China will eventually produce its own one world companies. Official China has long made it clear that one of its major economic goals is to establish Chinese enterprises among the ranks of the world’s leading businesses. Superficially, this process would appear to be under way. In 2009, China had thirty-four members of the Fortune Global 500. 9 China’s outbound investment was more than $52 billion in 2009, having risen from $1 billion to $3 billion annually in the early 2000s. 10
Ffowever, China still has a way to go before its companies attain the status of true one world multinationals. With one exception, all China’s Fortune 500 companies are centrally controlled state-owned companies, and their bulk can be attributed to operating in protected domestic markets. The exception is SAIC, the joint venture partner to VW and GM. But it is owned by the Shanghai municipal government and for all intents and purposes has the same status as a centrally controlled state company.
Examining the size of China’s outbound investment is also misleading. At least before the global financial crisis, much of Chinese spending abroad was used to either secure natural resources (most
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notably oil) or to buy passive stakes in overseas banks. For example, more than 60 percent of the total overseas investment in the first half of 2009 can be attributed to just four deals: Sinopec acquiring Africa’s Addax Petroleum Corp for $7.1 billion; Hunan Valin Iron and Steel acquiring a 16.5 percent stake of Australia’s Fortescue Metals for $1.9 billion; the full acquisition of Oz Metals in Australia by China Min- metals for $1.4 billion; and PetroChina’s 45.5 percent stake in Singapore Petroleum for $1 billion.
Moreover, before Chinese companies, whether state-owned or private, start making their presence felt on a major scale, they will have to confront two major obstacles: one internal, the other external.
The internal obstacle is the transformation Chinese companies have to make in their management practices to prepare themselves for global competition. Although the internal structures of most larger enterprises are formally similar to those of Western multinationals, both the nature and depth of business knowledge in China is nowhere near the same. The rate of China’s economic growth has far exceeded its capacity to educate and train people for working in a globalized economy, let alone give them the experience necessary, especially when it comes to doing business outside China’s borders.
Within many private enterprises, power is overconcentrated in one figure: the owner-operator. Sometimes, this individual relies on a handful of trusted senior advisors. This form of entrepreneurship can lead to fast, dynamic decision making, but it has also contributed to a culture of opportunism. While China’s economy boomed, many companies grew by moving from one hot new business area to another, often neglecting their original business along the way. Now, some companies find themselves with a portfolio of businesses spread across a group of increasingly competitive sectors and too little in-depth insight into any of them.
In state-owned companies, the leadership problem is often the opposite. Before acting, it is customary for executive teams in such companies to establish a consensus; doing so can be time consuming, making it a challenge for companies to effect rapid change. Moreover,
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state-owned enterprises are filled with managers with years of experience, but whose knowledge typically extends little beyond their own area of expertise. Thanks to their socialist legacy, these companies often have long histories of being process oriented and reliant on numerical measures of development. This makes fostering individual initiative hard. With older managers tending to remain in their positions for years, too many younger managers hit ceilings early in their career. Government rules make it hard to offer the incentives needed to retain and maximize the effect of talented staff. Profits, for example, can’t be redistributed to managers within a state-owned company.
For both private and state-owned companies the challenge is therefore developing executive teams who can devise and implement strong, resilient, and flexible strategies.
The external obstacle is the hostility to China’s reemergence as a global economic power, particularly from the United States. This first manifested itself publicly in 2005, when CNOOC, the smallest of China’s three major oil companies, offered $18.5 billion to buy American oil company Unocal. Despite Unocal providing less than one percent of the United States’s oil and gas needs, the bid generated a storm of opposition from American politicians and others opposing the deal as a threat to U.S. energy security. Offers by CNOOC to keep all Unocal’s American energy assets in the United States were not enough, and eventually CNOOC retracted its bid.
Huawei Technologies had a similar experience in 2008 when it joined Bain Capital in a $2.2 billion bid to buy out communications equipment maker 3Com. Although Huawei would only have ended up with 16.5 percent of 3Com, the purchase was abandoned in the face of political opposition in Washington.
Elsewhere, China’s expanding presence in Africa, which has become a major source of oil and other resources, has proved a source of friction, most prominently over Sudan, where China’s investment in oil fields have resulted in widely reported criticism from Western human rights groups. 11 And in 2009, a bid by the state-owned Chinalco for a
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$1.9 billion stake in the British-Australian mining company Rio Tinto was quashed, in part, by political opposition in Australia. 12
To many Chinese, all these responses suggest double standards, particularly given efforts by the United States and other developed countries to acquire businesses in China and their efforts to protect their economic interests in the Middle East and elsewhere. (From this perspective, the U.S.-led invasion of Iraq was primarily an effort to preserve American oil rights.) And there are indeed reasons to suspect self-serving motives behind much of the criticism of China’s overseas activities. For example, China, India, and Malaysia all have significant economic interests in Sudan’s oil industry. But no other country has been subjected to the same degree of criticism as China has for activities there.
