strategic challenges and strategic responses. the transformation of chinese state-owned enterprises

Strategic Challenges and StrategicResponses

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Strategic Challenges andStrategic Responses

The transformation of Chinesestate-owned enterprises

JIFU WANG

Chandos PublishingOxford • England

CP

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First published in Great Britain in 2007

ISBN:978 1 84334 222 9

1 84334 222 7

© Jifu Wang, 2007

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ix

Contents

PrefaceThe aims of this book are to identify the dominant challenges and forcesfor change facing state-owned enterprises in China (SOE), to look at thenature of SOE responses to those forces and to assess the degree of SOEsuccess in making the necessary transformations to compete in a globalbusiness environment.

Five questions have been explored and examined.

1. What factors create strategic challenges to SOEs?

2. How have SOEs responded to a more market-driven environment?

3. What factors determine the strategies of the SOEs?

4. What new business processes and structures have SOEs plannedand implemented?

5. How do SOEs measure the performance of their new strategies?

The investigation was carried out by means of case studies of eightcompanies in seven industries, of which six studies were used for thisbook. A holistic conceptual model for SOE study was developed basedon the framework derived from Hofer’s preliminary research. This model,which is built on the concept of business strategy, summarizes the findingsof this study, and has proved to be an effective analytical tool in studyingthe patterns of strategic behaviours of China’s SOEs in the dynamicenvironment of economic, social and industrial transformation. Themajor contribution of this model is that it takes a holistic view andstudies the developments in strategic behaviours at a macro level. Eventhough the variables in the model can change and their significance canvary with the different stages of transformation, the model providestheoretical guidance to research in emerging economies, and can catchthe dynamics of change. The beauty of this model lies in its simplicity oflogic flow and practicality in application.

State-owned enterprises (SOEs) in China are the dominant economicorganization:

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Strategic Challenges and Strategic Responses

� Of the 305,000 SOEs, 118,000 are industrial firms that provide thebasic inputs for the economy, provide employment and social welfarefor the vast majority of China’s urban workers, and provide thebulk of fiscal revenues for government at most levels.

� SOEs account for 35–40 per cent of the nation’s gross nationalproduct and 60 per cent of all state revenue.

� SOEs constitute the nation’s entire heavy industrial base.

This study therefore will be of great significance in helping both scholarsand business practitioners around the world to understand what isgoing on in China.

Finally, I would like to express my thanks to Dr William Boulton andDr Sharon Oswald at Auburn University for their great help. Withoutthem, there would be no such book.

xi

Contents

List of abbreviationsASMC Advanced Semiconductor Manufacturing Corp.BICMOS bi-complementary metal oxide semiconductorBMEHC The Beijing Machine and Electronic Holdings Co.

LtdBOM bill of materialsBYJC The Beijing No. 1 Machine Tool PlantCAD computer-aided designCAM computer-aided manufacturingCAPP computer-aided process planningCAQ computer-aided quality systemCAT computer-aided transcriptionCEO chief executive officerCEPR Centre for Economic Policy ResearchCHN & CHN The Chongqing CHN & CHN Ceramics Co., LtdCIDC The China Integrated Circuit Design Corp. Ltd.CIMS computer-integrated manufacturing systemCMOS complementary metal oxide semiconductorCNC computer numerical controlCNPC National People’s Congress of ChinaCPCIMS ceramic production computer-integrated

manufacturing systemCPU central processing unitDRAMS dynamic access random memoryEBITDA earnings before interest, taxes, depreciation and

amortizationEDA electronic design analysisEDS engineering design systemEMIS enterprise management information systemFAS flexible automated systemsFGD flue gas disperserGDP gross domestic productGE General Electric Corp. (US)

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GT-CAD group technology – computer-aided designHEC The Harbin Electric Machinery Company LtdHR human resourcesHSMC The Huaxia Semiconductor Manufacturing Co. LtdIC integrated circuitICC Integrated Industrial Circuit Design CenterICM integrated computer managementJIT just-in-timeLSI large-scale integrationMAS manufacturing automation systemMCU microprocessor control unitMIS management information systemMNE multinational enterpriseMOS metal oxide semiconductorMPEG-2 Motion Picture Expert Group 2MRP II manufacturing resource planningNC numerically controlledNEC The Nippon Electric CompanyNIE newly industrializing economyNPC National People’s Congress (China)OEMC The Oriental Electric Motor FactoryPDM product data managementPPP purchasing power parityQCS quality control systemQFD quality function deploymentRF radio frequencyROA return on assetsROE return on equityROI return on investmentROS return on salesSDRAM synchronous dynamic access random memorySEMICO The Wuxi Huajing Semico Microelectronics Co. LtdSOE state-owned enterpriseSRAM static random access memorySSS Shanghai SyncMOS SystemsTQCS time to market, quality, cost and serviceTQM total quality managementTSC total safety controlTVE township and village enterpriseVLSI very large-scale integrationWTO World Trade Organization

xiii

Contents

List of figures and tablesFigures

1.1 The strategic challenge–response process 132.1 Three development stages for Asian countries 232.2 Conceptual strategic challenge–response model 344.1 IC design centres in 1999 584.2 Product quality in three recent years 624.3 Evolution of Huajing Group structure 634.4 Sales target for Semico 714.5 Huajing science and technology level 764.6 New product development in three recent years 774.7 Sales revenue for Huajing from 1997 to 2000 787.1 Implementation of the safety management process 131

10.1 Perception of globalization 17210.2 Summary of strategies 17711.1 Holistic model of the strategic challenge–response

process for SOEs 197

Tables

1.1 Comparisons of US, Japanese, German and ChineseGDP and per capita GDP 4

4.1 China: imports and exports by IC product type, 1999 534.2 Summary of Chinese IC fabrication plants 554.3 IC manufacturing technology status in China 564.4 The top 10 of China’s 100 largest electronics enterprises 644.5 Operation index for 1996, 1997 and 1998 674.6 Stock structure for China Huajing Electronics Group Ltd 684.7 Stock structure for Wuxi Huajing Semico

Microelectronics Co. Ltd 70

xiv


4.8 Stock structure for Wuxi Huajing MicroelectronicsStock Co. Ltd 72

4.9 Progress of Huajing strategic restructuring 747.1 Important technical achievements 1358.1 Sales comparisons 1488.2 Summary of company valuations 1498.3 Profitability comparison 1509.1 Sales and profitability summary 1609.2 Sales comparisons 1619.3 Achievements for international projects 1629.4 Achievements for domestic projects 164

10.1 Perception of strategic challenges 170

xv

Contents

About the authorJifu Wang obtained his PhD from Auburn University, Alabama in theUSA and is currently an assistant professor at the University of Houston– Victoria in Texas. He has served as an executive in top managementfor several firms in Shenzhen Special Economic Zone, China and has awide range of management experience in international business. Hisresearch interests include international strategy and organizational change,and he has published numerous referred articles and several book chapterson international strategy with a focus on core competence and capableorganizations.

The author may be contacted via the publishers.

1

3

Introduction

China is an important nation that is forecast to become the world’slargest economy during the new millennium. In purchasing power parity,China is already the world’s second largest economy behind the UnitedStates, boasting the world’s largest population base of nearly 1.3 billionpeople. It is the most attractive market for foreign direct investment. Yetits most critical challenge is to complete the transition of its centrallycontrolled economy to an economy that is market-driven. Thistransformation is putting the greatest pressure on the government’s state-owned enterprises (SOE), which are having to learn to compete in anever increasingly open and competitive world. With China’s entry intothe World Trade Organization, SOEs had little time to prepare foroutside competition and needed to learn how to survive in the roughseas of competition. It was one of the government’s top priorities to cutthem loose from state control, and make them competitive with theoutside world for the nation’s revitalization in the marketplace. Thepurpose of this book is to analyse the transformation of China’s state-owned enterprises as they move to becoming corporations capable ofcompeting in a global market-driven economy.

China’s growing importance

There is little question that China is one of the world’s most importantnations. However, there is often confusion in attempting to classifyChina as a developing country. The actual size of the Chinese economyhas been a subject of extensive debate among economists. Measured inUS dollars using nominal exchange rates, China’s gross domestic product

4


(GDP) in 1998 was $948 billion, and its per capita GDP (a commonlyused figure to measure and compare a nation’s living standard) wasUS$769. Such data would indicate that China’s economy and livingstandards were significantly lower than those of the United States, Japanand Germany. In nominal US dollars, China’s 1998 GDP was about 45per cent the size of Germany’s, 23 per cent that of Japan’s and 11 percent that of the United States. China’s nominal per capita GDP was only2.4 per cent that of the United States (see Table 1.1).1

Many economists, however, maintain that using nominal exchangerates to exchange Chinese data into US dollars substantially undervaluedthe magnitude of China’s economy. This was because prices in China formany goods and services were notably lower than those in the UnitedStates and other developed countries. Economists endeavour to factorin these price differentials by using a purchasing power parity (PPP)measurement, in an attempt to convert foreign currencies into US dollarsin terms of the actual purchasing power of such currency (based onsurveys of prices of various goods and services) in each respective country.This PPP exchange rate was then used to convert foreign economic datain national currencies into US dollars.

Because prices for many goods and services were about one-sixth theprice in China as compared to the United States and other developedcountries, the PPP exchange rate raised the estimated size of the Chineseeconomy to $4.6 trillion, higher than Japan’s GDP in PPP ($3.0 trillion)and Germany’s ($1.6 trillion), and slightly over half the size of the USeconomy (see Table 1.1). PPP data also raised China’s per capita GDP

Country Nominal GDP GDP in PPP Nominal per Per capita($bn) ($bn) capita GDP GDP in PPP

US 8,500 8,500 31,414 31,414Japan 4,190 2,969 29,860 23,228Germany 2,109 1,637 26,024 21,376China 948 4,610 769 3,701

Note: PPP data for China should be interpreted with caution. China is not a fullydeveloped market economy; the prices of many goods and services are distorted due toprice controls and government subsidies.Source: DRI/McGraw-Hill, World Economic Outlook, Volume I, 1st Quarter, 1999, p. A-27.

Table 1.1Comparisons of US, Japanese, German andChinese GDP and per capita GDP in nominal USdollars and PPP: 1998

5

Introduction

to $3,701; however, this figure still fell far below the PPP per capitaGDP levels of major developed countries and was only 12 per cent of USlevels.

While PPP data position China’s economy as a whole as the world’ssecond largest, its living standards are fairly low. To illustrate, the WorldBank estimated that nearly 30 per cent of China’s population livesbelow the international poverty level of $1 per day. The InternationalMonetary Fund estimated that (using PPP measurements) China couldsurpass the United States as the world’s largest economy as early as theyear 2007. Yet, even if that were to occur, it would take China significantlylonger to attain US standard of living levels.

In the early 1990s, China became the leading exporter to the UnitedStates of 11 different product groups. The US’s deficit with China wasthe second largest on record, following only Japan, and predicted tosurpass Japan’s US trade deficit as its markets opened (Kelley and Luo,1999). China’s open market transformation and rapid economic expansionhave attracted an incredible surge in activity and market investment bymultinational corporations. The US was the second biggest investor inChina after Japan (Zhao and Culpepper, 1997). One study showed that72 per cent of American investment contracts in China involved equityjoint ventures (Beamish, 1993). Growth in the number of equity venturesbetween US and Chinese firms had been exponential in recent years.

China was second only to Japan as Asia’s largest and fastest growingmarket for most products. Real growth in GDP has averaged 9 per centper year since 1981. Within a few years, China’s consumer market willbe larger than that of the United States or Western Europe, largelythanks to the pragmatic and rapid economic transformations and unabatedparticipation in the world market economy.

Overview of China’s economictransformation

Transformation in China has spurred an economic response that keepson astonishing the rest of the world. Several factors made the Chineseeconomy ripe for the change that began in 1978 (World Bank, 1997).

First, China was ready for reform. The economic disturbance of theCultural Revolution, and before that that of the Great Leap Forward,had caused a deterioration in economic conditions. In 1978, real incomesin rural areas had been sluggish for more than a decade. The country

6


was running short of foreign reserves to procure essential imports. Thewidening technological disparity between China and the rest of theworld had become too substantial to overlook. To make its situationworse, China’s neighbours in East Asia had revealed the aptitude forgrowth when high-saving economies adopted market principles.

Second, in China more than two-thirds of the population lived in thecountryside. For them, the threat of reform was less distressing than thedifficulties of the present system. They had no income guarantees and,in spite of rising agricultural earnings, their average returns had scarcelyincreased for more than two decades. And agriculture’s surplus labourpromised that rural industry could achieve rapid, uninterrupted growthfor almost two decades without facing wage pressures.

Third, planning was less ingrained in China’ central economy than inother transitional economies. For example, in the 1970s, the SovietUnion’s government agencies centrally distributed about 60,000 differentcommodities through its plan. In China that number was about 600 in1978, unchanged from 1965 (Naughton, 1995). Not even the mostdetermined planners could oversee an economy of the size and complexityof China’s. Even at the height of planning, China had about 30,000rural markets operating, notwithstanding with restrictions (Naughton,1995). Smuggling was rife. So when commercial activities were legalized,Chinese enterprises needed little encouragement to develop.

Fourth, China had a strong administrative capability, especially atthe provincial level. Over the centuries, China had developed asophisticated system of local government to raise revenues and warehousegrain as a cushion against famine (Will and Wong, 1991). This practiceof local government became stronger under communist control. So whenreforms entailed administrative and financial decentralization, provincialgovernments are able to take on the new tasks. Moreover, the centralbureaucracy, severely weakened in the throes of the Cultural Revolution,quietly acquiesced to the transfer of economic power away from thecentre.

Fifth, China had a skilled, disciplined labour force. In spite of thedisturbance to education during the Cultural Revolution, literacy washigh by the standards of most developing countries. The average workerhad 3.6 years of primary education, almost half a year more than thedeveloping country average of 3.2 years (Nehru, Swanson and Dubey,1995). A relatively large population also had secondary education. Theproportion of technicians and engineers in the industrial labour forcewas higher than that in many newly industrializing economies of SouthEast Asia.

7

Introduction

Finally, the Chinese diaspora extended to practically all corners ofthe world. Chinese minorities in several South East Asian countries hadconsiderable economic power and they figured significantly in thephenomenal escalation of foreign direct investment in China. Furthermore,the Chinese diaspora has brought with it not only economic power butalso commercial expertise, knowledge of foreign markets, new approachesto management, new ideas on economic policies and the latest labour-intensive technologies.

Driving forces for China’s economic growth

According to the World Bank (1997), China’s extraordinarily speedydevelopment since 1978 has been driven by three forces:

1. A high and stable savings rate supported vigorous rates of investmentand capital accumulation. In accordance with the official statistics,China’s savings rate averaged 37 per cent of GDP between 1978and 1995 (World Bank, 1994), among the highest in the world.Even as reforms and structural change were reshaping the economy,the Chinese savings rate was astonishingly unwavering. The strengthof the high savings rate espouses the Chinese reform course.

2. Structural transformation has been both a cause and an effect ofgrowth. In the 18 years after 1978, China’s agricultural labourforce dropped from 71 per cent to about 50 per cent. It took theUnited States fifty years and Japan sixty to accomplish a similarstructural move. Low incomes from farming and the prevalent povertyin rural areas motivated farmers and their families to leave theirlands for better opportunities in urban areas. At the same time, thedemand for labour increased sharply in industry and service sectorswhich achieved speedy growth in productivity. This labour forcemigration facilitated the transformation from state-owned enterprisesto collectively owned township and village enterprises, and to privatelyand individually owned enterprises, supplemented by joint venturesand foreign-funded enterprises. This structural transformation hasgiven an extra boost to China’s growth over the past 18 years.

3. The economic transformation in 1978 was triggered neither byeconomic crisis nor ideological epiphany. Pragmatic and incrementalreforms enjoyed broad support. The country had endured muchhardship over the previous two decades, with the start of the Great

8


Leap Forward in 1958 and through the Cultural Revolution in1966. Against this turbulent backdrop the years leading up to 1978were comparatively serene. Growth in the economy and improvementsin living standards became the major goals for the Chinese leaders,who at first lacked experience and set moderate objectives. In 1979,for example, the government called for ‘a planned economysupplemented by market regulation’. With success, they becamemore motivated. By 1993, the goal had matured to the creation ofa ‘socialist market economy with Chinese characteristics’.

China’s development problems

China is in the throes of two transitions: from a command economy toa market-based economy, and from a rural, agricultural society to anurban, industrial one. So far both transitions have been marvelouslysuccessful. China is the fastest growing economy in the world, with percapita incomes more than quadrupling since 1978. In two generationsChina has achieved what took other countries centuries. For a countrywhose population exceeds that of Sub-Saharan Africa and Latin Americacombined, this has been a most noteworthy progress (World Bank,1997).

However, swift growth and structural change have created newchallenges such as employment insecurity, growing inequality, stubbornpoverty, mounting environmental pressures and periods of macroeconomicinstability stemming from incomplete reforms. Having never beenencountered before, these challenges could weaken the sustainability ofgrowth and endanger China’s future growth.

Challenge 1: Employment insecurity

At the turn of the century, urban SOEs had some 20 to 30 millionlatently jobless workers. In the countryside, a surplus labour force ofabout 100 million was in need of employment. In China’s tenth five-year plan, 80 million new jobs were needed to handle the estimated 40million workers expected to migrate from agricultural jobs, plus anadditional 40 million workers expected to be displaced from SOErestructuring. The surge of farmers crowding into the cities each yearafter the Spring Festival had already overpowered the large cities makingit extremely difficult to maintain social order.

9

Introduction

Challenge 2: Economic structure

The current Chinese economic structure depends heavily on processingindustries, which are growing very rapidly, whereas energy resources,transportation and the infrastructure lag far behind. These factorsconstitute the most important restraints on the continued rapid growthof the national economy.

Challenge 3: Differences between urban and ruralareas

Since the start of the transformation, both the countryside and cities havebeen developing, and the standard of living has been on the rise. However,the cities have grown much faster than the rural areas and as a result thedifference in incomes and living standards between the two and betweenindustrial workers and farmers has increased sharply in recent years.

Challenge 4: State-owned enterprises

The new policies put great pressure on state-owned enterprises, whichhad been the foundation of the economic system before 1978. Controlledby the bureaucracy and operated with state subsidies for decades, manySOEs lacked the capability to acclimatize to external changes or innovateto survive. With the rapid transformations, the reliance of the SOEs onpublic subsidies began to increase. The government’s desire to restrainits own budget deficit gave rise to the state banking system to providethe necessary financial support.

Beginning in 1980 many enterprises acquired increasing control overtheir operations. The new autonomy included a slowly rising share ofthe profits that could be kept for wage bonuses and new investment,greater discretion over business operations such as production decisionsand wages, the adoption of a system of management responsibility andin some cases staffing of new management. Central and local governmentsusually negotiated these new freedoms firm by firm. As a result, theoperational environment varied widely among firms, across regions andacross sectors. In 1984 the Enterprise Bill of Rights formalized thesechanges and generated a further incentive for growth.

The increased discretion of state enterprises allowed them to benefitfrom China’s dual-track pricing system, also introduced in the early

10


1980s. Under this system planners normally set a price for products andservices but allowed all above-plan output to be sold at market prices.Since the volume of planned output scarcely changed, enterprises soldincreasing amounts of commodities in the open market, thus enablinggrowth and development at market prices that significantly improvedresource allocation. Because every player in the marketplace was betteroff this way, the economic transformation received wholehearted financialand strategic assistance. Today more than 95 per cent of industrialoutput is sold at market prices.

The decentralization of management decisions improved firmproductivity. However, relative to the rest of the economy, state enterprisessuffered slow growth and declining profits. In part this was becausestate enterprises, unlike their non-state competitors, were obliged toprovide job security and a range of social services including housing,education and health care. Moreover sluggish performance also revealeda deeper malaise rooted in the poor investment decisions of the past andin an ‘iron rice bowl’ system that did not discipline low performance.

More recently, however, lower subsidies, tighter credit and growingcompetition have begun to reveal the incompetence and poor financialsituation of many state enterprises that were deep in debt and lacking inworking capital, giving rise to new tactics to revitalize enterprises, especiallyat the local level. Practices commonly seen were mergers, leases,incorporation, management contracts, worker and management buyoutsand bankruptcies. Meanwhile, the central government is concentratingon transforming and revitalizing 1,000 (from more than 100,000) state-owned industrial firms that will form the mainstay of China’s modernenterprise system.

The significance of China’s state-ownedenterprises

China had 305,000 state enterprises, 118,000 of which were industrial(World Bank, 1997). These enterprises were the firms that provided thebasic industrial inputs for the economy, employment and social welfarefor the vast majority of China’s urban workers, as well as the majorityof fiscal income for most levels of government (Steinfeld, 1998). SOEsconstitute a big percentage of the national economy, accounting for 35–40 per cent of the nation’s gross national product and 60 per cent of all

11

Introduction

state revenue. They constitute practically the nation’s entire heavy industrialfoundation: steel makers, machine builders, automobile and truckmanufacturers and petroleum producers. Statistics indicated that 50 percent of the firms in Chinese industry were SOEs, even without consideringfirms below the township level. In general, SOEs are monopolies in thebackbone industries of the national economy such as infrastructure,energy, transportation and public utilities (Gao and Chi, 1997).

Studying the transformation of SOEs

This book focuses on the strategic challenges facing the state-ownedenterprises and the strategic responses for success. Currently, thetransformations of SOEs and their structural readjustments have reacheda critical stage, filled with deeply rooted philosophical contradictions andmanagement problems. The majority of SOEs have not yet adapted to thedemands of the market economy due to the long-term influences of thetraditional centralized system. Redundancies, stagnation and obsolescenceof operations are causing firms to go out of business, generating newproblems of unemployment and welfare. Chinese SOEs lack flexibility interms of structural change, are weak in technological innovation, have alarge number of surplus employees and have inefficient production andbusiness operations. The research investigates these problem areas andattempts to identify how leading firms are overcoming such problems.

Officials at representative SOEs involved in China’s National HighTech 863 programmes were interviewed to identify how they successfullyinitiated strategic change, how they achieved their goals in terms ofdeveloping competitive product, and how they had to change their policiesand procedures to achieve a fit between the structure, strategy andculture. The history and experiences of individual firms were described,and collectively a model of the strategic transformation of ChineseSOEs was developed. The results are intended to be helpful to managers,researchers and policy-makers.

Research questions

The research was directed at identifying successful strategies fortransformation. It assumed that the purpose of China’s reforms was to

12


create modern, competitive corporations. The research described theobjectives for SOE reforms and the resulting development in:

� revising strategic direction and structure;

� responding to a changing market and competitive environment;

� establishing modern corporate systems;

� improving economic performance;

� strengthening the capacity of scientific and technological development.

The rationale for defining the research question is the same as it is inhypothesis-testing research (Eisenhardt, 1989). Specifically, the followingfive questions were explored and examined in this research:

1. What factors create strategic challenges to the company?

2. How has the company responded to a more market-drivenenvironment?

3. What factors determine the strategies of the company?

4. What new business processes and structures have been planned andimplemented?

5. How do you measure performance of the new strategies?

Until now, no researchers have used the Strategic Response Model tostudy the reforms among Chinese SOEs. Synthesizing knowledge andtheory from a variety of sources, this study creates a conceptual frameworkof strategic behaviour in SOE transformations based on Hofer’s challenge–response framework (Figure 1.1).

Structure of the book

In Chapter 2, the literature review introduces previous literature on theconcept of strategy, strategy classifications and business strategycomponents. The strategic challenges for emerging market economiessuch as China are then reviewed in terms of the institutional perspective,the resource-based perspective and the economic perspective of transactioncosts. Finally, related strategic responses are investigated.

Chapter 3 is primarily concerned with the research methodologyused for this study. It addresses potential problems in conducting research

13

Introduction

in China. It also discusses the merits of case research in such anenvironment.

Chapters 4–11 describe the case studies of Chinese SOEs included inthis research. Each study was a substantive investigation of the researchquestions which, taken together, serve to highlight the flexibility andcapabilities of the response model.

Chapter 10 provides an analysis of our research in addressing theresearch questions. It analyses the dominant challenges and forces forchange, the nature of SOE responses to those forces and the degree ofsuccess they are having in making the necessary transformations tocompete in a global business environment.

Chapter 11 provides a number of conclusions and implications formanagers and policy-makers and future research requirements.

Note

1. Wayne M. Morrison, China’s Economic Conditions, Foreign Affairs,Defense, and Trade Division, National Council for Science and theEnvironment, 1 December 1999.

Source: Hofer (1973).

Figure 1.1 The strategic challenge–response process

Environmentvariable

Organizationresource andcapabilities

Strategicchallenge

Strategicresponse

• Objective• Strategy• Functional

policiesCompetitiveresponse

Miscellaneousfactors

Failure

Borderlinesuccess

Highlysuccessful

Organizationstructureprocesses

Environmentstructure

2

15

Theoretical background and theresponse model

What is strategy?

As Markides (1999) pointed out, there is astonishingly little consensuson defining strategy regardless of the obvious significance and decadesof academic research on the topic. The term strategy has more frequentlybeen employed with business (Clampitt, DeKoch and Cashman, 2000).A long and intellectually invigorating history has produced both debateand comprehension (Mintzberg, Ahlstrand and Lampel, 1998).

After evaluating the broad range of strategy definitions in previousliterature, Hofer and Schendel (1978) found that there were majordisagreements in three main areas:

� in the breadth of the concept of strategy, i.e. whether the strategicconcept should include both the goals and objectives of a firm alongwith its means to achieve these ends;

� in the classifications of strategy; and

� in the components included in strategy.

In the following section, we look at the concept of strategy, the classificationof strategy and the components of business strategy from the point ofview of previous theories and research.

Concept of strategy

The term strategy, which is derived from the Greek strategos, originatesfrom the military and may be loosely decoded as the ‘art of the general’

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(Gomez-Mejia and Balkin, 1992). Generals are concerned with the bigpicture and so are general managers. Strategy typically occurs at the toporganizational levels (Clampitt, DeKoch and Cashman, 2000). Below,we consider some of the works on strategy by influential researchersand scholars in order to derive a specific definition for this study.

Chandler (1962), the father of research in the field of strategy, in hisclassic work Strategy and Structure: Chapters in the History of AmericanIndustrial Enterprise, depicted the concept of strategy based on thehistorical development of corporate strategy and structure in the US bystudying innovations in business administration between the years 1850and 1950. He defined strategy as ‘the determination of the basic long-term goals and objectives of an enterprise, and the adoption of coursesof action and the allocation of resources necessary for carrying outthese goals’ (Chandler, 1962). Chandler maintained that a change in afirm’s strategy ultimately triggers a change in its structure and that thecommon denominator of strategy and structure is the reallocation of theenterprise’s resources to meet changing market needs. Chandler supportedhis argument with evidence from executive activities such as long-termdecision-making, investment decisions and structural modifications tosupport strategies at General Motors, Sears, Standard Oil and Dupont.

Chandler’s work exerted a strong influence not only on the work ofother scholars in the field including Ansoff, Ackoff and Williamson’stransaction cost theory, Wrigley-Rumelt’s diversification, Galbraith’sorganizational fit, and Armout and Teece’s tests of the transaction costhypotheses, to name just a few, but also on practitioners in their endeavoursregarding the strategic activities of executives and those of top managementteams. The concept of strategy applied in this study is consistent withChandler’s view.

Ansoff in his book Corporate Strategy (1965) provided the appliedapproach for strategic decision-making within a business firm. He viewedstrategy as ‘an operator which is designed to transform the firm fromthe present position to the position described by the objective, subject tothe constraints of the capacities and the potential’ (p. 205). His approachwas much more programmatic than Chandler’s, and was more associatedwith the process of strategic planning than its outcome.

Ansoff reasoned that the overriding purpose of a firm was to maximizeeconomic return and that effective strategy was made up of fivecomponents:

1. product-market scope;

2. growth vector;

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Theoretical background and the response model

3. competitive advantage;

4. combinations of capabilities or competencies that create internalsynergies; and

5. the importance of the ‘make or buy’ decision.

The conceptual structure of this book draws on Ansoff’s framework forhis first and second components.

Andrews (1971), in The Concept of Corporate Strategy, focused moreon strategic formulation and implementation. He attempted to understandhow policy decisions are made through the analysis of hundreds of casestudies.

Andrews believed that strategy formulation relies on identifyingeconomic/market opportunities, distinguishing corporate competences,recognizing personal values and aspirations, and considering obligationsto society. In particular strategy formulation deals with four basic areas:identifying environmental opportunities and risks; identifying firmresources and distinctive competences; examining personal values andaspirations; and examining social responsibilities.

Strategy implementation, on the other hand, is concerned with twotasks:

1. designing an appropriate organization structure and relationships; and

2. establishing appropriate organizational processes and behaviours.

Andrews maintained that structure followed strategy, demanding thesubdivision and coordination of responsibility and an effective design ofinformation systems. Establishing appropriate organizational processesand behaviours involves establishing performance standards and measures,the use of motivation and incentive systems, the operation of restraintsand control systems, and the recruitment and development of management.In order to accomplish these two tasks, the top management team mustplay well the role of strategy architect, both as leader of the organizationand as personal leader.

Andrews defined corporate strategy as:

… The pattern of decisions in a company that determines andreveals its objectives, purpose, or goals, produces the principalpolicies and plans for achieving those goals, and defines the rangeof business the company is to pursue, the kind of economic andhuman organization it is or intends to be, and the nature of theeconomic and noneconomic contribution it intends to make to itsshareholders, employees, customers, and communities. (1980: 18)

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Mintzberg (1987) suggested five contexts where strategy may be used.Strategy functions as plan, a consciously intended course of action madein advance of the actions to which it applies stated explicitly in formaldocuments known as plans. Strategy works as ploy. In other words, it isa specific manoeuvre intended to outwit an opponent or competitor.Strategy serves as position. It specifies an organizational action or set ofactions for accomplishing an objective, for example to outwit an opponentor to occupy a niche in a marketplace. Strategy acts as pattern toindicate a stream of actions or results with consistency in behaviour.Finally, strategy performs as perspective for those with the same viewpointsharing a commitment to act and respond.

Tregoe and Tobia (1991) looked at strategy as a vision to indicatewhat a firm intended to become in the future. Their work serves as theframework guiding the alternatives that determine the nature and directionof an organization. These choices relate to the scope of a firm’s products,markets, key capabilities, growth, ROI and allocation of resources.

Phelan (1997) defined strategy as a consciously intended course ofaction to achieve some objectives. A strategy is made in advance of theactions to which it applies and is often stated unequivocally in a formalstrategic plan.

Clampitt, DeKoch and Cashman (2000) broadly described strategyas ‘the macro-level choices and tradeoffs executives make, based ontheir organizational goals and judgments about others’ reactions, whichserve as a basis for action.’

Thus from notions of ‘strategy as positioning’ to ‘strategy as visioning’a variety of possible definitions for strategy are fighting for supremacy(Markides, 1999). Using Hofer and Schendel’s concept of strategy (1978),Chrisman, Hofer and Boulton (1988) advocated that ‘a strategy describesthe fundamental characteristics of the match that an organization achievesamong its skills and resources and the opportunities and threats in itsexternal environment that enable it to achieve its goals and objectives.’This definition provides the centrepiece for this study because it isconsistent both with the needs of contingency theory and with the views ofmost scholars in the field of strategic management (e.g. Andrews, 1971;Ansoff, 1965; Ohmae, 1982; Porter, 1980; Schendel and Hofer, 1979).

Classification of strategy

Classification is the development of a system or schema that helpsresearchers organize entities into taxa based on their similarities,

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differences and relationships to one another as determined by or inferredfrom their most fundamental characteristics (Chrisman, Hofer andBoulton, 1988; Mayr, 1982; McKelvey, 1982). Thus the classificationsystem is useful for identifying both the past and future strategies followedby organizations.

Chandler (1965) identified four types of strategies:

� expansion of volume, which leads to the creation of an administrativeoffice to handle one function in one area;

� growth through geographic dispersion, which yields the need for adepartmental structure and headquarters to administer several localfield units;

� expansion into new types of functions (vertical integration),which calls for building a central office and a multi-departmentalstructure;

� developing new lines of products and expanding national/internationalgrowth (where diversification accounts for most of the changes),which leads to the formation of decentralized, multidivisionalstructures with a general office to administer different divisions.

Schendel and Hofer (1979) classified strategy into three major hierarchies:corporate strategy, business strategy and functional strategy. Theyexplained:

Corporate strategy addresses the question, ‘What business(es) shouldwe be in?’ It also focuses on the ways that the different businessesa firm chooses to compete in should be integrated into an effectiveportfolio … Business strategy deals with the question, ‘How shoulda firm compete in a given business?’ That is, how should it positionitself among its rivals in order to reach its goals? Functional areastrategies also address two issues. First, they are intended to integratethe various sub-functional activities in the firm. Second, they aredesigned to relate the various area policies with changes in thefunctional area environments. (pp. 12–13)

Hofer and Schendel (1978) pointed out that the classification of strategyinto three different levels helped both in identifying the components ofstrategy and in formulating strategy. In this book, the focus of strategyanalysis will be on the business level.

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Components of business strategies

Strategic management scholars and researchers have advanced numerouscomponents to strategy in an attempt to describe the nature of the‘match’ that strategy represents. The common business strategycomponents frequently seen in the literature include:

� investment intensity (Hofer and Schendel, 1978);

� scope or domain (Abell, 1980; Ansoff, 1965; Buaron, 1981; Galbraithand Schendel, 1983; Hofer and Schendel, 1978; Porter, 1980; Yavitzand Newman, 1982);

� growth vector (Ansoff, 1965);

� distinctive competences or resource deployments (Galbraith andSchendel, 1983; Hofer and Schendel, 1978);

� types of competitive weapons (Buaron, 1981; Porter, 1980);

� types of competitive or differential advantage (Ansoff, 1965; Galbraithand Schendel, 1983; Hofer and Schendel, 1978; Yavitz and Newman,1982);

� segment differentiation (Abell, 1980);

� synergy (Ansoff, 1965; Hofer and Schendel, 1978); and

� timing (Yavitz and Newman, 1982).

However, researchers are gradually recognizing that competitive advantageand synergy are characteristics (or outcomes) of effective strategies andnot components that describe the strategies themselves (Chrisman, 1986;Hofer, 1985). Additionally, there are overlaps among several of theother strategy components. For example, Hofer and Schendel’s ‘distinctivecompetences’ describe the internal organizational competences andresources that determine the external competitive weapons (Porter, 1980)organizations use to attain competitive advantage. Likewise, Ansoff’sgrowth vector is a mixture of the scope and timing components proposedby others. Hofer and Schendel, Porter and Abell, however, include timingin their scope and resource deployment/competitive weapons componentsby looking at both their current situations and planned actions. Thus,after eradicating overlaps and duplication, four major strategy componentsclearly show themselves:

1. investment intensity;

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2. scope;

3. segment differentiation; and

4. types of competitive weapons.

And of these, only scope, segment differentiation and types of competitiveweapons are needed to describe an organization’s competitive businesssubstrategy.

Hence, following Hofer and Schendel (1978) and Abell (1980), scopeis defined as the configuration of an organization’s interactions with itsenvironment that describes its action arena. And following Porter (1980,1985), competitive weapons are viewed as the primary ways anorganization applies its skills and resources to meet environmental demandsand create lasting competitive advantage. Finally, following Abell (1980),Porter (1985), Sandberg (1986) and Chrisman (1986), segmentdifferentiation will be considered as the use of different types of competitiveweapons in different market segments.

Environment

Early literature in this field focused on the environment of the decisionsrather than the environment of the organization (Barnard, 1938; Simon,1945; Selznick, 1957). Barnard (1938) in his study emphasized thedecisional world, the social world, the external situations and forcesand circumstances of the moment. He explained that purpose was viewedas being crucial in providing any meaning to the environment. Thuspurpose and environment act together through consecutive decisions tocreate more detailed descriptions of purpose. Barnard (1938) dividedenvironment into two parts, ‘the facts that are immaterial, irrelevant,mere background and the part that apparently aids or prevents theaccomplishment of purpose’.

Selznick (1957) talked about the institutionalization of an organizationas a process of adapting to its environment through internal strivingsand external pressure. Simon (1945), by contrast, was concerned withthe psychological impact of factors on the efficiency of the decision-making process. According to these researchers, the environment consistedof two dimensions:

1. the internal environment that was made up of relevant physical andsocial factors within the boundaries of the organization; and

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2. the external environment that was composed of relevant physicaland social factors outside the boundaries of the organization (Duncan,1972a).

Ever since system concepts gained paradigmatic centrality, organizationshave been conceptualized and researched as open systems engaging intransactions with their environments (Bourgeois, 1980). Chester Barnard(1938) was one of the first researchers to document the system propertiesof organizations. Dill (1958) in his pioneering study defined thecomponents of top management’s task environment and suggested acausal relationship in which this task environment affected managerialautonomy. Empirical studies (e.g. Burns and Sultan, 1961; Duncan,1972a, 1972b; Lawrence and Lorsch, 1967; Neghandi and Reimann,1973) yielded imperatives for organizational administration and structure,given certain environmental conditions.

Conceptual works (e.g. Emery and Trist, 1965; Terreberry, 1968)indicated that organizations must adapt to external forces in order tomaintain viability. The technology-based works of Woodward (1965)and Perrow (1967) extended the contingency idea to include a technologicaldeterminism, and Galbraith (1973) bridged environment and technologyby focusing on the environmental information-processing needs of theorganization. Osborn and Hunt (1976) in their field study found thatthe interactions of external and internal variables were better predictorsof performance than either acting alone.

In identifying the components of the task environment, Dill (1958)proposed four factors:

� customers;

� suppliers of materials, labour, capital, equipment and workforce;

� competitors for both market and resources;

� regulatory groups, including governmental agencies, unions andinter-firm associations.

Jauch and Osborn (1981) classified the components of the environmentas general and specific environments. Chandler (1962) investigated theinfluence of changing environment on the strategic choices of anorganization, and studied such external environmental factors aspopulation, national income and technological innovation. After Chandler,research started to shift to determining the relevant external environmentand the effects it had on the life and development of the organization.Andrews (1971) identified six elements making up the environment:

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technology, ecology, economy, industry, society and politics. Uyterhoeven,Ackerman and Rosenblum (1973) put forward four dimensions makingup the environment: the political, social and economical dimension, themarket dimension, the product and technological dimension and thecompetitive dimension. Hofer (1975) presented the environmental variablesthat were strategically significant at different stages in the product lifecycle – market and consumer behaviour. Hofer and Schendel (1978)further discussed the components of the broad environment as:

� economic factors;

� demographic factors;

� technological factors;

� sociopolitical/legal factors.

Understanding strategic challenge

Strategic challenges will be studied in an effort to understand both theenvironmental uncertainty and internal organizational challenge. Havingstudied the electronics strategies at the national and industry levels infive newly industrializing economies (NIEs) in Asia that are shaping thenew competitive paradigm: Korea, Taiwan, Singapore, Malaysia andChina, including Hong Kong, Boulton and Kelly (1997) concluded thatthese countries have been moving rapidly to ever more sophisticatedstages of economic development along a continuum of growth thatencompasses three stages (Figure 2.1).

Stage 1: Providing low-cost labour

Boulton and Kelly (1999) pointed out that emerging industrializingcountries in Asia have been attractive to large companies that produce

Upgradingtechnology

Providinglow-costlabour

Developingglobalbusiness

Figure 2.1 Three development stages for Asian countries

Source: Boulton and Kelly (1997).

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labour-intensive products or services and are searching for lower labourcosts. The labour costs of those countries have been radically lowerthan those of industrialized countries, and their populations have beenwilling to work diligently for long hours. Most of the countries coveredin Boulton and Kelly’s (1999) study are already past the low-cost, unskilled-labour stage of development. China is still solidly in this phase, thoughmoving into the technology development phase.

Further analysis showed that low-cost labour provides only a temporaryincentive to cost-driven companies. As local living standards and labourcosts have risen, Asian NIEs have lost competitiveness in low-wage jobmarkets and have been forced to move beyond this growth phase inorder to maintain their development momentum. China’s success inattracting low-wage jobs has added impetus to its neighbours’ searchesfor new ways to attract capital and add value to their products andservices. One interesting way that Asian NIEs have met the challenge ofrising domestic wages is to act as job brokers between multinationalcompanies and lower-wage providers in countries such as China, thePhilippines and Indonesia. Hong Kong, Taiwan and Singapore have allused variations of this tactic.

Stage 2: Upgrading technology andinfrastructure

As Asian NIEs have lost their low-cost labour advantage, they havefocused on building up national technology bases with increasinglysophisticated industrial and domestic research infrastructures andincentives designed to attract global technological leaders and advancedresearch activities. Singapore has been an energetic example of thisphase. Its 1991–96 five-year plan budgeted over 3 billion US$ to upgradeits infrastructure from that of a manufacturing centre into that of aninnovation hub capable of creating new and better products and servicesfor the region and the world; included was $500 million to promoteinnovation within companies by covering up to 70 per cent of qualifyingproject costs. A second thrust developed specialized skills and capabilities,land requirements and infrastructures to attract international investors.A third thrust was labour skills training for emerging industries andwafer fabrication projects.

This move to upgrade infrastructures is only the beginning of an ongoing process of reorienting traditional economies toward technology,

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innovativeness and institutional dynamism. Continuing to improve localstandards of living and build long-term economic viability requiressustained technological and business expansion.

Stage 3: Developing globally competitivebusinesses

With today’s rapid speed of technological change, Asian NIEs haverecognized that they must not only develop a world-class technologicalbase, but also grow world-class industries of their own. Asian companiesare working hard to participate fully in the global marketplace, oftenusing regional markets as springboards. The imperative to do so is parteconomics, to meet the high costs of keeping up with changing technologiesand market demands, and part politics and nationalistic aspiration. Inthe post-Second World War and Cold War eras, Japan and Korea benefitedgreatly from US technology transfers and support while systematicallybuilding their own technological leaders. Today, well-known Japanesecompetitors include Sony, Matsushita, Toshiba, Hitachi, Mitsubishi,Toyota, Honda and Nissan. Korea’s globally competitive firms includeSamsung, Hyundai, Daewoo and LG. Taiwan, Singapore, Malaysia and,most recently, China are working to build their own world-classcompetitors.

