Chinese Multinational Corporations, Research Paper Example

Introduction

Several authors [1] have examined what makes Chinese companies competitive on the global marketplace. Some authors focuses on the expansion practices of Chinese companies, others on leadership styles and approaches. The main purpose of the current study is to examine the factors that make Chinese companies able to create international competitive advantages that result in rapid expansion, higher productivity than that achieved by Western type of companies, and improved reputation and growth. The main areas of focus the author has determined are: strategic approaches of multinational Chinese companies, competitive advantages, such as cheap labor and raw material costs, the internalization process of companies, and the cultural/leadership aspects of success. The main thesis examined below is that China’s international competitiveness lies in its low labor and raw material costs, and export-oriented international trade approach.

Before reviewing the empirical evidence for China’s global competitiveness, however, it is important to define what researchers think constitutes towards the “competitiveness of China”. According to Heiduk[2], the main competitive factors of China as a country are: human capital, innovation, and an export-focused national economic policy. The growth of world exports makes China one of the most competitive nations today, according to some authors[3]. Based on the ideas presented by the above quoted authors, the next part of the paper will analyze the factors of China’s economy that could be identified as assets increasing the nation’s global competitiveness.

Focusing on China’s Advantages Abroad

One of the main advantages of China as a nation is the ability to produce goods at a low cost. The country has a large workforce, available at a low cost, and international policies and national economic approaches that favor export at a low cost, while minimizing import[4]. On the other hand, it is important to note that China’s competitive advantage is complex, and cannot be defined by only one factor of the economy. Mentioning the rate of export growth, Van Assche et  al. states that the country’s performance was exceptional on a global scale[5]. The export growth grew by an annual rate of 18.4 % between 1992 and 2005. However, simply stating that the performance of the country was excellent wold not lead the author closer to the answer to the research question: what makes China as a country and Chinese companies competitive on a global marketplace. Below the author will attempt to review some of the most commonly mentioned factors that are believed to contribute towards the growth of national income, production, and export.

Lanzavecchia and Zhong[6] states that the success of Chinese companies going abroad lies in exploiting market opportunities in time, accelerating technical and business developments, and improving the risk and opportunity profile of the company. These aspects of success will be reviewed in detail in the below sections.

Mergers and Acquisitions

One of the most commonly utilized methods of global expansion by Chinese multinational companies is mergers and acquisitions. The companies go abroad in order to gain access to new markets and natural resources. On the other hand, Chinese companies engage in a defensive strategy when it comes to foreign investment in China[7].Through mergers and acquisitions, Chinese companies can achieve rapid growth, and overtake companies that originate from developed countries. A recent Accenture study[8] confirms that in 2007 the list of Fortune Global 500 companies included 70 emerging market companies. Further, a recent KPMG study[9] states that in 2013 there were 85 Chinese Fortune 500 companies, compared with 2 in 1996. Further, due to the expansion of companies, “, China has become a top 3 outbound investor in global market”[10]. Hoffmann[11] highlights that Chinese companies started international expansion later than Taiwanese and South Korean businesses. Companies invest mainly in Asia, but are rapidly expanding to Europe, as well, through mergers. Still, as Hoffman[12] confirms, “the level of awareness for Chinese MNCs is low compared to MNCs from Japan, South Korea or Taiwan”, as many companies work in the business to business sector, or as contractors for international companies.

Exploiting Market Opportunities

The expenditure and consumption levels of foreign markets where Chinese companies expand to (mainly Western, developed countries) are much higher than domestic ones. This means that by going global, Chinese multinational companies are able to realize a higher profit margin and enter the competition at a low cost, due to the cost advantage. As  Lanzavecchia  and Zhong[13] confirms: “According to UN statistics, in 2008 China household consumption expenditure per capita has been US$ 1,030, while in the same period USA expenditure has been US$ 32,564 and Japan US$ 21,747”. This means that foreign markets are more profitable, while volumes of sales are likely to grow rapidly, following an international expansion.

Gaining Efficiencies and Prestige

While moving business functions abroad, considering the higher cost of labor in the developed world might not make sense at first, it is confirmed by Foster[14] that the companies merging with Western type, established firms are able to turn around companies by creating cost synergies. Further, the company is able to move up the value chain, and – due to the cost-effective approach of operation that Chinese companies have mastered – can realize higher profit margins and successfully compete in established markets and industries.

Gaining national prestige is another motivation of Chinese multinational companies to succeed and expand. Improving the company’s knowledge base and the assets of the country’s industry at the same time, while increasing China’s prestige on international markets is the main goal of merger and acquisition strategies. As Foster[15] confirms: “China, for example, initiated its “go out” policy in 2002, a plan to create between 30 and 50 globally competitive companies from the most promising state-owned enterprises”.

