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China in Spotlight





Alyce Su, Ph. D.
China Queen Capital
David Huang
Economic Consultant
TXTD Company
Stan Fung
Managing Director,
FarSight Ventures
Andre Loeskrug-Pietri
CEO & Founding Managing Partner
A Capital Asia
China Queen Capital FarSight Ventures TM

 “Four experienced financial experts with extensive Chinese experience respond to questions about the Investment scene in China and the rising level of Chinese investment in other countries. They are: Alyce Su, Ph.D., Founder of China Queen Capital; David Huang established TXTD Company, Stan Fung, managing director of FarSight Ventures, and Andre Loesekrug-Pietri, Founder and CEO, A Capital, China

Q: Does Danone’s experience investing with local entrepreneur, Zong Qinghou, serve as a warning to foreign investors? Qinghou took money and technology from Danone and set up a parallel company. Eventually Danone settled with Qinghou and lost an opportunity to be a player in the Chinese market.

Su: If a foreign investor has the luxury to go alone in China, then by all means. If one must find a local partner, clearly one needs to understand whom one is partnering with. Mr. Zong QingHou’s entire generation in China probably suffered more than any foreign investor could imagine.

Huang: Let me say this: To state that Danone lost the opportunity to be a player in Chinese yogurt market is not accurate, not even correct. China has 1.4 billion people and hundreds of yogurt brands including many many, foreign brands, a solid company like Danone will never be a loser in the largest market in this globe if they are doing right. There are many foreign yogurt brands in China and they all live extremely well. Why do we think Danone lost the opportunity? Danone will not be a failure if they do not want to be.

And, I can hardly agree the statement that Qinghou took money and technology from Danone. I am sure that Danone is way too smart to not let Qinghou took money and technology from them. It is business and it is serious business, no one wants to lose. The issue is: United, they stand, otherwise, they both are losers or, at least one of them will think that they are a loser.

Fung: When I work with foreign investors and partners in China, and for that matter, in any country, I always recommend patience, caution, and not rushing into a JV or working with the first interested party (from both sides). If possible, work with credible referrals. Even then, start small before growing into bigger commitments. This will enhance the opportunity for successes.

André Loesekrug-Pietri: This major setback is a reminder that each country has its own business culture, and that China is no exception. I think it should not deter investors to come to China, in particular now when the domestic market is picking up massively. But a lot can be learnt through this case: how important it is to be clear about each parties objectives; how much unstable legal situations, especially for IP, should be avoided; how important is that communication with local governments, employees, consumers are done with a local touch and local experts; and finally that involvement in the operations is crucial, especially for foreign firms, in order to understand better the local way of doing business, track possible misalignment of interests – and correct them while they are manageable.

Q: The Heritage Foundation, a U.S. think tank, puts China at 132 in the world on its economic freedom scale, below Yemen, Rwanda, Columbia, and Niger. What’s your opinion?

Su: I usually have no comment on a ranking offered by any entity. Any entity of real substance does not need to offer a ranking of others to boost its own influence. What is the cost to offer a ranking? The same cost as publishing words of the same quantity.

Huang: So what? Heritage Foundation put China at 132 even below Yemen, Rwanda, Columbia and so on. If I were the Chinese government, I just skip their evaluation and do not even think about it. I cannot say that they are doing this on purpose or they have some bias on this issue, but I am sure that they can not see the real picture and they did not see the whole picture of China. I do not know what was the value of making this scale? It is easy to open a big mouth and it is OK to be #132. It does not mean anything to me.

There is an old Buddhist saying: If a few blind men touch the elephant, none of them are able to get the whole picture of the huge elephant.

Only when you are in China, can you see the real China and the real business environment. I also know some other think tanks that put China as the #1 investment paradise. I do not even want to think about their rank. Just see those huge/big/medium/ small/tiny companies are doing great business in China.