Asian governments play a major role in nurturing the growth of suchcompetitors. For example, Taiwan’s government has establishedprogrammes that fund the life cycle of technology development throughcommercialization, providing funds for basic research and ‘ramp-up’ tofull production and loans for large-scale commercial expansion. Oncecompanies (and countries) build this kind of intellectual property, theyare also able to negotiate cross-licences with global technology leadersand form international scientific and technical exchanges, which help toensure timely product updates and global competitiveness.

Government-industry relationships tend to change during this thirdphase of development. For example, as local companies becomesophisticated enough to develop and commercialize proprietary products,they tend to eschew public involvement in research projects. Also,companies base future corporate growth and competitiveness on globalmarket penetration, not on national loyalties. Korean chaebols andJapanese keiretsu are struggling with this dilemma today. On theinternational front, global competitiveness can mean that national leaders

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must consider not only the domestic economy but also other economiesin the region and across the globe.

In analysing strategic challenges Hoskisson et al. (2000) suggestedthat in the early stages of market emergence, institutional theory issuperlative in helping to explicate challenges to firm strategies. This isbecause government and societal influences are stronger in emergingeconomies such as China than in developed economies. They also pointedout that as markets mature, transaction cost economics and, subsequently,the resource-based view are more imperative.

Historically, power relations and bureaucratic controls dominatedplanned economies. The state controlled opportunities and allocatedresources so there was little need for formal laws to classify exchangerelationships among economic players. Property rights were held andprotected by the state and individuals could use properties but did notpossess them. State-owned enterprises were closely attached togovernments from where they got direct financial subsidies and indirectpreferential treatment. Paternalism, soft budget constraints and verticalbargaining between governments and state-owned enterprises (SOEs)characterized central planning (Kornai, 1986).

Strategic challenges through the institutionallens

Institutional theory emphasizes the impact of the systems surroundingorganizations that mould social and organizational behaviour (Scott,1995). Institutional factors impinge on organizations’ processes anddecision-making. Perspectives derived to assess these institutional factorshave both an economic (Clague, 1997; Coase, 1998; North, 1990) anda sociological orientation (DiMaggio and Powell, 1983; Scott, 1995).

The new institutional perspective concentrates on the interaction ofinstitutions and firms resulting from market imperfections (Harriss,Hunter and Lewis, 1995). North (1990) argued that institutions providethe rules of the game that structure human interactions in societies andthat the organizations are the players bounded by those formal andinformal rules. The role of institutions in an economy is to reduce bothtransaction and information costs by reducing uncertainty and establishinga stable structure that facilitates interactions.

From a sociological orientation, Palmer, Jennings and Zhou (1993)studied the institutional constraints on US corporations’ strategies in

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developed market economies. Peng and Heath (1996) maintained thatthe internal growth of firms in transition economies is limited byinstitutional constraints. As a consequence, a network-based growthstrategy was expected to be more viable in emerging economies. Peng(1997) analysed three large enterprises in China and confirmed thisexplanation. In addition, Child and Lu (1996) argued that the economicreform of large state-owned enterprises was moving very slowly becauseof material, relational and cultural constraints. Similarly, Suhomlinova(1999) found that government institutions and their influences had anegative impact on Russian enterprise reform. At the individual level,Lau (1998) suggested that political and market pressures were theinstitutional constraints faced by chief executives in Chinese enterprises.It was noted that chief executives of state-owned enterprises had to becareful not to be too successful, for fear that bureaucrats would replacethem to gain access to their resources. Thus firms facing change in manyemerging economies were influenced by existing institutional realities.

Institutions can also facilitate strategy, thus allowing enterprises toreact to and play a more active role if they have an adaptive ability thatallows them to reposition themselves beyond institutional limitations(Oliver, 1991). Jefferson and Rawski (1995) discussed industrial reformin China and credited its success to market institutional change, thegradual relaxation of state ownership and control, and the developmentof private property rights. Institutional change endowed with appropriateinducements and changes supported by the right organizational culturewere critical in enabling organizational improvements. Additionally,Lee and Miller (1996) found that in Korea, a relatively developed economy,firms benefited from a number of cultural and institutional factors. Forexample, firms employing traditional technologies were more successfulin obtaining government help by following legitimate technological norms.In the Czech Republic, Soulsby and Clark (1996) showed how fundamentalinstitutional changes have led to a reinstitutionalization of managementin terms of the acquisition of managerial knowledge more appropriateto the new environment, with consequences for strategic decision-making.

Challenges through a resource-based lens

The major threat of the resource-based view centres on why firms differand how they achieve and sustain competitive advantage. Penrose (1959)indicated that heterogeneous capabilities give each firm its unique featureand are the core of competitive advantage. Wernerfelt (1984) explained

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that assessing firms in terms of their resources could lead to insightsdifferent from the traditional I/O perspective (Porter, 1980). Barney(1986) argued that strategic resource factors differ in their ‘tradability’and that these forces can be specifically identified and their monetaryvalue determined via a ‘strategic factor market’. Barney (1991) laterestablished four criteria to more fully explicate the idea of strategictradability. He suggested that firm resources and capabilities could bedifferentiated on the basis of value, rareness, illimitability andsubstitutability.

Resources are established in a context and, relying on features of thatcontext, concentration on resources could create strategic inflexibilityand core rigidities for a firm that would lead to negative returns (Leonard-Barton, 1992). Oliver (1997) analysed the issue of a firm’s enduringcompetitive advantage using the resource-based view and institutionalforces. Oliver further explained that firms were capable of creatinginstitutional capital to enhance optimal use of resources. Firms thereforehave to manage the social context of their resources and capabilities inorder to generate results. This idea is also underscored by the work ofMiller and Shamsie (1996), who found that the Hollywood film industryprovided a context that changed over time and created different strategicassets as changes were implemented.

To this point, little research using the framework of a resource-basedview has examined strategy differences in the social context of emergingeconomies. Like most resources that create competitive advantage,resources for competitive advantage in emerging economies are, on thewhole, intangible. However, they are not necessarily product-market-based, as would be suggested by the knowledge-based view of the firm(Conner and Prahalad, 1996). Although some capabilities are standardacross all economies, for instance first mover advantages, others areespecially prominent in emerging economies. Multinational enterprises(MNEs) often focus on the revenue-generating potential of emergingeconomies. Accordingly, MNEs have focused on the marketing challengeof creating and capturing the huge latent value associated with bigemerging economies such as China, India and Russia. Firms that areable to manage the daunting circumstances in emerging economies reapthe benefits of first-mover advantages; these include being the firstparticipants in new product markets, reputation effects and the economicadvantages of sales volume and of pre-emptive domination of distributionand communication channels.

In emerging economies, however, such advantages are difficult toestablish without good relationships with home governments. Early

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relationships give tangible benefits, such as access to licences, the numberof which is often limited by a government. Diversified business groupshave evolved in many emerging economies. Such groups often obtainlicensing advantages because of their government relationships. Asinstitutions change, business groups, which have dominated emergingeconomies, will have less and less advantage relative to competitors,both domestic and foreign, that wish to enter and exit a market. Khannaand Palepu (1999) suggested that business groups needed to take particularcare in restructuring once institutional changes take place that reducethe frictions and asymmetries mentioned above. More freedom anddecentralization for business units need to be initiated. More flexibilityfor setting pay scales for executives may be one way of allowing forpractices that retain the best managers.

In emerging economies, local competitors may have developedcapabilities for relationship-based management in their environmentthat substitute for the lack of institutional infrastructure. These assetsmay be used domestically or in transferring abroad to other emergingeconomies where such assets would likewise be useful. Developingdistribution mechanisms may protect a domestic firm in an emergingeconomy against entry by foreign firms. Furthermore, focusing on amarket that has not yet globalized might allow a domestic firm in anemerging economy to dodge the onslaught of multinational rivals.Additionally, competing in a global market may be possible in a commodityarea where natural resources or labour give a low-cost advantage (Aulakh,Kotabe and Teegen, 2000). In essence, a firm must understand therelationship between its company assets and the changing nature of theinstitutional infrastructure as well as the characteristics of its industry.In so doing, the emerging economy firm may be able to become anaggressive contender domestically or globally by using its resources assources of competitive advantage (Dewar and Frost, 1999).

Strategic response

There are only a few theoretical and empirical studies using an institutionalperspective in emerging industrializing countries, even though sometheorists have argued that this perspective is the most applicable paradigmfor explaining enterprise behaviour in emerging economies (Shenkarand von Glinow, 1994). Emerging economies, characterized by trendstowards ‘marketization’ and privatization but still heavily controlled by

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the government, provide the necessary institutional influences in developingand testing theories. Previous research points to the importance of studyingthe speed and nature of institutional change and its impact upon enterprisestrategies. Institutional factors also have many dimensions, each of whichcan change at a different rate. As Tolbert and Zucker (1996) pointedout, the process of institutionalization should be of interest in futuretheoretical and empirical work. The emerging economies are undergoingchanges that will facilitate the study of institutional processes. Thisobservation suggests that researchers should employ longitudinal designsto capture the process elements of institutional effects and compare thestrategic responses in economies at different stages of this process.

Oliver (1991) argued that firms could change their institutionalenvironments by developing strategic responses instead of adaptingpassively. Thus studies related to how firms develop growth-orientedresponses from an active strategic choice perspective, instead of justconstrained strategic choices (cf. Bluedorn et al., 1994), would be morerelevant. Such a research perspective would extend the ideas of a firm’ssustainable competitive advantages (Hennart, 1994; Oliver, 1997) to anemerging economy context. From the institutional economics perspective,how firms restructure themselves in response to institutional changecould be a focus in strategy research. This focus would also involve thestudy of multinational firms’ investment decisions in emerging economiesunder different institutional contexts. Examining the role and effects ofinstitutions in reducing the transaction costs of production and marketexchange is also a promising research stream. This point emphasizes theneed to examine interactions between institutional theory and othertheoretic approaches.

The current study of institutional effects on emerging economy firmshas focused mostly on state-owned enterprises (Child and Lu, 1996;Peng, 1997; Suhomlinova, 1999). Obviously, government institutionsdirectly affect SOEs. On the other hand, the institutional environment,including cultural, political and other factors, also has great impact onthese enterprises (Sullivan, 1998; Temple and Voth, 1998). The need toexplain the processes and outcomes of institutional influences in SOEsis important in understanding the dynamics of the consequent responsesfrom these firms for their survival.

Lastly, the effects of the larger institutional context on individualresponses rather than on whole firms (e.g. Calori, Johnson and Sarnin,1992; Rajagopalan, Rasheed and Datta, 1993) have not been thoroughlystudied. A focus on individual responses to institutional form mightcause confusion in studies that cross multiple levels of analysis (ranging

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from societal to individual), but a more comprehensive examination ofthe corporate-level effects on managerial responses will enhanceunderstanding of the total institutional effects on individual managerialbehaviour, as well as top management team orientations.

Transaction cost economics suggested several insights for strategicenterprise responses in emerging economies. The changing environmentcreates a need and an opportunity for enterprises to change their scopeand their governance structure. However, this process may not bestraightforward. First, in emerging economies, frequent and largemacroeconomic and political instabilities and shocks increase exogenousuncertainty. Formal rules may change overnight because of political andjudicial decisions. As a result, many firms may defer investments whereexternal shocks are frequent and cannot be foreseen, or where entrywould imply high-cost, irreversible investments. Firms may also deferentry if the creation of asset-specific investments, under conditions ofexternal or internal uncertainty, suggests a high probability of opportunisticbehaviour by an emerging economy government.

Second, institutional infrastructures to support a market-based systemare still weak or missing, particularly in transition economies.Opportunistic behaviour is likely because of the prohibitively high costsof obtaining information for monitoring, difficulties in constructinglegal contracts and shifts in relative bargaining power due to exogenousshocks. Transaction costs are likely to be higher in emerging economiesthan in developed market economies, suggesting a preference for morehierarchical governance structures. Further research, therefore, mightusefully be directed at analysing the changing links between governancestructures and infrastructure conditions, and at the impact of the continuingrole of governments in enterprise governance. In addition, given theimportance attached to networks in emerging economies, further researchis needed that examines the conditions under which networks are themost effective, comparing vertical and horizontal alliance networks andrelated forms of diversification.

From an agency perspective, in transition economies enterprisesgenerally lack managerial skills and knowledge of market-basedmanagement. As a result, enterprises are likely to interpret the sameobjective environment differently, process information differently andtherefore make different strategic responses. This variation suggestsscope for comparative studies of the impacts on strategy of governancesystems that differ between different types of emerging economies.

Like institutional factors, the ownership and internal governancestructures of enterprises in emerging economies might be expected to

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change over time. The pace of this change may vary according to anumber of factors, including the robustness of property rights and therole of insiders in privatization. Evidence from the former Soviet Union,for example (Estrin and Rosevear, 1999), shows that the shift awayfrom unconstrained insider ownership is very slow. There is a need tounderstand the implications of the timing of these changes for thedevelopment of different strategic options.

Emerging economies provide a social context for examining howinstitutional changes provide opportunities for probing how competitiveadvantage changes. At the beginning of the transition period, resourcesthat are valuable in a market context are likely to be scarce, yet theavailable resources are not necessarily inimitable. Managerial expertisederived from previous experience under a centrally planned system seemsunlikely to provide resources in an emerging economy environment(Lyles and Baird, 1994), and financial resources are also generally scarce(Filatotchev et al., 1999). As competitive markets develop, the acquisitionof resources becomes more important.

Many competitive advantages in emerging economies are based onnetwork relationships and close business–government ties, with firmsbecoming effective monopolies in their home markets. As the institutionalcontext changes, there are necessary changes in both the asset structuresand orientations of firms. New resources must meet opportunities aswell as challenges. For instance, business groups in the past have hadadvantages based on asymmetries in foreign direct investment. Theymust now change and evolve toward a business model that does not relyon government lobbying or generic financial investment strategies (Galvezand Tybout, 1985). Product markets must also evolve as more dynamiccompetition develops. Examining dynamic capabilities such as the abilityto learn continuously (Lei, Hitt and Bettis, 1996) and the knowledge-based view of the firm (Conner and Prahalad, 1996) will become moreprominent in the study of emerging economies. Further research is,therefore, needed on how firms adapt and learn as markets emerge.

The barriers to the acquisition of these resources require examination.For example, entrenchment behaviour by incumbents (Filatotchev, Wrightand Blearey, 1999) may contribute to the maintenance of core rigidities.Similarly, the downside of networks is that the parties involved maycollude to resist change unless there is strong competitive pressure andenforcement of the legal infrastructure. Analysis of these barriers toresource development together with the appropriate timing and sequencingof resource development would yield important insights concerning theinteraction between institutional and resource-based factors.

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Strategic responses and environmentalchallenges

The alignment of an organization’s strategic orientation with itsenvironment is of paramount importance for the business’s success. Theinformation processing argument (Galbraith and Schendel, 1983) andthe population ecology theory (Aldrich, McKelvey and Ulrich, 1984)suggest that an organization’s information processing system (in theform of hierarchical relationships and standard operating procedures)must be capable of accommodating both the variability and the uncertaintyof its product-market environment. In the Chinese economy, the necessityfor a strategy–environment fit can be greater because managerial discretionis highly constrained, strategic restructuring is fairly costly and theindustrial environment is enormously complex and turbulent (Child,1994; Shenkar and von Glinow, 1994).

The industrial environment in China is dynamic and complex (Luo,1995); its influence is thus highly persistant (Tung, 1982). As a result ofstructural transformation, most industries have been substantiallydecentralized or even privatized (Perkins, 1994). Efforts to revitalizeand restructure Chinese industry are closely linked to the reform ofpricing, public finance, ownership and social welfare. Thus the industrialenvironment has a critical impact on firm operations. Reform has meantan expansion not only of markets but also of industrial competition(Jefferson and Rawski, 1994). Naughton (1995) observes sharp reductionsin the dispersion of profitability across Chinese industrial sectors. Thereis also evidence of convergence in financial returns to capital, labourand materials across ownership types (Jefferson et al., 1992). Thesetendencies should be attributed to the decline and convergence of profitrates due to the continuing erosion of barriers that formerly protectedstate firms. Byrd (1992) finds that recent concentration ratios (marketshare of a few leading companies) for Chinese industry tend to fallconsiderably below comparable figures for the United States and Japan.Consequently, SOEs are now facing tremendous competitive pressure,not only from township and village enterprises (TVEs) and privatelyowned enterprises but also from foreign investors.

The strategic choice perspective suggests that a firm needs to havedifferent strategic responses to adapt to different kinds of industrialcompetition (Miles and Snow, 1978). Organizational adaptability involvesa firm’s innovativeness, proactiveness and riskiness (Miller and Friesen,1983). These responses affect the firm’s orientation in scanning, identifying

34


and capitalizing on emerging market opportunities, and its widercapabilities to respond to market and contextual changes (Hambrick,1982). As a hybrid strategic response between proactiveness anddefensiveness, analysis strategy focuses both risk-adjusted efficiency andemerging market opportunities (Miles and Snow, 1978). Firms usingthis strategy defend existing product markets through efficiency-orientedstrategies while cautiously penetrating new markets through intensifiedproduct/market innovation. Tan and Latchet (1994) found that Chinesemanagers’ perceptions of industrial competition intensity significantlyinfluence their firms’ decision characteristics, including the propensityfor risk taking, innovativeness, proactiveness and analysis.

Holistic strategic response model – theconceptual framework

The conceptual framework (Figure 2.2) is a strategic holistic modelderived from Hofer’s (1973) preliminary research on patterns of strategicbehaviour. This framework is built on the concept of business strategyand is designed to provide an analytic tool for examining and studyingstrategic challenges and responses. The research questions are intendedto collect specific information about a firm’s challenge–response behaviour:

� What factors create strategic challenges to the company?

� How has the company responded to a more market-drivenenvironment?

Exte

rnal

Inte

rnal

Strategicchallenge

Strategicresponse

Perf

orm

ance

� Technological� Government� Network� Industrial� Marketing� Globalization� Ownership� Structure� Culture� Resource� Managerial� Competence� Process

� Objectives� Strategy� Technology� Process� Procedures

� Restructuring� Innovation� Market share� Technological

development� Diverse� Ownership� Profitability

Figure 2.2 Conceptual strategic challenge–response model

35


� What factors determine the strategies of the company?

� What new business processes and structures have been planned andimplemented?

� How do you measure performance of the new strategies?

In essence, the assumption of this model is that the alterations in afirm’s strategy set (objectives, strategy, functional policies and procedures)are the results of its responses to either actual or predicted changes in itsexternal environment and/or internal situation. The type of strategicresponse adopted for a specific strategic challenge would significantlyinfluence the future success or failure of the firm (Hofer, 1973).

3

37

Research design andmethodology

Research in emerging economies

Hoskisson et al. (2000) noticed that the strategy literature was justbeginning to come to grips with the connotations for state-ownedenterprises of the economic and political changes that have taken placeover the years. Data and methodological issues have been troublingstrategy researchers in rapid-growth developing and transition economies,which are the culprits causing a paucity of research in this field.

Hoskisson et al. (2000) also indicated that the problems challengingresearch on strategies in emerging market economies include the following:

� that theories promulgated for developed market economies may notbe appropriate for emerging economies;

� that researchers are troubled by sampling and data collection problems,difficulties in measuring firm performance and a variety of timingissues; and

� that emerging economies are not a homogeneous or clearly identifiableand recognizable group.

What’s more, it is likely that different segments of emerging economiesfind themselves in different states of development: some still dependingon low-cost labour, others becoming technology-based and some leading-edge firms moving into global markets. It is expected that the challengesand responses will differ between firms, depending upon the nature oftheir own competitive environment.

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Organizational transformations

Since China’s prior economy was based on a stiff centrally plannedsystem, there are almost no well-tested and developed theories for strategicmanagement under such conditions. Now that China is making a transitiontowards a more open, market-driven economy, there is a great need forresearchers to understand the institutional problems in making thismove. Research hypotheses and research instruments developed andused in developed markets may not be applicable in this context becausethe research designs have not considered essential conceptual and culturaldifferences between developed market economies and emerging controlledor planned economies.

At the same time, Phelan (1997) pointed out that the push for morerigour in strategic management research has lead to a decline in relevanceas researchers search for data that is reliable, easy to obtain both interms of time and money and easily quantifiable. Research has becomedata-driven rather than theory-driven. It is the availability of data thatdetermines the questions asked rather than the study of importantquestions. McKelvey (1997) asserted that quantitative studies in today’sdynamic world are sterile and simplistic because of the inability tocapture change, complexity and uniqueness. Even researchers who workwith these large-scale public databases recognize that the scarcity andinadequacy of available data represents a serious problem (McGahanand Porter, 1997).

Sampling and data collection

Mintzberg (1979) noted: ‘No matter how small our sample or what ourinterest, we have always tried to go into organizations with a well-defined focus – to collect specific kinds of data systematically.’ In Chinathere are special problems to be addressed in conducting such research.

The absence of a culture involving independent researchers may makeit difficult to establish trust between respondent and researcher. Undera controlled economy, SOE managers were highly bureaucratic andpolitical. They did not need to provide information to outsiders andwere able to operate behind a wall of secrecy. Thus Lee and Miller(1999) highly recommended the research method used in collaborativeprojects with local researchers using face-to-face interviews, which can

39

Research design and methodology

be a key means of gaining access to reliable data sources. Luo and Peng(1999) and Luo, Tan and Shenkar (1998) reported response rates ofaround 25 per cent from mail surveys. Inefficient postal systems areanother source causing low response rates from mail survey subjects.

Great care was taken in assessing the accuracy of data available on-line or through public resources because the data sources are rapidlyoutdated owing to the fast pace of economic growth and frequent policychanges. Firm data, for instance, collected at the state, province and citylevels, as well as by different government departments in China, aresometimes not consistent with each other (Hoskisson et al., 2000). Theuse of multiple informants and data sources is an important means ofobtaining reliable and valid data. In this study, the data triangulation(Patton, 1987) technique was used so that information collected fromthe firm documents and archival records, public data sources such asnewspaper publications, government records and interviews from seniormanagers could be compared to validate data reliability. As Yin (1994)explained, triangulation serves to corroborate the same fact orphenomenon through the gathering of information from multiple sources.He concluded that triangulation helps solve the potential problems ofconstruct validity.

Another problem in conducting research in strategic managementwas gaining access to senior management. Usually upper-level managersin a firm are very reluctant to get involved with researchers, especiallywithout the consent of the CEO because the CEOs in many emergingeconomies monopolize information flows. Very often, the informationobtained from managers under such circumstances is normative, i.e. theideal conditions they are expecting rather than the truth about the firm(Adler, Campbell and Laurent, 1988). In order to conquer this problem,help from people in high social positions was sought, and this socialnetwork greatly facilitated access to CEOs in the firms of focal research.Some of the CEOs commented that they were doing a favour for theintroducer when they agreed to talk with the researcher.

As Hoskisson et al. (2000) indicated, understanding and knowledgeof terms and concepts familiar to managers in developed market economiesmay create problems in data collection and reliability of responses inemerging economies. Misunderstanding often occurs in respondentsbecause of cultural equivalency issues that are usually addressed throughback-translation (Riordan and Vandenberg, 1994). Addressing issuesrelating to whether language terms are understood may place a premiumon providing respondents with thorough explanations of terms, and on

40


using a methodology that provides researchers with the ability to checkand probe aspects of behaviour, notably face-to-face interviews. In thisstudy, the interview questions were first reviewed and revised by expertsin strategic management and then subjected to a translation and back-translation procedure to ensure validity in a cross-cultural setting (Adler,Brahm and Graham, 1992).

Performance measurement

Measurement of the impact of strategies on performance is intenselychallenging in emerging economies such as China. First, financial reportingsystems in many Chinese firms were not established using developedinternational market standards. Second, even where relevant financialreporting legislation has been enacted, its enforcement may be problematic.Comparisons of financial performance over time is made difficult becausedata has been compiled under different regimes and systems. Thisdrawback was compounded by substantial inflation and devaluation oflocal currencies. In addition, widespread use of barter in economieswith underdeveloped financial systems means that published sales andprofit data do not provide reliable measures of activity. For this reason,the major measures for firm performance were strategic restructuring ofthe firm to accommodate market competition, technological developmentand innovation and diversity of ownership of the firm as well as measuresof market share and profitability.

Case research data selection

Two fundamental questions exist at the core of strategy research (Bowman,1995): ‘What makes some firms more successful than others?’ and ‘Howdo I make this particular firm successful?’ Famous researchers such asChandler, Andrews, Mintzberg and others relied on case studies andcompany histories to generate a wealth of theories and insights intocorporate practice (Allison, 1971; Bower, 1970; Chandler, 1962; Cyertand March, 1963; Mintzberg, 1979; Mintzberg, Raisinghani and Théorêt,1976).

Eisenhardt (1989) provided a road map for developing theories fromcase studies that may be appropriate in an emerging market context. An

41


integral part of this approach is the development of research instrumentsthat can be used in quantitative studies. In addition, the combination ofquantitative and qualitative data in emerging market research can beparticularly useful in yielding novel, relevant and reliable insights.

The scarcity and inadequacy of data sources in strategic managementhas been identified as an important problem confronting researchers inthe discipline. In this research, the criteria for selecting firms are (a)firms that participate in national projects, and (b) firms that arerecommended by experts in this field, such as Professor Wu, who is theChief Scientist for the National High-Tech Program for AutomationTechnology, Director of the National CIMS Engineering Research Centerand a Member of the Chinese Academy of Engineering. Professor Wuhas completed numerous projects with Chinese SOEs and providedintroductions to CEOs.

Open-ended case study interviews were employed when talking toCEOs, in which key respondents could be asked for the facts of a matteras well as for the their opinions about events. CEOs’ insights into someoccurrences helped to form propositions as the basis for modifyingfurther enquiry and research. The best way of collecting data fromCEOs was to let them speak their mind. Interruptions or questions inthe middle of the interview often stopped their train of thought andspoiled the whole logic of their deliberations. Therefore, unless necessary,the interviewer had to be very patient and jot down questions for laterenquiry after the executives had finished their oration.

Semi-structured interviews were conducted with officials at sixrepresentative SOEs across six industries regarding how they successfullyinitiated strategic change, how they achieved their goals in terms ofcompetitive product development, and how they had to change theirpolicies and procedures to achieve fit among the structure, strategy andculture. Those designated to be interviewed were managers fromtechnology, HR, production, marketing and planning departments. Thesepeople had first-hand experience of what was going on and what hadbeen done.

Case study method

Individually, each firm was written up as a research case study and,collectively, a model of strategic transformation in Chinese firms wasdeveloped. The cases all began with a strategic overview of the firm and

42


its business activities, and then specifically addressed the research questionsin this study:

1. What factors create strategic challenges to the company?

2. How has the company responded to a more market-drivenenvironment?

3. What factors determine the strategies of the company?

4. What new business processes and structures have been planned andimplemented?

5. How does the firm measure performance of the new strategies?

From this data, conclusions were drawn about how these companieswere changing their strategies, structure, policies and procedures to dealwith changes in the industry and competitive pressure from theinternational arena or from China joining the World Trade Organization(WTO). Lessons from these companies will be relevant to other SOEsfacing similar forces of change and challenge. The results are intendedto be helpful to managers, researchers and policy-makers.

Tape recorders were used after getting permission from the intervieweesso that the researcher could concentrate on probing and interactingwith the subjects. After the interview, transcripts were made from thetapes of the interviews for result analysis.

Detailed analysis of the first case was reviewed before the secondcase study was started so as to make sure that the research was on theright track. Improvements were then made for further studies. Since theresearcher was based thousands of miles away it would be hard toremedy any problem with the data once the researcher had returned tothe US.

Research questions

The first research question probed the factors creating strategic challengesfor the focal firms. Based on the literature review, six categories ofstrategic challenges were considered, consistent with the findings ofresearchers studying emerging economies (e.g. Child and Lu, 1996;Hoskisson et al., 2000; Kornai, 1986; Lee and Miller, 1996; Peng andHeath, 1996; Soulsby and Clark, 1996). These were: (a) market related;(b) industry related; (c) technology related; (d) related to institutional

43


factors such as government regulation and infrastructure; (e) related toresources and capabilities; and (f) related to the broader environment.

In the interviews with managers, research into the market-relatedchallenges focused on major challenges in the market structure, marketshare, market expansion, product life cycle and customer satisfaction.Industry-related challenges concentrated on the following:

� competitor-related challenges: major changes in the market share ofexisting competitors;

� supplier-related challenges: major changes in availability of rawmaterials and conditions of trade;

� customer-related challenges: major changes in demographic structureand types of customers and customer preference;

� product and process technology related challenges: major changesin the speed of learning technology, product design capability andtechnology development capability;

� driving forces and key success factors.

In assessing resource and capability related challenges, questions wereasked about major changes in capital or cash flow, excesses or shortagesin production facilities, inadequacy or loss of management talents andability to acquire needed information. Investigation of macro-environmental challenges centred on changes in economic conditions,political/legal constraints and social/cultural values.

The second research question asked what factors determined thestrategies of the company. Among the identified challenges to the focalfirm, which impacted on the strategy formulation process? The strategymodel provides three representative groups of variables to be considered:(a) environment, (b) resources and skills, and (c) values and aspirationsof top management (Han, 1988).

The third research question studies how the company has respondedto a more market-driven environment. In other words, what approacheshas the firm taken in response to the environmental change or what newbusiness processes have been planned and implemented? What are thetechnologies required for staying competitive within the market? Whatare the technological investments required to remain ahead of the competitionand serve customers? How has the company improved the technologies?Did the firm change the ownership structure? Did the firm use an acquisitionstrategy or a diversification strategy to meet the market needs? Or didthe firm just wait and rely on the government for a solution?

44


The fourth research question explores the relationship between thefirm’s response strategies and its performance. What criteria has thefirm used to measure the performance of the new strategies: marketshare or profitability (such as ROI, ROE or ROA), the time required tobreak even, sales level, sales growth, ability to control costs, ability toearn foreign exchange? How were the performance indices evaluated?

The last question aims at collecting information concerning the impactsof changes on the organization and its culture. What do you believe andhow you will act (values)? What will you accomplish in the long term(goals)?

From what has been discussed, a detailed list has been developed forboth open-ended and semi-structured questions.

Open-ended questions

� Can you identify the major challenges for your industry and arethese factors equally challenging to your firm?

� Which factors are most threatening in terms of firm survival: (a)market, (b) industry, (c) technology, (d) institutional such asgovernment regulation and infrastructure, (e) resources and capabilitiesand (f) broader environment?

Semi-structured questions

Question 1: What factors create strategic challengesfor the company?

� For managers in marketing:

– Rank the following according to their strategic significance toyour firm: market structure, market share, market expansion,product life cycle, customer satisfaction.

– What competitor-related challenges do you see as more relevantto your firm’s market share position?

– After joining the WTO, do you expect major changes indemographic structure and types of customers and customerpreference?

– In the next two to three years, do you think that the threat ofcompetition in your business will increase?

45


– How strong was the competitive position of your company inthe global market?

� For managers in technology and production:

– Is technology a major concern in global competition for yourfirm?

– What are the product and process technology related challenges:major changes in speed of learning technology, product designcapability, technology development capability, or otherwise?

– What are the technologies required for staying competitive withinthe market?

– What are the driving forces and key success factors in technologicalinnovation?

– What are the technological investments required to remain aheadof the competition and serve customers?

– How has the company improved the technologies?

– Do you have excesses or shortages in production facilities tomeet the market demand?

– What have you done with your product quality?

� For resource and capability related challenges:

– What are the major changes in capital or cash flow?

– Where and how do you acquire working capital for youroperation?

– Do you have enough management talent for successful operations?

– Do you have the ability and network to acquire neededinformation?

– What are the major changes in economic condition in thetransformation today?

– What political and legal constraints is your firm facing?

Question 2: How has the company responded to amore market-driven environment?

� What approaches has the firm taken in response to environmentalchange or what new business processes have been planned andimplemented?

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� Did the firm change the ownership structure to make adjustmentsto the performance efficiency and competition?

� Did the firm use an acquisition strategy or a diversification strategyto meet market needs?

� Did the firm just wait and rely on the government for a solution?

� What policies and procedures have you taken to deal with: (a) theenvironment; (b) resources and skills; and (c) the values and aspirationsof top management?

Question 3: What factors determine the strategies ofthe company?

� Among the identified challenges for the focal firm, which have thegreatest impact on the strategy formulation process?

Question 4: What new business processes andstructures have been planned and implemented?

� What are the functions of the new processes: cutting down costs,shortening production time, improving quality?

� Have you flattened your chain of command or added more layers tofacilitate organizational communication?

� What does the organizational structure look like now?

� In what ways is the new structure more effective compared with theprevious one?

Question 5: How do you measure performance of thenew strategies?

� What criteria has the firm used to measure the performance of thenew strategies: market share or profitability (such as ROI, ROE orROA), the time required to break even, sales level, sales growth,ability to control costs, ability to earn foreign exchange?

� Who is going to evaluate the performance results and how: themanagement team, shareholders or the government?

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The results of these interviews along with other company and publicdata provide the content for the case studies that follow. Each casediscusses the company’s background, strategic forces and responses,and performance results that have occurred as they work to transformthemselves from SOEs to professionally managed and market-drivenenterprises. The cases include:

� China Huajing Electronics Group Corporation (‘Huajing’) – a leadingmicroelectronics enterprise in China;

� Beijing No. 1 Machine Tool Plant – one of China’s major machinetool producers;

� Chongqing CHN & CHN Ceramics Co. Ltd – a global marketleader in the high-end segment of ceramics products;

� Sichuan Chemical Works (Group) Ltd – one of the biggest Chinesechemical fertilizer manufacturers;

� Jingwei Textile Machinery Co. Ltd – the biggest textile machinetool producer in China;

� Harbin Electric Machinery Co. Ltd – the biggest electric motorproducer in China, and one of the five leading firms in the world.

Following the challenge–response–performance paradigm, we wouldlogically expect that SOEs would adopt different strategic postures thatare consistent with their respective environments in order to achieve afit which is crucial to their survival and success. Thus Chapters 4 to 9examine and identify the strategic challenges, responses and consequentsuccesses among firms operating under different environmental constraints.

4

51

The China Huajing ElectronicsGroup Corporation

The China Huajing Electronics Group Corporation (‘Huajing’) is a leadingmicroelectronics enterprise in China with 4,393 employees and assetsworth 3 billion yuan RMB.1 Since its beginning, Huajing has attractedattention from China’s top leaders. President Zemin Jiang, formerParliament Head Peng Li and former Premier Rongji Zhu visitedHuajing several times. President Jiang encouraged Huajing employeesto ‘work hard to speed up the information process for the nationaleconomy’.

Huajing specializes in the development, manufacturing, sales andmarketing of metal oxide semiconductor (MOS) integrated circuits (ICs),bipolar ICs and discrete electronic devices. It has three-semiconductorwafer fabrication and assembly lines, a photo mask shop, a tooling andstamping centre, a silicon material preparation plant and a utilitiessupply system. It also has its own research and development (R&D)centre with a state-of-the-art pilot line that supports its manufacturingactivities. Leading products include:

� high-, medium- and low-power transistors, semiconductor chipsand related products for use in household appliances, lighting,communications and industry automation;

� bipolar analog ICs for household information appliances,communications and industry automation; and

� MOS ICs for household appliances, electronic watches and clocks,communications, toys and industry automation.

While Huajing was addressing the problems of transforming itself froma state-owned enterprise to a stock-driven modern corporation, President

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Wang was concerned that its limited resources would not be adequateto keep up with the required growing investments.

Industry competitive situation analysis

According to the Ministry of Industry Information (MII), the outputvalue of China’s electronics industry was expected to reach US$110billion for 2000, growing nearly 25 per cent over 1999. IC and electroniccomponent sectors are projected to grow to 3.9 billion units and 250billion units, respectively, at a growth rate of 50 per cent. The total ICmarket in mainland China in 2000 would reach US$20 billion, a 21 percent jump from the previous year. Consumer electronic products wouldrequire 43 per cent of the ICs, and information technology (IT) andtelecom products 30 and 20 per cent, respectively.

China produces less than 1 per cent of the world’s ICs. About 87 percent of the total chips needed in mainland China were imported (Table4.1). Such a large market was attracting leading IC makers to find themeans to enter the market. The Chinese government added favourablepolicies to support the development of the microelectronics industry.Such overseas giants as Motorola, the Nippon Electric Company (NEC),Philips, Siemens and Toshiba are transferring technology, building waferfabrication plants and forming joint ventures with Chinese partners.Japan is investing more in China’s semiconductor industry than anyother country. Toshiba has been running an assembly plant near Shanghaisince 1994 and Hitachi has packaged Dynamic Random Access Memory(DRAM) since 1997. Fujitsu also transferred technology to a Chinesecompany to assemble logic chips.

Of China’s 330 semiconductor plants, 36 produced ICs and the restproduced discrete devices. Among the 36 IC manufacturers, only a fewprocessed wafers and fabricated ICs; most focused on back-end packagingand test operations. Shanghai and the surrounding area were fast becomingChina’s most important region for IC design and manufacturing. Themost advanced Huahong-NEC Microelectronic joint venture, also knownas Project 909, churned out 64 Mbit Synchronous DRAM (SDRAM) atthe 0.35-micron level for export to NEC Japan. NEC plans 0.25-micronproduction in the near future.

Eventually 20–50 per cent of capacity will be sold in the local market.Project 909 raised the bar for others, including the Huajing Group in

53

The China Huajing Electronics Group Corporation

Wuxi, Jiangshu Province, the Shanghai Belling Semiconductor Co. Ltd,the Huayue Group in Shaoxing, Zhejiang Province, and ShanghaiAdvanced Semiconductor Co. Ltd.

About one-third of China’s back-end (packaging and test) capacitywas also located in the Shanghai region. Along with local factories,Panasonic, Fujitsu, Alpha Tec and other foreign packaging and testvendors were located near Shanghai. Global IC leaders like Intel, AMD,Samsung and Hyundai were also constructing huge back-end lines inand around Shanghai. NEC’s participation in Project 909 was a goodwillgesture enabling NEC to sell more telecom equipment in China. Themainland often requires foreign investors to include technology transfersand extensive staff training in approved projects – and hints thatcompliance could lead to huge government contracts. In NEC’s case,some 450 Chinese were flown to Japan for five months of training.

The leading IC fabrication companies include the Shanghai HuahongGroup Corp., Shougang NEC, Beijing, the Advanced SemiconductorManufacturing Corp. (ASMC), Shanghai, the Shanghai Belling

Type Import Import Export Exportvolume value volume value

(10,000) (US$10,000) (10,000) (US$10,000)

IC chip 4,431 6,798 1,322 2,277

MOS technology 52,053 34,535 1,231,163 31,062produced IC

Bipolar technology 13,858 8,013 8,723 2,258produced IC

Mix and other 285,624 163,831 56,827 13,856technologyproduced IC

Other single chip 1,238,718 393,099 187,667 55,445IC

Mix IC 104,676 134,288 25,619 70,257

Microelectronics 28,684 12,791 15,302 13,774component

Total 1,728,046 753,355 418,576 188,929

Source: Xiaotian Xu, Department of Electronics Information Product Management,Ministry of Industry Information, China, 21 June 2000.

Table 4.1 China: imports and exports by IC product type,1999

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Microelectronics Manufacturing Co. Ltd, the Huajing Electronics GroupCo., Wuxi, and the Huayue Microelectronics Co. Ltd (see Table 4.2).Together, these chip makers account for 80 per cent of China’s currentproduction capacity. Most of China’s major semiconductor facilities arepartly or wholly foreign-owned by companies such as NEC, MatsushitaSGS-Thomson, Philips, Northern Telecommunications, Samsung,Motorola, Harris and Intel. Presently, China’s state-of-the-artsemiconductor technology is 0.35 µm with some still at a level of 2–3µm, well behind the 0.18 µm or 0.13 µm of the West.

Shanghai Huahong NEC Electronic Co. Ltd features an 8-inch 0.35µm CMOS fabrication line, which can produce 20,000 wafers per month.Beijing Shougang NEC Electronic Co. Ltd features a 6-inch 0.50 µmCMOS fabrication line, producing 8,000 wafers per month. Recently,Shougang NEC upgraded its fabrication line to launch 0.35 µm technology.Wuxi CSMC-HJ Co. Ltd also has a 6-inch 0.50 µm CMOS fabricationline. Recently, Motorola’s facility in Tianjing pressed ahead with debuggingthe 0.25 µm or 0.18 µm CMOS fabrication line. This was the mostadvanced wafer foundry in China in 2000. Only the Shanghai AdvancedSemiconductor Manufacturing Corp. (ASMC) possesses a 6-inch 0.8µm CMOS fabrication line producing 6,000 wafers per month. (Tables4.2 and 4.3 describe the key electronics firms and their technologies.)

Wafer fabricating plants with a technology level above 1 µm includethe Wuxi Huajing Semico Microelectronics Co. Ltd, the Shanghai BellingCorp. Ltd, the Hangzhou Youwang Electronics Co. Ltd and the ShaoxingHuayun Electronics Co. Ltd: Wuxi Huajing was operating a 4-inch anda 5-inch 2 µm to 5 µm bipolar fabrication line providing a capacity of15,000 units per month; Shanghai Belling was operating one 4-inch 1.2µm and one 4-inch 2 µm CMOS fabrication line with a monthly capacityof 15,000 wafers. A monthly capacity of 12,000 wafers was providedby Shanghai ASMC equipping a 5-inch 2 µm and a 5-inch 3 µm bipolarfabrication line; Hangzhou Youwang equipped one 4-inch 2 µm andone 4-inch 3 µm bipolar fabrication line with a monthly capacity of180,000 wafers; Shaoxing Huawang only featured one 4-inch and one5-inch 2 µm to 5 µm bipolar fabrication line with a monthly capacity of8,000 wafers.

The partners in Beijing Huaxia Semiconductor Manufacturing Co.Ltd (HSMC) were Shougang Group, a steel and iron maker in China,the Beijing municipal government, Alpha and Omega SemiconductorInc. and Joshua Semiconductor Inc. The initial investment totalled US$1.34billion. The partners planned to establish another 8-inch, 0.25 µmfabrication line by 2002. Annual sales from the two 0.25 µm production

55


lines were expected to total about $600 million. HSMC planned tobuild as many as six other fabrication lines by 2010 at a total investmentof US$10 billion. One would be a 6-inch production line with a monthly30,000 wafer capacity. Other lines would use 8- or 12-inch technologywith monthly capacities as high as 300,000 wafers.

