Political risks hinder Chinese enterprises' overseas expansions

Currently Huawei, China's leading telecommunications provider, is having exports to virtually all continents in the world, yet its US expansion is facing difficulties. The US government has just released a report on Huawei which concludes that American companies should not do business with Huawei if they are to protect consumers' privacy, protect intellectual property, and protect the US national security. The report bears a lot of sentimental wordings, but does not bear much substance. If the report has hard evidence against Huawei, the US would have released it and make it a big case. Resorting to this current method of using vague words is to mislead the public. Although it does not have much legal implications, Huawei's public image among American consumers has suffered damage and it will definitely hurt Huawei's future business in North America.

This example also demonstrates that political risk is an important element in international business. However, the 12th Five-Year Plan has made it clear that Chinese enterprises are encouraged to go outside the Chinese borders and expand their operations overseas. This is particularly important to China since the country has accumulated a large international reserve making it necessary to have overseas investments. So how do enterprises lower the overseas political risk.

In the insurance market, there are products that can protect enterprises from political risk. But most insurance products cover losses suffered by them in an overseas market such as confiscation of their business by a host government. In short, the insurance products on hand are mainly to indemnify the loss but does not include political risks coverage. Preventing political risks then remains a corporate activity that requires top level management's attention.

To many Chinese executives, political risks in the domestic environments are due mainly to policy changes that lead to uncertainties of enterprises' operations. For example, a local government may show favorable responses to a particular project, but when the project is due for operation, a new government policy may suggest that the project should be dropped due to environmental issues. Such policy changes are common in the mainland and are a major source of political risk. In parallel, sometimes changes of government officials will also lead to different policies.

However, when doing business overseas, political risks take a different format. Sovereign governments always show skeptical views towards expansion of enterprises from other nations, fearing the loss of national interests to overseas firms. As China's enterprises are more active in overseas business, this area of activity has come under the spotlight. Many governments are biased towards Chinese enterprises. Sometimes, it is simply fear and myth that make Chinese enterprise different when they enter an overseas market, causing substantial political risks hindering their overseas expansion. But the point is that Chinese enterprises need to face them even though the risks are not backed with proper reasons.

To Chinese enterprises which want to go overseas, they can learn a good lesson from the Huawei experience. To reduce the negative image associated with Chinese enterprises, a strong reengineered corporate image is needed, supported by good relationship with the media. One mistake made by Huawei is that it failed to answer calls for media interviews. The anchor of "Sixty Minutes Plus" asked Huawei's spokesman why the company turned down its interview request, showing that Chinese enterprises have yet a lot to learn on how to reduce political risks.

 

The author is dean, School of Business at Hang Seng Management College. The views expressed here are entirely his own.