chapter 8 expanding abroad: from emerging...

Dr. Youzhen Zhao FDU 1

Chapter 8 Expanding abroad:

from emerging markets

Chinese Firms as examples

Dr.Youzhen Zhao FDU

Outward FDI from China (1990-2011)

(In 100 million US$)

Source: World Investment Report (data for 1990-2001); Ministry of Commerce, P.R.C. (data

for 2002-2011), non-financial OFDI for year 2002-2005, OFDI of all industries afterwards

746.5

2011

Dr.Youzhen Zhao FDU

Major players of China’s OFDI at the end of 2010

State-owned

enterprises

Collective

companies

Companies from

TW,HK, Macao Others

Private

companies

Share-holding

companies

Co. Ltd.

Foreign

companies

Share-

cooperative co.

Dr.Youzhen Zhao FDU

Non-financial OFDI stocks by the end of 2010

State-owned

enterprises

Foreign

companies

Others

Collective

companies

Others

Companies from

TW,HK, Macao

Co. Ltd.

Private

companies Share-

cooperative co.

Share-holding

companies

Dr.Youzhen Zhao FDU

Industry distribution of OFDI stocks by the end of 2010 (unit: US$ 100 million)

Leasing and business service

Finance

Mining

Wholesale and retailing

Transport, warehousing & postal service

Manufactury

IT

Real estate

Construction

Science research, service & geo-survey

Power and other utilities

Resident service and other services

Agriculture, forestry, husbandry ,fishery

Water, environment and public facility mgt.

Residential and catering trade

Others

Dr.Youzhen Zhao FDU

Top 10 destinations of China’s OFDI stocks by the end of 2010 (Unit: Billion US$)

Ranking Country (region) Accumulated Value (US$ billion)

1 HK, China 199.056

2 BV Islands 23.243

3 Cayman Islands 17.256

4 Australia 7.868

5 Singapore 6.069

6 Luxemburg 5.787

7 USA 4.874

8 South Africa 4.153

9 Russia 2.788

10 Macao 2.229

Dr.Youzhen Zhao FDU

Top 10 destinations of China’s OFDI flow in 2010 (Unit: Billion US$)

Ranking Country (region) Value (US$ billion)

1 HK, China 38.505

2 BV Islands 6.12

3 Cayman Islands 3.496

4 Luxemburg 3.207

5 Australia 1.702

6 Sweden 1.367

7 USA 1.308

8 Canada 1.142

9 Singapore 1.119

10 Burma 0.876

Regional distribution of China’s OFDI stocks

(by the end of 2010)

Dr.Youzhen Zhao FDU

Latin

America North America

Oceania Europe

Africa Asia


Motivation of Chinese firms’ internationalization

1- 5 means from Not important to Very important

Source: IBM Institute for Business Value and Fudan Globalization survey, 2005


The McKinsey Quarterly , May 2008

• Chinese firms are reaching for new opportunities in new markets abroad, searching for raw materials, talented employees, technologies, brands and customers.

• Chinese companies have found acquisitions the fast way to establish a global presence. E.g. Lenovo, CNOOC, Huaneng Power International

• Behind these headlines, however, the true story of Chinese

globalization is unfolding more slowly.

(see the next slide)


Top 100 companies by market capitalization , 2006

Proportion out of home country/area ( %)

Sales Assets Employees Shareholders Top

management

Mainland

China

11 3 2 25 3

India 21 9 2 25 4

South

Korea

28 11 11 31 4

Taiwan 48 24 32 29 2


Major constraints of Chinese firms’

internationalization

• Inexperience in the international market

• Unfamiliar with some business practices that are widely

accepted in developed countries

• Re-organization is needed

• Lack of talents who have international experiences


Global strategy of successful Chinese firms

—— cases and analyses

• Galanz

• Goodbaby

• Haier

• Lenovo

• Huawei

The way to success

Case : Galantz

--- OEM for Microwave Oven

A small company in China in the early 1990s

Focusing on the microwave oven production at first

Holding about 50% of the global market share now

Now pursuing diversification in white goods (e. g. air-conditioner in 2001; refrigerators; washing machines; other home electric appliances)

Dr.Youzhen Zhao FDU

The way to success

Vision: Aiming at the world top-ranking company

Goal: world top 5 white goods producer in 5-10 years

try to reach sales of 100 billion RMB at 2015

Galanz Group 2008 Sales: 28 billion RMB

2008 Export: 1 billion US dollars

2010 Sales: 37.2 billion RMB

Choosing the right industry at the very beginning

Investment on R&D exceeding 3% of sales, 5 R&D centers (HK, USA, South Korea, 2 in Mainland China)

Operating on the global management system

Dr.Youzhen Zhao FDU

Challenges :

