By Su Xijia

Chinese enterprises in Southeast Asia: An overview

Pursuing overseas markets is not exactly a new practice for Chinese companies. However, when we talk about “going global” in today’s context, we are talking about very different business models compared to those Chinese enterprises that made the leap two or three decades ago. One Indonesia-based CEIBS alumnus described the phases of “going global” to me as “versions 1.0, 2.0, and 3.0”. Version 1.0 focused on sending products overseas; 2.0 was about taking services and human resources abroad;3.0 is about exporting the whole system, allowing the full circle of production, supply, distribution, R&D and financing to be done in the target market locally, supplemented by supply chain and services sourced outside of the origin country and a workforce and management team made up mostly of local hires.

The huge differences between now and then are the results of fundamental changes in China’s economic environment. Firstly, Chinese enterprises are now on a different level to previous years in terms of both strength and expertise. In many fields, they possess huge advantages over their Southeast Asian peers. Some are even ready to compete in what we might call the “big league”, on a global scale. Secondly, China’s highly comprehensive and efficient supply chain, together with its ahead-of-curve digitalisation, have allowed Chinese companies to dramatically widen the gap between themselves and their Southeast Asian counterparts. Thirdly, China’s entrepreneurial environment has nurtured a large pool of talented engineers and managers, who are professional, hardworking, and experienced; and many are already skilled in doing businesses with overseas partners as well.

Another important factor behind Chinese companies’ push to go overseas is intensifying competition at home. Overcapacity in production, declining enthusiasm from consumers, the waning investment confidence, not to mention low market demand, paint a gloomy picture of the domestic market.  To survive, many companies must compete fiercely, working harder for thinner margins, which results in a vicious circle. In this environment, it is understandable that companies want to turn to the overseas markets.

Amidst “going global 3.0”, a new category of Chinese companies has emerged. These companies were established outside mainland China by Chinese business founders, and are thus sometimes regarded as being “overseas businesses” in their DNA. More well-known examples include J&T Express and Chinese smartphone manufacturer Transsion; the majority, however, are SMEs that people based in China might never have heard of before. These companies have inherited a Chinese business philosophy from their Chinese heritage, yet are natives in terms of local market operations; they appear as “local businesses” in their target markets, yet have close ties with China. Some of them have formed strong alliances with families of Chinese origin, or with wealthy and successful local communities through marriages or other such connections. Such ties bring Chinese enterprises closer to the market while introducing “new blood” to local Chinese communities. With time, I believe these groups will be the hidden force which drives greater integration between the Southeast Asian economy and Chinese companies.

Among Chinese companies venturing overseas, a group of seasoned entrepreneurs and professional managers who have deeply immersed themselves in their target markets have also emerged, tuning their behaviours and expertise to suit the local market. In other words, they are thriving overseas, but might struggle to find a place for their skills if they choose to return to China. Everything they possess is very closely tied to the market they are in. For Chinese companies eager to expand to overseas markets, this group of people are ideal candidates to act as managers of overseas business. Their impact on the development of Chinese companies overseas is a subject worthy of further research.

In recent years, a popular saying in China’s entrepreneurial circles is “if you don’t go overseas, you go out of the race.” The truth, however, is that the difficulties and risks inherent in expanding overseas are much greater than most people realise. The enterprises that are most likely to fail in overseas markets are those which are already struggling at home which decide to try their luck overseas with something of a gambling mentality (if a product is not doing well in its home market, its chances of thriving in overseas markets is likely even smaller)Success relies on three contributing factors: timing, location, and people. When venturing overseas, companies are already at a disadvantage in terms of location and people; in order to succeed on foreign soil, therefore, the product or company needs to be extraordinary. The overseas market is an arena for the strong, not a refuge for the weak. Even companies that perform well domestically, for that matter, must be careful not to export their weaknesses as well as their strengths; when venturing abroad, room for error is extremely small. One tiny lapse can cause disastrous results. Even mature businesses would be strongly advised to avoid building both sales and manufacturing from scratch overseas, a common mistake which is the equivalent of fighting a war on two fronts. Even among the very well-known domestic enterprises that have already set up business operations in Southeast Asia, many are yet to turn a profit after over a decade of investing in these markets. Big players have the ammunition to support themselves until things finally take off. For SMEs, however, after suffering continued loss, their only option is usually to exit. 

