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Dancing on the Stage of a Multi-Polar World:The Path to Globalization for Chinese Enterprises

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Table of ContentsI. Globalization: the necessary choice 4

1. Through reform and opening up, China has integrated itself into the global economy 5

2. The rise of a multi-polar world and emerging market multinationals (EMMs) creates

globalization opportunities for China 5

3. To develop further, Chinese enterprises must globalize 5

4. Globalization catalyzes new ways of competing 7

II. A closer look at globalization 8

1. Whatisglobalization? 9

2. How do enterprises globalize? 9

III. Globalization of Chinese enterprises: an overview 12

IV. Globalization: strategic choice 23

1. Why should our company go global? 24

2. What businesses do we want to compete in? 26

3. Where should we locate our global businesses? 30

4. What means of investment will we use? 33

5. Different industries require different strategic choices 37

V. Global operating models 41

1. What is a global operating model? 42

2. A global company’s corporate culture must balance global vision with local perspectives 52

3. Post-merger integration presents unique challenges 53

4. A successful global operating model has several hallmarks 54

VI. Challenges facing globalizing Chinese enterprises 56

1. The multi-polar world has presented new difficulties 57

2. Chinese companies are taking steps to address the challenges 58

VII. Conclusion 62

VIII. Appendixes 63

Appendix1:OverseasM&AsbyChineseenterprises,January1,2008-June30,2010 63

Appendix2:Researchmethodologies 71

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an export orientation and efforts to optimize the organization’s value chain; the advanced stage is distinguished by true realization of global operations that is not bound by national borders in designing strategies and carrying out business activities. Few Chinese enterprises have reached the advanced stage of global operations.

• Chinese enterprises embarked on the road to globalization in the early days of reform and opening up. Since the financial crisis struck, they have forged ahead more vigorously.

• An enterprise seeking to “go global” must craft strategic plans detailing what businesses to be in, where to compete on the global stage, and how to invest in the overseas market. To make such decisions, business leaders need to consider, among other things, the goals they want to achieve through globalization and the characteristics of their industry.

• To ensure the success of their globalization drive, companies must build a global operating model that aligns with the local environments in which they are doing business. This means constructing a model that has the right leadership capabilities, organizational structures, talent management practices, processes, technologies and performance metrics.

• As newcomers to globalization, Chinese enterprises face a raft of challenges. While they are moving ahead with confidence, they must also devote sufficient attention to developing a leadership team with a global vision, recruiting the right talent through the right means, accommodating local business environments and establishing a global ecosystem of local partners and fellow Chinese companies going global.

Chinese enterprises have already set sail on their globalization voyage. Nothing can stop them. However, the voyage will prove long, arduous and stormy. It is our sincere hope that they will remain undaunted despite the inevitable setbacks. If in the not-so-distant future, people who are talking about globalization associates it with a string of names of Chinese companies, then we can safely say that China has successfully navigated the journey. We will continue to closely follow the efforts of Chinese businesses as they pursue globalization and will do our utmost to help new global leaders emerge.

Foreword

Gong Li Chairman, Accenture Greater China

Li Decheng Executive Vice President and Director-General, China Enterprise Confederation

In the aftermath of the worldwide financial crisis, Chinese enterprises are grappling with questions about globalization: Should they pursue it? And if so, how? The answers to these questions will have a great bearing on these companies’ strategic directions and growth tactics in the post-crisis era, as well as on their standing in the global economic system. The answers seem apparent. The world has witnessed a series of stunning acts by Chinese companies toward globalization since the downturn struck. These firms have initiated and led wave upon wave of overseas investment and have participated in a storm of high-profile merger-and-acquisition (M&A) deals. While Western markets remain troubled by the “new normal” of sluggish growth and depressed consumer demand, Chinese enterprises have shown remarkable vitality. They are making big strides beyond China’s borders and constitute a gathering force on the global economic stage.

These developments have prompted Accenture and the China Enterprise Confederation to join efforts to study the phenomenon. For the past three years, Accenture has analyzed how high performance Chinese businesses have achieved profitable growth, narrowed the gap between themselves and their world-class peers, coped with the short-term impact of the global financial crisis with a vision for long-term growth and pioneered their future beyond the recession. For the past eight consecutive years, the China Enterprise Confederation has published its annual list of China’s top 500 enterprises, followed by research reports, in a bid to help Chinese businesses enhance their

performance. The current research undertaken by the two organizations, reflected in this report, builds on their respective previous studies. In a global economy characterized by increasing interdependence, pursuing cross-border operations has become an indispensible component of companies’ efforts to achieve high performance. The stronger and bigger an enterprise becomes, the more it must seek new space for growth beyond its traditional familiar competition base. We hope that this report will go a long way toward assisting Chinese enterprises in this effort.

Our research has yielded the following principal findings:

• Globalization is the necessary choice for Chinese enterprises today. Businesses in China are embracing the globalization trend to spur their own development and evolution, to support China’s integration into the global economy as a result of reform, to reinforce China’s rising economic power and to transform their business models.

• Through globalization, an enterprise gradually becomes dependent on overseas markets and continuously augments its capabilities to better manage globalized production, distribution, resources allocation and operations management. A globalized enterprise does not yoke itself to the local market. Instead, it uses the global market as its only reference in shaping its strategies, operating decisions and corporate culture.

• Globalization is marked by an initial stage in which a company has some interaction with the global market; the intermediate stage is characterized by

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I. Globalization: the necessary choice

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1. Through reform and opening up, China has integrated itself into the global economy Since the initiation of reform and opening up in the late 1970s, China has achieved sustained, rapid economic growth. From 1978 through 2009, its annual GDP growth averaged 9.8 percent, the highest in the world for that period of time.1 Over the past 30 years, China has evolved from a centralized economy with widespread shortages of suppliers of goods and services, and the ever-present danger of collapse to a vibrant economic world power. In doing so, the country has stepped out of self-imposed seclusion to integrate itself into the global economic system. This achievement has stemmed not only from the opportunities presented by economic globalization but also from the country’s relentless efforts to develop a market economy, follow market rules and participate in the international division of labor.

Today, China is the world’s second largest economy, as measured by GDP and imports and exports. With its increasingly significant role in the global economy, it will need to adopt a broader vision and seek new space for its development. At the same time, it will have to shoulder more responsibilities in global economic affairs and reassess its position in the worldwide economic system. Only by doing so can it successfully address the array of challenges it will encounter in the post-crisis era.

To go global on a grander scale is the next logical step for China. But globalization must be supported and sustained by both soft power, such as culture, value, talent, corporate governance, social responsibility, and respect to intellectual property rights, and hard power, such as technology, equipment, capital, and resources. Therefore, the country’s economic strength will be put to a severe test. The world’s major economies are still reeling from the impact of the financial crisis, and the global economic balance of power has shifted. At this unique point in history, the Chinese economy, with its sustained, stable growth, has the rare opportunity to accelerate its pursuit of globalization.

2. The rise of a multi-polar world and emerging market multinationals (EMMs) creates globalization opportunities for China Over the past decade, globalization has entered a new phase marked by the appearance of emerging economies including China. Following the footprint of the four Asia tigers (Hong Kong, Singapore, South Korea and Taiwan), Brazil, Russia, India and China (BRIC) now stand as the world’s emerging market powerhouses.2 This development has transformed the global political, economic and social landscapes—creating a multi-polar world. A distinguishing characteristic of the multi-polar world is the spreading of economic power from the traditional centers of developed countries to the developing countries. The traditional economic structure, led by the advanced Western market, was characterized by one-directional flows of economic power from the advanced markets to the developing markets. This is giving way to a structure characterized by many centers of economic power, multiple directions of capital, talent and technology flows and interdependency among all the players. This new configuration has made further globalization of emerging markets possible and has provided them with rare opportunities for further development. Today, the extent to which an economy is globalized determines its status in the world.

A country integrates, by necessity, into the global economic system when its economic development reaches a level that national boundaries become constraint to further growth. Similarly, competition dictates that an enterprise must goes global when it achieves a certain scale. Only by competing on the global stage can it continue to produce the innovative products, services, processes and technologies on which its future depends.

The tidal wave of globalization has spawned a host of emerging market multinationals (EMMs). In the past, most people associated the word multinational with Western consumer-product giants such as the Coca-Cola Company, Exxon Mobil and GE, and later with developed-world high-tech leaders including Microsoft, Intel and Nokia. Seemingly

overnight, multinational now also includes the Tata Group of India, Vale of Brazil, Samsung of Korea, PetroChina, Huawei, Lenovo and Baosteel of China. According to a joint study by Columbia University and Fudan University,3 by the end of 2007, the combined overseas assets of China’s 18 topmost transnational corporations had reached US$105.7 billion, or 15.4 percent of these companies’ aggregate assets. The rise of EMMs in a multi-polar environment has captured worldwide attention. Born out of globalization, EMMs are now powerfully adding to its momentum.

3. To develop further, Chinese enterprises must globalizeIn the so-called post-crisis “new normal,” shrinking consumer spending and slowing economic growth have triggered much discussion among economic experts, scholars and business leaders in the West. Since China has protected itself from the worst of the crisis, it has managed to sustain high levels of growth and avoid the brunt of “new normal” hardships. Nonetheless, the crisis has prompted China to reflect on its economic development models. From a macroeconomic point of view, national leaders know that China cannot continue driving economic growth primarily through investment, exports and huge consumption of resources. This approach simply is not sustainable. The nation must move to a more balanced growth model—one comprising investment, exporting and domestic consumption that uses resources efficiently. Businesses, for their part, can no longer rely on extensive manufacturing that hinges on low costs. They will need to put more emphasis on innovation and move up the value chain. The worldwide recession may have dealt a moderate blow to Chinese business operations. However, it has transformed the way people in China think about business.

As the global economy recovers, Chinese enterprises will need to ponder two sets of fundamental questions:

• Will the financial crisis lead to a deceleration of globalization? Will the problems inherent in developed economies and enterprises that made them vulnerable to the crisis mean the demise of Western management thinking? Or is such thinking still instructive to Chinese enterprises?

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• Do Chinese businesses need to change their business and operating models? Should they reinvent themselves by adopting new strategic perspectives?

The answer to the first set of questions should be self-evident. Although the financial crisis laid bare the serious flaws inherent in developed economies, the claim that Western management philosophies and experiences are no longer valid or instructive is untenable. Rather, the lessons Western enterprises have gleaned from the global downturn can help all businesses guard against another worldwide recession. Still, Chinese business leaders will face a daunting challenge in using such lessons to restructure, transform and improve managerial skills to establish highly competitive modern corporations.

The answer to the second set of questions is a decided yes. The global financial crisis turned the global economic landscape and operating environment upside down. Accordingly, all countries must reconfigure their macroeconomic structures, and businesses should rethink their growth models. Pre-crisis business models may not necessarily be valid in the new global competitive environment. It is imperative that enterprises seek new ways to fuel growth through reform and transformation. Integrating themselves into the global economic system and competing on a larger stage will be vital steps for Chinese enterprises. The previous 30 years of reform has produced a roster of competitive enterprises; these same businesses will likely take center stage in the global economy in the next 30 years, and will powerfully shape global business rules.

As a necessary and sound strategic choice, globalization is gaining acceptance by an increasing number of Chinese enterprises. In our survey investigating the main strategies that enterprises plan to adopt post-crisis, as many as 12 percent of the respondents selected globalization (See Figure 1). When asked about the importance of global business in corporate strategy, 85 percent said “very important” or “fairly important” (See Figure 2). Interestingly, independent innovation, expansion of the domestic market and business diversification are more favored by Chinese enterprises at this stage, mirroring globalization’s salience for China’s business leaders.

Figure 2 The importance of globalization in corporate strategy (Percentage of respondents)

Very unimportant1%

Not so important6%

Source: Joint survey by Accenture and the China Enterprise Confederation, May-August, 2010

Very important43%

Average8%

Fairly important42%

Figure 1 Core corporate strategies in the post-crisis era(Select two items. The percentage is calculated by dividing the number votes for each item chosen by the total number of votes obtained)

Others1%

Brand building12%

Expansion of domestic market24%

Independent innovation29%

Source: Joint survey by Accenture and the China Enterprise Confederation, May-August, 2010

Globalization12%

Business diversification22%

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4. Globalization catalyzes new ways of competingEconomic globalization emerged first in the early 1970s. Since the dawn of the new century, it has entered a new and more complex phase characterized by the rise of a multi-polar world. In this environment, companies face significant challenges in the struggle for talent, capital, customers, resources and innovation. And the rules of the game have changed accordingly:

• Talent: The war for talent is no longer confined within national borders, and competition for innovative employees with strong technical skills is intensifying.

• Capital: The flow of capital is no longer unilateral. Developing countries are simultaneously recipients and exporters of capital.

• Customers: New consumer groups are developing rapidly in emerging markets. Their demands for products and services vary; businesses must think hard about how best to meet those demands and capture these consumers’ loyalty.

• Resources: Competition for resources will be fiercer than ever. It will center not only on control of resources, but also on their sustainable use.

• Innovation: Developed countries no longer have a monopoly on the creation of new technologies, products, services and even managerial expertise. Today, emerging markets and businesses are contributing their fair share of innovations in these areas.

Any business, be it in a mature market or emerging market, must grasp the dynamics of competition to achieve high performance and attain growth in today’s increasingly complex global environment. In the multi-polar world, economies are becoming increasingly interdependent and connected. To maintain a sharp competitive edge, companies must adopt a global mindset and operations.4

Accenture and the China Enterprise Confederation have jointly undertaken the research presented in this report as part of the effort to illuminate the globalization process experienced by Chinese enterprises, explore the formulation and implementation of global strategies and operating models, and summarize lessons learned from globalization. Our hope is that this work will support the efforts of Chinese enterprises seeking to become global companies. Drawing on extensive surveys of Chinese companies, face-to-face interviews with senior executives, previous research and Accenture’s methodologies in the areas of global operating model, this report aims to answer the following questions:

1. Why should Chinese enterprises pursue globalization?

2. What is globalization, and how should it be measured?

3. What is the current status of globalization among Chinese businesses?

4. How can Chinese business leaders make strategic choices to support their pursuit of globalization?

5. How might Chinese companies build and implement effective global operating models?

6. What challenges does globalization present, and how can Chinese companies best address those challenges?

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II. A closer look at globalization

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The global economic landscape underwent tremendous changes after the Second World War, as many Western multinational corporations became active in non-Western economies. The 1960s and 1970s saw the largest scale of post-war transformation in the global economic structure. Numerous labor-intensive manufacturing industries from the developed countries, armed with capital and technologies, sought to gain a foothold in the Third World countries. Under the new paradigm of global division of labor, export-oriented economies such as the Four Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) were created. The concept of globalization emerged in the 1980s and has stimulated discussion among politicians, economists and management researchers ever since. Another epochal event in the 20th-century world economy was the adoption of reform and opening-up program in China. This program brought the most populous country on earth into the global division of labor, further fueling globalization’s momentum. The pace of globalization accelerated in the 1990s thanks to advances in information and communication technologies, particularly the rise of the Internet.

Globalization has changed dramatically since the outbreak of the 2008 global financial crisis, which resulted in the rise of multiple centers of economic power and activity. In this new multi-polar world, the flows of products, services and capital are no longer one directional but rather bi-directional or multi-directional. Economies have grown increasingly interdependent. Developed countries no longer have a monopoly on the export of capital and technologies. And EMMs are striding onto the global economic stage.

1. What is globalization?The term globalization has inspired a number of definitions and interpretations by international organizations, researchers and the business world. Consider these examples:

• According to the IMF’s World Economic Outlook 1997, “Globalization refers to the growing economic interdependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.”5 This definition accentuates economic interdependence and the role played by technology in the globalization process.

• According to the United Nations Conference on Trade and Development (UNCTAD), globalization occurs when producers’ and investors’ activities are increasingly internationalized, and when the world economy consists of a single market and production zone, rather than being linked by trade and investment flows among different economies. Regions and countries are only sub-units of the world economy.6 This definition further expands the meaning of globalization, emphasizing the integration of the global economy. It stresses the merging of economies into one entity, rather than the exchanges and interdependencies between economies.

• Similarly, the Organization for Economic Co-operation and Development (OECD) interprets globalization as a process in which markets, technologies and communications function in ways marked increasingly by “globality,” whereby national and regional characteristics become less and less distinct.7

• Alan Rugman, former president of the Academy of International Business, defines globalization as activities of transnational corporations in conducting

cross-border foreign direct investment and establishing commercial networks, thereby creating value.8

• The Economics Institute of the Chinese Academy of Social Sciences defines globalization in its Dictionary of Modern Economics as “the trend of global free flows of goods, labor, capital and information.”9

2. How do enterprises globalize?While a universally agreed definition of globalization does not exist, each of the above definitions captures the essence and implications of the concept from a unique angle. However, these definitions take a macroeconomic approach to globalization, giving scant attention to organizations’ micro-level strategic and operational activities. Our current research centers on how globalization has influenced companies’ strategies and operations and how enterprises should cope with the challenges created by globalization to become global players. Therefore, we examine globalization from a micro-level perspective; that is, in the context of enterprises.

First, globalization has geographical implications for enterprises: Globalized businesses rely to some extent on overseas markets for their products and services, raw materials sources, technologies and operations.

Second, globalization is a process, not an event. An organization enters the global market progressively through several stages, each of which exhibits unique characteristics of globalization.

Initial stageIn the initial stage, some of an enterprise’s raw materials, technologies, equipment and personnel originate from other countries. The company’s

Globalization is a process in which an enterprise increasingly relies on overseas markets for its business, and acquires and enhances its capabilities in global production, distribution, resource allocation and managerial expertise. A globalized enterprise does not limit itself to the local market in its ways of thinking, formulation of strategies, decision making and corporate culture. Rather, it uses the global market as the sole context for all of these matters.

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products are sold on the global market directly or indirectly, and as finished or semi-finished goods. However, the organization’s operations are firmly rooted domestically, and its global business accounts for only a modest proportion of its total business.

Intermediate stageIn the intermediate stage, globalization presents two models and emphases:

• Export orientation. The enterprise manufactures products to be sold in overseas markets using local cheap labor and land resources. Over the past decade, a large number of labor-intensive and export-oriented original equipment manufacturers (OEMs) and original design manufacturers (ODMs) have sprung up in China’s Pearl River Delta and Yangtze River Delta areas, transforming the country from a manual workshop to the world’s factory. These enterprises have strong manufacturing and factory-management capabilities. They rely on low-cost labor and achieve low profit margins. Few of them have their own brands or sales channels in the domestic market or abroad. They derive most or all of their income from exports.

• Value-chain optimization. The enterprise capitalizes on globalization to move up and expand the value chain. It strives to improve its position in the value chain and achieve better performance through a variety of means, including acquisition of technologies, recruiting of talent, market expansion, enhancing of brands and acquisition of resources. For example, many Chinese enterprises set their sights on the European and US markets to improve their competitiveness in areas such as research and development, product design, technologies, marketing and branding. Other Chinese enterprises are eager to establish their presence in the Middle East, Africa and Latin America to tap these regions’ abundant local resources.

Globalized operations stageIn the globalized operations stage, the enterprise becomes truly globalized in terms of its resource distribution, industrial value chain, strategies, operations and culture. Its national origin ceases to be important. At this stage, the enterprise is no longer satisfied with global connectedness but devotes itself to global orchestration. That is, the organization not only makes itself present in various places of the world, but the

global presence enables it to structure and operate in a more efficient and coherent way to take advantage of the large global market.10 More important, it transcends national borders in its ways of thinking, decision-making processes and corporate culture. Nevertheless, achieving truly globalized operations is an arduous, protracted process, requiring painstaking efforts to build capabilities in business architecture and operation proficiency. In fact, only a sprinkling of enterprises has reached this lofty stage, including the Coca–Cola Company, PepsiCo, Toyota and Exxon Mobil.

Taking geographic footprint and the above-described stages into account, we propose the following working definition of globalization:

Globalization is a process in which an enterprise increasingly relies on overseas markets for its business, and acquires and enhances its capabilities in global production, distribution, resource allocation and managerial expertise. A globalized enterprise does not limit itself to the local market in its ways of thinking, formulation of strategies, decision making and corporate culture. Rather, it uses the global market as the sole context for all of these matters.

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Figure 3 Globalization of enterprises

Global operation capabilities (X)

Export orientation

The initial stage Value-chain optimization

Globalized operations

Shar

e of

ove

rsea

s bu

sine

ss (Y

)

What distinguishes a truly globalized player? Does the fact that the company’s products are exported mean that it is globalized? Is it globalized if it owns overseas assets or has established branches or subsidiaries in other countries? Or, is it globalized if it relies on overseas markets for sales of the majority of its products? Although globalization remains the goal for Chinese enterprises, a consensus has not been reached on the criteria for defining or measuring an enterprise’s degree of globalization.

Some international organizations and scholars have tried to clarify these criteria. For instance, in its 1995 publication The World Investment Development Report, UNCTAD advanced the Transnationality Index to gauge a transnational corporation’s overseas activities relative to its domestic activities. In 1979, the late Harvard professor Raymond Vernon put forward the Network Spread Index, which measured an enterprise’s degree of globalization by the number of countries where it established branches or subsidiaries.11 In 2009, Fudan University School of Management and the Vale Columbia Center on Sustainable International Investment compiled rankings of 18 Chinese multinational

companies using three measurements: the proportion of overseas assets to overall assets, the proportion of overseas employees to overall employees, and the proportion of overseas sales (exports not included) to overall sales.12

In our view, the degree of globalization of a company should be measured not only by the share of its overseas business in its overall business, but also by its operational and managerial capabilities on the global market. The former reflects the company’s degree of dependence on overseas markets. The latter reflects its production-base distribution, resource allocation and management capabilities, which normally include management’s global vision, cross-cultural communication skills, global organizational and coordination abilities, and global R&D and brand management expertise. Our measurement of globalization hence includes two dimensions: performance (share of overseas business) and operational capabilities13 (See Figure 3).

With this matrix in mind, let’s look again at the globalization stages through which an organization passes. Enterprises in the initial stage of globalization have modest levels of overseas operations

and business. In addition, their global operations capabilities are relatively weak. A considerable number of Chinese enterprises are in this stage.

Export-oriented enterprises generate a fair share of their revenues from exports, and some of them have begun to own assets overseas. However, their operations are deeply entrenched domestically, revealing that their globalization capabilities are incommensurate with their level of overseas business. Many export processing and OEM enterprises belong to this category of enterprises.

Companies in value-chain optimization, typically businesses started by returnees from overseas studies and private entrepreneurs, have stronger global operations capabilities but a relatively meager share of overseas business.

Finally, enterprises that are truly globalized with respect to markets, employees, operations base and management do not distinguish between domestic and overseas markets, since their overseas business constitutes a considerable share of their total business. Currently, few Chinese enterprises have reached this stage.

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III. Globalization of Chinese enterprises: an overview

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Figure 4 China’s outbound FDI

China’s outbound FDI (100 million US dollars)

Source: Statistical Bulletin of China's Outbound Foreign Direct Investment 2009, Ministry of Commerce of the PRC

0

100

2000

9.1668.85

25.18 28.5554.98

122.61

211.60 224.69

521.50

720.51

2001 2002 2003 2004 2005 2006 2007 2008 2009

200

300

400

500

600

700

800

We can trace the beginnings of Chinese enterprise’s globalization process back to 1978, when the country launched its reform and opening-up program. The period from that year through the 1980s constitutes the initial stage of globalization. Chinese firms began to participate in the international division of labor through exporting their products and establishing joint-venture businesses with foreign companies, which were entering China in increasing numbers. At the same time, certain forward-looking Chinese companies attempted transnational operations. For instance, in November 1979, the Beijing Friendship Store established Kyowa Co., Ltd. in Tokyo through a joint investment with Japan’s Maruichi Shoji, Inc.—marking the onset of overseas investments by Chinese enterprises.14 Economic globalization and regional economic integration gathered momentum starting in the mid-1980s. According to UNCTAD statistics, Chinese investors’ foreign direct investments (FDI) surpassed the US$100 million threshold for the first time in 1984 and averaged $670 million annually for the next five years. However, only a scattering of Chinese enterprises were seeking to go beyond their nation’s borders. Moreover, their awareness and scale of globalization were modest.