Sustaining development continuously

Maintaining market share

Brand building (Original Brand Manufacturing) vs. OEM

For comparison: Goodbaby 好孩子/ Geoby ( overseas)

----next slide

The way to success

Dr.Youzhen Zhao FDU

Goodbaby Group

• Located in Kunshan of Jiangsu Province

• CEO and founder: Mr. Song

• From OEM to ODM , not OBM

• 280 domestic patents

• 13 international patents

• 70% domestic market share

• 4% of sales going to R&D, replacing

partners’ R&D resources;

• Seeking international partners with the best

local brands and channels, while putting

it’s own brand “Geoby” on the sides

(putting local brand on the back to attract buyers)

Dr.Youzhen Zhao FDU

Case :

Setting up factories and channels overseas

The way to success

Set up factories overseas since 1998

Brand value of Haier reached 81.2 billion RMB in 2009

Manufacture household appliances and electronics

Dr.Youzhen Zhao FDU

Dream: Building up global brands

The way to success

Global Brand Strategy

*From the end of 2005

Dr.Youzhen Zhao FDU

The way to success

Worldwide employees: more than 60000

Worldwide sales: 119 billion RMB in 2008

Facts: 29 manufacturing bases and 8 comprehensive

R&D centers worldwide

10 overseas trading companies

150.9billion RMB in 2011

Dr.Youzhen Zhao FDU

New developments of Haier’s


• Bought Sanyo’s white goods business in Japan and

South-East Asia in October 2011

• Launch two-brand strategy in Japan in 2012

(Haier + AQUA)

• Set up Asia RHQ and R&D center in Japan in 2012

Dr.Youzhen Zhao FDU

The way to success

Get access to talents and technology to build the

global brand

Provide the management team with overseas

experiences

Localize its marketing channel, sales , services

Benefits:

Dr.Youzhen Zhao FDU

Challenges ahead

• Plateau in its globalization, e.g. mainstream market penetration in USA

• Cross-cultural trust and respect

• Balance global and regional interests

The way to success

Dr.Youzhen Zhao FDU

The way to success

Case : LENOVO

Largest personal computer manufacturer in China

Lenovo acquired IBM PC division in 2005

The third largest PC giant worldwide after the

acquisition

Dr.Youzhen Zhao FDU

Lenovo

• Inception in 1984, Lenovo Group

Limited, the largest IT

corporation in PRC

• Sales Revenue RMB 28400

million in 2000

• In 2005, acquired IBM PC

business

• Customers over fields including Finance,

Insurance, Manufacturing and Government

Dr.Youzhen Zhao FDU

Acquisition of IBM PC

(2005)

Public Lenovo

holding IBM

Lenovo

Group PC

business

43% 57%

New Lenovo

(Lenovo + IBM PC)

Public Lenovo

holding IBM

46% 19% 35%

before after

US$650 million cash

US$600 million stock of Lenovo 1.75 billion

US$500 million debt of IBM PC

Dr.Youzhen Zhao FDU

Corporate Functions Integration/Strategy Executives

SVP,COO

Global supply chain

Liu Jun

SVP

Region

Ravi Marwaha

VP

Lenovo Mobile

Liu Zhijun

CEO Steve Ward

William J. Amelio

SVP

CFO

Ma Xuezheng

SVP

General Counsel

Jim

Shaughnessy

SVP

Market

Deepak Advani

SVP,CTO R&D and Technology

He Zhiqiang

SVP

HR

Bill Matson

CSO

Wu Yibing

SVP，CIO

Steve

Bandrowczak

CIO

Kevin Burns

VP

New business

Steve Petracca

VP， Communication

Carol

Makovich

SVP,COO

Product Group

Fran O’Sullivan

SVP Global purchase

Qiao Song

SVP

BT and core application

Wang Xiaoyan

VP

Desk PC

Lv Yan

VP

China Region

Chen Shaopeng

Chairman Yang Yuanqing

Management team of the new Lenovo

Yang Yuanqing

Liu Chuanzhi

Dr.Youzhen Zhao FDU

Sharpen Lenovo's competitive edge in the global

market by acquiring some critical resources

Gain the global reach and scale to compete

internationally

Gain access to regions outside China with a well-

respected business partner and a highly established

brand.

The way to success

Benefits:

Dr.Youzhen Zhao FDU

Challenges :

Business and cultural integration after the acquisition

Brand maintenance and building

Obstacles in business development

The way to success

Dr.Youzhen Zhao FDU

Latest news about Lenovo（1） Reported JV with NEC (51% ownership) (China Business News, Jan. 2011)

In June 2011， announced to purchase 37% of Medion AG, a German company producing and selling computers and notebooks, as well as TV sets, refrigerators, etc. in Europe, USA and Asia Pacific.

