Joel Backaler, author of China Goes West, talks of the globalization of Chinese companies and whether or not the West needs to be wary of them.
Chinese companies are globalizing at an unprecedented rate. While Lenovo is now the world’s largest PC maker, Haier is the world’s largest consumer appliance manufacturer. Huawei has been giving Ericsson a run for its money in the telecom equipment space, and now two-thirds of its revenue comes from overseas. Other companies like real estate major Dalian Wanda, conglomerates like Fosun, and consumer goods manufacturers like Shuanghui and Bright Food have been on a global M&A spree.
What is fuelling their global ambitions? Are their strategies sophisticated enough? Also, Chinese companies often run different kinds of challenges when they go global—especially protectionist concerns in the West. How much of that is valid?
We posed these questions to Joel Backaler, author of the recently released China Goes West and Associate Vice-President at Frontier Strategy Group. Backaler, who has lived and worked in China, offers some insights on the globalization paths of Chinese companies and whether or not the West needs to be wary of them.
Q. Have you seen significant differences in how Chinese companies approached globalization 10-15 years ago versus now?
A. Previously [Chinese companies] were much more [focused on] distressed assets: for example, TCL buying Thomson. [Now] Chinese companies go overseas for a variety of business reasons. The market is getting very competitive here. Companies are going overseas for new technology, especially advanced technology, getting global management talent so they can start instilling some of their best practices into their own organization, and they are looking to get global brands to help them appeal to the overseas audience. The other real motivation is to diversify away from the Chinese market.
Q. Can you elaborate on the different patterns that are emerging in the globalization of Chinese companies?
A. If you look at the distinction between emerging markets and developed markets, and the approach that Chinese companies take, I think it comes down to their business model. For example, if you look at companies that are consumer-based, they are starting to do fairly well in some of the emerging markets because they are more easily able to adapt the products they are offering and also business practices for markets in southeast Asia, Africa.
Looking at the business-to-business (B2B) space, you see more and more these kind of companies that are going to the developed market because that’s where they are going to get the advanced technology, that’s where they are able to get some of the global managers that will strengthen their business. If you look at Goldwind, one of China’s largest wind energy firms, they’ve done extremely well over the years. They purchased a company in Europe called Vensys, and got their technology. They not only expanded their presence in Europe, but also developed a unique Americas business.
Companies like Lenovo are the exception at this stage. I think it’s going to be quite some time till we see companies, especially in the B2C (business to consumer) space, that are able to compete effectively in developed markets. It’s a very different business environment, especially for companies that don’t have experience operating within a much stricter regulatory environment. They don’t actually know who to go to for that kind of advice.
Q. In your eyes, what is the best example of a globalized Chinese company?
A. Lenovo has done a great job not only in their acquisition strategy, but also in incorporating global management at senior most levels. So they have senior executives from companies like Apple, Hewlett-Packard and IBM. Then they use their global perspective to do things that even well-established western companies wouldn’t do. They now structure their organization to have as much local experience as possible. They do this by having a headquarters in North Carolina, US, one in Beijing, and one in Singapore. Their senior management team is constantly going around to stay plugged in with their global team. They are also able to tap into that local knowhow that they have on the ground. There are others like Huawei [that] outside markets like the US are doing quite well. But again, there are very few.
Q. Talking about motivations for these companies to go global, how much of that is really driven by pride? What prompts them to go global?
A. There are a few different motivations: business motivation and government motivation with the “go out” policy. Some of them don’t quite fit but I think they are mostly related to pride. For example, Weichai, the largest bulldozer manufacturer, bought Ferretti (a yacht manufacturer) so that doesn’t necessarily make sense. Even Dalian Wanda’s purchase of AMC movie theaters at the time was very strange. Their core business was real estate. While AMC—obviously there is a lot of real estate involved in the movie theater industry—is an entertainment firm. Since that acquisition, the company has proven that they are more committed to making investments in the entertainment industry, especially movie production. They invested in Sunseeker, a yacht company. It goes to the fact that these CEOs are getting a lot of guidance from their inner circle, [which is] related to the ‘guanxi’ effect: people in their inner circle are giving them suggestions of areas to invest in. They may or may not make sense for their business from a pure commercial perspective.
Q. In your interactions with Chinese companies, what do you think of their level of preparedness to go global? Companies like TCL floundered when they went global.
A. When you are looking at the developed markets, the vast majority of Chinese companies aren’t ready. There are five relations that Chinese companies need to master or deal with effectively. First they need to understand how to interact with the government. That’s not just within the overseas market but also here in China. For Chinese companies to go global for the first time, they may need to interact with the NDRC (National Development and Reform Commission), MOFCOM (Ministry of Commerce), or SAIC (State Administration for Industry and Commerce of the People’s Republic of China) if they want to get their money outside China. It’s very complex. For a company that isn’t fairly large in size, it can be very difficult to understand how to navigate that system, what the right path is.