In the 1990s, as the wave of globalization engulfed the world, Chinese enterprises entered the second stage of globalization. In 1992, China defined a goal of establishing a socialist market economy, ushering in a golden age for Chinese enterprises. In the mid-1990s, the country announced its “going out” strategy15 and launched a series of policies and measures designed to encourage Chinese enterprises to expand into overseas markets. Soon a large number of enterprises sprang up. At the same time, China’s overseas investments increased. UNCTAD data indicate that China’s outward FDI reached the US$1 billion mark in 1992 and, despite downturns after the 1992 and 1993 peaks, averaged $2.3 billion annually for the entire decade.16

Since the year 2000 and especially since the outbreak of the worldwide financial crisis in 2008, Chinese companies have accelerated their globalization efforts. This third stage of globalization has been driven by the rising trend toward globalization worldwide as well as favorable domestic policies. Since 2001, when China acceded to the World Trade Organization, Chinese enterprises have further integrated into the world economy and deepened their

understanding of the rules of the game in making overseas investments.

1. China’s outward FDI has grown increasingly diverseThe past two years have been phenomenal for Chinese firms. They have been able to implement their globalization strategy after 30 years of continuously strengthening themselves. In the 2010 Fortune Global 500 list, 42 companies hailed from the Chinese mainland, equal the number coming from France, and second only to the number based in the United States (139) and Japan (71). At the same time, demand for external capital by developed markets devastated by the financial crisis, along with availability of devalued overseas assets, has created favorable opportunities. Statistics provided by China’s Ministry of Commerce suggest that China’s outward FDI reached a historical high of US$50 billion in 2008, up 96.7 percent year-on-year, and amounted to $72 billion in 2009, 78 times that of 2000 (See Figure 4).

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Chinese enterprises have made steadfast, impressive progress on the road to globalization, evidenced by their outward FDI, the diversity of investors, and the scope of such investments. Consider that China’s overseas investments have occurred in almost all industrial sectors. In recent years, mining, retail and wholesale, financial services and leasing have each accounted for more than 10 percent of these investments. In 2008, these industries accounted for a combined 86 percent (See Table 1). By contrast, share of manufacturing has decreased.

China’s overseas investments in mining are of increasing strategic importance, as domestic demand for minerals and energy soars with the nation’s rapid economic development. At present, a significant proportion of China’s overseas investments has gone to mineral-rich Australia. According to China Economic Net, in 2009 China surpassed Japan as Australia’s second-largest foreign investor, and most of its investments flowed into the mining and energy industries. To be sure, China’s overseas investments in the retail and wholesale industry (mainly in trade), the financial services industry (primarily through

the banking sector), and leasing and services (mostly through shareholding) have grown rapidly. However, these investments tend to be more scattered than concentrated. They are therefore small in scale at the firm level and do not reflect the typical characteristics of Chinese companies’ globalization effort. In contrast, China’s investments in the manufacturing, mining and energy industries show significant concentration and are dominated by a number of heavyweight enterprises. Most have resulted from high-profile mergers and acquisitions and joint investments. Our current research effort focuses on these investments.

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Industry 2004 2006 2008

1. Leasing and services 74,931 13.63% 452,166 21.36% 2,171,723 38.85%

2. Financial industry — — 352,999 16.68% 1,404,800 25.13%

3. Retail and wholesale 79,969 14.55% 111,391 5.26% 651,413 11.65%

4. Mining 180,021 32.74% 853,951 40.35% 582,351 10.42%

5. Transportation, warehousing, postal services

82,866 15.07% 137,639 6.50% 265,574 4.75%

6. Manufacturing 75,555 13.74% 90,661 4.28% 176,603 3.16%

7. Electric power, gas and water production and supply

7,849 1.43% 11,874 0.56% 131,349 2.35%

8. Construction 4,795 0.87% 3,323 0.16% 73,299 1.31%

9. Real estate 851 0.15% 38,376 1.81% 33,901 0.61%

10. Information transmission, computers and software

3,050 0.55% 4,802 0.23% 29,875 0.53%

11. Agriculture, forestry, animal husbandry and fishery

28,866 5.25% 18,504 0.87% 17,183 0.31%

12. Scientific research, technological services and geological surveys

1,806 0.33% 28,161 1.33% 16,681 0.30%

13. Residential services and other related services

8,814 1.60% 11,151 0.53% 16,536 0.30%

14. Water resources, environment and public facility management

120 0.02% 825 0.04% 14,145 0.25%

15. Hotel and catering industries 203 0.04% 251 0.01% 2,950 0.05%

16. Culture, sports and recreation industries

98 0.02% 76 0.00% 2,180 0.04%

17. Education — — 228 0.01% 154 0.00%

18. Health care, social security and social welfare

1 0.00% 18 0.00% 0 0.00%

19. Public administration and social organizations

4 0.00% — — — —

Total 549,799 100% 2,116,396 100% 5,590,717 100%

Source: China’s Outward FDI Statistics Report 2008

Table 1 Industrial distribution and share of China’s outward FDI 2004-2008 (in US$10,000)

Continent 2005 2006 2007 2008

Total 1,226,117 100% 1,763,397 100% 2,650,609 100% 5,590,717 100%

Asia 448,417 36.60% 766,325 43.50% 1,659,315 62.60% 4,354,750 77.90%

Africa 39,168 3.20% 51,986 2.90% 157,431 5.90% 549,055 9.80%

Latin America 646,616 52.70% 846,874 48.00% 490,241 18.50% 367,725 6.60%

Oceania 20,283 1.70% 12,636 0.70% 77,008 2.90% 195,187 3.50%

Europe 39,549 3.20% 59,771 3.40% 154,043 5.80% 87,579 1.60%

North America 32,084 2.60% 25,805 1.50% 112,571 4.20% 36,421 0.70%

Continent Investment coverage

Overseas businesses As a percentage of total overseas businesses

Asia 90% 6,000 51.2%

Africa 81% 1,600 12.9%

Europe 74% 2,000 16.3%

North America 75% 1,400 11.3%

Latin America 55% 600 4.8%

Oceania 42% 400 3.5%

Figure 5 Overseas M&As by Chinese enterprises

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090

50

100

150

200

250

300

4.70 4.52 10.47

149.04

63

302

175

16.47 11.25

52.79

350

Source: UNCTAD M&A statistics for 2000-2006, Chinese Ministry of Commerce statistics for 2007-2009

Overseas M&As (100 million US dollars)

16

Source: China’s Outbound FDI Statistics Report 2008

Source: China’s Outbound FDI Statistics 2008

Table 2 Geographical distribution and share of China’s outward FDI 2003-2008 (in US$10,000)

In addition to Australia, Asia has become a magnet for Chinese outward FDI. From 2005 to 2008, Chinese investments in Asia as a share of total investments climbed nearly 40 percent, whereas those in Latin America dipped by 46 percent (See Table 2). Recipients of Chinese investments also show increasing diversity. For example, the list of countries and regions receiving more than US$100 million of such investments expanded from just three in 2003 (Hong Kong, the Cayman Islands and the British Virgin Islands) to 22 in 2008. That year, Hong Kong, South Africa, the British Virgin Islands, Australia, Singapore and the Cayman Islands each received more than US$1.5 billion of Chinese investments.

2. Strategies for Chinese overseas investments have changedNotable changes have emerged in the means by which Chinese enterprises make foreign investments. In particular, the number of businesses established overseas by Chinese companies has risen. By the end of 2008, 8,500 Chinese companies had set up 12,000 businesses in 174 countries and regions throughout the world, over half of which were located in Asia. Globally, Chinese investors established businesses in 71.9 percent of the world’s countries and regions, with continents ranking as follows from high to low: Asia, Africa, Europe, North America, Latin America and Oceania (See Table 3).

Table 3 Distribution and investment coverage of Chinese enterprises’ overseas businesses, 2008

Figure 6 The globalization process of Chinese enterprises (Number of respondents (%))

Not intending to engage in overseas business in two years6%

Currently engaged in overseas business89%

Source: Questionnaire surveys by Accenture and the China Enterprise Confederation, May-August 2010

Planning on overseas business in two years5%

Figure 7 Ways of doing overseas business(Choose those that apply; the votes obtained are added up)

Source: Questionnaire surveys by Accenture and the China Enterprise Confederation, May-August 2010

45

41

33

32

13

10

3

Export agents or establishment of export postsEstablishment of branches/ representative officesEstablishment of overseas sales branches/subsidiaries

Overseas production

Establishment of overseas business units/operating centers

Overseas research and development

Others

17

Also, transnational mergers and acquisitions have emerged as the leading means of overseas investments by Chinese enterprises (See Figure 5). According to UNCTAD statistics, China’s overseas M&As reached US$470 million in 2001, with jumps observed in 2005 and 2006. China’s Outward FDI Statistics Report suggests that in 2003, 18 percent of the country’s overseas investments were in the form of acquisitions; another 14 percent, in equity investments. In 2008, 54 percent of these investments were accomplished through mergers and acquisitions; the figure decreased to 40.4 percent in 2009. Drawing on published information and statistics, we found that the number of M&A deals involving Chinese investors was 41 in 2008, 48 in 2009 and 29 in the first six months of 2010. Chinese private companies have been increasingly involved in these agreements, but their investments have remained relatively small. State-owned enterprises have made the lion’s share of such investments. China’s M&A efforts have been concentrated in mining, energy, manufacturing and IT; 16 of the 20 major M&A deals from January 2008 to June 2010 occurred in mining and energy (See Table 4).

By industry, the geographic concentration of such agreements is as follows: mining and energy industries in Australia, Canada, Africa and certain Latin American countries; IT, semiconductors and other high-tech industries in the United States, Hong Kong, Taiwan and Japan; and manufacturing in the United States and other advanced European countries.

The growth of China’s economy has helped spur its increasing participation in the globalization process. Of the 89 Chinese enterprises that responded to our surveys, 89 percent indicated that they are currently conducting overseas business. Another 5 percent plan to have overseas operations in five years. At present, the major ways of doing overseas business are through export agents or the establishing of export departments, followed by the setting up of overseas representative offices. Establishing overseas sales companies is the third most common means. Clearly, exporting is still the major focus of Chinese firms (See Figure 6 and Figure 7).

No. Time Acquirer Acquiree Country/region

Investments Equity/ assets acquired

Industry

1 2008.1 Chinalco Rio Tinto Great Britain 14billionUSD 9% Mining

2 2008.4 China Ping’an Fortis Investment Management Co.

Belgium 2.15billionEuros 50% Investments

3 2008.6 China Merchants Bank

Wing Lung Bank Hong Kong 17.2billionRMByuan

53.12% Commercial banking

4 2008.7 China Huaneng TuasPower Singapore 4.24billionSingaporedollars

100% Traditional energy

5 2008.7 China Oilfield Services

AWOOS Norway 2.5billionUSD 100% Traditional energy

6 2008.9 Sinopec Tanganyka Canada 2billionUSD 100% Traditional energy

7 2009.4 CNPC JSC Mangistaumunaigas

Kazakhstan 3.3billionUSD 100% Traditional energy

8 2009.6 Sinopec Addax Switzerland 49.5billionRMByuan

100% Traditional energy

9 2009.6 China Minmetals Corporation

OZMinerals Australia 1.35BillionUSD MineralAssets

Mineral Resources

10 2009.7 China Investment Corporation

Teck Resources Canada 1.74billionCanadiandollars

17.2% Mining

11 2009.8 Yanzhou Coal Mining

FelixResources Australia 19.8billionRMByuan

100% Mining

12 2009.8 CNOOC KosmosEnergy Ghana 3-5billionUSD N/A Traditional energy

13 2009.9 Sinochem Nufarm Australia 16.3billionRMByuan

N/A Agriculture

14 2009 PetroChina Merapoh Malaysia 10billionUSD Refining project Traditional energy

15 2009 PetroChina Athabasca Oil Sands Corp.

Canada 1.9billionCanadiandollars

Righttoextract60%oilsands)

Traditional energy

16 2009 PetroChina Arrow Australia 3.5billionAustraliandollars

100% Traditional energy

17 2009 Ansteel Gindalbie Metals Australia 1.7billionAustraliandollars

190millionshares Mining

18 2010.3 Geely Volvo Cars Sweden 1.8billionUSD 100% Automobile

19 2010.5 CNOOC Bridas Latin America

3.1billionUSD N/A Energy resources

20 2010.6 Bright Food CSR subsidiary Australia 1.75billionAustraliandollars

Sugar and renewable energy business

Foodstuffs

18

Table 4 Top 20 M&A deals involving Chinese enterprises, January 2008-June 201017

Source: Online content at: http://www.investide.cn/case/investCaseDetail.do?investCaseId=10107, http://www.investide.cn/case/investCaseDetail.do?investCaseId=10108 and other published information.

19

Case study

Haier’s global branding strategy

The Haier Group was established in December 1991. Its predecessor was the Qingdao Refrigerator Company, founded in 1984. In 2009, the company generated 124.3 billion yuan in revenue globally, and its brand name was valued at 81.2 billion yuan.18 For each of the past eight years, Haier has topped the list of the most valuable brands in China. It was ranked 27th in Bloomberg Business Week’s list of the 50 Most Innovative Companies in June 2010.19 Data from the business intelligence firm Euromonitor International, as cited by Dazhong Daily in December 2009, suggest that in 2009 Haier took the top spot in white-goods retail volume, boasting a global share of 5.1 percent, up 0.8 percent from the previous year.20

Since 1984, Haier has evolved from a collectively owned small enterprise with 53 dissatisfied employees and annual losses of 1.47 million yuan21 to a renowned global consumer electronics giant. It brings in annual revenues in excess of 100 billion yuan (30 percent of which are generated overseas). It owns 16 industrial parks (four overseas), 29 factories (24 overseas), eight research and development centers (five overseas),

61 trading companies (19 overseas) and 58,800 sales outlets (45,800 overseas). The company employs 60,000-plus people (more than 3,000 overseas). Its overseas business revenue soars at an annual rate of 30-50 percent.22

From “defender” to “extender”What has enabled Haier to transform itself in such a short span of time? Haier’s management team firmly believed that an enterprise cannot move onto the international stage without first establishing a leadership position in its home market. However, executives also realized early in the company’s history that Haier could not sustain its competitive advantage if it clung to the home market. They therefore made participation in global competition a core component of the company’s strategy. After China joined the World Trade Organization, Haier’s leaders resolved to expand internationally while staying strong in the domestic market and letting the two markets complement each other.

Haier’s strategy had two stages, which moved the company from “defender” to

“extender.” First, the company established itself as a leading brand in China by enhancing its core competencies and improving product quality. Its place in the domestic market secure, it began to reach out to the global market with its products, brand name and corporate culture, therefore achieving its objective of “dancing with wolves” (See Figure 8).

Figure 8 Two stages of Haier’s strategy

Source: Haier.com

1984 1991 1998 2005

Capturing the domestic market Developing the global market

Branding strategy

Total quality control

OEC management model

“market chain” processreengineering

The T model in processing orders

Diversification strategy

Outward looking strategy

Global branding strategy

20

Capturing the domestic marketHaier implemented its branding strategy from 1984 to 1991, focusing its time and energy on building up a refrigerator brand name. In 1988, the company was awarded a gold medal for product quality--the first of its kind ever awarded in China’s refrigerator industry. At the same time, Haier accumulated experience in managing refrigerator production lines.

From 1991 to 1998, Haier carried out its diversification strategy. Having made its name with its refrigerators, the company set out to transfer its operational expertise to other product lines. To do so, it revitalized the industry’s “shocked fish” (enterprises that were well equipped but poorly managed) through a series of low-cost mergers. Its goal? Establish a “fleet,” rather than a handful, of well-branded products in the home-appliances market.

Developing the global marketBy 1998, Haier was the undisputed leader in China’s home-appliance industry. However, domestic and international competition was intensifying. Rivals were upgrading their offerings. And consumers were growing increasingly sophisticated in their demands. Under these conditions, Haier could not afford to rest on its laurels. The company promptly set its sights on the international market.

Haier initially focused its global market strategy on exports, realizing the importance of gaining a foothold in the overseas markets. It then took its globalization effort to the next level by constructing research and development centers, sales and distribution channels and after-sale service networks around the world. These constituted the company’s localized operations.

In implementing its global growth strategy, Haier took a “difficult to easy” approach, selecting foreign markets with meticulous care. It first set its sights on the hard-to-penetrate US market, characterized by mature technologies and varied consumer demand. By doing so, it established a solid reputation for its brand name in the world’s developed markets. Its successful experience in the United States would serve as a model for its expansion in other countries and regions. In 1998, Haier founded its industrial park in the United States and a refrigerator manufacturing facility in South Carolina, thereby achieving

localized production. In 2001, it set up another industrial park in Pakistan, also a production center.

At the end of 2005, Haier began pursuing a customer-centric approach to its global growth strategy, realigning internal resources to serve customer needs. For example, it created the T model, whereby teams try to create value for customers on a specific link and timing of the value chain by fulfilling certain targets on time through collaboration.23 (To illustrate, T = manufacturing day; T-10 = order placement day; T+20 = container loading day.) The collective task of meeting customer demands can be broken down to each individual’s responsibilities, and each person’s efforts aggregate into overall company performance. Individual employees and a customer’s “order form” are thus combined into one. Haier’s Chinese name for this model—ren dan heyi—means “unity of people and customer order.”

The company’s global branding strategy was one step ahead of the outward-looking international strategy. While “outward looking” views China as a base reaching out to the outside world, global branding focuses on creating localized brands in every market into which Haier had made inroads.

21

Three steps to globalizationIn 1999, Haier defined a three-step strategy of “going out, going inside, and going upward.” This strategy would complete the company’s globalization process by establishing its capabilities for globalized operations and laying a solid foundation for becoming a prestigious local brand in every market Haier entered (See Table 5).

By 1999, Haier had established its global presence. Consider these highlights in the Haier story:

• The United States: (the first stop in Haier’s road to globalization): In 1998, Haier established a research and development center in Los Angeles, an industrial park in South Carolina and a sales center in New York City.

• Europe: In 2001, Haier took over a refrigerator manufacturing facility under Italy’s Meneghetti Company (the first transnational M&A case involving a Chinese home appliance manufacturer). Earlier, Haier had established R&D centers in Italy, the Netherlands, Germany and Denmark. It had also constructed a sales and distribution center in Italy’s Milan.

• South Asia: In 2001, Haier set up an industrial park in Pakistan and in 2006 established the Haier-Ruba Economic Zone. By 2005, the company owned nearly 3,000 sales outlets and 14 exhibition halls in India. In 2007, its manufacturing facility in India became operational.

• Africa: In 2000, Haier and Great Britain’s PZ Group established a joint venture in Nigeria for assembling and marketing Haier-Thermocool product line. In June 2007, Haier’s largest exhibition hall in Nigeria opened in Victoria Island, the business center of the capital city of Lagos.

• ASEAN: In July 2005, Haier established an exhibition hall in Malaysia. In April 2007, it acquired the Refrigerator Factory from Sanyo in Thailand.

• Oceania: Haier is currently purchasing local manufacturing shares in New Zealand and Australia. (In 2009, it acquired FPA, New Zealand’s famous home appliances manufacturer.) Haier is also forming alliances with local marketers.

“Going out” “Going inside” “Going upward”Timeline 1990—1999 2000—2006 2007—2010

Objective Enter mainstream markets in Europe and North America

Enter mainstream channels in the mainstream markets

Become local mainstream brand

Difficulties • Low brand recognition; “made in China” not widely accepted in international market

• Insufficient understanding of the European and North American markets

• Insufficient sales networks and low energy consumption standards

• Localized design falling short of consumer requirements

• Limited resources for channel construction and advertising

• Lack of understanding of consumers

• Consumer demand becoming more sophisticated and individualistic

Solutions • Expand overseas markets mainly through exports

• Take advantage of local small distributers and retail stores

• Fully utilize low-cost advantage

• Keep products affordable

• Develop niche products

• Establish overseas production facilities

• Form localized operational system combining design, production and marketing

• Enter mainstream channels

• Develop mainstream products

• Create localized brands

• Implement “Resource for resource” strategy, gaining global resources by exchange of domestic resources

• Establish stable relationships with big local customers

• Differentiate brand to make it well known locally

• Develop high-end products

Table 5 Haier’s three-step globalization strategy

22

Case study

Holley Group, founded in September 1970, is a diversified enterprise with pharmaceuticals as its core business.24 It currently owns factories, industrial parks and more than 20 sales outlets in other countries, and its products are sold in 120 nations and regions. Exports and imports account for 15 percent of its revenues. It employs more than 10,000 people worldwide.25

Holley started off mainly as a manufacturer of electric meters and commands 40 percent of China’s domestic market for these products. Having experienced explosive growth in the 1990s, Holley began facing stiffer competition on its home turf. China has more than 600 meter manufacturers. The company had to seek new opportunities for growth, and it opted for product diversification. Holley entered the pharmaceuticals industry by acquiring the Kunming Pharmaceuticals Company and Wuhan Jianmin Pharmaceutical Group, and by reconfiguring its internal business.26

In 1999, Holley defined its “international strategy for the 21st century,” which had several components:

• Independently develop international brands. Holley’s leaders believed that creating an internationally recognized brand name would be more important than merely selling its products in the international market. It has accomplished this by registering the Holley brand name in its major overseas markets and potential markets, doing so in more than 100 countries to date. Since 2000, 95 percent of the company’s electric-meter exports bear the Holley brand. The independent branding strategy has sharpened the group’s competitive edge.

• Take advantage of synergies in overseas sales outlets. Holley owns more than 20 overseas sales companies or agencies. Each deals in Holley’s products as well as other companies’ products, including electric meters, pharmaceuticals, cable and satellite

receivers. This has not only increased the sales companies’ revenues but also expanded other Chinese companies’ overseas sales.

• Localize talent. Holley relies heavily on local partners and recruits talent locally. At the same time, it encourages Chinese employees stationed overseas to settle there. When the company first implemented its strategy of “going out,” it tightly controlled its expatriates; for example, requiring them to live in dorms and forbidding them from socializing with foreigners at night. Gradually, its management philosophy shifted. For example, it now encourages expatriates to learn the local languages and assimilate into the surrounding society. And it allows them to live in rented houses as well as socialize with local colleagues and friends. Indeed, since this change, six or seven such employees married local people, and many of them have stayed overseas for more than 10 years.

• Shift from manufacturing to services. The year 2006 saw Holley’s creation of the Thai-Chinese Rayong Industrial Zone, with a planned area of 4 square kilometers. The first phase of the project, with an area of 1.5 square kilometers, has now been completed, with road, utilities and other infrastructure ready for industrial use. More than 20 Chinese enterprises have set up factories there, with combined investments totaling US$170 million. The industrial zone created a thriving ecosystem for other Chinese companies investing there.27 Its success has bolstered Holley’s confidence, and plans for another zone in Indonesia are now in the works.

• Move from wholly owned to joint venture. Holley usually chose to work alone when it first went global. However, as its overseas business grew more complex, it felt the need to partner with other players (for example, through joint ventures) to navigate in an unfamiliar business environment. The company adopted the strategy of allying with local partners, especially for projects

that required coordinated efforts among multiple parties and that were under government regulation. The Thai-Chinese Rayong Industrial Zone, for instance, is collaboration between the company and its Thai partners. The project has proceeded smoothly, thanks to the local partners’ social and political networks.