2009-2010 Fiscal Year (Liu as chairman, Yang as CEO) • Sales: US$ 16.6 billion

• Net profit: 0.129 billion US dollars

(-0.226 billion US dollars 1 year ago)

• Market share in global PC market: 8.8%

(a record high)

2010-2011 Fiscal Year Sales: US$ 21.6 billion ;Net profit: US$ 0.273 billion

Next steps (China Business News, B1, May 28, 2010) • Input more in brand ,marketing, R&D

• Defend leading position in China and explore emerging markets

Dr.Youzhen Zhao FDU

• No. 2 worldwide in sales, second only to HP (from 9% difference to 2%)

• Market share：global 14%；mature market 9.4%；emerging market

7.8%；China 35.3%

• Profit: US$ 0.192 billion (third fiscal quarter by the end of 2011)—59%

increase from the same period of the previous year

• Sales in mature market increased by 81% to reach US$ 3.6 billion,

accounting for 43% of global sales (benefiting from JV with NEC in

Japan and acquisition of more than 51% of Medion in Germany)

• Sales in emerging market increased by 13% to reach US$ 1.3 billion,

accounting for 15% of global sales. After losing the leader Chen

Shaopeng(陈绍鹏),loss reached US$ 30 million.

• Second only to HP in traditional PC areas, but lagging far behind Apple

in mobile internet and digital family businesses.

Latest news about Lenovo（2）

Dr.Youzhen Zhao FDU

Dr.Youzhen Zhao FDU

Case: Huawei

The way to success

•

Some info. about Huawei

• Huawei has captured the opportunity in a huge overseas market.

• Huawei has started building R&D capability globally. No. of R&D employees reaches more than 62000, accounting for 44% of total employees, with 23 R&D institutions worldwide.

• Huawei input 13.3 billion RMB into R&D in 2009, a 27.4% increase over the previous year. (23.696 billion RMB into R&D in 2011)

• By the end of 2009, Huawei’s accumulated number of patents had been 42543 (China Business News, March 31,2010)，serving 45 of world’s top 50 telecom operators（ up from 36 by the end of 2008）

Dr.Youzhen Zhao FDU

Building R&D capability globally (1)

Indian software development center

Description

Indian CMM software development skills combined with Chinese manufacturing skills

First CMM Level 5-certified R&D center

Targeted as their most important overseas R&D center

Impact

Best expertise leveraged

Dr.Youzhen Zhao FDU


Description

Familiarity with local customers and culture

High speed of infrastructure exchange

Proximity to local competition

Impact

Deep understanding of local customers and

competition

Local R&D centers in ,e.g. Europe, USA

Dr.Youzhen Zhao FDU


Customer interface R&D center

Description

Gathering information on customer preferences, and

feedback on products

Deducting potential R&D topics from customer

demand

Coordination with R&D on technology

and customer needs

Impact

• High degree of flexibility in adjustments to changing needs

Dr.Youzhen Zhao FDU

Sales of Huawei in recent years

2002 2.1 billion US Dollars 2003 2.7 2004 3.8 2005 6.0 2006 8.5 2007 12.56( a 48% increase over that of 2006) 2008 18.33 2009 21.8 (China Business News, March 31,2010)，19% increase over 2008 2010 185.2 billion RMB, 24.2% increase over 2009 2011 203.9 billion RMB ( profit: 11.6 billion RMB), 32.396 billion US Dollars 2012 35.313 billion US Dollars • Serves 45 of world's top 50 telecom operators by the end of 2012 (35 by July 2008 )

• Ranked only after Ericsson in 2009 and 2010 in terms of sales Source: China Business News, 20080710 and 20100331, May 2011 http://www.huawei.com/cn/about-huawei/corporate-info/index.htm

Dr.Youzhen Zhao FDU

Market Share in North America (Source: China Business News, 20081009)

• Mobile operators AT&T 25%

Verizon 24.8%

Sprint 22%

T-mobile 10% Top 4: 81.8%

• Telecom companies

Motorola 46%

Alcatel-Lucent 21%

Nortel (北电） 13%

Ericsson 10%

Huawei 1% (contract with Leap Wireless, No. 5 or 6 mobile

operator in the USA; 0.1billion US$ sales in 2007)

Dr.Youzhen Zhao FDU

Dr.Youzhen Zhao FDU

Conclusions

Chinese companies are usually at early stages

of internationalization.

There is still a long way to go for Chinese

enterprises to implement the global strategy.

The emerging Chinese Multinationals are not

threats to the world, but important contributors to

the world economy.

