Africa and other target regions need to realise that China, already a world economic powerhouse, will emerge in a new globalisation framework that will suit its style of expansion says Adi Karev, the Oil & Gas Global leader of Deloitte Touche Tohmasu.
Karev, who was in SA to meet role players in the oil and gas industry, told members of SAOGA, the South African Oil & Gas Alliance, that Chinese companies have limited experience dealing with foreign legal, financial, environmental and other compliance requirements.
“Labour regulations, trade, environment, financial disclosure and investor relations can be very challenging to the uninitiated. Chinese companies with a large portfolio of foreign assets are exposed to multiple global and local risks, requiring strong corporate governance and strategic risk management,” says Karev.
How do the Chinese companies intend to balance their government’s quest for globalisation?
“We believe it is a uniquely Chinese trait that lends them the ability to mix the yin and the yang of integrating into and differentiating from western global practices, something that is important for Africa and other regions to understand.”
Karev says Chinese companies continue to expand cross-border operations through acquisitions of foreign assets. In its latest five-year economic plan – the main focus of all China’s economic activity – the aim is to create a more investor friendly regulatory environment for outbound investments and to support key industries, such as energy, technology and banking. Moreover, the plan articulates a theme of “inclusive growth,” emphasising economic growth balanced with sustainability and social responsibility in domestic and international activities.
“China’s approach to economic growth and its rising influence in the global market gives rise to an emerging Eastern dimension to globalisation where the motivation of profit maximisation is balanced with national objectives and social responsibility,” says Karev.
The Chinese ‘globalisers’ attempt to increase their global presence by following a strategy that leverages on the acquired asset’s country-based management infrastructure and staff on site, while keeping in line with China’s government policy and socially-driven directives. “This has an impact on the service providers and the vendors involved in supporting the global assets,” says Karev.
He says that compared with Western companies, risks are absorbed differently by Chinese State Owned Enterprises (SOEs) “given their tight linkages with the Chinese government and the Yin & Yang focus on social contribution as well as profit”.
“However, upcoming commodity price reforms will increase operating costs and impact SOE’s profitability, pushing SOEs to improve operational efficiency and quality control. Enjoying the deep pockets of the Chinese government, foreign financial markets are not an immediate necessity but learning how to navigate their requirements will be critical in the future,” adds Karev.
In the meantime as China’s globalisation moves ahead its state owned enterprises and other large private enterprises will have to find ways to innovate to sustain growth by shrugging off the label of being at the centre of low cost manufacturing.
Karev says studies about national innovation indicated that they emanated “mostly as a result of necessity”. “It is a result of a particular need at a particular time without which the country will be critically disadvantaged. Like Japan, following its World War II defeat, South Africa developing Coal to Liquids technology (Sasol) and Israel with its High Technology capability to expand globally with the only source it has – brainpower,” says Karev.
The key to China’s continued global expansion lies in being able to enter into partnerships. If they are to consider extending their influence to SA they will have to understand that the level of expertise that exists in SA is not necessarily the same as exists elsewhere in Africa. In SA it is higher because of more experience, management and fiduciary responsibility expertise, which may not exist in their target company.
“They need to understand it and they need to be able to explore how to incorporate that into their business. I think it is a question of partnership, doing less by themselves and more through Joint Ventures probably at the insistence of National Oil Companies,” says Karev.
Additionally, in the case of SA, it has to mean that South Africa be in a position to provide the type of services that cannot be provided by others.
“South Africa finds itself in an enviable position as a gateway to Africa. We already have much of the infrastructure and expertise to add value to the Chinese expansion model. We therefore have much to contribute and have the potential to become joint venture and expert partners in many different areas”, said Deloitte SA oil and Gas Leader Anton Botes.
He said that South African businesses had a lot to gain from partnering with Chinese companies as their economic growth plan will continue to be a lucrative investment option in the longer term.
“The fascination the Western world has with China is going to stabilise in future, but until then China will continue its march towards becoming an even more powerful global economic force”, says Karev. The world is now made up of two main economic forces, namely the United States and China.
Who will be dominant?
“Both,” says Karev.