Hypocritical or not, the challenge of overcoming such responses is real. Overcoming the problems of management shortcomings and overseas hostility are long-term challenges, ones that will need at least a decade to work through.
And these obstacles will be overcome. Just as multinational companies come to China because they have no alternative, so Chinese companies will have to go overseas both to reach new markets and to maintain their competitiveness within their home markets. Moreover, both Chinese companies and official China want this sort of global expansion. It represents one more aspect of the intense economic desire that is driving the country forward.
China's Soft Power
China will achieve its overseas goals by riding the familiar forces of globalization: communications, trade, and investment. In early 2009, it was widely reported that the government was planning to spend several billion dollars developing global media, including a twenty-four- hour television station loosely based on A1 Jazeera, to establish credible voices for Chinese news, analysis, and opinions. 13
Since 2004, it has also been sponsoring the establishment of Confucius Institutes around the world: cultural centers, often based in uni-
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versities or other educational institutes, that promote the teaching of Chinese languages and Chinese culture. And around the time of the G20 summit held in April 2009, China launched a series of economic proposals clearly aimed at showing it intended to play a more influential role in setting the global economic agenda.
Communications measures like this represent attempts to develop China’s soft power. Political analyst Joseph Nye first coined the term soft power as a counterpoint to military might: national leaders, argues Nye, can gain as much from wielding diplomacy and economic incentives effectively as they can from waging war. Corporations also have a form of soft power at their disposal: instead of hostile takeovers and poaching either markets or key people, they can build alliances, cultivate markets, and provide reasons for other members of the value chain to trust them and profit from association with them.
Chinese government and corporate leaders will step up their soft power efforts in the coming decade, especially where these moves can be expected to smooth the way for international expansion of China’s economic and other interests in the United States and Europe. Already, many Chinese corporate leaders know that sheer scale and financial might alone are not enough to allow them to expand internationally. They know they need to be able to influence and attract stakeholders— including customers, employees, shareholders, governments, and the broader community—in every country where they plan to operate. As with any business strategy, developing the capabilities of soft power calls for mapping out a clear path of initiatives, timelines, investments, and milestones. As implementation proceeds, plans will need to be updated and adapted, interdependencies tracked and managed, successes built upon, and shortcomings addressed. All this will require complex, crossfunctional, organizationwide efforts that will demand much time and attention from senior management.
While each company needs to forge its own path, Chinese companies can learn from those who have gone before them. The success of Japanese and Korean companies illustrates the size of the prizes on offer—
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consider the presence of Toyota, Sony, Toshiba, Sanyo, and Hyundai in the U.S. economy—and the routes toward winning them. Guided by these examples and bolstered by continued economic development at home, Chinese companies are finding themselves positioned to become global powers more quickly than their predecessors.
Trade will expand through the well-developed Chinese value chains. The Chinese businesses best positioned to accomplish this fall into two categories. The first group will be manufacturers and other firms that can compete with multinationals or offer goods or skills that they need, typically at very specific points on the value chains of specific industries. These include suppliers such as BYD, with its competence in batteries, or Wanxiang, which first established itself as a manufacturer of universal joints. The second group will be those that have succeeded in establishing a dominant position in a market segment within China and can use that position for global leverage. These include the personal computer maker Lenovo, the appliances manufacturer Haier, and the telecommunications operator China Mobile.
Most Chinese companies lack the capabilities they need to single- handedly expand their domestic operations into international territory. They will need international partners to improve the weaker aspects of their own value chains. Among the functional areas particularly in need of support are marketing and distribution, brand development, public relations, and IT support. Even when Chinese companies are successful with their purchases, turning them into successful, long-term businesses is not easy. In 2004, the electronic consumer goods manufacturer TCL became the world’s largest television manufacturer when it paid $282 million to become the dominant partner in a joint venture with French consumer electronics company Thomson Electronics. Its strategy was straightforward: use Thomson’s brand name and marketing reach to go global. The venture was a disaster, losing several hundred million dollars in its first twenty-one months of operation.
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Investment will be another means by which Chinese companies reach out. This will be accelerated in the aftermath of the global economic crisis. While China’s total outbound investment and acquisitions fell off sharply in the second half of 2008, it should rise again in 2009 and 2010 as Chinese companies take advantage of lower prices. Although the CNOOC-Unocal and Chinalco-Rio Tinto deals did not succeed, they demonstrate the scale at which Chinese companies will seek acquisition. These companies will tend to buy stakes for strategic reasons, such as access to resources or to lay the foundations for a longterm relationship, rather than buying companies outright with the goal of installing their own management teams to run them.