Fung: There is a tendency for think tanks (such as The Heritage Foundation), the press and the public to compare countries based on indexes (such as the Index of Economic Freedom) without taking into account other factors that have made countries different. Without going into details on the 100+ factors used to represent a country, I want to point out that leading emerging countries such as India, China, Brazil, South Africa, began their reforms only in the past two to four decades, while developed countries such as the United States, Hong Kong and the United Kingdom, have decades and decades of development experience behind them – thus making direct comparisons irrelevant. If one insists on using an index, I would rather look at the trend of the country rankings over a long period of time in order to draw meaningful (but yet not complete) conclusion.”

Loeskrug-Pietri: “Regarding the Heritage Foundation, and without being an expert of their criteria, I think this can be explained by the fact that China is still very much influenced by its central planning, which has to be recognized as pretty effective. In private equity, you would say that the ‘Track-record’, i.e. the capacity to deliver on your promises of Central Planning has been remarkable, and that the Five Year Plan is a great tool to anticipate the sectors that will be strongly developed. In some areas requiring a long term vision and heavy investments, this is a real tool for investors. On the other side, being in sectors less favored by the plan makes you swim against the tide – difficult.” 


Q: “Unless you live there or have a staff of analysts that does, making consistent money buying individual Chinese stocks is a tough game.”-Harry Domash. Please comment.

Su: “I think it’s true anywhere that if one wishes to make consistent money one at least needs intimate knowledge with one’s investments, but having local presence to making consistent money in China is a sufficient but not a necessary condition, an important logical distinction.”

Huang: “Harry is 100 percent right, if you have never been in a country and you do not have staff in an unfamiliar soil, do you have the guts to throw your money in? If you do, you are insane.

Think about this: US stock, UK stock, Japan Stock and you name all the stock markets, which one is not tough? The funny thing is: when you make money from the stock, it is not tough, if you lose, it is tough and it is getting tougher and tougher. Right? My answer is: Harry is very right, but, all the stocks are tough, not only Chinese stocks.”

Fung: “This is just common sense. Will you invest in Brazilian companies, Indian companies, or even United States companies without having done an in-depth due diligence and analysis on the regions, the countries and the companies? Are you going to rely on third party reports to make critical investment decisions? Of course, the answers are NO and NO. Given that said, there is always a home-biased advantage for investors when they are closer to the companies and can visit the companies locally; but then there is also an advantage of being farther away so that investors can get a better sense of the markets and the competition. You have to do both.”

Loeskrug-Pietri: “I fully agree. And for a simple reason, China’s years have to be counted in multiples, i.e. things change in China in one year as fast as in 3, 5 or 7 years in the West. Holding boards twice a year, coming here every quarter, flying in and out of fancy hotels will not get you to the heart of the action – the daily transformation of society and business, new consumption habits, trends and gossip, evening drinks with partners keeping you updated on the latest investment opportunities and building long lasting friendships.”


Q: Many investment advisors recommend putting no more than 5 percent to 10 percent of your investment dollars in this sort of an emerging market (China). Do you agree?

Su: “Owning the right companies “in or about China” deserves more than 10 percent of almost any portfolio mandate for the next decade. Clearly I disagree.”

Huang: “It is a tough question. Many investment advisors equals who?

I will say this: Investment is always risky, the issue is how to value the percentage of risky. If you are smart enough to analyze the market, the future and the potential, you will minimize the risks. Of course, there is no blind investor.

I hate to blame or laugh at those losers and hate to state that they are not smart enough to control their own investment. If you failed, do not blame the market, do not blame the country, face toward the wall and blame yourself.

There is no one can win his/her investment 100 percent in human history, as I know. As a smart investor, you invest the future, not the past.”

Fung: “Investment advisors should assess the Return Objectives, Risk Objective, and Constraints (such as Time Horizon, Taxes, Liquidity, Legal and Regulatory, and Unique Circumstances) of their clients before proposing investment recommendations and recommending asset allocations.

Thus, without knowing the specifics of an individual or investment entity, it is difficult to assess the recommended allocation in emerging markets. In the long run, stock prices reflect growth prospects, and discount risk attributes of countries and companies within those countries. If one expects emerging markets to continue their rapid growth, one should participate in their growth through investments in those markets. However, the exact allocation should be case dependent.”

