Thinking beyond China's cheap labor producing cheap export goods and giant trade imbalances, Chinese companies putting down roots in the US market could well produce great mutual benefits.

 

When Chinese Commerce Minister Bo Xilai addressed business and government leaders at a Chicago Council on Global Affairs luncheon in Chicago May 31, his emphasis on a China-US "joint effort to win" received an enthusiastic response.

 

He spoke at a time when some US politicians and labor unions blame China for taking away manufacturing jobs and say that the US$232.5 billion trade deficit with China is caused by the undervalued yuan.

 

At the same time, it is also widely recognized that US consumers have greatly benefited from low-cost Chinese imports to maintain their high standard of living.

 

And China's surge in "going out" is having some positive effects on that trade deficit. In May, a large Chinese procurement delegation toured 25 US cities and signed deals with US companies worth US$32.60 billion. This sum equals 14 percent of the 2006 trade imbalance between the two countries.

 

In today's division-of-labor global economy, however, the US will not be able to balance its payments with China on the trade front, especially with its tight restrictions on high-tech exports to China.

 

Instead, it is apparent that the US should look at other options that will improve its trade position.

 

Some insight into these options was provided in Washington last month during the second session of the Strategic Economic Dialogue between the United States and China.

 

US Treasury Secretary Henry Paulson's closing statement summarized: "The United States and China understand that getting our economic relationship right is vital not only to our people, but to the world economy. Our relationship works best when it produces mutual benefits, which lead to growth, balance and a stronger global economy."

 

The mutual benefits desired can come, in part, from China's vigorous efforts to transform its manufacture-based economy into one that is more diversified and capable of competing in the fast-changing global economy.

 

For example, to diversify the country's US$1.2 trillion foreign exchange reserve holding, China's State Investment Co signed an agreement to take a US$3 billion equity position in US private equity Blackstone Group.

 

And, at the May 15 Chinese Enterprises Outbound Investment Conference in Beijing, Zhang Xiaoqiang, vice-minister of the National Development and Reform Commission, indicated that Chinese government entities will provide diplomatic, foreign exchange, tax, customs, credit, insurance and other support to Chinese overseas investment in targeted industries.

 

The US economy will benefit from Chinese investment. It will create jobs for Americans, increase purchases of goods and services from US businesses, raise tax revenues at different levels of the US government.

 

Chinese investment in the US will also benefit China. It will help in gaining market access and market intelligence, acquiring a skilled workforce and management talent, brand recognition and profits.

 

If both sides can gain such great benefits, what are we waiting for?

 

As Minister Bo said in Chicago, the US and China and their two peoples need to get to know each other in order to strike a long-term strategic partnership.

 

His observation reflects Chinese culture, which focuses on prudence, doing things step by step. It's all about proceeding with caution by securing a base before taking the next step.

 

This prudence was displayed in the successful entry into US business by several Chinese companies over the past decade. In 1994, the Wanxiang Group initiated Wanxiang America. It grew from selling the group's core ball bearings to the US market to involvement in the US automotive and industrial markets

 

In 1999, the Haier Group created Haier America. It entered the US market through the niche market of refrigerators and eventually expanded into a range of products sold by retailers across the United States.

 

BYD Company set up BYD America in 1999. By 2000 it was Motorola's first Li-ion battery supplier in China. It used its American foothold for market expansion.

 

These Chinese companies successfully entered the US market through a seeding model. They secured a major customer to form a base there, or entered the market with a niche, or expanded with growth into other areas. They took risks while slowly moving into an unfamiliar market.

 

Chinese enterprises, at least at present, are in a risky position when dealing with business-savvy economies, particularly in markets outside their home turf. Nevertheless, this is a step China must take to successfully go global.

 

However, with the marketplace rapidly changing, Chinese companies now need a more time-efficient model than the seeding model. This new approach could be called the "seedling transplant model".

 

It would be a lot more appropriate for a Chinese firm to use this faster-moving model to succeed overseas in the current global economy.

 

The seedling transplant model calls for the transfer of a success-proven product or service from one geographic location to another, or from one industry to another. Such a seedling, even a strong seedling, is not yet a full plant, so should be shielded from predators at the early transplant stage.

 

The transplanted product needs to be watered, fertilized, and protected so that it can take root, spread out, grow and be able to stand alone.

 

A Chinese seedling company must be protected by an appropriate local partner in the foreign market - a partner that is able to offer the Chinese enterprise insight, assistance and support to swiftly align the Chinese company in the new foreign market.

 

For agricultural plants, it is important to find a place to transplant that will give enough space and light for the plant to grow - above and below the ground - to its full size. For a Chinese company to succeed in the seedling transplant model, the potential market should be big enough and open enough for competition, for the transplanting product to take root and grow.

 

Successful transplant means the product gets known, accepted, desired, and secures respect and good sales in its transplanted market.

 

The perfect opportunity for seedling transplant does not come easily because leading local players often close out newcomers to protect their market.

 

An example of a great seedling opportunity currently exists for the Chinese in the US$3 billion global market for surveying instruments and GPS (global positioning system) equipment.

 

If Chinese players can gain a foothold in this market, the ventures will be highly profitable for managers, employees, and shareholders by taking such innovative enterprises public.

 

The global geomatics' market is dominated by three top players that are all publicly traded companies: the US Trimble Navigation, the Swiss Leica Geosystems and the Japanese Topcon.

 

They all came to their size and power - with respective market capitalization of US$3.54 billion, US$2 billion, and US$1 billion - through mergers and acquisitions, knowledgeable management and access to sales channels.

 

They have used China to take advantage of low-cost manufacturing and now are capitalizing on their international brand recognition to sell to China's huge and growing market. These incumbent market leaders, enjoying high profits, work to defend their position at all costs.

 

They are not hiding their efforts to destroy competition. Their numerous merger and acaquisition activities help expand their product line and competitiveness while closing out any opportunity for the emerging Chinese manufacturers to get into the market.

 

The door to the US geomatics market, and eventually to the world market, can be found in a Chinese company or companies forming a winning team with one of the few remaining independent US players. This local protector can help a Chinese surveying instruments manufacturer access the global market through the seedling transplant model.

 

As Minister Bo emphasized to American business and political leaders in Chicago, the go-global effort for Chinese companies is inevitable.

 

A Chinese team winning in the global geomatics market helps China achieve national goals for innovation and global business.

 

Chinese survey instrument manufacturers need to find ways to transcend their position - to offer a showcase to other Chinese enterprises - and they need to do it soon. The seedling transplant model is an innovative technique that can lead to success.

 

The author is managing director of Chicago-based Royal Roots Global Inc, a US-China business advisory firm

 

(China Daily June 15, 2007)