HSMC would provide analogue ICs, mixed-signal chips and electronic-component ICs as well as digital IC and Flash memory. Local designhouses would be HSMC’s eventual partners as homegrown businesses

Manufacturers Technology Silicon Production Remarkschip size capacity

(inch) (per month)

China Huajing 2–5 µm 4–5 15,000 Including the pre-Electronics (bi-pole) and post-productionGroup Co. 1.5–3 µm 5 12,000 lines

(CMOS)0.8–1 µm 6 6,000(CMOA)

Huayue 2–5 µm 4–5 20,000 Including the pre-Microelectronics (bi-pole) and post-productionCo. Ltd lines

Shanghai Belling 1.2–2 µm 4 15,000 Including the pre-Semiconductor (MOS) production lineCo. Ltd

Shanghai Pioneer 2–3 µm 5 12,000 Including the pre-Semiconductor (bi-pole) production lineProduce Co. Ltd 0.8 µm 6 6,000

(CMOS)

Shougang NEC 0.5–3 µm 6 8,000 Including the pre-Electronics (CMOS) and post-productionCo. Ltd lines

Shanghai 0.35 µm 8 20,000 Including the pre-Huahong NEC (CMOS) production lineElectronicsCo. Ltd

Hangzhou 2–3 µm 4 1,800 Including the pre-Youwang (bi-pole) production lineElectronicsCo. Ltd

Source: Xiaotian Xu, Department of Electronics Information Product Management,Ministry of Industry Information, China, 21 June 2000.

Table 4.2 Summary of Chinese IC fabrication plants

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increasingly master analogue and digital semiconductor design. Amplifiers,data converters, interface chips, radio frequency (RF) ICs and sensorswould be major product categories under HSMC’s plan. Target marketsincluded telecommunications, computers, automotive electronics andconsumer electronics.

Company Foreign Chinese Product Technology (monthly(location) partner partner sector wafer capacity, in

year 2000)

ASMC Philips Shanghai Wafer 5′′, 1.5 µm bipolar(Shanghai) Semi- Belling foundry (25,000)

conductors 6′′, 0.6 µm CMOS(15,000)

Shanghai Alcatel Shanghai Telecom 4′′, 1.2–2 µm MOSBelling (Belgium) Huahong/ IC card 4′′, 3 µm biCMOS(Shanghai) Shanghai Consumer (total 13,000)

Bell Co.

Shougang NEC (Japan) Capital Iron 4 Mbit DRAM 6′′, 0.35 µm CMOSNEC & Steel Co. 64 Mbit DRAM 6′′, 1.2 µm MOS(Beijing) MCU (total 10,000)

Huajing – State-owned Consumer 4′′, 2–3 µm bipolar(Wuxi) (15,000)

5′′, 2–3 µm bipolar(1,600)5′′, 3 µm MOS(10,000)6′′, 0.6 µm CMOS(10,000)

Huayue – Zhejiang Consumer 3′′, 5 µm bipolar(Shaoxing) Province 4′′, 3–5 µm bipolar

5′′, 2 µm bipolar

Shanghai NEC (Japan) Huahong 64 Mbit DRAM 8′′, 0.35 µm CMOSHuahong Electronics logic IC (16,000)NEC 8′′, 0.35 µm logic(Shanghai) chips (4,000)

CSMC- – CSMC/ Wafer foundry 5′′, 0.5 µm CMOSHuajing Huajing (28,000)(Wuxi) 6′′, 0.5 µm CMOS

(16,000)

Source: IEEE Spectrum, December 1995; WSC study visit, April 2000.

Table 4.3 IC manufacturing technology status in China

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Shanghai Grace Semiconductor Manufacturing Co. Ltd planned tobuild a $1.63 billion facility in the Zhangjiang Hi-tech Park, PudongNew Area in Shanghai. The new facility would have an 8-inch waferproduction line with monthly capacity of 50,000 wafers using the 0.25µm process technology. The main products would include large-scaleintegration (LSI chips), including DRAMs, static random access memory(SRAM), Flash memories and central processing units (CPUs). Thecompany expected construction and equipment installation to becompleted by the end of 2001. Mass production was targeted at thethird quarter of 2002. About 20 IC production lines were set to beintroduced in the park this decade, amounting to US$2 to 4 billion inoutput value.

Leading competitors, like Mosel Vitelic Inc. of Taiwan, were movingfrom DRAMs to system LSIs over the next five to ten years. Currently,the company generates 75 per cent of its sales from DRAMs. However,the company intends to increase output of system LSIs to reach 75 percent of sales by 2010. Manufacturing system LSIs requires 0.1 µmtechnology using 300 mm wafers. The company planned to constructtwo lines for 300 mm wafers. One was the ProMOS Fab in Hsinchu,Taiwan, which would initially start producing DRAMs in 2002 using a0.13 µm process and would later be upgraded to 0.1 µm. The otherplant in Canada by 2003 would manufacture Flash memory chips andFlash memory-embedded logic ICs using a 0.14 µm rule. This plant alsowould downsize the process rule to 0.1 µm by the end of 2004.

IC design

In China, IC design (Figure 4.1) is regarded as a part of IC manufacturingindustry. However, design actually drives the IC industry. ‘IC design isthe key driver in China – not foundries,’ said Chang Zhong Yuan,deputy general manager of Shanghai Belling, China’s leading foundry.‘Any [chip industry] breakthrough will come in design instead ofmanufacturing,’ he says. ‘Manufacturing requires a huge investmentthat China cannot afford, and some of the domestic foundries have noproducts and a lot of capacity left over.’ Design can be defined as abridge between the market and IC manufacturing. Over 90 per cent ofChina’s entire fabrication capacity is reserved for overseas markets,while ironically the country needs to import 95 per cent of the ICs itconsumes. This is not only due to the poor design capability in thecountry, but also due to the loose link between design houses and foundries.

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Compared to the manufacturing industry, the formation anddevelopment of the IC design industry is lagging behind in China. In1998, there were about 80 design companies in China, but many ofthem were in universities or research institutes. Most of them had smallinvestments, around US$500,000, and few staff. The total number of ICdesign engineers in China was estimated to be 1,500 and sales revenuefrom IC design could not have been more than US$25 million in 1997.This compared to around 300,000 to 400,000 engineers in Silicon Valleyalone in the US. In Taiwan, there were no less than 6,000 IC designengineers.

IC designers need to master the mature design technologies (for example,those at 0.5 µm), before they can move to new ones (0.35 µm, 0.25 µm,and 0.18 µm) with high design complexity. The central governmentencourages Chinese designers to design their own ICs so that they canreplace the large number of imported ICs found in their appliances. Asa result, most ICs designed by local engineers are consumer ICs, althoughsome are communication ICs. Consumer ICs are simple to design. Thatis why the average price of the Chinese-made IC is less than US$10 perunit. The country’s communication ICs have higher product value.Smartcards offer a great opportunity for investment. The centralgovernment may encourage Chinese designers to develop such productswith their own IP before foreign companies jump in. In this way, Chineseengineers can accumulate precious design experience that is crucial forfuture development. Moreover, this would be a good source of revenuebecause China is a huge market.

Perc

enta

ge

50

40

30

20

10

0

24

14 14

38

10

Fablessco.’s

Depts ofIC makers

Depts ofequlpment

makers

Centres foruniversities/institutes

Foreign-fundedcentres

Total number of deslgn centres = 80

Figure 4.1 IC design centres in 1999

59


In the past 15 years, many Chinese students have gone abroad forhigher education. Now, there are about 5,000 Chinese IC designersspread across the world, especially in the United States. This is the timeto encourage them back to develop the design industry.

Design companies that do not fabricate include CIDC, Beijing Huahong,Beijing Zhongxin, Shanghai Huahong, Shengzhen Aike Microelectronicsand Shenzhen State Microelectronics. Huahong has designed manyproducts, such as the untouchable memory card, the touchable CPUcard, the watt-hour meter chip and the control chip for a hand-heldbattery. With government support, CIDC has established itself as aleader in IC design and provides ongoing technical support to sevenregional IC design centres. According to CIDC, non-Chinese customersfor design services and/or its Panda 2000 design tools include C-Cubed,S3, Intel, National Semiconductor, Fujitsu and NEC. CIDC has 180employees with over 60 per cent of its engineers having worked or beentrained abroad. Its revenues in 1999 were $6 million; projected revenuesin 2000 are US$10 million. CIDC is believed to be seeking approval toprivatize through a public stock offering. Aike Microelectronics hasbeen able to design a two-port SRAM chip enabling a data rate up to 15ns. The IC CAD Federation expects annual sales revenue from IC designto be about US$150 million to 200 million by 2000.

In recent years, the subsidiary IC design departments in communicationsmanufacturers such as Datang and Huawei and electronic companieslike Panda, Langchao and Haier have made some progress in integratedsystem design. It is said that Huawei is able to design a 0.18 µm chip.In addition, many university and research institutes have joined the ICdesign and development initiatives. Tsinghua University, Fudan University,Beijing University and Shanghai Jiaotong University are actively pursuinghigh-level design and large-scale integration. Moreover, many foreigncompanies, including those from Taiwan, are establishing chip designcentres. Among those are Shanghai Epson, Intel, Nortel Networks, Avant,Beijing Motorola, Analog Devices, NEC and Sunplus.

In 2000, China’s Ministry of Science and Technology joined forceswith the Shanghai municipal government to open the Shanghai IndustrialIntegrated Circuit Design Centre (ICC), the first Chinese industrial parkdedicated to IC design. Thirteen design houses, including a joint venturewith the Beijing-based China IC Design Centre, have moved to the park,which aims to nurture local chip-design startups. The centre will alsooffer design houses and universities a multi-project wafer-processingcapability that is able to handle many different designs with similarprocessing requirements. The approach aims to reduce layout and foundry

60


costs for the prototype and low-volume products developed by localdesigners (see Figure 4.2 below).

Design products can generally be divided into five categories:communication chips, ICs used in smart cards and memory cards,computer chips and consumer chips. Consumer ICs more or less occupythe leading position. However, communication ICs and computer ICsare progressing in terms of speed. The representative products featuringhigh-technology levels were 500,000-gate integration using 0.35 µmMotion Picture Expert Group 2 (MPEG-2) compression encoder/decoderchips. Most high-end design products are being outsourced to Korea,Singapore, Japan and Taiwan. Some non-fabricating companies expectto use low-end domestic foundries for the manufacture of more standardchips. Shanghai SyncMOS Systems (SSS) plans to subcontractmanufacturing to Wuxi-based Huajing, with its 6-inch line installed byLucent Technologies. There is also Shanghai’s ASMC foundry, partiallyowned by Philips and Nortel. In June 2000 the China State Councilpromulgated a policy to encourage capital and human resource investmentsin the software and IC industries.

Huajing Corporation profile

Huajing: three stages of development

China Huajing Electronics Group Corporation was founded on 4 August1989 from the merging of Factory 742 and Research Institute 1424(Wuxi Branch) into the Ministry of Electronics Industry. It has gonethrough three stages of development: the foundation stage, the expansionstage and the development stage.

The foundation stage started with the establishment of local state-run Jiangnan Radio Equipment Factory on 1 September 1960. On 24December 1962, the National Economy Committee approved theupgrading of Local Jiangnan Radio Equipment Factory to become JiangnanRadio Equipment Factory with factory code 742. It then became a state-owned enterprise run by the central government.

The expansion stage began in 20 December 1968 when JiangnanRadio Equipment Factory merged with Wuxi Radio Industry School.On 25 June 1985 came the completion and national acceptance of thefirst production line for colour TV integrated circuits, one of the majorprojects for the nation in that period.

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The development stage began in March 1987. The MicroelectronicUnited Company was founded when Jiangnan Radio Equipment Factorymerged with the Wuxi Branch of Research Institute 24 of the ElectronicMinistry. From then on, the company had the full capacities of R&D,manufacturing, and sales and services. Within the year, an updatingproject for transistor device production was completed, a major nationalproject. China Huajing Electronics Group Corporation was officiallyapproved on 14 April 1989 and founded in August of that year. On 25June 1994, Wuxi Microelectronics Project, a national project, was acceptedby the state. The project to upgrade the bipolar IC production line forvideocassette recorders (VCRs) was accepted by the state in 1996. The‘908’ Huajing Project, which is a super-large integrated circuit productionline, started in 1998.

People

Huajing has 4,393 employees with 2,309 engineers and techniciansaccounting for 53 per cent of employment. Eight per cent or 349 areexperts, including 39 professors; 716 are engineers (10.3 per cent) and1,244 are assistant engineers and technicians, accounting for 28 percent. There are 2,084 people engaged in production, accounting for 47per cent of total employment (Huajing Document [2000] No. 6).

Products

Huajing is one of the leading enterprises in the microelectronics industry,engaging in R&D, manufacturing, sales and services of two major productlines: integrated circuits and discrete devices. Leading products include:

� high-, medium- and low-power transistors, chips and final productsfor household appliances, green lighting, communications and industryautomation;

� bipolar analogue ICs for household information appliances,communications and industry automation; and

� MOS ICs for household appliances, electronic watches and clocks,communications, toys and industry automation.

Subsidiary products include:

� silicon materials and epitaxial wafers;

62


� precise moulding dies;

� lead-frames for discrete devices and ICs;

� photo-masks;

� hyper pure water, N2, H2, O2 and industry gases.

Quality

Huajing received ISO 9001 certification in 1993. According to theinternational standards, Huajing is reviewed biannually by an internationalagency for its quality work and management and re-evaluated twice ayear for renewal of its certification (see Figure 4.2). The quality policyis: ‘Quality first, customers are king. Based on strict, scientific andsystematic quality management, to provide customers with satisfactoryproducts and services.’

Production capacity

� Huajing’s production capacity for discrete devices has the highestvolume and widest variety in China:

100

50

0

199719981999

1997 63.57 96.3 98.75 6.08

1998 67.18 92 99.33 4.39

1999 73.52 96 99.42 3.19

Mean productyield

Qualityimprovement

rate

First-timequalification

rate of testing

Ratio of classesC and Dproducts

Figure 4.2 Product quality in three recent years

63


– ϕ3’: 120,000 wafers/year;

– ϕ4’: 300,000 wafers/year;

– key technology includes Mesa and planar high breakdown voltage,PCT, NPN and PNP planar technology.

� Huajing has the best development and production capacity in bipolarIC in China:

– ϕ4’: 150,000 wafers/year with 3 µm PCT planar process;

– ϕ5’: 20,000 wafers/year with 2 µm ANSA process.

� Huajing’s production capacity in MOS ICs includes:

– ϕ5’: 120,000 wafers/year with 2–3 µm Si-gate CMOS process;

– ϕ6’: 100,000 wafers/year with 0.6–1.0 µm Si-gate CMOS process.

Structure

Figure 4.3 illustrates the evolution of the Huajing Group’s controllingstructure. The controlled stockholding companies are owned by thestate while the stockholding companies are joint ventures with investmentsfrom different owners.

China H

uaj ing Electronics Group

Corporation

Silicon MaterialsPlant

Discrete DevicesPlant

Bipolar ICs Plant

MOS ICs Plant

Design, productionand marketing


Assembly

Assembly


Wafers

Other seven sponsors

Wuxi HuajingMicroelectronics

Co., Ltd

Huajing Group’sAssembly Plant

Wuxi Huajing SemicoMicroelectronlcs Co., Ltd

Wuxi CSMC-HuajingCo., Ltd

China’s first foundry line

Figure 4.3 Evolution of Huajing Group structure

64


The current company can be divided into six sections:

� four controlled stockholding companies;

� four stockholding companies;

� six subsidiary companies;

� five subsidiary plants;

� two branches in Shenzhen and Zuhai;

� three support centres for technology, information and material supply;and

� nine functional departments, including the Complex ManagementDepartment, the Planning and Operations Management Department,the Accounting Department, the Technology and Quality Department,the Labour, HR and Education Department, the Monitoring, Auditingand Security Department, the Politics Department, the Labour Unionand the Logistics Department.

Customers

Huajing has over 2,000 customers domestically such as Konka,Changhong, HiSense, TCL, Amoisonic, Great Wall, Haier, Panda,Chunlan, etc. Overseas customers include Hong Kong, Taiwan, Japan,Singapore, India, Indonesia and South America (see Table 4.4).

Order Company Sales Profit Note

1 Legend 2,029,181 49,5112 Shanghai Broadcast and TV 1,745,656 137,304 *3 TCL 1,324,054 67,930 *4 Konka 1,315,070 62,466 *5 Changhong 1,304,684 66,540 *6 Great Wall Computer 1,209,020 26,7877 Beijing Post and Telecom 1,147,537 62,2618 HiSense 1,065,221 23,351 *9 Panda 1,034,812 40,373 *

10 Shenzhen Huawei 1,021,473 170,096

*Huajing’s customers (from China Electronics Daily).

Table 4.4 The top 10 of China’s 100 largest electronicsenterprises in 2000

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Strategic challenges

Government control and intervention

Government control and intervention were the major source of problemsfor Huajing. When the government made decisions for firms, it did notconsider much of what happened in the marketplace, nor did it do agood job as regards feasibility studies for products, manufacturingequipment and market needs. The government’s decisions on investmentswere mainly based upon political considerations, and thus may not haveyielded profits for the firms concerned. This was especially true withHuajing before 1997. The government realized that microelectronicsforms the core of a nation’s technological development, and decided tobuild up China’s microelectronics capability. It made decisions thatHuajing would start two huge projects: Project 75 and Project 908 forimporting MOS IC production within ten years from 1986 to 1995,which cost more than 2 billion yuan. Yet the government decision-makers did not fully understand that MOS development changes veryrapidly, and its technological life cycle is three to four years. However,it took Huajing almost ten years before the production line startedoperation.

Financial constraints and lack ofautonomy

The government gave the orders to Huajing to start the projects andproclaimed that it had invested money in them. In fact, the governmentdid not become a true investor. It just gave the rod to the banks to loanthe money needed to the firm. Even though Huajing borrowed themoney from the banks and had to pay back both the capital and theinterest, it was not in a position to direct the finance which was underthe control of the government agencies. These agencies imposed a lot ofconstraints on the use of the money, and Huajing could not get themoney when it was needed for the projects. For example, the investmentin Project 75 of 0.1 billion yuan was delayed up to five years beforeHuajing received all the loans and, before the MOS line was evaluatedand accepted, 5-inch and 6-inch production lines had already becomeobsolete in the world market.

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Disconnection between R&D andmanufacturing

When the government ordered Huajing to implement Project 75 andProject 908 for MOS IC production, it also set up several R&D institutes.The purpose of these institutes was to design products for MOS production.However, up until the date of this research study, the design instituteshad not provided any successful products, thus imposing enormouspressures on Huajing.

External and internal obligations

Huajing was in the worst situation between 1996 and 1997. The loan forpurchasing the state assets for Project 75 and Project 908 was 0.76 billionyuan. The total interest was as high as 0.24 billion yuan. Because of theslow progress in establishing the production lines for these two projects,and then the lack of successful products to make, the state assets suffereda great loss. However, Huajing had to pay back both the loan and theinterest. Huajing was deep in debt for 1.73 billion yuan at the end of 1998.

Huajing had the same drawbacks as most state-owned enterprises(SOEs): it had the responsibility of being ‘a small society’ its own right,providing ‘small and complete’ services. There were 26 production andnon-production plants, dependent firms, subsidiaries and branches insidethe Huajing group. Huajing performed all the operational (manufacturingand service) functions and all activities were completed inside the firm.Huajing was also required to perform most of the social functions andprovide supporting social institutions such as nurseries, kindergartens,elementary and middle schools, a hospital and community committees.In 1997, when orders came down from both the state and the provincethat Huajing should start to transform its operating system from anSOE, Huajing was in such a bad financial situation that it was not ableto pay wages to its employees (see Table 4.5). With defective institutionalrigidity and lack of financial support, Huajing’s leaders had to face thechallenge of changing its corporate structure.

Strategic responses and strategiesRealizing that if no fundamental transformation was made the firmwould not survive long in the market, President Wang and his management

67


team started to take actions towards the goal of turning Huajing into amodern competitive enterprise group. Knowing that Huajing could notfinancially and politically afford to start the transformation of the wholegroup all at once, Huajing management made the decision to go forprogressive change. The first step was to simulate operations in themarketplace for each of its plants and subsidiaries. They establishedrelatively independent accounting systems functioning as cost centres totake care of sales, expenses and profits. Once the plants and subsidiarieslearned how to operate on their own, their operating systems would bechanged into those of modern corporations. After three years’ practice,this so-called ‘upward transforming approach’ achieved tremendoussuccess (i.e. the progressive corporate system transformation movedfrom local strategic units to the enterprise group).

Three major strategic responses

The first strategic response to changing Huajing’s ownership systemrequired government help and creditor banks to convert debt into stock.With the help of the central government, Huajing was able to change itsaffiliation from the Electronics Ministry in Beijing to the local WuxiMunicipality, which established the Microelectronics Hi-Tech Park forHuajing and provided a favourable operational environment throughits local policies. In January 2000, Huajing’s new corporate form, the‘China Huajing Electronics Group Ltd’, was presented to the centralgovernment for approval. This new organization was controlled by theWuxi Asset Management Company, which consisted of the Wuxi StateAsset Committee and creditor banks (Table 4.6). With the help of Wuxi

1996 1997 1998

IC yield 5,516.64 7,319.26 8,056.74Discrete device 12,775.29 15,654.03 19,437.16Sales income 36,048.58 38,799.22 43,080.01Receivables collected 43,200.98 43,870.33 49,889.70Sales profit 927.00 –5,946.00 –932.00Total profit –19,638.00 –17,026.00 –13,650.00Tax paid 1,582.00 1,926.00 2,804.00Interest expense 4,959.00 5,814.00 5,616.00

Table 4.5 Operation index for 1996, 1997 and 1998 (in00,000 yuan)

68


government, Huajing planned to get rid of its social institutions such asthe elementary school, hospital, kindergarten, community committeesand estate company. This alone could save 3.4 million yuan per year.

Being run as a modern enterprise system would be the second strategicresponse after the system transformation was completed. The organizationwould be run strictly according to state corporate law and firm regulation.Power and the responsibilities of the stockholders, board of directors,supervision committee and management would be clearly specified sothat owners, managers and producers would know their roles in theorganization. The government no longer made decisions for theorganization but instead played its role through its representation onthe board. Only in this way could the right relationship be built betweenthe government and the organization.

The third strategic response was through asset restructuring and systemtransformation, whereby the right internal relationship between Huajingheadquarters and its subsidiaries would be established according to therequirements of the modern corporate system, with clear definition ofownership, authority and responsibility.

Restructuring MOS operations

The MOS IC plant was the centrepiece of Project 75 and Project 908,which put Huajing into its desperate financial situation. While the MOSplant became a life-threatening issue for Huajing, there was no way to

Stockholding institutions No. of shares Percentage

1 Wuxi Municipality State Asset 123,061 59.01Management Committee

2 Xinda Asset Management 45,867 36.38Corporation

3 Great Wall Asset Management 5,641 2.70Corporation

4 Huarong Asset Management 3,980 1.91Corporation

Total shares of China Huajing Electronics 208,549 100.00Group Ltd

Table 4.6 Stock structure for China Huajing ElectronicsGroup Ltd

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sell or liquidate it. Though production volume was low, the high-techmachines could not be shut down. The energy costs, depreciation expenseand interest expense were enormous. After careful study, Huajing managersadopted strategies unheard of in managing China’s state-owned enterprises.They divided the plant into three sections: design, assembly and waferproduction, and dealt with each section separately.

Restructuring MOS wafer manufacturing

In 1998, the MOS manufacturing line was contracted to Hong KongCSMC. CSMC’s head, Peter Chen, has a PhD/EE from Cornell Universityand was one of the MOS inventors. He worked in California’s SiliconValley before starting Hong Kong CSMC. While CSMC’s contract coveredonly the utility and labour costs, it still lost 7 million yuan in 1998. In1999, Chen turned the plant around and the monthly average profitwas 1.5 million yuan. On 1 August 1999, Huajing and Hong KongCSMC established Wuxi CSMC-HJ Co. Ltd as a joint venture (49 : 51)with an investment of US$6 million.

In 1998, Huajing completed the transfer of Lucent Technologies’ 0.9µm CMOS very large-scale integrated circuits technology. By 2000,Huajing produced 70,000 wafers of 229 different integrated circuits onthe production line using the sub-micro technology from Lucent. Themaximum monthly production level exceeded the projected capacity.Huajing has also developed more than 30 new technologies with higherthan 95 per cent first-time success rate and the average customer returnrate currently at 1 per cent and decreasing. In August of 1999, thisproduction line received the stringent QS 9000 certificate followingaudits by the international company DNV. At the same time, Huajingdeveloped 36 new MOS products for applications in fax, remote controlinstrumentation and telephony, resulting in accumulated sales of 133million yuan RMB (about US$17 million). In 2000, these wafers werealso qualified through the stringent Lucent Technologies Bell Laboratories,quality and reliability procedures to be used in the production of 5ESSat the Lucent Qingdao Joint Venture with China.

The company was China’s first foundry for MOS wafer fabricationwith ϕ6’ 20,000 wafers/month using a 0.5 µm CMOS process. InNovember 2000, one-third of the employees had at least bachelor degreesand all of the technical staff received long-term training in internationallyfamous organizations such as Toshiba and Siemens.

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Restructuring of MOS design section

Wuxi Huajing Semico Microelectronics Co. Ltd (SEMICO) was establishedon the basis of the MOS Design Institute and Test Center. Wuxi HuajingSemico Microelectronics Co. Ltd is a non-fabricating IC product company.SEMICO’s goal was to become a first-rate high-tech IC company inthree to five years and raise funds in the Chinese or international stockmarket to fund expansion and growth. Three parties invested 10 millionyuan in cash. SEMICO provided a new model of ownership with 55 percent of shares held by employees and managers thanks to the help andsupport of the Wuxi government (Table 4.7).

SEMICO’s goal was to serve China’s fast-growing information industryby developing IC products. Using its R&D resources, SEMICO developedand fabricated digital, analogue and mixed signal ICs for applicationsin telecommunications, consumer electronics and other industrial sectors.SEMICO’s development roadmap is shown in Figure 4.3 above. Itdeveloped 3.0–2.0 µm, 1.5–0.8 µm and 0.6–0.35 µm design technology(CMOS, bipolar and BICMOS), established high-speed and low-powergate array and standard cell libraries, and also built its own microprocessorcontrol unit (MCU) core. The main products evolved into over sevenseries with over 50 types. The company’s sales targets are shown inFigure 4.4.

It has advanced VLSI design and testing technologies, design personnelwith a wealth of experience and knowledge, and advanced EDA (electronicdesign analysis) tools. Around 100 design engineers account for 80 percent of its workforce, including professors, senior engineers or engineerswith prior experience in VLSI designing and fabrication at noted ICfirms. In a spirit of ‘pioneering enterprise, practicability and mutualbenefit’, SEMICO is committed to ‘helping you maintain your strongholdin this ever-changing information era’. SEMICO’s quality policy is to‘Pursue complete customer satisfaction incessantly. Improve in qualityand service constantly’. SEMICO staff’s behaviour norms include:

Investors Amount (yuan) %

1 China Huajing Electronics Group Corporation 4.5 million 452 Huajing Employee Stockholding Committee 3.5 million 353 23 managers and core technical staff 2.0 million 20

Total 10.0 million 100

Table 4.7 Stock structure for Wuxi Huajing SemicoMicroelectronics Co. Ltd

71


1998 1999 2000 2001 2002 2003

40,000

35,000

30,000

25,000

20,000

15,000

10,000

5,000

0

Figure 4.4 Sales target for Semico (in 00,000 yuan)

� Verbal elegance

� Behavioural decency

� Honesty and trustworthiness

� Dedication and devotion

� Solidarity and cooperation

� Compliance and observance.

Restructuring of MOS assembly section

Duplication was a deep-rooted strategy in China. During the 1960s,duplicate factories reduced the risks of loss in case of war. This ideologyguided Chinese SOEs for decades. For example, the Huajing Bipolar ICPlant included a ‘back-end’ package assembly facility. Then Huajing’sMOS IC plant included another package assembly section. Both assemblysections were under-utilized. However, when one section was busy andthe other was idle, no help was rendered unless the order was givenfrom Huajing’s top management. In 1999, the two sections were mergedinto the Huajing IC Assembly Co. Ltd. The key technologies were importedfrom Toshiba and Siemens. Its monthly production capacity was 10–15million units with high pin number and high-density packaging. Thecompany had 249 employees with most of the key technical staff trainedin top semiconductor companies in the world.

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Restructuring the bipolar IC plant, discretedevices plant and silicon materials plant

Huajing planned to merge the bipolar IC plant, discrete devices plantand silicon materials plant, and work with seven partners to establishWuxi Huajing Microelectronics Stock Co. Ltd (Table 4.8). The newcompany would issue stocks to generate capital for improving the design,manufacturing technology and scale of bipolar and discrete production.

Strategic planning for development2

In managing Huajing’s transformation, management had to operateunder extreme financial limitations. Having spun off operations and

Partners Investment Investment No. of Percentageform (00,000 shares (%)

yuan) (00,000)

1 China Huajing Net assets 13,245.5 8,610.00 86.10Electronics GroupCorporation

2 China Electronics Cash 1,538.5 1,000.00 10.00Information EnterpriseGroup Corporation

3 Great Wall Industrial Cash 50.0 32.50 0.33Park (Hui Zhou) Co. Ltd

4 Youyan Semiconductor Cash 200.0 130.00 1.30Material Co. Ltd

5 Jiangsu Xinke Cash 50.0 32.50 0.33Electronics Group Co.Ltd

6 Lianyugong Huawei Cash 100.0 65.00 0.65Electronics Group Co.Ltd

7 Shenzhen Nanfeng Cash 100.0 65.00 0.65Electronics Co. Ltd

8 Huzhou Xongyan Cash 100.0 65.00 0.65Photoelectricity andQuartz Co. Ltd

Total 15,384.0 100,000 100.00

Table 4.8 Stock structure for Wuxi Huajing MicroelectronicsStock Co. Ltd

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focused on its core business, management’s strategy for continued growthand development included:

� acquiring market share by using the firm’s strengths to gain competitiveedge in local markets;

� evaluating internal strengths and weakness and making appropriateinvestments;

� minimizing inventory and investments and improving productionfor fast expansion.

Available resources were committed to the markets for polar ICs anddiscrete devices. Huajing concentrated on markets with quicker returns,i.e. growing markets where Huajing already had an advantage. Theinvestment strategies included the following:

� Only after Huajing has laid a solid foundation in its core industry,accumulated a large amount of capital and resources and achievedmanagement competence can it diversify to other areas.

� Huajing will concentrate its limited resources in areas that match itscapabilities: ‘First become strong before getting large’.

� Huajing must ‘avoid face-to-face conflict with powerful players inthe market. Find a niche and survive before making rapid expansion.’

� With low market penetration in China and a lot of undevelopedregions, Huajing has no reason to compete against strong playerslike Intel. China is a huge market for computers, and thussemiconductor products will grow rapidly for another decade or two.

Evaluation of performance

Strategic restructuring

The restructuring of Huajing is in train and has proved to be successfulin turning around the group corporation. Table 4.9 charts the progress.

Science and technology development

Huajing paid special attention to the development of science andtechnology because it understood that science and technology is the

Before change Change mode After change Progress as Plan for Plan for Plan for Plan forof December 1st quarter 2nd quarter 2nd half 1st half1999 of 2000 of 2000 of 2000 of 2001

China Huajing Debt China Huajing Assessment Sign RestructuringElectronics into stock Electronics in progress agreement completeGroup Group Ltd for debtsCorporation into stocks

MOS IC Joint venture Wuxi CSMC-HJ Company Each partyproduction with Hong Co. Ltd operating investing asection Kong CSMC production line

MOS Design Invested in by Wuxi Huajing Company Issuing stockInstitute and Huajing and Semico operating in Hong KongTesting Center Huajing Microelectronic

employees Co. Ltd

Bipolar plant, Invested in by Wuxi Huajing Assessment Complete Company Issuing Adiscrete device seven large Microelectronics in progress registration operating stock toplant, silicon organizations Stock Co. Ltd the publicmaterial plant

Assembly plants Assets Huajing IC Company Seeking joint Changefor bipolar restructuring Assembly Co. Ltd operating venture ownershipIC and MOS partners nature

Table 4.9 Progress of Huajing strategic restructuring

Table 4.9 Cont’d

Import and Invested in by China Huajing Registration Companyexport Huajing Electronics Group completed operatingcompany Import & Export

Co. Ltd

Power plant Invested in by Huajing Power CompleteHuajing Co. Ltd restructuringsubsidiaries and start

operating

School, hospital, Given to Wuxi In progress Separate Separateasset company, government school the restcommunitycommittees

Production Costing Production In progress CompleteService centres Service restructuringDepartment charging Company andLife Service for services Life Service operatingDepartment Company

Before change Change mode After change Progress as Plan for Plan for Plan for Plan forof December 1st quarter 2nd quarter 2nd half 1st half1999 of 2000 of 2000 of 2000 of 2001

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lifeblood of the company. Huajing has a national-level enterprise technicalcentre postdoctoral research station. It also has advanced computer-aided design (CAD), computer-aided transcription (CAT), computer-aided manufacturing (CAM) and computer integrated manufacturingsystems (CIMS) and technologies. Over 450 people work on technologydevelopment in cooperation with other firms in the industry, universitiesand research institutes, such as the Chinese Academy of Science’sSemiconductor Research Institute and Microelectronics Center, SoutheastChina University, the Electronics Science and Technology University,Tsinghua University, Beijing University, and so on (see Figure 4.5).

New product development

Huajing developed 87 new products in 1999, including: seven high-techprovincial new products and two national new products, the sales ofwhich were 414,256,000 units, for 227,283,300 yuan. The new productsales ratio was 51.55 per cent. In the same year, 57 new products werequalified (Figure 4.6). Huajing achieved 80 per cent of its economicgrowth from new product development in the last two years.

Operations and performance

Ever since progressive restructuring in 1997, Huajing has been on ajourney to improve its strength. The transformation of its operating

National Level EnterpriseTechnical Centre

Postdoctoral station

Bipolar ICDesign Centre

Discrete DeviceDesign Centre

Other researchfacilities

Circuit design

Layout design

Process development

Appl ication research

Rel iabi l i ty design

Layout des ign

Proces s development

Application res earch

Reliability des ign

Joint power s em

iconductordevice lab

Metrology centre

Phys ical & chem

icalanalys is lab

MO

S des ign

Figure 4.5 Huajing science and technology level

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systems has reduced much government interference: the government nolonger issues direct orders or makes decisions regarding Huajingoperations. The economic reforms have put the organization straightinto the competitive market while government subsidies for poorperformance have continued to fall. Firms have to rely on their ownstrategies, products and services to attract customers, and they have towork very hard to survive among the growing competition. This marketmechanism energizes organizations and their employees. The newcompensation and pay systems have aligned the interests of the firmsand their employees. Over the three years from 1998, Huajing enjoyeda 35 per cent average growth rate. Figure 4.7 indicates the sales revenuefor Huajing excluding the revenues of its subsidiaries.

Sales revenue from the first eight months of 2000 was 0.49 billionyuan, with a 49.13 per cent increase against the same period in 1999.The estimated sales revenue for 2000 was 0.82 billion yuan, the expectedsales increase being 36.7 per cent.

Achievements and honours

Honourable prizes

� Three second prizes for National-Level Science and TechnologyAdvancement

� Three third prizes for National-Level Science and TechnologyAdvancement

199719981999

1997

1998

1999

60

50

40

30

20

10

0Qualified product Sales income Ratio of new product

sales

36 11.392 30.98

35 17.125 46.25

57 22.728 51.55

Figure 4.6 New product development in three recent years

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� Six first prizes for Ministerial Science and Technology Advancement(Ministry of Electronics Industry)

� Forty second prizes for Ministerial Science and TechnologyAdvancement (Ministry of Electronics Industry)

� Forty-two third prizes for Ministerial Science and TechnologyAdvancement (Ministry of Electronics Industry)

� One second prize for Jiangsu Provincial Science and TechnologyAdvancement

� Five third prizes for Jiangsu Provincial Science and TechnologyAdvancement

Huajing technical achievements

� 1986: first 64K DRAM in China, which marked VLSI stage ofChina’s IC technology

� 1991: State-Level Enterprise Technical Advancement Prize

� 1992: National 1 May Labour Prize

� 1993: ISO 9001 quality system certification

� 1993: first 256K DRAM in China

� 1995: first 1 µm IC in China

� 1998: title of Jiangsu Provincial Famous Product (IC, Transistor)

� 1999: Wuxi Famous Trade Mark

36,760 43,048

60,000

82,000

Sales revenue

10,000

80,000

60,000

40,000

20,000

0

1997199819992000

Figure 4.7 Sales revenue for Huajing from 1997 to 2000(in 00,000 yuan)

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Proprietary processes (know-how)

� High breakdown voltage all-planar fabrication process

� High breakdown voltage high-power transistor GPL fabricationprocess

� Bi-directional SCR fabrication process

� Medium- and low-power transistor PCT fabrication process

� LEC transistor fabrication process

� Low-noise microwave transistor fabrication process

� Ultra-high frequency high-power transistor fabrication process

� Darlington transistor fabrication process

� Varactor fabrication process

� High resistance thick epitaxy process

� Ultra-thin epitaxy process

� PNP transistor series fabrication process

� Backside multi-metal-layer process

� Bipolar PCT process

� Bipolar double wiring process

� Conventional bipolar process

� Bipolar ANSA process

� APP power transistor fabrication process

� Reverse 1/2 PCT process

� Mesa fabrication process for high breakdown voltage high-powertransistors

Notes

1. At the time of writing USD = 7.95 yuan Renminbi (RMB, meaningPeople’s Money), Chinese currency.

2. President Wang’s Report on 11 September 2000 in Suzhou.

5

81

The Beijing No. 1 Machine ToolPlant

Company profile

The Beijing No. 1 Machine Tool Plant (BYJC) is the largest computernumerical control (CNC) machine tool manufacturing firm in China.Since the founding of the factory on 30 June 1949, it has provided itscustomers with over 100,000 units of various milling machines in over450 styles involving small and medium-sized, heavy-duty and super-heavy-duty milling machines. The Beijing No. 1 Machine Tool Plant hasover 700 technical engineers and technicians and occupies an area of710,000 square metres that includes a building area of 430,000 squaremetres. It has a modern 4,000 square metre air-conditioned assemblyworkshop, a 2,000 square metre flexible manufacturing system(FMS) workshop, advanced machining equipment and high-precisionmeasuring instruments, and a high-rack storehouse with 4,896 storagepositions.

The main products are CNC milling machines, CNC lathes, verticalmachining centres, horizontal machining centres and CNC plano-typemilling and boring machines. In addition, 20,000 units of geologicalrigs in more than 20 configurations have been provided to its customers.Products of the ‘Beiyi’ brand enjoy a good reputation in over 50 countriesand regions over the world. The establishment of an advanced informationplatform on their computer network has allowed optimization of theenterprise’s resources. The Beijing No. 1 Machine Tool Plant was awarded‘Industrial LEAD Award’ issued by the Society of Manufacturing Engineersof the USA. This was the first time this award had been presented to afirm outside the US.

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China’s machine tool industry

The growth of China’s machine tool market is directly related to thegrowth rate of the Chinese government’s investment in fixed assets andvarious new economic policies. In 1999, the government’s investmentfocus was on infrastructure development, national grain storage facilities,environmental protection and the renovation of rural power networks.In 2000, China added petroleum recovery, inter-city high-speed raillinks and completion of the Three Gorges project and other powerstation projects.

These direct and indirect stimuli for machine tool consumption willcontinue to influence the machine tool market. In 1999, the total salesvolume for machine tools and tool accessory products was about 45billion RMB (US$5.5 billion). The demand in China for CNC lathesand special-purpose machine tools continues to rise. Although the large-scale investment projects and renovation projects of the ‘Ninth Five-Year Plan’ were completed by the end of the year 2000, these projectscontinue to stimulate strong market demand for metalworking machineryin China. The total demand for machinery products in 2000 is estimatedat US$240 billion.

The machine tool market was expected to continue to benefit fromthe fact that machine tool manufacturing companies are the primeequipment providers of the vast machinery industry. This demand focuseson the special-purpose and highly efficient machine tools used in capital-intensive manufacturing industries such as automotive, aviation, railwayequipment and locomotives, transportation, ship building, electric power,electronics, telecommunications and environmental protection.

It is estimated that the demand for CNC lathes and CNC systems willreach 15,000 machines in 2000 and 20,000 machines in 2005. In 2000the market demand for machine tools was US$5.42 billion. By 2010,the market demand for machine tools will reach US$7.23 billion. Themarket increase will be concentrated on tools such as sophisticatedCNC lathes. Foreign-manufactured leading-edge technology CNC latheswill account for a significant percentage of the projected sales growth.

The vigorous development of China’s industry in recent years hasbrought a continually increasing demand for machine tools. Foreign-manufactured machines captured a large share of this market. Accordingto a China Machine Tool & Tool Builders’ Association report, duringthe Eighth Five-Year Plan period (1990–95) the import of machine toolssteadily increased to US$2.2 billion in 1995. In 1996 the import value

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The Beijing No. 1 Machine Tool Plant

reached the record-breaking level of US$2.52 billion. This surge wasdriven by the belief that the Chinese government would announce acancellation of the tariff exemption on imported capital equipment atthe end of the year. This indeed did occur. The import of machine toolsin 1997 dropped down to US$1.58 billion. Starting from 1 January1998, the Chinese government resumed tariff incentives and preferentialtreatment on imports of high technology and machine tools for foreign-funded projects. China imported US$688 million worth of machinetools in the first six months of 1998, up 9.77 per cent from a year earlier.

There has been a rapid increase in the demand for NC (numericallycontrolled) and high-efficiency and precision machine tools of medium,medium-high and high grades. According to a China Machine Tool &Tool Builders’ Association report, the consumption rate of machinetools and the market share of NC and high-efficiency precision machinetools have increased from 6 per cent to 30 per cent of all machine toolsfrom 1990 to 1996. Domestic production of similar grade machinetools has been insufficient to meet market demand and, as a result,imports of foreign-manufactured machine tools have increaseddramatically during the past few years.

Beijing No. 1 Machine Tool Plant’s products

Beijing No. 1 Machine Tool Plant designs and manufactures small andmedium-sized, heavy-duty and super-heavy-duty numerically controlled(NC) and computer numerical control (CNC) plano-type millingmachines, machining centres bed-type milling machines, knee-type millingmachines, CNC lathes, special-purpose milling machines, etc. The productsoffered are:

� knee-type milling machines, universal milling machines and swivelhead milling machines;

� bed-type milling machines and rotary table milling machines;

� plano milling machines, plano milling and boring machines, singlecolumn milling machines as well as double column milling machines;

� CNC vertical milling machines, CNC plano milling machines andvertical or horizontal machining centres;

� various kinds of special-purpose milling machines;

� geological drills.