Video：Huawei Story

(tentative)



SMEs’ internationalization(1)

Obstacles: • Scale and transaction constraints

• Access to capital

• Lack of knowledge

• Lack of market power

• Vulnerability to intellectual property violations



Advantages: • Innovativeness

• Creativity

• Entrepreneurial spirit

• Lower overhead cost

• The ability to move fast to take advantage of new

opportunities



Nature of FDI by SMEs:

• Emphasis on developed markets (next slide)

• Selective globalization

---focus on one link in the supply chain as well as on a selected market

• Strategy: SMEs often adopt niche strategies, pursuing areas that are not covered by large firms due to neglect, lack of expertise or high cost structure


Geographical distribution of overseas affiliates of transnational

SMEs (%)

Host country

Home country

Developed

countries

Developing

countries

China, Middle

and East Europe

USA 82.6 16.9 0.5

Japan 46.6 52.3 1.1

Europe 92.1 7.8 0.1

All countries

81.4

18.3

0.3

Source: Fujita（1998）, The transnational activities of small and medium-sized

enterprises, Kluwer Academic Publishers


Some perspectives on Chinese SMEs’

internationalization (1)

Driving forces of Chinese SMEs’


• Globalization of world economy

• China’s access to WTO in 2001

• The development of E-commerce



internationalization (2) Main advantages of Chinese SMEs’


• SMEs have a large variety of products with small

volumes catering to the different market needs

(flexibility and quick response)

• Absolute cost advantage in terms of price



internationalization (3) Problems on the level of SMEs

• Domestic mentality of quite many SMEs

• Limited financial resources and weak abilities to raise funds

• Short of information and knowledge of international market

• Relatively preliminary stage of internationalization

• Mostly low value-added products, low-to-middle end

products

• Poor control over FDI due to shortage of talents and

experiences

• Limited technological innovation capabilities




Problems on the level of Macro Environment

• Policies to promote SMEs’ internationalization are not mature;

• There are very limited channels for SMEs to raise funds;

• Social service system for SMEs needs to be upgraded;

• Protection of intellectual property rights is relatively poor, which influences SMEs’ incentives to innovate;

• Some foreign exchange controls still exist;

• Price war among domestic SMEs to get overseas orders still happens;

• Lack of laws in FDI and complex approval procedures;

• Lack of insurance system for SMEs’ FDI to reduce risks.


Suggestions to Chinese SMEs’ in their


• Fostering international mentality is the first step in SMEs’

internationalization process;

• Try to develop suitable strategy to explore international

market;

• Utilize modern IT to facilitate the internationalization

process;

• Improve competitiveness by cooperating with foreign

firms and big domestic firms.

• Take a focus strategy and pay attention to highly

specialized market segment.


Suggestions to Chinese SMEs’ in their


• Engage in a cluster to develop together with others and

improve the anti-risk ability.

• Invest in human capital.

• Borrow “brains” from universities and research

institutions to enhance R&D strength and foster

innovations.

• Accumulate experiences in international competition

while using OEM to expand the scale and prepare for its

own brand building .


Suggestions for the external environment

improvement(1)

• Create a better institutional environment for SMEs’

development;

• Provide more financial support for SMEs’ international

expansion;

• Relax the approval process of SMEs’ import and export

activities;

• Improve the information consulting and social service

system for SMEs;

• Provide a better protection of intellectual property rights;



improvement(2)

• Build and regulate official , semi- official and private

agencies to coordinate international business activities

of SMEs and reduce price wars in SMEs’ exporting;

• Further relax foreign exchange control in FDI and

promote SMEs’ foreign investment;

• Improve China’s overseas investment management

system and establish FDI laws while paying attention to

protecting enterprises’ overseas investment benefits;

• Treat SMEs favorably in terms of tax and other fiscal

policies;



improvement(3)

• Establish and improve the insurance system for FDI , and fully utilize the multilateral investment protection mechanism;

• Further develop venture capital to foster technological SMEs’ development and their innovation capabilities;

• The government should strongly support high-tech SMEs’ development and their cooperation with research institutions in hope to improve SMEs’ international competitiveness;

• Try to train more talents for international business activities and provide policy incentives for them to work for SMEs;

• Advocate and foster entrepreneurship to promote SMEs’ internationalization.


内容提要：

本书分析了传统的企业国际化理论在解释中小企业国际化方面的不足，提出了针对中小企业国际化的理论诠释。本书还以国际视角考察中小企业国际化的实践和政策，对“天生的国际企业"这一特殊群体和新现象进行了探讨，然后阐述和分析中国中小企业国际化的发展历程、现状和问题，并针对其国际化过程中的融资、技术创新、人力资源和控制等重要问题进行了专门研究。最后，本书根据中国中小企业国际化的现实，在借鉴国际经验的基础上，从中小企业自身和外部环境两个层面提出对策建议。

chapter 8 expanding abroad: from emerging...

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