The Transformation of China - Essay Example

Transformation of China started with the process of globalization; globalization affected countries as the governments liberalized the international flow of capital, telecommunications and transportation (Andersson and Wang 2011). Hay (2008) cites that China has reinvented itself as if it were a huge enterprise. China managed its way up like a corporation through its people and for its people. The Chinese companies may have been late entrants to the global market place but they experienced shorter learning processes facilitated by advances in technology and by a better understanding of the globalization process (Zhu, Lynch and Jin 2011). Both push and pull factors have contributed to the international expansion of Chinese business. China opened up its economy in the 1970s and gained accession to World Trading Organization (WTO) in 1990. Because of the locational advantages that China offered, it received huge inward FDI (foreign direct investment) flows since the mid-1990s which has been one of the reasons for outward FDI (OFDI). Inward FDI resulted in massive foreign currency reserves (Andersson and Wang 2011) while the MNCs in China also provided the much-needed technical know-how, competence and confidence to the domestic companies to venture overseas (Bhuiyan 2011). China no longer remained a magnet for inward FDI but now has become a major source of OFDI (Liu and Buck 2009). Most OFDI was directed towards developing nations with geographical or institutional proximity requiring limited resources. The newly industrialized economies (NICs) of East Asia and Japan engaged in OFDI due to push factors (labour shortages, high operating costs) while China initially engaged in OFDI due to pull factors (natural resource endowments and market potential) (Biggeri and Sanfilippo 2009). The motives to internationalize included enhancing the corporate brand values of Chinese enterprises (OECD 2009). However, as the Chinese government tried to integrate China into the world economy (1979-1985) only the state-owned enterprises (SEOs) were granted approval for internationalization. In the next stage the non-SOEs were allowed to expand abroad through a foreign affiliate. OFDI from China remained highly regulated during the first two decades of the economic reform (Liou 2009). As part of the Go Global Policy outlined in China’s 10th five-year plan in 2001, certain industries like textiles, machinery and electrical equipment, were provided with foreign exchange support and export tax rebates to boost internationalization. However, because of the large scale resource development, the Go Global pursuit was attainable only by the large SEOs. In 2006 the OFDI was 13.4 billion of which 81 percent was from the SOEs (OECD, 2009). Large SOEs such as China Petroleum & Chemical Corporation (SINOPEC) and China National Petroleum Corporation (CNPC) invested in oil wells (Andersson and Wang 2011). Galvez (2012) observed that the Chinese SOEs suffer from low levels of profitability but this does not mean they are not competitive. According to State-owned Assets Supervision and Administration Commission (SASAC) most of the central SOEs located overseas are located in places where both political and economy situations are unstable. Perhaps this is the reason that SOE overseas assets have incurred great losses in the past few years (Chang 2011). Once China entered into WTO domestic competition became fierce and the pull factors were now changed to push factors. The Chinese firms were also drawn to Africa driven by strategic interaction among the three channels – FDI, trade and economic cooperation, all of which have been effective for increasing China’s influence in developing countries (Biggeri and Sanfilippo 2009) although the consequences of liberal African investment policies imposed by western donors in the past is also responsible for expansion into Africa (Kragelund 2009). The government restrained from providing active support to internationalization for fear of losing control over state assets (Andersson and Wang 2011). However, support for SEOs to internationalize was readily forthcoming against the private companies that sought internationalization. In later years private firms were allowed to internationalize and the Chinese firms started entering developing markets to access new resources and markets. Despite the support, the domestic companies faced several challenges when going overseas. Lack of developed framework, excessive government intervention and bureaucracy hindered progress in internationalization (Cooke 2007). Chinese products suffer from a low image due to the country-of-origin (COO) effect (Ille 2009), low cost products and lack of business ethics, lack of responsiveness and strategic planning (Fan, Nyland and Zhu 2009), uncertainty and risks (Zeng, Shen, Tam and Wan 2010), and limited understanding of tastes, preferences, and habits in host countries (Leonidou, Palihawadana & Talias, 2007). Chinese businesses, embedded in the expanding global and regional production networks, have adopted transnational characteristics and hence are characterized more by diversity and fragmentation than by cultural coherence (Pan 2009). Chinese firms need to benchmark themselves against the local giants (Li-Hua 2007). The Chinese companies failed to respond to the local conditions in their overseas expansion efforts because in words of Porter four mutually reinforcing features of factor conditions, demand conditions, related and supporting industries, and local competition are essential to gain competitive advantage (Bennett and Smith 2002). China Mobile and TCL – two Chinese MNCs failed to takeover US expansion successfully as they lacked global visibility and had no experience