In Eastern Beijing on April 2, Lenovo released its new global consumer business strategy to the public. The press conference had the flavor of a world-class fashion show, with flickering lights, dynamic music and cat walks. Yangyuan Qing, the Chinese electronics multinational’s newly appointed CEO who had returned to the helm four years after leading his company’s high-profile acquisition of IBM’s personal computer business unit, stood on the stage like a pop star. However, the dazzling lights could not obscure his company’s plight in today’s highly competitive PC market.

Lenovo reported a net loss of US$97 million in the third financial quarter of 2008-2009. At the beginning of this year, as part of an effort to turn the company around, Liu Chuanzhi, Lenovo’s founder, stepped back in as company chairman. The group announced its global restructuring plan on January 8 and expects to save around US$300 million in the next financial year. But for Lenovo, the fierce competition in the consumer electronics market, the quickly changing tastes of consumers, the global recession and the complexities of managing a global company are tough challenges.

Lenovo is not the first Chinese company to make an acquisition in the West, and surely it won’t be the last. In fact, the trend has just begun, according to Kang Rongping, a researcher at the Chinese Academy of Social Sciences and director of the World Chinese Companies Research Center. The ranks of Chinese companies seeking cross-border M&A deals are due to swell, he says, and the reasons for this are multiple. Perhaps most importantly, companies need to go global to sharpen their competitiveness in a world where commerce has been transformed. Nevertheless, managing global operations today is in some ways tougher than it used to be, Kang notes.

What are the challenges of managing cross-border mergers and acquisitions in the present environment, and how have the rules changed? How does the nature of competition in the domestic market influence the increasing trend for companies to “go out,” as the Chinese describe it? Kang, who closely follows Chinese overseas investment, shared his thoughts with China Knowledge at Wharton.

Below is an edited transcript of the conversation.

China Knowledge at Wharton: In your research, you divide Chinese overseas investment into three historical stages. What were your criteria?

Kang: Essentially, I divided the periods according to the number of Chinese deals overseas. The door was opened after China’s market reforms started in 1978, which marked the beginning of the “transition period” (1979 to 1995).

This was a special time for China. The first to “go out” were state-owned companies – a typical example is Shougang Group, a Beijing based, state-owned steel company with annual turnover of around 100 billion yuan (US$14.7billion). There is huge difference between these companies and their Western counterparts in terms of shaping their business strategies. For various reasons, many of their overseas investments ended in failure.

The “regular development stage” lasted from 1996 to 2003, and featured major players that were established after the beginning of market reforms. During that period, companies were driven to hunt in overseas markets by excess capacity, cheap labor and limited demand inside China.

China Knowledge at Wharton: Are there any stand-out examples of companies that spread their wings in this period?

Kang: Companies in home electronics and motorcycles were among the first to invest outbound. A typical example would be Haier Group, now the world’s fourth-largest white goods manufacturer with global turnover of around 118 billion yuan (US$16.2 billion). [Editor’s note: According to its official web site, as of 2007, the Haier Group had established a total of 64 trading companies (with 19 overseas), 29 manufacturing plants (24 overseas), 8 design centers (5 overseas) and 16 industrial parks (4 overseas).]

In terms of its pace of expanding overseas operations, Haier is a perfect example of cautious gradualism: Geographically, it has worked outwards from near to distant, first setting up a trading company in Hong Kong, then in South East Asia, and then in the U.S. and Europe. Culturally, it has proceeded from similar to dissimilar. It chose to enter Indonesia — where Chinese business culture has a huge influence — first, and then the Philippines, an Asian but English-speaking and Catholic country, and then the U.S. and Europe. In terms of its products portfolio, it has gone from a single product to diversification. It would pick one product or business to enter the local market — one for which it enjoys a competitive edge compared to local players — and then enrich its portfolio.

A strong preference for joint ventures is another characteristic of Haier’s global operations. Of its dozens of overseas investments prior to 2004, most were joint ventures, with the exception of factories in the U.S. and Italy — although these only took on manufacturing functions. The same strategy has been adopted in their product development and sales operations overseas.

Then, at the end of 2001, China joined the WTO. This opened its market up to foreign companies, since when Chinese companies have faced much tougher competition in their home market. This has forced them to pick up the pace of internationalization, and cross-border M&As have soon become a major vehicle for Chinese companies to penetrate foreign markets.

In 2004, there were some high profile deals. SAIC (Shanghai Automobile Industrial Corporation) took a controlling stake in Ssangyong Motor of Korea for US$500 million; TCL acquired Thomson’s TV RCA brand, valued at 450 million euros, and the mobile venture for Alcatel handsets (which failed three years later); and Lenovo paid US$1.75 billion for IBM’s PC business.

We call the period after 2004 an “accelerating stage” of Chinese companies going global. The percentage of cross-border acquisitions as a proportion of total overseas investments by Chinese companies grew from below 20% to 31.8% in 2004, to 53% in 2005, and between 30% and 50% from 2006 to 2008. The other trend in recent years is that, evidently, Chinese resource companies have become much more aggressive in cross-border acquisitions.