Additionally, when Chinese companies go to the US or Europe, they tend to rely on the government to give them more direction as to where to invest. They are finding that the only way to get that insight is through relying on professional services firms, be it tax advisors, management consultant or accountants: people know how to play by the regulations in these different markets. Oftentimes Chinese companies want to continue that government relationship model as they do here in China.
The next thing is their relationship with their employees. As you look at any company when they go overseas, there tends to be a need to balance between a centralized organization and a decentralized organization. So how do you maximize the fact that you have a global company but also the fact that you have people on the ground that can respond more quickly to change?
In addition to needing to empower individuals on the ground, Chinese companies need to have people back at headquarters that have global perspectives and are able to manage expectations across the organization for overseas business. The other factors are the relationships with consumers and communities, to overcome misconceptions, to know how a Chinese company operates. The last relationship is with capital. Chinese companies need to make sure that they are investing for the long term, investing in their employees and incentivizing them appropriately.
Q. Compared to western multinationals, Chinese companies are fairly young. Let’s take Lenovo which as a recent Businessweek article put it: “sold only one product, PCs, in one country, China,” 10 years ago. “Now it sells PCs, phones, tablets and servers in more than 160 countries. It has 46,000 employees.” That is a phenomenal achievement in a short timeframe. Do you think that some Chinese companies have found ways to shorten the “learning curve” and achieve global scale faster than it would normally take?
A. Chinese business has only been operating since last the three or four decades since the ‘Reform and Opening-up’. If you compare a company like Haier with Maytag or GE, these western companies have hundreds of years of experience therefore these companies are able to understand how to evolve and operate in international markets. It’s very difficult.
If you look at Chinese companies based on their size and revenue, it seems like unequal footing in terms of the experience of the companies and the executives who run them. It’s very different. So this is not only causing a lot of companies to continue to scale here in China, but also go overseas at the same time. It is becoming very complicated because you are not only looking at many different geographies. A lot of the companies are also expanding into a variety of product lines that could be very different from their core. If you look at the number of Chinese companies right now, especially in sectors like steel [which has] overcapacity, or infrastructure where things have slowed down for quite a bit, they are looking for different ways to diversify. One of the examples domestically is of a lot of steel companies investing in real estate. You even have a lot of them investing in really bizarre areas as agriculture. It doesn’t necessarily make sense and I think part of that goes with the level of experience and the sophistication of the executives that run those companies.
Q. Chinese companies also have to battle perception issues when they go abroad, as we have seen in the case of Huawei in the US. Protectionist concerns often crop up, especially when iconic Western brands become the takeover target of Chinese companies. Are these concerns valid?
A. I think there are some very valid concerns. They are going to vary depending on whether they are at the government level, the business level, or the consumer level. If you are looking at the whole country like the US, what is the government worrying about? National security is number one, cyber security, the supply of national resources and China’s ability to manipulate global resources. If you look at the companies, it is anti-competitiveness, it is intellectual property theft. What happens after that acquisition? Will the company be purchased? Will all the employees be fired? Will the manufacturing of the technology go back to China? And then at the consumer level, consumers are worried about food quality, environment and labor standards? I think Chinese companies have quite a bit to overcome.
If you look at Smithfield Food and Shuanghui International last year in the US, at that time when Shuanghui announced they wanted to purchase Smithfield, which is pork producing company, just a few months earlier globally there were headlines about Shanghai where there were thousands of pigs floating in the Huangpu River. So when you are reading headlines about floating dead pigs, tainted milk, food security, these are all things that perpetuate the whole idea of it. Is it going to be safe for Chinese companies to operate in my own backyard? So consumers are worried and the media plays it up, politicians make it work in their favor.
The number of deals that are politicized are actually quite small but they are the ones that are talked about all the time. Meanwhile, I think the US is very open to investment and you’ll see that when you dig into the data. You’ll see that when you look at the other side which is ‘what are the positives of Chinese investment’. As long as you have the right security review, anti-competitiveness mechanism within the government, then you can strike that right balance between essentially mitigating the negative consequences while maximizing the positive benefits.
Q. As the ranks of Chinese MNCs grow, do you think they’ll become similar or more different from the established western multinationals?
A. I think what this comes down to is not “Will China build global companies?” It really is: “Will there be companies that are global that just happen to be from China?” I know from speaking to the executives from Lenovo, that’s exactly what they are pushing for. They want to be known as a global company. If you were to ask a typical American consumer if Siemens is an American company, I think they probably think that it’s an American company, not a German company. That’s what the Chinese companies need to strive for. They need to be incorporating international talent from around the world, operating locally, really investing in their brands so they are seen as a local company. Only when they get to that point will you see companies operating much more as a global entity.