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Overseas Expansion of Chinese Business: Lessons and Challenges

Ming-Jer Chen, Ph.D.Darden Graduate School of Business, University of Virginia

Chinese University of Hong Kong

Beijing Symposium: China in Global EconomySeptember 19, 2006

Copyright 2006 Ming-Jer Chen. All rights reserved 2

Making Sense of Three Recent Expansion Cases

China’s (re-)emergence: from manufacturing and exporting to overseas expansion

LENOVOLENOVO IBM PCIBM PC

LENOVO(New)

LENOVO(New)

Timing

InadequatePR & Brand Promotion Insufficient

Overseas M&AExperience

Post-MergerIntegration Concerns

High Media Exposure

Public Resistance

Veto on Capitol Hill

Mute AmericanBusiness

2


China’s Outward Foreign Direct Investment (OFDI)

Sour

ce: U

NCTA

D, F

DI/T

NC, M

OFC

OM,

Asia

Paci

fic B

ulleti

n

China’s OFDI has increased sharply over the last 25 years, with 31% compound annual growth rate (CAGR).

China's Annual OFDI ($ Bn)

01

234

56

78

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

1979 1983 1992 1999 2002 2005

China's Accumulated OFDI ($ Bn)

0

10

20

3 0

40

50

60

1979 1983 1992 1999 2002 2005


China’s Global Business Profile

Number of companies in BRIC economies listed in Fortune Global 500

Sour

ce: A

ccen

ture

repo

rt, F

ortun

e Mag

azine

There has been an increasing presence of Chinese enterprises in the global elite club.

4

21

11

43

1

11

43

4

15

3 3

5

16

45

6

20

2002 2003 2004 2005 2006

BrazilRussiaIndiaChina

3


China’s Outward M&A

Sour

ce: M

inistr

y of

Com

merc

e, E

IU, B

usine

ssW

eek

Failed Deal

Oil18,500USAUNOCALCNOOC

Home Appliances

1,280USAMAYTAGHAIER

Completed Deal

PC1,750USAIBM PC LENOVO

Oil2,700NigeriaNigerian OilCNOOC

Oil1,400CanadaEnCanaCNPC

Auto8.7BritainMG ROVERNAG

Telecom5,300Luxembourg

MILLICOMChina Mobile

Mining5,000CanadaNORANDAChina Minmetals

Home Appliances

559FranceTHOMSONTCL

IndustryIndustryPricePrice

($ Mn)($ Mn)CountryCountryTarget Target

CompanyCompanyChineseChinese

AcquirerAcquirer

Natural Resource, 46%

High-tech, 33%

Telecoms, 11%Industrials, 7%

Financials, 1% Others, 2%

China’s Outward M&A by sector, 2005

0.20

0.831.18

2.30

2002 2003 2004 2005

China’s Outward M&A ($ Bn)

Recent history has been marked by some high-profile successes--and failures.


Enterprise Overseas Expansion: A Snapshot of Two Cases

% of International Revenues

6% 8% 10%

16%

22%

0%

10%

20%

30%

40%

50%

60%

2001 2002 2003 2004 2005

11%

21%

27%

41%

58%

0%

10%

20%

30%

40%

50%

60%

2001 2002 2003 2004 2005

Sour

ce: C

hina-

CBN

. Com

, com

pany

web

site

Leading Chinese enterprises have dramatically increased the international composition of their corporate portfolios.

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FINANCINGCapital shortage, financial risks

FINANCINGFINANCINGCapital shortage, financial risksCapital shortage, financial risks

CULTURECultural integration, diversity

CULTURECULTURECultural integration, diversityCultural integration, diversity

POLITICSForeign regulation & policies, trade barriers

POLITICSPOLITICSForeign regulation & policies, trade barriersForeign regulation & policies, trade barriers

BRANDBrand recognition, access to market channels

BRANDBRANDBrand recognition, access to market channelsBrand recognition, access to market channels

TALENTHuman capital, global management team

TALENTTALENTHuman capital, global management teamHuman capital, global management team

Hurdles for Overseas Expansion


Overseas Expansion Hurdles: Talent

How effectively can Chinese enterprises deal with talent shortage and escalating competition for talent as they expand aggressively overseas?

