When discussing international business expansion, big Western brand names like Apple, Boeing, or Nike typically come to mind. Yet, shifting winds have changed the market. Nowadays, Chinese companies are at the fore; in less than a decade, Chinese outward foreign direct investment has grown to over one hundred billion dollars annually – elevating China to one of the top cross-border investors in the world.
China is a market of big winners and losers. Companies that have tasted success in the domestic market often leave their home turf to expand operations internationally, with prominent examples being Haidilao and Tencent. However, expanding across borders for Chinese firms can be uniquely challenging. First, companies can often be stifled by bureaucracy from Beijing, as the central government frequently imposes strict regulation on certain industries deemed “strategic” or critical to national security. Furthermore, firms are often sensitive to shifting geopolitical tensions between Beijing and other governments around the world, which can impact foreign operations at a moment’s notice. Lastly, local consumer tastes for various products in foreign markets may starkly differ from those in China.
Nonetheless, the potential rewards of internationalizing for China’s giants often vastly outweigh the risks. Expansion allows for firms to diversify their revenue sources both by industry and geography, offering a buffer against the risk of single market operations. Furthermore, successful expansion provides businesses with an additional cash cushion in markets that are potentially less competitive, which in turn can be reinvested at home to bolster competitiveness in the fierce Chinese market. As China’s share of large businesses grows, more are looking to the iconic success stories of Haidilao and Tencent as models through which to achieve their own vision of international expansion.
China’s Goals for International Expansion
China’s share of big business is getting even bigger. As of 2020, China had the largest quantity of Fortune 500 enterprises at 133, and had added 27 new firms to the ranks over the preceding five years. As businesses mature, they continue to seek new avenues for growth, and international expansion has become a common choice. In 2019, China’s outward foreign direct investment (OFDI) was approximately US$117.2 billion, contributing to an upward trend in the figure.
Many Chinese companies seeking to expand internationally already have extensive, well-established domestic operations. However, despite their economies of scale, foreign locales still offer competitive advantages unavailable in the domestic market. For example, according to Yao Yang, the Director of the China Center for Economic Research at Peking University, some Chinese companies expand and relocate to the United States due to preferential pricing for resources such as natural gas, electricity, and even logistics for various production lines. Additionally, China is also beginning to ship production and labor offshore to Southeast Asia to cut costs, which in turn has inflated profit margins.
Beyond the benefits of offshoring operations to cheaper markets, there are still additional incentives to global expansion. First, China’s slowing economic growth is being felt by domestic players. Expanding to an external market unearths new long-term growth opportunities that competitors may lack while also diversifying geopolitical and systemic risk endemic to single market operations. Furthermore, foreign market expansion also unlocks the reverse productivity spillover effect, which provides access to new labor forces with unique skills and education, resources, and oftentimes, technologies. These elements, when harnessed successfully, can result in increased competitiveness, more efficient operations, and heightened brand awareness.
Haidilao’s International Expansion Success Story
Haidilao is a hotpot restaurant founded in 1994 just east of Chengdu in Jianyang prefecture. Hotpot, a dining experience in which the diner cooks various ingredients like fresh meats and vegetables in a simmering pot of soup at the table, is immensely popular in China. Despite the saturated industry competition, Haidilao has managed to establish itself as the largest hotpot chain nationwide. It is most famous for offering customers an above-and-beyond level of service; the chain is known to offer drinks and snacks as patrons wait to be seated, and, at times, has even provided free massages and manicures while customers queue. The company also provides luxury food options that other hotpot restaurants do not offer, such as A5 beef, Japanese prawns, and high-end baijiu.
Beyond its success at home, Haidilao has also found its niche in the service industry around the world. While it entered the Singaporean market relatively early on, in 2014, Haidilao entered its first region that did not have exposure to hotpot culture: the United States. Having opened its first branch in the Southern Californian neighborhood of Arcadia, early operations for the location were challenging. American customers were not accustomed to the level of service and costly food options. The “over-the-top” customer service became a common complaint from visitors, highlighting that staff seemed “confused and ill-trained,” leading to a Yelp rating of only three out of five stars after opening.