Despite Holley’s successes, its globalization journey has not always been smooth. Volatile market conditions and companies’ unpredictable responses to change have introduced obstacles. For example, in 2001, to gain a foothold in the telecommunication-equipment sector, Holley purchased the US-based CDMA chip R&D center from Philips in an attempt to get access to the CDMA core technology. With this move, it hoped to acquire a competitive advantage in the telecom value chain by combining technology with the vast application market in China. However, things did not pan out as Holley had hoped. First, Philips and Qualcomm had certain cross-licensing agreements on CDMA chips, and most 3-G-related CDMA patents are in the hands of Qualcomm.28 As a result, Holley found it more difficult than it had expected to gain access to some key 3-G related technologies. Second, China’s domestic 3-G market had been slow in getting under way, so it took longer to realize the financial benefit of the investment. Third, as a newcomer to the communications industry, Holley found it difficult to manage an R&D center located as far away as the United States As a consequence, communication between engineers and researchers and the management team suffered. The company also saw its operating costs skyrocket. By 2005, Holley had achieved breakthroughs in its pharmaceutical business, which had grown large enough to become the company’s core offering. Pharmaceutical products accounted for 50 percent of its revenues. Holley redirected its strategy, cut back on the operations of its CDMA R&D center and relocated the center’s main operations to China.

Holley Group’s corporate transformation through globalization

23

IV. Globalization: strategic choices

24

Chinese companies seeking to globalize face numerous strategic questions—including why the company should go global, what businesses it should engage in, where it should locate its global activities and operations, and what means of investment the company will use to conduct business globally. The goals of globalization and the industries in which companies compete will influence the answers that executives generate for these strategic questions.

1. Why should our company go global? Globalization has now become an inevitable trend for Chinese enterprises. In the post-crisis era, in particular, globalization enables Chinese companies to achieve performance breakthroughs and fuel long-term development. A globalized firm has access to more resources, wider markets, more diversified talent and a more innovative environment. However, Chinese businesses have gone global for a set of distinctive strategic reasons and motivations. The “breakthroughs” they seek by way of globalization therefore have multiple meanings – breaking threats to their survival, breaking limitations to development, breaking their reliance on certain growth paths and breaking their traditional status as followers rather than leaders. Our observation reveals four different motivations behind Chinese companies’ push for globalization.

Reduce threats to survivalThe global financial crisis presented Chinese enterprises with immense challenges; some businesses’ very survival was threatened. Export processing enterprises, represented by the traditional OEM manufacturers of apparel and toys in the Pearl River Delta, have borne the brunt of the crisis, owing to their lack of adequate domestic sales and marketing systems, insufficient capabilities for innovation and reliance on foreign orders. As many countries raised trade barriers during the recession, numerous Chinese exporters faced a shrinking international market and the specter of bankruptcy. At the same time, countries including India

and Vietnam increasingly became the destination of choice for multinational corporations seeking cheap labor, a trend that has eroded China’s labor-cost advantage. Under these worrisome circumstances, many export-oriented businesses have decided to go beyond China’s national border and capture host countries’ markets by establishing local production and distribution channels or leveraging those countries’ low-cost advantage. For example, one Chinese company runs an industrial park in a Southeast Asian country jointly with a local partner. The executives from the company revealed that the majority of investors setting up businesses in the park were Chinese enterprises. Some Chinese businesses quickly signed leasing contracts because their exports from China to the European and US markets faced anti-dumping investigations. They had to relocate their businesses quickly to a third country to avoid disruption to exports.29

Expand space for developmentAlthough the global economy remains sluggish, China has a vast number of ambitious and pioneering enterprises that are experiencing a growth spurt or have remained stable and strong. The global devaluation of assets in the post-crisis era has created a rare opportunity for these companies to expand their overseas markets and leverage those markets’ resources. At the same time, other Chinese enterprises are following suit because of saturation of the domestic market, vicious competition or dearth of critical resources. For instance, competition within China’s construction industry has intensified, especially with the entry of foreign construction contractors. In the face of shrinking profitability, many construction companies, such as the China Construction Engineering Corporation and the Anhui Construction Group, have chosen to go global. Ambitious and strong firms have decided to globalize to escape the constraints of the home market and maximize their development on the global stage.

Move up the value chainMoving up the value chain can help Chinese businesses improve their

profitability and achieve sustainable development. But deficiency in capabilities in business functions such as financing, research and development, production, branding and marketing has limited these companies’ ability to move up the value chain. Globalization provides the necessary conditions for Chinese enterprises to optimize their operations and extend their value chain. The Chery Company, for instance, has promoted its products in the EU and North American markets while meeting the domestic need for low-end cars. (See “Case study: A tale of two Chinese automakers..”) The Haier Group, on the other hand, pursues globalization through the “resource for resource” approach, thereby extending its value chain from its main line of products to high-end products.

Become a global playerSince China’s movement toward reform and opening up, foreign investments have flowed into the country and have brought advanced technologies and managerial expertise. Most Chinese enterprises were passive recipients of these new experiences at first. Some gradually became active followers of best practices. As China is more and more integrated into the world economy, Chinese companies are no longer content to follow and compete in the domestic market. Going global is the right choice for Chinese enterprises seeking to develop and excel today. Since the launch of the “going out” strategy in the mid-1990s, the Chinese government has consistently supported enterprises of various ownership structures in their efforts to engage in international economic activity and technological cooperation and to build global brand names. The global financial crisis in 2008 created the opportunity for Chinese enterprises to “go out” further. Blessed with favorable conditions, a large number of visionary companies are pursuing globalization in an effort to become multinational companies with international brand names. The Chery Company, in expanding to overseas markets, will focus on the long-term objective of constructing an international brand name. The Wanxiang Group has also established its “going

“For CSR, [competing] in the global market today means [our] survival and development tomorrow.”

Zhao Xiaogang, Chairman, CSR Corporation Ltd.30

25

out” strategy of using overseas resources and achieving localized operations.

Depending on its objective, each enterprise has its own unique place, and plays a distinct role, on the global stage. Our research has identified five types of globalized enterprises setting forth from the emerging markets:

• Full-fledged globalizers are comparable to big Western multinationals with long histories and deep-rooted traditions. Examples include the Tata Group of India and CEMEX of Mexico.

• Regional players have set their sights on neighboring markets, at least for the time being, owing to cultural and geographical affinity. However, they strive to break through their home market to enhance profitability. Examples include VinaCapital of Vietnam and PKO BP of Poland.

• Global sources, while focusing on sales in their home market, make international purchases of raw materials and semi-products to cope with domestic resource constraints. These companies are concentrated in the energy and bulk-commodities sectors. Examples include

CNOOC of China and Reliance Petroleum Limited of India.

• Global sellers, unlike global sourcers, focus on domestic manufacturing for the overseas market. SUEK of Russia is one example.

• Multi-regional niche players draw on innovative technologies or processes to specialize in operations in a number of regions. Examples include the business service and technology firm MDS Holdings of Lebanon and the specialized 3-D display technology manufacturer Holografika of Hungary. (Its CEO labels Holografika “a small global company.”32)

Regardless of to the motivation to go global, the strategic purposes of globalization invariably consist of several key elements—namely, overseas markets, raw materials, talents, technologies and international brand names. Responses to our surveys indicate that the globalization strategies pursued by Chinese enterprises have centered on these elements with varying degrees of emphasis. At present, developing overseas markets is still the major motivation behind the decision to go global (See Figure 9).

38.7%

16.1%

9.1%

9.0%

7.1%

6.1%

5.6%

2.7%

1.9%

1.9%

1.8%Eschewing trade barriers

Reducing cost pressure

Reducing risks

Accelerating capital flows and operations

Responding to the trend of economic globalization

Expanding sales

Obtaining international managerial talents and expertise

Obtaining advanced technologies

Acquiring raw materials and resources

Establishing self-owned international brand names

Developing the overseas market

Figure 9 The main aims of globalization(Select three items, which are weighted in order of importance: most important=0.5, important=0.3, least important=0.2. The marks obtained for each of the three are divided by the total marks.)

Source: Accenture and China Enterprise Confederation Questionnaire Surveys, May-August 2010

“Globalization represents the third pioneering effort of the Sany Group. Without globalization, we would be small.”

He Zhenlin, Vice President, the Sany Group31

26

While constructing an overall globalization strategy from a long-term perspective is essential, it is equally important that an enterprise approach globalization in line with its current situation and objectives. More specifically, companies need to consider such factors as their capabilities, stage of development and characteristics of the industries in which they compete in formulating globalization strategies. Otherwise, globalization will remain out of reach or could even endanger an enterprise’s development. While globalization is a worthy goal, a firm should not pursue it merely for its own sake. Of the enterprises that responded to our surveys, most indicated that they have finalized globalization moves of one sort or another or plan to do so within two years, but 6 percent said they have no plans for globalizing within the next two years. Evidently, globalization is not the only road worth pursuing.

Regardless of the objectives globalization is intended to support, success requires a leadership team with a vision and capabilities for globalization. The ultimate goal of any enterprise is to create value. Strategies that do not contribute to value creation are unjustified, however grand they may appear. Therefore, the material result of a globalization strategy ought to be enhanced international competitiveness and the creation of value for stakeholders.

2. What businesses do we want to compete in?In addition to assessing desired outcomes of globalization, companies must ask, “What kinds of overseas businesses do we want to engage in?” Companies achieve global growth in

various ways but mainly through the following stages:

1. Relocating existing lines of business overseas. This approach enables optimization of a company’s current operations to reduce costs and improve profitability, thus ensuring sustainable development. Coca-Cola setting up production lines in China is an example of this model. It is true to the majority of companie’s overseas busineses.

2. Extending the value chain downstream or upstream, or moving up the value chain. By adopting this approach, an enterprise enlarges its sphere of business in its own industry through expansion of the activities in which it engages.34 For instance, Google, which generates the bulk of its income through online advertisements, has taken a major step by establishing Google Wave, a shared space on the Web where people can collaborate using richly formatted texts, photos, videos, maps and more. This product has significantly expanded Google’s advertising business.

3. Developing new business in a new environment. GE offers an apt example of such transformation. The company has made breakthrough innovations in emerging markets by designing portable and affordable medical instruments. For instance, it has developed portable electrocardiographic equipment priced at US$1,000.00 for the Indian rural market and portable ultrasound equipment priced at US$15,000.00, for the Chinese rural market. In the process, GE has reaped huge profits in these emerging markets and has fueled growth by bringing these low-end products back to the US market.35

Few globalizing Chinese enterprises have reached the stage of developing new businesses in new environments. Notable

exceptions include the Holley Group and the Haier Group, which have established industrial parks overseas. While some enterprises cling to their original line of business, many others strive to extend their value chain. In an interview with us, the senior manager of one enterprise said that his company had gone global by establishing a global value chain rather than by exporting its products to the global market.

We believe that this approach has great merit. An enterprise’s value chain represents the various processes involved in the production of goods (and services)—from research and development to the acquisition of raw materials, and from production and marketing to final delivery of products. It also represents the various activities the enterprise undertakes to generate profits and strengthen its competitiveness. A company establishes its core competencies by enhancing various capabilities while managing and developing its value chain. The value chain varies from enterprise to enterprise. In setting up a globalization strategy, a business should first analyze its comparative strengths and weaknesses in terms of resources and capabilities, and then determine which links in the value chain should go global.

Innovation is a primary consideration for the majority of Chinese enterprises—it is the only avenue through which they can expand to the global market, extend from the low end to the high end of the value chain and therefore achieve profitability and sustainable development. Amid a volatile international business environment and rapid technological advances, it is imperative that Chinese enterprises fundamentally improve their managerial and innovation capabilities to become truly globalized players.

“An enterprise should think through and be clear about what it wants to achieve by globalization. The financial crisis has led many export-oriented companies to realize the importance of market. Foreign companies flock to China because China is a big market. An enterprise may not necessarily have to go the harder way of globalization; it may not be so late for it to do so when it has been well established in the domestic market.”

Liu Chuanzhi, Chairman, Lenovo Group33

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To maximize profitability, Chinese companies must become more innovative in research and development, marketing, brand construction and other key business functions.36 They used to compete on cost and price, without core innovative technologies or independent brands, and seldom broke into the highly profitable service sectors. Most Chinese primary equipment manufacturers, for example, are at the bottom of the global value chain, with their profits accounting for less than 5 percent of the value of their products. At a time when the global economy and the manufacturing industry are in a critical period of recovery, Chinese enterprises need to shift their products’ reputation from “Made in China” to “Made with China” or “Created in China.” Such a transformation is crucial for Chinese businesses seeking to own world-class brands and thus feature more prominently in the global economic landscape.

To access advanced technologies and upgrade their value chain, more Chinese enterprises are focusing their research and development efforts in North America and Europe. Some have taken on independent technologies and absorbed technological advances in developed countries by means of overseas mergers and acquisitions or the establishment of R&D centers or labs in other countries. Gree Air Conditioners, for instance, successfully developed an advanced air-conditioning technology following its failure in 2001 to purchase such technology from a Japanese company. The company has long insisted on mastering core technologies to support its development strategy. It does not set a ceiling for R&D expenditures, and it became the first in its industry to establish three research institutes devoted to medium- and long-term research in sophisticated technologies. It has moved on from medium- and low-end manufacturing, and is the global bellwether in air-conditioning technologies.37

Other enterprises, by contrast, have acquired advanced manufacturing technologies, managerial expertise, sales channels, customers, markets and even brands by purchasing overseas peers that are technological leaders. For example, in April 2010, the Chongqing Machinery and Electronics Company acquired the UK-based Precision Technologies Group (PTG) for £20 million. The company plans to pump £10 million into PTG in the next several years to strengthen its competitiveness in the machine-tool product area. PTG, which owns two factories in the UK, has provided the Chongqing Machinery and Electronics Company with precision machinery manufacturing technologies, thereby enhancing Chongqing’s technological and managerial prowess.38

“The first phase of our strategy is a global market for our products, and the second phase is a global brand.”

Wu Fei, General Manager of COFCO Wine39

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Case study

A tale of two Chinese automakers

The year 1997 will go down as a shining page in the history of China’s automobile industry. In March of that year, the Chery Motor Company broke ground. Also in 1997, the Geely Company, which had started in the refrigerator components business, declared its entry into the automobile industry.

The two companies have striking similarities. Both had begun by developing cars targeted to the masses and following a low-price strategy. They adopted this approach because of the large gaps between them and their foreign counterparts with regard to technological levels, brand value and market influence. Because multinational automakers’ prices were relatively high, middle-income Chinese families could not afford them. Chery and Geely concentrated on the medium- and low-end segments of the market for middle-income Chinese families, carving out a narrow space for themselves in the crowded and highly competitive auto market.

The two companies have also tried to push into the global market. China accounted for no more than 10 percent of the global automobile market in the late 1990s, so a Chinese automaker

had to go global to achieve world-class status. Yin Tongyue, Chairman of Chery Company, noted, “The Chinese auto market is a small part of the global market though it grows fast.”40 Li Shufu, Chairman of Geely Company, pointed out, “China’s auto industry has got to participate in global market competition in order to improve its competitiveness.”41 Both started to “go out” by selling their products on the world market. Owning independent brands, they could decide where to export. Unlike partners in a Chinese-foreign joint venture, which is limited by foreign partners’ global strategies, Chery and Geely took globalization into their own hands. In October 2001, Chery began exporting its sedans to Syria. In August 2003, Geely also began to export its sedans.42

However, the two businesses chose different paths to expand into the global market. Chery took the incremental approach of emphasizing exports, green-field development and independent research and development. In contrast, Geely chose the more radical strategy of strengthening itself through overseas mergers and acquisitions—swiftly increasing its scale and market presence.

Spotlight on CheryThe Chery Company has spread its wings overseas cautiously. Its chairman, Yin Tongyue, sees overseas M&A as risky, especially when it comes to the integration of diverse corporate cultures. Consequently, Chery has focused on organic growth.43 It reached out to the overseas market in a substantial way in 2004 and established a specialized international company for its export business. The destinations of its products initially included the Middle East, Southeast Asia and Africa, and slowly expanded to include Russia, Southeast Europe and Latin America. Chery targeted medium- and low-income consumers in these countries and regions. And it refrained from entering the West European and North American markets, which set more rigorous quality and environmental standards.44

Chery began building factories overseas in 2006. In light of financing and operational risks, it chose to embark on this building effort jointly with local partners. In exporting products, it insisted on constructing CKD (complete knock down) or SKD (semi-knock down) assembling facilities with these partners. Such localized production,

29

which contributed to local taxation and employment, largely protected Chery from local trade protectionism.45

In 2008, the Chery Company sold 356,000 cars, winning fifth place on China’s passenger-car sales chart. For the 10th consecutive year, it was the champion in sales of domestic brand products. About 135,000 of the cars it sold were exports, which made Chery the No. 1 auto exporter for the sixth year running. The company is now firmly established in Asia, Europe and Africa, with localized production and selling in countries including Thailand, Russia, Argentina and Uruguay. Its products have reached more than 70 countries and regions.46

Spotlight on GeelyIn contrast to Chery’s methodological approach, the Geely Company has globalization more energetically. In October 2006, it signed a deal with UK-based Shanghai Maple and Manganese Bronze Holdings (MBH) to jointly produce brand-name taxicabs. By acquiring a shareholding stake in MBH, Geely obtained related car-manufacturing technologies and, most important, sales channels in Europe for its independent brand products. Also, it could take advantage of MBH’s after-sales services in the UK and in Europe overall.47

In June 2009, Geely plunked down 54.6 million Australian dollars to acquire the Australian automatic gearbox maker Drivetrain Systems International Pty Ltd. (DSI), which was under bankruptcy protection. As one of the two independent manufacturers of automatic gearboxes in the world, DSI had strong design, R&D and production capabilities. The move significantly improved Geely’s technological and production capabilities in the area of automatic gearboxes. In addition to meeting its own demand for gearboxes, it supplied these products to other automakers. The acquired business had strategic importance for Geely’s core car manufacturing business. Indeed, the acquisition helped Geely to upgrade its value chain.48

In March 2010, Geely completed the purchase of Volvo Cars from Ford Motor Co. with a hefty US$1.8 billion, acquiring 100 percent of Volvo’s equity and related assets (including intellectual property rights). The deal constituted the biggest overseas acquisition ever by a Chinese automobile manufacturer.49 Geely

maintained that the acquisition met its strategic needs in an age of globalization. It expects to create high-end products as quickly as possible and therefore improve its international visibility, by relying on Volvo Cars’ core intellectual property rights, brand value and market position. However, Geely faces formidable challenges in integrating Volvo Cars’ advanced management systems, establishing a cross- cultural management team and making Volvo Cars’ technologies and brand name entirely its own.

Wang Ziliang, Vice President of Geely, noted that Geely’s acquisition was made with the company’s unique situation and needs in mind, and that acquisition for acquisition’s sake is meaningless.50 However, inking the deal is only the first step. The post-merger integration process, upon which the acquisition’s long-term success hinges, is anticipated to be protracted.

The Chery Company and the Geely Company have taken diverse approaches to globalization not only because of the differences in their strategic orientations, management philosophies, market positioning and corporate cultures, but also because of the differences in their leadership styles and preferences.

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3. Where should we locate our global businesses?Executives at globalizing Chinese firms take into account their globalization objectives to decide where to locate their global business. Companies seeking to acquire resources have to go where such resources are abundant. Those whose main purpose is market expansion need to go where their target markets are large enough. Enterprises most concerned about avoiding trade barriers must go to third-party countries or regions through which they can access their target markets. Those whose primary aim is the acquisition of innovative technologies have to go to countries where businesses possess considerable technological strengths.

Political, cultural, social and linguistic factors also influence the geographical choice of enterprises seeking to globalize. For instance, some executives we interviewed defined Southeast Asia as an ideal destination for their investments, noting that it is home to a substantial ethnic Chinese population, which facilitates communication and management. Others said that they would not attempt to do business in countries that are not friendly to China. In deciding where to go, executives should gain a thorough understanding of a potential market’s competitive strengths, products and availability of opportunities. Integration of cross-regional resources optimizes an enterprise’s portfolio of resources and thus sharpens its competitive edge.

According to Bruce Kogut’s global strategy model on comparative strengths and geographical choice, an enterprise should give capital and human resource inputs primary consideration in deciding where to locate their global business activities. Capital and human resource inputs are closely correlated with countries and industries. For example, countries have different cost structures in areas of taxation, tariff, transportation, salary and so forth. Various industries require different levels of inputs in capital and human resource. Businesses can formulate their geographic strategy based on their industry’s defining characteristics, their own competitive advantage and whether they follow a capital- or labor-intensive strategy. Thus, they can choose to locate their business in developed countries, emerging markets or developing countries51 (See Figure 10).

Developed countries, which enjoy comparative strengths in talent and capital, have industries concentrated in digitized production and manufacturing, services and product research and development. In contrast, developing countries generally have cheap and abundant labor and hence have relative strengths in production costs. Many transnational corporations originating in developed countries relocate their manufacturing processes to developing countries to capitalize on this low-cost advantage. Therefore, industries that are concentrated in developing countries and regions include food processing and export of simple consumer products.

However, the so-called emerging markets have already begun challenging this paradigm. Such markets include the IMF classifications of “newly industrialized Asian economic entities” and “other newly emerging markets.” Distinctive features of these markets include a gradually advancing market economy, rapid economic growth, big market potential and ongoing integration into the global economic system through institutional reforms and economic progress. Emerging-market nations usually include Brazil, China, India,

Indonesia, Mexico, Russia, South Africa, South Korea and Turkey.52 These countries are experiencing accelerated economic growth and technological progress and have accumulated huge pools of high-end talent. Because overall wage levels in these emerging markets are far lower than those of developed countries, multinational corporations are competing to establish research and development centers in localities characterized by a concentration of high-quality talent. This, in turn, promotes further technological progress and rapid development of high-tech industries in these countries. Therefore, the industries in emerging market economies currently encompass basic production and manufacturing, digitized production and manufacturing and so on.

Emerging market multinationals (EMMs) are racing to catch up with their peers in developed countries, although they are newcomers to globalization. Globalizing Chinese enterprises should recognize and employ the comparative strengths of the aforementioned different markets in making geographical choices.

Chinese companies’ comparative advantages lie in low-cost labor and

Product research and development

Technological service industries

Digitalized production and manufacturing

Industrialized machinery production and manufacturing

Basic production and manufacturing

Assembly production

Exports of simple consumer goods

Food processing

Emerging markets

Developing countries

Developed countries

Human resource inputs

Source: “Designing Global Strategies: Comparative and Competitive Value-Added Chains.” Bruce Kogut, in Smart Globalization: Designing Global Strategies, Creating Global Networks, the MIT Sloan Management Review Innovation Series 2003

Figure 10 Industries’ comparative strengths in different countries

Capi

tal i

nput

s

23.0%

20.5%

19.3%

16.8%

14.3%

6.2%

Figure 11 Countries and regions preferred for globalization by Chinese firms(Select two items. The votes of each item divided by total votes = %)

Source: Accenture and China Enterprise Confederation Questionnaire Survey, May-August 2010

European and North American markets

Asia-Pacific emerging markets

Other emerging markets

Pacific developed markets (Japan, Australia and New Zealand)

The BRICs (Brazil, Russia and India)

Taiwan, Hong Kong and Macao

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raw materials. However, a sizable gap exists between them and multinational corporations with respect to market share, technologies, innovation capabilities and high-end talent. Chinese enterprises generally have an edge over their counterparts in other developing countries in terms of capital, R&D and technologies, but lag behind some of them when it comes to volumes of natural resources commanded, such as land, forests and oil. Although emerging market countries have achieved rapid economic growth, the drivers behind each nation’s growth are unique. Globalizing Chinese enterprises should make geographical choices on the basis of their target industries, capital reserve and human resources as well as the comparative advantages offered by potential countries and regions in which to do business.

