Chinese firms have displayed their share of global ambition with some high-profile deals over the past few years. Those deals include Lenovo’s acquisition of IBM’s PC business at the end of 2004, TCL’s take-over of certain assets belonging to the French multinationals Thomson and Alcatel in 2004, and Alibaba’s merger with Yahoo! China in August 2005. The latest news came on December 4th when Baidu, the biggest search engine company in China, announced that it is going to enter the Japanese market next year to compete directly with Google and Yahoo! abroad. Clearly globalization has become a key word for many Chinese companies hoping to propel themselves from national champions to global winners.
“They are right to do so. With the opening of world markets and the continued globalization of services, [these companies] might fail if they do not have real global scale,” says Frank-Jürgen Richter, the author of a recent book titled, Global Future: The Next Challenge for Asian Business. “Powerful forces for change are reshaping the competitive environment. For many Chinese companies, globalization will be a key to success in the new competitive game.”
Recently, however, warning signs are cropping up as these companies find themselves fighting for survival rather than simply attempting to expand. On November 28, for example, Yahoo! China announced a new president, Zeng Min, who is succeeding former president Xie Wen after only 40 days. Zeng, who is in his mid-30s, was formerly a business strategy professor. He is the third president in the last two months.
Meanwhile, the challenges for Jack Ma, the president of Alibaba.com, who engineered the merger with Yahoo! Group, are more than picking a head to steer the China operation of the latter. On July 2006, a report issued by Piper Jaffray, an investment bank specializing in technology, noted that Baidu holds 55% of China’s search engine market, Google holds 24% and Yahoo! has only 7%.
In an exclusive interview with a local business magazine, China Entrepreneur, in late September, Jack Ma indicated that he is “going to spend two to three years making Yahoo! China successful,” although his original plan had been to take only six months to complete the integration with integration. In addition, the article wrote that according to internal sources, Yahoo! China has now a loss of RMB10 million (US$1.25million) every month while it was showing a profit before the merger.
Jack Ma’s counterpart, Li Dongsheng, chairman of TCL, one of the biggest electronics group in China, is struggling with a much tougher situation. Li admitted to the media In August that he had underestimated the challenges involved in rescuing Thomson’s business.
On October 31st, in an official announcement to public investors, TCL said it would shut most of its European TV operations, which have accumulated losses of 203 million euros (2billion RMB, 2500 million US$) since TCL took over. The company has also started a restructuring program to launch a new business model for its European business. And last year, TCL discontinued nine-month-old mobile handset joint venture with France’s Alcatel due to mounting losses.
As Jack Ma noted in the magazine interview, he named his company “Alibaba” because he “was not aiming at China alone, but for the whole world. I did taobao.com [the biggest consumer-to-consumer Internet service in China] with the same ambition … .I have noticed, with the emergence of Google, that eBay’s revenues have dropped and the Yahoo boat has been wobbly. We have to look for global strategic alliance partners — a search engine would be ideal — to avoid the possible consequences of being kept out of the competition … .Taking over Yahoo! China could fulfill all these dreams.”
Ma is placing his bets “on Yahoo’s search engine, the future global platform and its brand,” and says that if they hadn’t gone global this year, “we would have to do it next year.” However, he said that for future acquisition deals, he “would do homework a couple of years in advance and conduct thorough due diligence before [making an] acquisition.”
Li Dongsheng agrees with Jack Ma at least on one thing: “We must go global. If it doesn’t happen today, it will happen tomorrow.” that “The Chinese government encourages local enterprises to ‘make positive moves overseas’ because the rise of China as a major economic power is dependent upon the evolution of Chinese companies into world-class enterprises. Against such a backdrop, TCL has made the first move to become a truly global enterprise.”
Li also said that at the time the company took over Thomson’s TV business, “the advantage (of global acquisition for us) is to obtain the core technology and the sales network in foreign countries. The combination with TCL’s mature management team, low labor costs and the vast domestic market will be beneficial for both parties.”
The more low-profile Yang Yuanqing, chairman of Lenovo Group, explained the motives for Lenovo’s global deals during a business summit on September 11 in Beijing. “After attaining more than 30% of China’s highly competitive PC marketplace, each additional 1% of market share was very costly,” he said. He compared the thinning profit margins to “wringing water out of a towel.” He believes that “going global was our only chance,” adding that “when the opportunity to get IBM’s PC division came along, we grabbed it.”
Yang listed Lenovo’s advantages that made it “ready to go global.” First is maintaining the revenues generated in the domestic market. Second is playing to its core competencies of high efficiency, low costs and an emphasis on R&D. Third is having successful dual business models for enterprises and individual consumers. “We can compete with anyone around the world,” he said.
Researchers have explored the reasons behind these global acquisition deals. In a recent paper, two scholars — Lu Xueping and Jin Rungui of Business School, East China Normal University — concluded that the major motive behind Chinese companies’ cross-bordering M&A deals is to acquire strategic capital, including core technology, resources and brands. In addition, these companies can explore markets abroad, increase stock values, get tax breaks and so forth. The strong economic growth and abundant foreign exchange reserve during the recent decade, these two researchers note, have provided strong financial support for Chinese companies’ expansion abroad. Finally, they add, due to the low labor cost advantage in China, it will be a good time to acquire struggling manufacturing enterprises in the West.