in handling local issues (Cao and Forrest 2011). They fail to integrate the value chain and lack the technological assets such as patents, trade secrets and proprietary designs (Shenkar 2009). TCL suffered because of the COO effect when they chose Vietnam as the key market for overseas production and expansion (Fan 2006). They invested in three production lines but the negative perception was hard to overcome in the short-term. The Chinese companies started overcoming these challenges as $64.3 billion were transferred from China to Europe between November 2009 and March 2010 in various forms such as investments, trade deals and loans (Andersson and Wang 2011). OFDI was based on the research-seeking motivation and on the benefits of gaining a quick customer-base. Networks of multiple, interlinked firms, has profound implications for the process of internationalisation (Liu and Buck 2009). Thus China’s Blue Star acquired Norwegian Elekm. Europe was supposed to be less protectionist towards Chinese investments than the US, and hence the choice of Europe. The figure below depicts China’s OFDI between 2003 and 2009. Source: Andersson (2011) Chinese MNCs engaged in asset-seeking rather than asset-exploiting FDI as access to key resources was the prime motive for internationalization (Gattai 2012). Chinese OFDI based on economic activities is show below. Source: Gattai (2012) However, as per the National Bureau of Statistics, the number of Chinese SOEs declined from 64,700 in 1998 to 20,300 in 2010 while the number of private enterprises surged to 272,300 in 2010 from 10,700 in 1998 (Lina 2012). The Chinese SOEs have also been criticized for their lack of collaborative business models, contributions to capacity building and sustainable business practices (Alden and Davies 2006). Private firms such as Wanxiang Group is investing US$256 million to buy most of A123 Systems while a consortium of Chinese investors have agreed to pay $4.2 billion for controlling stakes in the American International Group’s aircraft leasing business (Bradsher and Merced 2012). While the SEOs received more support and the private enterprises were at a disadvantage in securing funds to invest overseas, private companies accounted for 45 percent of China’s USD 68.6 billion non-financial ODI in 2011 as show in the figure below (Galvez 2012). This is not surprising considering China’s most famous companies such as Haier, Huawei, Lenovo and Geely are private companies. This trend is likely to continue as the government supports investors seeking profitable overseas projects. Source: Galvez (2012) As technology and strategic asset-seeking became the motives for OFDI by private MNCs, one such company that adopted a strategy different from others has been Haier Inc. Established in 1920 as a small refrigerator manufacturing company Haier transformed into a global company by the 1990s. From competition to cooperation and from conflict to connection is the strategy (Business Week 2003) that has helped Zhang Ruimin of the Haier Group to rise up from a humble refrigerator manufacturer in China’s eastern coast to a company with 70,000 employees and boasting of a turnover of 135.7 billion Yuan in 2010 (Haier Inc 2013). A catch-up company may struggle to obtain the benefits of an integrated global strategy (Zhu, Lynch and Jin 2011) but Haier’s success lies in the careful positioning of its products in its niche markets (Duysters, Jacob, Lemmens and Jintian 2009). Ten of America’s supermarkets stock Haier’s goods and its products are also available in several European markets. Haier’s successful strategy based on OEC (O for overall, E for everyone, everything and every day, C for control and clear) and on brand building, globalization and diversification led it to be listed in the top 100 most recognized global brands (Strategic Direction 2006). The primary motive of Haier in internationalization was following customers, exchanging threat, meeting competition, and building permanent market position (Du 2003), to exploit the competitive advantage and to seek technology-based resources or skills that are low or not available in the home market (Cooke 2007). When Chinese MNCs enter a developed market the government participates directly by committing most of the investments and by signing treaties and trade and investment agreements (Fornes and Butt-Phillip 2011) although preference has always been for the SOEs. Haier invested heavily in R&D and innovation, had strategic partners (Liebherr, Merloni, GK Design) and worked with other appliance makers (Sanyo and Samsung) in cooperation and connection (Bonaglia and Goldtsien 2007). Such cooperation between competitors or strategic alliance is used by competitors as a mode of market entry in internationalization (Andersson and Wang 2011). This helped Haier to sell its wine coolers and washing machines in Japan while Sanyo could market its batteries and other appliances in China (Business Week 2003). Thus, the network of relationships that firms are embedded in, become the source of competitive advantage (Ritala and Ellnoen 2010). When other Chinese companies were trying to make inroads in the neighhbouring Asian countries, Haier invested in the US – the most difficult market (Fan 2006) followed by the European markets because their biggest competitors are located in these markets (Hunt 2005; Strategic Direction 2003). Haier’s strategy from 1984 to 2012 has been show in the figure below. Source: Haier Inc. (2013a) Haier’s OFDI took shape in four stages as shown in the figure below. It first remained a defender (confined to the home market), then as an extender it used competencies developed at home into neighbouring countries, then a contender when it took a giant leap forward in 1999 and finally a