“I thought the investment banker’s admission was ironic and fairly hilarious, and that was before the stock price of the company he represented collapsed.”
It was a dinner to commemorate the first anniversary of a Chinese company going public on a major stock exchange in the US. The investment banker giving the presentation was the lead underwriter on the deal. At the end of the presentation he showed slides of the entire underwriting team site-seeing in China—the Great Wall, the Forbidden City, the Summer Palace, the whole nine yards. It looked like they had great fun in China. I had had to hold back laughter. Do you see the irony yet?
Underwriters are supposed to be experts
They aren’t supposed to be tourists
An underwriter’s job is to assess the risk and potential of an investment opportunity. When you buy a stock in an IPO, part of the reason is because the underwriter has thoroughly investigated and analyzed the company, understands its market, competitiveness, and growth potential, and has determined it is a good investment at the price suggested. The underwriter is supposed to be an expert. In this case he had just admitted that he had absolutely no experience in the market he was supposed to have analyzed. I should add that, in this case, the economic sector of the company in question had very distinctive local characteristics. You certainly couldn’t say all countries are the same relative to this industry. If the underwriter had never been there before how well could he analyze that company?
“He showed slides of the entire underwriting team sightseeing in China—the Great Wall, the Forbidden City, the Summer Palace, the whole nine yards. It looked like they had great fun in China. I had had to hold back laughter. Do you see the irony yet?”
What if your doctor took the same approach?
Let me put it another way. Let’s say that, after you had surgery, the surgeon showed you photos of him cutting you open and told you he was excited because he had never actually performed this kind of surgery on a human being before. Would you consider that a confidence-building moment or a confidence-eroding moment? Might you suddenly be interested in a second opinion?
Billions in losses as trust disappears
Allegations of fraud and accounting irregularities decimate the China Space
I had to chuckle at the nonchalant way the banker shared the highlights of his first visit to China, gleefully unaware of the implication of his comments. If that Chinese company’s stock price had remained high then I probably wouldn’t bother sharing this story with anyone. But that’s not what happened. For those who don’t follow such things, between roughly 2002 and 2008, more than 200 Chinese companies went public in foreign markets, mostly the US (excluding huge Chinese state-owned enterprises that listed in China and overseas). In the 2009-10 time frame, due to accusations of accounting irregularities and other alleged fraudulent activity, the stock prices of all but the biggest and best of those companies collapsed. It was a total rout brought about by a collapse in trust. In its wake were billions of dollars of losses, dozens of lawsuits, Chinese companies that went public trying to go private, and hordes of unemployed investment professionals as the entire community of foreign investment firms scaled back their China operations.
In my opinion, the investment banker’s actions revealed a classic case of “not knowing what you don’t know.” Having direct experience working with many of those Chinese companies at that time, I can also’ tell you that this banker’s approach was typical of most foreign firms active in that area. That is, they operated as if it were business as usual, not as if China required a special approach.
“It was a total rout brought about by a collapse in trust. In its wake were billions of dollars of losses, dozens of lawsuits, Chinese companies that went public trying to go private, and hordes of unemployed investment professionals.”
Foreign companies continue to struggle in China
Outright failure is not uncommon. More common is simply a lack of progress
These companies certainly aren’t alone. We continue to see all kinds of companies—from high-profile, global giants to SME’s—struggle in China. Outright failure is more common than you might think, although the inability to make progress, to get “stuck in the mud” as I like to call it, is the more common phenomenon. Sometimes obstacles in China are impossible to avoid. But in many cases a big part of the problem is that foreign companies simply do not adjust well to China’s local conditions—culture, economic structure, business environment, etc.—which are the factors that make China difficult.
“Sometimes obstacles in China are impossible to avoid. But in many cases a big part of the problem is that foreign companies simply do not adjust well to China’s local conditions…”
Regardless of your objective in China–devising the right strategy, managing effectively, growing the business, minimizing personnel turnover, improving performance, getting started, assessing risk—if you don’t learn how to adapt to the local conditions, success can be hard to find.