Compared with state-owned enterprises (SOEs), private enterprises are more agile and adaptable to competitive local environments when expanding overseas. An important reason for this is the rigid internal control and strict audit process of SOEs, which often results in slow responses to challenges. When expanding overseas, if offshore teams are not fully empowered to take action but are instead micro-managed remotely, the expansion attempt is almost doomed to fail. Empowered and authorised local teams are key to ensuring agility and responsiveness when going global. In contrast, extended decision-making processes with too many stakeholders plus too much interference from the headquarters tends to be a recipe for disaster.

Proven practices for success in overseas markets

Find the right positioning

When in overseas markets, you should first find the right positioning for yourself, remaining humble and acknowledging that you are the outsider here. It is important to respect local cultures and customs and proactively demonstrate goodwill towards local communities. The successful Chinese companies that we visited invariably put a lot of effort into promoting their corporate citizenship and governance, actively demonstrating that they take good care of their local employees. One must also take note of the fact that some Southeast Asian countries have territorial disputes or historical issues with China, and that public sentiment towards China can be very delicate and complex. Hidden anti-China sentiment could be fuelled by sudden incidents and lead to extreme reactions, for example historical instances in which street riots have targeted Chinese-owned businesses. If Chinese enterprises make a conscious effort in their day-to-day operations to cultivate good relations with local communities and earn their trust, however, they are less at risk when unfortunate incidents such as these occur. This all goes to say that effective public relations is a skill that all enterprises venturing overseas must acquire.

Address local customer needs

Another key lesson is that Chinese companies should always be wary of the assumption that they can change local consumers’ habits; the cost of educating local consumers is much higher than simply adapting and catering to their needs. It is important to let go of biases and arrogance and truly respect local needs, even when the target market is perceived as far less developed than the domestic market. Companies should be especially vigilant of possible such views in head offices, which may attempt to assert control despite being far from the front line.

This is just as true when we look at it from the other way around. Many multinational companies’ unsuccessful first attempts to enter the Chinese market resulted from their failure to properly adapt. These companies’ headquarters felt that they knew better and thus didn’t take the opinions of their China-based teams seriously. Yet simply exporting experience from one’s home market to foreign markets will often lead to unexpected setbacks. For example, some of the earliest companies to venture into offline retail in Vietnam were thrilled to see the country’s bustling streets, believing that roads covered by huge traffic would be perfect locations for their stores. It was only after they opened them that they realised that the lifeline of retail stores in Vietnam is parking spaces for motorcycles. Without convenient parking spaces for motorcycles, few customers would visit. The prevalence of motorcycles concurrently expands consumers’ travel range and has a significant impact on their consumption habits. Many retailers, like Mixue, Miniso, and Haidilao, learned this lesson the hard way when selecting store locations in the country.

Another instructive example is the challenges faced by Chinese motorcycle companies in Vietnam. In a market once dominated by Japanese brands, Chinese companies, represented by top players like Jialing and Lifan, fought hard to gain themselves a foothold. As the competition intensified, however, several Chinese motorcycle companies were dragged into a price war. To maintain profitability, they cut corners on quality, which in turn resulted in further price reductions. This vicious circle led to a decline in the combined market share of Chinese motorcycle brands in Vietnam, and finally a collective exit. What they lost was not only the motorcycle market in Vietnam, but also the reputation of Chinese products in Southeast Asia more broadly. As a result of miscalculations like these, when today’s Chinese enterprises try to enter the Southeast Asia market, they must be particularly cautious in order to counter existing prejudice against Chinese manufacturers.

Recognise the importance of branding

In comparison to companies of the past, today’s Chinese enterprises now share a new consensus when going global: no matter how cheap a product is, the importance of branding must never be overlooked. Maintaining brand values means adopting a long-term mindset that places consistency and product positioning ahead of short-term gains. The ultimate goal is winning over repeat customers, which will translate into larger market share in the future. 