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These machines are widely used in metallurgy, mining machinery, railways,power generation, aerospace and aircraft and mould manufacturing.The plant also produces geological rigs that are widely used in mineprospecting and the development of water resources.

Services

The Import & Export Corporation was approved by the Ministry ofForeign Trade and Economic Cooperation and founded in 1988. It hasthe authorization to import and export on behalf of the BYJC. It conductsinternational trade on the principle of mutual benefit and is seeking co-developments. The Corporation was awarded ‘Customs Worthy Enterprise’by customs.

The main business scope of the Corporation includes:

� import and export of machine tools, such as machining centres,plano milling machines, CNC milling machines, conventional millingmachines, and other electric and machinery products; indirect exportbusiness through professional import and export corporations;

� cooperative production projects;

� machining according to drawings, samples, materials, castingsprojects;

� technical maintenance and services;

� labour export and engineering contracting.

Since it was founded twelve years ago, the products have been sold bydirect or indirect export through professional import and exportcorporations to more than 50 countries and regions such as the USA,Germany, Japan, Iran and Russia, and the products are widely acclaimedby users and traders all over the world. In recent years, Beijing No. 1Machine Tool Plant imported and adopted advanced technologies fromdeveloped countries through the Import & Export Corporation and themanufacturers and traders of Japan, the USA and Germany to co-produceCNC lathes and CNC milling machine (including CNC super-heavy-duty plano-type milling and boring machines) to meet theneeds of overseas customers. At the same time, the BYJC undertookprojects for machining to drawings, samples and materials and forproviding castings and machined parts for domestic and internationalcustomers.

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Globalization challenge

One of the challenges in the machine tool industry comes fromglobalization. Among the state-owned enterprises, the machine toolindustry suffered most from operating losses. The state opened themachine tool industry to the global market as early as 1994. Beforethen, products from SOEs accounted for more than 70 per cent of thedomestic market. But when the state allowed companies to purchasemachine tools without government permission, foreign products pouredinto the Chinese market like a flood because they had superior featuresand functions with much better quality and lower prices than those ofChinese manufacturers. Since the Chinese government did not imposeany tariffs or taxes on imported machine tools, the domestic manufacturerssuddenly found themselves without government protection and had tocompete on equal grounds with competitors from Japan, Germany, theUS, Korea and Taiwan. However, the state imposes restrictions on exportedparts or systems for machine tool development. Firms in this industryawait early entry of China into the World Trade Organization (WTO),for it could eliminate tariffs and other restrictions that affect domesticcompanies’ exports.

Product challenges

Another problem in enterprise development is product orientation. TheChinese government realized the significance of the machine tool industryto the country’s development. In the early 1950s, machine toolmanufacturing had been one of the 150 industrial projects importedfrom the Soviet Union for establishing the national industrial base.Machine tool manufacturing was regarded as the core industry for Chinesemanufacturing, and 18 plants were built. But the state neglected thedevelopment of this industry between 1976 and 1996. This neglect hurtnot only the national manufacturing capability but also research anddevelopment for machine tool products. During those two decades,even though the government invested money (US$37 million) in thisindustry, the money was not spent on the right projects. An advancedmachine tool manufacturing system was not put in place, thus producinga wide gap between the Chinese machine tool manufacturers and thosein Japan and Germany.

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Japan and Germany were two nations defeated in the Second WorldWar with various restrictions on developing their own machine toolindustry. In Germany, for example, the government supports civilassociations developing machine tool techniques and technology sincethey are not allowed by international treaty to invest directly in R&Dof machine tool systems for corporations. New techniques and technologywere then given to corporations without any charges or fees. The Japanesegovernment took various covert actions in this endeavour. Fastdevelopment of the manufacturing sector for these two nations can betraced to the fast development of the machine tool industry.

The United States fell behind these two countries because most of itsmachine tool plants were family owned and not able to compete againstforeign competition. This contributed to the decline of US manufacturingcapability after the Second World War. Many of its machine toolmanufacturing systems are now imported from Japan and Germany,though these two countries are reluctant to transfer their most advancedtechnology abroad. The US has learnt its lesson, as has the Chinesegovernment. Since 1999, the Chinese government has established fournumerical control machine production bases, which consist of the BeijingNo. 1 Machine Tool Plant, the Shanghai Machine Tool Group, theShenyang Machine Tool Group and the Jinan Machine Tool Group,thus creating a favourable environment for the BYJC.

Challenges of reorganization

Restructuring is still a big challenge for state-owned enterprises. In theBYJC, the incorrect structure manifested itself in two aspects. On theone hand, the plant owns everything in its value chain, from casting,forging and machining to assembly. The plant is big and comprehensivewithout any distinctive competence. On the other hand, the plant isresponsible for its society, i.e. the enterprise runs society, as people say.The BYJC has to run primary and secondary schools and dining rooms,repair residential houses for its workers and manage affairs for residentialareas. Problems such as a quarrel between a couple would be given toplant managers for mediation.

Manufacturing challenge

The next challenge the BYJC faces relates to the manufacturing technologyand facilities for producing advanced machine tools. For example, the

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development of numerically control products has been constrained bythe computer numerical control (CNC) system. Until now, nomanufacturers in China have been able to produce a reliable CNCsystem of high quality. Over the twenty years from 1976 to 1996, onlyUS$37 million was invested in the machine tool industry, and coveredtoo wide a range of product developments without focusing on criticalmanufacturing facilities. Most of the production equipment in the plantwas purchased in the 1950s and 1960s.

Property rights challenge

Even though 100 per cent of the machine tool plant assets belong to thestate, it is not clear who is in charge of the plant. The Beijing Machineand Electronic Holdings Co. (BMEHC) appoints the plant’s generalmanager and gives approval to managerial appointments in other levelsnominated by the plant manager, but the state does not give the BMEHCauthorization to manage the plant and deal with the assets. Sometimesthe Beijing Municipality government will issue directions to the plant.Since the BMEHC has the ‘property rights in name only’, it cannoteffectively and fully exercise the owner’s rights, and it neither showsconcern for and supports the plant nor guides and controls major enterpriseactivities, especially in balancing short-term behaviour (Gao and Chi,1997).

Several years ago, for example, the BYJC proposed a detailed plan tomodernize the plant, which cost about US$120,500, but it was rejectedby the Beijing local authority because the project did not have ‘Chinesecharacteristics’. Thus the plant has operating rights, but does not controlits corporate property or investments. The impact of this enterpriseproperty rights structure means that the enterprise cannot adapt itself tothe market. As a result, market mechanisms in the state-owned economyare incomplete because the current operating system is not effective andthe market regulatory role is weak.

People challenge

How to keep people in the plant and motivate them to do their best isa challenge too. The turnover rate for junior technical staff is as high as70 per cent. The plant is humorously called a ‘post-bachelor base’. Theplant is a wonderful place for university graduates to put what they

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have learned into practice and to systematically learn the manufacturingprocess. Within three years, they become experts, but the private andjoint-venture enterprises then attract them away with higher pay – morethan four times that paid by the BYJC. Those who remain at the BYJCalso suffer from underemployment. The company cannot pay the marketprice for its employees for two reasons. One reason is that, beforerestructuring the plant and spinning off the strategically insignificantparts, there were more than enough people to keep the plant operating.The other is that money alone does not solve the problem. Since theplant is not effectively and efficiently run, an increase in pay will resultin higher costs for the operation.

Sales force challenge

Another challenge for the BYJC is its weak sales force. People in salesdo not understand the concept of marketing and do not have a clearidea of how the product can be promoted and sold in the marketplaceowing to the conventional practice under the economic planning systemin which the state took care of finished products. The marketing ofmachine tool products has its own features. It requires that the salespeople have knowledge and skills in the product specification, serviceand maintenance of their products. To sell one machine needs theparticipation of three people: a person from the technical department toexplain the features and functions of the machine, a person from theservice department to explain the warrantee and maintenance programmeand a person from the sales department to negotiate the terms and pricewith the customer. This has led to high sales costs. In any event whatnormally occurs is that customers turn to competitors, not because ofdissatisfaction with the quality or price of the products, but because ofinsufficient knowledge and inadequate service by the sales force.

Strategic responses

Property rights solution

In December 2000, the Beijing local authority changed the propertyrights for all state-owned assets. The BMEHC was given full authorizationto take charge of the assets of the BYJC. The restructuring plan for the

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Beijing No. 1 Machine Tool Plant would result in its becoming theMachine Tool Group. The ownership for this group would be such thatthe BMEHC would be the biggest shareholder representing the stateand other shareholders could include private investors, other domesticfirms and foreign investors.

The Machine Tool Group would be run according to the ChineseCorporate Law. The board of directors would be the highest organ ofpower for the group. The management process would be similar to thatin western countries. This restructuring process would start at the endof 2000, and the mixing of functions between the government and thecompany would be terminated. Since the plant is located in the middleof the national capital, Beijing, it would have to avoid turmoil ordisturbances to the stability of the society as a whole. It was estimatedthat it would take a year or two to carry out this restructuring plan.However, separation from the government would free the company toadapt to market demand. The company would no longer have to worryabout government invention in its operations.

Focusing the business

The BYJC also changed its organizational structure. The plant was tospin off those subsidiaries that were not strategically important to theBYJC, such as casting, forging and machining. Such operations madelittle or no money. However, once they were able to stand on their ownand improve their management, they were expected to become profitable,like other private-owned companies specialized in manufacturing. TheBYJC was to help these factories operate independently in terms ofmoney, facilities and management skills with strategic alliances. In thefuture, many parts would be outsourced to these factories for production.The plant would only keep the R&D department, sales department,assembly department and manufacturing departments for criticaltechniques and technology. Machine tool plants in the developed worldusually employ around 200 people but can produce several thousandmachines every year.

Employee obligations

Since 1993, the number of employees has been cut from 9,700 to 4,000.Employment levels will be further reduced to 2,000 after the restructuring

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before 2004. So far, the BYJC has done a good job helping the unemployedworkers by both providing training and giving them a lump sum ofmoney for their services and resettlement. Having completed therestructuring, the plant will form a relationship with its employees basedon contracts. The plant will pay a certain amount of money for itsemployees’ medical insurance and pension benefits, but the responsibilitywill be shifted to society in general.

The plant has been enjoying a good national reputation for a longtime for both its manufacturing capability and high quality. Most of thesenior technical staff continue with the company, even though theycould find highly paid jobs elsewhere. Now the plant has negotiated asalary with them to improve their living conditions. However, their payis still much lower than the ongoing market price. They stay because oftheir loyalty, and they understand the current situation. Meanwhile,they believe that after the reform, the BYJC has great potential and abright future.

Product developments

The BYJC has been working very hard to upgrade its machine toolproducts since high-tech manufacturing systems are still restricted fromentering the Chinese market for political reasons. For the last six years,restrictions have allowed the BYJC to withstand fierce competitivepressure. The plant has heavily invested in the development of newproducts. The plant has purchased advanced production systems andblueprints from Japan, Germany and the US in an attempt to build theChinese machine tool industry based upon their advanced techniques.

Training efforts

The BYJC has made great efforts in training its technical staff. Severalclasses have been run together with universities to get people ready forcomputer integrated manufacturing production. The plant has a plan tosend many of its key employees abroad to open their eyes, see how othercompanies are managed and learn the rules of the internationally acceptedgame. When this new group is ready, changes will be made to thehardware and software of the manufacturing system, as well as to theperceptions and mindset of the people working there. At present, theplant has run the second-term training course for its sales people.

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Project cooperation

The BYJC has also been working closely with universities that haveadvanced research facilities and equipment on some research projects.Thus the plant does not have to purchase all the facilities needed forresearch. For example, the plant has benefited from the computerintegrated manufacturing system (CIMS) in Tsinghua University.

The BYJC constantly introduces and applies world-class advancedtechnology and has established cooperative relationships withmanufacturers in Japan, the United States and Germany to producemachine centres and CNC super-heavy-duty plano-type milling machines.An agreement to co-produce high-level CNC machining centres wassigned between the BYJC and Hitachi Seiki Co. Ltd of Japan in October1999.

Capital investment

Before the BYJC’s stock can be publicly traded, the plant plans to makethe best use of its land. The plant has an excellent location in the bestpart of Beijing City, called the Golden Triangle. The BYJC had an offerof US$204 million for its land, and planned to move the plant outsideBeijing City to an economic development zone. This money will besufficient to finance the first phase of restructuring before its publicoffering.


Evaluation of the BYJC’s performance focuses more on its strategicorientation. Three accomplishments contribute to the survival of theplant in the face of international competition: reform of the enterprisemanagement system, adjustment of the product structure andorganizational restructuring.

New information systems

In order to improve the management level of the enterprise and meet theneeds of a market economy, an enterprise management information

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system has been established that includes the computer-aided design(CAD) of products, computer-aided manufacturing (CAM) and integratedcomputer management (ICM). Beijing No. 1 Machine Tool Plant is oneof the 100 enterprises in China approved as an ‘Enterprise TechnicalCentre’ by the state in 1995. In 1997 the plant obtained the ISO 9001Quality System Qualification Certificate.

The enterprise management information system (EMIS) providesmanufacturing resource planning (MRP II) to integrate sales, planning,production, procurement, inventory and accounting cost into acomprehensive system. It includes the following systems.

Closed-loop scheduling for timely product delivery

� MRP is used to precisely schedule the timetable for the productionprocess from raw material, to manufacturing, to assembly.

� Using JIT philosophy, the standard parts are procured and stockedscientifically; special parts are provided based upon daily productionmachine sets according to the production contract.

� Timely checking and monitoring of the production and assemblyprocess enables emergency scheduling to be made for other workshopsto finish any delayed production plan because of accidents.

� Workshop production is arranged in a cross and concurrent fashion.

� Data regarding product structure in the project engineering designsystem can be shared, and technical documents are transmitted,electronically so that the new products are managed and controlledby the MRP in time.

Cost planning and control

Reducing working capital cash flow

� Controlling reserved capital:

– purchasing capital is arranged according to MRP requirementsfor production phases, thus controlling purchasing quantity;

– materials in the inventory are grouped into A, B and C categories,with emphasis on controlling materials in category A that are ofhigh price and large consumption;

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– materials kept unused for some time are sorted out for thedesign department to find a better use.

� Controlling items in the production process:

– MRP planning is arranged based on (1) gross requirements ofproduction in different phases minus current inventory, and (2)net requirements for supply purchase. MRP planning greatlycuts down the working capital tied to the items being produced;

– MRP planning provides precise schedules for material flow inproduction, and workshop material procurement andmanufacturing are under control;

– semi-finished products are only provided to the assembly linebased on assembly plan and BOM product structure.

� Cutting down working capital for finished products:

– MRP planning is adjusted based on the dynamics of contractsto deliver products on time and reduce the finished products ininventory;

– market analysis is done to increase the accuracy for predictedproduction planning.

Strengthening cost planning and control

� Improving cost for production quota: the cost for parts is calculatedbased on product structure, material quota and product per hourquota, and the cost for parts and finished products are accumulated.

� Calculation of targeted cost:

– price for variable model products is quoted based upon ratiobetween cost and specification and function for the basic modelproducts;

– direct material cost is estimated after the design of a new product;

– direct labour cost is estimated after the engineering design of anew product.

� Calculation of real cost:

– cost ratio per hour is calculated monthly according to theproduction expenditure and real production hours in each workcentre;

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– real cost is calculated based on the cost of each batch of parts,semi-finished products and finished products when put in thewarehouse.

Quality control and responsibility follow-up

� Inspecting quality of procured raw materials: the procured rawmaterials are inspected and stored in three categories: returnedmaterials, repaired materials and qualified materials, with associateddocumentation for each procurement.

� Production quality management in workshops:

– production progress form is provided based on MRP planningand product documentation with a summary of good qualityproducts and poor quality products produced by whom;

– person responsible for quality is recorded with the product serial,and product serial is recorded in the sales contract.

� Follow-up service management:

– following up customer feedback concerning product quality andhandling procedures, and monitoring after-sales effects;

– categorizing and analysing customer feedback concerning productquality for future product quality improvement.

Assisting managers in decision-making

� Comprehensive information inquiry:

– company capital situation: capital used, payments receivable,sales income and profit;

– production: production progress, utilization of facilities andquality control;

– competitors and suppliers: comparison of functions and pricesfor the firm’s products with those for competitors, prices formaterials from suppliers and their reputations.

� Simulation for decision-making process:

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– Adjusting targeted cost for the product: (1) decomposing productcost and purchasing expensive raw materials based on pricecomparisons among suppliers; (2) reducing work hours forexpensive labour; and (3) recalculating product cost to obtaincustomer satisfaction.

– Adjusting delivery cycle: using MRP to schedule productionarrangements for the critical path. Additional hours are scheduledfor parts that require a longer time for production orrearrangement is made after production assimilation to achievethe optimal solution for customers.

� Using modern enterprise management system and reforming internalcost structure: based on inventory activities of inflow and outflowof materials and information on cost, simulating marketingrelationship between the headquarters and workshops for accountingpurposes.

Product developments

The BYJC’s product structure has been altered to allow the applicationof CNC systems in order for the firm to compete effectively in theglobal market. A high-level CNC horizontal machining centre modelHB 500, cooperatively produced by Beijing No. 1 Machine Tool Plantand Hitachi Seiki of Japan, was introduced at the ‘China CNC MachineTool Show’ in Shanghai in August 2000. The CNC bed-type seriesmilling machines developed by Beijing No. 1 Machine Tool Plant wereintroduced at ‘The 5th China Machine Tool Show’ in Beijing in June2000. The machine features high carrying capacity, high torque, highefficiency and high performance. It is designed for die and mould machiningand has an acceptable price.

Restructuring

Spinning off several factories has freed the BYJC and made it moreflexible in its strategic manoeuvring. At the same time, management isable to focus its attention on developing and producing high-tech productsfor global competition. Outsourcing the middle part of the manufacturingchain has greatly lowered the cost.

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Honours

The BYJC is one of the four main machine tool enterprises listed by theState Machinery Building Bureau which will be given support by theChinese government. It has attracted the attention of the national leadersof three generations. Chairman Mao Zedong visited the plant in July1958. President Deng Xiaoping inspected the plant several times. PresidentJiang Zemin paid two visits to the plant: on 18 August 1989 when hebecame party head and on 11 December 1995 when he became president.Inspection from the state leader in China is an indication of the strategicsignificance of the firm to the country.

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The Chongqing CHN & CHNCeramics Co. Ltd

The Chongqing CHN & CHN Ceramics Co. Ltd (CHN & CHN) wasChina’s leading producer of fine china, having an annual productionoutput of 30 million superior quality ceramics and revenue of 0.18billion yuan. On the fiftieth birthday of the PRC in 1999, CHN &CHN, as a brand name product, was the only tableware chosen for thestate banquet for 5,000 people. The company’s premium quality evensatisfied the requirements of Rosenthal in Germany.

Industry competitive situationanalysis

China1 pottery, one of China’s great discoveries in history, was recognizedthroughout the world for thousands of years for its beauty, design andshape. It reflected the mystery and elegant taste of this ancient countryin the Far East. Stepping into the twentieth century, China the countryfell far behind such countries as Britain, Germany and Japan – countriesthat were well equipped with advanced technology for producing finechina. Mainland China ranked sixth in the world in the ceramic business.Although China has been top in terms of ceramic production yields andhas exported as much as two-thirds of the world’s total ceramics, itsrevenue reached only one-quarter of the total income of the world’sexport ceramics market. Poor quality and inferior products had causedChina’s competitive failure.

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Company profile

The Chongqing CHN & CHN Ceramics Co. Ltd (CHN & CHN) wasan organization suffering in the face of competition. Ten years ago, allits products were manufactured in a shabby workshop and sold in localconvenience stores or flea markets. Its quality and profit were ranked aslow as 1,000 among the large and midsize firms in China. At that time,people hardly knew there was a ceramic manufacturer in the mountainareas of Chongqing. When Min Zhang, CHN & CHN’s current CEOand chairman of the board of directors, was nominated as factory managerat the end of 1993, CHN & CHN was 10 million yuan in debt and onthe edge of bankruptcy. In the strict centrally planned economicenvironment of the time there was little room to manoeuvre for a state-owned enterprise manager. He had neither control over the companyresources nor authority over the factory personnel. The typical courseof action would have been to make some incremental changes and waitfor the government to decide the factory’s destiny. President Zhangexplained that he had to fight to save the firm and had to take drasticaction to keep it from failing.


Having analysed both the internal and external environments, PresidentZhang and his management team understood very clearly that if theywanted to be successful in their turnaround, they had to gain the supportof both local and central government. The essential key to this supportwas to have practical and well-planned strategies and bold actions.Zhang’s strategy from the start was to restructure the factory, renovatethe manufacturing technology and upgrade the production facility.

The biggest challenge was to change the structure of the factory sothat it could be flexible and adaptive to market needs. In his turnaroundefforts, another hurdle was the capital needed to renovate the technologyand purchase equipment.

Firms require markets to survive and grow, thus firms can never existwithout their markets. In China, however, firms and markets wereartificially separated by the centrally planned economic system. Today,after more than two decades of economic reforms intended to changeChina into a market economy, it is a firm’s capabilities in production

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The Chongqing CHN & CHN Ceramics Co. Ltd

and technology that still determine what it is going to provide for themarket, not customer needs. In the Chinese ceramic industry, most firmsare traditional workshops possessing low technology and manufacturingcheap products of shabby quality. There is often a mismatch betweenthe products supplied and the products demanded, and the productsavailable in the marketplace are barely accepted by the consumers. Inrecent years, substitutes and competition caused a rapid decline in theceramic industry: products were hard to sell, costs were high, thus therewas little profit.

The challenge to find customer-drivenstrategies

CHN & CHN was challenged to change its product structure and innovatenew products to satisfy consumer demand. President Zhang pointed outthat one of the weaknesses of most Chinese firms lay in product design,which drove a firm’s technical innovation. Market research and studieswere not utilized for design, and the designers did not know customertastes and preferences or what was needed in the marketplace. Thisweakness was deeply rooted in the Chinese ‘closed-door policy’. Therewas no communication between the designers and consumers. This wasespecially true when Chinese firms dealt with international consumers.The designers had no chance to visit countries where they sold theirproducts, let alone know what colour or pattern was in fashion in thatparticular region.

The challenge for cost management andprice strategy

Traditionally, firms made pricing decisions based on cost and expectedmarkup, customary pricing or economic pricing, all of which completelyignored the requirements and needs of the customers. It became a challengefor CHN & CHN to carefully analyse the market, to focus only onselected customers and to make an appropriate pricing strategy to meettheir needs. Pricing to the market introduced competitive pressure intothe firm’s cost management system. CHN & CHN wanted a pricingstrategy that not only became adaptable to changing customer needs butalso worked as a controlling mechanism for its operation’s management.

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The challenge for product qualitymanagement

CHN & CHN realized through years of practice and experience thatgood quality products are consistently reproduced to design specificationsthat satisfy customers’ needs. While modifying and changing ceramicproducts could contribute to achieving this goal, more important wasthe shared value among employees that everyone in the firm was aquality controller. At the same time, the firm needed to know both thecustomers and their changing tastes. ‘Good quality’, as President Zhangsaid in our interview, ‘was not only the fundamental basis for firmreputation but also an intangible asset for sustained advantage incompetition.’

The challenge to create brand name andcompany reputation

In the past few years, CHN & CHN has gained a competitive edge overits rivals on quality, pattern design and product shape and variety.However, it was more than possible that firms with advanced technologycould catch up with and imitate CHN & CHN. The goal for CHN &CHN in the ceramics business was to create a famous brand that wasNumber One not only in the Chinese and Asian markets, but in theworld market. President Zhang explained that it took several decadesfor firms in traditional manufacturing businesses to establish their well-known brands in the world. In the Chinese ceramic industry, there wasno famous brand name because Chinese firms in the past did not realizethe significance of the brand effect. China was the home of ceramics,and people were aware that places like Jingdezhen and Tangsan werewell known for quality ceramic products with good designs. But peoplecould not name a particular firm that had a famous brand of ceramics.Thus CHN & CHN needed a detailed brand creation strategy to helpsustain its competitive advantage.

The challenge to establish a sales network

CHN & CHN planned to set up a national operations network toincrease its market share, while expanding its business scope to Asia

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and other global markets. CHN & CHN needed strategies for both theinternal national and the international markets. Effective and flexiblemarketing strategies were the key to success.

Strategic responses

Restructuring and rejuvenation

On facing bankruptcy, CHN & CHN carefully studied and analysedwhy it had failed and how it might survive. It came to realize that themajor reasons for its failure rested with its low-tech manufacturingfacilities, its low-quality products and its low-end market concentration.Led by President Zhang, then vice factory manager, the managementteam decided on a three-step rescue plan: technical renovations,restructuring of ownership and the purchase of high-tech manufacturingfacilities.

Technical renovation

During the early 1990s, SOE technical renovation plans had to be approvedby the central government’s ministries before they could be put intopractice. CHN & CHN was not on the Ministry of Light Industry’s listof firms that qualified for technical renovation during the period of theEighth Five-Year National Plan (1990–95). Zhang was not discouragedand, with his team, prepared a detailed plan of how the firm couldimprove itself with high speed to a high standard and provide premiumceramics. He went to Beijing with the plan. His courage, powerful willto turn the company around and well-planned strategies deeply impressedthose experts for assessing qualification for technical renovation. Finallyhe got an opportunity to present his plan to the Ministry’s decision-makers, and they all agreed that the plan was not only feasible, but alsobased on sound scientific principles. Thus CHN & CHN was put on thelist and able to start the innovation process.

Once CHN & CHN had the go-ahead for its plan, Zhang needed alarge amount of money to carry it out. He tried to persuade banks andother financial institutions to make loans for his plan, but was turneddown due to the risks involved. As a last resort, he decided to visit

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Premier Zhu Rongji, who was then the vice premier responsible forChinese production and finance. Determined, Zhang waited at the gateof the State Economy and Trade Commission for a whole week beforehe met a top leader who passed Zhang’s plan to Premier Zhu. Havingstudied the plan, Premier Zhu appraised the plan as bold and feasible,and believed that it was worth trying. He supported Zhang withUS$4 million from the reserves of the State Economy and TradeCommission.

Restructuring

Zhang knew when he obtained authorization from the Ministry andmoney from Premier Zhu that he also needed a good operating mechanismto guarantee long-term success. He had taken advantage of the state-owned enterprise to get the authorization and money he needed, but heneeded more money and management expertise to implement his plan.The optimal solution was to find a foreign partner and change the firmownership to a joint venture, which could bring the firm many advantages:money, management expertise, product information, international marketsand distribution channels, tax privileges,2 more management autonomyand much less government intervention.

Zhang and his team worked out their goals and expectations for apartnership and contacted potential investors in the UK, the USA, Germany,Japan and Hong Kong, and visited some of these countries looking forpartners. Most of Zhang’s potential investors made the same commentafter their visit to the old factory: investing in CHN & CHN would belike throwing money into a fire.

In 1991 at the Guangzhou Ceramics Exhibit, Zhang met ZhaofengLi, President and chairman of the board of directors of the Hong KongZhaofeng Ceramics Group, who was exhibiting his ceramic productionfacilities. Li had dreamed of becoming the king of the Chinese ceramicsbusiness, and had been looking for a competent domestic partner.Naturally, Zhang’s capability, confidence and sincerity and Li’s ambitionmatched very well. They signed a partnership agreement right away,and later signed a joint venture contract whereby the party fromHong Kong invested US$1.25 million and CHN & CHN investedUS$3.75 million. The Chongqing Zhaofeng Ceramics Co. Ltd wasestablished.

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Purchase of advanced manufacturing facility

The first move of the joint venture was to upgrade its production capabilityfor premium quality products. At that time the Chinese manufacturingcapability was low, and the manufacturing machines were big and handcontrolled. The product quality was inconsistent and lacked fine-tuning.Hence, Zhang and his joint venture decided to import foreignmanufacturing equipment. Their guiding principle for the purchase wasto start high and expect the facility to be among the best for at leasttwenty years. They undertook comprehensive homework comparingceramic manufacturing machines in the international markets, and finallydecided that Germany had the best equipment. Thus CHN & CHNbecame the leading ceramic manufacturer in China with the most advancedautomated production line.

Strategies for creating premium productswith superior quality

A manufacturer’s reputation comes from its premium products andconsistent superior quality, while consistent product quality depends onboth reliable machines and people. Zhang’s operating motto was: ‘Employthe best people, use the best manufacturing facilities, manufacture thebest products and create the best organization’. In order to produce thebest quality products, CHN & CHN also purchased the formula forpremium ceramic products from the German Ceramic Research Centre,a formula specifically made for using Chinese raw materials to meet thestandard for German five-star hotels. CHN & CHN also purchased for30,000 German marks 30 sets of blueprints from the best Germandesigners of ceramic patterns.

In order to improve product quality and obtain the leading positionin the ceramics market, Zhang implemented three engineering projects:a hardware engineering project, a software engineering project and ahuman resource engineering project.

Hardware engineering

Xianlin Zheng, President of the Light Industry Ministry, acclaimed that‘this has been what we have dreamed of for years!’ after inspecting the

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performance of the first manufacturing line in CHN & CHN. Indeed,CHN & CHN has been equipped with the most advanced manufacturingfacilities in the world from Germany and Italy, including a computer-controlled direct-firing fast-roller kiln made by Heimsoth in Germany,the first such high-tech kiln made after its creation in the experimental lab.

CHN & CHN also purchased an automatic isostatic press machinefor oval plates, an automatic production line for cups and plates and anautomatic glazing line from Dorst in Germany. Other top-class equipmentincluded fast firing shuttle kilns, decorating firing roller kilns, highpressure casting lines, automatic glazing lines, etc. The integration ofadvanced technologies and machinery has helped to make the factorybecome the leading enterprise in the ceramics industry in China to haveachieved industrialization and automation.

Software engineering

Based on the problems of slow information, protracted times for thedevelopment of new products and the low level of informationstandardization for management, Zhang realized that while hardwarewas a necessary tool for manufacturing, software was the core elementin the process innovations and functionalities that make products valuableto customers. The two strategic issues he spent much of his time goingover in his mind were:

� How can a traditional manufacturing company harness superior ITto gain competitive advantage in strategic business processes?

� What can IT contribute to corporate success?

As early as 1995, Zhang started to apply the computer integratedmanufacturing system (CIMS) to the traditional ceramic production(CPCIMS), which was listed in the national ‘863 High-Tech Plan’. Inorder to improve time to market, quality, cost and service (TQCS), hehas employed information technology and modern managementtechnology combined with manufacturing technology in all his operationalprocesses for the optimization of information integration and resources.

The CPCIMS system enhances in a timely manner communicationand the exchange of ideas between customers and manufacturers regardingshapes, patterns, technology and tools for ceramic product requirements,thereby greatly shortening the development time for new products. Inthe past, sample mailing and customer feedback would take weeks to

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months before the final contract could be signed for production. Quickerand better communication among different departments such as design,material supply, manufacturing and logistics via CPCIMS informationintegration has drastically improved production efficiency. It also allowedthe development of powerful supporting systems such as the computernetwork system, a database system and functional systems such as theceramic product engineering design system (EDS) and the managementinformation system (MIS). The EDS included sub-systems such as thedatabase management of the computer-aided design (CAD) shapes, decalsand moulds, as well as computer-aided process planning (CAPP) forceramic products. The MIS integrated the management systems for sales,production, purchasing, storage, accounting and personnel.

Electronic integration of the CAD process

Key challenges in R&D management, such as reducing developmenttime and broadening technical expertise, have led CHN & CHN tointegrate both its own core processes and its development partnershipswith universities, research institutes and other companies. Such data asCAD data, simulation results, work schedules and project statusinformation on tasks in the development process have been integratedinto its engineering data management (EDM) systems. The CPCIMSprovides three-dimensional designs for decorated ceramics through theintegration of CAD shapes and decals. With the help of the patterndesign CAD system and mould CAD system, product design and moulddesign have been integrated. CIMS has also helped integration betweenthe ceramic product engineering design system (EDS) and the ceramicenterprise management information system via product data management(PDM).

Digital technology for the manufacturing process ofceramic moulds

Ceramic manufacturing has a high demand for product moulds. One setof moulds can only work for a certain type of product, and there are somany varieties of ceramics. In the past, the traditional practice of makingmoulds depended on the operator’s experience and skill and the cost ofmaking moulds was enormous because of high failure rates. Theapplication of ceramic mould CAD has completely changed the way

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ceramic moulds are made and standardized and digitalized the mouldmanufacturing process.

Technology of production planning and managementfor manufacturing process

CIMS helped integrate the ceramic enterprise information managementwith the management process through the management informationsystems, which included systems for purchasing, finance, productionand personnel.

Simulation technology

The application of the EDS to modelling dummy ceramic products solvessuch key problems as the decal deformation for complex curves, thepositioning of decals and the transparence of the decoration by three-dimensional designing. The EDS systems test CAD representations ofpotential designs against anticipated variations in use without buildingphysical models. Simulations often allow the creation of much lessexpensive and more effective test information than the experimentercould possibly afford to achieve through physical models. The integrationof CAD and simulation databases has served as a springboard to faster,simpler communication with engineering partners. A 3-D CAD systemwith spatial geometric representation of objects can usually serve thispurpose. The use of simulation in assembly and production enables theproduction process to be adapted to the product much earlier indevelopment, thus reducing manufacturing costs.

Manufacturing engineering

CPCIMS now provides data-gathering, analytical and test capabilitiesfor complex process design and manufacturing engineering. In processdesign, software allows inexpensive experimentation, yield prediction,workstation design, process layout, alternative testing, three-dimensionalanalysis, network manipulation, quality control and interface timingcapabilities that would otherwise be impossibly expensive. CPCIMS isespecially helpful in allowing workers, technologists and managers tovisualize solutions and work together on complex systems. Further, the

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knowledge-based systems of CIMS now allow the design coordination,manufacturing monitoring and logistics control needed to find and sourceinnovative solutions worldwide.

Interactive design

CPCIMS provides the central vehicle enabling the inventor–userinteractions, rapid distribution of products and market feedback thatadd most value to ceramic innovations. It allows multidisciplinary(marketing–manufacturing–development) teams to interact continuouslywith customers all over the world, capturing their responses throughvideo, audio, physical sensing and computer network systems. Throughsoftware, customers participate directly in the design of new or customizedceramic products to the preferred patterns and shapes, colours anddecoration. Such customer participation is a crucial element in bothlowering risks and enhancing the customer value of designs. Moreimportant, by designing ‘hooks’ on CPCIMS to allow customers all overthe world to innovate further on their own, CHN & CHN can leveragetheir internal capabilities enormously by tapping into their customers’sophisticated creative ideas.

In the past, it would take about a month to design, make and delivera new prototype ceramic sample to the customer for confirmation beforethe customer finalized the order. This was made more difficult and morecomplicated for international customers because the sample could easilybe damaged on the long journey. At present, CPCIMS can entirely eliminatemany traditional steps in the innovation process and can consolidateothers into a simultaneous process. And it can provide the communicationmechanisms and disciplined framework for the detailed interactionsthat multidisciplinary departments and their customers need to advancecomplex innovations most rapidly. This has cut development time andcost enormously. Through rapid 3-D ‘virtual’ prototyping rather thanconventional tooling up and physical delivery of samples, CHN & CHNhas reduced greatly the time needed for prototyping samples, which wasone of the major reasons for customer dissatisfaction and loss of productcontracts.

Human resource engineering

Zhang explained: ‘Human capital is the core of CHN & CHN sinceeverything in the firm is accomplished by people, and thus our organization

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is only as good as our people.’ CHN & CHN has not only attractedcompetent people from all over China but also develops and trains itsemployees.

CHN & CHN has paid special attention to attracting people. Asearly as 1993, Zhang himself went to Jingdezhen, the world-famouscentre for ceramics, and investigated the best people in the ceramicbusiness. As Zhang put it:

I went there without attracting any public attention, talked topeople and studied the cream of ceramic operations. Then I wentto each of them, telling them the bright future they could havewith CHN & CHN to realize their dreams. I promised them severalthings that were almost impossible at that time: (1) I would givethem 10 times the pay they had with their present companies; (2)I would buy them a house for their families; and (3) I wouldchange their resident status from a small town to Chongqing City.This was the first daring and pioneering act ever in Chongqing,which is one of the only four cities controlled by the centralgovernment thanks to special approval from both the Mayor andthe Party Secretary of Chongqing Municipality. So, I have all ofthem: the best in ceramic design, the best in furnace, the best inmould, and the best in product pattern and decoration. Had it notbeen for these people with the skills and experience passed downfor thousands of years in ceramic operations, CHN & CHN wouldnot have had such brilliant success as it has today.

This combination of the best western hardware and software with thebest eastern intelligence and experience has proved successful.

CHN & CHN has also attracted talent from other parts of the country.Some people in the top management team were recruited and selectedfrom Shenzhen, China’s special economic zone, a special laboratory forexperimenting with the market economy. The company has also recruitedMBAs and college graduates.

Employee development and training played a significant role in CHN& CHN’s operations. Zhang took the lead in self-improvement. Hestudied part-time for an MBA at the Business School at ChongqingUniversity. Regardless of his busy daily schedule, he took time andpains to finish his MBA programme in the Fall Semester of 2000, whichcould explain why he has been so successful in his course of action, notonly through gaining the knowledge which was crucial in guiding theenterprise to successful performance, as learnt in his MBA classes, but

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also as a result of his strong mental will to pursue a course right throughto its end.

CHN & CHN has continued to send its core technical and marketingstaff abroad to study, and they are required to train other people whenthey have finished their own training so as to keep CHN & CHNpeople well acquainted with global development trends and changingcustomer tastes and preferences. CHN & CHN also runs Devil Trainingclasses, which originated in Japan. Training is focused on four managerialfactors: new management ideology, good team spirit, good health andgood eloquence. People from the top management team and middlemanagement were sent to the training class held in Guangdong for sixdays, the youngest being in their early 20s and the oldest in their 60s.At first some people believed that this training was nothing but aobscurantist policy, but when they came back from the training theytold their colleagues that they had really changed their way of thinkinglogically and their way of doing things. By the end of 1999, one third ofthe company employees had received college education by various means,which is not a common practice for a traditional manufacturingorganization.

Strategies for company reputation andworld-famous brand

Having achieved operational excellence, Zhang, with his modernmanagement ideology and rich market experience, realized that premiumproducts with superior quality alone would not spell success in theChinese marketplace, which would soon be joining the WTO. A well-known brand name for a firm’s products and company reputation aretwo invisible assets that reinforce each other in today’s society noted forits quick communication and wealth of news media. A brand name isthe aspect that speaks for the company reputation, and the companyreputation, in turn, will reinforce customer loyalty to the brand. Therefore,Zhang knew that he needed the influence of such invisible assets as aspringboard to achieve his ambition of global leadership. CHN & CHN3

in Chinese and CHN & CHN4 in English was the brand name createdand nurtured for this purpose. The trade mark consisting of two Csfacing each other represents CHN & CHN, and forms a shape like aplate.

When talking about the logic underpinning his brand, Zhangcommented:

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It is wrong to think that CHN & CHN is the first brand, china is.What perceptions do people have when they see products withMade in China on them? Poor quality, cheap and unreliable? Chinahas not yet created an image of producing products with consistentquality with established brand names. It will take many yearsand great effort by all Chinese firms in the market to achieve anational reputation in the global market for consistency andreliability. But first of all, Chinese managers have to fully understandits significance and the relationship between building up a firm’sbrand name and a country’s reputation as a whole. What is theconsequence? Right now, the average price for a piece of china isUS$0.87 for the other six major manufacturers in the globalmarketplace, but is only 0.30 for the same Chinese products. Thatis the painful lesson we must learn from Japan, South Korea andTaiwan.

Marketing strategies

Zhang’s marketing strategy was to ‘walk with two legs’. On the onehand, he tried his best to conquer the domestic market with his premiumproducts. On the other, he went all out to set up worldwide distributionchannels.

Domestically, Zhang started ‘carpet bombardment’ by means of publicadvertisements in 1995, positioning CHN & CHN in the high-endsegment of the ceramic market. In 1996, the company adopted theinternational practice of establishing a regional exclusive dealershipsystem, which gave rich profits to the dealers while the company focusedon the management of pre-sale, in-sale and post-sale services. Thepromotional campaign reached its climax when the Great Hall of Peopleordered 250,000 pieces of ceramic products from CHN & CHN toreplace the old ones, selected from seven other famous ceramic productionareas5 to celebrate the 50th Anniversary of the founding of the People’sRepublic of China. That was the highest honour that a ceramicmanufacturer could ever get, and thus the competition was incrediblyfierce. In order for products to be selected for the anniversary, which isregarded as the toughest test of quality for a premium commodity, somemanufacturers not only offered all their products for free but wouldalso pay the cost for product promotion in the selection process. CHN& CHN’s competitive strategy was to win the order with premiumproducts of superior quality for the exclusive dealer’s price. In the end,

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CHN & CHN won the titles of ‘China’s First China’ and ‘China’s FirstBrand in China’. Thus CHN & CHN was the first brand name toappear in the Great Hall of People, where the highest authorities of thenation are located. The company planned an enormous ceremony whenthe CHN & CHN china was delivered to Beijing. At the same time, apromotion campaign was engaged: the purchase of 100 yuan of CHN& CHN product would entitle the purchaser to a bonus of 50 yuan topurchase other CHN & CHN products. By then, CHN & CHN waswell known to most Chinese people.

In early 2000, CHN & CHN was the first in the nation to start two‘projects of one hundred stores’, one setting up one hundred specialtystores all over the country, and one establishing one hundred specialtycounters in nationally well-known department stores, supermarkets andhotels. The aim of the two projects was to provide easier customeraccess to CHN & CHN brand name products. Within the five yearsfrom 1995, CHN & CHN had become the undisputable ‘China’s FirstChina’ through its achievements of being leader in sales volume, leaderin market occupation rate, leader in product design and quality andleader in average exporting price compared with other ceramicmanufacturers in the country.