Loeskrug-Pietri: “I don’t. Considering that China once represented 25 to 30 percent of the world’s GDP, that you have here some of the most entrepreneurial talents, and that in 2009 alone, 50 percent of the growth, in value, came from this country, I let you do the math if 5 or 10 percent is a high enough allocation.”


Q: One of the difficulties when Chinese companies invest abroad is the huge gulf in corporate culture and often a degree of negativism toward China on the part of politicians. What’s your view on these issues?

Su: “China outbound acquisition started mostly with cash-rich State Owned Enterprises, hence the previous episodes.

Going forward, I think the situation will change with Chinese family-owned businesses with overseas non-Chinese family-owned businesses, as most current generation of resourceful families are somewhat commonly global in nature.”

Huang: “I have to say this: There is huge gulf between any two cultures, languages, companies, countries even between two people because they are speaking different languages, living in different geographic locations, under different political arenas, swimming in different business pools and have different values of life.

The issue is to find the way to work together, just like marriage: Make love, not war.”

Fung: “Cross-border investment and merger/acquisition is difficult! There are issues related to cultural differences, language barriers, differences in expectations, differences in legal and regulatory frameworks, corporate culture differences, difficulties in cross-border integration and consolidation, etc. These issues are faced not only by Chinese companies investing abroad, but are also encountered by foreign companies investing in China. Beyond these issues, there are additional elements of mistrust and misunderstanding between government and government, and between government and the public (in both directions).”

Loeskrug-Pietri: “I fully agree. Chinese investors face multiple challenges when investing abroad. And this is mainly due to the fact that while China is one of the largest exporters in the world, it is still at an infant stage regarding international investments. OECD countries have in average the equivalent of 27.7 percent of their GDP invested abroad. China has only 2 or 3 percent, including investments in resources, which used to represent 2/3 of this pot. This means a low experience in international M&A and a low use of advisors which could complement these missing skills. The second weakness is a lack of talents to manage foreign teams.

Chinese firms are still not at the top of the list of employers for international talents – in parallel and linked to the fact that it is very difficult for foreigners to adapt to a Chinese corporate culture. Lastly, it may be easy to ‘write the check’, but the challenge lie in the integration and capturing the expected synergies, which require strong process, industrial and cross-cultural skills.”

Q: Chinese investment in the west faces three primary challenges. First, the political pressures and name-calling likely to result from any worthwhile and high-profile activity between an established company and its Chinese suitor. Second, Chinese companies have to prove that they can adapt their management cultures to the western way of doing business. Third, the ability to integrate two cultures and execute a business plan that works globally. What are your thoughts on this?

Su: “The Chinese company that bought the IBM-PC business offered a good example to this comment, but I think this is casedependent.”

Huang: “First things first, as I know, Chinese people are learning, at least they are willing to learn more. If you knew a Chinese company and an American company doing business together you will realize one simple thing: almost all Chinese can speak English unfortunately, only few Americans can speak Chinese and they have to use an interpreter and most of them do a lousy job.

It is not easy to understand a different political environment but it is not an excuse for not working well. You have to learn and you have to have the will to learn. At this point, Chinese do a better job of this than other nations. “Make peace with different people,” Confucius stated 2500 years ago.”

Loeskrug-Pietri: “I fully agree with this analysis. Chinese firms should be aware that they are like hot potato and their image is not necessarily good in the public opinion: this is first and foremost because these firms are still relatively unknown to the general public and sometimes even to the business community. Remedies are : minority investments (raising fewer eyebrows since there is no change of control, nor strategy), co-investments with local firms – like us – who will help the Chinese investor be more comfortable about the target company before the deal, navigate the local intricacies (a sort of ‘reverse JV’ as a reverse to what happened in China for 20 years) and finally a strong capacity to create value for the invested company : these deals need to make strong strategic sense, in order to be obviously positive for all parties.”

Reviving Economic Growth session chaired by Alex Wan (2nd from left), China CEO Roundtable; Senior Advisor of China Daily, China at the Global China Business Meeting 2010 in Luxembourg.



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