The benefits of going global in Southeast Asia

The days are gone when you could significantly cut costs by going to Vietnam or Indonesia. Labour costs in these two countries have risen consistently in recent years, and the cost of land and utilities such as water and electricity have also increased. Although costs remain relatively low compared with China, this slight reduction in production costs does not in itself justify the trouble of moving entire manufacturing lines abroad. Whatever savings one might be able to achieve would be disproportionately offset by underdeveloped supply chains and lower productivity.

So here is the question: why are so many Chinese companies still so eager to gain a solid foothold in Vietnam or Indonesia? Based on my most recent research, local tax regimes and the potential demand from the wider Southeast Asia market are the main attractions. As a result of US-China trade tensions, Chinese products are subject to an additional 20% tariff when being exported to the US, leaving almost no profit for companies that already operate on thin margins. When exporting to the US from Southeast Asia, however, companies can circumvent that 20% tariff, making production and operations profitable again.

The Southeast Asian market can be very attractive to enterprises struggling with a stagnant and saturated domestic market. Compared with the Middle East and South America, for example, the Southeast Asian market is geographically closer, boasts relatively simple and convenient supply chains, and has a certain cultural affinity with China, making it easier to understand and adapt to local practices and habits. For Chinese enterprises going overseas for the first time, Southeast Asia makes a suitable testing ground in which risks are more controllable.

Building cultural understanding

It bears noting that when relocating, Chinese entrepreneurs and business leaders should avoid becoming too attached to local Chinese communities in their target markets to the extent that they become distant from local merchants, organisations, and people due to linguistic or cultural barriers. Being immersed in the local community and adapting to local ways of thinking and habits is the only way to win the recognition of the local market and avoid conflicts that arise from misunderstandings. Learning some of the local language always helps, too.

When operating businesses overseas, compliance is also of the utmost importance. In Vietnam and Indonesia, however, local laws and regulations change frequently, and a company may only become award of such changes when their products arrive at customs. Such issues are compounded by the fact that, generally speaking, regulations are getting stricter, making compliance harder.

Certain regulations can be very rigid and demanding, for example if certain corporate positions must be held by local people, or bank accounts must be opened by local people., Newcomers unfamiliar with these practices might want to outsource these activities to save some trouble, but this entails serious risks. In some notable cases, bad actors in local markets have effectively taken control of foreign companies while its leaders were unable to return during the COVID-19 pandemic, and flawed procedures during founding meant that rightful company owners were unable to recoup losses or regain control. 

Most business owners have no trouble exercising their operational and managerial expertise overseas, but they do often lack a strong sense of compliance. On the walls of one furniture and home decoration company that we visited, a hiring notice stated that female candidates applying for a job there must be of a certain height and weight. I was personally appalled by both these discriminatory hiring criteria and by how blatantly they were displayed in public. Some among my fellow visitors on this trip were lawyers, who warned that this would be a blatant violation of the law in most countries.

Being compliant requires an accurate understanding of specific conditions and applications of laws and regulations in a market, instead of copying one’s experiences from back in China. For example, one Chinese company operating in Indonesia received a notice about a fine issued by the tax bureau. This company planned to pay the fine as usual, but their friends familiar with local tax policies reminded them to appeal to the tax court. The company was sceptical at first, assuming that the tax bureau and the tax court were two branches under the same government authority and that they would likely side with each other, making filing an appeal just unnecessary trouble. However, their friends insisted that the two organisations were independent entities. With solid justifications, an appeal would have the chance of success. Indeed, the fine was overruled by the courts after the appeal was heard. This goes to show that most Chinese companies of reasonable scale in Indonesia stand to benefit greatly from hiring a local legal professional to manage all matters related to contract reviews and tax.

Leadership, dedication, and the right connections

The journey overseas is an adventure, an expedition, and just as often, a battle. The first person to step into the fray should be the boss, or the founder. In Southeast Asia, all successful foreign businesses tend to share one quality: their business owners are willing to devote themselves fully to the undertaking.  Some suggest as a rule of thumb that only when owners are committed to staying at least four months a year in the target market can they start to gain real understanding of the local environment, thus enabling them to make wise strategic judgments and business decisions.