The two ‘projects of one hundred stores’ form only part of the workin establishing the domestic sales system. CHN & CHN adoptedinternational practice when setting up its sales channels: only one exclusivesales agency in one province responsible for all the dealers within thatprovince. These exclusive agents had a loose partnership with CHN &CHN. In those provinces where CHN & CHN had no sales, the companywould enter and set up its own agencies to develop the markets. Oncethe markets were cultivated and the distribution system had startedoperating, a trustworthy exclusive agent would be found to furtherdevelop and expand this system. This was a win–win approach, whichproved to be a very effective strategy in developing, cultivating andexpanding markets within China. An ‘ABC price system’ was developedto help the market expansion. Exclusive agents in a province enjoyedthe A price system, which provided the most favourable price amongthe three and took into consideration the next level of wholesale. Withinthose provinces where there were no exclusive agents, the companywould handle all the wholesale agents in that province, who would takeB price system. The C price system was applicable for big departmentstores or supermarkets.

In 1998, 95 per cent of CHN & CHN’s products were sold in the

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domestic market. By mid 2000, the ratio between national andinternational sales changed to 50 : 50, and Zhang expected to rewritethat ratio to 30 : 70 by the end of 2000. Zhang planned to export 80 percent of his products to the global market in 2001. In general, sales in theinternational markets yield more revenue, and it is especially true forpremium product manufacturers. Step by step, Zhang has been buildingup his global distribution network. By mid 2000, he had products sellingin more than 20 countries.

In the domestic markets, Zhang adopted a family branding strategyto cover all of his products. In the international market, however, hewas flexible. Zhang explained that he would like to introduce his productsto customers of the targeted country if the cost and time for acceptancewere right. Otherwise, he would prefer to join forces with a well-knowncompany in the local market and use their established brand name. Inthe US, for example, one of the major partners of CHN & CHN wasOneida.6 Zhang said that he would be happy to be a manufacturingbase for Oneida for the next couple of years. He has also persuadedseveral other large ceramic manufacturers in the US to outsource theproduction function to him. Zhang’s argument was: ‘Why do you makeyour own products when I can provide the exact same goods at almosthalf your price?’ In September 2000, CHN & CHN was undergoingDisney’s two-year tough assessment process before Disney startedproviding orders.

Strategies for innovation

Zhang explained that innovation is the soul of a nation’s progress andan endless motivating power for a firm’s development and growth. Inthe field of technical innovation and new product development, CHN& CHN has established a Technical Centre and is attempting to turn itinto a national centre for the ceramic industry. They have been pursuingthis goal with two approaches. One approach was to make timelyadaptations in operational strategies, such as introducing and creativelyusing the CIMS management system and the CAD design system toincrease organizational management efficiency and improve the capabilityof new product development. The second approach was to adjust andmake changes in product structure, style and pattern so as to meet theever-changing needs of the customer.

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Accomplishment of strategic andfinancial goals

By the end of 2000, CHN & CHN had achieved two of its three long-term strategic goals. The first goal, to be ‘China’s First China’, wascompleted in 1998. The planned annual production capability of 6million pieces of superior ceramic houseware was surpassed, reaching7.2 million after technology innovations. The product quality met theRick Standard of Japan. Domestic sales for 1995 were 27.2 millionyuan, 46.64 million yuan for 1996, 59.91 million yuan for 1997, 60.45million yuan for 1998 and 61.49 million yuan for 1999. The salesrevenue for the first six months of 2000 was 26.46 million yuan, whichwas 156.78 per cent higher than that of 1995.

The second goal, to become Asia’s leading ceramic company, wasaccomplished by the end of 1999 with annual production output of 30million superior ceramics with a revenue of 0.18 billion yuan. Thepremium quality satisfied the requirements of Rosenthal in Germany.The export income for 1995 was 30.26 million yuan, and 115 millionyuan for 1999. The export revenue for the first six months of 2000 was44.81 million yuan, which was 509 per cent higher than that of 1995.It is planned that 67 per cent more superior ceramic products will addedto the product arsenal in 2001.

CHN & CHN planned to become world leader with an annual outputof 80 million superior ceramic houseware items to satisfy the requirementsof the British Royal Doulton Standard in 2005.

Management information system

CHN & CHN’s management information system has reduced the fundsneeded for purchasing after optimizing inventory levels through the useof its purchasing management system. The cash needed for decal papersand packing materials was reduced by 2.87 per cent per month from8.12 million yuan to 6.72 million yuan with plans for a further reductionto 1.2 million yuan by 2002. The money for purchasing raw materialswas reduced by 4.63 per cent per month from 1.26 million yuan to 0.91million yuan with plans for a further reduction to 0.6 million yuan by2000. The capital needed for other materials was reduced by 5.56 per

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cent per month from 1.5 million yuan to 1 million yuan, with plans fora reduction to 0.5 million yuan by the end of 2000. The application ofthe sales management system and production management system resultedin more accurate sales forecasts and production plans, thus eliminatingexcessive production and inventory. The carrying and handling costs ofinventory have been cut by 3.1 per cent per month from 11.5 millionyuan to 9.36 million yuan, with plans for a further reduction to 8million yuan by the end of 2000.

Premium quality product

In January 1997, CHN & CHN became the first ceramics manufacturerto obtain both the ISO 9001 certification and the quality certificatefrom Geneva SGS International Quality Institute. CHN & CHN alsoobtained the American FDA certificate for its quality ceramic non-injurious to health and made with lead and cadmium free on-glazetechnology. CHN & CHN has been recognized by the state with thehighest AAA certificates for both quality satisfaction and customersatisfaction.

The ceramic formula, which is a recipe from Germany specially madefor CHN & CHN, is a super-white glaze free of lead and other pollutingmaterials. Produced by high-tech hardware and software, ceramic productsare ‘white like jade, ringing like a bell and shining like a mirror’. Thehardness of the glaze has reach as much as 8400 MPa, highly tolerantto knives and forks. The mean time before failure is two to four timesgreater than ordinary tableware. Because the product design reflects theessence of stylish design drawn from both the past and the present – andfrom both the East and the West thus merging both the East and Westcultures and civilization – CHN & CHN ceramics have great value forcollection with elegant cultural taste.

The national gifts presented to US President William Clinton andFrench President Jacques Chirac by President Jiang Zemin and PremierLi Peng of China were CHN & CHN products. Its products are alsoused by the Chinese embassies of the Ministry of Foreign Affairs, theChinese National People’s Congress, Northwest Airlines of the USA, theChina Diaoyutai State Guest House and some five-star hotels. On the50th birthday of People’s Republic of China in 1999, CHN & CHN, thenew product of CHN & CHN, was the only tableware chosen for thestate banquet for 5,000 people. The company is also the long-term

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supplier of THC, the biggest distributor of ceramics in the USA, andCGC, the biggest producer with the largest sales of hang-plate in theUSA.

First China Brand

CHN & CHN has been treasuring its reputation for organizational life,and has created a reputable brand name well accepted by consumers.This is the richest resource for the organization because such reputationwill bring to CHN & CHN profits in the long-term that are hard tomeasure in money terms. Zhang explained that not all firms that makemoney are successful firms, but successful firms make money. A firmsucceeds because it has created its reputation by means of its operations,and reputation is the sustaining force to help a firm with its profit. ThusZhang believes that reputation is the foremost important competitivecompetence for CHN & CHN.

CHN & CHN has established a reputation in the domestic marketfor its well-known brand, which was demonstrated with the award ofFirst Brand of Ceramics of China by the China Assessment Centre forFamous Brands of the State Quality and Technology Control Bureau.CHN & CHN has been recognized by the state with the highest AAAcertificate for brand recognition and AA certificate for brand influence.Vice Premier Bangguo Wu commented after his business visit to CHN& CHN that the company had attained three number ones in its industry:‘Number one in product quality; number one in exporting; number onein brand name.’

Sustaining a modern management model

CHN & CHN was the only firm in the ceramic industry that wasapproved by the State Science and Technology Ministry as a modelenterprise in using CIMS by the National High-Tech 863 Programme.The use of CIMS enables the functional departments to correctly and ina timely manner share information for sales, production, purchasing,accounting and marketing. The Manufacturing Resource Planning II(closed-loop manufacturing system) and Enterprise Resource Planning(MRPII/ERP) systems help the organization overcome the problems ofunclear responsibilities for all departments and makes the managementmechanism more standardized and scientific. The integration of the

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electronic data systems (EDS) and management information system (MIS)makes a good combination for fully utilizing ‘material flow’, ‘informationflow’ and ‘capital flow’. The structural data of the products, materiallist, technology data and basic numbers for inventories have beenstandardized and are accurate and complete, which facilitates the sharingof information and makes a good foundation for scientific managementand decisions.

The enterprise management standards have been established basedon the industry standard, the national standard (GB) and the internationalstandard (ISO). On the one hand, it standardizes the management of thetechnology, operations and all documentary files. On the other hand, ituses the normal national and international agreements to enablecooperation and communication between national and internationalenterprises. And these standards have important reference values formaking relative standards for the ceramics industry and national standards.The standardization and integration of the marketing, design, production,sales and service functions have greatly enhanced the organizationalcapability in terms of market response and its distinctive competence interms of global competition.

Technology innovation

Competitive advantage lies in speed and accuracy in response to changesin demand. CHN & CHN attributed its success in large measure to thetechnological innovation and CIMS system it has implemented throughoutthe organization. IT has served as a powerful driver of process innovation.Strong performance in IT does make a real difference: better informedmanagers are also better at core processes such as R&D, order processing,sales and service. In turn, excellence in core processes produces tangiblepayoffs: solid competences in core operational processes improveprofitability and superior product development promotes growth. Forexample, the use of product configurators – electronic tools that simulatethe putting together of a product from thousands of possible features –has made an important contribution to business success. During a salespitch, staff are able to show customers the full range of products, variantsand types, calculate the price of the product chosen and agree a realisticdelivery date. Therefore CHN & CHN became the national model ofreorganization and reconstruction in the ceramics industry in the EighthFive-Year Plan and a high-technology enterprise of China. It has wonthe only first prize awarded for the First Class New Production of

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National Light Industry, and the first prize of Science and TechnologyProgress in Chongqing.

Notes

1. The origin of the term china standing for ceramics goes back to thethirteenth century when explorers from the West came along theSilk Way to a small town named Tanlan in Jiangsi Province, China.They were attracted to and amazed by the beauty of the ceramicsthere. From then on, ceramics and the ceramics production techniquewere introduced into Europe, people calling them china after thesound that the Tanlan natives produced for ceramics.

2. In order to attract and encourage foreign investment, the Chinesetax regulations then stated that joint venture enterprises could enjoya two-year full-tax and three-year half-tax exemption.

3. CHN & CHN in Chinese means China China or China ceramics,and originated from the words of encouragement written for thecompany by President Zemin Jiang when he visited the organization.

4. CHN & CHN has multiple meanings: it can stand for China China(CHN & CHN), China Chongqing or Chongqing China, while thesecond China represents ceramics.

5. The eight famous areas in China for ceramics are Jingdezhen, Fulin,Tangshan, Zhibuo, Handan, Hunan and Chongqing.

6. Oneida Ltd is the world’s largest manufacturer of stainless steel andsilverplated flatware for both the consumer and food service industries,and the largest supplier of dinnerware to the food service industry.Oneida is also a leading supplier of a variety of crystal, glasswareand metal serveware for the tabletop industries.

7

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The Sichuan Chemical Works(Group) Ltd

The Sichuan Chemical Works (Group) Ltd (SCW) is a major chemicalenterprise in China, one of 18 large-scale chemical firms, and China’slargest producer of ammonia, nitrogenous fertilizer, melamine and highlypure argon. Its products are sold to more than 20 countries such as theUSA, Japan, Russia, Germany, Korea and Indonesia. SCW holds stockin 14 companies, and has a strategic relationship with 50 firms inChina. In 2000, the company had 15,000 staff and workers with totalassets of 1.5 billion RMB. The company has been in the list of ‘500largest industrial enterprises in China’ for around ten years.


Chemicals are an important component of China’s drive to modernizeindustrial production. In 1997, petrochemical revenues were US$73billion. Even while domestic demand has sustained sales volumes, Chinahas had to cope with the two-pronged effects of the Asian financialcrisis, namely decreased demand as export growth has slowed and newsupplies of low-priced Asian imports.

In 1998, China imported US$4.45 billion in inorganic and organicchemicals, $465 million of which was imported from the US. Althoughthe government is eager to attract foreign investment, they are skittishabout giving away too much of the domestic market. As an example, in1997, China’s ethylene output reached 3.58 million tons, which onlymet around half of the domestic demand. However, due to heavy lossesracked up by many of its affiliates in 1998, Sinopec decided to postpone

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all five of the multibillion-dollar petrochemical joint ventures it hadbeen planning with western partners to produce ethylene. In East Chinathis new policy affected projects with BASF, BP Amoco and Philips.

China mirrors the world market in that inorganic and organic chemicalsface situations of both oversupply and undersupply. Inorganic chemicalssuch as caustic soda and soda ash are greatly oversupplied whereasethylene, propylene, butadiene and styrene are undersupplied.

The pace of change in the chemicals industry, however, is slow. Despitea wave of mergers and acquisitions, the same companies have held thetop ranks for well over a decade. And looking ahead, the traditionalgrowth strategies of chemical companies are running out of steam. Unlessthey find a new direction, they will preside over ever-diminishing growthprospects that will prompt investors to abandon the sector.

Over the next decade, traditional asset-based strategies will still bean important source of profit, but chemical companies will also need tocreate other such sources to grow. Knowledge-based strategies will providethat new growth.

The industry today includes three main kinds of companies: commodityplayers that produce basic chemicals and plastics, specialty players thatformulate chemicals to meet specific customer requirements and hybridsthat have interests in many kinds of business along the length of thevalue chain.

What is remarkable is how few new entrants the industry has attractedcompared with other sectors and how little impact the Internet and thenew economy have had on the incumbents. Essentially, the chemicalsindustry lacks ‘shapers’: companies that have generated new profits bytransforming the way they do business. Chemicals companies still relyon traditional strategies for growth. For the past three decades, chemicalscompanies have been trying to extract additional value from their assets.In the 1970s and 1980s, that meant a focus on functions such as salesand operations. In the 1990s, consolidation and restructuring were thename of the game. The former was primarily to reap economies of scaleand capture synergies, the latter primarily to realize cost savings.

Until the Asian crisis hit in 1997, these strategies served many companieswell. The overall sector’s performance was in line with the total stockmarket, and companies in Europe and North America, where most ofthe consolidation and restructuring took place, often performed betterthan their counterparts in other basic materials industries such as steeland paper. But the Asian crisis wiped out some US$25 billion worth ofannual economic profit and confidence in the sector fell. Share prices

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The Sichuan Chemical Works (Group) Ltd

haven’t recovered, because investors are still sceptical about the industry’sgrowth prospects.

It would be wrong to conclude that asset-based strategies no longeroffer any potential for growth. Such strategies could clearly help Asiancompanies – many of which have been losing money – that have yet tobegin serious consolidation or restructuring. Indeed, analysts believethat these approaches could generate up to US$60 billion a year inadditional earnings. In North America and Europe, where companieshave responded more swiftly to the performance demands of the capitalmarkets, the potential for further cost-cutting is limited and furtherconsolidation in many product segments would raise antitrust concerns.In any event, share prices have already taken into account expectedincreases in operational performance.

Strategic herding has become the problem (Nattermann, 2000). Astrategy that has worked for one business is commonly adopted by itscompetitors, making it difficult for customers to differentiate amongthese companies. Industry-wide cost reduction efforts lead all competitorsto offer lower prices, damaging the whole industry. Of course, chemicalscompanies can’t ignore cost reduction efforts: they have to be made if acompany is to remain competitive. But in the future, cost-cutting willnot be a significant driver of value creation for shareholders. The mainsource of value creation in asset-based strategies will be the kind ofrestructuring that focuses the activities of a company more narrowly inareas where it is truly distinctive. Many hybrids are finding that theyhave captured all the synergies available from their different businesses.Consequently, a few are starting to focus on businesses in which theyalready have a leading position. Their strategy is to divest weaker businessesand to buy up assets in their core one, hoping to strengthen their operationsand capture still more economies of scale (Bryan and Fraser, 1999;Crawford et al., 1999). The potential is huge, since hybrids dominatethe industry, but the savings are still finite and will not be likely to boostprofits for more than five to ten years.

Company profile

The Sichuan Chemical Works (Group) Ltd (SCW), located in westernSichuan Plain, was established in 1956. During the last 44 years, SCWhas given birth to the first Chinese-made medium-scale nitrogenous

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fertilizer plant (1959), the first imported large-scale fertilizer plant inChina (1976), the first imported large-scale melamine plant in China(1984) and the first Chinese-made large-scale ammonia plant in China(1990). In 1992 SCW annexed Chendu Wangjiang Chemical Corporation.The year 1994 saw the organization and establishment of the SCWGroup.

The first large-scale joint-venture lysine plant opened in 1996. SCWwas restructured into a limited liability company with the merger ofShifang Chuanxi Phosphorus Chemical Group Company.

Sichuan Chemical Works (Group) Ltd is a state-owned corporationwith 22 departments engaging in production, management and R&D,and a holding company with nine subsidiaries. SCW holds stock in 14companies and has a strategic relationship with 50 firms in China.Currently the company has 15,000 staff and workers with total assetsof 1.5 billion RMB.

With its comprehensive troops of professionals and advanced technicalfacilities, SCW’s business range covers chemical production, scientificresearch and development, chemical engineering, anti-corrosion anddesign, manufacture, inspection of pressure vessels, construction anderection, real estate development, road transportation and technicalsupport.

SCW is a super-large chemical enterprise in China, one of the 18large-scale chemical production bases, the largest enterprise presently inChina producing ammonia, nitrogenous fertilizer, melamine and highlypure argon. SCW manufactures more than 90 varieties of products tomore than 200 specifications, with a capacity of 500,000 tons of ammonia,620,000 tons of urea, 240,000 tons of ammonium nitrate, 15,000 tonsof concentrated nitric acid, 100,000 tons of sulphuric acid, 12,000 tonsof melamine, 2,500 tons of catalyst, 1.8 million cubic metres of argon,8,000 tons of leather chemicals, 4,500 tons of amino-plastics and 100,000tons of phosphorous chemicals. The dominant products are made inline with international standards or advanced standards in the world inpreparation for entry into the WTO in the near future. High-qualityvalue products meeting or exceeding national and provincial requirementsaccount for 87 per cent of the total annual output.

SCW enjoys the authorization to import and export. Its products sellwell to more than 20 countries such as the USA, Japan, Russia, Germany,Korea, Indonesia, etc. The company has been in the list of ‘500 largestindustrial enterprises in China’ for approximately ten years.

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Management challenge

When talking to China Economic Weekly journalists on 3 March 1998,Muxi Xie, the CEO of SCW, pointed out:

In the ever increasing market competition today, the externalconstraining factors are, of course, significant considerations inthe firm’s decision-making, but for the organization itself, appropriatemanagement is the most crucial and decisive determination of thefirm’s performance.

Throughout the 1960s and 1970s, the major management approach forSCW was organized control of manufacturing processes, with themanagement goal of ‘safety and stabilized operation’ of its chemicalindustrial facilities. In other words, the management model was productionmanagement with an emphasis on ‘safety’.

In the 1980s, new changes took place in both of SCW’s external andinternal environments. In the external environment, the state adopted apolicy of a ‘planned commodity economy’, which started thetransformation from centrally planned economy to market economy.All of SCW’s products, except fertilizer, were put into the market andjoined the competition. Competition was a new concept for most of theChinese state-owned enterprises, especially the large ones. Under suchcircumstances, SCW introduced ‘total quality management’ and startedan ‘internal economic responsibility system’. Based upon the managementphilosophy of ‘high work quality, long operation cycle, low energyconsumption and good value products’, SCW shifted its manufacturingmanagement approach to both manufacturing and service models withan emphasis not only on safety but also on quality.

Entering into early 1990s, SCW faced more challenges and threatsfrom market competition. Several factors reduced the historically highprofitability of SCW to very thin profits. These factors included a shortageof natural gas – the primary raw material for SCW – and its continualprice rise, government regulation of the price and sales of chemicalfertilizer, the backbone products of SCW, the heavy burden of accumulateddebts, and the deficiency and ageing of some production facilities. Thereare 22 dependent subsidiary firms in SCW, of which five companieswere rated as Grade A large companies. There were continuing debatesas to whether these firms should be authorized to manage their own

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operations during China’s transition from a planned economy to a marketeconomy. SCW had difficulty in making the transition. Once centralized,these firms became very rigid and lost their vitality, but became chaoticwhen given full autonomy in management because these firms had beenworking in a central planning environment for 40 years and were notready for independent operations, especially with both national andinternational environments changing rapidly and dynamically. The CEO,Muxi Xie, and his management team realized that its manufacturingmanagement approach to operations with an emphasis on safety andquality could no longer meet the requirements of the new market economy.Thus in 1993, a new model of risk responsibility and goal managementwas put forward for discussion and put into practice in 1994. Thismodel won second prize in the Fourth National Innovation for EnterpriseManagement Modernization in 1997.

Entering into 1997, SCW found that the dynamic environment andswiftly changing economic situation required large-scale operations toachieve economies of scope and economies of scale. The business modelof risk responsibility and goal management was no longer effective, themajor weakness being its ineffective capacity to coordinate amongfunctional departments and subsidiary firms.

Production safety

SCW is one of China’s 500 biggest industrial enterprises. Safetymanagement and control is one of the major concerns for this extralarge chemical manufacturer. This is especially true when the organizationstarted to adopt the manufacturing goal of ‘Maximum Profit’ in 1995when competition was introduced into the Chinese chemical market.The firm entered an ever increasingly dangerous and threatening man-made environment with its high pressure and high temperature productionfacilities, and highly flammable and explosive materials, which arepoisonous, corrosive and suffocating. Only through improving safetymanagement could the firm fulfil its social responsibilities and meet thedemands of the market economy.

Product structure

In general, the product structure of SCW was not satisfactory: chemicalfertilizers accounted for 65 per cent of all the products. Even though

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this focused strategy worked fine in the Sichuan Province, it seriouslyconfined SCW in its competitive capability in the national and globalmarkets SCW needed to provide a wider range of products.

Threats from upstream suppliers

SCW relied heavily on raw materials from upstream suppliers. For example,a 1 cent increase in the price of its raw material gas could wipe out eightmillion dollars profit from its income statement. The cost of water andelectricity was so great that the organization could not survive unlesssome emergency measures were taken. However, the prices for the majorproducts of SCW were controlled by the government.

Strategic responses

Risk responsibility and goal management

Risk responsibility and goal management is a management system thatfocuses on three critical factors influencing the economic and socialefficiency of the enterprise: cost, quality and safety. With market demandas a guiding principle, the system adopted the theory and practice ofgoal management through analysing and decomposing responsibilitiesfor each level of management, and contracting the correspondingresponsibility and authority to every level of manager.

In SCW, the internal management for all the subsidiary firms wascentred on goal setting, and resources such as manpower, capital, rawmaterials, energy and facilities were allocated based upon the priority ofthe planned goals. The major aim of this management approach was toachieve what the organization existed for – to create profit through lowcosts, high quality and safe operations. Low costs and high qualitymade it possible for the firm to use the brand name strategy, increasemarket share in both domestic and international markets and enhancethe firm’s reputation globally. Only through safety management couldthe organization minimize disastrous incidents to ensure continuousoperation and a long cycle of stability.

SCW made it very clear at the beginning to all its employees that thesuccess of the organization depended on the three decisive factors ofcost, quality and safety, and that these factors in turn relied on employees’

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loyalty and commitment. Risk responsibility and goal management wasthe source and continuation of the firm’s motto of ‘creating a superiorreputation and establishing a civilized organizational culture’ and theorganizational spirit of ‘solidarity, self-improvement, hard work andinnovation’. This management approach covered four areas: the simulationof market costs, the establishment of internal financial accounting, theassessment of goal accomplishment, and compensation for performanceand work contribution.

The simulation of market costs

Simulation was used to introduce the market price system into thetransactions between all SCW departments. All product costs werecalculated using the market price as the index for materials bought fromthe market, for materials or semi-products acquired by exchange, andfor labour, electricity and all other direct and indirect product costs.This method was particular important for employees who had workedall their lives under the central planning system and had no idea ofmarket competition. Detailed calculation and simulated marketenvironments helped the employees understand what was going on inthe marketplace. The most important thing was that all the employeesin the company came to realize how significant cost saving was to thecompany’s profit and survival. Ever since the simulation of market costs,employees worked hard to cut costs of labour, materials and especiallyin major maintenance. The company achieved 10 per cent less expensefor four years running, and saved as much as 40 million yuan duringthat period.

The establishment of internal bank accounts

The major purpose of establishing an internal bank account for eachfunctional department was to set up a company price system, similar tocost centres in western management systems. This approach was asimulation of the market operation system. Transactions amongdepartments inside the organization were dealt with as those amongfirms in the marketplace. Compensation and rewards were made mucheasier and employees were highly motivated to exert their best in bothcost savings and departmental growth, because they knew that workingtowards the department interest would bring them more income too.

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The assessment of goal accomplishment

The overall goal of the organization was broken down into detaileddepartmental goals, which then formed the goal system for the firm.When interviewed by the Sichuan Workers’ Daily in 1998, CEO Xieexplained that this approach aimed at setting up a complete responsibilitygoal system, and assessment of the performance at each level determinedthe pay for employees in each functional department. Every month, 40yuan was retained from each employee’s pay as a responsibility deposit,and if the planned goal was not completed for the next month, theemployees not only got no bonus pay for the month, but also lost theresponsibility deposit.

Six steps to implementation

� Step 1: Creation and breakdown of responsibility goal. Based uponSCW’s long-term planning and the internal and external situation,the enterprise set up a goal expectation system for the variousfunctional units and established standards for assessments. Thisformed the company-wide system for goal management in cost,quality and safety.

� Step 2: Establishing assessment standards for internal economicresponsibility goal. SCW established six categories of economicresponsibility on the basis of ability of the functional departmentsand subsidiary firms to carry out the principle of ‘profitability decidesreward distribution’.

� Step 3: Establishing a responsibility accounting system. A responsibilityaccounting system was established to help the functional units withtheir book-keeping and management, and performance pay wascalculated based on the accomplishment of the target responsibilitygoal.

� Step 4: Establishing the internal banking system. Marketing exchangerelationships were established between the functional units in theireconomic transactions. This was a breakthrough in the former socialistcentral planning system because each unit had to take care of itsown cash inflows, outflows, loans and other financing business.

� Step 5: Establishing an internal price index. The internal pricesystem was set up in accordance with the current market price, and

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adjustment was made every six months to keep on track with marketfluctuation.

� Step 6: Assessment of performance. Detailed evaluation procedureswere laid out for economic contracts with functional units. In thisway the management approach could be continuously carried outand successfully improved over time. The principles outlined belowwere adopted in the assessment of performance.

Compensation for performance and workcontribution

A financial bonus marked the firm’s appreciation for its employees’hard work and extra contribution. The performance assessment systemwas strictly reinforced to overcome the bad habit derived from thecentral planning economic system in which you ‘get your salary whenyou come to work and get your bonus when you carry out yourwork’.

Principle of risk sharing

In order to stimulate and reinforce motivation and overcome the internal‘iron bowl’ phenomenon,1 part of the employees’ pay was withheld asrisk-sharing money. The risk-sharing money and bonus were put togetherand termed ‘performance pay’ which was not fixed but decided byemployees’ contributions to work.

Principle of three repudiations

The performance would be repudiated and performance pay would notbe given for any work unit that did not achieve the target index in thecontract for cost and profit, that did not meet the quality requirementsfor their work and products, and/or that suffered significant accident ordeath owing to safety negligence. The following two equations wereused for monthly pay.

W1 = C Q S (PP + CP) – N

W2 = C Q S [20 (URI) + 20 (RSI) + UPI (CAP) – N]

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where:W1 : performance pay for manufacturing employees for chemical

productsW2 : performance pay for administrative employeesC : cost repudiation indexQ : quality repudiation indexS : safety repudiation indexPP : pay of production yieldCP : pay for cost savingsURI : unit responsibility indexRSI : risk-sharing indexUPI : unit performance indexCAP : average bonus for chemical production employeesN : total deduction from three repudiations.

Safety management

The successful practice of safety management in SCW resulted from theapplication of total quality management (TQM) and total safety control(TSC). The philosophy of TSC was that safety and prevention comefirst, hard data speaks louder and safety control involves the participationof all employees in every aspect during the entire internal value chainprocess for 24 hours a day the whole year long.

Safety training and education

The Safety and Technology Department in SCW, consisting of 70 welltrained and experienced personnel, collected and processed safetyinformation in a timely manner and compiled a textbook as needed fortraining. From 1986, the department ran six training classes nationally,11 in the province and 721 in SCW itself. More than 30,000 people inthe organization were trained.

In recent years, the teaching methodology has included not onlytraditional class lectures but also various activities that educate peoplethrough the arts, literature, exhibitions, calligraphy, a safety knowledgecontest on TV, dancing, cross talk and so on. These activities haveproduced better results. After years of persistent and hard effort, employeeshave made the mental transition from ‘I am required to work safely’ to‘I need safety’ and ‘I am doing my best to operate safely’.

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Safety network based on the productionresponsibility system

Three layers of safety hierarchy were developed after years of practiceand experience. The decision layer, which comprised the top managementteam of SCW, the union chairman and the heads of the functionaldepartments, was responsible for coordination among departments andsubsidiaries and for making decisions concerning major production safetyissues. The management layer consisted of the functional departmentsand carried out comprehensive management. The supervisors of workshopsand manufacturing teams functioned as the layer which carried out thesafety processes. They were not only responsible for production but alsofor the entire safety process in daily operations. SCW has 124 safetyinspectors equipped with the best facilities out of all the professionalsafety and technology teams in the industry.

Documentation of specific safety responsibilities

The safety responsibility system is the guarantee of the safety of thechemical production system, and sets out the guiding rules for employeebehaviour in the chemical manufacturing process. For the variousdepartments and workshops, there are 36 safety management systems,46 safety technical procedures, 400 commonly used safety informationindexes and more than 100 management forms, cards and pamphlets.Seventeen safety systems were upgraded to enterprise standards to avoidthe lack of clear responsibilities that resulted in accusations of blameand finger pointing.

Scientific assessment system

One of the most difficult tasks in the development of the safetyresponsibility system was the setting up of an effective and efficientassessment system. The contracted risk responsibility system consistingof ‘risk responsibility and goal management, simulation of market cost,the establishment of internal bank accounts, the assessment of goalresponsibility and the three repudiations’ has proved to be an excellentand scientific assessment management system. This management approachreceived a Second Prize for National Enterprise Management Innovationand a First Enterprise Management Prize from the Ministry for the

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Chemical Industry. The implementation of the safety management processis illustrated in Figure 7.1. Every production unit is required to hand inits written safety information to the Safety and Technology Department,which makes an assessment and assigns a grade before a performancepayment is awarded. The grading is made in accordance with 17 evaluationcriteria.

Strategies for expansion

Development of compound fertilizer

CEO Xie realized that the company could not withstand the impact ofmarket risk without diversification. He put emphasis on the relateddiversification of his products to adapt to ecological agriculture in China.He started a joint venture with Norway in 1999 to make annually 0.5million tons of fertilizer compounded from nitrogen, phosphorus andpotassium. This is a premium product that is far superior to similarproducts in the domestic market and has a very bright future because itcan not only help increase the yield in agriculture, but also protect the

Figure 7.1 Implementation of the safety managementprocess

3.Schedule and plan ofsafety technology andmanagement

2.Assessment and decision

4.Implementation

5.Evaluation

Safety andAccidentDatabase

1.Safetysystemanalysis

Governmentregulation

Safety laws,technical

specificationsand safetystandards

Norms,safety

experiencein industry

Consultation,informationon safety

Researchon safety

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environment. The expected return on investment was estimated at 13per cent.

Sulphuric acid and potassium nitrate

The factory with an annual production capacity of 20,000 tons of sulphuricacid and potassium nitrate in which SCW and Qingsang Corporationfrom Taiwan invested started production in 1999. The factory made 2million yuan profit in the same year of production. At the end of 1999,the production capacity was doubled, with plans to double it again in2000. SCW’s existing products of ammonium nitrate and urea were rawmaterials for the compounded fertilizer of sulphuric acid and potassiumnitrate. This compound has a protective effect on the environment.

Melamine

Another new production facility made 15,000 tons of melamine, inaddition to the existing 12,000 tons capacity. This expansion helpedSCW to gain a leading position in the niche market for supplying thismultifunctional material. The production yield for melamine accountedfor 40 per cent of the total production capacity for SCW with sales of0.7 billion yuan.

Biochemistry

An important step taken by SCW was diversification into biochemistry,which was in need by the agricultural economy. The successful operationresulted from a joint venture with Japan with annual capacity of 10,000tons of lysine. After technical modification in 1999, the productionyields increased by 3,000 tons. The production capacity was due to beincreased to 20,000 tons in 2002.

Fine and specialty chemistry

SCW is continuing research and development into fine and specialtychemical products. Xie, the CEO, explained that the fine and specialtychemical products were a development priority for China’s chemicalindustry. Fine and specialty chemicals are value-added performance

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chemicals with many varieties. They are hi-tech in nature, very efficientand have a wide variety of applications. These chemicals are used invarious industry sectors such as agriculture, textile, health care, electronics,food and feed, medicine, household and industrial cleaning, automotive,paper, plastics and rubber, and other industries. China started to developthis industry in the 1980s. Presently, China has ten fine and specialtychemical technology development centres, with over 3,800 companiesmanufacturing more than 9,200 kinds of fine and specialty chemicalswith an annual output of around 8.7 million tons. This presently onlyaccounts for 35 per cent of gross chemical output. In developed countries,the ratio is in the region of 55–65 per cent.

Domestically produced fine and specialty chemicals were not able tosatisfy China’s rapidly growing market because domestic manufacturershad quality problems and lacked the same product variety as foreignmanufacturers. As a result, China needed to import many types of fineand specialty chemicals to meet the increasing market demand for highquality and high technology chemicals. Because of this, the Chinesecentral government and local governments issued a series of preferentialpolicies, such as tariff reductions and investment incentives, to encourageforeign investment in the chemical industry to manufacture products inChina. Furthermore, the Chinese government placed emphasis on patentprotection and environmental problems, which resulted in new lawsand regulations, and enforcement of technology patents and environmentalprotection.

A few big US firms have good reputations for their products and haveinvested in China with joint ventures to expand sales. However, Americanfirms face stiff competition from Germany, Britain, France, Italy andJapan.

In the early 1980s, China introduced large-scale petrochemical facilitiesand began to develop the fine and specialty chemical industry. As China’sindustries rapidly developed, the demand for fine and specialty chemicalsrose. CEO Xie explained that the development of the fine and specialtychemical industry has been restricted by the shortage of applied research,technical services, high technologies, funds and market exploitation. On8 September 2000, SCW planned to issue 13,000 shares of stocks on theChinese stock market, which was strictly controlled by the government.Part of the investment would be used to develop fine and specialtychemical products to improve the product variety and quality to meetthe market demand. It was planned that the fine and specialty chemicalproducts would make up as much as 20 per cent of SCW’s total productstructure.

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Drastic improvement in overall enterprisemanagement

CEO Xie commented:

Enterprise management involves every aspect of activities in thecompany, including people, finance, assets, manufacturing,marketing, etc. It is extremely significant to appropriately handlethe relationship between risk, responsibility and benefits for ouremployees. That is why SCW employed the risk responsibility goalmanagement approach to mechanically merge the three together,which overcomes the motivational problems derived from thecentrally controlled economy. This approach has put the majormanagement factors in a nice scientific order, and greatly enhancedthe overall management level.

Improvement of basic management

In order to implement the risk responsibility and goal managementapproach, SCW put emphasis on team building and workfloormanagement on top of management standardization, information sharingand employee education. The company has run 17 training classes forteam supervisors, and all the supervisors in the firm have been trained.Three hundred and fifty-five outstanding safety production teams havebeen awarded.

Improvement of workfloor management

The workfloor management centres regulate discipline for bothtechnological operations and labour, thus preventing any incidents suchas leaks of dangerous liquids or gas and promoting a hygienic productionenvironment. The firm has awards from both the Chemical Ministryand the province for its safety. Although the chemical process is harshand dangerous, SCW has tried at great cost to maintain safety andprovide a human-friendly environment.

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Improvement of technical management

The risk responsibility goal management approach has resulted in asteady decrease in total production costs since it was implemented, andthis has helped SCW gain the leadership position in the industry forproduct quality and management. Premium products accounted for 87per cent of the total output. Urea and melamine have maintained theirfamous brand reputation in the country. Great achievements have beenmade in the field of safety with a total incident rate below 0.15 per cent,much lower than the industry standard of 0.30 per cent. Within the lastten years, no fatal incident has occurred. Detailed technical achievementsare shown in Table 7.1.

1978

1978

1978

1978

1978

1978

1985

1985

1986

Triple tube internal ofNH3 converter

NH3 synthesis catalystType A9

Perforated tray withnon-homogeneousopening rate for copperliquid scrubbing column

Modified ADA de-sulphuration process

CO2 removal process ofDETA catalysed K2CO3solution

Intermittently catalyticreforming of natural gas

Treatment of NOx inHNO3, tail gas by selectivecatalytic productionprocess with NH3

Technical innovation ofan imported large-scalefertilizer plant

Solid ammonium sulphitefrom treatment of SO2 insulphuric acid tail gas

Award from NationalConference of Science






National Third Prize forTechnical Innovation


Second Prize for TechnicalInnovation from Ministryof Chemical Industry

Qinghua University

Research Institute ofNanjing ChemicalCorporation

Chengdu Universityof Science andTechnology

Sichuan University

Chemical ResearchInstitute

Chengdu Universityof Science andTechnology

Year Item Cooperators Award

Table 7.1 Important technical achievements

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Year Item Cooperators Award

Table 7.1 Cont’d

1987

1987

1989

1990

1992

1992

1995

Primary reformingcatalyst Z109-1Y,Z109-2Y

Computer controlledlarge-size NH3 plant

Modification of themelamine plant stripperwith triphase perforatedtray by SCW

Computer controlsystem for fertilizermanufacture

Ammonia plant built byChina with capacity of200,000 tons

A technical revampingproject for energy-saving and productionof the outmodedammonia plant

Porous granularammonium nitrate

Chengdu ResearchInstitute of OrganicChemicals ofScience Institute

Chengdu 715Factory

Shanghai ChemicalResearch Institute

Nanjing ChemicalResearch Institute

Eastern ChinaChemical Institute

Shanghai ChemicalResearch Institute

13 cooperatorsincluding CCECC

National Second Prizefor Technical Innovation

First Prize for TechnicalInnovation fromSichuan Province

First Prize for TechnicalInnovation from Ministryof Chemical Industry


First Prize for TechnicalInnovation fromSichuan Province


Second Prize for TechnicalInnovation from Ministryof Chemical Industry


Special Prize for TechnicalInnovation from Ministryof Chemical Industry

National First Prize forTechnical Innovation

Second Prize forTechnical Innovationfrom Sichuan Province

Second Prize forTechnical Innovationfrom Sichuan Province

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Drastic improvement in financial goals

CEO Xie pointed out:

In essence, the aim of reinforcing management is to do a betterexchange job of input for output. A better result in that exchangeis a good illustration of better management. Since the implementationof the risk responsibility goal management approach, the enterprise’seconomic profits have increased so much that major economicindexes have reached historical heights.

Note

1. The expression commonly used in China to refer to equal pay withoutconsidering performance and contribution under the central planningeconomic system.

8

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The Jingwei Textile MachineryCo. Ltd

The Jingwei Textile Machinery Company Ltd (Jingwei) operates in thetextile machinery sector. Jingwei is one of the largest textile machinerymanufacturers in China. It produces a wide array of textile machineryproducts, which can be classified under three categories: natural fibretextile machinery, chemical fibre textile machinery and components,and special parts for textile machinery.

This analysis compares Jingwei with three other user selected companies:Shanghai Erfangji Textile Machinery Co. (1999 sales of 291.04 millionChinese Renminbi [US$35.16 million]), Lakshmi Machine Works Limitedof India (2000 sales: 4.31 billion Indian Rupees [US$92.58 million] ofwhich 46 per cent was spinning preparatory machinery) and ChinaTextile Machinery Stock Ltd (1999 sales of 276.89 million ChineseRenminbi [US$33.45 million]).


The vigorous development of China’s industry in recent years broughta continually increasing demand for machine tools. According to aChina Machine Tool & Tool Builders’ Association report, during theEighth Five-Year Plan period (1990–95) the import of machine toolssteadily increased to US$2.2 billion in 1995. In 1996 the import valuereached the record-breaking level of US$2.52 billion. This surge wasdriven by the belief that the Chinese government would announce acancellation of the tariff exemption on imported capital equipment atthe end of the year. This indeed did occur. The import of machine tools

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in 1997 dropped down to US$1.58 billion. Starting from 1 January1998, the Chinese government resumed tariff incentives and preferentialtreatment on imports of high technology and machine tools for foreign-funded projects. China imported US$688 million worth of machinetools in the first six months of 1998, up 9.77 per cent from a yearearlier.

There has been a rapid increase in the demand for NC (numericallycontrolled) and high-efficiency and precision machine tools of medium,medium-high and high grades. According to a China Machine Tool &Tool Builders’ Association report, the consumption rate of machinetools and the market share of NC and high-efficiency precision machinetools have increased from 6 per cent to 30 per cent of all machine toolsfrom 1990 to 1996. Domestic production of similar grade machinetools has been insufficient to meet market demand and, as a result,imports of foreign manufactured machine tools have increased dramaticallyduring the past few years.

Company profile

Historical perspective

Most of the big state-owned enterprises in China, especially those withstrong production capability and technical competence, were built inthe 1950s. The national economy from the 1950s to the 1980s wasdominated by central planning, which was learned from the Soviet Union.China established its basic industries such as the mechanical industry,the electronics industry, the shipbuilding industry, general light industryand the textile industry. The distribution system was socialist, i.e. equalpay. In general, in a poor and backward country such as China in the1950s to the 1970s, the national economic goal was to provide employmentto everyone with production capability. In emerging basic industries,there was shortage of supply, and thus anything produced could be soldquickly. There was no conception of competition in the marketplace.Over the forty years, the SOEs have developed into small societies,heavily involved in social responsibilities from kindergartens to hospitals.During the last twenty years of reform, many of such problems havebeen solved, but some critical issues still remain, thus forming thechallenges to efficiency and effectiveness for firms such as Jingwei.