Policies favoring export of multinational Chinese Corporations

A recent review of government policies[16] in China has confirmed that the development and economic support, credit policies of the government do not favor creating an equality within the country between regions. Most production is focused around the coastal areas of the country, and there is an unbalanced growth in the country. This, according to some analysts[17] might result in social and political difficulties in China that would negatively impact the growth of the economy. The government is currently focusing on reducing unemployment and supporting labor-intensive industries that would be able to create new jobs for workers. This, however, can be seen as an obstacle to development and innovation, as well as low wages. In the western world, most projects focusing on reducing operational costs are triggered by the growing cost of labor and production.

According to some researchers, however, one of the main competitive advantages of China lies in the fact that the country “has a long-term strategic vision and is able to orchestrate

and implement long-term plans”[18]. The government realized that there was a great opportunity in expanding on a global scale, and invested into technologies that allowed Chinese companies to integrate in the worldwide production system.

Foster[19] states that the 1978 economic program by Deng Xiaoping opened up the trade in China, and started a process of international trade liberalization, which resulted in the current growth of the number and size of Chinese multinational companies.

Using the High Tech Indicators Conceptual Model, later discussed in detail when looking at the innovative advantages of the country, Porter et al.[20] Found that government policies and initiatives in the country are likely to have an impact on thee country’s national orientation, which in turn reflects on the culture and business attitudes of companies operating in China. Looking at national policies and government initiatives, however, should not be looked as a standalone issue. It is important to note that policies are likely to be influenced by social issues, capacities, and the ability of the government officials to realize both opportunities and challenges.

One of the important points made by Ding et al.[21] is that the government of the country is focusing on supporting companies in exporting goods and going global. The state does not only help companies product goods in China, but also provides them with support to invest overseas and go global. This initiative of the Chinese government might not seem entirely relevant, however, it is in terms of collaborative assets, experience in western markets, and image of companies. On the other hand, in order to increase economic output originating from the country, the Chinese government also adopted a policy that attracts business investment from all over the world.

Based on the technological standing (TS) of China, according to the table presented by Porter et al.[22], both the country’s technological standing and average input increased between 1993 and 2007. As the authors confirm, in 2007 China took over the lead from the United States, and as of the year 2007 “On TS, China leads all at 82.8, trailed by the US at 76.1.”[23].

Main Motivations of Chinese Companies to Expand Internationally

According to a recent IBM research paper[24], one of the main motivations of Chinese companies to expand into the global economy is to integrate the country’s economy in the world trade. According to the authors, the integration of China in the world economy is driven by four main factors: rapid growth of domestic economy, the growth of global demand, investment of foreign companies in China, and Chinese investment abroad. The above mentioned factors need to be examined in detail in order to reveal the true motivations of Chinese companies to become international corporations. It is presumed by the author that Chinese companies see an opportunity in creating a global reputation and taking advantage of the stable currency rates favoring investment both ways.

One of the main trends revealed by the IBM business study[25] is that while many companies choose to trade outside of China and expand their company, most of these firms remain small. This trend seems to be interesting, compared with the behavior of European and American firms going global. The study focused on examining the behavior of companies that matched certain criteria: annual revenues over 1 billion dollars, a strong potential for globalization, and the importance of China as a major exporter within the industry. The study finally found 60 companies that matched the above filters, and researched their market behavior. One of the main areas of focus was the companies’ motivations to go global, which is relevant to the current study. The main motivations identified by the team were: seeking new markets for growing production and trade, acquiring advanced management and technology skills, to escape the price-based and effectiveness-based competition of the domestic market, to diversify the risks of the market strategy, and to obtain production resources.

The above finding shows that the unique position of Chinese companies creates a shift of preferences when compared with companies from the Western world. As an example, Western global companies would rather invest into their own new technology and become leaders on the market that way. In the case of Chinese companies, however, obtaining suitable management, production. and design technologies necessary for improving business processes is the second most important motivations, based on the results of the survey (3.8 points out of 5)[26]. This also indicates that – despite many people believe that Chinese companies follow technology leaders, innovation is one of the main priorities of the country’s CEO-s. While innovation still has a lower priority than in Western companies, it is still a significant motivator of expansion. As the IBM study confirms, however, “many Chinese manufacturers still compete on low-cost labor and aggressive pricing, rather than on innovative, branded products and services with higher profit margins[27]”.