Deals on such a scale will be dominated by the big state-owned companies in the immediate future. But because state-owned companies will find their freedom constricted—both by having to tailor their needs to those of official China and being subject to suspicion because of their government ties—China’s first truly one world companies are more likely to emerge from businesses now in the next tier down: the private or semiprivate businesses that are growing fast and have more freedom to act independently. Huawei Technologies is often singled out as a prime contender, although its close ties to the government, despite being privately held, have led to opposition such as that which derailed the 3Com bid. Its main competitor, ZTE, is another candidate.
Chinese companies in less strategic industries, such as the white- goods maker Haier, the automotive components firm Wanxiang, and the automaker Geely, receive less official support and have a freer hand to make their own decisions. Of these, Haier has been the most successful, establishing itself as the world’s fourth-largest home appliances manufacturer. In 2008, one-third of its $17.8 billion in revenues came from outside China.
However, it is unlikely that many other such companies will emerge rapidly, especially given the lack of overseas demand expected in the next few years. The story of Lenovo provides a good example of the
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difficulty of this transition. As China’s highest-profile manufacturer of personal computers, Lenovo has deliberately tried to be a model one world company ever since its acquisition of IBM’s personal computing division in 2004. But it is still not clear whether that acquisition will ultimately be financially successful. After reporting losses of nearly $100 million in the last quarter of 2008, Lenovo ousted its American CEO and announced it would be focusing on the Chinese market. In 2009, it was still unclear whether Lenovo would evolve into a global company or retreat to being primarily a domestic one.
Instead, Chinese companies will concentrate on developing and honing their capabilities in China, both strengthening their own value chains and integrating themselves into the value chains of multinationals. Such processes are already well advanced in the automotive industry. The majority of China’s cars are made in Sino-foreign joint venture plants, many of which initially used a large proportion of imported parts and systems. Only after these plants were up and running have components makers sprung up to support them. Developing this part of the automaking value chain is crucial for China’s own vehiclemaking brands; as in Japan, the United States, and Europe, the viability of a national automobile industry depends in large part on the robustness and quality of its network of suppliers.
In addition to developing value chains within China, some Chinese vehicle makers have tried to integrate themselves with global companies. In 2007, Chery reached a provisional agreement with Chrysler to build small cars on the American company’s behalf. Although that deal was abandoned in 2008, it points the way forward to the kind of arrangement Chinese and foreign companies could be making in the future. For a business such as BYD, it may make sense to tie up with a partner in the United States to sell its new line of electric cars there, rather than embark on trying to set up a distribution and support network of its own.
Indeed, the first Chinese companies that become one world companies and enter global markets will do so by forming partnerships with
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foreign companies, tied into their value chains. This will not be perceived as Chinese companies—despite their Chinese government support and financial firepower—“taking over” other companies. Rather, it will be a gradual process, in which Chinese companies establish themselves, step by step, alongside other multinational businesses, just as European-, North American-, and Japanese-based multinationals have done before them. This is likely to happen with resources first, and in developing economies rather than developed ones.
The Chinese companies that make this transition will use every advantage they have, including the significant leverage of backing from official China. And though they take on one world elements, they will remain essentially Chinese, especially the strategic state-owned enterprises. For now, all of China’s largest companies fall into this category. These companies can be expected to behave like “Confucian multinationals,” answerable to the government, which will oversee appointments of their top officials who will continue to rotate them in and out of government. (The official who set up Chinalco’s Rio Tinto offer, the company’s then chairman, Xiao Yaqing, was transferred to China’s cabinet, the State Council, while the deal was being scrutinized by the Australian government. This episode demonstrated how close the ties are between the government and its core group of state-owned enterprises. Any government claims to maintain an arm’s-length relationship in the management of these companies should be treated with skepticism.)
Foreign governments and commentators are less likely to be suspicious of private companies, so they will face fewer external barriers to their overseas expansion, particularly in making acquisitions. Even these companies, however, are likely to maintain relatively strong ties with the Chinese government. As I noted in the previous chapter, official China remains suspicious of the emergence of any organization or individual that could form an independent locus of power and certainly doesn’t want to see the emergence of oligarchs or a tycoon class. So while private companies have more freedom to go their own way and
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THE CHINA STRATEGY
correspondingly receive less support, it is unlikely that the larger ones either will want or be able to act entirely independently of the state.