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The Jingwei Textile Machinery Co. Ltd


Challenge of technology innovation

The biggest challenge for Jingwei in the market economy is technologyinnovation. With the global economic situation constantly changing,technological innovation is a driving force. Jingwei is facing the challengeof global competition, especially after China joined the WTO and hasbeen abandoning all protections and tariff barriers. Can Jingwei survivein the face of open competition with domestic and foreign players?

The normal practice in Jingwei was to buy the most advanced productsor technology, if possible, and learn from them. Frequently, Jingweipurchased the blueprint and the patent, and spent several yearsdigesting the new technology and turning it into commercial products.When the products hit the market, although no longer advanced,they would hopefully not be obsolete. The company was constantlyplaying catch-up.

Challenge of compensation

One of the major reasons leading to the lack of motivation in technologyinnovation in SOEs is that all the employees including the managershave not been paid for what they have contributed. Even though variousapproaches have been attempted, the problem still remains. Globalcompetition affects products, technology, quality, production costs andmarketing strategies. However, another look reveals that globalcompetition is about human talent. Without an appropriate compensationsystem, there will be no motivated workforce, and without enthusiasticemployees, there is no way to withstand the global pressure.

In technology, it is hard for Jingwei to take a leadership role becausethe company cannot guarantee a better quality of life. Since there islittle difference in pay no matter whether people perform well or not,there are very few technical people focusing on their job. In a market-driven society, competent people can buy a house of their own and havea car for convenience. Therefore people choose jobs that can bring themmore income to satisfy their material needs.

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Challenge of high staff turnover

It is difficult for Jingwei to keep junior technicians. Jingwei has becomethe employee resource for joint ventures and private and foreign-ownedcompanies. Two or three years after graduation, employees have beenwell trained in the production process and become most productive, atwhich point headhunters offering much higher pay attract them away.Shitong Chen, the CEO of Jingwei, illustrated this point with his personalexperience:

My son, who graduated from a university, majoring in computers,went to work for a foreign-owned company. His monthly salarywas higher than mine. I have been working for so long, and managingsuch a large company, which has been very successful. However, Iwas paid less than new college graduates. On the other hand, if Ineed people such as my son, I have no way to afford to attract himhere.

CEO Chen explained that the distribution system and working conditionsfor SEOs such as Jingwei are poor at attracting and keeping humantalent, resulting in a high turnover rate. This is understandable becausethese people hope to have bigger living areas with better living conditions,and they want to have their own cars.

This is a major problem for SOEs that cannot afford to pay what theemployees’ contribution is worth and satisfy the minimum livingrequirements of a modern society. ‘The government knows it and we,the executives of SOEs, know it, but it is just hard for us to solve itunder the present conditions, which is an accumulation and legacy ofthe centrally controlled system of the past 50 years.’ The needed socialinfrastructure is lacking. There is chaos in an organization when suddenlya very few people get paid ten or twenty times more than the majorityof the employees in the company who have deep rooted feelings aboutequality in pay from the traditional system.

Challenge of employee quality

CEO Chen argues that labour costs are not low in China. He explainedthat people only look at the individual pay rate and jump to the conclusionthat labour costs are favourable. In fact, in SOEs, several people are

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doing the job that one man can handle, and the skills of these people arepretty low. He compared the textile machinery manufacturers in Taiwanhe visited in July 2000 with their counterparts in China. The maximumnumber in those factories in Taiwan is less than 200, while there areseveral thousand in the mainland firms. People in Taiwanese firms masterthe core technology and assembly secrets, and outsource other factoryjobs. They have much higher profits.

Strategic responses

The Jingwei contemporary integratedmanufacturing system

The aim of establishing the Jingwei contemporary integratedmanufacturing system (JW-CIMS) was to improve the competitivenessof the organization by information integration, process re-engineeringand optimization, and flexible manufacturing (enterprise integration).This system requires huge investments. In the ten years before 1996,Jingwei invested 15 million yuan into its research and application. In1996, Jingwei had attained the operating scale and company size requiredby the government to issue stock to the public. The 10 million yuan ofequity was used for development of and modifications to the JW-CIMSsubsystems.

The JW-CIMS consists of four systems: the manufacturing automationsystem (MAS), the computer-aided quality system (CAQ) and themanagement information system (MIS), plus the computer-aidedoperations systems such as computer-aided design (CAD), computer-aided process planning (CAPP) and computer-aided manufacturing (CAM).A team of about 100 worked on the development and application ofCIMS. In 2000, Jingwei had three super-small machines, 70 CADworkstations, 250 peripheral PCs and 100 graphic printing machines,which constituted the information network covering all the systems,departments for various products and businesses. With the support ofthe data system, great work has been done in enterprise management,product development, technology innovation, product manufacturing,sales and marketing, etc.

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Engineering design system

Since 1990, group technology CAD (GT-CAD) has been used to establisha databank for categories of parts for old products and to providesupport for improvement modifications. Two-dimensional and three-dimensional technology has been used for new product design anddevelopment. Optimization technology was used for designing crucialparts, thus enhancing the product standardization and serial level. In1996, a project to design without the use of drafting boards was completedand all new products could be designed through the engineering designsystem. Since then many new application methods have been developedfor CAPP and CAM systems to effectively improve the engineeringdesign technology. The integration of CAD/CAPP/CAM based on theSTEP standard and the project to design without the use of draftingboards provided the enterprise with new tools and technology whichgreatly shortened the product research and development cycle and greatlyreduced the cost both for labour and equipment for engineering design.

Manufacturing automation system

Computer numerical control (CNC) and flexible automated systems(FAS) have been the focus of investment in recent years for Jingwei,with 90 million yuan being spent on computer numerical machines,production centres and flexible production lines. In 1999, CNC machinesaccounted for more than 30 per cent of all the fixed assets in machinesin Jingwei, and CNC technology upgraded and greatly enhanced themanufacturing capability and provided a solid foundation for new productdevelopment and product quality. Two FAS lines were integrated throughnetworks and the MIS using CAD/CAPP/CAM. In 1997, a large-scaleflexible production workshop was set up, and Jingwei was equippedwith the capability to develop and manufacture new and high-techproducts.

Quality control system

The quality control system (QCS) works together with the enterpriseMIS to collect and analyse information concerning the quantity andquality of all materials in the firm. Automatic follow-up and control areperformed by the QCS. The major functions of the QCS are the planning

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of quality and the scheduling of quality index, and evaluation andassessment. The QCS is also used to implement the ISO 9000 standardsand evaluate the work results. It is employed in the analysis of qualitycost control and the quality test for product modification with qualityfunction deployment (QFD) methodology. The QCS has done anoutstanding job in improving product quality and quality management.

Enterprise management system

The enterprise management system is a modified form of ManufacturingResource Planning II (MRP II), a closed-loop manufacturing system.The enterprise management system covers all the strategic functionalunits, such as marketing, material procurement, production planning,manufacturing control, inventory management, accounting and finance,equipment management, HRM and office automation. It is an advancedand effective management information system, which integrates the flowof material, information and value. The entire operational process ofover 98 per cent of the firm’s sales has been integrated, resulting inimprovements in production scheduling efficiency, a much shorterproduction cycle for major products, timely and accurate response ofthe firm to customer demand and, enhanced capability of the firm toadapt to changes in the market, as well as in improved capital utilizationand inventory management.

Competent top management team

In the past ten years, explained CEO Chen, Jingwei has paid specialattention to the training and development of its top management team.They all understand that the TMT is the central nervous system of theorganization. Having analysed the real situation, both internally andexternally, the top management team have made several decisions whichhave proved crucial to Jingwei’s long-term success.

Accumulating capital from the stock market

The usual practice of large Chinese firms in financing their operationshas been to use their leverage to borrow money from the banks. Manyfirms got into this deadly cycle and have suffered from the heavy debt.

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The top management team realized this trap, and decided to establish anew route for the organization. In the late 1980s, Jingwei started toprepare for the future stock strategy. In China, not many firms dared totake action to get into the stock market because the government hadstrict regulations and very high requirements in terms of a firm’sperformance and size. After about ten years of hard work and preparations,Jingwei at last succeeded in issuing stock to the public in 1996, andgathered enough funds for product research, development and innovation.In May 2000, Jingwei issued stock for the second time to finance itsstrategic actions.

Proactive actions in the marketplace

Jingwei is one of the few companies in China with advanced CIMS,which increased the firm’s capability for a quick response to marketdemand. The integration of information processing and research anddevelopment capability provides competitive advantage to Jingwei. Eachyear, the company purchases for research purposes the most advancedequipment and facilities in the world such as computer numerical controlledmachines, flexible production lines, etc. As CEO Chen noted, he had allthe best machines in the world for his business. Based on the newdevelopments in the global market, Jingwei tries to innovate and createnew products for the next generation and gain first-mover benefits. Chenexplained that market followers were always playing catch-up and werealways attempting to meet the strategic minimum in the market. Withoutproactive actions, he continued, the firm would never win in the marketplace.

Strategic asset restructuring

When talking about the strategic responses to the challenges facingJingwei, Chen commented that strategic asset restructuring is one of thecore actions leading to competent organizations. In the past, the lack ofscientific scheduling and market demand-supply mechanisms led to thecommon practice in China of duplicating production capacity, resultingin over-capacity in the market. Today, most firms are restructuring assets,though some have not done a good job. Many firms spun off some oftheir units along the value chain, attempting to focus on their corecompetence. But Jingwei adopted a related diversification strategy. Inthe past, the textile machinery made in Jingwei could only produce fine

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cotton yarn, which is the last of five cotton processes. Now Jingwei canprovide a complete set of high quality machines for cotton processing. Chenmade an analogy: ‘In the past, we were only one warship and otherproducers were independent ships fighting on their own, whereas now wehave grown into a fleet of ships, enjoying economies of scope.’ In fact,what Jingwei has done is to combine the advantages of different assetsand optimize the operation. Jingwei has now taken the lead in its industry.

Strategies to retain human talent

In order to attract the best people in the industry, Jingwei moved itsheadquarters from Shanxi Province to Beijing, with the production baseremaining in Shanxi. The Technology Centre was set up in Beijing withresponsibility to research and develop new products. Because theproduction base and Technology Centre are situated far away from eachother in two different localities, different pay and compensation systemswere used. Now there is no problem with internal equity to use marketpay or better pay to attract and keep technical people in the organization.There are other ways that have been used in economic terms. For example,suppose the firm purchases a flat that is worth 1.4 million yuan. Everymonth the firm pays most of the mortgage. If the employee living in thethat stays in the firm for ten years, then the flat would become thatperson’s property. So people are encouraged to think hard before decidingto leave the company.


Competitor sales analysis

Jingwei reported sales of 803.59 million yuan (US$97.09 million) forthe year ending December 1999. This represents an increase of 96.2 percent (see Table 8.1) over 1998 when the company’s sales were 409.63million yuan.

During 1999, the company’s sales increased at a faster rate than itsthree major competitors in the Asian market:1 Shanghai Erfangji TextileMachinery Co., Lakshmi Machine Works Limited of India and ChinaTextile Machinery Stock Ltd. Shanghai Erfangji Textile Machinery Co.reported sales of 291.04 million Chinese Renminbi (US$35.16 million)

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in 1999. In 2000, Lakshmi Machine Works Limited of India had salesof 4.31 billion Indian rupees (US$92.58 million), of which 46 per centwas preparatory spinning machinery. China Textile Machinery StockLtd generated sales of 276.89 million yuan (US$33.45 million) in 1999.

While Jingwei enjoyed a sales increase of 96.2 per cent, the othercompanies saw smaller increases: Shanghai Erfangji Textile MachineryCo. sales were down 5.4 per cent, Lakshmi Machine Works Limitedincreased 5.0 per cent and China Textile Machinery Stock Ltd experiencedgrowth of 0.7 per cent.

Stock performance

In recent years, this stock has performed poorly. In 1997, the stocktraded at 3.28 yuan against 1.52 Chinese RMB in February 2001. In1997, the stock retreated significantly from its high because of its strategicexpansion, and by the end of the year was at 0.82 yuan. The stock pricehas more than doubled recently: for the 52 weeks ending 23 February2001, the stock of this company was up 126.4 per cent to 1.52 yuan.Within 13 weeks in 2001 the stock had increased 38.8 per cent.

During the 12 months ending 31 December 1999, earnings per sharetotalled 0.21 yuan. Thus the price/earnings ratio was 7.23. Earnings pershare rose 950.0 per cent in 1999 from 1998 (see Table 8.2).

Company Year Sales Sales Sales/ Largestended (US$ m) growth employee region

% (US$)

Jingwei Textile December 97.089 96.2 11,265 N/AMachinery 1999Company Ltd

Shanghai December 35.163 –5.4 N/A N/AErfangji Textile 1999Machinery Co.

Lakshmi Machine March 92.581 5.0 N/A IndiaWorks Limited 2000 (100.0%)

China Textile December 33.453 0.7 5,396 N/AMachinery 1999Stock Ltd

Source: Wright Investors’ Service, 23/02/01.

Table 8.1 Sales comparisons (most recent fiscal year)

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Table 8.2 Summary of company valuations

Company Date P/E Price/ Price/ 52-week priceBook Sales change

Jingwei Textile 23/02/01 7.2 0.78 0.80 126.40%Machinery Company Ltd

Shanghai Erfangji 19/02/01 105.2 1.59 4.91 179.25%Textile Machinery Co.

Lakshmi Machine 23/02/01 4.2 0.41 0.23 –51.47%Works Limited

China Textile 19/02/01 N/A 5.83 3.21 220.00%Machinery Stock Ltd

This company is currently trading at 0.80 times sales. The threecompanies vary greatly in terms of price to sales ratio: trading from0.23 times all the way up to 4.91 times their annual sales. Jingwei istrading at 0.78 times book value. Since the price to book ratio is lessthan 1, this means that theoretically the net value of the assets is greaterthan the value of a company as a going concern.

The market capitalization of this company is 643.10 million yuan(US$77.70 million). Closely held shares (i.e. those held by officers,directors, pension and benefit plans and those shareholders who ownmore than 5 per cent of the stock) amount to over 50 per cent of thetotal shares outstanding: thus it is impossible for an outsider to acquirea majority of the shares without the consent of management and otherinsiders. The capitalization of the floating stock (i.e. that which is notclosely held) is 21.32 million yuan (US$2.58 million).

Profitability analysis

On the 803.59 million Chinese RMB in sales reported by the companyin 1999, the cost of goods sold totalled 595.94 million Chinese RMB,or 74.2 per cent of sales. In other words, the gross profit was 25.8 percent of sales. This gross profit margin is slightly lower than the companyachieved in 1998, when cost of goods sold totalled 73.4 per cent of sales(see Table 8.3).

The company’s earnings before interest, taxes, depreciation andamortization (EBITDA) were 111.89 million Chinese RMB, or 13.9 percent of sales. This EBITDA margin is better than the company achievedin 1998, when the EBITDA margin was equal to 10.0 per cent of sales.

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In 1999, earnings before extraordinary items at Jingwei TextileMachinery Company Ltd were 88.60 million yuan, or 11.0 per cent ofsales. This profit margin was an improvement over the level the companyachieved in 1998, when the profit margin was 2.1 per cent of sales. Thecompany’s return on equity in 1999 was 12.0 per cent. This wassignificantly better than the 1.2 per cent return the company achieved in1998.

Inventory analysis

As of December 1999, the value of the company’s inventory totalled447.71 million yuan. Since the cost of goods sold was 595.94 millionyuan for the year, the company had 274 days of inventory on hand.Another way to look at this is to say that the company turned over itsinventory 1.3 times per year. In terms of inventory turnover, this is asignificant improvement over December 1998, when the company’sinventory was 312.83 million yuan, equivalent to 380 days in inventory.

Note

1. Note that not all of these companies have the same fiscal year: themost recent data for each company are being used.

Company Year Gross profit EBITDA Earningsmargin margin before extra

Jingwei Textile Machinery 1999 25.8% 13.9% 11.0%Company Ltd

Jingwei Textile Machinery 1998 26.6% 10.0% 2.1%Company Ltd

Shanghai Erfangji Textile 1999 N/A N/A 2.3%Machinery Co.

Lakshmi Machine 2000 16.2% 14.6% 5.0%Works Limited

China Textile Machinery 1999 N/A N/A –63.5%Stock Ltd

Table 8.3 Profitability comparison

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The Harbin Electric MachineryCompany Ltd

The Harbin Electric Machinery Company Ltd (HEC), the former HarbinElectric Machinery Works, was founded in 1951 and was one of the 156industrial bases that were built with the aid of Russia. HEC is theleading manufacturer of thermal and hydropower equipment and completepower stations in China. HEC has 9,830 employees, including technicalstaff of 1,840. HEC has produced an accumulated total capacity ofelectric power generating equipment of 49,000 MW, about one-third oftotal installed capacity of Chinese-made units. HEC has also exportedpower-generating equipment to Asia, Africa, America and Europe, andhas established substantial economic and technical cooperation relationswith 28 overseas firms in 12 countries.


China’s electric power industry also experienced an oversupply problem,due in part to slower Chinese economic growth owing to the Asianeconomic crisis. While residential demand was up 10.5 per cent in 1998over 1997, demand from heavy industry, the main consumer of electricpower in China, was unchanged.

The Chinese government responded to the short-term oversupply inpart by implementing a drive to close down small thermal power plantsand imposing a moratorium on the approval of new power plantconstruction. Most of the small plants are diesel or coal-fired plants,which were opened by provincial or municipal governments as demand

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grew in the 1980s, and are relatively inefficient and environmentallydamaging.

Chinese officials have stated that the moratorium on new powerplant construction will be in effect for two years, and three years fornew coal-fired plants. To keep China’s domestic power equipmentmanufacturers afloat, a moratorium on purchases of foreign-builtgenerators with a capacity of less than 600 MW has been imposed. Evenso, as of the beginning of 1999, there was a total of 70 GW of newcapacity under construction or with final approval, so there will still bea significant capacity increase in the near future. The largest projectunder construction, by far, is the Three Gorges Dam, which whencompleted will power 26 separate 700 MW generators, for a total of18.2 GW. There are also several nuclear projects under construction,with Russian, French and Canadian firms involved in several projects.

Another key issue for China’s power industry is the distribution ofgeneration among power plants. China’s goal is to create a unifiednational power grid, and to have a modern power market in whichplants sell power to the grid at market-determined rates. In the shortterm, though, traditional arrangements still hold sway, and state-ownedpower plants that have government connections tend to have a higherpriority than independent private plants. Additionally, some privateplants with ‘take-or-pay’ contracts, which provide for guaranteed minimumsales amounts, have had trouble getting the provincial authorities to runthe local grids to honour those terms.

Domestic competition

There are approximately 600 domestic boiler factories which produceresidential and industrial boilers. Of these the Harbin Boiler Factory,the Shanghai Boiler Factory and the Dongfang Boiler Factory are thebiggest, occupying nearly 60 per cent of the market.

There are a few large, electric machine factories in Shanghai (ShanghaiElectric Machinery Factory), Sichuan (Chengdu Electric MachineryFactory) and Harbin (Harbin Electric Machinery Factory), which allcooperate with foreign companies in the technology field.

Most air pollution control equipment is produced locally. However,the high cost of flue gas disperser (FGD) systems means that they arestill not commonly used and therefore not generally manufactureddomestically.

Some institutes and universities also contribute to the development

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The Harbin Electric Machinery Company Ltd

of clean coal technology such as the Shanghai Institute of IndustrialBoilers and the Second Design Institute of Hangzhou (both of whichbelong to the State Machine-Building Industry Bureau), QinghuaUniversity, the Harbin Institute of Technology, Xi’an Traffic Universityand Zhejiang University.

Third-country imports

Foreign companies occupy 25 per cent of the Chinese market. Becauseof their competitive prices, some European countries have made moderategains in China. Their strategic entry into China’s market is in hopes ofbeing part of its future prospects. Due to their soft loans, Japanesecompanies also occupy a small percentage of the Chinese market. Recentprojects awarded include the Jiangui Jiujing Phase of the Three PowerGenerating Co., which was awarded to Hitachi and Itochu (Japan) andFoster Wheeler (US) in March 1998. Valued at US$192 million, theproject is to build a coal-fired power plant with 700,000 KW capacity.In June 1998, National Power (UK) announced that it would investUS$180 million in a coal-fired power station in Changsha, Hunan andan additional US$66 million with a 49 per cent stake in the Shaowu,Fujian plant. On 2 July 1998, Shandong Huaneng Power DevelopmentCo. signed two equipment purchase contracts with Deutsche BabcockAG and Siemens AG in which the two companies will supply two 660MW boilers for the Dezhou Power Plant Phase III expansion. The twonew coal-fired units are expected to become operational by 2002 and2003. The total purchase agreement amounted to US$160 million.

US market share

During the Summit between Presidents Bill Clinton and Jiang Zemin inOctober 1997, the United States announced an initiative of cooperationin energy and environmental science, technology and trade between thetwo nations. A joint programme of conducting research and expandingefficiency and clean energy technologies was planned. Such expandingcooperation between China and the United States will open new investmentand trade opportunities for US companies, as US technologies can helpChina meet the challenges of its energy and environmental needs. UScompanies can concentrate on providing four main areas of technologyto the Chinese market: for improving coal quality, for increasing coal-

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combustion efficiency, for improving post-combustion particulates andfor improving coal use in urban households.

In May 1998, the Meizhou Wan power plant received final approval.This 700 MW coal-fired power plant is the first wholly foreign-ownedand offshore funded power project. The plant would be run by FujianPacific Electric, 70 per cent of which is owned by Intergen (a 50 : 50joint venture between Bechtel Enterprises of the US and Royal DutchShell). Operations were expected to begin in 2000. On 26 June 1998,the joint venture Zhejiang Wenzhou Telluride Power Generating Co.was established. The cooperative joint venture will begin building a 600MW coal-fired power plant near Wenzhou, Zhejiang at the end of theyear. The plant is scheduled to open for operation in 2001. The jointventure is composed of affiliates of the US-based Oxbow Power Corp.and Sithe China Holdings (40 per cent), Zhejiang Provincial PowerDevelopment Co., China (30 per cent) and Wenzhou Power InvestmentCo., China (30 per cent).

On 1 July 1998 a power plant joint venture agreement was signedbetween Johnston Southern Development Co. (Southern Energy Co.and Johnston Development Co.) and Shanxi Enhua Co., China. TheUS$500 million project will build two 300 MW coal-fired power unitsin Shanxi province. The project will use domestic products and is one ofthe first large-scale power plants to be sponsored by China’s coal industry.

Company profile

The main products of HEC are hydro turbines, hydro generators, turbogenerators, synchronous compensators, synchronous motors,asynchronous motors, DC motors, DC dynamometers, Eddy currentdynamometers, complete equipment and auxiliaries including main valves,governors, oil pressure units, control systems and elements, field excitationsystems and hydrogen, oil and water control systems. HEC has over3,800 various kinds of manufacturing equipment, and an annualproduction capability of turning out turbo generators of total capacity3,500 MW, hydro units of total capacity 800 MW, and AC and DCmachines of total capacity 600 MW. The maximum unit capacity of thehydropower generating units produced by HEC is 300 MW for Francisturbines and 200 MW for Kaplan turbines. The maximum unit capacityfor the turbo generator is 600 MW, 42 MW for the AC motors, 5.5 MWfor the DC motors and 60 MW for the condensers.

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Global competition

Globally, the electric equipment market is mature in the developedcountries. Many giant electric equipment and facility manufacturers inthe developed countries are suffering a drastic decrease in productionowing to a steady drop in market demand. Mergers, restructuring andacquisition became a common practice in this industry all over theworld. Zheng, the Vice President, explained that well-known companiessuch as General Electric (GE) and Westinghouse Electric Company weredoing well in the 1970s and 1980s, when they generated more than 20million kilowatts every year. But things started to go from bad to worsefrom the late 1980s. When Zheng visited GE in early 1999, he saw thatthe factory covering 0.1 million square metres had only one 0.35 millionkilowatt generator for Qilihe in China.

Like GE, most of the famous electric equipment suppliers focusedtheir attention on the Chinese market, where there was a steady increasein demand because of the fast development since 1978. The entry ofthese companies equipped with advanced technology and wide productionexperiences has made life harder for domestic Chinese electricmanufacturers. Since 1995, more than 40 per cent of the Chinese markethas been taken by foreign suppliers.

Domestic competition

In the 1960s, China duplicated factories and moved them to the inlandareas of the country owing to its poor relationships with the USSR. TheOriental Electric Motor Factory (OEMF) was such an example. HECsent its best people and best factory facilities to Sichuan to set up theOEMF, which has the same production capability, production lines andproducts, and even the same management style. Today, this factory isthe major competitor for HEC because they produce the same productsand compete for the same customers.

Another major threat comes from joint ventures in China. Until 1995,HEC was one of the biggest manufacturers in the industry. It hardlyworried about the market for its products because of its technology,good quality products and solid relationship with customers. However,since 1995, the Chinese government has allowed foreign manufacturersinto the domestic market. Most foreign companies join up with domestic

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companies and provide the technology and new production lines whilethe domestic firms provide the marketing know-how and distributionchannels in China. These joint ventures have competitive advantagesover HEC because they have better manufacturing facilities and flexibleproduction lines and lack the social burden of HEC.

Incomplete restructuring

HEC went through a company-wide restructuring in October 1994 thatseparated the social responsibilities such as hospitals, schools,kindergartens, etc. from HEC. At that time, HEC had 12,500 people,and 2,500 were spun off to establish the Harbin Electric EnterpriseDevelopment Co., Ltd. The major purpose of restructuring at that timewas to get its stock issued to the public in Hong Kong. It has been morethan seven years since the restructuring, but HEC is still responsible forfinancing that part of the social responsibility. Every year, HEC has toallocate about 60 to 70 million yuan to those separated units. Thesenot-for-profit units need money to increase their employees’ pay toadjust for inflation and for bonuses to attract and keep staff.

High turnover of key employees

Low pay is the major problem causing high turnover of key employees,especially the technical workforce. Many employees work in HEC forsix to eight years after graduation from university to become experts inthe various departments. They are then enticed away by other firms,particularly by joint ventures and privately owned branches of foreign-owned companies where the pay and other benefits are seven to tentimes better than HEC’s. Vice President Zheng explained that one HECaccount manager, who was highly knowledgeable and competent, earned1,000 yuan in HEC per month and lived in a flat of about 50 squaremetres. Mawan Electric Power Plant in Shenzhen recruited him for20,000 yuan a month, plus a house of more than 100 square metres inaddition to a personal car. HEC could not compete.

Lack of technicians

HEC was one of the key enterprises in China. From 1959 to 1998, eachyear the state would assign graduates from key universities to work for

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HEC. Now things are different. Students are no longer assigned to workby the state. The principle of Three Satisfactions was used by universitystudents when job hunting: satisfaction from the university, satisfactionfrom the student and satisfaction from the parents. Since then, HEChardly attracts any high-quality graduates from key universities becausethey have better alternatives where they can get much better compensation.In addition to being unable to recruit top graduates, competent peoplehave left the company. Human resources have become one of the criticalthreats to future development.

Strategic responses

Strategy for technological innovation

HEC established an R&D centre, the high-calibre Harbin ResearchInstitute of Large Electric Machinery, which is the base for significantscientific research and product development for HEC. It is also theadvisory body and leading institute for all the large electric machineryand hydro turbines in the country. The institute has 40 test stationsequipped with advance testing and measuring facilities, and a workshop.It has seven research sections, including electric machine testing, hydrotesting, ventilation testing, etc., and a workshop for machining testedcomponents. The institute is equipped with an internationally advancedhigh head hydraulic test stand, and a 3,000-ton thrust-bearing test stand.Both are world class. It mainly conducts testing, research and developmentfor large hydroelectric power-generating units, large turbo-generators,large AC and DC motors and control equipment related to electricmachinery products.

HEC has attempted technological innovation and developed somehigh-tech products to differentiate if from other competitors. The long-term objective is to keep the competitive edge by sustaining some productsor technology that are hard for other firms to imitate and expensive tocopy.

Quality strategy

In the process of reform and development, HEC has improved its technicaland product quality levels significantly. HEC has formed an excellent

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quality assurance system and obtained the certificate for qualified qualitysystem of GB/T19001. HEC has adopted overall quality control andwork site management systems. All the main products are produced tointernational standards. The company has been ISO 9001 certified since1994.

Project management techniques, with quality control as their core,control project quality and meet the requirements of customer and contractspecifications. According to ISO 9001 certification initiated in 1994,HEC had a good quality system, including a quality assurance standardof design, development, manufacture, installation and service. Certification(No. 96003) was issued by VTI of China on 25 April 1996, and issuedby FMRC (96081. IV) of the USA on 5 August 1996.

HEC issues a Quality Plan for specific projects, in which specificquality precautions, the sources and the sequence of activities are stipulated,and the objective of quality control over the project is defined. Withquality control management, HEC can assure its customers with confidenceand objective evidence that it can supply reliable premium-quality powerequipment and facilities.

Product strategy

HEC has established a marketing strategy that is profit centred, led byproduct development, ensured by excellent quality, based on scientificadministration and driven by the market. HEC introduced and optimized60 MW turbo generators and 210 MW turbo generators for Pakistanand 2,050 rolling mill motors manufactured to internationally advancedstandards on both product quality and technological attributes. HECwon the state’s scientific and technical progress super grade prize andgold medal prize for the Gezhouba 125 MW hydro units and silvermedal prize for the Yunfeng 100 MW and the Taipingwan 47.5 MWhydro units. HEC was awarded National Grade I Enterprise, ‘May 1st’Labour Prize Certificate, Quality Control Prize of MMI, National ExcellentEnterprise (Gold Horse Prize).

HEC has built a modernized turbo generator workshop with a 36 mspan, a crane of 400 tons and a world-class stator frame machiningcentre and shaft machining centre. HEC has solved the machining andtransportation problems of large pieces for the Yantan power plant onthe coast of the Bohai Sea that will help the Three Gorges project.

After several technical improvements between China’s Seventh andEighth Five-Year Economic Plans, HEC reached an annual output of

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3,500 MW for turbo generators, 800–1,200 MW for hydropowergenerating units and 600 MW for AC and DC motors. HEC now canproduce 300 MW and 600 MW turbo generators in batches.

By the end of 1997, HEC had produced altogether 57,466 MW ofpower generating equipment and 11,733 MW of DC and AC motors.The hydropower generating units produced by HEC accounted for morethan half the total installed capacity produced domestically in China,HEC having installed 120 hydro power stations in 22 provinces. Theturbo generators made by HEC accounted for one-third of the totalinstalled capacity, HEC having installed 132 thermal power plants in 22provinces.

HEC has exported products to Canada, the Congo, Korea, Pakistan,the Philippines, Turkey, the USA, Venezuela and some other countries.The contract value of the exported products is around US$345 million.

Strategy for business alliance

In recent years, HEC has built up close cooperative relationships withabout 30 companies in 12 countries. It has established good strategicpartnerships with Hitachi, Siemens and Voith, and periodically exchangestechnologies with those companies. HEC and the Bohai Bay ShipbuildingWorks have formed a joint venture, the Northeast Binhai HydroelectricLarge Machinery Plant, where it installed large-scale manufacturingequipment such as the 16 m vertical lathe, ∅250 milling machine,∅12.6 m furnace and welding positioners. Large hydroelectric equipmentcan be made in this plant and delivered directly by sea.


HEC is prepared to contribute to the coming Three Gorges project1,000 MW nuclear turbo generators and other power plants in what isa bright future. After forty years of establishing and developing a teamof employees with proficient skill and knowledge, HEC’s spirit is to‘unite to struggle, persist in forging ahead, warmheartedly dedicated’.

HEC produced an accumulated total capacity of electric power-generating equipment of 49,000 MW, about one-third of the total installedcapacity of Chinese-made units. These units include 230 thermal andhydropower plants in China and 11,000 MW of AC and DC motors,

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meeting the demands of China’s metallurgical, mining, petrochemical,electric power and defence sectors. HEC has also exported power-generating equipment to Asia, Africa, America and Europe, and hasestablished substantial economic and technical cooperative relationswith 28 overseas firms in 12 countries.

Since 1985, HEC has been awarded more than 50 prizes and honoursby the nation, province and Harbin City for the excellent quality of itsproducts and the progress of the technology. The 125 MW hydropowergenerating unit for the Three Gorges Power Station gained a nationalgold medal. The 100 MW hydropower generating unit for the YunfengPower Station and the 47.5 MW hydropower generating unit for theTaipingwan Power Station gained silver medals for excellent quality.

Sales analysis

HEC enjoyed sales of 2.96 billion yuan (US$357.45 million) in 1999.Of the revenues, sales of goods accounted for 66 per cent and servicesrendered 31 per cent while sales of properties was 3 per cent for powerstations (see Table 9.1). HEC is the leading manufacturer of thermaland hydropower equipment and complete power stations in China.Additional products are power equipment accessories and parts andAC/DC motors. Important sources of revenues are services to existingpower stations and other products. The firm operates in the wholeAsian market but has only domestic subsidiaries.

The following analysis compares HEC with three other majormanufacturers in Asia: Greaves Limited of India, the Shanghai DieselEngine Company Limited and Changchai Co., Ltd (see Table 9.2). In1999 Greaves Limited of India enjoyed sales of 6.15 billion IndianRupees (US$132.16 million) of which 43 per cent was engines. The

Table 9.1 Sales and profitability summary (bn yuan)

Year Sales Sales EBITDA % of No. Sales /growth sales employees employee

1994 2.396 n/c 0.450 18.8 27,500 87,1341995 2.668 11.3% 0.407 15.3 26,971 98,9201996 2.403 –9.9% 0.359 15.0 26,609 90,3011997 2.596 8.0% 0.359 13.8 26,000 99,8451998 2.865 10.4% 0.374 13.1 n/a n/a1999 2.959 3.3% n/a n/a n/a n/a

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Company Year Sales Sales Sales/ Largestended (US$ m) growth employee region

(US$)

Harbin Electric December 357.454 3.3% 13,748 n/aMachinery Co., Ltd 1999

Greaves Limited March 132.165 –3.5% n/a India1999 (100.0%)

Shanghai Diesel December 138.933 –31.5% 15,969 n/aEngine Company 1999Limited

Changchai Co., Ltd December 373.849 12.0% 78,738 n/a1999

Table 9.2 Sales comparisons (fiscal year ending 1999)

Shanghai Diesel Engine Company Ltd had sales of 1.15 billion ChineseRMB (US$138.93 million) and Changchai Co., Ltd had sales of 3.09billion Chinese RMB (US$373.85 million).

Profitability analysis

In 1999, earnings before extraordinary items at HEC were 34.64 millionChinese RMB, which was 1.2 per cent of sales. This profit margin islower than the level that the company achieved in 1998, when the profitmargin was 2.6 per cent of sales. The company’s return on equity in1999 was 1.2 per cent. This was a decline in performance from the 2.6per cent return that the company achieved in 1998. (Extraordinaryitems have been excluded.)

Achievements in project contracting

By the end of 1997, the total capacity of power station projects thatwere finished was 18,260 MW made up of 35 power stations and 78units. The capacity of international projects was 6,200 MW made up of12 power stations and 31 units (see Table 9.3). The capacity of domesticprojects is 12,060 MW made up of 23 power stations and 47 units (seeTable 9.4). Among them, the capacity of turnkey projects was 3,997MW made up of 15 power stations and 29 units, and the capacity ofequipment supply and technical service projects was 14,263 MW madeup of 20 power stations and 49 units.

No. Country Name of power Capacity Contract mode Year of Completion Remarksstation and unit no. contract time

signing

1 Pakistan Guddu Thermal Power 210 MW General 1983 1986 Oil/gas-firedStation Unit No. 4 contracting

2 Pakistan Jamshoro Thermal 3 × 210 MW General 1987 1990 Oil/gas-firedPower Station Unit 1991 (Unit 3) contracting (Unit 2)Nos 2, 3 and 4 1992 (Unit 4)

3 Philippines Angat Hydropower 18 MW General 1990 1992 Type: FrancisStation Auxiliary contracting Head: 96 mUnit No. 5 Speed: 400 rpm

Frequency: 60 Hz

4 Pakistan Kotri Gas-Steam 2 × 47 MW General 1991 1994 CombinedCombined Cycle Power contracting cyclePlant Faisalabad

5 Pakistan Muzaffargarh Thermal 2 × 210 MW General 1991 1995 Oil/gas-firedPower Station contractingUnit Nos 5 and 6

6 Vietnam Hiep Phuoc Power 3 × 125 MW General 1993 1997 (Unit 1) Oil-firedStation Unit contracting 1997 (Unit 2)Nos 1, 2 and 3 1998 (Unit 3)

Table 9.3 Achievements for international projects

Table 9.3 Cont’d

7 Pakistan UCH CCPP 3 × 120 MW + With GE 1995 1997 Oil/gas-fired1 × 180 MW combined

contracting

8 Iran KARUN III Masjid- 12 × 250 MW + Equipment 1995 Hydraulice-soleyman 1 × 130 MW + supply and equipment

1 × 133 MW technicalservice

9 Malaysia 650 MW General 1997 Combinedcontracting cycle

No. Country Name of power Capacity Contract mode Year of Completion Remarksstation and unit no. contract time

signing

No. Location Name of power station Capacity Contract mode Year of Completion Remarksand unit no. contract time

signing

1 Anhui Pingwei Thermal Power 2 × 600 MW Main equipment supply 1984 1988 Coal-firedStation Unit Nos 1 and 2 and technical service

2 Heilong- Shuangyashan Thermal Power 2 × 200 MW All equipment supply 1984 1988 Coal-firedjiang Station Unit Nos 1 and 2 and technical service

3 Harbin Harbin Third Thermal Power 2 × 200 MW Main equipment supply 1986 1988 Coal-firedStation Unit Nos 1 and 2 and technical service

4 Jilin Hunjiang Thermal Power 1 × 200 MW All equipment supply 1987 1991 Coal-firedStation Unit No. 5 and technical service

5 Shan- Huangtai Thermal Power 1 × 300 MW Boiler supply and 1987 1990 Coal-fireddong Station Unit No. 1 technical service

6 Shan- Hualu Thermal Power 2 × 300 MW Main equipment supply 1988 1993 Coal-fireddong Station Unit Nos 1 and 2 and technical service

7 Guang- Zhujiang Thermal Power 4 × 300 MW Main equipment supply 1988 1997 Coal-fireddong Station Unit Nos 1, 2, 3 and 4 and technical service

8 Heilong- Daqing Thermal Power 3 × 200 MW All equipment supply 1988 1991 Coal-firedjiang Station Unit Nos 1, 2 and 3 and technical service 1992

1993

9 Inner Yuanbaoshan Thermal Power 2 × 600 MW Main equipment supply 1990 1997Mongolia Station Unit Nos 3 and 4 and technical service 1998 Coal-fired

Table 9.4 Achievements for domestic projects

10 Liao-ning Tieling Thermal Power 4 × 300 MW Main equipment supply 1990 1992 Coal-firedStation Unit Nos 1, 2, 3 and 4 and technical service 1993

19941995

11 Shenzhen Mawan Thermal Power 2 × 300 MW Main equipment supply 1991 1993 Coal-firedStation Unit Nos 1 and 2 and technical service 1994

12 Henan Dengfeng TPS ext. 2 × 50 MW All equipment supply 1993 1995 Coal-firedUnit Nos 1 and 2 and technical service

13 Hebei Xibaipo Thermal Power 2 × 300 MW Main equipment supply 1991 1993 Coal-firedStation Unit Nos 1 and 2 and technical service

14 Inner Shuangliao Thermal Power 2 × 300 MW Main equipment supply 1992 1994 Coal-firedMongolia Station Unit Nos 1 and 2 and technical service

15 Shenzhen Mawan Thermal Power 2 × 300 MW Main equipment supply 1993 1995 Coal-firedStation Unit Nos 3 and 4 and technical service 1996

16 Harbin Harbin Third Thermal Power 2 × 600 MW Main equipment supply 1990 1995 Coal-firedStation Unit Nos 3 and 4 and technical service

17 Baotou Tianjiao Unit Nos 1 and 2 2 × 100 MW General contracting 1996 1998 Coal-fired

18 Luannan Luannan Thermal Power 2 × 50 MW General contracting 1996 1998 Coal-firedStation Unit Nos 1 and 2

Table 9.4 Cont’d


signing

19 Hefei Hefei 2nd Thermal 2 × 350 MW Boiler completing 1996 1999 Coal-firedPower Station and design combined

with GE

20 Hunan Nan Fang Thermal 3 × 25T/H + General contracting 1997 1999 CFBPower Station 2 × 1.2 MW

Table 9.4 Cont’d


signing

10

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Analyses and discussions

The conceptual framework for this study (see Chapter 2, Figure 2.2) isbased on the challenge and response model derived from Hofer’s (1973)preliminary research (See Chapter 1, Figure 1.1). This framework, whichis built on the concept of business strategy, has proved to be an effectiveanalytic tool in studying the patterns of strategic behaviours of businessorganizations.

This chapter uses the framework to discuss the data from the sixresearch case studies. Chapters 4 to 9 describe the external and internalchallenges and responses of six Chinese state-owned enterprises. In thischapter, the strategic challenges for these firms are first summarizedaccording to their stage of economic transformation and organizationalrestructuring. The change strategy responses (objectives, strategy,functional policies and procedures) are then compared between the firms.Finally, the resulting performance of their strategic responses isdiscussed.

Analysis of strategic challenges andresponse patterns

This study revealed a number of challenges that were common to Chinesestate-owned enterprises. External threats to the six enterprises studiedin this research included globalization, government and socialresponsibility. Common internal challenges to the six firms includedtechnology innovation, IT, human capital, compensation, quality andbranding (see Table 10.1).