In our research, we have broken down the global market into the following components:

• European and North American developed markets

• Asia-Pacific developed markets (Japan, Australia and New Zealand)

• Taiwan, Hong Kong and Macao

• the BRIC countries (Brazil, Russia, India and China)

• the Asia-Pacific emerging markets

• other emerging markets

According to our surveys, the Asia-Pacific emerging markets are the most favored by Chinese enterprises, with 23 percent of the enterprises targeting these markets as the prime locations for their overseas investments (See Figure 11). These findings coincide with related Chinese official statistics, which suggest that in 2008 Asia accounted for a remarkable 78 percent of China’s total overseas investments. Chinese enterprises prefer these Asia-Pacific countries and regions for two main reasons:

• China’s geographical proximity to them and affinity with them historically, culturally and ideologically. For example, these countries and regions have long served as markets for China’s exports.

• Rapid pace of industrialization, high per-capita income and large markets. The stable macro-economic environment

in these countries and regions provides assurance of returns on Chinese enterprises’ investments.

Roughly 20 percent of the Chinese enterprises that responded to our survey preferred the European and North American developed markets second to the Asia-Pacific emerging markets. These markets have high levels of economic development, a large capacity for outside investments, an outstanding investment environment, highly developed transportation and communication infrastructure, and stable market regulations, legal systems and societies. These countries also offer a huge consumer market as well as high levels of division of labor and high market differentiation. In addition, they are traditionally leaders of global technological innovation and originators of high-tech industries, such as biomedical engineering, material technologies, aeronautic and space technologies and microelectronics. Therefore, by investing in Europe and North America, a Chinese enterprise not only keeps in close touch with international market trends and regulatory standards, but also stays up to date on the latest developments in technologies and products.

19.2%

17.4%

15.6%

14.5%

14.4%

3.0%

0.9%

0.8%

0.7%

Figure 12 Considerations in selecting target countries for investments(Select three items in order of importance: The most important=0.5, less important=0.3, the least important=0.2. Score of each item divided total score=%)

Source: Accenture and China Enterprise Confederation Questionnaire Survey, May-August 2010

The enterprise’s current strategic expectations

The enterprise’s industrial characteristics

Capacity of the target country’s market

The target country’s infrastructure and natural resources

Policy support of the Chinese government

The target country’s legal and policy environment

Labor cost

Language barrier

Others

Culture and social system

18.6%

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Countries that traditionally have not attracted much foreign investment from China, such as those in Africa and Latin America, have recently experienced dramatic improvements in their investment environment. Thus they are seeing more interest from globalizing Chinese enterprises.

Consider Africa. In 2008, Africa accounted for 9.8 percent of China’s aggregate overseas investments, up from just 3.2 percent in 2004. In 2002-2008, Africa ranked second in the world in GDP growth. (Thirteen African countries surpassed China in terms of average per capita GDP, and 22 surpassed India in the same measure.) Africa is the second most populous continent in the world, with rapid increases in consumption levels. The rising middle class is boosting consumption of services, which account for 40 percent of GDP. Accelerated urbanization has created more concentrated and affluent markets. Also, regional economic organizations and trade agreements have facilitated international trade. Africa is blessed with rich natural resources such as minerals, fresh water, forestry, arable land and renewable resources—a key advantage in a world characterized by increasingly severe resource shortages. Thanks to this advantage, Africa remains a magnet for investors from China and India. With the strengthening of education in Africa, the quality of labor is also improving, and labor cost is around half that of Central Asia, Latin America and Eastern Europe. Market liberalization reforms have accelerated free movement of capital, and strengthened regulation has improved capital market stability, efficiency and maturity. A thriving capital market is a boon to internal and external trade. In addition, innovative technologies are becoming prevalent in Africa’s mobile communication sector and increasingly in healthcare and agriculture, two sectors that were already presenting a market for these technologies. Last but not least, infrastructure in Africa has seen significant improvements.53

The Latin American countries of Brazil, Mexico, Argentina, Colombia, Chile and Peru possess considerable potential for growth and therefore have also begun attracting external investment. With a stable social and macroeconomic environment and increasing government investment in infrastructure development, these countries are enjoying stable economic growth and

vigorous domestic markets. They are rich in mineral resources, oil, agriculture and renewable resources. They also have a growing young labor force; their human capital is sufficient to sustain economic growth for 20 years. The middle class in these nations is expanding as well. (In 2008, Brazil’s middle class accounted for 46 percent of incomes.54) Brazilian media anticipated China to be the biggest investor in the country in 2010.

For an enterprise deciding where to invest, an in-depth analysis of a potential host country’s industrial characteristics is critical. For instance, the company should define its current strategic expectations, ascertain its alignment with the local industry to invest in and investigate the local opportunities, threats and challenges. Our survey respondents paid almost equal attention to their own characteristics and strategic planning; target countries’ market capacity, infrastructure and resources; and the local legal and policy environment. It is striking that labor cost, language, culture and social system are secondary considerations for globalizing enterprises, although these are often cited and highlighted (See Figure 12).

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4. What means of investment will we use?Ideal ways of investment are those that are consistent with the enterprise’s characteristics, needs and competitive strengths. In the past, China stimulated economic development by vigorously attracting foreign investment and encouraging companies to export. Many enterprises went global by engaging in exports, at least in the initial stage of their globalization effort. Today, however, most enterprises choose to globalize by making merger and acquisition deals or by joining hands with local companies.55 Specifically, these enterprises invest overseas by establishing independent production facilities, forming joint or cooperative ventures or strategic alliances with local partners, making equity investments, conducting mergers and acquisitions and so forth. Exports, mergers and acquisitions and joint ventures constitute the most popular means of investment (See Figure 13). Notably, establishing wholly owned companies is not preferred, perhaps because wholly owned businesses take more time to set up and hence are slow in going to market. Moreover, “going it alone” is disadvantageous because no partners are there to share risk.

Our surveys show that the overriding consideration of Chinese enterprises deciding where to invest is how to avoid the host country’s market risks. This reveals a widespread desire for assurance and stability. Their second consideration is whether they own a strong international management team, which strongly influences decisions about how to invest (See Figure 14).

Some Chinese enterprises we interviewed shared their views and experiences regarding their globalization practices. For example:

Organic growth is the best way for incremental globalizationBy establishing green-field production facilities independently or in partnership with local companies, an enterprise can expand into the global market through organic growth. This is a relatively slow approach, but the firm is able to manage its pace and control risks. Such approaches to investment ensure greater preferential treatment from local governments because the investing company helps to create jobs and inject capital into the local economy. In

Figure 13 Chinese companies’ preferred overseas investments approaches(Select two items. The votes of each item divided by total votes=%)

Source: Accenture and China Enterprise Confederation Questionnaire Survey, May-August 2010

Establishing exclusively owned companies8%

Becoming listed (IPO)10%

Shareholding in local companies13%

Establishing joint ventures17%

Mergers and acquisitions23%

Exports29%

34.0%

13.8%

13.7%

9.9%

6.0%

3.3%

0.7%

Figure 14 Factors weighed in Chinese firms’ investment decisions (Select three items in order of importance: The most important=0.5, less important=0.3, the least important=0.2. Score of each item divided by total scores=%)

Existence of a strong internationalmanagement team

Market risks

Political risks

Capabilities for cultural managementand resource integration

Capabilities for cultural managementand resource integration

Capabilities for cultural managementand resource integration

Prior experience in globalization

Others

18.7%

Source: Accenture and China Enterprise Confederation Questionnaire Survey, May-August 2010

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“If we had not had a grand vision and gone out, we would still be small. Like a fish in a small pond, we would never grow big. So we must go out.”60

Zhang Ruimin, CEO, Haier Group Company

addition, the investing company avoids the complexities of integration that come with mergers and acquisitions. In the words of one senior executive who spoke with us, this is an issue of new business versus existing business. New business means injecting additional resources into local communities and would be welcomed by local governments. Existing business involves change of ownership, replacement of workers without necessarily creating new jobs. Indeed, the gradual approach gives the management team time to learn and gives the company an opportunity to improve its competitiveness in a controllable way. It also ensures the alignment of internal management systems and culture.56 A number of leading Chinese enterprises have succeeded through organic growth, including the Haier Group, Trend Micro, Huawei and ZTE.

However, a major drawback of this investment approach is that research and development ae often slow to develop and faces numerous hurdles. For instance, the Sany Group decided to found its European R&D center at the same time it planned on constructing its factory in Germany. (See “Case study: Sany and Zoomlion: building up one’s own business versus making M&A deals”) The company expects that establishing the center will be a long, drawn-out process because of the conservative German culture and the relatively high R&D costs.

M&A drives growth quickly, but watch out for post-merger integration challengesThrough M&A—the purchasing of a targeted company’s equity or assets with cash or securities—a company obtains ownership rights to the acquired entity’s whole or partial assets, or controlling power over the acquired firm. M&A is a common approach to globalization. World Investment Report 2009 suggests that 36 percent of global foreign direct investment (FDI) in 2008 was accomplished through mergers and acquisitions.57 According to Accenture research, since 2008, Chinese enterprises

have achieved approximately 70 percent of their M&A deals in the European and North American markets and the remaining 30 percent or so in Asia, Africa and Latin America. Most Chinese acquirers favor companies in developed markets because these deals enable them to acquire advanced technologies and managerial expertise as well as expand their market networks. For example, China’s Pacific Century Motors (PCM) recently reached an agreement with General Motors to acquire GM’s auto-parts business, Nexteer Automotive. PCM’s goal is to boost its capability in steering and driveline systems. The single largest Chinese investment in a US-based automotive supplier and in the global automotive supplier industry, the deal was completed in November 2010, making PCM the official owner of Nexteer Automotive and opening new channels for growth in China.58

Mergers and acquisitions yield instant results in the acquisition of advanced technologies, brands and an international team. However, post-merger integration (PMI), which entails changes in organizational structures, people, processes, technologies and corporate cultures, is often daunting. The success rate of such integration has been proven discouraging. Chinese enterprises are zealous about mergers and acquisitions. But according to a joint study by Accenture and The Economist Intelligence Unit, these companies are not well prepared for these activities. As much as 82 percent of Chinese senior managers believe that Chinese enterprises lack experience in managing overseas investments.

In implementing its M&A strategy, a firm should clearly analyze pre-merger risks and evaluate post-merger investment needs. At the same time, it should have a clear idea about its own capabilities, strengths and weaknesses. The success of a merger or acquisition depends on the generation of cost and revenue synergies. Therefore, an acquirer should think twice about signing a deal if executives question whether the expected synergies will result. Also, executives should ask whether the technology that would be

acquired through the M&A deal will quickly become obsolete. If the answer is yes, the deal may not be wise.

Few Chinese enterprises possess a dedicated team to manage overseas mergers and acquisitions. Usually, they hire investment bankers for these efforts. As a consequence, they tend to be overly focused on deal making and ill prepared for the range of issues that arise during the PMI process. In addition to drawing on assistance from intermediary organizations in making M&A decisions, Chinese companies must also build up their own M&A capabilities if they hope to make wise choices.59

Strategic alliances can create win-win outcomesShared goals and complementary strengths form the basis on which two enterprises forge a strategic alliance. Such an alliance is a long-term arrangement between two enterprises to cooperate in the value chain and is an ideal choice for maximizing mutual benefits and increasing competitiveness. A globalizing enterprise can enter the overseas market quickly by forming an international alliance, and the arrangement’s success depends largely on the quality of the relationship with the international partner. Long-term mutual trust and coordination are essential. The two sides can strengthen technological innovation and improve managerial capabilities by exchanging technologies and personnel.

Each approach to globalization has its own characteristics and advantages. An enterprise ought to select a path or paths to globalization in accordance with its strategic requirements and goals and its particular stage of development. For instance, Sinochem relies on M&A for its core businesses to strengthen its competitive position in key technology, distribution channels and branding. For non-core businesses, it forms strategic alliances.

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Case study

Sany and Zoomlion: Building up one’s own business versus making M&A deals

The Sany Heavy Industrial Group (Sany) and the Zoomlion Heavy Industrial Science & Technology Development Company (Zoomlion), both based in Changsha, capital of Hunan Province, are well- known engineering machinery manufacturers. The former ranked 266th and the latter 236th on the list of China’s top 500 enterprises in 2009.61

With the continuous expansion of China’s engineering machinery manufacturing industry and rapid increases in the number of overseas construction projects contracted by Chinese companies, both companies have embarked on the road to globalization in R&D, manufacturing, sales and distribution, and services. Their businesses have now reached Italy, India, Brazil, the US, Germany and other countries, and their products are sold to more than 100 countries. Their income generated by overseas operations in 2009 declined significantly owing to the financial crisis. However, the Sany Group still brought home 1.46 billion yuan in such income, or roughly 9 percent of its overall income,62 and Zoomlion brought home 2.61 billion yuan, or about 13 percent of its overall income.63

Spotlight on SanyIn 2006, Sany ranked No. 1 in the world in sales of concrete pumps, surpassing Germany’s Putzmeister.64 Its globalization strategy emphasizes optimization of its value chain rather than exports; for example, the company seeks to overcome bottlenecks in its hydraulic technology through globalization activities. “Sany’s globalization begins with value chain optimization, instead of product export,” says Vice President He Zhenlin.65 Having weighed the pros and cons of mergers and acquisitions and establishing Sany’s own production facilities, executives decided to attach greater importance to the latter. By doing so, they have avoided the local cultural, managerial and legal pitfalls that might have come with M&A.

Sany selects target overseas markets on the basis of its own characteristics and capabilities, bearing in mind its supreme goal of value chain optimization. It has established production bases in the US, Germany and India, and is planning one in Brazil. The US is the world’s largest engineering machinery market and is home to giant engineering machinery manufacturers. By setting up a base in the US, Sany can secure adequate parts supply and learn advanced management

ideas. Germany enjoys advantages in industrial design, precision instruments manufacturing, technology, business processes and research and development. In the words of a senior manager at Sany, by establishing a plant in Germany, the company can “conquer the world’s heartland of engineering technologies.” Also, assembling products in Germany saves costs for selling to European clients.66 Sany’s concrete pump plant located near Cologne was scheduled to go into operation in early 2011.67 Sany has also made its way to India, attracted by the country’s vast market and sales channels. By establishing a presence in such an important emerging market, Sany can be close to clients and understand their needs better. Brazil is on a fast track for growth, but its tariff levels and transportation costs are relatively high. Therefore, setting up a factory within the country saves costs.

In addition, Sany has implemented domestic or global strategies in accordance with the characteristics and requirements of its value chain. For example, it takes both global and domestic approaches to research and development. Chinese engineers and their German colleagues work together

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closely, with the latter providing the conceptual framework and the former completing the functional designs. The company fosters collaboration between Chinese and German engineers in R&D and design by fully utilizing IT-enabled colloabration tools. Such interaction and communication is expected to save on research and development costs. In contrast, manufacturing (with the exception of precision devices) takes place in China since manufacturing costs there are a fraction of those in Germany. Finished products are then sent to Germany for assembly. In expanding its markets, Sany takes full advantage of existing sales channels to develop local and neighboring markets. In talent management, the company ensures that Chinese and foreign skilled workers team up to maximize technical diversity.

Spotlight on ZoomlionZoomlion, unlike Sany, strives for both internal growth and external expansion. Its notion of globalization consists of the dual elements of “diffusion” (the existence of multiple divisions/departments by product categories so that every product line receives the largest amount of attention) and “fusion” (formation of a transnational business division through overseas mergers and acquisitions which integrate the company’s global business and overseas companies in the same industry).

In September 2008, Zoomlion purchased Italy’s cement equipment manufacturer CIFA (the third-ranking brand in cement equipment in Europe). This acquisition represented a major act of “fusion” by the company. In purchasing CIFA, Zoomlion paid particular attention to reducing risks. The company had had business relations with CIFA, its supplier of components, since 2001. Therefore, executives were intimately familiar with CIFA’s business and management. CIFA was an 80-year-old, family-run business. It operated under capacity but had a strong research and development function and solid sales networks in Europe, North Africa and the Middle East. Struggling with the impact of the global financial crisis, some members of the family decided to sell the business, and its management team wanted Zoomlion to be the buyer. Zoomlion made the acquisition jointly with Goldman Sachs, Mandarin Capital Partners and the Chinese private equity firm Hony Capital, with Zoomlion holding 60 percent of the stake and its partners the remaining 40 percent. Through this

move, the company not only diffused financial risks but also realized greater market expansion.68 The first two quarters of 2009 were difficult, but things began to improve in the second half of the year.

The completion of an M&A deal is only the first step. Whether a deal ultimately succeeds depends on how effectively executives handle the post-merger integration process. Zoomlion achieved seamless integration with CIFA by applying a series of practices. For example, after the acquisition, Zoomlion established a joint committee to oversee the new company’s business and facilitate cross-border and cross-cultural cooperation and communication. The committee comprises the Zoomlion Chairman, the CIFA Chairman and senior managers from the investment partners. Zoomlion also merged CIFA with its domestic cement division to achieve operational synergies. The Chairman of CIFA retained his position and was concurrently appointed Vice President of Zoomlion. The former CIFA CFO served as CEO. CIFA’s new CFO was named by Zoomlion and stationed in Milan. Zoomlion also named two deputy general managers. These moves created an international management team. At the same time, the functional departments in charge of strategy, markets, research and development and sales were established. The new company has both Chinese and Italian headquarters.

Zoomlion takes an integrated approach to research and development, fully absorbing and using advanced Italian technologies. It has founded its R&D center in Italy. Chinese and Italian engineers work jointly to develop new products. R&D accounts for 3-5 percent of Zoomlion’s overall investments.

Shortly after the acquisition, Zoomlion came up with the innovative “factory within factory” model for fully utilizing CIFA’s advanced technologies and managerial skills. It has “transplanted” to China the original CIFA manufacturing processes, equipment and even personnel, so the Chinese side can learn from firsthand experience and replicate the mature operating model.

Zoomlion’s global R&D center for cement machinery and market center have been relocated to Milan, while strategic planning, procurements and manufacturing are based in Changsha. These centers support each other while handling their unique responsibilities.

Zoomlion is now making efforts to acquire and consolidate global markets for specialized cement machinery. In the process, Zoomlion and CIFA mutually back each other in different regions. Zoomlion has now secured its No. 1 position in the world in cement machinery.

In sum, the Sany Group and the Zoomlion Group have taken different approaches to raising their global profile. The former focuses on internal growth by building its own plants and adopting business models that are in line with its own requirements and capabilities. The latter relies heavily on acquiring the assets of its international counterparts and fully taking advantage of their capabilities and managerial experience.

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5. Different industries require different strategic choicesThe type of industry in which an enterprise competes influences its strategic choices regarding globalization:

Natural resource-based industries are characterized by high risk, high capital intensiveness and use of advanced technologies. Therefore, many transnational companies that compete in these industries and that originate in emerging market countries are state-owned enterprises. In trying to improve their competitiveness and meet the country’s strategic needs, Chinese natural resource companies should develop their overseas resources and secure supply for domestic consumption. Distribution of natural resources is a primary determinant of these companies’ geographical choices. They acquire overseas natural resources mainly through mergers and acquisitions. By April 2009, China’s National Development and Reform Commission had approved 26 overseas M&A projects in energy resources, each involving over US$300 million, with a total investment of US$45.8 billion (78 percent of the overall investments of non-financial overseas M&A projects of US$10 million and above).69 A number of large enterprises in these industries choose to globalize through a combination of M&A, international alliances and joint ventures or collaborations, depending on their value chain and strategic requirements.

In the early days, most Chinese mechanical and communication equipment manufactures took the OEM approach in participating in global competition. They possessed considerable processing capacities but were less strong in R&D and innovation. In the initial stage of implementing the “going out” strategy, these enterprises expanded overseas mainly by relying on exports. More of these enterprises have realized that only through enhancing their operational efficiency and innovation capabilities can they own prestigious global brands and independent intellectual property rights. Therefore, some have chosen to establish overseas production bases or R&D centers to access high-tech talent and information technologies.70 Huawei, for instance, recently established a number of domestic and overseas research institutes, allowing R&D to boost market

expansion. Its annual inputs into these efforts consistently account for over 10 percent of its revenues. At the same time, Huawei introduces new products at lower costs than its competitors do, which gives it a competitive edge as well as satisfactory financial returns. In all, the company has established a sustainable competitive advantage by relying on low-cost and high-quality R&D efforts.

Chinese enterprises in traditional mature industries, such as consumer goods, home appliances and personal computers, have reached advanced international levels in technology use and product quality. Nevertheless, they lag behind leading multinationals in profitability, which weakens their research and development capability. Also, they are at a significant disadvantage when it comes to brands and sales channels. The Haier Group, for example, has not been able to build up its R&D capabilities in the highly competitive global market, even if it leads its domestic competitors in R&D and patents granted. Chinese home appliances and consumer goods companies should acquire advanced technologies, managerial expertise and sales channels by mergers and acquisitions or the construction of production facilities, depending on their stage of development and strategic needs. For instance, in 2009, the Suning Electrical Appliances Company paid RMB57 million for 27.36 percent of the shares of Japan’s Laox, thereby becoming its biggest shareholder. Through the purchase, which was Suning’s first step toward globalization, the company aimed to acquire the managerial expertise and approaches of Japanese chain stores.71

Service-based businesses, such as those in retail, financial services, catering, tourism, advertising, rentals and intermediary services, globalize to achieve economies of scale and improve their international competitiveness. A major challenge they encounter in going global is the coordination of human resources, materials and processes. Our research has shown that transportation and delivery services enterprises strengthen their global operational networks by establishing supply chains in Hong Kong, Taiwan and Macao. Chinese financial service enterprises seek overseas expansion mainly through mergers and acquisitions and establishment of facilities in foreign countries. For example, in 2008, the

Ping’an Insurance Company purchased 50 percent of the shares of the asset management arm of Fortis to establish its asset management business in Europe and speed up its QDII investment product design.72 As more Chinese enterprises have entered the global stage, global services provided by Chinese banks are much in demand.73 The Industrial and Commercial Bank of China has recently renamed the Bank of East Asia in Canada, in which it has a controlling stake, as the Industrial and Commercial Bank of China (Canada). ICBC plans to open a branch in Russia, and its application to establish offices in Dubai and Doha have been approved.

Our conclusion so far is that Chinese enterprises’ globalization strategies are shaped by their aims, capabilities and industry characteristics. Therefore, these strategies differ from enterprise to enterprise based on variations in these three factors. Those driven to globalize by the pressure for survival emphasize the expansion of overseas sales channels, investments in new factories and use of local low-cost advantages. Those eager to expand the scope of their development focus on capturing overseas markets or entering new lines of business through M&A or through building factories in other countries. Others, however, seek to optimize their operations and extend their value chain by going global. For example, they explore ways to transcend low-end manufacturing, improve R&D capabilities and acquire state-of-the-art technologies and managerial expertise at minimal cost. Many seasoned Chinese enterprises aim to transform themselves into global multinationals. These companies can expand globally through a variety of means, such as registering global brands, localizing operations, engaging in mergers and acquisitions and establishing overseas factories.

Enterprises that are mulling over whether and how to globalize can make strategic choices in accordance with their aims and characteristics (See Figure 15 and “Case study: China Construction and Anhui Construction: expanding development in the global market.”).