CHINESEMNCs

FOREIGNMNCs

TALENTTALENT

Strategic Perspective

Cross-Culture/Market Appreciation

Multi-FunctionalExperience

ExecutionCapability

“China will require 75,000 top-level executives with global experience by 2010, about 70,000 more than it has now. Without them, the future is uncertain.” (McKinsey & Co.)

Sour

ce: U

SQ re

sear

ch, E

mera

ldMa

nage

ment

Xtra

74 86 1000

1200015,000

18,500

1984 1991 1993 2000 2002 2005

Annual MBA Intake in China

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Overseas Expansion Hurdles: Brand

• The top 100 global brands: US (51), Japan (8), Korea (3), China (0).

• Building a brand takes time and considerable investment with no immediate tangible returns.

• Building a global brand requires a different mindset from what it has traditionally taken for a Chinese enterprise to be successful.

China Global

How easily and quickly can Chinese enterprises overcome the global branding hurdle?


Overseas Expansion Hurdles: Politics

“Undue Fears of China Inc?: As we see more Chinese companies seeking mergers, the political factor will get bigger.“ (Global Envision, 10/21/05)

“Wake Up to the Chinese Threat: It’s time for the sleeping giant (US) to wake up and respond to the very threatening rise of communist China” (The Hill, 06/28/06)

• Do not underestimate potential socio-political resistance to overseas expansion, which is a natural part of the battle between incumbents and newcomers.

• Perceived invading/retaliating, or winning/losing, will create more obstacles on the political front.

• Chinese enterprises need to proactively manage political and regulatory concerns.

The double-edged sword of the Chinese government: How involved should it be, and what role should it play, in overseas business activities?

6


Overseas Expansion Hurdles: Culture

China: 5,000 going on 25

• China’s “re-emergence” and the West’s “unreadiness” create a gulf.

• The dual challenge for Chinese enterprises is to develop a forward-looking global business model while connecting to Chinese history.

• Clearing cross-cultural hurdles and bridging cross-border social practices should be high on corporate agendas.

Tradition

How can Chinese executives blend “people based” and “system based”management styles in globalization?

Modernization


Overseas Expansion Hurdles: Financing

HK2,165Bank of Communications

HK3,276China Shenhua Energy

Year 2006

Year 2004

HK1,839Ping An Insurance

NYSE1,803SMIC

HK1,238Air China

Year 2005

HK9,227China Construction Bank

HK1,227China COSCO Holdings

HK11,200Bank of China

ExchangeCapital Raised

($ Mn)Top Overseas Top Overseas

Chinese IPOChinese IPO

Sour

ce: E

rnst

& Yo

ung

/ Th

omso

n Fi

nanc

ial, H

oove

s

45 46

344

New York London Hong Kong

Number of Chinese Firms Listed Overseas

“As more and more Chinese companies are going abroad to compete, the difficulties in financing their overseas operations prevent them from growing bigger and stronger.”(China’s State Administration of Foreign Exchange)

How can Chinese enterprises secure financing to fulfill their global ambition? How can they balance the interests of diverse stakeholders in China and overseas?

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Concluding Thoughts

• Management know-how, managerial talents, and brand are imperative for Chinese global business expansion.

• Cross-border M&A is a new ball game for Chinese enterprises, and it often takes time to determine the true winner (or loser).

• Setbacks are part of the process of overseas expansion, and one should learn from the process.

• Chinese enterprises need to look from the “local” viewpoint and appreciate the domestic socio-political concerns.

• The right timing, prudent speed, and alignment of business savvyand socio-political sensitivity are particularly vital for securing overseas business deals.


Thank you

The Darden Graduate School of Business University of Virginia

P.O. Box 6550Charlottesville, VA 22906-6550

U.S.A.Phone: + 1-434-924-7260/ Fax: + 1-434-243-7678

Email: [email protected]

Ming-Jer Chen, Ph.D.

Leslie E. Grayson Professor

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