud Abdul Ridha, head of the Wasit provincial council, whose budget has been cut in half by Baghdad in the past year because of lower international oil prices. "There is an unemployment crisis. We need roads, schools, water treatment plants. We need everything.""
This experience for China is not new; it has been facing similar reaction in Africa, as often highlighted by Dr. Tom Barnett, and who's comments brought me to this article. Whereas China is operating in a mature market with well established rules in Australia, Iraq's market is in the very early stages of developing rules at a national and local level that help it deal with foreign direct investment by countries and businesses with varying degrees of experience. China may be able to keep much to itself in totalitarian regimes such as Iran and Sudan, but it as an Iraqi puts it below, investing in a young democracy has its implications:
"The result has been a local-rights movement — extraordinary in a country where political dissent has historically carried the risk of death — that in the past few months has begun demanding that at least $1 of each barrel of oil produced at the Ahdab field be used to improve access to clean water, health services, schools, paved roads and other needs in the province, which is among Iraq’s poorest.
""No one would have dared to ask for such a thing during Saddam’s regime; if he did, he would definitely be executed," said Ghassan Ali, a 43-year-old farmer who lives near the oil field. "But now we are a democratic country, so we have the right to ask for our rights like any other province in Iraq.""
"The basis of the complaints here is that, aside from the hiring of a few hundred residents as laborers and security guards at salaries of less than $600 a month, the Ahdab field — a roughly $3 billion development project — has provided no local benefit."
The response by the Chinese is representative of how its understanding of global supply chain management remains immature across industries and markets, suffering a lack of holistic thinking and ability to see the direct links between investment success and the success of surrounding communities:
"China National Petroleum says it needs relatively few workers because it is still in the exploration phase of its 23-year project at the Ahdab field. Oil production is not scheduled to begin for two and a half years.
"Now, the field’s 100 or so Chinese workers rarely leave their spartan compound for fear of being kidnapped, the company said, even though the Iraqi government recently deployed extra security to the area.
"More trouble could be on the way next spring when 1,000 Chinese workers arrive to build a central processing plant.
"Mr. Han said hiring Iraqis to do the job was out of the question. “We don’t have enough time to train local people to do that work," he said."
With this perspective, the Chinese make their work at the nexus of cross border trade unnecessarily difficult in the short-term and with increasingly negative effects downstream in the long-term as local tension is brushed aside and ignored.
Over time, Chinese businesses will internalize lessons learned from one market, deploy them where applicable in another, and develop the skills and talent required to tailor their investment decisions and execution for a wide range of operational environments. Cross border professionals need to ensure that the natural flow of globalization and corresponding rule sets will gradually work to hold the Chinese and other nations accountable for their actions across borders and in communities like those of the miners in Australia and farmers in Iraq.