Figure 15 Strategic choices for globalization

Strategic choices Types of industry

Dealing with pressure for survival

Expanding scope of development

Optimizing operations and moving up the value chain

Becoming a globalized company

Resource based industries

Mechanical and communication equipment manufacturing industries

Consumer goods and home appliances industries

Service industries

Geographical choice (where) Asia-Pacific emerging markets; Europe and North America; Asia-Pacific developed markets; BRICs; other emerging markets; Taiwan, Hong Kong and Macao

Choice of ways of investment (how) Wholly-owned greenfield; JV greenfield; JV or cooperation with existing partners; strategic alliances; equity investment; M&A

Objectives of globalization

Choice of businesses (what) Duplicating existing businesses Expanding the value chain (Design, distribution, production, marketing, R&D) Entering new businesses

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Case study

China Construction and Anhui Construction: expanding development in the global market

Any enterprise can make globalization serve its needs and wants, whether the company is small or large, state owned or privately owned, national or local, or a manufacturer or service provider.

China Construction Engineering Corporation was established in 1982, but its origins can be traced back to 1952. That year, the central government established the Ministry of Construction, which oversaw six construction bureaus. China Construction is China’s largest construction enterprise as well as the largest international contractor, ranking first among the world’s residential housing construction companies.74 Its overseas revenues in 2009 climbed 18.6 percent to top 29.8 billion yuan, or 11.5 percent of its total revenue.75 Anhui Construction Group Co., Ltd. was established in 1996, with its origins also dating back to 1952. Since 2003, on average, the company’s overall revenue, profits and overseas revenues have increased 45 percent, 80 percent and 92 percent, respectively, per annum. Currently, its overseas business accounts for 20-25 percent of its overall revenue.76

Spotlight on China ConstructionChina Construction started on its globalization journey in 1978. As a centrally owned enterprise, it initially focused on labor exports for the purpose of generating foreign exchange. Then, its business evolved to include overseas subcontracting and contracting. From 1978 to 2000, the company undertook more than 5,000 overseas contracting projects, which made up 57 percent of the country’s total projects. It currently does business in 28 countries and regions, with a workforce of more than 6,000.77

Recently, China Construction has restructured its overseas business by shifting focus toward infrastructure and industrial areas. It has submitted the winning bids for a number of road and bridge construction projects in the US, Algeria and the Congo, such as the Haier Refrigerator Factory in the US, New York subway stations and bridges and some schools in South Carolina. Infrastructure construction accounts for 37 percent of the total contracted value of its overseas business.

Meanwhile, the company has made breakthroughs in managerial and marketing approaches. As a prominent example, it was awarded the contract for Revel Atlantic City through joining forces with the Export-Import Bank of China. While expanding overseas, China Construction has nurtured a large team of talented managers with international experience. Young managers in their 30s oversee projects valued at hundreds of millions of dollars and involving tens of thousands of workers. In addition, the company has cooperated and allied with leading international contractors, specialized subcontractors and suppliers, creating a win-win competitive environment in global market development and resource allocation.

The company is now inclined toward the high-end markets and has penetrated into a number of regional markets including Hong Kong and Macao, Southeast Asia (mainly Singapore and Vietnam), North Africa (primarily Algeria), South Africa (mostly Botswana), North America (mainly the US) and the Gulf region in the Middle East (primarily the United Arab Emirates).78

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Spotlight on Anhui ConstructionAnhui Construction went global in 1982. Initially, its overseas business concentrated on the construction of Chinese embassies. These were small projects and did not constitute true “going out.” In recent years, competition in the domestic construction industry has intensified. The overseas construction business promises higher profitability, and deposits paid by proprietors in overseas markets prior to the start of construction reduces risks. These factors compelled Anhui Construction to seriously reconsider its globalization strategy. In 2002, the company resumed its globalization efforts on a different scale, defining a strategy of “concentrating on project contracting with labor and building material exports.”79 In executing the strategy, Anhui relied on its own efforts while collaborating with its peers. It went overseas by “building a ship” and “borrowing a ship,” so to speak. Later on, executives realized that labor exports entail bigger risks and management costs. Therefore, they reduced labor exports gradually. Currently, Anhui’s overseas business encompasses construction of embassies, projects for China’s foreign aid purposes and projects undertaken jointly with other centrally owned construction enterprises.

Anhui Construction has established a presence in nearly 30 countries and regions, where it has two branches, three management departments and more than 20 project departments. These entities involve more than 500 project managers and 3,000 construction workers. Executives have made the strategic decision to give up the European market, because it is tending toward saturation. (There is also the visa issue.) It now zeros in on the African, Middle East, ASEAN and Latin American markets, establishing one or two management departments in each host country.80

Spotlight on the overseas construction sectorThe overseas construction sector involves economic risks, standard risks, political risks and the risk of inadequate integration of resources.

• Economic risks include the legal issues concerning contracts and currency devaluations. These risks increase costs and management expenses.

• Standard risks include complexities introduced by construction standards that differ from Chinese standards. (North Africa, for instance, adopts French standards.) Such risks also include different construction norms and approval procedures.

• Political risks consist of political instability and frequent policy changes in host countries.

• Resource integration risks arise when Chinese construction companies lag behind multinational construction companies in terms of their ability to integrate global resources.

China Construction and Anhui Construction strive to control these risks in their overseas businesses. To do so, China Construction has consistently emphasized management. First, it has enhanced its risk management practices and controls institutional risks. Its overseas agencies (branches and management departments) are gradually evolving to become limited companies so that any mistakes made by one of them will not affect the others or hurt the entire company. Second, it stresses management based on law or rules. Third, it puts a premium on scientific decision making. For example, it has adopted centralized procurement processes and increased coordination in bidding and subcontracting to minimize risk.

Anhui Construction imposes strict risk control and assessments on overseas projects by applying four cardinal principles:

1. Cooperate with domestic and international companies to complement each other’s strengths and share risks. Take multiple approaches to international contracting, including overall contracting, subcontracting, alliances and outsourcing.

2. Mitigate cultural conflicts by, for example, requiring employees to respect local customs in countries such as Iran and Saudi Arabia.

3. Assess the host country’s payment abilities; the payment of deposits reduces risk of default.

4. Consider the relationship between China and the host country. Select countries that are on friendly terms with China, such as Algeria, Nigeria and Angola.

China’s construction service industry is edging toward its Japanese and Korean counterparts in terms of market share and scale. Nevertheless, it needs to augment its engineering, procurement and construction capabilities. Both China Construction and Anhui Construction must move up their value chain to achieve these goals. While Chinese construction companies single-mindedly focus on labor-intensive construction, their European and US counterparts are diverting rapidly into consulting services. For the two companies featured in this case study, deepening globalization means development of capabilities in financing, design, procurement and project management.

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V. Global operating models

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1. What is a global operating model?A globalizing enterprise faces two major challenges: developing a global strategy and executing it. The strategy, formulated on the basis of the company’s competitive advantages, provides a clear direction. Execution puts the strategy into action through everyday operations and business processes—all delineated in the company’s global operating model. A sound strategy is worth little unless it is executed effectively.

The global operating model proposed by Accenture explores how a firm can operate its global business efficiently, taking into account the characteristics of its industry, the company’s capabilities and its globalization path.81 The model encompasses five core elements: leadership, talent, organizational structure, processes and technology, and performance metrics. The first two elements are viewed as “soft,” the latter three as “hard” (See Figure 16). In a successful global operating model, these five elements work in concert. Soft and hard elements are balanced. And the elements support the enterprise’s globalization strategy and local market

conditions. Successful businesses are willing and able to reconfigure their global operating model to adapt to major changes such as market shifts and the presence of new competitors.

To execute their globalization strategies, Chinese companies need to enhance their responsiveness to local environments and adjust their scale and operating models to suit diverse markets and accentuate the importance of customers. Toward these ends, enterprises may have to rely more on the “hard” operating-model elements—standardized processes, technologies and organizational structure. However, the “soft” elements of leadership and talent development are not to be ignored. In executing their globalization strategy, many Chinese companies take a hybrid approach—combining Western, Japanese and Chinese operating practices, especially in the fields of human resources and corporate culture.

The multi-polar world has presented new challenges and opportunities related to global customers, resources, talent, capital and innovation.82 As a consequence, Chinese enterprises have been ushered into a new era.

Globalization means the adoption of a unified global strategy and allocation of resources under the guidelines of this strategy in the context of a single global market. Business activities such as product design, procurement, production, distribution, sales, marketing and customer service all are guided by this global operation to maximize return on assets and investment. This unified execution of global strategy requires a far-sighted global vision as well as savvy use of local resources and an adequate market. A global vision enables a company to flexibly and quickly adjust its globalization strategy in response to changes in the global economic environment and the enterprise’s own strategic requirements.

Localized operations are key to a global strategy’s success. Hisense Group, for instance, hires numerous local managers and sales personnel to meet both the local markets’ needs and global standards for operations and management. The Wanxiang Group also uses local resources and establishes its market system with local support in many of the countries and regions in which it operates. The company sells its universal joints in the United States

Figure 16 Global operating model

Source: the Accenture Institute for High Performance, 2009

Global operating strategy

Elements of a global operating model

High performance

"Soft" elements "Hard“ elements

Target adjustment

Execution

People

Performance metrics

Leadership

Processes and technology

Organizational structure

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through the Rockwell International Corporation, and draws on the sales networks of Japan’s NTN Company and the United States’ GBC. In South America, it uses the entire sales network of Schaeffler, and in Europe it seeks out the personnel of GKN Driveline. In addition, Wanxiang has set up bonded warehouses in the US, the UK, Mexico and Brazil to meet customers’ time requirements and ensure top-quality service.83

Localizing their global operating models through such means helps Chinese enterprises establish their brands and capture local markets. It also enables them to fully leverage local comparative advantages to lower production costs, extend their value chain, reduce inventories as well as logistics costs, and provide individualized services. In addition, such models facilitate their efforts to master local advanced technologies and managerial expertise as well as improve their innovation capabilities.

In the sections that follow, we take a closer look at the elements of an effective global operating model.

1.1 LeadershipIt is vitally important that an enterprise’s core leadership team possesses a global vision and the capabilities for executing a globalization strategy. A strong senior leadership team is arguably the most important group in any organization. Through its leadership style, members’ diverse abilities and decision-making approaches, the team continuously influences the organization. An effective management team is capable of handling global operations and is committed to the enterprise’s globalization objectives. The team localizes managerial talent—cultivating managers from within the country in which the enterprise operates.

To build a strong leadership team with a global vision and the right capabilities, the enterprise should first define its leadership strategy, which depends on the company’s global business requirements and future development goals. The leadership strategy should align with and serve the company’s global operating strategy. The enterprise should also define its criteria for successful leadership. Respondents to our survey believe that a leader of a globalizing enterprise should possess a global vision and global way

of thinking. Interestingly, other more practical skills, such as English proficiency and an education received overseas, are considered far less important, according to our survey participants (See Figure 17).

40.8%

10.7%

10.5%

8.9%

6.9%

4.9%

1.1%

0.8%

0.4%

Figure 17 Qualities expected of globalizing enterprise leaders(Select three items in order of importance: most important=0.5, less important=0.3, lest important=0.2 Score of an item divided by total scores=percentage)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

14.9%

Understanding of the global economy and markets

Capability for setting strategic goals

Global vision, global way of thinking

Capability for integrating transnational resources

Capability for cross cultural management

Cross cultural communication

Capability for organizational innovation

Background of received an education overseas

English proficiency

Capability for data analysis and information for decision making

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Financing

56

44

38

30

28

27

26

23

1

Figure 18 Independent power of leaders in charge of global businesses(No restriction of the choice of items; the votes obtained are added together)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Day to day operations

Marketing, markets

Recruitments

Budgeting

Strategic decision making

Appointment/dismissal of senior manager

Investment decision making

Product development

Others

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• Senior managers at headquarters to take responsibility for overall planning as well as selection, cultivation and coordination of the first three types of managers. These senior managers constitute the most important type of talent.84

Recruiting and retaining qualified global talent are priorities for Chinese enterprises that are going global. An enterprise gains access to global talent through the following channels:

• Recruiting from external sources. An enterprise can quickly obtain talent this way, but integrating new recruits with existing employees takes time. Therefore, the company should consider how well these recruits fit with the corporate culture.

• Developing talent from within. Internally developed employees are more committed to the enterprise’s culture and values, and hence more attuned to its globalization requirements. Compared to externally recruited employees, they tend to be more dedicated to the company’s goals. However, it takes time to develop talent from within.

• Obtaining talent through mergers and acquisitions (M&A). This is a quick and effective way to bring in new expertise. However, it can take extensive effort and time for the acquired employees to play a constructive role in the new entity created during the post-merger integration process.

• Using consultants or cooperating with other intermediate firms. Compared to other methods, this one is less costly and more flexible.85

An enterprise should select a method for acquiring global talent that supports its globalization progress, management capabilities and current resources. However, internal development of talent should always receive serious consideration. If an organization relies on attracting employees from outside while neglecting development of its own talent from within, it will not survive intensifying global competition. CNPC, for example, balances development of internal and external talent. To meet its globalization requirements, the company has established an international talent training center that provides training in foreign language skills, managerial expertise, technologies and so on. At the same time, it vigorously introduces global talent into the organization.

The CEOs of the most successful Chinese enterprises have insight into their own organizations and the markets where their companies are operating. By drawing on this knowledge, they can make the right judgment calls regarding their global operations. They are charismatic and personally involved in formulating and approving globalization strategies. As a result, in many Chinese enterprises, the power to make decisions related to global business rests in the hands of the core leadership team. Those in charge of global business often handle daily operational issues as well. All of this indicates that globalization is given high priority in the enterprise. On the other hand, it also suggests that managers of global businesses are not yet part of the core team. When asked how much independent power the leader of a global business unit has, our survey respondents said that the two most common forms of power are sales and marketing, as well as daily operations (See Figure 18).

1.2 TalentAlmost all the enterprises responding to our survey considered international talent the most crucial determinant of success for their globalization strategy—and they see the shortage of such talent as a daunting challenge. Whoever wins talent wins the day, as the Chinese saying goes. Harvard Business School professor Christopher Bartlett and London Business School professor Sumantra Ghoshal point out that a transnational corporation needs four types of talent:

• Business managers to achieve global economies of scale and competitive advantage

• Regional managers to capture the local market demand and respond flexibly

• Functional managers to conduct transnational transfer of specialized knowledge and integrate the resources and capabilities of the countries in which the company operates

Localization of talents

27.9%

20.3%

10.2%

9.3%

6.1%

3.7%

Figure 19 Talent strategies for successful globalization(Select three items in order of importance: most important=0.5, less important=0.3, least important=0.2 Score of each item divided by total scores=percentage)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Training of global talents

Clear standards on the quality of talents

Incentive mechanisms for global talents

Encouraging Chinese employees to be stationed overseas for an extended period of time

Establishing a system by which employees work domestic and overseas shifts

22.6%

Increasing the proportion of foreigners or people with international experience in its senior management team

45

In 2009, as it expanded its overseas business, it signed employment contracts with 63 Chinese graduates studying in Russia and Azerbaijan, and introduced 27 Chinese graduates from Europe and North America.

M&A enables a company to take in a large number of new employees relatively quickly. For instance, Neusoft focuses more on human capital than on other types of assets in identifying and forging M&A deals. The employees of the acquired entities are usually software developers. Neusoft seeks to obtain high-end experts in the industry through M&A. The company had started by providing software outsourcing services for Japanese clients such as Sony, Toshiba and Alpine. Later, it purchased three Finnish software design companies, establishing a global service network connecting China, Japan and the US. Today, Neusoft is a strong competitor as a provider of industry solutions, product engineering solutions and related software products, platforms and services. As many as 6,000 of its 16,000 people engage in global software design and development.86 Talent it acquired through M&A has played an important role in its growth and success.

While trying to retain talent through attractive salaries, training in corporate values and other means, a globalizing enterprise should pay attention to localization of talent as well. The Wanxiang Group has accumulated an international talent pool by tapping local human resources and implementing a system of “domestic and overseas post rotation” for employees.87 Of the more than 50 people working for Wanxiang’s US branch, only two or three come from China; the rest are locals. By the end of 2009, more than 26,000 of the workers for CNPC’s overseas oil and gas cooperative project were locally sourced; in the Sudan and Kazakhstan, the company’s localization rate had reached 90 percent.

To manage talent in a globalizing enterprise, we suggest the following practices:

• Define an overall plan in accordance with the company’s talent requirements, deciding (for example) which functional departments should use local people, and which need globalized managing expertise.

• Increase the proportion of foreigners in the senior management team while also

building up a reserve of managers with global leadership skills.

• Establish exchange programs to provide employees with opportunities to work in different geographical locations, to promote communication and collaboration between employees from different cultural backgrounds.

• Set up forums for information and knowledge sharing and constructive discussions.

• Establish mechanisms for attracting and retaining global talent. Businesses located in developed countries should emphasize the adoption of local employment standards, while those located domestically in China should maintain their Chinese characteristics.

When asked about the talent required for successful globalization, our survey respondents cited a clear standard for talent, intensified development of global talents and an increase in the proportion of foreigners or people with international experience in top management teams as more important than other practices (See Figure 19).

1.3 Organizational structure

An efficient and flexible organizational structure—clearly defined departments and functions, along with coordination and reporting relations between them—also helps ensure successful globalization. A globalizing enterprise should take into account its strategic needs and competitive advantages in selecting an appropriate organizational structure. When an organization has grown to a certain size and expands globally, it needs to adopt a decentralized, agile and flexible structure. This calls for clear definition of roles and responsibilities among departments, reporting relationships and accountabilities. In a company that has global operations, a centralized management structure divorces the leadership team from local realities and markets, which leads to sluggish or blind decision making.88

Figure 20 Organizational structures for global business(Percent of respondents)

International business department33%

Export department29%

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Overseas division23%

Integration of overseas and domestic businesses15%

Figure 21 Models of overseas business management(Percent of respondents)

Management by geographical location 40%

Management by host country3%

Unified management28%

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Management by project 29%

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A globalizing enterprise should, in line with its strategic requirements and characteristics, establish a global coordination mechanism that includes uniform business standards and service philosophy, common goals and sufficient cooperation between the various departments, as well as a mechanism for resource sharing. As globalization progresses, the organizational structure should evolve. When Chinese companies first began to “go out,” they established an international business department or overseas business department as an independent entity. Our surveys indicate that most Chinese enterprises still do this; integration of domestic and overseas businesses is not the mainstream practice (See Figure 20). With the expansion of overseas business and the resulting increased interrelatedness between domestic and overseas operating environments, the original international business department will need to evolve into a matrix defined by functional departments, products, markets, geographical regions and customer groups. When the enterprise has fully globalized, it will have to distribute its resources globally, integrate its operations and extend its supply chain; it should no longer need an “international” department.

For instance, in 2009, Huawei began to implement a decentralized management structure. Its organizational matrix consists of strategy and sales/marketing, research and development, business units, market units, a delivery platform and supporting functions.89 However, many other Chinese enterprises lack such a structure to support and coordinate their global business. As they further expand overseas, their existing organizational arrangements become inadequate. Our surveys show that most enterprises based in China are inclined to manage their overseas business by geographical location rather than integrated management, a practice that may hinder their efforts to integrate their overseas business operations (See Figure 21).

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Department/product head 11%

CEO 34%

Vice CEO 55%

Figure 22 Managers of global business (Percent of respondents)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Figure 23 Decision making for global business (Percent of respondents)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

By the overseas business2%

By the headquarters 58%

Consultations by the headquarters and decision making by the overseas business 11%

Proposals by the overseas business to be decided by the headquarters 29%

For most of the enterprises responding to our surveys, the managers in charge of global businesses are typically the president/CEO or vice president, and global-business decisions are made at headquarters (See Figures 22 and 23). This indicates the importance these managers attach to global business. No matter who is in charge of global business, decisions regarding processes and principles should be made at headquarters and those regarding daily operations should be made regionally or locally.

A culturally diverse management team plays a particularly important role in a globalizing enterprise. Such a team facilitates management and cooperation. The enterprise should deploy to its local markets managers who understand local conditions and who have close ties to headquarters to execute localized operations. Therefore, the best managers should be dispatched to local markets, rather than staying at headquarters. Such a localized organizational structure helps enterprise leaders understand the different cultures and markets of the world. For instance, trust in distributors and wholesalers are critical in many immature or underdeveloped markets. Exercising integrated management of local distributors and wholesalers in the supply chain can help a company fully develop a market’s potential rather than achieving only limited market entry.90

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1.4 Technology and processesMultinational corporations pay close attention to acquiring advanced techniques and processes as a way to create competitive advantage. These technologies and processes can be used to manage a global business and to coordinate business activities in different locations. Processes include strategic planning, resource distribution, knowledge management, innovation management, customer relationship management and supply chain management. Modern information technologies are also critical for managing geographically dispersed global operations.92

Consider global supply chains. Instead of focusing their purchasing and sales activities in a particular country or market, globalized companies draw on suppliers from around the world to accomplish key business activities such as product design, sourcing, manufacturing, distribution, sales, marketing and product support. In recent years, multinational corporations have swiftly shifted manufacturing operations from their home countries to other countries. According to Accenture research, from 2005 to 2008, developed countries’ manufacturing costs in East Asia increased by more than 65 percent, and more notable jumps occurred in East Europe, South Asia and Central Asia (80 percent and 75 percent, respectively). However, globalization has also introduced instability into companies’ operations and tightened product lifecycles. Given shortages of energy, raw materials and skilled labor, a globalizing enterprise must continuously adjust its operating model, including finding new suppliers in other countries or extending its supply chain.93 All

“We should first of all establish an organizational structure and a professional management team which are consistent with international practices. Otherwise, we will not be able to compete in the high-end markets, let alone carry out mergers and acquisitions. A group of amateurs cannot operate a modern international company. Nor can they digest any “Western meals” they buy from the market.”91

Ren Zhengfei, CEO, Huawei Technology Co., Ltd.

31.5%

18.2%

10.5%

8.1%

6.8%

5.4%

4.7%

3.6%

3.0%

2.6%

2.5%

1.7%

1.1%

0.2%Training

Human resource management

Performance appraisals

Information system

Procurement

Supply chain and inventory management

Manufacturing

Customer service

Financial accounting

Knowledge management

Sales and channel management

Research and development

Branding and sales

Strategic planning and budgeting

Figure 24 Systems and processes to be unified globally(Select three items to be weighted by importance: most important=0.5, less important=0.3, least important=0.2 Score of an item divided by total score=percentage)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

this requires careful management of a global supply chain, so the company can recognize and flexibly cope with changes in supply and demand. By doing so, it minimizes operating costs, increases returns on assets and promotes profitability and market expansion.

An effective global operating model balances cross-border uniformity of systems and processes for such business activities as strategic planning and resource distribution with localization of systems and processes for human resource management and customer service. In response to the question in our survey, “What systems and processes should be unified globally?” 31 percent of the participating enterprises named

strategic planning and budgeting, 18 percent said branding and marketing, and 11 percent cited research and development (See Figure 24).

Globalized and localized processes can be combined in accordance with technological requirements, cost factors and distribution of markets. An enterprise can localize and globalize production of certain products. The Sany Group, for instance, manufactures key product components in Germany and other standard parts domestically in China, then assembles them in Germany.94 The Haier Group owns more than 5,000 sales outlets and more than 10,000 service centers overseas and therefore has globalized its sales function.