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External challenges and responsereactions

Globalization

Today, there is an overwhelming trend towards globalization. Globalizationis the process by which the world’s economy is transformed from a setof national and regional markets into a set of markets that operate

Challenges HJ BYJC CHN SCW JW HEC

Globalization + +++ +++ ++ +++ +++Technology ++ +++ +++ ++ +++ ++Government +++ +++ +++ +++ ++ +++Social obligations ++ + + +++ +++ +++Industry competition ++ +++ + ++ ++ +++Ownership +++ ++ + + + +Financial constraint +++ + + ++ + ++Technology innovation + +++ +++ ++ +++ +++IT + +++ +++ + +++ +++Restructuring +++ ++ + + + ++R&D and manufacturing + +++ +++ ++ +++ +++Product challenge +++ ++ + +++ + ++Production safety + + + +++ + +Management +++ + + + +++ ++Human capital + +++ +++ + +++ +++High turnover +++ +++ + + +++ +++Cost management +++ ++ + +++ + +Sales network + ++ +++ + ++ ++Branding + ++ +++ + ++ ++Quality +++ +++ +++ +++ +++ +++Compensation ++ +++ ++ + +++ +++

Key: +++: major influence++: moderate influence+: minor influence

HJ: China Huajing Electronics Group CorporationBYJC: Beijing No. 1 Machine Tool PlantCHN: Chongqing CHN & CHN Ceramics Co. LtdSCW: Sichuan Chemical Works (Group) LtdJW: Jingwei Textile Machinery Co. LtdHEC: Harbin Electric Machinery Co. Ltd

Table 10.1 Perception of strategic challenges

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without regard to national boundaries. In 1978, China opened its doorsto the outside world. Since then, China has increased its exposure,joining the Asia Pacific Economic Cooperation group in November1991, an organization that promotes free trade and cooperation intrade, investment, technology and other economic concerns. Since Chinaobtained its membership of the World Trade Organization (WTO), ithas become a very active player in the global arena.

The globalization of markets equates to the globalization of competition.With greater market exposure comes intensified competition, diminishingmarket dominance by state-owned enterprises, accelerated product lifecycles and deepening performance uncertainty. As China opens itself tothe global marketplace, most SOEs, unable to rely on patronage orposition for protection, are permanently vulnerable. The scale of theglobal opportunities, the complexity of the competitive arena and therelentless performance discipline imposed by the capital markets areforcing these companies to either specialize to become world-class playersin their selected arenas or exit. In the industries considered in this study,globalization was raising the stakes and forcing national and regionalplayers to double their efforts to compete or quit. The coming decadewill witness shakeouts and consolidations in all of China’s industries.The global marketplace is a battlefield and able competitors from aroundthe world are fighting for a share of the Chinese market. Since China isthe largest market in the world, competition has lined up at the gate.International attention attracted by China’s membership of the WorldTrade Organization is opening more markets and increasing access toexisting ones, nurturing competition and providing consumers with greaterchoice of higher quality goods and services at lower prices.

For China, globalization brings development in technology and aconsequent improvement in the living standards of China’s citizens. Butthe facts have indicated that once the Chinese markets are opened toglobal competition, it becomes integrated into the world marketplace.This current economic transformation gives state-owned enterprises littlechoice but to modernize and prepare to compete or cooperate with themost competitive firms in the world.

By opening China to these global opportunities and threats, the state-owned enterprises have been forced to develop strategies and structuresthat will allow them to survive. As membership of the WTO approaches,the time available for SOEs to make appropriate decisions shrinks. Eventhough all the organizations in this study realized the threat and challengeof globalization, their perceptions of the challenge differed by industry(see Figure 10.1).

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Perception and reaction of Huajing Electronics GroupCorporation

When asked how globalization and China’s access to the WTO wouldimpact on Huajing’s strategic plans, most senior executives includingthe chief strategic advisor for Huajing Electronics Group Corporationexplained that the pressure from market globalization was for betterproduct selection and quality. They did not perceive the necessity for orpossibility of entering into direct completion with international electronicsgiants such as Intel. They argued that the Chinese market for electronicswas so huge that they did not worry about foreign competition. Thechief strategic advisor explained that any niche in the Chinese marketcould feed Huajing for years to come.

Up to the arrival of strong foreign competitors, the Chinese electronicsindustry enjoyed the competition umbrella established by the government.With government regulations forbidding price competition, Chinese playerswere incapable of head-to-head competition with global competitors inproduct, quality, service and price.

However, the industry competitive analysis for Huajing in Chapter 9did not paint the same picture, as they perceived it. Their strategic focuswas on organizational restructuring and how to create a capableorganization with better profitability. Their perception that globalcompetition was not a problem resulted from limited domestic supplyof electronic components as the market continues its rapid growth.

Perception and reaction of the Beijing No. 1Machinery Tool Plant

The Beijing No. 1 Machinery Tool Plant (BYJC) went through verydifficult times when China opened the door wide to foreign competition

High

Low

Perceptionof

pressure

• Beijing No. 1 Machine Tool Plant• CHN & CHN Ceramics• Jingwei Textile Machinery• Harbin Electric Machinery• Sichuan Chemical Works

• Huajing Electronic

Low High

Need for action

Figure 10.1 Perception of globalization

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in the machine tool industry as early as 1994. State-owned enterprisesin the machine tool industry suffered their most significant operatinglosses. Previously, machine tools from SOEs accounted for more than70 per cent of the domestic market, and the Chinese government forbadeany producer’s request to export machine tools. BYJC’s leadership positionin the industry and the government protection policy made the companyquite secure in its position. Prior to 1994, competition was not in BYJC’svocabulary. However, the rules of the game changed when the governmentrelaxed its control of the purchase of machinery tools from foreigncountries. Many of BYJC’s customers turned to foreign manufacturersfor products which had superior features and functions with much betterquality and lower prices, placing BYJC on the edge of bankruptcy.More than four decades of central planning had not given Chinesecompanies opportunities to withstand the test of competition, and themanufacturing facilities and technology could not deliver the hightechnology products at the premium prices needed for the high-endmarket. At that time, BYJC was driven to the low-end market wherecustomers only needed the basic design of machine tools and the profitmargin was very low. Because of the government’s regulation of foreigncurrency, BYJC could not import or update its production facility in ashort time. The president and four senior executives told the author thatthey wanted to see China join the WTO so that BYJC could compete ona fair ground as the WTO eliminates tariffs and other restrictions on adomestic company’s ability to export. They believed that foreigncompetitors have more flexibility and more favourable policies forcompetition due to Chinese government regulations, such as foreigncurrency access. In spite of these problems, they explained that afteryears of hard struggle, BYJC was ready for the global marketplace.They have restructured not only the products but also the whole company.Technology innovation, flexible production restructuring and CIMS arethe major characteristics in its strategic response pattern.

Perception and reaction of Chongqing CHN & CHNCeramics Co. Ltd

Chongqing CHN & CHN Ceramics Co. Ltd (CHN & CHN) operatesin the ceramics industry, which is a local product industry that has neverbeen protected by the government, even under the central planningeconomic system. Competition from the outside world was fierce,

174


particularly in product design, variety, quality and price. To survive,CHN & CHN established a focused differentiation strategy targetingthe high-end market with premium products. Its global strategy is offensiveas the international market contributed around 80 per cent of its revenueby the end of 2004.

With help from the state and provincial governments, CHN & CHNchanged its company structure and ownership as early as 1991, thusenabling its aggressive global market penetration strategy. Its heavyinvestment both in hardware and software in R&D, production andmanagement allowed CHN & CHN to take the leadership position inChina and go after the global ceramics industry. Its global responsestrategy is proactive and aggressive in product innovations and globaldistribution channels.

Perception and reaction of Sichuan Chemical Works(Group) Ltd

Sichuan Chemical Works (Group) Ltd (SCW) is in the chemical industry,which has been protected from global competition by the state. It isespecially protected in the chemical fertilizer segment because agricultureis the focus of national policy. In the chemical fertilizer segment, productionfacilities of most manufacturers were domestically made and outdated.In spite of the firm’s hard efforts to improve operations and lower costs,SCW’s production lines needed to be replaced. Because of the heavysocial burden placed on SCW, it cannot afford the heavy investmentrequired to purchase new production facilities. With the ever increasingprice for raw materials, government regulation of prices for finishedproducts has made profit margins thinner and thinner.

SCW was one of the firms in China that dreaded global competitionbecause chemical products from foreign competitors were better in qualityand much lower in price. That is driving SCW to change its productstructure and diversify into related markets. However, cutting costs andimproving management proficiency does not relieve its heavy socialresponsibility in that region. SCW, with its huge social rigidity, has beenunable to respond and adapt to the external situation. That was whySCW issued stock to the public to accumulate capital for the neededinvestment. But SCW’s future depends on the speed and accuracy withwhich the chemical market is opened to global competition.

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Perception and reaction of the Jingwei TextileMachinery Co. Ltd

The Jingwei Textile Machinery Co. Ltd (Jingwei) identified technologicalinnovation as its first and foremost challenge. The top managementteam (TMT) in Jingwei shares the belief that Jingwei is facing the challengeof global competition, especially when China joins the WTO and removesall protection and tariff barriers. The top management’s major concernis whether Jingwei can survive competition not only from domesticplayers but also from more threatening opponents from other countries.Therefore the top management team decided to change Jingwei’s practicesrather than play catch-up after joining the WTO. While the companyhad historically acquired the most advanced products or technologypossible, it had been slow to use them. Frequently, Jingwei had purchasedthe blueprint and the patent but took years to digest the new technologyand turn it into commercial products. When the products hit the market,they were often no longer advanced, if not actually obsolete.

Jingwei’s strategic responses are to build a responsive organizationusing JW-CIMS to achieve a competitive edge in engineering design,manufacturing agility and quality control systems. While otherorganizations are spinning off departments or subsidiaries so as to focuson their core businesses, Jingwei’s asset restructuring strategy is to diversifyinto related business and acquire a complete set of textile productionmachinery. This strategy made it possible for Jingwei to take the leadershipposition in its industry. Moving the headquarters to Beijing and establishingbranches in five different provinces provided Jingwei with the flexibilityto change policy, especially its compensation strategy for attracting andkeeping human talent. This critical move helped Jingwei shift its long-term strategic plan from just manufacturing to global marketing, serviceand production.

Perception and reaction of the Harbin ElectricMachinery Co. Ltd

The Harbin Electric Machinery Co. Ltd (HEC) has learned hard lessonsfrom global competition. Before the 1990s, HEC was one of two majormanufacturers that dominated the domestic Chinese market. Thingsstarted to change when the electric equipment market matured fordeveloped countries. Many giant electric equipment and facilitymanufacturers from developed countries have suffered drastic decreases

176


in production as market demand has fallen. Mergers, restructuring andacquisitions became a common practice in this industry throughout theworld. To generate business, they shifted their attention to the fast-growing emerging markets like China. From 1986 to 1990, importedelectric machinery increased from 16 per cent of the domestic market to25 per cent. By 1995, foreign suppliers had more than 40 per cent of theChinese market.

HEC’s reactions to the global challenge included technical innovationand the development of competitive products. HEC also establishedstrategic partnerships with Hitachi, Siemens and Voith, with whom theyperiodically exchange technologies. HEC also worked with some foreigngiants and won some big projects in China. HEC also obtained agreementswith the foreign companies for complete technical transfer on jointprojects, a major step leading to global competitiveness for HEC.

Hitachi and Harbin Electric formed a ‘Technical Cooperative’ agreementin the field of hydroelectric generators and worked together to capturecontracts in this field. This cooperation led in 1991 to a contract forseven 235 MW generators with Kaplan turbines for a facility in FujianProvince and in 1995 to a contract for nine 30 MW generators withbulb turbines in Hunan Province. Itochu, Hitachi Ltd and HEC werechosen on 22 November 2000 to supply five generators and turbines fora hydroelectric power station to be constructed in the city of Hongjiang,Hunan Province in China. The five generators will have a combinedoutput of 225 MW. The plant is the first power station to be constructedunder a Japanese government programmeme that extends yen-denominated loans to protect China’s environment. The bulb-type turbineswill rotate the generators by utilizing energy from the river’s current,eliminating the need to build a large dam and minimizing the environmentalimpact.

Major components of two of the five generators are to be producedby Hitachi, with assembly to take place in China. Hitachi will share itstechnology in this field with HEC, thus establishing a production capabilityin China. This cooperation is expected to allow the fifth generator to befabricated almost entirely by HEC.

On 22 May 2000, the French company Alstom Power was awarded14 units of the governor system worth US$12.76 million. Voith SiemensHydro Power Generation, from Germany, was chosen to provide 14units of the excitation system worth US$12.79 million. HEC was chosenas the Chinese subcontractor. The two winners have committed totransferring their advanced technology to the Chinese subcontractor,

177


thus guaranteeing that HEC will manufacture five units of the twodifferent systems with final assembly and system test.

Figure 10.2 sums up the strategies taken by different companies asthey respond to the different perceptions concerning the pressure fromglobalization.

Technology

One major driving force that has made globalization a reality istechnology. The world has entered a new epoch, in which technology isdeveloping at an extremely rapid pace. Previously, the impetus fortechnological development was driven by the needs of war and militaryforces. While the importance of the military has been diminished, thedevelopment of technology has reached a point of no return, and cannotbe slowed down. Today, technology is driving market competition.

Technology is also the engine of economic growth. It underpins China’sfastest growing industries, provides the tools needed to compete inevery business and drives growth in every major market segment. Today,technological leadership often means the difference between success andfailure in the global marketplace for companies. Chongqing CHN &CHN Ceramics Co. Ltd, which developed its core competencies withthe integration of the most advanced hardware and software in theworld, provides a good example.

Technical progress is the single most important determining factor insustaining economic growth. Increases in productivity have long been

Figure 10.2 Summary of strategies

High

Low

Perceptionof

pressure

• Technology innovation• Product innovation• CIMS• HRM• Quality control• Distribution network• Strategic alliance

• Restructuring• Turnaround• Domestic development

Low High

Need for action

178


recognized as one of the primary mechanisms by which technologycontributes to growth. Advanced technologies were used to enhanceperformance in virtually every important category for the six focalorganizations. Compared with other competitors, all the firms usedadvanced technologies to improve productivity and profitability, allowingthem to pay higher wages and increase employment more rapidly thanless technical firms. Beijing No. 1 Machine Tool Plant and JingweiTextile Machinery Co. Ltd used computer numerical control technologyand flexible production machine tools to gain competitive advantage inthe domestic market, and to move into the traditional and low-endmarkets using this technology with low prices.

Technology is transforming the very basis of Chinese competition,enabling large businesses to perform high-quality design and manufacturingwork, while achieving the speed, flexibility and closeness to customersthat were once the sole domain of smaller firms. Technology providesthe tools for creating a spectacular array of new products and newservices. Chongqing CHN & CHN Ceramics Co. Ltd employed thecomputer integrated manufacturing system (CIMS) in its traditionalceramic production (CPCIMS). Beijing No. 1 Machine Tool Plant andthe Jingwei Textile Machinery Co. Ltd used CIMS to integratefunctionalities in machine tool operations. The Harbin Electric MachineryCo. Ltd utilized the same technology in the electric machine business.These four companies used information technology and modernmanagement technology with manufacturing technology to integrateoperations, including design, business and manufacturing processes. Timeto market, quality, cost and service (TQCS) were improved through theintegration of information on processes and resource optimization.

CIMS helped realize the cooperation and design integration to improveproduction efficiency. It also allowed for powerful supporting systemssuch as a computer network system, a database system and functionalsystems including product engineering design systems (EDS) andmanagement information systems (MIS). The EDS included the databasemanagement of computer-aided design (CAD) as well as computer-aidedprocess planning (CAPP) for products. The MIS integrated sales,production, purchasing, storage, accounting and personnel.

CIMS now provides data-gathering, analytical and test capabilitiesfor complex process design and manufacturing engineering. In processdesign, software allows inexpensive experimentation, yield prediction,workstation design, process layout, alternative testing, three-dimensionalanalysis, network manipulation, quality control and interface timingcapabilities that would otherwise be impossibly expensive. CIMS is

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especially helpful in allowing workers, technologists and managers tovisualize solutions and work together on complex systems. Further,knowledge-based CIMS now allows the design coordination,manufacturing monitoring and logistics control needed to find and sourceinnovative solutions worldwide.

CIMS provided the central vehicle enabling the inventor–userinteractions, rapid distribution of products and market feedback thatadd most value to new product innovations. It allowed multidisciplinary(marketing-manufacturing-development) teams to interact continuouslywith customers all over the world, capturing their responses throughvideo, audio, physical sensing and computer network systems. For example,Chongqing CHN & CHN Ceramics Co. Ltd can involve its customerssimultaneously in the design of new or customized ceramic productsaccording to the preferred patterns and shapes, colours and decoration.Such customer participation is a crucial element in both lowering risksand enhancing the customer value of designs. More importantly, bydesigning ‘hooks’ in CIMS to allow customers all over the world toinnovate further on their own, CHN & CHN can leverage their internalcapabilities enormously by tapping into their customers’ sophisticatedcreative ideas.

Chongqing CHN & CHN Ceramics Co. Ltd can entirely eliminatemany of the traditional steps in the innovation process using CIMS andcan consolidate others into a simultaneous process. CIMS can also providethe communication mechanisms and a disciplined framework for thedetailed interactions that multidisciplinary departments and theircustomers need to advance complex innovations rapidly. This has cutdevelopment time and cost. Through rapid 3-D ‘virtual’ prototypingrather than conventional tooling and physical delivery of samples, CHN& CHN reduced greatly the time needed for prototyping samples, whichhad been one of the major reasons for customer dissatisfaction and lossof product contracts.

In the executive interviews, most stressed the significance of technology,which was the decisive factor in the speed with which they could createknowledge and put it to work, thereby determining the firm’s positionin the international marketplace for the next century. Advances intechnology have spurred the creation and growth of core competencies,facilitated the conduct of business worldwide and accelerated thedevelopment of new products, services and capabilities. With suchtechnology, SOEs can respond quickly and flexibly to ever changingglobal market demands with high-quality, customized goods and servicesat competitive prices.

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In sum, CIMS helped build sustainable distinctive competences toachieve a competitive edge in both the domestic and international markets.The firms using this technology have gained access to global marketsand become regular members of the global club. The major purpose ofimproving management’s approach at SCW was to improve workingefficiency and cut costs. This approach has limited the management’smindset and its strategic vision, and thus the firm’s ability to expand itsbusiness. While Huajing Electronics is equipped with advanced productiontechnology, it is busy restructuring and turning around the companyfrom heavy operational losses. Without the help of such technologies asCIMS, these two organizations have not achieved economies of scope.In other words, they have neglected the interaction effects of their criticalfunctionalities.

Government

Until passage of the State-Owned Enterprises Law in 1988, whichdistinguished the rights and obligations of the government (as owner)from those of the firm, firms belonged to government departments,their losses being covered through budgetary allocations or directedbank loans. The government is now separating some commercial activitiesfrom government bureaus, though the process is not yet complete. Thegovernment could no longer afford the inefficiencies and losses financedexplicitly through the banking or budgetary systems. In the 1990s, themost significant aspect of China’s economic reform was in transformingstate-owned enterprises into independent legal entities responsible fortheir own profits and losses. Redefining government functions was viewedboth as a prerequisite and a logical consequence of such reforms of stateenterprises. The thrust of economic restructuring was thus separatinggovernment from enterprises and the promotion of a ‘small government,big society’. The latter implies that governments at all levels shouldlimit their functions and allow people to acquire the goods and servicesthey want from the market.

The 15th Communist Party Congress held in September 1997 agreedto undertake a fundamental restructuring of the state-owned enterprises.While the shareholding system will become the major form of ownership,the government will continue to be a major shareholder and supportreforms of 1,000 large-sized SOEs, while other SOEs will be allowedgreater autonomy in restructuring. Since 1997, the number of mergers,acquisitions and bankruptcies among SOEs has increased. Moreover, a

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series of concrete steps have been taken to improve the debt/asset ratioof SOEs by converting debt into equities to reduce SOEs’ socialresponsibilities. The government’s goal was to make the loss-makinglarge SOEs profitable within three years. By the end of 1999, all sixSOEs in the six industrial sectors in this study reported profits or hadstopped making losses.

After the Fourth Plenary Session of the 15th Communist Party Congressheld in September 1999, the government reaffirmed its goals to improvethe debt/asset ratio of SOEs (by converting debt into equities) and toreduce SOEs’ social welfare obligations by 2010. The state no longerintends to be the controlling shareholder except in certain strategicallyimportant sectors.

The Third Plenary Session of the 15th National People’s Congress(NPC) held in March 2000 reiterated the government’s three priorities:to continue implementing fiscal-stimulus policies, to continue strategiceconomic restructuring and to continue SOE reforms.

As for corporate structure, the government has chosen to adopt themodern corporate form, in which the owner elects a board of directorsto oversee the daily operations of the firm by professional managers.The government has also set up an elaborate state asset managementsystem to monitor the performance of state enterprises and ensure thattheir assets are preserved. But progress has tended to lag behind policies.The state asset management system is short on qualified staff, budgetand motivation. None of its institutions receives timely, accurate financialinformation. It is not clear whether, even with time, the new arrangementswill ensure that enterprises are properly managed in an increasinglycompetitive environment.

The government has little time to improve the efficiency andcompetitiveness of these large enterprises. Many will be exposed tointernational competition with China’s entry into the WTO. Still, it isbest to make tough decisions now, while firms still have time to cutcosts, reconfigure their operations and improve competitiveness withthe help of the gradual release of government protection. In this matter,the government should consider diversifying ownership so that firm-level changes are based on purely commercial criteria and risks arespread across many shareholders. Since change is inevitable, delays willonly add to costs, force defensive adjustments under market pressuresand add to the bad debt of banks.

The government has been trying to turn SOEs, particularly the largeand medium-sized, into shareholding companies. Under the shareholdingsystem, the state will retain controlling stakes in large SOEs in strategic

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industries but is willing to reduce its total share of ownership in otherSOEs. The shareholding system will help SOEs raise capital on domesticand overseas stock markets and at the same time allow partial divestitureof SOEs to non-state interests.

In the early 1990s, the organizations in this study were 100 per centstate invested entities belonging to the state government. The ChongqingCHN & CHN Ceramics Co. Ltd changed its ownership structure in1993, and the Jingwei Textile Machinery Co. Ltd became a joint venturein 1996. The Harbin Electric Machinery Co. Ltd and the Sichuan ChemicalWorks (Group) Ltd have completed their transition to the corporateshareholding system. Beijing No. 1 Machine Tool Plant and China HuajingElectronics Group Corporation remain unchanged.

The government’s National High-Tech 863 Programme wasestablished in March 1986 for high technology research in biotechnology,energy conservation, aerospace, mechatronics, advanced materials,information and micro-electronic developments. The programme forautomation technology specified companies for the implementation ofresults. Much of the research was funded through the National High-Tech 863 Programme. It involved over 3,000 researchers, 650 researchprojects and 250 company applications. There are seven engineeringlabs involved in CIMS-ERC programmes (including Beijing, Shanghai,Huajing, Xian and Shengyang). There are ten training centres. CIMSNETwas developed to aid in interactive design and manufacturing activitiesthat occur in different cities/locations. Some 200 firms have usedCIMSNET. Results have already shown significant improvements inproductivity and sales. Four of the six companies studied in this research,including Beijing No. 1 Machine Tool Plant, the Chongqing CHN &CHN Ceramics Co. Ltd, the Harbin Electric Machinery Co. Ltd andthe Jingwei Textile Machinery Co. Ltd, have developed and appliedCIMS to integrate their functionalities and enhance their corecompetencies.

In conclusion, the firms in this study believed that they faced institutionalproblems, largely due to the following policy-related obstacles:

� China has yet to establish a fully liberated enterprise environment,thus laws protecting private property cannot be effectivelyenforced.

� Lacking a highly efficient capital market, the securities market hasbecome the principal means to resolve the funding difficulties ofstate-owned enterprises.

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� The labour flow is restricted by such means as the householdregistration system and the incompleteness of the social securitysystem.

� Non-governmental capital cannot freely enter many areas. Forexample, China’s postal system recently prohibited non-governmentalexpress delivery companies from conducting mail delivery businesses.

Industry competition

Under the central planning economic system before 1978, industrialfirms never experienced competition against one another becauseeverything in the industrial sector was planned in detail first by centralgovernment at the macro level and then at provincial level. Competitionwas strictly limited by state policies and regulations, which had theeffect of creating strong barriers to entry. Firms got so used to thisoperational mode that they panicked when competition barriers wereremoved and they had to compete for a market share to survive.

The industry competition came from three sources. First, China’sopen-door policy and its establishment of 14 special economic zones ledto a rapid expansion of trade and foreign investment. In the 1980s,investors from Hong Kong provided the bridge between domesticproducers and foreign customers since few mainland firms had experienceof or business connections with foreign countries after decades of self-reliance and closed-door operations. China’s south coast regions,Guandong Province (next to Hong Kong) and Fujian Province (next toTaiwan) in particular, were the direct beneficiaries from this policychange since most of the capital, skills and commercial contacts originatedfrom overseas Chinese, not those in the domestic market. Second, China’srural reforms led to the rapid rise of agricultural productivity that inturn generated a rural labour surplus and ballooning rural savings thatprovided the resources for the rapid entry and growth of new ruralenterprises. Shanghai, Jiangsu and Jiejiang lead the country in industrialenterprises of a township and village nature. Entrepreneurial leaders inhundreds of counties and thousand of production brigades were poisedto take advantage of deregulation by bursting into markets that theyhad coveted for years. Many of these firms later formed joint ventureswith foreign partners to compete in the national and/or internationalarena. Finally, China’s long-standing policy of duplicating state-ownedproduction capabilities and operations in most provinces in case of war

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had created a ready-made source of competition (Jefferson and Singh,1997).

In this study, firms facing the most challenge in their industry wereBeijing No. 1 Machine Tool Plant, the Harbin Electric Machinery Co.Ltd, the Jingwei Textile Machinery Co. Ltd, the Sichuan Chemical Works(Group) Ltd and the China Huajing Electronics Group Corporation,among which the Harbin Electric Machinery Co. Ltd and Beijing No. 1Machine Tool Plant had the most difficult time in coping with theindustry competition. The Chongqing CHN & CHN Ceramics Co. Ltdwas not influenced much because it had differentiated itself as early as1993 from the majority of the industry and focused on the high-endsegment with the world’s best hardware and software.

Internal challenges and responsepatterns

Extensive social obligations

China’s state-owned industrial enterprises employ more than 43 millionpeople. What makes many SOEs different from traditional firms incapitalist countries is that they perform the function of a ‘small society’,guaranteeing employment and offering housing, health, education andpensions. The mix of corporate enterprise and social functions, complicatedby a system of vaguely defined property rights, confounds the task ofmaking an economic profit, and also legitimizes soft budget constraintsthat weaken incentives and the financial system.

One of the more crucial reforms is the transfer of pension, health andeducation obligations from state enterprises to government bodies. Somemunicipalities are pooling payroll taxes for pensions and unemploymentand health benefits. Some local authorities are taking over schools andhospitals previously run by enterprises. And some state enterprises arereducing housing subsidies by raising rents and wages (Jefferson andSingh, 1997). But such examples are the exception rather than the rule.Such changes have not fundamentally affected the enterprises in thisstudy. Because the government has no appropriate infrastructure forsocial welfare, firms such as Jingwei, that have changed their ownershipstructure, have one of their legs chained to these heavy social obligationswhile they try to run hard to win the competition race.

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Restructuring

The China Daily, the first official newspaper in China, pointed out on22 September 1999 that China’s state-owned enterprises have problemsin structure, layout, management systems and operating mechanisms. Itargued that because they were not competitive, they must be restructured.SOEs lacked capital and bore too many social burdens to continue basicoperations. One especially alarming phenomenon was the duplicateconstruction, causing industrial operations in different regions of Chinato overlap by as much as 98 per cent. Duplicated construction resultedin substandard production capabilities, insufficient factory work orders,overstocked products and vicious price wars.

An important theme of the 15th National People’s Congress (NPC)was further reform of SOEs. Jiang Zemin, the President of the state,appealed to members to find practical forms of public ownership whichcould stimulate productivity and improve operational methods, withorganizational forms reflecting the laws of socialized production. Thecriteria for assessing the ownership structure had been put forward byDeng Xiaoping, the state president after Mao, in 1992: ‘Whether itpromotes the growth of productive forces in a socialist society, increasesthe overall strength of the socialist state and raises living standards.’The shareholding system was considered a form of public ownershipthat could facilitate the development of productive forces.

The introduction of the shareholding system among SOEs was nothingnew. Shunde city in Guangdong Province, for example, began to reformthe ownership structure of enterprises owned by its towns and higherlevels of administrative units in 1992, and completed the process in justover three years. All these enterprises eventually adopted a shareholdingor shareholding-cooperative system. The CPC’s endorsement, however,was essential in providing the ideological foundation and thereforelegitimacy for this line of reform.

In the early 1990s, structural weaknesses plagued all of China’s SOEs:a large number of small factories, backward technology and an inabilityto develop new products. Today, SOEs are in different stages of economicreform.

Chongqing CHN & CHN Ceramics Co. Ltd

The Chongqing CHN & CHN Ceramics Co. Ltd is the pioneer ininnovation. It changed its structure to a joint venture enterprise as early

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as 1993, and adopted restructuring measures to improve its ability todevelop new technology and increase production capacity. It enjoyedfirst-mover benefits: tax cuts from both the state and local governments,the ability to purchase the most advanced manufacturing hardwarefrom Germany, financial autonomy in paying higher wages to attractand keep the best people in the industry, and the ability to develop theeffective CIMS software for functionality integration. Currently, CHN& CHN has achieved the leadership position in ceramics in the globalmarket.

Jingwei Textile Machinery Co. Ltd

The Jingwei Textile Machinery Co. Ltd changed its ownership structurein 1996 when it issued stock to the public and gathered enough fundsfor product research, development and innovation. In May 2000, Jingweiwas able to issue stock for the second time to finance its strategicactions.

Strategic asset restructuring is one of the core actions enabling Jingweito be a competent organization. Many firms spun off some of their unitsalong the value chain, attempting to focus on their core competence.But Jingwei adopted a related diversification strategy. In the past, thetextile machinery made in Jingwei could only produce fine cotton yarn,which is the last of five cotton processes. Now Jingwei can provide acomplete set of high-quality machines for cotton processing. Jingweicombined the advantages of different assets and optimized the operation.Jingwei has now taken the lead in its industry.

Because of its financial capability Jingwei was able to develop advancedCIMS, which few companies in China have. The integration of informationprocessing and research and development capability provides competitiveadvantage to Jingwei and has increased the firm’s capability to respondquickly to market demand.

Beijing No. 1 Machine Tool Plant

Beijing No. 1 Machine Tool Plant’s unsuitable structure manifesteditself in two ways. First, the plant owns everything in its value chain,from casting, forging and machining to assembly. The plant is big andcomprehensive without any distinctive competence. Second, the planthas social responsibilities, e.g. BYJC has to run primary and secondary

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schools, provide dining rooms, repair residential houses for its workersand manage affairs for residential areas.

BYJC’s restructuring efforts started with plans to spin off thosesubsidiaries that are not strategically important to BYJC, such as casting,forging and machining, in order to focus technology on core functionssuch as the R&D department, the sales department, the assemblydepartment and the manufacturing departments.

Laying off employees is another measure taken to change theorganizational structure. Since 1993, the number of employees has beencut from 9,700 to 4,000. Employment levels will be further reduced to2,000 after the restructuring, which is expected to be complete in 2002.Having completed the restructuring, the plant will form a relationshipwith its employees based on contracts. The plant will pay a certainamount of money for its employees’ medical insurance and pensionbenefits, but the other social responsibilities will be shifted to the widersociety.

In 2001, BYJC was actively seeking a foreign partner to form a jointventure, its long-term goal being a group enterprise in public ownership.BYJC planned to use the money from selling its land to finance theorganizational restructuring and business expansion.

China Huajing Electronics Group Corporation

The China Huajing Electronics Group Corporation realized that withoutfundamental transformation it would not survive long in the market. Toachieve the goal of turning Huajing into a competitive modern enterprisegroup Huajing’s first step was to change the ownership system. With thehelp of the central government, Huajing was able to change its affiliationfrom the Electronics Ministry in Beijing to the local Wuxi Municipality,which provided a favourable operational environment through its localpolicies. Huajing will be controlled by the Wuxi Asset ManagementCompany, which consists of the Wuxi State Asset Committee and creditorbanks. With the help of the Wuxi government, Huajing planned to getrid of its social institutions such as the Huajing elementary school,hospital, kindergarten, community committees and estate company. Thisalone could save 3.4 million yuan per year.

The modern enterprise system will be used once the systemtransformation is completed. The organization will be run strictlyaccording to the State Corporate Law and Firm Regulations. Power andthe responsibilities of the stockholders, board of directors, supervision

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committee and management will be clearly specified so that owners,managers and producers will know their roles in the organization. Thegovernment no longer makes decisions for the organization but insteadplays its role through its representation on the board.

The third step is through asset restructuring and system transformation,specifying the right internal relationship between Huajing headquartersand its subsidiaries according to the requirements of the modern corporatesystem, with clear definition of ownership, authority and responsibility.

Harbin Electric Machinery Co. Ltd

The Harbin Electric Machinery Co. Ltd went through a company-widerestructuring in October 1994 that separated the social responsibilitiessuch as hospital, schools, kindergartens, etc. from HEC. At that time,HEC had 12,500 people, and 2,500 were spun off to establish theHarbin Electric Enterprise Development Co. Ltd. The major purpose ofrestructuring at that time was to get its stock issued to the public inHong Kong. It has been more than ten years since the restructuring, butHEC is still responsible for financing its social responsibility. Everyyear, HEC has to allocate about 60 to 70 million yuan to those separatedunits. In fact, the restructuring was only a matter of packaging thecompany for the outside world and did not change operations.

Sichuan Chemical Works (Group) Ltd

The growth strategy for Sichuan Chemical Works (Group) Ltd focuseson related diversification of its products to adapt to ecologic agriculturein China and to withstand the impact of market competition. The companyimplements this strategy through joint ventures with foreign partnersfrom Norway, Japan and other regions. In reality, the company has notadopted any real measures to fundamentally change its organizationalstructure. Until September 2000, the company had never spun off anyof its unrelated social units or laid off any unnecessary employees. Theirguiding principle is to perfect management of the group and reduce costs.

On 8 September 2000, SCW issued 13,000 shares of stock in theChinese stock market, which was strictly controlled by the government.The accumulated money is used to support its growth strategy of changingthe product structure and developing fine and specialty chemical productsto improve the product variety and quality to meet the market demand.

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The shares outstanding make up a very small portion of the ownershipof the group. Because the shareholders are scattered all over the country,they are unlikely to play any significant role in influencing the long-term strategy of the group.

The results of responses to the unsuitable structures established underthe central planning system for the six SOEs included here exhibitedthree forms:

� changes in organizational structure and attempts to build capableorganizations with core competences such as in CHN & CHN andJingwei;

� changes in organizational structure so that each strategic businessunit is able to stand on its own either to increase its working efficiencyand generate more profit, or to stop the organization from losingmoney, as in the cases of SWC and Huajing; and

� to repackage the organization for stock issuance, such as in HEC.

Building a capable organization

Building a capable organization is a new concept for most SOEs. UnderChina’s central planning economic system, firms had similar operations.The major responsibility for firm managers was to implement the strategiesmoulded by the central government. China was run like an enormouscompany. Competition for markets, products or prices was not allowed.Resources, including people, capital and natural resources, were allocatedin accordance with the national strategic intent. Managers were notencouraged to differentiate themselves in terms of managerial competences,technological innovations, product offering or branding. There werealmost no economic incentives for managers’ long-term or short-termperformance.

In 1992, China formally announced the establishment of the socialisteconomic system, within which enterprises were required to changetheir sole dependence on the government to a dual dependence on thegovernment and on the market, and gradually create the capability tocompete in the marketplace. Since then, the state has lifted step by stepgovernment protection for domestic firms from the competition of foreignfirms, and meanwhile has encouraged the entry of private-ownedenterprises, joint ventures and foreign-owned companies.

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Facing multiple challenges in the external environment, the six firmsin this study came to realize that survival depended on the firms’capabilities: the skills, assets and relationships that companies assembleto build competitive edge.

Integrative management capability

Four of the study firms, Beijing No. 1 Machine Tool Plant, the ChongqingCHN & CHN Ceramics Co. Ltd, the Jingwei Textile Machinery Co.Ltd and the Harbin Electric Machinery Co. Ltd have implemented acomputer integrated manufacturing system (CIMS) to integrateinformation technology and modern management methods withmanufacturing technology. CIMS changed all operational processes,including design, computer-aided process planning, product datamanagement, simulation databases, inventor–user interactions, rapid3-D ‘virtual’ prototyping and computer-aided manufacturing. CIMSprocess and resource optimization improved their TQCS (time to market,quality, cost and service). CIMS was applied to product development tointegrate technology and tools to reduce development time. The integrationof the information for product manufacturing has drastically improvedmanagement and production efficiency.

The concept of contemporary integrated manufacturing is very usefuland helpful for Chinese enterprises in improving their competitivepositions. The integration capability, including process re-engineeringand optimization (concurrent engineering) as well as resource optimizationbetween enterprises (agile manufacturing), are concrete and comprehensiveways to enhance the enterprise’s competitive ability. CIMS has made itpossible for these firms to create interactions among their functionalities,thus leading to deeply embedded synergy (Werther and Kerr, 1995). Forexample, CIMS provides the central vehicle enabling the inventor–userinteractions, rapid distribution of products and market feedback thatadd most value to product innovations. It allows multidisciplinary(marketing-manufacturing-development) teams to interact continuouslywith customers all over the world, capturing their responses throughvideo, audio, physical sensing and computer network systems. Suchcustomer participation is a crucial element in both lowering risks andenhancing the customer value of designs. These unique advantages areunavailable to other firms in the industry, and it will take several yearsfor other firms to acquire this capability.

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Technological innovation capability

Technological innovation can reshape the competitive landscape of anentire industry with astonishing speed. Some businesses may fail tobridge the discontinuity and wither away, while a few innovators withnovel concepts or methods rise to dominance. Firms investigated in thisstudy, though in different industries, exhibited similar patterns oftransformation when a new product or process technology emerged tochallenge old formats. A close look at Beijing No. 1 Machine ToolPlant, the Chongqing CHN & CHN Ceramics Co. Ltd, the JingweiTextile Machinery Co. Ltd and the Harbin Electric Machinery Co. Ltdreveals that innovation has been the key to success and helps identifythe qualities that determine whether a firm will survive the encounterwith dramatic technological change.

Shift from product to process innovation

As producers and customers agree to product features, and as marketsexpand, a shift takes place in the rate at which product and processinnovations occur. Although the companies in this study never stoppedinnovating their products, computer numerical controlled (CNC) machinesprovided a major shift early on from product to process innovation. Ingeneral, this shift took place when CIMS was used to help the integrationof engineering design and manufacturing to achieve the agility capability.Beijing No. 1 Machine Tool Plant, the Chongqing CHN & CHN CeramicsCo. Ltd, the Jingwei Textile Machinery Co. Ltd and the Harbin ElectricMachinery Co. Ltd made great efforts to improve their manufacturingprocesses.

Dual focus on cost and quality

It was every firm’s strategy to consider cost, both in the design of theproduct and in the process that would manufacture it. Beijing No. 1Machine Tool Plant and the Jingwei Textile Machinery Co., for instance,have tried their utmost to replace their original manufacturing machineswith CNC machinery because the former had high operational costsand made low-quality products. Today, many believe that about 70 percent of manufacturing costs are dictated by product design, which was oneof the driving forces for four of our study firms to invest heavily in CIMS.

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Brands and reputation

Achieving operational excellence for premium products with superiorquality does not guarantee success in either the Chinese or the internationalmarketplace. A well-known brand name and company reputation arerequired in modern society due to rapid communication and news mediacoverage. A brand name is the part of the company reputation that canbe vocalized, and the reputation, in turn, will reinforce customer loyaltyto its brand. Therefore companies need this privileged invisible asset asa springboard to gain more global market share. The Chongqing CHN& CHN Ceramics Co. Ltd has taken the lead in its industry in thisendeavour and CHN & CHN is the brand name created and nurturedfor this purpose.

The China Huajing Electronics Group Corporation, Beijing No. 1Machine Tool Plant, the Sichuan Chemical Works (Group), the JingweiTextile Machinery Co. Ltd and the Harbin Electric Machinery Co. Ltdalso identified the significance of brand name and reputation for customerawareness and firm growth, and are all in the process of creatingreputations for their brand named products. But it takes years of consistenteffort and outstanding market performance before these firms will enjoythis privileged asset as a distinctive competence, while other Chinesefirms are starting to realize the importance of this strategic marketingconcept.

Customer information

Detailed information of all kinds can be critical to maximizing sales.Some of the most valuable information involves customers’ buying habitsand needs. CIMS information at BYJC, CHN & CHN, HEC and Jingweihelped to ensure that these companies have the right product mix fortheir customers. They try to extract a range of data from each sale. Theinformation is downloaded daily from computer terminals to headquarters,where sales trends are analysed. Every day, managers can gain access tocurrent and historical data to adjust and customize the product mix tosatisfy the never-ending quest for the optimal product mix for theircustomers. CIMS information databases can also generate informationfor total industry unit sales of the previous period, its growth rate andthe percentage of a market segment of the total industry, which helpsmanagers to make more accurate predictions for the production plan forthe next period, and sales and promotion budgets can be made accordingly.

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Special relationships

One of the most important yet least discussed capabilities involvedrelationships. Ties with existing customers and suppliers provide growthopportunities and should be nurtured. Those relationships with powerfulindividuals, businesses and governments can unlock opportunities thatwould otherwise be shut off. In particular, relationships can facilitateentry into new industries and geographies, as well as bring deals to thetable. This is true, particularly in countries without a stable legal andregulatory environment, or in countries that are undergoing drasticsocial change or transformation as is the case in China. The Chineseusually use the word guanxi to refer to the connections, contacts andpersonal relationships needed to do business in the market. For the lastfew years, US press reports on questionable campaign contributionsfrom Asian companies and individuals have been equating the wordguanxi with bribery and corruption. Businessmen and investors needthe right local contacts and connections to do business in these relationship-oriented business cultures. But developing those vital connections neednot involve illegal payments, and there is no necessary linkage betweenguanxi and corruption.

In China, guanxi does not carry negative connotations (Xin andPearce, 1996). To managers, it is the social network for information andmutual help. Luo Yadong (1997) concluded in his study that ‘guanxi-based business variables are significantly and positively related to afirm’s accounting and market performance’, and he explained thatsalesforce marketing and credit-granting decisions based on guanxi arefound to have a systematic and favourable effect on a firm’s profitability,asset turnover and domestic sales growth.

When talking about the relationship between the firm and thegovernment, Xu Juyan, a member of the Chinese Academy of Engineering,Senior Advisor to the China Huajing Electronics Group Corporationand Honorary Director of the China Huajing Central Research Institute,commented that some senior executives have misconceptions aboutrelationships with government. Because the government officials usedto interfere with the firms’ decisions, these senior executives try to avoidcommunicating with government departments. ‘This is the wrong attitude,’he criticized. It was the central planning system that imposed governmentalinterference in all the affairs of the firm. Now they try to help if theycan, and firms will miss many opportunities when they cut shortcommunication channels with the government.

