Chinese Companies Going Global: Operational Strategies and Communication Challenges
When the private Chinese computer company Lenovo acquired IBM’s PC unit for $1.75 billion in December 2004, the deal made headlines around the world. But that was only one of a number of high-profile Chinese overseas investments.
In January 2003, the Jingdongfang Group spent $380 million for South Korea’s Hynix Company and kept its 1,700 Korean employees. In 2004, China’s zinc and copper producer China Minmetals negotiated a $5.5 billion deal to take over Noranda, Canada’s biggest mining company. Also in 2004, TCL claimed a 55% stake in a 100 million euro joint venture with French telecommunications giant Alcatel. Currently, China Mobile Communications Corp is close to finishing a $5.3 billion pact to acquire Millicom International Cellular SA of Luxumbourg.
Chinese companies are going global, and they’re doing it in a variety of industries: energy, steel, automotive, logistics, computers, consumer electronics, household appliances, telecommunications equipment, textiles and consumer products. Companies such as Haier (home appliances), Galanz (home appliances), Wanxiang Group (auto parts), Cosco (logistics), Lifan (motorcycles), BaoSteel (steel) and Huawei (telecom equipment) are among those well positioned to become global players over the next decade. Today, China has 16 companies in the Fortune Global 500 list, up from 11 in 2002. By May 2004, there were 7,720 Chinese companies registered abroad in 160 countries and $33 billion dollars in investment.
In this research, I explored the operational strategies and communication obstacles involved in China’s global expansion. Research data was obtained through ethnographic observation, textual analysis and case studies conducted in China and the U.S. in June, July, August and September of 2006. I will begin by summarizing the current state of Chinese companies’ global expansion, the political and economic support structure for such expansion, and the reasons these companies are going global. Then six operational strategies and three communication obstacles will be conceptualized.
Chinese companies are going global in search of new markets, raw materials, energy sources, advanced technology and global human resources. The move is being driven by growing labor costs in China and intensified competition from foreign multinational corporations in China following Beijing’s entry into the World Trade Organization Many of the Chinese companies looking outward are medium or large, state-owned and private enterprises. Most are market-driven, ambitious, nimble and flat in structure.
An obvious impetus for Chinese companies’ global expansion is China’s WTO entry, which came officially on December 11, 2001. WTO membership made it possible for Chinese companies to enjoy favored nation status in expanding to global markets, but it also presented Chinese companies with enhanced competition at home. WTO membership granted all member countries favored nation status in China. As a result, in recent years China has experienced a 36% increase in Fortune 500 representation. Anxiety about “foreign wolves coming to China” plagues many Chinese companies. For example, China’s entry into the WTO dramatically cut import barriers previously imposed on American agricultural products. Total U.S. exports to China have grown from negligible levels to about $14 billion a year.
Chinese companies have accumulated capital to invest overseas, and they are receiving official encouragement, which means support from Chinese banks. “Going global” became a national policy in the five-year plan for 2001-2005 in an effort to move from the “defense” to the “offense” and enable Chinese companies to acquire advanced technology, global brands, managerial know-how, and advanced human resources.
Chinese banks are well poised to provide support by virtue of a strong Chinese economy, high savings rate and abundant foreign reserves. Net savings have been accumulating in Chinese banks since 1994. In 2001, savings in banks exceeded loans by 3,200 billions RMB. China’s GDP is currently fourth in the world, and the country is No. 3 in foreign trade. Foreign reserves exceed $6 trillion.
Finally, labor costs are rising in China, making the country less competitive in some areas as a manufacturing base. Experts estimate that labor costs in China will continue to rise by 30% to 50% in the next three to five years. One result: Nike has moved some of its production line out of China to Vietnam to take advantage of lower labor costs.
Chinese multinationals are adopting six operational strategies in their global expansion:
- Establishing overseas production bases
- Making global mergers and acquisitions
- Building up global brand names
- Starting in emerging markets
- Accumulating overseas capital from global stock markets
- Employing global marketing and management personnel
All Chinese corporations going global need to answer three critical questions prior to any decision. First, should a manufacturing base be built in China or overseas? Second, should product distribution and sales be outsourced to foreign marketing companies? Third, should the Chinese company go global with its own brand name, which is usually little known to the outside world, or with a global brand name?
Chinese companies also have to overcome three major communication challenges in their globalization drive: negative perceptions of Chinese companies by the outside and especially the Western world, Chinese companies’ inefficient conflict management style, and their low proficiency in understanding local cultures worldwide.
Chinese executives can learn much from the Japanese and Korean experience in the 1970s, 1980s, and 1990s. As the domestic market in China continues to grow, these outward-looking companies play a key role in shaping up Chinese economy while bring in new knowledge, capital, products and personnel to China.
“Ten years ago, Lenovo’s participation in the international market was just like taking part in the Paralympics, with various tariffs and other obstacles preventing its internationalization process,” said Liu Chuanzhi, Lenovo’s former chairman, “Things have changed, however, now we are on a racetrack of real Olympic Games.”