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Figure 25 Performance management promoting globalization

Value chain optimization linked to performance management

Driving individual and organizational performance to facilitate globalization

Source: Accenture

Globalization

Strategy and competitiveness

Optimization of the value chain

Organizational matrix

Execution

Balanced scorecard

Business unite performance metrics

Individuals performance metrics

“Whether an enterprise is truly global does not depend on how [many] assets it has acquired overseas. Instead, one should examine if the company possesses global brands, global operating capabilities, and if its management philosophy, organizational structure, human resources and corporate culture are all globalized.”95

Liu Jiren, President of Neusoft

1.5 Performance metrics

Effective performance metrics ensure successful management of an enterprise’s global business. A performance evaluation system should be directly linked to the globalization process and therefore facilitate coordination of various global business priorities. When a company establishes the right performance metrics, internal and external activities work in concert and thus support the development of new products or services. According to Accenture research, to achieve high performance, a globalizing enterprise should set clear strategic goals and a roadmap, establish an organizational structure and business processes on that basis and define a detailed execution plan to promote its globalization process. Metrics assess, incentivize and manage the performance of the organization overall as well as employees and thus improve the enterprise’s value-creation process. Effective performance management links the organization’s strategic priorities and execution plans to different levels within the organization, from the top management team down to individual employees. By linking business requirements to organizations and individuals, the right metrics drive performance, thereby accelerating globalization (See Figure 25).

The establishment of key performance indicators is crucial for the implementation of a performance management system. A company’s senior management team should define financial and nonfinancial indicators for assessing business processes, employee quality and leadership skills. Many multinational corporations adopt the balanced scorecard methodology for performance management. The balanced scorecard enables every individual in the organization to understand how his or her performance and decisions influence the entire organization. Through this

approach, the organization can define measurable goals, gain companywide consensus on their importance and establish accountability for achieving the goals.

The top management team should consider how to evaluate performance of different business units across various regions, because performance evaluation influences employees’ work priorities and orientation. Evaluation criteria usually include profitability, costs and other areas (such as global market share, speed of new product launches on the global market and the number and profitability of new products). Evaluation criteria should communicate clearly defined priorities; be based on particular organizations’ key roles, responsibilities and goals; be consistent across departments; and aim to strengthen the entire organization’s competitive position.

As Chinese enterprises have continued down the path of globalization, they have realized that a performance evaluation system plays an indispensible role in improving management of their global business. This is particularly the case for companies involved in overseas M&As. Management of the merged or acquired company through strategic planning, goal setting and performance appraisals has proven effective for addressing challenges that arise during the post-merger integration process (See

“Case study: Lenovo: a new chapter in global operation”).

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Case study

Lenovo: a new chapter in global operation

In 2005, with an eye toward transforming itself from a Chinese company to a global player, Lenovo purchased IBM’s PC business and thereby acquired its ThinkPad series PC brand, technologies and global operations team. From a strategic point of view, it was the right move, considering Lenovo’s need to accelerate its pace of growth in the global market, and the changing situation in the global PC market. Understanding new trends in the global PC market and new sources of profitability, as well as going global, had been key to the company’s sustainable development.96 Undeniably, Lenovo faced a difficult test in managing its global operations following the acquisition. It had to integrate management models and organizational structures, as well as manage the merging of workforces hailing from two different cultures.

Realizing the importance of integrating organizational structures and building an international management team, Lenovo started by introducing international management practices into existing domestic management models. To integrate senior executives of Western and Eastern cultural backgrounds and ensure sufficient international elements

in the core management team, it established an executive committee comprising 14 senior executives. Eight of these executives had overseas backgrounds, including four former IBM executives, one former Dell executive and one former Microsoft executive.97 Besides Lenovo’s original management team and managers from IBM, the company brought in third-party management talent. No matter how busy they are, members of the executive committee meet periodically for two to three days every month to discuss key issues in strategy and operations in order to ensure that communication is smooth and strategy consistent.98 The management teams below the executive committee allow their members to shift between different geographical locations and markets.

Such practices have contributed to Lenovo’s emergence as a global company. In terms of organization and management style, today’s Lenovo (and the IBM PC of old) differs markedly from yesterday’s. The new Lenovo combines the strengths of the formerly separate organizations.

Most multinational corporations achieve global expansion by moving from mature markets to newly emerging markets. However, Lenovo, founded in the world’s largest emerging market, has taken the opposite approach—expanding into other emerging markets first, and then pushing into the mature market. Emerging markets experience the fastest growth in PC sales in the world and therefore have strategic importance in increasing Lenovo’s market share. On the other hand, for products that are deeply rooted in mature markets, including the ThinkPad PCs, the company continues with their expansion in these markets while pushing them into the emerging markets. Viewing the market from a global perspective and adopting different strategies for different products and regions demonstrates Lenovo’s unique globalization approach. Because Lenovo carefully maintains the positive brand image of the ThinkPad series, it has not experienced the negative impact of “Made in China” in its European and North American markets. For its most competitive “Idea” and “Think” lines of laptop products, Lenovo adopts a clearly defined strategy of balancing and combining the products’ respective business models to provide the best

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offerings. At the same time, Lenovo combines the advantages of its erstwhile

“deal based” sales and marketing approach and IBM’s “relationship based” approach to increase sales in different markets. This practice played an important role in helping the company survive the global financial crisis that struck in 2008.

Lenovo is committed to establishing a unique, outstanding global corporate culture. For any entity formed through a merger or acquisition, particularly a cross-border M&A deal, it takes time and effort to soften the impact of cultural differences and the differences between professional managers and entrepreneurs. Wherever Lenovo operates in the world, the company sticks unswervingly to its cultural values, which include “keeping promises and trying our best” and “putting individuals in the first place.”99 These seemingly simple statements reveal a long-term view, a commitment to strategy formulation and execution, and the belief that employee are valuable assets. Lenovo further communicated its values by launching its “Cultural Day” activities in China, West Europe and North America in 2010, announcing its new Lenovo Way:

“Plan, Prioritize, Perform, and Progress.”100 In endeavoring to become a world-class global company,101 Lenovo is committed to bringing together different cultures, fostering entrepreneurship and providing world-class products and services.

In expanding globally, Lenovo has consistently attached importance to the domestic market, which, according to a UBS report, accounts for 45 percent of its profits from sales worldwide.102 As a point on its global innovation “triangle,” the company has established the Beijing R&D Center. The other two points are innovation parks in Tokyo, Japan, and in North Carolina, in the United States. Most of Lenovo’s suppliers are located in the Asia-Pacific region, especially China, where labor costs remain relatively low. Low-cost manufacturing in China is the basis for the company’s global expansion.103 More important, the huge Chinese PC market and maturing consumers provide incentive for Lenovo to develop new products and a reference point for launching fresh offerings into other emerging markets as well as mature markets. In terms of regional strategy, Lenovo has integrated the Chinese market into its global market

system. The Chinese Lenovo has turned into a global Lenovo.

In 2008, Lenovo struggled with the impact of the worldwide financial crisis and complexities in its operations following the merger deal. However, its performance during the 2009-2010 fiscal year markedly improved, thanks to organizational restructuring, improved business processes and re-establishment of the company’s cultural values. By the end of March 2010, Lenovo had generated US$129 million in profits after having sustained losses for several years, surpassing its leading competitors in profit growth.104 In releasing Lenovo’s 2009-2010 financial report, Liu Chuanzhi, chairman of the board, remarked, “In the past year Lenovo has demonstrated its ability to overcome difficulties. The financial performance has come as a result of correct strategies, technological innovations and an excellent global culture.”105

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2. A global company’s corporate culture must balance global vision with local perspectivesAn enterprise’s culture runs through its leadership, talent, organizational structure, processes and technologies, and performance metrics—including how these elements interact. Corporate culture therefore serves as a kind of infrastructure that enables and guides day-to-day operations. A corporate culture with a global vision is like a strong adhesive, bonding all elements of the operation together and creating synergy. The experience of successful multinational corporations has demonstrated the indispensable role that a comprehensive global corporate culture plays in global operations. Just as Harvard Business School professor Christopher Bartlett and London Business School professor Sumantra Ghoshal point out, changes in tangible aspects of a company are not sufficient for success; global enterprises must also actively shape employees’ values and behavior.106 A corporate culture with a global vision represents a globalizing enterprise’s capability for sustainable development and a manifestation of its maturity.

A global enterprise’s culture has to address human beings’ cultural differences and balance the company’s global vision with local perspectives—because value is created in local markets. So the root of globalization is in localization, whereby the company maintains its vitality. While the enterprise follows a globally consistent strategic mindset and operating model, it should also adjust to local cultures and leverage their positive components. Of 900 senior managers surveyed by Accenture, almost half believed that identification with the local culture was the most important thing for a globalizing enterprise, and 44 percent stressed the importance of understanding local customers and ways of doing business. A widely accepted corporate culture includes tangible elements such as a unified corporate identity system and brand images, as well as intangible elements such as value systems, service concepts and cultural networks.

Many Chinese enterprises have made successful attempts in this respect. The Wanxiang Group, for example, believes in “thinking globally and acting locally,”

tailoring operations related to marketing, management, financing and recruitment to local markets while maintaining a firm global vision. The Haier Group is committed to developing a corporate culture built on local cultures and creating “globalized local brands.”

Accenture research suggests that the culture of a high-performance global enterprise possesses five distinguishing characteristics, all of which help to balance globalization and localization:

A balance between the desire to develop new markets and actual capability for execution A global enterprise should fully consider local realities and gauge the viability of its business expansion plan. Walmart, for example, had originally intended to expand globally. It later realized that it could implement its low-price strategy much better in developing countries such as Mexico and China than in Japan or South Korea.

Balanced development and management of talentA global enterprise should attract talent at intermediate and senior levels globally and treat them equally. It should also respect cultural diversity and encourage employees to take initiative based on their cultural backgrounds. With a free flow of knowledge globally, employees develop a mindset of learning and cooperation and strengthen their career development opportunities. The company thus maximizes the advantages embodied in its global talent. Successful global companies treat talent management as the way to grow a leadership team that possesses global experience and vision. They also foster an open learning environment for employees and instill in them a global vision for professional development. HSBC, for example, believes in “global finance and local wisdom”; it is committed to developing a leadership team with global experience, and it rewards outstanding employees with opportunities to work in different countries. In addition, a global corporate culture promotes shared values among employees. For instance, Marriott carries out its “care for partnerships” idea in all its hotels worldwide. In East Europe, Marriott employees are generally skeptical about the management, and the company aims to obtain their trust and cultivate in them a sense of belonging. In Asia, on the other hand, the concept of decentralization is weak and the company encourages employees to make decisions by themselves.

Sustained innovationInnovation requires free flows of knowledge and ideas. However, the various markets, customers and labor that a global enterprise deals with hinder knowledge flows and consequently pose a challenge to innovation. In response, the enterprise should maintain an open, flexible organizational structure, and encourage innovation in all its global branches. For instance, Marriott facilitates internal knowledge flows through informal and formal channels. One channel is the quarterly internal global forum, which brings together managers from branches worldwide to share discoveries in different markets. The forum heightens managers’ awareness of the need to innovate in the global and local markets.

Use of information technology as a strategic assetInformation technology is critical for ensuring satisfactory global performance. This is especially true for a global enterprise that operates over long distances and encounters language barriers and cultural differences every day. Consider Mexico’s CEMEX, which sells a commoditized product. The company applies IT technologies such as GPS and forecasting technology to significantly reduce its costs in developing new markets and gaining a competitive advantage in most newly emerging markets.

Selective performance metricsA global enterprise should establish uniform standards for assessing performance, no matter where it has located its businesses. It should select comparable indicators from a large number of indicators to build a fair and consistent performance evaluation system.

The importance of localization has become a widely accepted idea among leaders of globalizing companies. To establish a corporate culture with a global vision, companies must adjust to local conditions. Our surveys and interviews show that a considerable number of Chinese enterprises that are going global have realized the value of cultivating a global corporate culture. However, they lag behind other companies in practice. To catch up, they can learn from the experiences of successful global enterprises from other countries.

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3. Post-merger integration presents unique challengesOverseas mergers and acquisitions are an effective way for an enterprise to go global. However, whether a company can achieve its expected objectives through M&A largely depends on its success in integrating the acquired business and thus achieving synergies among its strategy, organization, people, processes, culture and IT systems. Accenture’s study of the 50 largest M&A transactions for 1996-1999 and 2003-2007 reveals some disturbing news: In general, post-merger three-year average annual total returns to shareholders (TRS) are lower than returns in the pre-merger period.107 Another study of 302 M&A deals worth at least $500 million announced between July 1995 and August 2001 found that 61 percent of acquiring companies eroded value for their shareholders.108 The challenge of creating value through M&A has been recognized by an increasing number of enterprises. Making M&A deals themselves is difficult, but as long as a company has the required resources, it usually can get the deals it is seeking. The real challenge comes after the deal is completed. Strong capabilities in post-merger integration are required to ensure that the M&A agreement delivers its promised business value.

Drawing on research into an extensive number of M&A cases, Accenture believes that the following capabilities are critical to successful integration after an M&A deal:

• focusing on post-merger value creation

• putting into place a leadership team as soon as possible, and minimizing talent loss

• designing processes for transition of business units

• paying attention to cultural integration (values, norms and so forth)

• earning the trust of employees from different cultural backgrounds

• actively managing organizational changes

• communicating plans frequently and consistently to managers and employees

Most of these capabilities relate to integration of employees after the M&A deal is signed. Such integration is even

more important for an overseas deal, which brings together people of different cultural backgrounds. The success of post-merger integration is directly related to how the acquiring company deals with the challenges of employee integration. These challenges include the following:

• ensuring that the organizational structure retains the best of the company’s traditions while also being innovative

• achieving revenue and cost synergies in the new organization

• placing people with appropriate skills at the appropriate time and place

• retaining key employees

• maintaining positive morale during integration planning and implementation

• merging competencies as well as performance management and compensation systems

• ensuring accuracy of the human resource application system and minimizing adjustments made to human resource management processes

Employee integration involving an overseas M&A deal is ultimately about creating positive experiences for employees, rather than making tremendous changes to former teams or assigning a large number of people from the acquiring company to work in the acquired company. Enhancing understanding of and communication with the former management team and ordinary employees can also support successful post-merger integration and set the business on a new path. Often, communication and understanding diffuse formidable tensions or conflicts.

A case in point is Beijing No. 1 Machinery Factory’s acquisition of Germany’s Waldrich Coburg, which had ranked first worldwide in heavy machinery manufacturing. Thanks to the emphasis on pre-deal communication, the post-merger integration was a success. In the 10-month negotiation period, the Chinese side expressed their full respect and understanding of the interests of the German workers. At the same time, they pointed out that the company had to survive in the world market in order for the employees to have jobs. Change was unavoidable if they wanted to compete with Korean, Japanese and Chinese workers. Eventually the company’s union

agreed to work an extra two hours per week without additional pay. Thanks to the successful integration, the enterprise’s profitability improved, and it created more than 120 jobs within two years.109

Media reports and our surveys indicate that for the majority of overseas M&A deals involving Chinese enterprises (mainly in the manufacturing sector), very few of them achieved true post-merger integration. There are currently two main approaches that Chinese companies use to manage their post-merger businesses. One is to shut down the manufacturing operations in the acquired company and relocate them back to China, while keeping R&D, design, sales and marketing, and branding abroad. The Wanxiang Group, for example, used this approach in carrying out multiple M&A deals in the US.

The other approach is to leave the acquired company’s manufacturing operation intact and maintain minimal involvement in its management. The Chinese acquirer dispatches only one or two senior managers to handle financial supervision and communication responsibilities. A team comprising senior executives from both companies, usually called the executive committee, supervises operation of the acquired company through performance metrics linked to the M&A terms and compensation. Companies using this approach include Changsha Zoomlion Co., Ltd. which acquired Italy’s CIFA Company; Hangzhou Donghua Chain Group, which purchased Germany’s KOBO Company; and Lianyungang Zhongfu Lianzhong Composites Group Co. Ltd., which acquired the German rotor blade manufacturer NOI. In the last case, the Chinese acquirer has not sent anyone to the new merged company SINOI.110

22.2%

19.9%

18.7%

12.9%

8.6%

5.8%

4.1%

3.9%

3.8%Integrating procurement and distribution channels

Immediately implementing the merged or acquired company’s management philosophy and systems

Organizational structure adjustments

Integrating information systems and technological platforms

Minimizing changes

Maintaining stability of the former management

Stabilizing production and markets

Retaining the talents of the merged or acquired company the merged or acquired company

Building up communication and trust

Figure 26 First priority following an overseas M&A deal(Select three items to be weighted by importance: most important=0.5, less important=0.3, least important=0.2 Score of each item divided by the total scores=percentage)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

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Chinese acquiring companies may select the second of these approaches for several reasons. For one thing, the costs of overseas manufacturing remain high, making it not competitive against domestic manufacturing. However, R&D and design, branding and sales channels are strengths of the global entities. It is a natural choice to fully leverage the strengths and avoid the weaknesses. Moreover, the management team in a purchased company based in a developed country is mature and advanced, while the Chinese party is still learning and lacks a comprehensive management system to integrate the acquired company. Therefore, “doing nothing” is the right strategy. Finally, most Chinese enterprises have not reached the stage of globally distributed operations. They at best own some isolated entities in local markets; hence they lack the capability or urgency to carry out management integration (See Figure 26). Eventually, as the low-cost advantage diminishes, Chinese companies will become more sophisticated in their managerial skills and gain more confidence in dealing with overseas counterparts. Their global business units will no longer be isolated, and the companies will be better positioned to devote sufficient time and effort to post-deal integration.

4. A successful global operating model has several hallmarksThere are several criteria for judging the success of an enterprise’s global operating model. The first is localized operation. From adjustment to the external environment (social networks, partnerships and consumers) to internal management (leadership, people, management methods and corporate culture), the company adapts to local conditions and becomes a local enterprise. The second is a globalized structure; that is, the company sells to the global markets, allocates its production facilities on a global basis, sources its talent from a global pool and forms its top management team with senior executives who have extensive global experience. When it comes to internal management, governance structure and management process flow freely on the global stage without regional hindrance or management silos. The third criterion is a global mindset. Top management teams must reorient their perception of management, orchestrating a global enterprise from a global point of view.

Whether an enterprise globalizes successfully depends on its globalization strategy. Decisions regarding what global businesses to enter, where to place the businesses and how to invest globally should be informed by the company’s objectives, capabilities and the characteristics of its industry. Only by starting with a clearly defined goal and designing an executable strategy based on its own capabilities and industry characteristics can a company lay a solid foundation for success. However, a smart strategy that is not well executed is just a castle in the air. This is where an efficient global operating model comes into play. The model transforms a strategic blueprint into reality, step by step, through the right leadership, talent, organizational structure, processes and technologies, and performance metrics. Indeed, the reason many Chinese enterprises have lagged behind in going global is that they lack experience and capabilities in managing and operating global businesses. As globalization activities proceed, Chinese enterprises will accumulate managerial and operational expertise. (See “Case study: Wanxiang’s success story in integrating global resources.”)

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Wanxiang’s success story in integrating global resources A globalizing enterprise should view the world as one market and integrate resources globally to build an optimal operating model. The Wanxiang Group’s success lies in its effective integration and utilization of global resources.

Wanxiang, established as a blacksmith shop in 1969 with 7 employees and 4,000 yuan in capital, is now an auto-parts manufacturing enterprise operating in 9 countries. In 2009, it generated revenues of 51.48 billion yuan (US$7.84 billion), US$1.169 billion from overseas sales, and profits and taxes of 5.227 billion yuan (US$794 million), maintaining a growth rate of over 20 percent for the 30th consecutive year.111

Wanxiang is a leader in the globalization race. The company successfully achieved its goal of “penetrating the domestic market through export.” In the early 1980s, it decided to adopt an export orientation to address market challenges. In the centrally planned economy that existed at that time in China, the township of Wanxiang was not included in the state planning. This meant that the company could not purchase raw materials or sell its products in the domestic market. To survive as well as fuel its development, founder Lu Guanqiu decided to “go out,” seeking opportunities in the global market. In March 1984, Wanxiang was recognized by the Schaeffler Group of the US for the quality of its products and received an order of 30,000 universal joints, becoming the first Chinese auto-parts manufacturer to enter the US market.112 Its success in the overseas market attracted widespread notice. In 1985, domestic auto manufacturers started to use Wanxiang’s products, demonstrating the wisdom of its strategy of promoting domestic sales through overseas sales.

In 1994, with the approval of the Ministry of Foreign Trade and Economic Cooperation, Wanxiang established Wanxiang US. Wanxiang delegates its main global businesses (including those in Europe and North America) to

Wanxiang US, rather than managing them from headquarters. With Wanxiang US managing all global businesses, the company does not have an international department. All business units in China assist Wanxiang US in global operations. This structure differs from that used in other Chinese companies. Wanxiang US has established 18 overseas companies in eight countries (including Brazil, Canada, Germany, Mexico, Venezuela, the UK and the US) and has an international sales and service network covering more than 50 countries and regions. Wanxiang US’s M&A deals include the following:

• July 1997: Purchased 60 percent of the equity of the AS Company to establish the Wanxiang European Bearings Company, which became a stronghold for Wanxiang’s expansion in the European bearings market.

• October 2000: Spent US$420,000 to purchase the Schaeffler Group’s equipment, brand, patented technologies and global market network, which generated US$5 million in revenues annually for Wanxiang.

• October 2000: Purchased 35 percent of the equity of the LT Company to fully use its processing and assembling center in North America.

• August 2001: Spent US$2.8 million to acquire 21 percent of the equity of the UAI Company. The agreement stipulated that UAI purchase US$25 million worth of brake systems and components from Wanxiang every year and introduce its well-known brand UBP to China.113

• September 2003: Purchased 33.5 percent of the Rockford Company, becoming its largest shareholder. With over 100 years of history, Rockford possessed multiple product lines, patents, advanced testing and technology centers, and capable engineers. However, owing to high production costs, it had lost its competitiveness. After the acquisition, Wanxiang relocated many standard processes to China, keeping only

precision manufacturing in the US. This measure greatly reduced cost, and the company soon turned a profit.114

In integrating and optimizing the resources of the companies it acquired, Wanxiang US maintained their research and development centers and sales channels, established centralized overseas R&D centers, and conducted periodical exchanges between Chinese technological personnel and their overseas counterparts. The transfer of basic manufacturing to China helped reduce production costs. For key processes and technologies, the company sought the assistance of overseas technological personnel. Therefore, it realized comprehensive integration from research and development to markets and products.

Wanxiang has achieved optimal synergies between the domestic low-cost labor advantage and overseas strengths in technologies, finances and markets. It has thus broken through the geographical barrier to needed resources and has successfully implemented its “going out” strategy.

Case study

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VI. Challenges facing globalizing Chinese enterprises

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1. The multi-polar world has presented new difficultiesChina is now indisputably an important player in today’s multi-polar world. Globalization has penetrated every facet of the Chinese economy. It is no exaggeration to say that any Chinese enterprise, big or small, is connected to the outside world in one way or another. From this point of view, we can say that Chinese companies not only have started their journey of globalization but also have established a foundation and achieved a degree of scale. Nevertheless, from a historical and global perspective, these enterprises are relatively new players on the global stage. They lag behind the multinational corporations of the developed countries and those of other newly emerging economics such as Korea, Taiwan, Hong Kong and Singapore. The path to globalization for Chinese enterprises is paved with difficulties.

These challenges stem from the standing of the Chinese economy in the global economic system. As latecomers, Chinese enterprises are at a disadvantage in terms of overall strength, globalization

experience and managerial expertise. Globalization is an uphill battle for them. A senior manager from a large home appliance manufacturer who spoke with us commented, “Foreign companies enter China armed with strength and experience accumulated over many years. Chinese companies, however, go global with little experience to speak of.”115

Cultural barriers and differences in social systems also present obstacles for globalizing Chinese companies. This is the case whether they have a presence in Southeast Asia, Latin America, Europe or North America. Respondents to our surveys listed “local market entry barriers and trade protectionism” and “local government policy restrictions and social risks” as their biggest challenges (See Figure 27). This is precisely why diplomatic support by the Chinese government tops the list of support requested by these enterprises. In practice, differences in such issues as labor laws and regulations, work ethic, awareness of rights and interests, attitudes regarding overtime work, collective bargaining and the role of trade unions make local operational and management routines more demanding. Chinese executives striving to manage

global businesses using practices that are customary in the domestic market are bound to run into difficulties—especially in Europe and North America. During our interviews, top managers confessed their frustration in dealing with these issues. Their responses suggest that Chinese management systems and social conventions are not conducive to global operations, although they are not necessarily inferior. To continue globalizing, Chinese companies may have to learn to adapt to different economic, business and operational environments.

