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The Trend of Chinese businesses going offshore

Updated: Jun 4

By Dr. Hans Au - 3 May 2024


Since 2023 DCC offices in Beijing and Munich have received dozens of enquiries from mainland Chinese companies regarding offshoring (in Chinese: 出海 chu hai). The drivers for Chinese businesses to go offshore are typically the following: (1) a rapidly shrinking market share and growth  in China (due to cut-throat competition, deflation and over supply), (2) a desire to lessen the dependency from a single country with opaque economic policy, (3) pursuit of overseas markets that are perceived easier, (4) hedging against loss of asset risk and (5) generational issues such as creating new opportunities for young successors (often sons or daughters). 


Essentially there are 5 key business models t emerging from the Chinese offshore drive:

1. Joint Venture: this is a model that Chinese are very familiar with. A joint venture will work best , if complimentary strengths are combined together in a way so that the result is greater than the sum of its parts. What we might be seeing in the next years is that Chinese companies with strong or even cutting-edge technology may enter into JVs to access new markets in Europe by partnering with a local businesses that has deep experience in distribution. In 2023 we assisted in setting up such a Sino-German JV in southern Germany.


2. Setting up a 100% subsidiary


This is a relatively straight-forward way of entering a new country and market as it is a defined process that allows planing, allocation of ressources without the need of spending time acn costs to accomodate to the issues and agendas of a partner. It may suit the pragmatic Chinese approach of getting started quickly. However, the challenges will be how fast and how deep can a Chinese business localize in the foreign country. It takes a few years to understand how hiring, financing, sales cycles, compliance and customer care works. To get up to speed on such management areas some degree of involving local managers, whether external or through hiring, will be needed.


3. M&A


Currently we are getting quite some enquiries for acquisitions in Germany and we antipicate there might be a bit of rebound in M&A activity coming in the next years. A lot of Chinese companies are looking for mature high-tech companies, or businesses that are leaders in their field, to invest into. Acquisitions are always hard to do and the last 10 years have showed that Chinese investors need to recalibrate their approach to M&A and focus on post merger integration work. In particular the area of work and business culture is still weakly understood by Chinese managers.


4. Distributors and agents


Selling is one of the most important functions in a business. We spend quite some time daily to discuss with Chinese industrial manufacturers - often machine tool or eletronics manufacturers, or makers of gear in the renewable energy sector - to set up distribution models in Europe. The obvious advantage could be fort he Chinese producxer to supply reasonable Chinese quality at 30% or less of the engineering costs to a European distributor, who then does the sales work and after sales. However, in most cases the Chinese manufacturer underestimates the power of brand and image versus the pricing advantage. In China brand and marketing in the B2B space is generally less important than „channel power“ (access and ability to close sales deals), which is different in Europe. A lot of negotiations with German distributors fail also because of disagreement on marketing responsibilities. Marketing in Europe uses different methods and tools than in China and Chinese product makers often believe that the local European distributor should simply have sales ability and power.


5. E-commerce


Actually E-commerce is only a specific form of distribution. Similarly to hardware crossborder sales as discussed in the preceding paraggraph, the entry costs for E-commerce are realtively lower versus a JV, a 100% subsidiary or an acquisition. However, we see many Chinese companies in the E-commerce space that fail to understand that operating a warehouse (even if outsourced to an 3PL) and 1 customer rep in Germany may consitute a „permanent establishment“ triggering tax issues. Also there are specific E-commerce compliance issues which are virtually unknown to most Chinese exporters.  

 

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