A Tough Mission
Kang Rongping, a researcher at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, pointed out that Chinese companies have no choice but to go global, given the limitations of domestic markets and resources. However, he maintained, “getting global by merger & acquisition will be a most difficult way for Chinese companies. One of the reasons is that the modern business language and the rules of the game are all set by the West. Meanwhile, Chinese companies have had little experience with global M&A.”
Chinese companies’ globalization journey is a mission that will certainly be tough. One reason is perhaps best illustrated by comments from James Kynge, a China observer and the former Beijing bureau chief for the Financial Times, who says that “Chinese manufacturers (the energy and resources companies are in a separate category) are being pushed overseas through weakness rather than strength.”
According to Kang, “at this stage, Chinese companies face more challenges than the established multinationals. During the last 20 years, China has been filled with fierce competition from international players and an accelerating opening up of the domestic revolution. Chinese companies are born in a tough environment. The globalization journey for them will be different from the journey for companies in developed countries.”
Kang’s comment resonates with the views of Guy de Jonquieres, the chief analyst for Asia Business at the Financial Times. He wrote in a recent article that “Asian Companies should not rush to go global,” and that “integrating them smoothly into existing businesses is hard enough, even for experienced operators; doing so across borders is harder still. It is also a task for which history has poorly prepared Chinese companies.” He quoted Arthur Yeung, a professor of the China Europe International Business School, who pointed out that “decades of domestic political turmoil have produced an ultra-short-termist national business culture, with corporate structures that are typically based on a top-down model tightly controlled by a single all-powerful leader.”
Misjudgments on Foreign Markets
According to Kang, it’s too early to conclude that TCL has failed in international markets. Its factory in Thailand is doing well and its operation in North America broke even last quarter. However, TCL’s failure in Europe has been a meaningful lesson for its followers, and various researchers have provided their comments.
The two scholars from East China Normal University concluded in their paper that the assets TCL acquired abroad are low quality, and there are problems with regard to debt and company management. These shortcomings will cause financial problems for TCL in the short term, they say. On the other hand, TCL’s too-anxious-attitude in the negotiation process has meant that the company’s real objectives were not realized. “The true motive for TCL’s acquisition was to get the most cutting-edge technology in the TV business but, in reality, what they got was the CRT TV technology which is going to be phased out.” Last but not the least, the two scholars argue, “Their globalization step was compelled by the situation instead of being its best strategic choice.”
Zhang Decheng, a management professor at AnTai College of Economics & Management, Shanghai Jiaotong University, analyzed TCL’s failure in Europe from four angles in an interview with knowledge@Wharton:
1. CRT color TV is a complete standardized product which should be produced in low labor cost regions instead of in Europe.
2. The European color TV market demand has been changed from CRT TV to flat-panel TV. TCL didn’t do enough marketing before the acquisition and made misjudgments about the trend of TV technology. Meanwhile, it hadn’t acquired enough information on Thomson’s European business and the demands of the European market.
3. Thomson is not a brand that is very competitive in France or in the European market. On the other hand, the sales channel for flat-panel TV and CRT TV differs.
4. Finally, the talent needed to run global operations of Chinese companies is in short supply. The managers that TCL sent abroad did not have enough experience and capability and helped cause TCL’s failure in Europe.
Kang echoed Zhang on the last point: Talent with international exposure is in high demand. “Li Dongsheng has sighed that he can’t find enough suitable talents… .Meanwhile, successful experience in the domestic market has made Chinese companies unaware of the risks involved in global deals and unprepared [to manage risk]. Personal character also plays a role,” Kang added; some business leaders are just genetically more adventurous than others.
“There is a very important element in Lenovo’s not-bad performance after the IBM deal, which was widely ignored by the domestic critics,” Kang argued. “Its business partner, IBM, has strong strategic interests in the Chinese market and it doesn’t want the deal to fail. In this sense, Thomson is different.”
Go Back to the Basics
Wharton management professor Marshall Meyer said in a speech he gave last month that “Government policy favors companies that look large. However, looking large and acting like a large, integrated firm are different things.” His advice for Chinese business leaders would be to “build a strong domestic platform before going out, make small overseas acquisitions before attempting large acquisitions, treat early losses as tuition. Globalization is not a skill learned overnight. It is, rather, a product of deep experience.”
Jayant Sinha, a principal in McKinsey’s Delhi office, said in a report last year that “In reality, emerging markets, far from being a handicap, actually provide an invaluable springboard. The combination of demanding yet price-sensitive customers and challenging distribution environments can help determined companies develop the distinctive capabilities they need to compete successfully elsewhere…. Indeed, as John Seely Brown and John Hagel III [experts in the field of knowledge management] argue, emerging markets are seedbeds for distinctive capabilities.”
While TCL is having a hard time, its compatriots at Huawei, one of the biggest telecom equipment providers in China, seem to be gearing up for a big Christmas. In the first half of 2006, its sales in the international market reached $3.2 billion, accounting for 62.7% of its total revenue. Huawei is penetrating well into the Latin America market by cooperating with Telefonica (the Spanish Telecom Operator) and other major telecom operators in that region. Critics said its performance in the UK is also ahead of expectations.
Perhaps business leaders in China have to go back to what Peter Drucker said 45 years ago about what really counts on business: “There is only one valid definition of business purpose: To create a customer. Markets are not created by God, nature, or economic forces, but by the people who manage a business.”