All the firms in this study cultivated and nurtured good relationships

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with government and leaders at various levels. The Chongqing CHN &CHN Ceramics Co. Ltd obtained development funds from building thischannel of trust. The Wuxi government has provided the China HuajingElectronics Group Corporation with favourable policies and supportfor its growth. It has created the Wuxi Electronics Industry Park specificallyfor Huajing, where Huajing has the opportunity to develop into aconglomerate in its industry. Beijing No. 1 Machine Tool Plant hasworked closely with Beijing municipality government in moving fromthe central city into an industry park, obtaining a large amount offunding for the modernization of its facility and process innovation.Help from various sources played a significant role in the issuing ofstock for the Sichuan Chemical Works (Group), which was in desperateneed of capital for product restructuring and facility upgrading. One ofthe major reasons the Jingwei Textile Machinery Co. Ltd moved itsheadquarters to Beijing was to have direct connections within thisimportant governmental and social network. The Harbin ElectricMachinery Co. Ltd needs help from government to remove its socialobligations, even though these social units have been separated from itsorganizational structure.

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Conclusions and implications

This study focuses on the strategic challenges and responses facing ChineseSOEs from the nationwide economic transformation towards a marketeconomy, from rapid globalization and increasing industrial competition.This research has identified the dominant challenges and forces for changein China, the nature of SOE responses to those forces and SOE performancein making the necessary transformations to compete in a global businessenvironment. It was assumed that the purpose of China’s reforms was tocreate modern, competitive corporations. The research described theobjectives for SOE reforms and the resulting development in:

� revising the strategic direction and structure;

� responding to a changing market and competitive environment;

� establishing modern corporate systems;

� improving economic performance; and

� strengthening the capacity for scientific and technological development.

The rationale for defining the research question is the same as in hypothesis-testing research (Eisenhardt, 1989). Specifically, the following five questionswere explored and examined in this research.

1. What factors create strategic challenges to SOEs?

2. How have SOEs responded to a more market-driven environment?

3. What factors determine the strategies of SOEs?

4. What new business processes and structures have SOEs plannedand implemented?

5. How do these SOEs measure the performance of their new strategies?

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The investigation was carried out using a case study methodology. Eightcompanies in seven industries were studied, and six are described in thisstudy. Two of the cases lacked adequate data to complete their analysis.Open-ended interviews covering the research questions were employedwhen talking to CEOs. Respondents were asked for facts to supporttheir comments, as well as providing opinions about events. The CEOs’insights formed the basis for modifying further inquiry and directingcompany research.

Semi-structured interviews were conducted with officials at each SOEregarding:

� how they perceived challenges both from the external environmentand internal situations;

� how they successfully initiated strategic change;

� how they achieved their goals in terms of bringing about competitiveproduct development; and

� how they had changed their policies and procedures to achieve thefit between structure and strategy.

Those designated to undertake this semi-structured interview weremanagers from departments of technology, HR, production, marketingand strategic planning. These executives had first-hand experience indeveloping new strategies and implementing change. Accuracy ofinformation was achieved by probing for the details on issues presentedby the CEOs. Individually, each firm was written up as a research casestudy and, collectively, a model of the strategic transformation of ChineseSOEs was developed.

Conclusions

Conclusions were drawn about how these SOEs were changing theirstrategies, structure, policies and procedures to deal with changes inChinese industry and with competitive pressure from the internationalarena after China’s entry into the WTO. Lessons from these companieswill be relevant to other SOEs facing similar forces of change andchallenge. The results are intended to be helpful to managers, researchersand policy-makers.

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The holistic strategic model forChina’s SOEs

A modified model for SOE study has been developed (see Figure 11.1)from the conceptual framework for this study (see Chapter 2, Figure2.2) based on the framework derived from Hofer’s (1973) preliminaryresearch (see Chapter 1, Figure 1.1). This model, which is built on theconcept of business strategy, summarizes the findings of this study, andhas proved to be an effective analytic tool in studying the patterns ofstrategic behaviours of SOEs in responding to China’s dynamic economic,social and industrial transformations. The major contribution of thismodel is that it takes the holistic view and studies the developmenttrends in strategic behaviours at a macro level. Even though the variablesin the model change and their significance can vary according to stagesof the life cycle for change, the model provides theoretical guidance inthe research into emerging economies and catches the dynamics of change.The beauty of this model lies in its simplicity in logic flow and practicalityin application.

External strategic challenges to SOEs

The model begins with the external strategic challenges to SOEs, whichformed the initial research question for this study. Most of the findingsof the model in the external environment were consistent with the findings

Exte

rnal

Inte

rnal

Strategicchallenges

Strategicreponses

Perf

orm

ance

� Globalization� Technology� Government� Network� Industry� Marketing� Ownership� Structure� Management� Innovation� Brand� Information� Human resource

� Finance

� Objectives� Strategy� Technology� Process� Procedures

� Restructuring� Innovation� Market share� Technological

development� Profitability� Quality� Information

integration� Product

development

Figure 11.1 Holistic model of the strategic challenge–responseprocess for SOEs

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of previous researchers studying emerging economies (e.g. Child andLu, 1996; Hoskisson et al., 2000; Kornai, 1986; Lee and Miller,1996; Peng and Heath, 1996; Soulsby and Clark, 1996). These variablesincluded globalization, technology, the institutional background such asgovernment regulation and infrastructure, social networks and industrychallenges.

Globalization

The globalization of markets equates to the globalization of competition.With greater market exposure comes intensified competition, diminishingmarket dominance by state-owned enterprises, accelerated product lifecycles and deepening performance uncertainty. As China opens itself tothe global marketplace, most SOEs, unable to rely on patronage orposition for protection, are permanently vulnerable. The scale of globalopportunities, the complexity of the competitive arena and the relentlessperformance discipline imposed by the capital markets are forcing thesecompanies to either specialize and become world-class and world-scalein their chosen field or exit the business. International accords inpreparation for China’s membership of the WTO are opening moremarkets and expanding access to existing ones, fostering competitionand bringing consumers more choices of higher quality goods and servicesat lower prices. By opening China to these global opportunities andthreats, its state-owned enterprises have been forced to develop strategiesand structures that will allow them to survive. After China’s entry intothe WTO, the time available for making decisions shrinks.

Technology

One major driving force that has made globalization a reality is technology.The world has entered a new epoch, in which technology is developingat an extremely rapid pace. Technology is also the engine of economicgrowth. It underpins China’s fastest growing industries, provides thetools needed to compete in every business and drives growth in everymajor market segment. Technology is transforming the very basis ofChinese competition, enabling large businesses to perform high-qualitydesign and manufacturing work while achieving the speed, flexibilityand closeness to customers that were once the sole domain of smallerfirms. Technology provides the tools for creating a spectacular array of

199


new products and new services. Advances in technology have spurredSOEs’ growth and the creation of core competencies, facilitated theconduct of business worldwide, and accelerated the development ofnew products, services and capabilities. With such technology, SOEscan respond quickly and flexibly to ever changing global market demandswith high-quality, customized goods and services at competitive prices.Therefore technological leadership often means the difference betweensuccess and failure in the global marketplace for companies.

Government

The government is now separating some commercial activities fromgovernment bureaus, though the process is not yet complete. Thegovernment could no longer afford the inefficiencies and losses financedexplicitly through the banking or budgetary systems. Redefininggovernment functions is viewed as both a prerequisite and a logicalconsequence of such reforms of state enterprises. The thrust of economicrestructuring is to separate government from business and the promotionof a ‘small government, big society’. The latter implies that all levels ofgovernment should limit their functions and allow people to acquire thegoods and services they want from the market. Firms in China arefacing institutional problems, largely from a less developed enterpriseenvironment, an inefficient capital market and incompleteness of thesocial security system.

Social network

The social network is one of the most important yet least discussedvariables in China, which is undergoing drastic social, economic andindustrial change and transformation but has not yet created a stablelegal and regulatory environment. Ties with existing customers andsuppliers provide growth opportunities and should be nurtured. Thosewith powerful individual, business and government networks can unlockopportunities that would otherwise be shut off. In particular, a strongcustomer network has a systematic and favourable effect on a firm’sprofitability, asset turnover and domestic sales growth. Stronggovernment networks are also essential to carry out significant SOEtransformations.

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Industry competition

Industry competition came from three sources:

� China’s open-door policy and its establishment of 14 special economiczones to facilitate the rapid expansion of trade and foreign investment;

� China’s rural reforms that led to the rapid improvements in agriculturalproductivity that in turn generated a rural labour surplus andballooning rural savings that spurred the rapid entry and growth ofnew rural enterprises; and

� China’s ‘cold-war’ policy of duplicating state-owned productioncapabilities and operations in most provinces in case of war, creatinga ready-made source of competition.

Internal strategic challenges to SOEs

The challenging forces from internal organizational situations identified inthis study include restructuring the ownership of the firm, restructuring thecompany itself, managerial capabilities, innovation, brand and reputation,information integration, human resources management and finance.

Organizational ownership and structure

China’s SOEs perform the functions of a ‘small society’, guaranteeingemployment and offering housing, health, education and pension. Themix of corporate enterprises and social functions, complicated by asystem of vaguely defined property rights, confounds the task of makingan economic profit, and also legitimizes soft budget constraints thatweaken incentives and the financial system. One of the more crucialreforms is the transfer of pension, health and education obligationsfrom state enterprises to government bodies. Another inherent deficiencyof China’s SOEs rests with their organizational structure, layout,management systems and operating mechanisms.

Management capability

The management capability of integrating information technology andmodern management methods with manufacturing technology provided

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SOEs with a great competitive edge in market competition. Thismanagement capability changed all operational processes, includingengineering design, computer-aided process planning, product datamanagement, simulation databases, inventor–user interactions andcomputer-aided manufacturing. The process and resource optimizationgreatly improved an organization’s time to market, quality, cost andservice. In addition, the integration of the information for productmanufacturing has drastically improved management and productionefficiency.

Innovation capability

Technological innovation reshaped the competitive landscape of an entireindustry with astonishing speed. Some businesses may fail to bridge thediscontinuity and wither away, while a few innovators with novel conceptsor methods rise to dominance. The SOEs investigated in this study,though in different industries, exhibited similar patterns of transformationwhen a new product or process technology emerged to challenge oldformats. Computer numerical controlled (CNC) machines provided amajor shift early on from product to process innovation. In general, thisshift took place when CIMS was used to help the integration of engineeringdesign and manufacturing to achieve this agility.

Brand name and organizational reputation

A well-known brand name and company reputation are required inmodern society due to rapid communication and news media coverage.A brand name is the part of the company reputation that can be vocalizedand the reputation, in turn, will reinforce customer loyalty to its brand.Therefore companies need this privileged invisible asset as a springboardto gain more global market share because achieving operational excellencefor premium products with superior quality does not guarantee successin either the Chinese or the international marketplace.

Customer information

Detailed customer information of all kinds can be critical to maximizingsales. Some of the most valuable information involves customers’ buying

202


habits and needs, which can help to ensure the right product mix forcustomers. Managers’ access to current and historical data providedreliable information for making strategic decisions concerning adjustingand customizing the product mix to satisfy the never-ending quest forthe optimal mix for their customers. Information regarding total industryunit sales of the previous period, its growth rate and the percentage ofa market segment of the total industry can help managers to make moreaccurate predictions for the production plan for the next period, andsales and promotion budgets can be made accordingly.

Human resource management

Another element in building a capable organization is the quality oftheir human resource (HR) support systems, including training andcareer planning, because introducing a competitive mechanism to HRdevelopment can make the enterprise full of dynamism. Many companies‘borrow’ various sources of human resources by cooperating with researchinstitutes and companies both at home and abroad in technicaldevelopment. IBM, Procter & Gamble, Volkswagen and others are wellknown in China for their training programmes and are popular employersamong recent graduates. P&G, for example, runs ‘P&G University’ fornew recruits and offers training and career development opportunitiesabroad for top-performing Chinese employees. Several European andJapanese companies invest heavily in training local staff in China andoverseas. Since HR capability building is so important, it is absolutelynecessary for SOEs to employ very senior HR managers to establishChina-wide policies on recruitment, compensation, training anddevelopment. They have also had to boost their complements of recruitingand training staff in order to deal with the rapid throughput of newhires needed to offset China’s high attrition rates.

Financial capability

Highly developed financial and risk management skills enabled someSOEs to grow in ways that others could not. By crafting elegant solutionsto funding constraints, some SOEs advanced along promising growthpaths that are too costly or risky for their competitors. Two principlesare very important to the market economy – the principle of prudence,and the emphasis on cash flow rather than just profit.

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Strategic responses to SOE challenges

The second research question in the model addressed what factorsdetermined the strategies of SOEs. Among the identified challenges toSOEs in this study, which impacted on their strategy formulation process,were three groups of variables, including (a) the environment, (b) resourcesand skills, and (c) the values and aspirations of top management. Thesethree groups of variables played the most significant role in crafting theSOE’s strategy.

Every organization exists within a complex network of environmentalforces, and these forces are so dynamic in an emerging economy thattheir constant change presents a myriad of opportunities and threats orconstraints to strategic managers. Organizations that master such genericgrowth-enabling skills as acquisition, deal structuring, financing, riskmanagement and capital management have a big advantage in creatingand sustaining growth.

Another very significant finding of this study is that successfulorganizations always had strong CEOs, who, in general, presided overthe board of directors. Decentralization of power and internal consumptionof energy resulting from diverse value systems among the top managementteam (TMT) would lead SOEs nowhere. A shared vision and valuesystem among TMT members can direct the focus of attention to,and align all the resources for, targeted strategic orientation of theSOE.

The third research question studies how SOEs responded to amore market-driven environment. It has been found that whileoperational skills and policy procedures tended to be specific to eachSOE’s business, the growth-enabling strategies and technologicalinnovations are transferable from one market or business unit toanother. Because of their broad applicability, such capabilities usuallyreside in the corporate centre, from where they are made availableto business units. In other words, the new business processes thatwere planned and implemented and the technologies acquired bySOEs created the core competencies needed to stay competitivewithin the market. Continuous innovation became the driving forcerequired for SOEs to remain ahead of the competition and tobetter serve customers. The findings of this study indicate that all theSOEs investigated were making efforts to improve their technologieswhile changing the corporate structure to facilitate the strategicimplementation.

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SOE performance evaluations

The last two research questions explored the strategic approaches firmshave taken and the relationship between the SOE response strategiesand performance. The results of the investigation indicate that SOEshave different evaluation systems in assessing their performance becauseChina has not standardized reporting requirements and only adoptedgenerally accepted accounting principles in 1998. Hence, it is very difficultto compare firm performance while evaluating the results of their efforts.However, this study found that choices of performance evaluation criteriafor strategic implementation have been greatly influenced by the stagein the life cycle of the economic transformation.

� Incremental responses. Firms adopting incremental changes in theiroperation, without attempting to alter the existing structure, usuallyfocused attention on cutting costs and improving efficiency. Thestrategy is to improve their management systems, not their businessstrategy. The long-term future for these firms is uncertain.

� Strategic responses. Firms that are busy changing their organizationalstructure in an attempt to restructure their businesses and free themfrom the central planning swamp were concerned about completionin their strategic business units and successfully stopped losing money.The strategic approaches commonly seen are process development,technical innovation, brand and reputation creation and adoptionof the global market system.

Following the challenge–response–performance paradigm, we wouldlogically expect that SOEs would adopt strategic postures consistentwith their respective environments in order to achieve the strategy andenvironment fit which is crucial to their survival and success. ThoseSOEs that have completed their restructuring and moved to compete formarket positions tend to lay emphasis on market share and product andtechnological innovation. SOEs that have merged in the global markethave been using performance measures that are well accepted in developedcountries, such as return on investment (ROI), return on equity (ROE),return on sales (ROS), return on assets (ROA) and asset turnover.

Implications for practitionersThe main purpose of this study has been to identify and examine thestrategic challenges, responses and consequent performance among SOEs

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operating under different environmental constraints. The results of thisresearch should help policy-makers in government and strategic managersin business to better understand the behaviour of SOEs confronted bystrong global competition and social, economic and industrial change.This study found a variety of reasons for SOEs taking different approachesin strategic planning and implementation. The strategic actions takenby SOEs differed between improving efficiencies and redirecting strategies.Such actions differed according to a firm’s stage of change. Policy-makers design and evaluate their strategies according to their legalenvironments. This institutional perspective helps to identify factorsthat influence political/legal strategies. This study found that governmentalactions without market-based adjustments did not help improve thecompetitiveness of SOEs, such as separating SOEs’ social obligationsjust for the sake of appearance.

Strategic managers of firms may also benefit from this study informulating and implementing strategies that cope with industrial andglobal competition. Development of the challenge–response process wouldalso help managers understand the dynamic forces of industrial andglobal competition. By understanding the nature of competition, managerscan have better ideas in planning future developments to deal withcompetition. In most cases, the competition challenges the existing ‘rulesof the game’ used by SOE incumbents. In established industries, therules of the game are generally accepted and honoured by the existingplayers. The ‘problematic nature’ of competition lies in the fact that it‘violates’ or ‘bypasses’ the established ‘rules of the game’ that SOEshave been accustomed to for as long as five decades.

Strong competition reveals serious competitive weaknesses in SOEs’capabilities and structures. Managers are facing two challenges: one isto focus on organizational efficiency; the second is to change competitivestrategies. Creating lean structures in a short period of time can preoccupymanagers. If they bury their heads in restructuring and neglect thechanges in the external environment, they can find themselves unable tocompete in their businesses. Strategists should always view their long-term future so that they can align the organizational resources to theright orientation. Although implementations need careful planning andconcentrated efforts, CEOs and the top management team should neverbe confused with too much detailed operational procedures. Forgettingto identify potential enemies is very dangerous.

The second alternative is to realign the firms’ resources to build acapable organization with distinctive competencies. It is very importantfor SOEs to understand that separating out the non-strategic business

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units and social affiliations such as schools and hospitals is not immediatelypossible. Local governments and counties have different financialcapabilities and policy priorities. This complicates the situation for SOEs.

Managers need to create an organization with skills, capabilities andprivileged assets. Global competition often leads strategic managersinto a dilemma between changing the product/market scope and changingdistinctive competences. SOEs in most industries are inflexible in termsof changing the product/market scope of existing businesses becausesuch a change of scope through diversification demands huge capitalinvestment. In order to survive, SOEs must invest a considerable amountof funds in the improvement of certain distinctive competences and inupgrading their technology. The findings of this research are helpful formanagers to understand the problems encountered and benchmark theindustry leaders.

Implications for academic research

This study has attempted to develop a holistic model of the challenge–response behaviour of Chinese SOEs involved in global competition andeconomic transformations. The conceptual framework was designed toreflect the dynamic nature of the challenge–response process by focusingon the research flow of challenge, perception and response. The centralquestion was how to capture the dynamic aspects of challenge–responsebehaviours and to build a theoretical model guiding research on SOEsin a fast-changing environment.

The necessity of utilizing a dynamic approach has been clearly notedin the field of strategic management, though few models have beendeveloped to effectively deal with this problem. To this end, this studyhas provided a contribution by using a dynamic holistic model of thestrategic response behaviour of SOEs facing a strategic challenge. In thisstudy, only the strategic behaviours of industry leaders were examinedbecause it was assumed that such leaders were more heavily involved inand affected by global and industry competition. Of course, companieswithin the same industry but in different provinces and localities mayhave developed different competitive strategies in response to the strategicchallenge of competition. Such variation in response strategies calls forfurther investigation.

Another limitation of this study relates to its sample selection of theeight industry leaders that were involved in different stages of change in

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their current transformations. Time and other resource limitationsrestricted the scope of this study to only six industries.

Further research may find that responses to the strategic challengesare influenced by factors other than those identified in this study. Forexample, the relationships between SOEs and the Communist Partysystem, the labour unions and customers may affect strategic responsesto both external and internal challenges. Though not investigated in thisstudy, relationships with the Party system and the growth in labourunions have had a significant impact on the strategic responses of somefirms.

Hofer (1973) provided a model of the strategic challenge–responseprocess and some tentative conclusions about the strategic responses offirms facing various types of strategic challenge. This research applied amodified version of Hofer’s model to SOEs facing both strong externaland internal challenge. In his article, Hofer tentatively concluded thatdifferent types of strategic challenge do indeed elicit different types ofstrategic response, and noted that the relative success of different possiblestrategic responses differed for different types of strategic challenge.The findings of this study confirmed his hypothesis, but at the sametime discovered similar response patterns across industries in dealingwith strategic challenges. The central question of this study was toidentify the pattern of responses of SOEs within different industries thatconfront similar strategic challenges.

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219

AAA certificates, 114achievements and honours (Huajing),

77–9honourable prizes, 77proprietary processes (know-now),

79technical achievements, 78

Alpha Tec, 53Alstom Power, 176AMD, 53analyses and discussions, 169–94Andrews, K.R., 17–18, 40Ansoff, H.I., 16–17, 20Asia Pacific Economic Cooperation,

171Asian economic crisis, 120, 151Asian NIEs, 24asset restructuring (Jingwei), 146asset-based strategies, 121

Barnard, Chester, 21, 22Barney, J.B., 28BASF, 120Beijing Huahong, 59Beijing Huaxia Semiconductor

Manufacturing Co. Ltd(HSMC), 54

Beijing Machine and ElectronicHoldings Co. (BMEHC), 87,88–9

Beijing No. 1 Machine Tool Plant(BYJC), 47, 81–96, 178, 184,187, 191

Beijing University, 76Beijing Zhongxin, 59bipolar ICs, 51Bohai Bay Shipbuilding Works, 159BP Amoco, 120brands and reputation, 192broad environment, components of

the, 23demographic factors, 23economic factors, 23sociopolitical/legal factors, 23technological factors, 23

business scope (BYJC), 84business strategy, 34

components of, 20–1concept of, 169

CAD design system, 112case studies, 40, 47

data selection, 40–1methodology, 41–2, 196

centrally planned economic system,26, 173, 183, 189

ceramics, 117, 186business, 97formula, 114industry, 99–100, 173innovations, 107market, 110product engineering design system

(EDS), 105production (CPCIMS), 104products, 100

Index

220


quality of, 103chaebols (Korea), 25challenge–response:

behaviour, 34, 206process, 205

challenge–response–performanceparadigm, 47

chemicals:companies, growth strategies of,

120industry, change in, 120

Chen, Shitong, 142–3, 145–6Chendu Wangjiang Chemical

Corporation, 122Chengdu Electric Machinery Factory,

152china, term for ceramics, 117China, machine tool industry, 82–3China Daily, 185China Huajing Electronics Group

Corporation, 47, 51–79, 172, 180,184

customers, 64development stage, 61expansion stage, 60foundation stage, 60people, 61production capacity, 62–3products, 51, 61profile, 60–4quality, 62science and technology level, 76structure, 63

China Machine Tool & Tool Builders’Association, 139

report, 83China Textile Machinery Stock Ltd,

139Chinese Academy of Science:

Semiconductor Research Institute,76

Chinese diaspora, 7Chinese IC fabrication plants, 55Chirac, Jacques, 114

Chongqing CHN & CHN CeramicsCo. Ltd, 47, 97–118, 177, 179,182

Chongqing Zhaofeng Ceramics Co. Ltd,102

CIDC, 59CIMS, 112, 179–80, 186, 190–2, 201CIMS-ERC programmes, 182CIMSNET, 182‘closed door’ policy, 99command economy, 8Communist Party system, 207company profile:

BYJC, 81CHN & CHN, 98SCW, 121

computer integrated manufacturingsystem (CIMS), 76, 91, 104,178, 190

computer numerical control (CNC), 81,87, 191, 201

computer-aided design (CAD), 76,92, 105, 178

computer-aided manufacturing(CAM), 76, 92

computer-aided process planning(CAPP), 105, 178

computer-aided transcription (CAT), 76conceptual strategic challenge–response

model, 34controlled or planned economies, 38core rigidities, 32corporate law, Chinese, 89corporate strategy, 17cost and quality, 191CPCIMS, 104, 106–7

information integration, 105Cultural Revolution, 8customer information, 192customer participation, 190

Daewoo, 25data, 30

triangulation, 39

221

Index

design products, 60Deutsche Babcock AG, 153development problems in China:

challenges, 8–10difference between urban and rural

areas, 9economic structure, 9employment insecurity, 8state-owned enterprises, 9–10

Dezhou Power Plant Phase III, 153domestic Chinese market, 131, 175Dongfang Boiler Factory, 152driving forces, 7dual-track pricing system, 9–10Dupont, 16dynamic environment, 124dynamic random access memory

(DRAM), 52

economic development, stages of,23–5

developing competitive business, 25providing low-cost labour, 23upgrading infrastructure, 24upgrading technology, 24

economic growth, 119China, 5driving forces, 7pragmatic and incremental reforms,

7rate of investment and capital

accumulation, 7structural transformation, 7

economic reforms, 77, 98economic restructuring, 199economic structure, 9economic system, 173economic transformation, 10

causes of, 5–7economy, 26, 28–9, 31–2

China’s, 5EDA (electronic design analysis) tools,

70effective strategy, components of, 16

Eighth Five-Year National Plan(1990–95), 82, 101, 116, 139

electric power industry, 151electronic data systems (EDS), 116Electronics Science and Technology

University, 76emerging economies, 37employee development and training

(CHN & CHN), 108employment insecurity, 8engineering data management (EDM)

systems, 105engineering design systems, 144, 178

CAD (GT-CAD), 144optimization technology, 1442-D technology, 1443-D technology, 144

engineering design systems (EDS), 178engineering projects (CHN & CHN):

hardware engineering project,103–4

human resource engineeringproject, 107–9

software engineering project,104–7

Enterprise Bill of Rights 1984, 9enterprise management, 134

modernization, 124enterprise management information

system (EMIS), 92assisting managers in decision-

making, 94–5closed-loop scheduling, 92cost planning and control, 92–4quality control and responsibility

follow-up, 94enterprise management system

(Jingwei), 145Enterprise Resource Planning (MRPII/

ERP), 115environment, 21–3

external, 22internal, 21

environmental challenges, 33

222


environmental variables, 23evaluation of performance:

BYJC, 91–6CHN & CHN, 113–17HEC, 159–66Huajing, 73–9Jingwei, 147–50SCW, 134–7

expansion, strategies of (SCW), 131–3diversification into biochemistry,

132fine and specialty chemical

products, 132–3melamine, production of, 132sulphuric acid and potassium

nitrate, production of, 132external challenges, 170–7

globalization, 198government, 198industry challenges, 198social networks, 198SOEs, 198technology, 198

external environment, 98, 123

FDA certificate (US), 11415th Communist Party Congress,

180–115th National People’s Congress, 181financial condition (Jingwei), 145–6

accumulating capital, 145proactive actions, 146

financial goals:accomplishment of, 113improvement in, 137

firm data, 39First China Brand (CHN & CHN), 115flexible manufacturing system (FMS)

workshop, 81flue gas disperser (FGD), 152Fourth Plenary Session, 181Fujitsu, 53

GDP, 4, 5, 7

General Electric (GE), 155General Motors, 16Geneva SGS International Quality

Institute, 114German Ceramic Research Centre, 103global ceramics industry, 174global competition, 174global market, 25, 29, 171, 173, 179,

186, 198, 199, 204global marketing, 175globalization, 170–7, 198globalization, perception of, 172–7

BYJC, 172–3CHN & CHN, 173–4Huajing, 172HEC, 175–7Jingwei, 175SCW, 174

goal accomplishment, assessment of,127

Golden Triangle, 91government, 180–3, 199government–industry relationship, 25Great Hall of People, 110Great Leap Forward, 8Greaves Limited of India, 160gross domestic product (GDP), 3Guangzhou Ceramics Exhibit, 102guanxi, 193

Harbin Boiler Factory, 152Harbin Electric Enterprise

Development Co., Ltd, 156Harbin Electric Machinery Co. Ltd

(HEC), 47, 151–66, 178, 182,184

products, 154profile, 154–5

Harbin Electric Machinery Factory, 152Harbin Research Institute of Large

Electric Machinery, 157hardware engineering, 103–4high-density packaging, 71Hitachi, 25, 159, 176

223

Index

Hitachi Seiki Co. Ltd, 91, 95Hofer, C.W., 15, 18–20, 34, 207Hofer’s challenge–response

framework, 12holistic strategic response model, 34–

5, 197Honda, 25Hong Kong Zhaofeng Ceramics Group,

102honours (BYJC), 96HSMC, 55Huahong–NEC Microelectronic joint

venture, 52Huajing – see China Huiajing

Electronics Group CorporationHuajing Bipolar IC Plant, 71Huajing IC Assembly Co. Ltd, 71human resource engineering, 107human resource support systems,

202hybrid strategic response, 34Hyundai, 25, 53

IC design, 57–60IC fabrication companies, 53IC manufacturing technology, 56implementation, six steps to, 127imports and exports, 53improvement:

of basic management, 134of enterprise management, 134of technical management, 135of workfloor management, 134

incremental responses, 204industrial environment, 33Industrial LEAD Award, 81industrial production, 119industry competition, 183–4, 200

‘Cold War’ policy, 200open-door policy, 200rural reforms, 200

industry competitive situation analysis,52, 97

CHN & CHN, 97

HEC, 151–4Huajing, 52–60Jingwei, 139–40SCW, 119–21

industry-related challenges, 43industry-wide cost reduction, 121innovation, strategies of, 112institutional environments, 30institutional infrastructure, 31institutional theory, 26–7integrated circuits (ICs), 51integrated computer management

(ICM), 92integrative management, 190Intel, 53, 172interactive design, ceramic products,

107internal bank accounts,

establishment of, 126internal challenges for SOEs, 184,

200–2brand name and organizational

reputation, 201customer information, 201–2financial capability, 202human resource management, 202innovation capability, 201management capability, 200–1organizational ownership and

structure, 200internal management (SCW), 125International Monetary Fund, 5international standard (ISO), 116investment, focus of, 144‘iron bowl’ phenomenon, 128ISO 9001 certification, 62, 114, 158

Jiang, Zemin, 51, 114Jiangnan Radio Equipment Factory,

60–1Jinan Machine Tool Group, 86Jingwei contemporary integrated

manufacturing system – seeJW-CIMS

224


Jingwei Textile Machinery Co. Ltd, 47,139–50, 178, 182, 191

company profile, 140compensation system, 141high staff turnover, 142market economy, challenge of,

141–2quality of employee, 142technology innovation, 141

Johnston Southern Development Co.,154

Juyan Xu, 193JW-CIMS, systems of:

computer-aided design (CAD),143

computer-aided operationssystems, 143

computer-aided quality system(CAQ), 143

management information system(MIS), 143

manufacturing automation system(MAS), 143

keiretsu (Japan), 25

Lakshmi Machine Works Limited,139

Li Peng, 51, 114Lucent Qingdao Joint Venture, 69Lucent Technologies, 60, 69Luo Yadong, 193

Machine Tool Group, 89machine tool industry, 173machine tool market, 82machine tool plants, 89machine tool products, 90macro-environmental challenges, 43management challenge (SCW), 123–4management decisions, decentralization

of, 10management information system

(MIS), 105, 116, 178

at CHN & CHN, 113management systems, 105management team, development of

(Jingwei), 145managerial expertise, 32manufacturing automation system,

Jingwei, 144manufacturing engineering, ceramic

products, 106–7Manufacturing Resource Planning II

(MRP II), 145market costs, simulation of, 126market economies, 5–6, 11, 27, 37–8,

98, 123market economy:

emphasis on cash flow, 202principles, 202

market globalization, 172market mechanisms, 87market operation system, simulation

of, 126market share, 44market-based management, 31market-based system, 31market-driven economy, 38market-driven environment, 43, 203market-related challenges, 43marketing of machine tools, 88marketing strategies (CHN & CHN),

110–12marketization, 29Matsushita, 25Meizhou Wan power plant, 154metal oxide semiconductor (MOS),

51methodology of research, 37Microelectronic United Company, 61microelectronics capability, 65Microelectronics Center, Southeast

China University, 76Ministry of Industry Information

(MII), 52Mitsubishi, 25modern enterprise system, 187

225

Index

modern management model (CHN &CHN), 115

modern power market, 152MOS assembly section, restructuring

of (Huajing), 71MOS Design Institute and Test

Center, 70MOS design section, restructuring of

(Huajing), 70MOS IC production, 65–6MOS wafer manufacturing

restructuring, 69Motorola, 52multinational enterprises (MNEs), 28Muxi Xie, 124

National High-Tech 863 Programme,115, 182

national operations network, 100National People’s Congress (NPC),

185National Power (UK), 153national power grid, 152national standard (GB), 116network-based growth strategy, 27Ninth Five-Year Plan, 82Nippon Electric Company (NEC), 52,

53, 54, 59Nissan, 25Northeast Binhai Hydroelectric Large

Machinery Plant, 159

Oneida Ltd, 117open-door policy, 183, 198open-ended case study interviews, 41open-ended interviews, 196open-ended questions, 44operation index, 67organizational transformations, 38Oriental Electric Motor Factory

(OEMF), 155

Panasonic, 53paradigm, 29

performance evaluation (SOE), 204performance evaluation (Huajing),

73, 76new product development, 76operations and performance, 76science and technology

development, 73strategic restructuring, 73

progress of, 74performance evaluation (Jingwei),

147–50inventory analysis, 150profitability analysis, 149sales analysis, 147stock performance, 148

performance evaluations, SOE, 204performance measurement, 40petrochemical revenues, 119Philips, 52, 120planned commodity economy, 123planned economy, 26, 123policy-related obstacles, 182population ecology theory, 33Porter, M.E., 18, 21, 28, 38power industry, 152–3

domestic competition, 152third-country imports, 153US market share, 153

power industry, challenges of, 155–6domestic competition, 155global competition, 155high turnover of key employees,

156incomplete restructuring, 156lack of technicians, 156

power station projects, 161Premier Zhu, 102premium quality product, ceramic, 114President Clinton, Bill (USA), 153President Jiang, 51President Wang (Huajing), 66

report, 79President Zhang (CHN & CHN),

98–101

226


privatization, 29product data management (PDM),

105product developments (BYJC), 95product orientation, 85product quality (Huajing), 62product strategy (HEC), 158product structure, 124–5product to process innovation, 191product type, 53production responsibility system, 130production safety (SCW), 124products (BYJC), 83products and market feedback, 190Professor Wu, 41profitability analysis (HEC), 161profitability comparison, 150Project 75, 65–6, 68Project 908, 52, 65–6, 68project management techniques, 158purchasing power parity (PPP), 4

quality control system (Jingwei), 144quality function deployment (QFD),

145quality strategy (HEC), 157

rapid 3-D ‘virtual’ prototyping, 190research design, 37research questions, 42–7

open-ended, 42semi-structured, 42

restructuring, 185–8BYJC, 95, 186CHN & CHN, 185HEC, 188Huajing, 187Jingwei, 186SCW, 188

restructuring and rejuvenation (CHN& CHN), 101–2

purchase of advancedmanufacturing facility, 103

restructuring, 102

technical renovation, 101restructuring MOS operations,

68–71return:

on assets (ROA), 204on equity (ROE), 204on investment (ROI), 204on sales (ROS), 204

risk responsibility, 125risk sharing, principle of, 128

Safety and Technology Department(SCW), 129

safety hierarchy, 130decision layer, 130management layer, 130

safety management (SCW), 129total quality management (TQM),

129total safety control (TSC), 129

safety management system,implementation of, 131

safety training and education, 129sales analysis (HEC), 160sales and profitability summary, 160sales comparisons, 148, 161sales force, weakness of, 88sampling and data collection, 38–40Samsung, 25, 53scientific assessment system, 130Sears, 16semi-structured interviews, 41, 44, 196Semico sales target, 71services (BYJC), 84Seventh and Eighth Five-Year

Economic Plans (HEC), 158Shanghai Advanced Semiconductor

Manufacturing Corp. (ASMC),54

Shanghai Boiler Factory, 152Shanghai Diesel Engine Company

Limited, 160Shanghai Electric Machinery Factory,

152

227

Index

Shanghai Erfangji Textile MachineryCo., 139

Shanghai Grace SemiconductorManufacturing Co. Ltd, 57

Shanghai Huahong, 59Shanghai Industrial Integrated

Circuit Design Centre (ICC),59

Shanghai Machine Tool Group, 86Shanghai SyncMOS Systems (SSS), 60Shanxi Enhua Co., 154shareholding system, 180, 181, 185Shengzhen Aike Microelectronics, 59Shengzhen State Microelectronics, 59Shenyang Machine Tool Group, 86Shifang Chuanxi Phosphorus Chemical

Group Company, 122Sichuan Chemical Works (Group)

Ltd (SCW), 47, 119, 121, 182Sichuan Workers’ Daily, 127Siemens AG, 52, 69, 71, 153, 159, 176simulation technology, ceramic

products, 106Sithe China Holdings, 154social network, 199social security system, 199socialist economic system, 189software engineering, 104–5Sony, 25specific safety responsibilities,

documentation of, 13Standard Oil, 16State Corporate Law and Firm

Regulations, 187State Economy and Trade

Commission, 102state-owned economy, 87state-owned enterprises (SOEs), 3, 8,

9–10, 26, 30, 42, 47, 51, 66,85, 71, 102, 123, 141, 169,171, 173, 179, 180, 181–2,185, 196, 198–9, 201, 203–6

environment, 203reforms, objectives of, 12, 195

resources and skills, 203significance, 10strategy, 203technical renovation, 101transformation of, 11values and aspirations of top

management, 203State-Owned Enterprises Law, 180state-owned industrial enterprises, 184stock market, 188stock structure (Huajing), 68, 70, 72stock-driven modern corporation, 51strategic asset restructuring, 186strategic challenge–response process,

13, 207strategic challenges, 23–6, 86, 207

manufacturing challenge, 86–7reorganization challenge, 86

strategic challenges (BYJC), 85–8globalization, 85manufacturing, 86people, 87–8product, 85–6property rights, 87reorganization, 86sales force, 88

strategic challenges (CHN & CHN),98–100

cost management, 99create company reputation, 100customer-driven strategies, 99establish a sales network, 100price strategy, 99product quality management, 100

strategic challenges (HEC), 155–7domestic competition, 155–6high turnover of key employees,

156incomplete restructuring, 156global competition, 155lack of technicians, 156–7

strategic challenges (Huajing), 65disconnection between R&D,

manufacturing, 66

228


external obligation, 66financial constraints, 65government control and

intervention, 65internal obligation, 66lack of autonomy, 65

strategic challenges (Jingwei), 141–3compensation, 141employee quality, 142–3staff turnover, 142technology innovation, 141

strategic challenges (SCW), 123–5management, 123product structure, 124–5production safety, 124threats from upstream buyers, 125

strategic challenges, categories of, 42industry related, 42market related, 42related to institutional factors, 42related to resources and

capabilities, 43related to the broader

environment, 43technology related, 42

strategic challenges, perception of, 170strategic choice, 30, 33strategic decision-making, 27strategic factor market, 27strategic herding, 121strategic management, 18, 39, 206strategic orientation, 91strategic planning for development

(Huajing), 72strategic response model, 12strategic responses, 29–32, 33, 35,

88–91, 204strategic responses (BYJC), 88–91

business focus, 89capital investment, 91employee obligations, 89–90product development, 90, 91project cooperation, 91property rights, 88–9

training, 90–1strategic responses (CHN & CHN),

101–12branding and company reputation,

109–10innovation, 112marketing, 110–12product quality improvement,

103–9restructuring, 101–3

strategic responses (HEC), 157–9business relationships, 159product development, 158–9quality assurance, 157–8technological innovation, 157

strategic responses (Huajing), 66–73asset restructuring and system

transformation, 68conversion of debt into stock,

67–8run as modern enterprise, 68

strategic responses (Jingwei), 143–7asset restructuring, 146–7engineering design system, 144enterprise management system, 145JW-CIMS, 143manufacturing automation system,

144quality control system, 144–5retention of human talent, 147top management team, 145–6

strategic responses (SCW), 125–33expansion, 131–3risk responsibility and goal

management, 125–9safety management, 129–30scientific assessment system, 130–1

strategies, summary of, 177strategy:

business strategy, 19concept of, 15–21contents of, 18corporate strategy, 19functional strategy, 19

229

Index

strategy formulation, 17strategy implementation, 17strategy model, 43structural transformation, 7

task environment, components of the,22

tax regulations, Chinese, 117teaching methodology, 129Technical Centre (CHN & CHN),

112‘Technical Cooperative’ agreement

(Hitachi and HEC), 176technological innovation:

CHN & CHN, 116HEC, 157

technological innovation capability,191

technology, 177–80, 198–9Third Plenary Session, 1813-D CAD system, 1063-D ‘virtual’ prototyping, 107, 179Three Gorges project, 82, 152, 159,

160Three Power Generating Co., 153three repudiations, principle of, 128top management team (TMT), 203Toshiba, 25, 52, 69, 71total quality management (TQM),

123township and village enterprises (TVEs),

33Toyota, 25transaction cost hypotheses, 16transaction cost theory, 16transition economies, 37Tsinghua University, 76turbo generator workshop, 158

Vice President Zheng, 156videocassette recorders (VCRs), 61Voith, 159, 176

wafer fabricating plants, 54Wenzhou Power Investment Co., 154Westinghouse Electric Company, 155World Trade Organization (WTO),

42, 85, 109, 171, 173, 175,181, 196, 198

Wrigley-Rumelt’s diversification, 16Wuxi Asset Management Company,

67Wuxi Branch of Research Institute

24, 61Wuxi CSMC-HJ Co., 69Wuxi Electronics Industry Park, 194Wuxi Huajing Microelectronics Stock

Co. Ltd, 72Wuxi Huajing Semico Microelectronics

Co. Ltd (SEMICO), 70Wuxi Microelectronics Project, 61Wuxi Radio Industry School, 60Wuxi State Asset Committee, 67

Xianlin Zheng, 103Xiaoping Deng, 185Xie Muxi, 123, 127, 131–2, 134,

137

Zemin, Jiang, 153, 185Zhang, Min (CHN & CHN), 98,

102–4, 107–9, 112Zhejiang Provincial Power

Development Co., 154Zhejiang Wenzhou Telluride Power

Generating Co., 154Zhu Rungji, 51, 102

strategic challenges and strategic responses. the transformation of chinese state-owned enterprises

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