Chengdu: The Right Move for Chilton?
February 12th, 2008 | by This is China! |
November of last year the Financial Times reported the American private equity fund Chilton planned to set up an investment office in Chengdu. Chilton manages US$6.5 billion in assets from its Stamford, Connecticut headquarters. The fund manager currently manages US$450 million in investments in Asia. Though the company has a subsidiary in Hong Kong, they seem to have only have a stake in a Kunming tooling company. But they would like to have more.
As of November 2007, however, the company had not yet received approval from Beijing to set up a representative office in the capitol. Still, they are bullish on investing in Chinese companies that are on a clear trajectory for Chinese bourses, or are already listed. They seem to think, according to an article in The Deal that because Intel has moved out to Chengdu, it is a good area in which to find companies that are sophisticated enough to accept the kind of Western business structures and strictures that companies in Silicon Valley are. And if not Chengdu, they figure, then Chongqing or even Kunming.
Clearly the company has money to burn.
Though the local economies of these second- and third-tier cities are certainly booming, with GDP growth rates in the double-digits, the business sense in these areas is far from progressive. As a South Korean colleague once put to me about Chongqing business practices: “They’ve got 21st century hardware with 20th-century software.” That is, concepts like transparency of business practices, a single set of books, holding structures and the like are quite alien west of Nanjing. And certainly, management The Chinese Way is as much a way of life as eating spicy hot pot in Chongqing and Chengdu. Though some Chongqing and Chengdu companies have grown large because of the Central Government’s Go West policy – especially in the automobile parts and motorcycle manufacturing industries – the economy of Kunming is still based in tourism and cigarette manufacture. Sure, Chengdu is attracting its fair share of IT Outsourcing companies in the wake of investments by Intel and Microsoft, for instance; however, it remains to be seen how competitive Chengdu can remain given its isolated location, lack of experienced professionals and dearth of management talent.
Private equity firms by definition are pretty far up the value chain when it comes to the kind of companies they take into their portfolio. Outside of Shanghai, there are very few cities that have had the exposure to international norms and the base from which to grow their industries to a point where the companies are viable second-seed targets. Suzhou is one; Dalian is another. Suzhou, though, is still heavily steeped in foreign-invested manufacturing. Dalian, though, has home-grown software development and IT Outsourcing industries that have been servicing the Japanese and South Korean markets for more than a decade. The city by the sea is also becoming a base for manufacturing R&D, with the likes of Intel, British Telecom and IBM.
From personal experience I know many of the Chinese domestic ITO companies that are beholden to the Japanese would love to extend their operations into the United States and Europe; and software development firms to move beyond developing by-the-numbers embedded software the Japanese spec with little room for creativity. Capital from a Western fund would be just what the doctor ordered to help the companies break out of the Pacific Rim.
Certainly, the Chinese government and the World Economic Forum – which organizes the annual Davos Conference - together felt Dalian was ready enough to shine a spotlight on the north-coastal city. Davos brings together the rich and the powerful from all over the world to discuss issues that commonly face societies and economies around the world.
Certainly, Dalian has a manufacturing base; however, it’s main strength has been as a logistics depot serving northern China and northeast Asia. Another of its strengths is that it is an economically mature platform from which to explore opportunities in China’s northern rust belt, in provinces like Jilin, Heilongjiang and Liaoning. Those economies are in as dire a need for investment and development expertise as anything in central China. Northeast China also has the advantage – from an investment point of view – of bloated State-Owned Enterprises (SOEs) that the Central Government is still trying to disassemble with as few protests from laid-off workers as possible. Parts of some of the SOEs are ripe buy-out targets. Banks in the region have their capital bound up in keeping the SOEs in the northeastern provinces afloat. Even the Singaporean Prime Minister Lee Hsien Loong after his visit to Dalian in October 2005 directed Singaporean investment into the region, seeing the Bohai Rim as the next Yangtze River Delta in terms of the amount of expected economic growth.
Chilton – and other foreign private equity investors and hedge funds – that want to venture beyond the relatively safe confines of Beijing and Shanghai – or even Stamford - need to perform regional due diligence before they commit themselves to Lands that Time Forgot: China looks a whole lot different from ground-level than from 30,000 feet up, especially viewed through rose-tinted glasses. And though fund-pioneers who venture into the northeast of China may have to drink a bit more Chinese fire water than in the South to seal the Deal, they’ll be certain to see returns appear more quickly, instead of lost in the fog-shrouded mountains of Sichuan, Chongqing and Yunnan.
Bill Dodson
SUZHOU, China
