Advisers help balance risks and rewards

PUBLISHED : Monday, 29 November, 2010, 12:00am
UPDATED : Monday, 29 November, 2010, 12:00am

China's state-owned enterprises face growing business risks as they expand into unknown territory overseas as part of the 'going out' strategy encouraged by Beijing.

To manage those risks they are turning to international consultancies to protect themselves from potential problems including labour disputes, financial losses and physical danger.

An example of the circumstances confronting outward-bound state-owned enterprises was the shooting in October of striking miners in a Zambian coal mine owned by a Chinese businessman, Xu Jianxue. Some 12 or 13 Zambian miners were shot and injured, and two Chinese nationals were charged with attempted murder over the incident.

Then there is the light rail project in Mecca, Saudi Arabia, undertaken by China Railway Construction Corp, which warned in October that its losses from this project could be as high as 4.15 billion yuan (HK$4.83 billion).

'At the moment, we're doing a lot of outbound business for Chinese companies who operate in high-risk markets, including Africa, the Middle East, Latin America and Southeast Asia,' said Julia Piao, director of China client services at Control Risks, an international risk consultancy.

'I'm optimistic because so many Chinese companies are going overseas and often operate in high-risk countries. So we see further growth.'

Control Risks, headquartered in London, has seen its revenue from Chinese firms venturing abroad jump 377 per cent this year from last year, said Dane Chamorro, the company's North Asia managing director.

'We're seeing a trend where more Chinese companies are interested in understanding local political and operational risks and the entities they're doing business with, to mitigate threats such as fraud and corruption,' said Chamorro.

Chinese companies form a small fraction of Control Risks' global revenue but account for about one third of its China-related revenue, which includes both Western multinationals operating within China as well as Chinese SOEs operating outside China. Yet Control Risks started serving Chinese clients, all of which are SOEs, only in 2007.

'A few years ago, a lot of these Chinese companies were not even taking risk assessments. They are now. It's a sign of greater internationalisation and sophistication,' said Andrew Gilholm, senior analyst for China and North Asia at Control Risks.

In contrast, financial institutions in the United States and Europe have used risk consultancies for decades.

'We help Chinese clients with political stability, regulatory regimes and more dramatic things like regime change. When a Chinese company starts a new project, it needs comprehensive plans on matters ranging from terrorist attack on buildings to more mundane things like, are people going to steal information from their computers?' said Gilholm.

One common risk is expropriation of their investments and physical assets, which can occur if their financial assets or business licence are taken over by a local company, Gilholm said. 'Because the impact is huge, it's something all clients have on their list as their major fear.'

Another risk consultancy benefiting from Chinese clients is Africa Risk Consulting.

'As the presence of Chinese companies grows [in Africa], they will become an increasingly important target client base or stakeholder in our client base,' said Tara O'Connor, Africa Risk Consulting's managing director.

'I see their use of companies like ours increasing significantly. Chinese companies come to us for the same reasons that any newcomer to African markets would.'

The operating conditions that Africa's 53 countries present can be daunting, she said.

An example, O'Connor said, is the challenges that Africa's emerging democracies pose: Will the new government honour the contract the company signed with the previous government? Will the new president drive forward reforms started by his or her predecessor?

Another driver for Chinese companies to use Africa Risk Consulting is their increasingly global nature.

'Chinese companies now need to demonstrate to international shareholders, partners and governments their adherence to local and extraterritorial laws. Like other global corporations, major Chinese companies have to weigh the consequences of investing or trading in some countries,' she said.

An example is PetroChina's reported decision earlier this year to scrap its plan to process Sudanese crude oil at its new refinery in China, in order to comply with its New York Stock Exchange listing, she said.

Going out

Risk experts are seeing a sharp jump in business from Chinese firms

Control Risks has seen its revenue from state firms venturing abroad jump this year by: 377%