Yet, despite these initial hiccups, Haidilao has since done very well in the US market. After revisiting its localization strategy and incorporating more American-style cuisine, services, and experiences to match local tastes, the brand has opened at least five more outlets across New York City, Seattle, Los Angeles, and Chicago, with the New York City and Seattle branches both obtaining 4.5 star ratings on Yelp.
International success has brought a material impact to Haidilao’s bottom line. In 2018, the company earned almost 10% of its gross revenues outside China. In 2015, Haidilao’s total revenues were CN¥5.76 billion (US$917.2 million); by 2018, this figure had exploded by over 300% to CN¥25.56 billion (US$3.89 billion). This growth was due to market expansions into the United States, the over 300 stores that Haidilao opens annually within China, and its growing international presence in tertiary markets. Currently, Haidilao operates over 900 stores across more than 10 countries and regions.
Tencent’s Growing International Presence
While Haidilao left home to seize new business development opportunities, Tencent’s mission has been much more targeted. Tencent is a technology giant spanning social communication apps, digital advertising platforms, financial services, gaming services, and more. The company is valued at over US$750 billion and owns major apps such as WeChat and QQ.
Tencent has begun to prioritize international market expansion, particularly amid a recent struggle to maintain high profitability on its home turf. A tumultuous regulatory environment has undermined Tencent’s stable earnings potential, with internet and online gaming restrictions oftentimes subject to drastic short-term measures that bring serious consequences for the company. For example, the gaming industry screeched to a halt as Chinese gaming regulators froze approvals for new games for nine months in 2018. Such volatility has cast a shadow of a doubt over certain areas of Tencent’s operations and thus driven the giant’s international expansion ambitions.
Whereas Haidilao relied on exporting and localizing its at-home business model, Tencent has instead preferred to make use of strategic partnerships and investment to expand. One need not look further than its gaming business for examples. Unknown to most gamers, Tencent profits from many popular titles. It owns Riot games, the US-based developer studio behind League of Legends and owns a 40% stake in Epic games, another US agency behind Fortnite. In addition, it holds a majority stake in Supercell, the Finnish mobile gaming powerhouse behind Clash of Clans and owns a minority stake in Bluehole, the South Korean corporation behind the massively popular 2017 battle royale game, PlayerUnknown’s Battleground (“PUBG”). In 2019, it also announced a new partnership with The Pokémon Company to develop new mobile games. The list goes on; look into the background of a popular game, and there is a decent chance that Tencent or one of its subsidiaries is involved.
This has led to Tencent’s strong success in foreign markets. PUBG and Honor of Kings, both distributed by Tencent, ranked first and second respectively for mobile game revenues in 2020. In 2019, the firm reported that nearly 25% of its gaming revenues came from international markets. And, in 2020, with more gamers spending time at home due to the pandemic, the firm saw its entire gaming division grow by 45% between July and September. With many more partnerships in the works, the firm has even started leveraging its global market position to push its other services abroad, such as its social media platforms, digital payment tools, and even its ride hailing and maps services.
The Future of China’s International Pursuits
Countries around the world will feel the reverberation of the steps taken around the world by Chinese giants. However, international relations will continue to define the global business landscape. For example, due to heightened US-China tensions, many Chinese companies have set their sights elsewhere. At its height, Chinese investment in the US had reached US$53 billion in 2016, but sank by 94% to a paltry US$3.2 billion in 2019 amid spiraling US-China tensions and an increasingly complex international regulatory environment.
Guangzhou Automobile Group is one such company adapting its expansionary plans in light of a changing global landscape. As of 2018, the company had established R&D centers in Silicon Valley, Los Angeles, and Detroit. Then, the company’s plans to expand further into the US were derailed by the trade war. Instead, Guangzhou Automobile Group is now looking towards the Middle East and Russia for operational expansion.
This is just a single example indicative of the rising concern over geopolitical risk that will continue to define outward foreign direct investment trends for years to come. While long-term economic ties between the US and China are unlikely to be severed, the COVID-19 pandemic and a series of increasingly terse trade restrictions between the two nations are likely to stifle the US-China trade relationship over the short- to mid-term. Over the coming years, the world can expect Chinese outbound foreign direct investment to redirect from North America to friendlier shores in ASEAN, Africa, and the Middle East.