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Does the Alibaba IPO mark a new stage for Chinese companies in the US?

by Bennett Voyles

June 10, 2014

US_Expansion

Does the Alibaba IPO have the potential to change the perception–and fortunes–of other Chinese companies in the US?

China may be the United States’ third-largest trading partner, but most Chinese business in the US is still conducted from a distance. With a handful of exceptions, Chinese brands are almost entirely unfamiliar to Americans, although most American homes are chock-full of Chinese-made goods.

Alibaba’s recent filing for an initial public offering (IPO) on NASDAQ–which if successful, will raise as much as $20 billion, making it the largest IPO in US history–might suggest that China’s days of being the US’s ubiquitous yet anonymous supplier are over.

However, experts say the fast-growing Chinese e-commerce giant is an exceptional case, and Chinese companies have a long way to go before they develop the kind of presence that such an important trading partnership would normally warrant.

The financial markets may be where the relationship starts to change first. “If Alibaba’s IPO in the US is successful, it’s very likely to have a positive ripple effect in that it will encourage other Chinese companies to pursue IPO opportunities in the US,” predicts Yan (Anthea) Zhang, a professor of strategic management at the Jesse H. Jones Graduate School of Business at Rice University in Houston.

However, Chinese companies with aspirations to succeed in the country Chinese immigrants once called the ‘Gold Mountain’ face a number of challenges.

One aspect that may be daunting, if not unfamiliar, to Chinese companies, is the important role of regional authorities as kingmakers. In a 2012 report by the US Chamber of Commerce about Chinese investment in the US, many executives of Chinese companies noted the importance city and state authorities tend to have in providing economic incentives for site selection, and the relative unimportance of the federal government.

Companies choosing locations to do business should be aware that many of the 50 states offer a web of tax credits and other incentives to attract foreign direct investors. Many cities and municipalities also have their own carrots to try to attract particular kinds of industries. Whether you want to film a movie or set up a factory, chances are that some jurisdictions will be better than others for the investor’s purpose.

One aspect that may be more novel, however, is being seen not just as a company but as a representative of a country–a situation that can be delicate when your home country and the target market don’t always see eye to eye on foreign policy, such as the recent controversy over oil drilling rights in waters claimed by Vietnam.

One marketing expert says Chinese companies should be careful because he perceives that anti-Chinese propaganda to be growing in the US right now–and he expects it to get worse as Chinese economic clout rises. “There will be some shift in public opinion that will be negative,” predicts Jagdish Sheth, a corporate strategist and professor of marketing at Emory University’s Goizueta Business School in Atlanta.

Even aside from foreign policy concerns, foreign brands tend to suffer some kind of backlash from the American public at precisely the moment they begin to grow familiar and popular. The textbook example of this phenomenon is Japan, whose automobile industry had to cope with special import quotas slapped on in the early 1980s, and which eventually began building cars within the US, says Sheth.

For role models in managing that kind of nationalism risk, Sheth advises looking toward British and American companies, which have built global brands that keep some distance between the company and its home government.

One secret is “to localize as quickly as possible,” Sheth says, by hiring local people and local suppliers. Minimizing the Chinese connection is probably a good idea as well. In Alibaba’s case, he says, the company is helped by having a name that has no Chinese connotation. A local face is also important, he says. In this case, he argues that Jack Ma, Alibaba’s charismatic CEO, should not be the face of the brand in the US.

However, Ma, a former English language teacher, may be the exception that proves the rule. Ma’s rags-to-riches story and penchant for punch quotes have made him a media darling in the US, and even landed him the distinction of being the first Mainland Chinese entrepreneur to be featured on the cover of Forbes.

One attorney sees other obstacles to US entry as well. “I guess it can be done, and Alibaba will probably do it, but is that going to herald a new era where Chinese companies are going to seamlessly enter the US? No, I don’t think so, because most of them really have no clue of how to do business in a place like the US, and they’re very uncomfortable with the US,” says Dan Harris, a partner at Harris Moure, a Seattle law firm with associates in Chicago, Beijing, and Qingdao, who specializes in representing Chinese companies in the US. Even wildly successful Chinese companies can blunder when they reach the US, he says.

For Harris, executives’ understanding of the centrality of law in the US market is often the biggest stumbling block. Often, Chinese companies new to the US don’t understand that they “need to really, really, really follow the law”. “You would be shocked at the trouble Chinese companies have gotten into in the US,” he says.

“I’ve seen Chinese companies that don’t pay overtime, don’t pay commissions. They’re used to being able to get away with that stuff in China but they try to get away with it in the US and it causes them problems,” Harris notes.

A second common mistake is a failure to make the necessary investment to break into such a mature market. Often Chinese companies demonstrate “an unwillingness to spend money on marketing, an unwillingness to spend the money on branding, an unwillingness to spend the money on good people,” in Harris’s experience.

Finally, distance itself can be an enemy. Whether it’s an American company trying to manage a Chinese subsidiary or a Chinese company trying to manage an American subsidiary, companies often find it difficult to operate businesses with so much distance between them.

Chinese companies are “not willing to put the right people in charge and let them run it,” Harris says. “They have to run it from China and that’s a disaster, because Tulsa isn’t Beijing and people in Beijing don’t know what’s going on in Tulsa.”

Unconfident about the local leadership, companies will sometimes micro-manage–and the micro-management can reach ludicrous extremes, according to Harris. One case in point: a publicly traded company with at least $500 million in revenue, “where people in the US needed to get approval from Beijing to buy printer ink”.

The business culture itself can be quite different. Harris finds that Chinese companies have a tendency to treat their employees as more fungible than US companies do–a serious limitation in the US market.

Language can be an issue too, even when both parties are ostensibly speaking the same language.

For instance, Harris says he has often run into problems in bridging the gap between Asian styles of negotiation and American styles of negotiation. Sometimes, for instance, the American habit of offering a hypothetical idea is often misunderstood as a firm decision. On the other side, Americans are often confused by the Chinese reluctance to correct anybody, even when the speaker’s information is erroneous.

This can lead to misunderstandings, Harris says, in which the American team thinks that the Asians are liars and the Asian team is annoyed because they thought they were doing the American team a favor by not pointing out that they were ignorant.

Other kinds of nuances can also be a problem for Americans to comprehend, but over time, Harris has learned to decode the implications. “‘Yes’ means probably; ‘maybe’ means ‘no’; and ‘no’ means ‘Hell no, I never want to see you again’…. If they say, ‘Look, I think that’s a really bad idea’, what they are saying is, ‘You are so stupid, get out of here and don’t come back’,” he says.

One way around the management difficulties is to begin learning about the market by making minority investments, Zhang suggests. Alibaba has done this with a few small US acquisitions, she says, and it’s worked well. “I think it’s really smart,” she says; it gives them exposure to the market without the necessity of taking on an operational role all at once.

Over time, East and West are likely to get closer, particularly as Chinese innovations gain ground in the US. However, this shift may take some time, experts say. As Alibaba founder Jack Ma says, “The very important thing you should have is patience.”

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