Lenovo: The case of targeting the right markets

One of the findings of the Lenovo Case Study[28] is that the reason for the government’s support for companies’ expansion abroad is based on the initiative to reduce the large amount of foreign exchange reserves built up over the year.  This is an interesting approach, as it highlights the fact that the goals of the Chinese government are aligned with the aspirations of companies that are looking to grow on international markets. This particular condition makes expansion both feasible and cost-effective for corporations, and helps them become significant players in international trade. The case of Lenovo revealed that through direct investment, Lenovo was able to acquire IBM in 2004, build a reputation for the firm, and acquire crucial technologies and processes needed to compete in the Western world. However, when looking at the main success factors that contributed towards the growth of Lenovo, one should not forget about the change and shift in management approaches that was a result of focusing on emerging and already established markets. Instead of focusing on mature markets that were highly competitive, and where consumers already had a brand preference, the management targeted emerging markets through a “protect/attack” strategy[29]. In the financial year of 2010-2011, the shipment growth (year to year) in emerging markets, excluding China grew by fifty percent. In the 3^rd quarter of 2011, Lenovo held a 13.5 percent global market share in PC manufacturing, which was greater than Dell’s, and became the second largest PC manufacturer in the world, after HP. Dell and HP lost their market share for Lenovo in the years 2009 to 2011. At the same time, Lenovo also holds the largest market share in China: 28.8 percent as of 2011[30]. It is, however, clear that instead of targeting established markets that are already competitive, the strategy of the company focused on emerging markets, such as India and Russia. The market share gain of Lenovo in India was 13 percent in 2012, and 9.6 percent in Russia. Company documents published by the Lenovo case study[31] show that the market share of the company on Japanese and U.S. markets is still relatively small, but through exploiting opportunities related to the increased demand in emerging markets, the company realized the highest sales growth among computer manufacturers in years 2010 and 2011.

The acquisition strategy adapted by Lenovo also reduced the company’s budget on research and development, providing the company with technologies through taking over IBM’s computer manufacturing operations, providing Lenovo with a cost based competitive advantage.

Huawei. The Rapid International Expansion

Ahrens[32] mentions Huawei as a Chinese company that realized rapid growth and expansion after the government’s international market liberalization. Today, the company has offices in 140 countries, and it is “the second-largest telecommunications equipment company in the world by revenue”[33]. The company entered other emerging markets, such as Russia, South Africa, Latin America, and Thailand[34]. By obtaining large commercial  and government contracts abroad (mostly in developing countries), the company could increase production level, profitability, and create a foundation for future growth. Huawei only entered competitive, established markets of developed countries in the second phase of the expansion, in the beginning of the 21^st Century.

Since 2010, according to Farhoomand and Ho[35], the company has engaged in a strategy called: “ABC”, focusing on three improvements in operations: increasing the revenue per user, reducing cost, and increasing bandwidth (improving quality of service).

Analyzing the competitiveness of Huawei, Farhoomand and Ho[36] confirms that the company has a global market share of 16 percent in network infrastructure (2010 data). Considering that the Chinese enterprise was only founded in 1988, this success is outstanding. The revenues of the company in 2010 also reached the same level as the international, long-established company’s: Ericksson’s. Huawei also had the largest sales growth in the years 2007-2010. Huawei is focusing on new opportunities and developing capabilities in emerging technologies, increasing the spending on research and development. Unlike other Chinese multinational companies, Huawei is now the leader in China in research and development, and instead of using mergers and acquisitions to gain access to technological capabilities, processes, and talent, it is focusing on building long term assets.

The Impact of Globalization

Government policies of China also focus on supporting globalization efforts of national companies. According to the IBM study[37], the government created a support system that helps companies that qualify managing risks and planning investments abroad. The main purpose of these initiatives is to provide finance for companies and realize a return on investment that would benefit the economy of the country.

While many companies focus on expanding onto emerging markets, like Lenovo, it is also important to note that these markets also have industries rapidly developing that could create a fierce competition for Chinese firms. As a recent discussion paper[38] states, globalization has increased wages in China, which reduces the cost competitiveness of all Chinese companies. As the authors state, neighboring countries’ companies have also realized the advantage of low wages, and are rapidly entering the competition on international markets, such as India and Taiwan. As Dahlman’s study[39] shows, “in the developing world, the only region that continuously increased its share of global GDP was East Asia”. While the growth of other BRIC countries slowed down, this region slowly started to integrate into global trade, and build upon competitive advantages, increasing their significance worldwide. This, however, also indicates that China is likely to face competition from other countries in the region, and the impact of globalization will not remain all positive for long.

Conclusion

Based on the above comprehensive review of China’s rapid economic growth, it is evident that the cost advantage created by low wages and production costs greatly contributes towards the success of Chinese companies. The case study of Lenovo has showed that acquisition of technologies and processes is the most successful method of maintaining global competitiveness. The Chinese government fully backs companies that are looking to expand their international trade or invest into companies abroad, while attracting foreign investment. However, it is also important to note that acquiring Western type of management processes – as it has been seen in the case of Lenovo – was also important for companies in China to increase their global market share and exploit emerging markets.

Notes

Ahrens, N. “China’s Competitiveness: Myth, reality, and lessons for the United States and Japan. Case study: Huawei. CSIS Hills Program. 2013.