Some Chinese companies pivoting towards Southeast Asia choose to locate their overseas headquarters in Singapore, often due to the geographical conveniences offered by the international financial centre. CEIBS alumni with experience of the Southeast Asian market, however, strongly opposed this in our conversations, believing it to be a choice advocated by professional managers prioritising comfort for themselves and education for their children. Business owners are responsible for pushing the professional managers they themselves have hired to the front line in local markets. It is human nature to seek comfort, but to maximise potential success, sometimes we must step outside of our comfort zones.

Based on their experiences in China, many Chinese enterprises spend a great deal of effort establishing relationships with local government officials in overseas markets. In fact, government officials in Southeast Asian countries have limited influence. Key opinion leaders, however, such as civic organisations, labour unions, or charities, may have a more significant impact on public opinion and employee sentiment. Communicating and interacting with them regularly is essential to running business in Southeast Asia, but is easily neglected by Chinese companies when they first arrive. Moreover, people in Southeast Asia have their own preferred news channels and social media which are often unfamiliar to Chinese companies; if companies continue to simply do what they do in China in terms of product promotion, their campaigns will not resonate with local consumers.

Localisation is key

When expanding overseas, companies that possess similar production strength nevertheless achieve drastically different results. Such divergence is usually due to two main reasons: level of insight into local market and customers, and depth and quality of localisation. True localisation must be carried out in every aspect of the company’s expansion: product design should consider the specific needs of the local community, company websites should reflect local users’ browsing habits, and marketing campaigns should take into account local sentiment and culture. In Southeast Asia, where people may harbour prejudices against Chinese products, companies must tactfully counter these misconceptions with solid actions and products.

Locally hired employees can be of great value in achieving such localisation. Finding the right local talents and unleashing their potential is as essential as finding outstanding managerial/technical talent in China to support outbound expansion. Please note the use of the word “find” here, rather than “recruiting”. Companies should not wait around and hope for someone to show up, but proactively seek them out. This is an important lesson that some companies have learned the hard way. Candidates for certain key positions are particularly influential, and which roles are “key” varies from across time and location. Some entrepreneurs on our trip shared that when setting up factories in Southeast Asia, there are two positions for which they always make sure to interview candidates personally: General Manager (in some countries, regulations require this role to be assumed by a local citizen), and Head Security Guard.

Risk management for enterprises going overseas

When entering new markets, enterprises must avoid taking an “all or nothing” approach. Residual risk can largely decide whether an enterprise can survive overseas or not, and as such risk management is something that all enterprises must learn before venturing abroad.

First, there are geopolitical, religious, and cultural risks. Multiple Southeast Asian countries have territorial disputes with China over the South China Sea, which are unlikely to be resolved in the foreseeable future. Businesses should try to steer clear of such sensitive topics. Religious issues can be even more sensitive; some CEIBS alumni have even told me that if an enterprise were to violate religious taboos, even the company’s president wouldn’t be able to salvage the situation.

Second, there are compliance risks. As more and more Chinese enterprises go overseas, many of them are performing increasingly well, and as such could be subject to greater scrutiny and even obstruction, which is likely to take the form of tightened compliance requirements.

Third, there are risks of fraud and physical safety. The bad debt rate of foreign-owned businesses in Southeast Asia is said to be several times higher than that of local businesses; this is because foreign businesses are more likely to be scammed, usually by their so-called “business partners”. Business leaders should pause and think again when presented with partnership opportunities that seem too good to be true.

Finally, the biggest risk of all lies in values. Every company that we visited in Vietnam and Indonesia reiterated the importance of upholding their core values and influencing local employees to subscribe to these values. Values should not be comprised, yet habits are hard to change. It has become a common practice among Chinese companies operating in overseas markets to translate the core values that matter a lot in doing business - honesty, dedication, adherence to law, diligence, cooperation - into local languages and display them in noticeable locations in the workplace.

In all, expanding overseas can reap exceptional rewards for Chinese companies, but only when done carefully and with appropriate due diligence. Allow me to end this article with a philosophical proverb: “Stopping at the port is safe, but that’s not why you build the ship.”

Su Xijia is Professor Emeritus at CEIBS. His diversified research interest in accounting, auditing and corporate governance with current focus on China related issues. Research topics include corporate governance in family firms, auditor switch and rotation, auditing quality, and earnings management.