dodger when it transferred its international competitive assets back home (Du, 2003). Haier’s positioning in OFDI: Source: Du (2003) Haier started investing overseas in mid-1990s based on the resources-seeking strategy – market access and asset acquisition (Bongalia et al 2006 cited in Andersson 2011). According to the Yaprak and Karademir (2010) Haier’s internal expansion was a strategic choice and defied the norms of OLI and the Uppasla models of entering the countries with lower psychic distance or countries where commitments are low (Bhuyian 2011). This is based on their own philosophy of ‘difficult first, easy later’ (Haier Inc 2013a). As a Global Aspirant in the global white goods market where no participant has more than 10 percent market share (Omar, Williams & Lingelbach, 2009), Haier sought more than earning foreign exchange and wanted to create China’s own brands (Hunt 2005). They wanted to make the Americans feel that Haier is a localized US brand and not an imported Chinese brand. Haier’s success is also attributed to the speed at which they introduced products in the market based on consumer preferences which shows that speed can provide avenues for success in mature markets (Haley and Haley 2006). Internationalization of Chinese firms shows two characters – gradual development and inward internationalization (Hunt 2005). Haier, for instance, has benefitted from the foreign technologies, entered into strategic alliances and joint ventures (characteristics of inward internationalization) which helped them success in setting up manufacturing units in foreign markets. Lack of inward internationalization has restricted the Chinese firms from expanding overseas. Starting with small-scale and niche products and then expanding the product portfolio, is a general marketing strategy (Fan 2006). Their three steps strategy of internationalization comprised of ‘Get in, Move into mainstream, Leadership’ (Haier Inc 2013a), a disciplined approach to entering new markets (Jain, Malik and Cruickshank 2006). They entered the US with low-end items that high-cost American companies would not be able to produce and when the brand is accepted, they worked their way to the top – the principle of good, better, best (Hunt 2005). This was through China-based exports which enabled them to study the markets and also invest incrementally (Jain, Malik and Cruickshank 2006). As the company learnt the intricacies of consumer taste, won trust of distributors and established distribution channels, it decided between organic growth and acquisition-led opportunities as part of an overall business strategy. In the US it set up a manufacturing unit to cater to the underserved markets but in Europe it grew through mergers and acquisitions. While it focused on brand creation in the developed countries, in developing countries it adopted the localization approach where it combined the design, manufacturing and sales into one (Hunt 2005). They thus did not follow the strategy of cost leadership but focused on differentiation, which conforms to the generic strategies of Porter (1985) because quality differentiation to achieve competitive advantage impacts each of the four stages of the industry life cycle (Beal and Lockamy III 1999). They derived competitive advantage through patents which assured them success (Wipo, 2010). Haier also developed core competencies by investing in creating customer satisfaction (Gülsoy, Özkanli & Lynch, 2011). Haier enjoyed the fruits of globalization as it moved away from the traditional activity chain (Slywotzky, Baumgartner, Alberts and Moukanas 2006) and had dealt with many problems of globalization before leaving home (Hunt 2005). Globalization also means newer risks but Haier learnt to anticipate risks and adjust to the new competitive game. Haier learnt to adapt to local preferences and hence its international expansion was just an expansion of its domestic strategy. Other Asian companies such as Sony and Samsung did not have this advantage. The role of the founder at Haier has been a strong component of its development as it helped to bring the brand to the highest level in world recognition (Ille and Chailan 2011). Growth is not a random event; entrepreneurs with their skills and knowledge can push the firm on the path of rapid growth (Zhang, Yang and Ma (2008). The “militaristic” style of management (Bonaglia and Goldtsien 2007) and the sophisticated approach and energetic leadership, Haier’s growth impacted how foreign companies in China would survive (Flannery, 2001). The international expansion of Chinese businesses has been possible as China was viewed as a corporate identity and government support was forthcoming for growth and development. However, the SOEs and the private enterprises were differentiated but the private enterprises achieved success in the international markets through their creative and innovative strategy. Haier for instance, had gained sufficient experience in the huge domestic market and had expertise in local adaptation. With the resource-seeking strategy, Haier defied the traditional models of international expansion but followed a disciplined approach. It is thus not surprising that Haier is ranked fourth in the white goods market in the world. It is the leader in wine coolers and compact refrigerators in the USA, for washing machines in Iran and for air conditioners in Cyprus (Fan 2006). Haier has been termed as the only Chinese company that had an all-out internationalization strategy as they invested in all activities across the entire value chain – design, production, sales and marketing. It is also the only company to have spent millions of dollars in mass media advertising to build brand awareness. 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