Ahrens, N. annd Zhou, Y. “China’s Competitiveness: Myth, reality, and lessons for the United States and Japan. Case study: Lenovo. CSIS Hills Program. 2013.

Chen, Guifu, and Shigeyuki Hamori. “Energy prices and China’s international competitiveness.” (2009).

Dahlman, Carl. “Technology, globalization, and international competitiveness: Challenges for developing countries.” asdf (2007): 29.

Ding, Qiang, Michèle EM Akoorie, and Kathryn Pavlovich. “Going international: the experience of Chinese companies.” International Business Research 2, no. 2 (2009): p148.

Farhoomand, Ali F., and Phoebe Ho. Huawei: Cisco’s Chinese Challenger. Asia Case Research Centre, University of Hong Kong, 2006.

Foster, M. Multi-Polar World 2: The Rise of the Emerging-Market Multinational. Accenture. 2008.

Heiduk, G. and McCaleb, A. “ China’s competitiveness in international trade: The impact of innovation and human capital – Review of empirical literature. World Economic Research Institute. 2012.

Hoffmann, R. Emerging Multinational Companies from China. Ecovis. 2014.

IBM Consulting Services. “Going global. Prospects and challenges for Chinese companies on the world stage”. Strategy and Change. 2006.

KPMG, The emergence of Chinese multinational corporations (MNCs): Local and global implications. 2013.

Lall, Sanjaya, and Manuel Albaladejo. “China’s competitive performance: a threat to East Asian manufactured exports?.” World development 32, no. 9 (2004): 1441-1466.

Lanzavecchia, E. and Zhong, C. Key drivers and success factors for Chinese companies going abroad. Value Partners. 2010.

Porter, Alan L., Nils C. Newman, J. David Roessner, David M. Johnson, and Xiao-Yin Jin. “International high tech competitiveness: does China rank number 1?.” Technology  Analysis & Strategic Management 21, no. 2 (2009): 173-193.

Van Assche, Ari, Chang Hong, and Veerle Miranda. “China’s international competitiveness: reassessing the evidence.” (2008).

Wang, Jing. “Global Strategy of Chinese Companies: Comparison of Two Companies Doing Business Globally.” PhD diss., Fachhochschule Nordwestschweiz. Hochschule für Wirtschaft, 2011.

Yang, Dennis Tao, Vivian Weijia Chen, and Ryan Monarch. “Rising Wages: Has China Lost Its Global Labor Advantage?.” Pacific Economic Review 15, no. 4 (2010): 482-504.

[1] Assche& Hong, 2007: Ahrens &Zhou, 2013: Ding et al. 2009

[2] Heiduk, G. and McCaleb, 2012

[3] Van Assche, Ari,  Hong, and Veerle, 2007

[4] Heiduk and McCaleb, 2012

[5] Van Assche, Ari,  Hong, and Veerle, 2007, p. 3.

[6] Lanzavecchia  and Zhong, 2010

[7] Ibid, p. 2

[8] Foster, M.  Multi-Polar World 2: The Rise of the Emerging-Market Multinational. 2008.

[9] KPMG, The emergence of Chinese multinational corporations (MNCs): Local and global implications. 2013.

[10] Ibid, p. 2.

[11] Hoffmann, R. Emerging Multinational Companies from China. 2014. Ecovis.

[12] Ibid

[13] Lanzavecchia  and Zhong, 2010, p.  3

[14] Foster, M.  Multi-Polar World 2: The Rise of the Emerging-Market Multinational. 2008. p. 14

[15] Ibid, p. 15

[16] Yang, Chen, and Monarch, 2010

[17] Ibid, p. 13

[18] Dahlman, 2009, p. 55.

[19]

[20] Porter et al., 2009, p. 3

[21] Ding et al. 2009, p. 159.

[22] Porter et al., 2009, p. 8.

[23] Ibid, p. 8.

[24] IBM, 2006

[25] IBM, 2006

[26] Ibid, p. 5.

[27] IBM, 2006, p. 5.

[28] Ahrens and Zhou, 2013, p. 1.

[29] Ibid, p. 10.

[30] Ahrens and Zhou, 2013, p. 13.

[31] Ibid, p. 13

[32] Ahrens, N. China’s competitiveness. Myth, reality, and lessons for the United States and Japan. Case Study: Huawei. 2013.

[33] Ibid, p. 2.

[34] Farhoomand, A. and Ho, P. “Huawei: Cisco’s Chinese Challenger”. 2006. p. 9.

[35] Farhoomand, A. and Ho, P. “Huawei: Cisco’s Chinese Challenger”. 2006. p. 12.

[36] Ibid

[37] IBM, 2006, p. 6.

[38] Yang, Chen and Monarch, 2010

[39] Dahlman, 2009, p. 34.