Another challenge facing Chinese enterprises is a lack of managers proficient in foreign languages and versed in local cultures, international laws and international management practices. As China’s domestic standard of living continues to improve and professional development opportunities multiply, Chinese managers’ willingness to work overseas is waning. This is particularly the case for managers sent to areas in developing countries where local conditions are harsh.116

Difficulties stem from external and internal sources. Externally, cultural, social and political barriers make

Figure 27 Challenges faced by globalizing Chinese enterprises(Weight the three items selected in order of importance: most important =0.5, less important=0.3, least important=0.2Score of each item divided by total scores=percentage)

Others

Complicated procedures for roject reviews and approvals

Post-M & A integration

Insufficient government support

Difficulty in transnational financing

Exchange rate risks, strict foreign exchange controls

Difficulty in finding M & A targets

Low-cost disorderly competition within the same industry

Cultural differences

Local government policy restrictions and social risks and social risks

Local market entry barriers and trade protectionism

22.1%

20.0%

11.6%

11.0%

8.3%

6.2%

5.0%

4.3%

4.2%

3.4%

0.8%

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

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globalization a tremendous uphill task. Internally, deficiencies in skills needed to manage global operations, lack of innovation or core technologies and shortage of talent are major weaknesses perceived by Chinese executives (See Figure 28).

2. Chinese companies are taking steps to address the challenges External and internal difficulties cannot stop the trend of globalization for Chinese enterprises. Companies should prepare to meet the challenges in their efforts to go global. As Mr. Liu Yonghao, Chairman of the New Hope Group, put it, this step must be taken regardless of the result.

First, on the strategic level, Chinese enterprises should find the right starting point for them, depending on their goals in globalizing, their stock of capabilities and the characteristics of their industries. Some markets are more difficult than others. For example, a Chinese company might find it easier to enter emerging markets than to enter developed markets, and to enter

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Figure 28 Disadvantages of globalizing Chinese enterprises(Weight the three items selected in order of importance: most important =0.5, less important=0.3, least important=0.2Score of each item divided by total scores=percentage)

Others

Unsatisfactory product quality

Organizational structure not adapted to global operations

Lack of streamlined, efficient business processes

Financing issues

Lack of an adequate modern enterprise management system

Corporate culture ill prepared for globalization

Brands not recognized by overseas consumers

Lack of global business managers

Lack of innovative technologies

Lack of experience of managing transnational business 21.2%

19.1%

18.4%

11.3%

10.5%

10.4%

4.9%

3.4%

3.3%

2.9%

0.2%

“As a non-state owned company, we have gone so far. I think it is time for us to consider whether we should go out. It’s better to do so now than later. We should take this step whether we will succeed or not.”117

Liu Yonghao, Chairman, New Hope Group

markets geographically closer to China. Companies can start from the easier markets and then move the more difficult ones (as Huawei and ZTE have done). Joint ventures and M&A are valid choices (as Zoomlion and Zhongfu Lianzhong Composites have discovered). Wholly-owned green-field development is another option (as Sany and Haier have done). To fulfill their strategic intention, Chinese businesses can leave an acquired company’s operations and management team intact and not get involved in its daily operations (Donghua Chain’s approach; see “Case study: Donghua Chain Group Co. Ltd.: From OEM to brand creator”). Alternatively, they can relocate manufacturing operations back home and keep R&D, sales and marketing abroad (Wanxiang’s choice).

Second, Chinese enterprises must set up a leadership team with a global vision and ensure that the team has members with overseas educational and work experience. There should be a rational distribution of functions and responsibilities among members of the leadership team based on global exposure. Team members, even those not directly involved in overseas business, should keep an open mind and be willing to learn about the outside world.

Third, Chinese enterprises should assess overseas investment and operational environments. They can deepen their understanding of local policies, laws and regulations by collecting information from all sources. Then they must observe these local dictates. They should adapt

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“My experience is that more and more Chinese companies are switching from cheap and low-cost products to more sophisticated products. They often eye the Germans as paragons. This new type of competition has to be taken very seriously.”123

Hermann Simon, Chairman, Kucher & Partners

their products and services on the basis of their knowledge of the local market, as well as understand local markets’ supply of human resources, natural resources and innovative resources. In our interviews, many executives told us that lack of adequate information prevented them from further going global. They are not clear about what opportunities exist or where to find these opportunities. They expect the Chinese government to provide more market information—which it has done.

During our interview with the Investment Promotion Agency of the Ministry of Commerce, we discovered that the agency provides extensive information regarding overseas investment by signing agreements with its counterparts in 65 countries, sending personnel to Chinese embassies and consulates and cooperating with foreign investment agencies in China. For example, the agency has compiled an overseas investment map in collaboration with Thomson Reuters that provides details such as the distribution of patents, the possession of patented technology by enterprises, the availability of substitute technologies, and potential competitors and partners. In addition, it publishes related information on its public website. The menu “Overseas Investment” includes these five sub-menus:

• “Investment Environments by Country,” which contains investment reports on 24 countries and regions

• “Overseas Investment Statistics”

• “Overseas Investment Projects”

• “Overseas Investment Plans”

• “Overseas Investment Research”

Agency employees told us that few companies had taken advantage of the database. Chinese enterprises aspiring to go global need to take full leverage these sources of information provided by the government.118

Fourth, Chinese enterprises should seek out globalization talent, regardless of nationality. By July 2010, eight of the 14 members of the Lenovo Group’s top management team were from outside Mainland China (including a Hong Kong citizen). The other six, including Chairman Liu Chuanzhi and CEO Yang Yuanqing, each had some overseas education and work experience.119 At the same time, Chinese enterprises should maximize use of young managers and develop globalization managers from inside. China State Construction Engineering Corporation Ltd., for instance, has built up a team of young managers for its global business. Some of them are in their early thirties, but they are already leading overseas projects involving tens of thousands of workers and worth hundreds of millions of US dollars.120 In addition, enterprises should encourage the managers of their overseas operations to assimilate into the local society. For example, when Holley Group first started its global operation, the company set strict rules regarding Chinese employees’ behavior. They lived in company dorms and were not allowed to leave the dorms at night. As managers realized the importance of cultural mingling, they began encouraging Chinese employees to “go out.” Employees could rent their own apartments and socialize in restaurants and bars after work. Supported by the company, six or seven employees have married locals. A number of Chinese employees have served in overseas markets for over 10 years.121

Fifth, Chinese companies can create a globalization ecosystem by establishing alliances involving multiple parties. This is smart, because most enterprises cannot successfully expand into overseas markets alone. Alliances of two, three or even more parties can help the participants identify and capitalize on global opportunities. For example, companies in industrial equipment manufacturing and those in construction can join hands in market development.

Companies can also establish joint ventures or cooperative entities with domestic and even international counterparts (in subcontracting or co-bidding, for example). Also, firms may partner with financial institutions, using the financial resources to expand markets.

During an interview with us, the CEO of a large railway equipment manufacturer revealed that although orders from the European and North American markets had dwindled owing to the financial crisis, orders from developing countries had remained stable. Indeed, he said that the company’s exports for the first half of 2009 increased over 60 percent against the same period of the previous year. He pointed out that many developing countries with limited financial resources are still using the locomotives and railroad equipment that characterized the colonial period, as one modern locomotive costs up to several million US dollars.

In the past, European and North American banks financed the operation of these countries’ railway systems. The financial crisis weakened the banks’ capabilities, and railway systems were left with little resources to continue the business. In contrast, Chinese banks were not hurt as much as Western banks were. Chinese enterprises began allying with Chinese banks to capture this market. The CEO we spoke with was confident about his business because he believed that his products rivaled those of multinational corporations in quality. He said that even though China had mainly exported consumer products in the past, more and more industrial equipment would be exported, and that this trend could not be stopped.122

Chinese enterprises ought to focus on developing their capabilities as they grapple with the challenges confronting them. Those responding to our surveys listed leading technologies and innovation as the most important

60

capabilities to be cultivated, followed by financing capability and top management teams’ global experience (See Figure 29). Interestingly, none of our respondents listed foreign language proficiency as a key capability. This is probably because they believe that such capabilities as innovation, finance and international experience are more difficult to acquire than language proficiency.

In addition to increasing their own capabilities, Chinese enterprises also see government support as crucial for successful globalization. In our interviews, many executives said they expected the government to be more supportive of them. They noted the significant role that the Japanese and Korean governments (and industry associations) played in the endeavors of their enterprises to go global. Diplomatic support comes up as the most expected form of support, followed by financial and information services (See Figure 30).

28.9%

17.9%

16.5%

11.0%

10.8%

6.5%

4.1%

2.6%

1.6%

0.9%

0.6%

0.0%English proficiency

Others

Proper use of local talents

Adaptability

Establishment of a localized corporate culture

Networking with the local government, community and trade union

Globalization talents

Internationally recognized brands

Risk control ability

Top management’s international experience

Sufficient finances and strong financing ability

Leading technologies and innovation

Figure 29 Key capabilities for success in globalization(Weight the three items selected in order of importance: most important =0.5, less important=0.3, least important=0.2Score of each item divided by total scores=percentage)

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

Figure 30 Government support needed by globalizing enterprises(Select two items. Votes of each item divided by total votes=percentage)

Consulting services

Foreign exchange support

Taxation preferential treatment

Legal services

Provision of information

Financing support

Diplomatic support

Source: Accenture and China Enterprise Confederation surveys, May-August 2010

26.5%

23.5%

15.4%

14.7%

10.3%

7.4%

2.2%

61

Donghua Chain Group Co. Ltd.: From OEM to brand creatorContinuous appreciation of the RMB yuan. Lowering and even cancelation of export tax rebates. Rising labor costs. Mounting trade barriers. Since the worldwide financial crisis, Chinese manufacturing enterprises at the lower end of the value chain have wondered how they can best cope with these challenges and break new ground. They may draw some inspiration from the experience of the Hangzhou-based Donghua Chain Group Co. Ltd., which successfully pursued a globalization strategy by transitioning from an OEM producer to creating its own brand.

Established in November 1991, Donghua Chain is one of the largest chain manufacturing enterprises in China.124 The company exports 65 percent of its products to Europe, the Americas, Japan and Southeast Asia. It is the supplier to many leading industrial equipment manufacturers in the world, such as Claas, Hitachi, John Deere, Kubota, New Holland, Otis and Yanmar. It also supplies chains to the assembly lines of many world-class companies.125

Donghua is known at home and abroad for the quality of its products. In 1996, less than five years after its founding, it achieved ISO9002 quality standards. It achieved ISO9001 standards in 1999 and ISO9001:2000 in 2002. At the same time, the company actively participates in defining national standards for the chain industry. For example, it helped establish the ISO/TC100 international standard for chains, and in 2004 it hosted the 16th ISO/TC100 international annual conference.126

Donghua is a preferred supplier to multinational corporations because of the proven quality of its products, its understanding of the rules of the game in the international market and its participation in the establishment of standards for the chain industry. It has been an OEM manufacturer for nearly all the leading companies in the industry. Its global business has grown steadily; exports now account for over 60 percent

of its products. However, no more than 12 percent of these exports bear its own brands, and the remaining 88 percent are OEM manufactured.127 That is, Donghua stays at the lower end of the industrial value chain. Even more worrisome, it has seen its export orders decrease since the onset of the financial crisis.

Executives have realized that “going out” means emphasizing building brands over having products sold in the global market, and that real globalization requires extending the value chain and transitioning from “order fulfillment” to “brand management.” To these ends, the company formally launched its “Donghua” brand in the European and North American markets in 2009 and declared 2010 its “Year of Globalization.”128 These were heroic, history-making moves—and painful ones. Donghua’s branding strategy met with resistance from nearly all of its customers, and sales plummeted. So far, the branding strategy has not generated profit for Donghua, because overseas markets are still recovering from the global recession. However, the company remains committed to crafting its own brand. To expand the influence of the “Donghua” brand, it has had the brand registered in 70 countries and regions. It has also established six sales companies—one each in the US, Thailand, Germany, the Netherlands, the UK and Hungary—and is contemplating setting up a production facility in Thailand.129

As another strategic move, Donghua used overseas M&A in the aftermath of the global financial crisis. Its management team decided to take advantage of the crisis by purchasing cheap overseas manufacturing assets. At the end of 2009, it had spent nearly €10 million purchasing the entire assets of Kobo, Germany’s second-largest transmission chain manufacturer. The newly formed Kobo-Donghua Company started operations on January 1, 2010. Kobo, established in 1896, had combined R&D and manufacturing capabilities. It struggled with a shortage of capital after

the financial crisis. Donghua had long been an OEM manufacturer for Kobo, and both sides knew each other well. The merger went smoothly, thanks to the companies’ past cooperation, and the two sides established a solid relationship based on trust. Donghua obtained Kobo’s technologies, markets and brands. At the same time, it entrusted day-to-day management to the Kobo team, maintaining only financial supervision of the acquired business. Donghua’s liaison group stays in close communication with Kobo, which sends people to work in China every month. Both sides have strived to smooth away cultural differences. In addition, the interests of the two companies were closely bundled in the M&A deal. According to the purchase agreement, the purchasing sum would be paid in installments and linked to the new company’s performance.130

Kobo-Donghua’s most recent financial statement indicates that it is earning modest profits—an indication that the two sides make a good pair. With Kobo’s reputation in Europe, leading technologies and mature sales channels, Donghua has multiple benefits to gain. Engineers at Donghua will have more channels for communicating with the outside world, for gaining new experience and for following international practice in technical standards, design, process, testing and equipment. Donghua will be able to fulfill its vision of becoming a premier transmission chain manufacturer in the world within five to 10 years.

Case study

We are moving toward a smaller and flatter world in which different types of organizations are more intermingled than ever. A seemingly insignificant event in one corner of the world may ultimately shake the whole world. A mono-polar structure has been replaced by multi-polar one, and a single-directional flow of economic power has given way to multi-directional flows. All economic entities around the globe are now interdependent. Under these circumstances, no country or organization can step out of the current and go it alone. The traditional balance of economic power has been toppled, and there is a shift of power from developed markets to emerging markets. A large number of multinational corporations have taken shape in the emerging economies and are playing an increasingly important role on the global stage. Economic globalization is an irresistible trend. Any enterprise that lacks a global vision and tends to think and act only in terms of the home market will likely forfeit opportunities for development and may even lag far behind its peers.

Globalization is particularly meaningful to Chinese companies on the course of development and growth. As we know, China has emerged from the global financial crisis relatively unscathed. Chinese enterprises are in a relatively advantageous position compared to their counterparts in the Western markets. But at the same time, the impact of the worldwide downturn has also compelled economic decision makers and company executives to rethink approaches to economic growth. As for Chinese enterprises, they must leave the beaten track and transform their business and operating models to fuel new growth. This transformation calls for strong capabilities in innovation, brand building, customer value, resource streamlining and cultural integration. Chinese companies’ expanding strength and the need for transformation are pushing these enterprises to go out and face the world. In this new context, globalization is a natural choice for Chinese businesses. There are no other options for most of them.

Chinese enterprises go global to achieve different goals. Some do so to survive; others, to expand their markets; others, to upgrade their value chain; and still others, to become global enterprises. No matter what form of globalization they engage in, they are on the way to the final destination. In the process, they are interacting with the outside world and improving their global operating capabilities. Any globalization effort is worthy if it aligns with an enterprise’s development requirements and creates value. There is no need for every Chinese firm to strive to become a multinational company, but some Chinese corporations must have that aspiration. We hope that after a period of development, we will see a number of Chinese enterprises emerge as global companies.

We also hope that globalization is more than economical or commercial for Chinese businesses; it should also be cultural, social and environmental. Through globalization, China will contribute to global economic development, the welfare of humanity, exchanges between different cultures and environmental improvement. Globalization is an unshakable mission of Chinese enterprises because it benefits not only themselves but also human society overall.

Yet globalization is not easy for these companies. As newcomers from an emerging market, they have a heavier load to carry on the way to globalization. Compared with hundred-years-old MNCs from Western countries, Chinese companies lack experience, innovative capabilities and cultural influence. They have yet to be fully accepted by the global business community and consumers worldwide. As a consequence, their path to globalization is fraught with difficulties and setbacks. But as the ancient Chinese thinker Hsun Tzu said, “Unless you pile up little steps, you can never journey a thousand miles; unless you pile up tiny streams, you can never make a river or a sea.” We hope that Chinese enterprises will keep moving steadily forward on the road to globalization and that, step by step, they will reach their ultimate destination.

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VII. Conclusion

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

1 2008.1 CHINALCO Rio Tinto plc United Kingdom

12.85 Billion 9% Mineral Resources

2 2008.1 Tencent Quorum USA 70 Million 100% IT and Semiconductor

3 2008.1 Youngor Group Smart Apparel Group Limited, Xin Ma Apparel International Limited

USA 120 Million 100% Traditional Manufacturing

4 2008.1 Goldwind Science & Technology Co., Ltd.

VENSYS Germany €41.24 Million 70% Clean Energy Resources

5 2008.2 THB Group KenSa USA 14.55 Million 45% Traditional Manufacturing

6 2008.3 CDC Software Integrated Solutions Limited

Hong Kong N/A 51% IT and Semiconductor

7 2008.3 iSoftStone Akona USA N/A N/A IT and Semiconductor

8 2008.4 Venturepharm CBI USA 3.118 Million 39% Biomedical

9 2008.4 Shougang Group Prosperity Australia 4.5 Million Australian Dollars

19.90% Mineral Resources

10 2008.4 CHINA PING AN Fortis Investment Management Co.

Belgium €2.15 Billion 50% Investment Company

11 2008.4 China National Gold Group Corparation

Jinshan Gold Mines Inc.

Canada 220 Million 41.99% Mineral Resources

12 2008.4 Jinchuan Group Limited(JNMC)

Fox Resources Australia 16.6 Million 11% Mineral Resources

13 2008.4 China National Offshore Oil Corp. (CNOOC)

Husky Energy Inc. Canada 130 Million 50% Traditional Energy Resources

Appendix 1: Overseas M&As by Chinese enterprises, January 1, 2008-June 30, 2010

63

VIII. Appendixes

14 2008.5 Mindray Medical International Limited.

Datascope USA 210 Million Life Care Business

Medical Device

15 2008.5 Western Mining Co.

FerrAus Australia 15.5 Million Australian Dollars

10% Mineral Resources

16 2008.6 CDC Software DBC Australia N/A N/A IT and Semiconductor

17 2008.6 Anhui Zhongding Sealing Parts CO.,LTD.

AB Compay USA 4.5 Million 100% Traditional Manufacturing

18 2008.6 China International Marine Containers (Group) Co.,Ltd.

TGE SA Germany €20 Million 60% Traditional Energy Resources

19 2008.6 Zoomlion Heavy Industry Science & Technology Development Co., Ltd

CIFA Italy €160 Million 60% Machinery Manufacturing

20 2008.6 China Merchants Bank

Wing Lung Bank Hong Kong 17.2 Billion RMB

53.12% Commercial Banks

21 2008.7 CHINA HUANENG Tuas Power Ltd. Singapore 4.24 Billion Singapore Dollars

100% Traditional Energy Resources

22 2008.7 COSL AWO OS Norway 2.5 Billion 100% Traditional Energy Resources

23 2008.7 Sinochem International Corporation

GMG Singapore 270 Million Singapore Dollars

51% Rubber Industry

24 2008.7 Bank of China Heritage Fund Management

Swiss 60 Million RMB

30% Fund

25 2008.7 Shandong Runxing Investment Group

AFB USA 750,000 100% Retail Chain

26 2008.8 Jinchuan Group Limited(JNMC)

Tiomin Canada 25 Million 70% Mineral Resources

27 2008.8 Zhuzhou CSR Times Electric Co., Ltd.

Dynex Power Canada 15.72 Million 75% Semiconductor

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

64

28 2008.8 Hunan Valin Steel Co., Ltd.

Golden West Australia 170 Million RMB

11% Mineral Resources

29 2008.9 Bank of China La Compagnie Financière Edmondde Rothschild Banque

France €240 Million 20% Commercial Banks

30 2008.9 Hunan Nonferrous Metals Holding Corp., Ltd.

Abra Mining Australia 540 Million RMB

70% Mineral Resources

31 2008.9 Sinosteel Corporation

Midwest Australia N/A 98.52% Mineral Resources

32 2008.9 Sinosteel Corporation

Murchison Australia N/A 49.9% Mineral Resources

33 2008.9 SINOPEC Tanganyka Canada 2 Billion 100% Traditional Energy Resources

34 2008.1 GlobalMarket Group

Marketplace Hong Kong N/A 100% Internet

35 2008.1 GlobalMarket Group

TradeEasy Hong Kong 32 Million HKD

100% Internet

36 2008.12 Shougang Group Mount Gibson Iron Limited

Australia 160 Million Australian Dollars

69% Mineral Resources

37 2008.12 Shenzhen Zhongjin Lingnan Nonfemet Company Limited

Perilya Australia 200 Million RMB

50.1% Mineral Resources

38 2008.12 Wuhan Iron And Steel Company Ltd.

Centrex Australia 920 Million RMB

50% Mineral Resources

39 2008.12 Net263 Ltd. iTalk USA 7.5 Million 33% Telecommunication

40 2008.12 Perfect World Co., Ltd.

InterServ International

Tai Wan 23 Million 100% Internet

41 2009.1 Harbin Livechain Technologies Co.,Ltd

LGM USA 2 Million 100% IT and Semiconductor

42 2009.1 Lenovo Swichbox Labs USA N/A 100% IT and Semiconductor

43 2009.2 CDC Software WKD United Kingdom

N/A N/A IT and Semiconductor

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

65

44 2009.2 Shenzhen Zhongjin Lingnan Nonfemet Company Limited

Perilya Comapy Australia 45.46 Million Australian Dollars

50.1% Mineral Resources

45 2009.2 CNPC Verenex Canada 500 Million Canadian Dollars

100% Traditional Energy Resources

46 2009.2 China Valin FMG Australia 560 Million Australian Dollars

16.48% Mineral Resources

47 2009.3 Inspur Co., Ltd. Qimonda (China) Germany 30 Million RMB

100% IT and Semiconductor

48 2009.3 GEELY DSI Australia 320 Million HKD

100% Traditional Manufacturing

49 2009.3 Wuhan Iron And Steel Company Ltd.

Thompso Canada 240 Million 19.9% Mineral Resources

50 2009.3 China Nonferrous Metal Mining (Group) Co., Ltd.

TZN Australia 10.075 Million Australian Dollars

12.29% Mineral Resources

51 2009.4 SINOPEC Oil Sands Assets Canada 140 Million 10% Traditional Energy Resources

52 2009.4 CNPC JSC Mangistaumunaigas

Kazakhstan 3.3 Billion 100% Traditional Energy Resources

53 2009.4 China Mobile Far EasTone Tai Wan 4.08 Billion HKD

12% Telecommunication

54 2009.5 CNPC Singapore Petroleum Company

Singapore 1.02 Billion 45.51% Traditional Energy Resources

55 2009.5 China Nonferrous Metal Mining (Group) Co., Ltd.

Lynas Australia 190 Million 51.66% Mineral Resources

56 2009.5 Ctrip eatravel Tai Wan N/A N/A Internet

57 2009.5 CDC Software Informance USA N/A N/A IT and Semiconductor

58 2009.5 Beijing Teamsun Technology Co., Ltd

ASI Hong Kong 260 Million HKD

68.43% IT and Semiconductor

59 2009.6 Suning Appliance LAOX Japan 57.295 Million RMB

27.36% Retail Chain

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

66

60 2009.6 Newland Group Digit Professional Tai Wan €280,000 58% IT and Semiconductor

61 2009.6 China Nonferrous Metal Mining (Group) Co., Ltd.