Compared with green field investments, acquisitions have the advantage of being a fast way to enter a foreign market, but they bring new challenges to Chinese companies in terms of managing global operations.

China Knowledge at Wharton: Since China entered the WTO, what are the forces that have driven companies’ overseas strategies?

Kang: One of the things I would like to stress is that the competitive context has changed.

First of all, economic globalization and the emergence of information technology such as the Internet have brought a deep-seated revolution. Before the 1980s, or even the 1990s, local companies were the norm and multinationals the exceptions. But globalization has resulted in a fundamental change: Multinationals have become normal.

You can see the footprint of multinationals in every corner of the globe now. And they cover almost every niche, meaning a smaller and tighter market for latecomers. This has proved to be a much tougher environment for latecomers. On the other hand, the restructuring and refocusing of multinationals’ competitive strategies tend to provide new opportunities for late entries.

In this drastically altered environment, several strategic trends are visible among big Western multinationals. These are: (1) the refocusing of strategy and a stronger interest in the controlling position in the supply chain; (2) a stronger taste for global operations and cross-border acquisitions; (3) a stronger presence in emerging markets and localization; (4) cooperative competition becoming a leading growth method.

China Knowledge at Wharton: Could you tell us a little bit more about how events on the home front have factored in?

Kang: Over the past decade, especially after China’s concession to the WTO in 2001, China has really been a highly open market to global players in most industries. As foreign multinationals have strengthened their investments and expanded their operations in China, the country has become a major part in multinationals’ value chains or even a major revenue resource for their businesses.

The implications for Chinese companies are multiple. Most of all, Chinese companies are now competing with global players in every dimension. And these are companies with global visions and strategies, who allocate resources in a global context (especially natural and human resources). Chinese companies are forced to do things in the same way if they want sustainable growth.

I want to stress that Chinese companies are latecomers as global multinationals. American and European firms’ overseas expansion has mostly been based on their competitive advantages in home markets: Japanese and Korean companies still enjoyed a big “niche” market when they invested overseas dozens of years ago, and they also have their own competitive advantages. Chinese companies, in contrast, have been forced into the global market by competition. Therefore, they have had to find their own way of managing operations overseas, which I call “Conciliation”.

China Knowledge at Wharton: You have mentioned in your research that academics have also experienced a revolution in theories on multinationals?

Kang: Traditional theories on multinationals are all grounded on the experience of European or American enterprises, such as the theory of monopolistic advantage, product life cycle theories, or ideas about oligopolistic markets. There has been little research on emerging market multinationals.

One of the most important premises of traditional theories is that before a company invests overseas, it has to have a clear competitive edge, which could be called a “competitive precondition”.

However, globalization has eliminated some of the barriers to the free flow of key elements of production globally. Information technology, especially the Internet, has made a significant contribution to cutting cross-border management costs, and countries are competing to attract foreign direct investment. As a result, the difference in cost between managing a domestic company and managing an overseas operation has declined dramatically. All the above changes have brought some huge challenges to existing theories on multinationals.

My view is that today’s companies are forced to obtain competitive advantages in a global market. They can hunt for people, technology and natural resources all over the world. This is one of the key motives nowadays for outbound investment. The “competitive precondition” is historic. For big or medium-sized companies in emerging markets, the question before them is not whether they should go outbound, but how to develop and sharpen their competitive advantage through overseas investment. Companies today must restructure their value chain on a global basis, and learn to obtain their competitive advantages in a global market. Being a multinational is not a choice, it’s something they can’t afford not to do.

China Knowledge at Wharton: So what are the opportunities for academics?

Kang: For academics, this is a new subject. The traditional theory on corporate management is based on the importance of the domestic market, and on top of this there are theories on multinationals. These two sets of theories are separate. At present, the urgent task for researchers is to consolidate them.

China Knowledge at Wharton: You have done some comparative research on companies in other Asian countries, for example, Korea, Japan and India. Could you share some of your findings?

Kang: One of the findings is that non-Western language companies face a greater barrier in acquiring Western counterparts, which means that their failure rate is above the usual 60%. There are hardly any precedents for Japanese or Korean companies successfully acquiring mid- to large-scale American or European firms.

There is also the issue of a “conflict of civilizations” in cross-border deals. One of my arguments is: The present market economy and corporate governance and management system, including the rules of the game, are deeply rooted and have developed in a Western cultural and linguistic context. This presents a huge hurdle for East-Asian companies in managing Western operations.

One of the major challenges is human resources. It’s difficult for Chinese, Korean or Japanese companies to hire and manage middle- to high-level managers in the U.S. or Europe on a short timetable. It’s especially tough as cross-border M&A doesn’t offer you too much time to deal with this issue.

Taiwanese company BenQ’s acquisition of Siemens’ mobile business came to a halt in September 2006, just one year after its announcement. The reasons for the failure are multiple. But according to people at BenQ, it’s very hard for them to manage local German engineers.

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