China has been a champ exporter, but the country's growth depends on developing other avenues of business, too
As China continues its march to become the world's largest economy in 20 years, it is entirely logical that many of its leading enterprises (such as Huawei, Haier, Lenovo, Geely, Chinalco, and MinMetals) should aspire to become global champions within their respective industries. No wonder, then, that, as U.S. icons such as General Motors and Ford (F) have stumbled, Chinese companies have been rumored to be interested in buying some of their subsidiaries. For instance, Beijing Automotive Industry has made a bid to buy Opel from bankrupt GM.
However, the ability to buy is not the same as the ability to swallow. Shanghai Auto has seen its nearly $500 million investment in South Korea's Ssangyong Motor wiped out. The jury is still out on whether Lenovo was wise to have acquired the PC business of IBM (IBM). And, as electronics group TCL's difficulties acquiring the cell-phone business of Alcatel and the TV business of Thomson demonstrate, failed acquisitions—especially if they're big—can actually make companies weaker rather than stronger. Indeed, reported moves by China's regulators to block Tengzhong's acquisition of GM's Hummer could well be a blessing for Tengzhong's owners.
Of course, many Chinese companies have had great success with two types of globalization. The first is conquering global markets via exports from China. The second is acquisition of natural resource assets in Africa, Australia, and Latin America. These are important accomplishments.
Approaching a Limit
Both of these globalization models, however, are close to reaching their natural limits, and neither is particularly demanding in terms of cross-border organizational capability. Exports will never again be as important for China's growth as they have been. China is already the world's No. 1 exporter. If its exports were to continue growing at the same rate as the past 10 years, they would rocket from 10% of the world total to almost 50% by 2020—an economic and political impossibility. Similarly, political sovereignty issues in other countries will soon begin to put major constraints on China's ability to acquire natural resource assets.
The next wave of globalization by Chinese companies, therefore, will have to be different. It will require smart acquisition of established companies in some of the world's major economies. It will require skillful management of geographically dispersed marketing, manufacturing, and R&D operations. It will require distribution of managerial decision-making authority to senior executives coming from different national cultures and located thousands of miles away. And it will require the ability to integrate all of these dispersed resources and run a cohesive global enterprise. Chinese companies will need to overcome four major challenges in pursuing this type of globalization.
The first challenge pertains to financial skills critical to ensuring that any cross-border acquisition is properly evaluated for its strategic and financial merits and done on the right terms. Given an abundance of capital in China and a well-recognized propensity on the part of China's state-owned enterprises to put national policy goals ahead of shareholder value maximization, Chinese corporate leaders are still at a relatively early stage in developing world-class finance skills. Nor can sound financial analysis be outsourced to investment bankers. Investment bankers earn their fees by making deals happen. As is well known, they can scarcely be relied upon for objective analysis.
The second challenge pertains to the skills needed to create and manage horizontal organizations in which key resources are distributed across borders and which are under the control of managers separated from one another by geographic, cultural, and language distances. China's is a command-and-control economy embedded in a culture that respects hierarchy. Most Chinese organizations view information as a source of power resulting in a much lower degree of intra-firm transparency than at Western corporations. China is also a relatively homogenous society in terms of race, religion (or lack of it), and language. Importantly, too, most Chinese managers—especially those at senior levels in major companies—have at least rudimentary fluency in English, the business language of the world.
The third challenge pertains to the fact that, while many Chinese companies are champions at competing through cost efficiency, they have yet to master the art and science of competing through differentiation. Lenovo has made a determined effort to differentiate itself through branding and product design. Other prominent companies such as Huawei (telecommunications), Haier (appliances), and Li Ning (athletic shoes and apparel) are making a similarly concerted effort in this direction. However, for a majority of Chinese companies, competing through differentiation remains a distant concept.
The fourth major challenge pertains to political sensitivity and barriers to potential acquisitions by Chinese companies in other developed economies. Prominent examples include roadblocks faced by CNOOC in its attempt to acquire the U.S.-based Unocal and by Huawei Technologies in its attempts to acquire stakes in Marconi and 3Com. This challenge remains alive and well, as demonstrated recently by the decision of Rio Tinto's board to not accept Chinalco's offer to increase its shareholding in the company. The roots of this political sensitivity lie in the fact that most big acquirers from China tend to be state-owned or state-supported enterprises and governments are reluctant to cede control over "strategic" assets to a foreign government.
These are major challenges, and overcoming them will be neither easy nor quick. An incremental step being undertaken by many Chinese companies to build the needed organizational capabilities is to acquire a minority stake rather than complete control. While these moves are laudable, minority stakes suffer from severe limits to the amount and quality of learning they can yield. Learning by observation can never be as deep as learning by doing. Any company that became a master at the mergers-and-acquisitions game—look at General Electric (GE), Microsoft (MSFT), and IBM—did so by acquiring a controlling stake in and integrating a large number of smaller acquisitions before attempting to swallow a giant.
Having acquired Manganese Bronze (a British manufacturer of London's taxicabs) and Australia's DSI (an auto-parts manufacturer), Geely is on the right track to learning-by-doing and thereby building the needed organizational capabilities. It is an open question, however, whether the company is ready to acquire a company as large as Volvo or Saab, let alone both. The restructuring of the global auto industry has barely started. The next 10 years will bring many opportunities for acquisitions in this industry and others. Going on an acquisitions spree after having built the necessary organizational capabilities will be much wiser than the hasty moves that today are driven largely by ambitions rather than ability. Just ask the shareholders at Daimler who lost a bundle after the botched acquisition of Chrysler.