China Will Always Be a Struggle

Robin Li, CEO of China's largest search engine, says foreign firms will always find China a tough market to crack.

Baidu CEO Robin Li believes foreign firms will always find it tough to succeed in China, the search engine’s home market, according to a CNN story Monday. The reason they  fail is because they don’t “understand the local market environment,” says Li. “Companies need to know how to connect to the ground.”

Baidu, of course, has benefited from foreign companies’ mistakes, most notably with competitor Google. After running into regulatory roadblocks, most significantly on censorship issues, Google exited mainland China in 2010. There are companies that have done well in China though. For example, Yum Brands, the operator and franchisor of KFC, Taco Bell and Pizza Hut, has built its China division into a $7 billion business that generates 51 percent of its revenue, up from 21 percent in 2007.

But, as we pointed out in a recent story in the CFO Tablet edition, many companies move into new regions or countries without a firm grasp of the culture or the investment environment. The latter has particular relation to China, a fact Li failed to note. China has a longstanding policy of requiring foreign companies to transfer technology to the local Chinese partner in exchange for access to a market.

Also on the list of hurdles and constraints for companies trying to invest internationally, says professor Andrew Karolyi of The Emerging Markets Institute at Cornell, are market-capacity constraints; governmental bureaucracy; lack of governance and transparency on the part of joint-venture partners; poor legal protections; and political risks.

Meanwhile, some securities analysts are still warning institutional investors to stay out of Chinese companies, as financial reporting and transparency issues bedevil Chinese firms. In October, research firm Muddy Waters  accused NQ Mobile, a Beijing company listed on the New York Stock Exchange, of overstating its revenue and market share. The Muddy Waters report called NQ Mobile’s $22.99-per-share stock “a zero.” The shares are now down to $14.11.

The Chinese government itself is cracking down on Chinese company disclosures. The China Securities Regulatory Commission, according to Dealbook, said on Sunday that “it would monitor companies that sought to sell shares at higher valuations than the average for their industry and require them to make additional risk disclosures.” On Monday, five Chinese companies, all startups, pulled their IPOs, underscoring that China’s domestic companies and the country as a whole have their own puzzle to solve: how to run a securities market that investors can trust.

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