Luanshya Zambia N/A 100% Mineral Resources

62 2009.6 GEELY DSI Australia 58 Million Australian Dollars

100% Automobile Manufacturing

63 2009.6 East China Mineral Exploration & Development Bureau

Arafura Australia 22.94 Million Australian Dollars

25% Mineral Resources

64 2009.6 China Minmetals Corporation

OZ Minerals Australia 13.5 Billion Mineral Assets

Mineral Resources

65 2009.6 SINOPEC Addax Swiss 49.5 Billion RMB

100% Traditional Energy Resources

66 2009.6 CARDANRO Pierre Cardin France €200 Million Business in China

Garment

67 2009.6 CNPC, BP Rumaila Iraq N/A Service Contract for 20 Years

Traditional Energy Resources

68 2009.7 Guangdong Rising Assets Management Co., Ltd.

Panaust Limited Australia 140 Million 19.90% Mineral Resources

69 2009.7 Wuhan Iron And Steel Company Ltd.

Centrex Metals Australia 220 Million Australian Dollars

15% Mineral Resources

70 2009.7 China Nonferrous Metal Mining (Group) Co., Ltd.

Chaarat GoldHoldingLimited

United Kingdom

5.6 Million GBP

19.90% Mineral Resources

71 2009.7 Shenzhen Kaifa Technology Co., Ltd.

Elcoteq SE Finland €50 Million 30% Electronics Manufacturing

72 2009.7 CNPC ENEOS Osaka Refinery

Japan N/A 49% Traditional Energy Resources

73 2009.7 LDK Solar SGT Italy N/A 70% Clean Energy Resources

74 2009.7 XiKing Group Propeller United Kingdom

N/A N/A TV Channel

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

67

75 2009.7 JACK HOLDING GROUP

Bullmer, Topcut Germany 45 Million RMB

100% Traditional Manufacturing

76 2009.7 China Investment Corporation(CIC)

Teck Resources Ltd. Canada 1.74 Billion Canadian Dollars

17.20% Mineral Resources

77 2009.8 Yanzhou Coal Mining

Felix Resources Australia 19.8 Billion RMB

100% Mineral Resources

78 2009.8 CNOOC Kosmos Energy Ghana 3-5 Billion N/A Traditional Energy Resources

79 2009.8 Sinochem Pt.Sele Raya Indonesia N/A Working Interests in Indonesia

Traditional Energy Resources

80 2009.8 Sinochem Emerald United Kingdom

880 Million 100% Traditional Energy Resources

81 2009.9 Sinochem Nufarm Australia 16.3 Billion RMB

N/A Agriculture

82 2009.12 Beijing Automotive Industry Holding Co., Ltd.

SAAB Sweden 200 Million Some Intellectual Property Rights

Automobile Manufacturing

83 2009 China National Offshore Oil Corp. (CNOOC)

Marathon Oil Corp. (Angola Block 32)

Angola 1.3 Billion N/A Traditional Energy Resources

84 2009 PetroChina Merapoh Malaysia 10 Billion Refinery Project

Traditional Energy Resources

85 2009 PetroChina Athabasca Minerals Inc.

Canada 1.9 Billion Canadian Dollars

60% Oil Sands Mining Rights

Traditional Energy Resources

86 2009 PetroChina Arrow Australia 3.5 Billion Australian Dollars

100% Traditional Energy Resources

87 2009 Ansteel Gindalbie Australia 1.7 Billion Australian Dollars

190 Million Shares

Mineral Resources

88 2009 China Garments Shanghai Co.

Pierre Cardin Italy N/A Brand Rights in Greater China

Garment

89 2010.1 ZHEJIANG SANHUA Co., Ltd.

Helio Focus. Ltd. Israel 10 Million 30% Clean Technology

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

68

90 2010.1 CIMC Raffles Shipyard Limited

Singapore 110 Million 28.70% Machinery Manufacturing

91 2010.1 HNA Group Allco Finance Australia 150 Million 100% Air Freight

92 2010.1 HANLONG GROUP Moly Mines Ltd. Australia 200 Million 51% Mineral Resources

93 2010.2 WISCO MMX Brazil 400 Million 22% Mineral Resources

94 2010.2 Bosai Minerals Group Co., Ltd.

Ghana Bauxite Co. Ghana 30 Million 80% Mineral Resources

95 2010.2 CGNPC Energy Metals Ltd Australia 100 Million 66% Energy Resources

96 2010.3 GEELY Volvo Cars Sweden 1.8 Billion 100% Automobile Manufacturing

97 2010.3 WISCO Iron Mine in Liberia Liberia 70 Million 60% Mineral Resources

98 2010.3 Jinjiang Hotels InterContinental Hotels & Resorts

USA 80 Million 50% Service

99 2010.3 The9 Limited Red 5 Studios USA 20 Million IT

100 2010.3 Perfect World Co., Ltd.

C&C Media Japan 20 Million 100% IT

101 2010.4 ICBC ACL Thailand 550 Million 97% Financial Service

102 2010.4 Beyondsoft Group ExtendLogic USA N/A Some Technology and Consulting Businesses

IT

103 2010.4 Chongqing Machinery & Electric Co., Ltd.

Precision Technologies Group

United Kingdom

20 Million GBP 100% Traditional Manufacturing (Machine)

104 2010.5 Shenhua Group Centennial Coal Australia N/A 10% Energy Resources

105 2010.5 China Investment Corporation

Penn West Energy Trust

Canada 820 Million Canadian Dollars

45% Trust

106 2010.5 CNOOC Bridas Latin America 3.1 Billion N/A Energy and Mineral Resources

107 2010.5 Jilin Jien Nickel Industry Co., Ltd.

Canadian Royalties Inc.

Canada 140 Million N/A Energy and Mineral Resources

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

69

108 2010.5 Tongling Nonferrous Metals Group Holdings Co.,Ltd., CRCC

Corriente Resources Canada 630 Million N/A Energy and Mineral Resources

109 2010.5 CNPC Syria Shell Petroleum Development (SSPD)

Syria N/A N/A Energy and Mineral Resources

110 2010.5 Shandong Ruyi Group

Renown Japan N/A N/A Garment

111 2010.5 CDC Software Trade Beam USA N/A N/A IT

112 2010.6 WISCO Zambeze Coal Mine Mozambique 800 Million 40% Mineral Resources

113 2010.6 Bright Food (Group)

Sucrogen in CSR Australia 1.75 Billion Australian Dollars

Sugar and Renewable Energy Resources

Food Industry

114 2010.6 Harbin Pharmaceutical Group

Phizer Pharmaceuticals Limited

USA 50 Million Swine Vaccines Business in China

Biotech, Healthcare

115 2010.6 Dalian Rubber & Plastics Machinery Co., Ltd.

Macro Engineering & Technology Inc.

Canada 9 Million 100% Chemical Industry

116 2010.6 Alibaba Vendio Services USA N/A 100% Internet

117 2010.6 CDC Software Information Development Consultants

USA N/A N/A IT

No. Date Purchaser Purchased company

Origin of purchased company

Investments involved (US$, unless otherwise stated)

Equity or assets acquired

Industry

70

Source: (http://www.investide.cn/case/investCaseDetail.do?investCaseId=10107, http://www.investide.cn/case/investCaseDetail.do?investCaseId=10108) and others

71

Appendix 2: Research methodologies

To explore globalization of Chinese enterprises, we used in-depth interviews, questionnaires, literature reviews, media reports and related research completed by Accenture. The research report combines qualitative and quantitative analysis, modeling and case studies.

We interviewed more than 10 influential Chinese enterprises from different industries, including home appliances, machinery manufacturing, construction, medicine, automobile and auto parts manufacturing. We also interviewed related government departments in charge of investments. In preparing for the interviews, we conducted necessary research, designed interview questions and maintained good relationships with the organizations to be interviewed. We encouraged the interviewees to offer their own views and opinions. In-depth interviews enabled us to obtain rich, detailed information.

We also conducted surveys. Questionnaires were designed to ensure that respondents fully expressed their views on globalization of Chinese enterprises. We sent out a total of 460 questionnaires to China’s top 500 enterprises from May 2010 through August 2010, and received 89 of them back. Responding enterprises were from 11 industries, including automobile manufacturing, metallurgy, energy, consumer goods, construction, real estate, chemicals, communications and mining. Most of them were large; more than half of them each generated more than 10 billion RMB yuan in revenues in 2009; 64 percent of them each employed more than 5,000 people. Non-listed state-owned enterprises accounted for 40 percent of them; non-listed private enterprises and listed companies each accounted for around 30 percent. All the data obtained were analyzed using SPSS and were tabulated using MS Excel.

References

72

1. China Statistical Yearbook, National Bureau of Statistics of China.

2. Some analysis frameworks add Korea and Mexico to “BRIC” to make the “Big Six” (B6), or, alternatively, add South Africa (BRICS).

3. “Rapid Increases in Chinese Multinational Enterprises’ Overseas Assets: Fudan-VCC2009 Ranking of Chinese Multinational Enterprises”, 2009 http://www.fdsm.fudan.edu.cn/Aboutus/ShowNews.aspx?InfoGuID=9aa3d6c6-181d-4f1c-8ea5-e27a656cbe4b

4. “The Rise of a Multi-polar World”, Accenture Institute for High Performance, 2007 http://www.accenture.com/NR/rdonlyres/4D4C1A6A-82F3-418A-B66E-0E1407E74E25/0/Accenture_China_Special_Report_2.pdf

5. “Meeting the Challenges of Globalization in Advanced Economies,” World Economic Outlook 1997, IMF, p45.

6. UNCTAD, Informational Encounter on International Governance: Trade in a Globalization World Economy. Jakarta, Indonesia. June 1991. pp.19-20. Cited in Liao Fan, “Economic Globalization and the New Trend in International Economic Law” (in Chinese). Published in the website of the Institute of Law, Chinese Academy of Social Sciences, http://www.iolaw.org.cn/showArticle.asp?id=2601

7. Cited in Liu Jianjiang, “The Meaning of Economic Internationalization, Globalization and Integration” (in Chinese), January 16, 2006, http://www.chinavalue.net/Article/Archive/2006/1/16/18535.html.

8. Alan Rugman, The End of Globalization, 2000, page 1-9, (Chinese translation), Beijing: Central Compilation & Translation Press.

9. Modern Economic Dictionary, The Institute of Economics of CASS, 2005, p557; Editor-in-chief Liu Shucheng, Nanjing: Phoenix Publishing House; Jiangsu Renmin Press.

10. From Global Connection to Global Orchestration, Accenture, 2010 http://www.accenture.com/Countries/China/Research_And_Insights/China-Special-Reports.htm.

11. Vernon, R. 1979, “The Product Cycle Hypothesis in a New International Environment”, Oxford Bulletin of Economics and Statistics, 41:255-267.

12. Strong Growth in Foreign Assets of Chinese Multinationals, Fudan University School of Business & Vale Columbia Center, Fudan-VCC2009 Rankings of Chinese Multinational Enterprises, December 17, 2009.

13. For example, the proportion of overseas business can be calculated by the formula: Y = 60% Y1 + 40% Y2, where Y1 is the share of overseas sales in the overall sales and Y2 is the share of overseas assets in the overall assets. Because an enterprise’s globalization capabilities involve multiple aspects and are not easily quantifiable, an alternative approach is the calculation of capabilities for global operations: X = 70% X1 + 30% X2, where X1 is the proportion of overseas employees (including senior managers) in the total number of employees and X2 is the overseas experience of senior management (the combined overseas experience in years as a percentage of the total work experience).

Due to data restrictions and lack of time, our research has not performed quantitative assessments on the globalization levels of Chinese enterprises.

14. “Chinese Enterprises’ Transnational Operations from a Perspective of Globalization by These Enterprises”, http://www.macrochina.com.cn/zhzt/000070/005/20010608007953.shtml.

15. “Jiang Zemin’s ‘Going Out’ Strategy: Its Formation and Significance”: http://finance.people.com.cn/GB/8215/126457/8313172.html

16. Data from UNCTAD FDI statistics

17. For a complete list of the M & A cases involving Chinese enterprises, please see the Appendix.

18. “Haier Ranks First in Brand Value at 81.2 Billion Yuan”, March 23, 2010: http://news.163.com/10/0323/17/62FOP1GD0001125P.html

19. Business Week (Chinese edition), No. 6 2010, p56

20. “Haier Ranks as World’s No.1 White Goods Brand”, Dazhong Daily (Shandong), December 7, 2009

21. Zhang Ruimin, “Take Haier Global”, October 19, 2002: http://www.china.com.cn/zhuanti2005/txt/2002-10/19/content_5219777.htm

22. Interview, May 2010

23. “T” symbolizes “Time, Target, Today and Team.” Interview, May 2010.

24. Availabe at: http://www.holley.cn/about.html

25. Interview, June 2010

26. “The Holley Group’s New Moves in Integrating the Pharmaceutical Business”, China Pharmaceutical News, August 14, 2009: http://www.sz.gov.cn/spypjdglj/szsspypjdglj/gzfw/hyjj/200908/t20090814_1159786.htm

“The Holley Group: Kingdom Dominated by Diversification”, China Urban & Rural News, June 12,2009: http://www.yhgcc.com/newsshow.aspx?artid=2318

27. Interview, June 2010

28. “The Holley Group: Trial and Error in Acquisitions in the Era of Globalization”, March 28, 2005: http://biz.zjol.com.cn/05biz/system/2005/03/28/004463503.shtml

29. Interview, June 2010

30. The Car Making Story of CSR, South China Weekly, July 29, 2010, D21

31. Interview, May 2010

32. “Multi-Polar World 2: The Rise of the Emerging-Market Multinational,” the Accenture Institute for High Performance, http://www.accenture.com/NR/rdonlyres/89C0432D-6E4E-409F-BBC5-C387C4481F66/0/Accenture_China_Special_Report_3.pdf

33. “Liu Chuanzhi Says Lenovo Group Is Far from the Dangr Zone,” August 18, 2009: http://it.people.com.cn/GB/42891/42893/9883968.html

34. ”From Global Connectedness to Global Coordination”, Accenture, 2010: http://www.accenture.com/Countries/China/Research_And_Insights/China-Special-Reports.htm

35. Jeffrey Immelt, Vijay Govindarajan, and Chris Trimble, “How GE is disrupting itself,” Harvard Business Review, October, 2009

36. “Chinese Enterprises Go Global: Growing in Pain”, 2010: http://www.gemag.com.cn/gemag/new/Article_content.asp?D_ID=11096

37. “Dong Mingzhu: Moving up the Global Value Chain by Relying on Core Technologies”, 2010: http://big5.ifeng.com/gate/big5/finance.ifeng.com/news/people/20100715/2410645.shtml

38. ”Chinese Industrial Enterprises Going West”, Financial Times (Chinese), September 7, 2010: http://www.ftchinese.com/story/001034499

39. 2010: http://finance.sina.com.cn/chanjing/b/20100603/15418055156.shtml

40. “Chery’s Overseas Capacity Reaches 200,000”, July 5, 2010: http://auto.sina.com.cn/news/2010-07-05/1744620931.shtml

41. “Zhejiang Collectively Owned Enterprises Go Global: Their Approaches in the Globalization Age”, April 11, 2009: http://lw.china-b.com/jjlw/20090411/1303407_1.html

42. “Geely’s Milestones”, September 20, 2004, China Auto Net

43. “Geely and Chery Forge Ahead”, 21th Century Economic News, July 4, 2010 http://finance.sina.com.cn/stock/hkstock/ggscyd/20100407/03407699331.shtml

44. Interview, May, 2010

73

45. Ibid.

46. “Chery’s Overseas Capacity Reaches 200,000”, July 5, 2010 http://auto.sina.com.cn/news/2010-07-05/1744620931.shtml

47. “Chinese Automakers’ Overseas M & A Deals: What and How”, June 8, 2009: http://finance.sina.com.cn/roll/20090608/18222881939.shtml

48. “Chery Annual Report 2009”

49. “Geely’s M & A Drive: China Goes Further in ‘Going Outside’ ”, China Economic Weekly, April 5, 2010 http://finance.qq.com/a/20100405/001292.htm

50. “Geely Says an Enterprise shall be Realistic in Pursuing Overseas M&As”, Xinhuanet, March 31, 2009: http://auto.daynews.com.cn/zxzq/csyw/736405.html

51. Bruce Kogut, “Designing Global Strategies: Comparative and Competitive Value-Added Chains,” in Smart Globalization: Designing Global Strategies, Creating Global Networks. the MIT Sloan Management Review Innovation Series, 2003

52. See, for example, “The Rise of the Emerging Market Multinationals,” the Accenture Institute for High Performance, 2008

53. Africa: The New Frontier for Growth, Accenture, 2010

54. Accenture analysis, 2010

55. “Chinese Enterprises Should Transcend the Globalization Threshold,” 2010: http://www.chinareviewnews.com/doc/1013/0/6/2/101306259.html?coluid=7&kindid=0&docid=101306259&mdate=0430080253

56. “Roses and Thorns: Exploring the Road to Globalization by Chinese Enterprises”, Yang Guoan etc., The Commercial Press, 2008

57. “World Investment Report 2009”, UNCTAD, 2009

58. July 2010: http://www.chinanews.com.cn/auto/2010/07-14/2400251.shtml

59. “Globalization: The Future of Chinese Enterprises,” Li Quanwei, Fortune, 2010

60. Zhang Ruimin’s Rermarks in Chongqing, 2010

61. “Development Report on China’s Top 500 Enterprises 2009,” China Enterprise Confederation and China Entrepreneurs Association, Enterprise Management Press

62. Sany Heavy Industries Co., Ltd. Annual Report 2009

63. Zoomlion Heavy Industrial Science & Technology Development Company Annual Report 2009

64. “Chinese Enterprises Enter Germany,” The Financial Times, August 13, 2010: http://www.ftchinese.com/story/001034075

65. Interview, May 2010

66. “Chinese Enterprises Enter Germany,” The Financial Times, August 13, 2010: http://www.ftchinese.com/story/001034075

67. Ibid

68. Interview, May 2010

69. “Three Trends of Chinese Enterprises Making Overseas M&As,” Wenhui Daily (Hong Kong), 2009: http://www.sinovision.net/index.php?module=news&act=details&col_id=3&news_id=90895

70. “Technology Enterprises Go Global: Different Trends”: http://www.people.com.cn/GB/144613/151235/10450821.html

71. “China’s Top Ten M&A Deals 2009”: http://www.antimonopolylaw.org/article/default.asp?id=745

72. “Ping’an Purchases Fortis: What’s Behind it?” Hexun News, March 20, 2008. This deal later turned out to be very risky for Ping’an, and the company suffered a huge loss. http://news.hexun.com/2008-03-20/104630547.html

73. “CICB Aims Emerging Markets for Globalization,” Xinhua Net, October 18, 2007: http://news.xinhuanet.com/fortune/2007-10/18/content_6898952.htm

74. China Construction Engineering Corp public website: http://www.cscec.com.cn/co.htm

75. “China Construction Engineering Corp Annual Report 2009”

76. Interview, May 2010

77. Interview, May 2010

78. “Implementing the State Strategy of ‘Going Outside’ for Expanding the Overseas Market,” China Construction Industrial Association, August 23, 2006: http://www.zgjzy.org/guild/sites/ccia/detail.asp?i=XHDT&id=8618

79. Interview, May 2010

80. Anhui Construction Group Overseas Development website: http://www.ahodc.com/main/model/childcatalog/ChildCatalog.do?subfcode=0030101

81. Stephane, J. Griod, Joshua B. Bellin and Robert Thomas, “Are Emerging-Market Multinationals Creating the Global Operating Models of the Future?” Accenture Institute for High Performance, 2009.

82. “Creating Effective Global Operations in a Multi-polar World,” Accenture, 2008.

83. Accenture interview, 2010.

84. Christopher Bartlett, Sumantra Ghoshal, “Who Is a Global Manager?” Harvard

Business Review (Chinese edition), June 2004, pp. 88-97.

85. Yang Guoan et al., Roses and Thorns: Exploring the Path to Globalization for Chinese Enterprises, The Commercial Press, 2008.

86. Li Quanwei, “Targeting High-end Talents,” Fortune, 2010.

87. Accenture interview, June 2010.

88. “Creating Global Operating Models in a Multi-polar World,” Accenture Institute for High Performance, 2009.

89. Huawei Group Annual Report 2009.

90. Creating Effective Global Operations in a Multi-polar World, Accenture Research, 2008.

91. IT Times, 2009: http://www.ittime.com.cn/ content.asp?id=6900.

92. “Creating Global Operating Models in a Multi-polar World,” Accenture Institute for High Performance, 2009.

93. “Creating Effective Global Operations in a Multi-polar World,” Accenture Research, 2008.

94. Interview, May 2010.

95. http://chinasourcing.mofcom.gov.cn/ content2.jsp?id=74677.

96. Telephone interview, August 2010.

97. http://www.lenovo.com/lenovo/hk/en/ management.html.

98. Telephone interview, August 2010.

99. “Liu Chuanzhi’s 512 Days,” Liu Xiangming, Business Value, July 5, 2010.

100. Ibid.

101 . http://www.lenovo.com/lenovo/us/en/ our_culture.html.

102. “Credit Suisse lifts forecast for Lenovo Group’s FY 2011 profit,” Xinhua News Agency (CEIS) (China), August 3, 2010.

103. “Lenovo Goes Global: From Brands to Talents to Performance,” http://www.ic37. cm/htm_news/2007-8/79672_230408. htm.

104. “Liu Chuanzhi’s 512 Days,” Liu Xiangming, Business Value, July 5, 2010.

105. Lenovo reports fourth quarter and full- year 2009/10 results.

106. Christopher Bartlett and Sumantra Ghosal, Managing across Borders: The Transnational Solution. Boston: Harvard Business School Press, 2002.

107. Paul Nunes and Tim Breene, Jumping the S-Curve, Harvard Business Press, 2011, 116-119.

108. David Henry and Frederick F. Jespersen. “Mergers: Why Most Big Deals Don’t Pay Off,” BusinessWeek, October 14, 2002.

109. South China Weekly, July 29, 2010, B11.

110. Interview, February, 2011

111. Accenture interview, June 2010.

112. Ibid.

113. “Wanxiang Purchases Ailing US Companies,” China Daily, October 9, 2010: http://www.chinadaily.com.cn/ hqzx/2009-10/09/content_8772573.htm.

114. “Wanxiang Becomes Rockford’s Largest Shareholder,” Zhejiang Daily, October 30, 2003: http://news.sina.com.cn/c/2003- 10-20/0832952252s.shtml.

115. Interview, May 2010

74

116. Interview, May - June, 2010

117. ”The Road of Globalization: Go It Earlier Than Later,” Forbes, May 2010 (second issue), p.18

118. Interview, July 2010

119. Lenovo website: http://www.lenovo. com/lenovo/hk/en/management.html

120. Interview, May 2010

121. Interview, June 2010

122. Interview, September 2009

123. ”Chinese Push into Germany’s Heart and Soul,” The Financial Times, August 13, 2010. http://www.ftchinese.com/story/001034075/en

124. Homepage of Donghua Chain Group website: http://www.dhchain.net.cn/athena/companyprofile/wangwjdh.html

125 . Interview, June 2010

126 . Ibid.

127 . Ibid.

128. “The Chain King’s Strategy,” China Machinery Industry News, June 10, 2010: http://business.sohu.com/20100610/n272704703.shtml

129. Interview, June 2010

130. Interview, June 2010

75

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