China's impressive economic growth over the past quarter-century has given rise to a new breed of Chinese companies with the motivation and scale to expand into global markets. Similar to Japan and Korea, Chinese companies are building on their export origins to become global players in industries ranging from electronics to automobiles. But success is far from certain. Chinese companies must overcome significant challenges to compete against established foreign companies in global markets, including within China.

Introduction:

Over the past quarter-century, China has achieved phenomenal economic growth – primarily through a combination of exports, massive infrastructure spending and gradual market liberalization – culminating in China’s entry into the World Trade Organization (WTO) in 2001.

Many economists now project China’s economy will surpass the size of the U.S. economy by 2035. Chinese companies will undoubtedly accelerate their global activities in line with China’s ascent as a major economic power. By “global,” we mean much more than simply exporting – companies need to possess the right combination of management capabilities, innovation, market savvy and an overseas footprint to compete on a worldwide scale and extend their presence across industry value chains.

While some Chinese companies will globalize organically, we anticipate many others will pursue joint ventures, strategic partnerships, or mergers and acquisitions (M&A) to accelerate their global presence. Lenovo’s recent purchase of the IBM Personal Computer (PC) Division, SAIC’s 50.6 percent acquisition of Korea’s Ssangyong, China National Petroleum Corporation’s (CNPC) US$4.2 billion acquisition of PetroKazakhstan3 and Haier’s unsuccessful bid for Maytag in 2005 highlight Chinese companies’ ambitions to expand globally by securing assets and capabilities that can enhance their competitiveness – not only in foreign markets, but also in China.

Which Chinese industries and companies hold the best prospects for becoming global players? What parallels and “lessons learned” can be drawn from Japan and Korea? What are the challenges facing Chinese companies going global? What strategies and operational capabilities must companies have in place to succeed? These and other questions were the focus of our research on the globalization of Chinese companies over the next decade.

The IBM Institute for Business Value, in partnership with Fudan University, assessed the globalization trends, aspirations, motivations and challenges of Chinese companies primarily in high-potential manufacturing and natural resources industries. Over 40 interviews were conducted with Chinese companies, M&A specialists and global subject matter experts.

This study provides a strategic framework for Chinese companies to assess their global readiness and identify innovative ways to move up the global value chains in their respective industries. At the same time, foreign companies – whether active in China or not – will benefit from this study by factoring our insights into the formulation of their business strategies.

China’s integration into the global economy

China’s integration into the world economy is being driven by four key forces: Rapid economic growth, booming
global trade, foreign direct investment in China and Chinese investments abroad.

Rapid economic growth
During the past twenty-five years, China achieved an average annual gross domestic product (GDP) growth rate exceeding 9.6 percent,4 with total GDP reaching US$2.35 trillion in 2005.5 China’s economy has grown by 7 times in the past 20 years, faster than the U.S. and Japan grew during their early stages of economic development. Japan took 25 years to grow 6 times from 1960 to 1985 and the U.S. took over 60 years to grow 3.5 times from 1870 to 1930.6 China’s GDP growth is projected to continue at annual growth rates of at least 7 percent through the next decade and beyond.

Booming global trade
China’s exports reached US$760 billion in 2005, making it the fourth largest exporter globally – with high-technology products such as telecommunications equipment, computer and electronic products and electronic components accounting for 43 percent of total exports. In fact, China is now the largest exporter of information technology products in the world, surpassing the United States in 2004. But foreign funded firms and those from Hong Kong and Taiwan are driving China’s massive export trade. These companies accounted for 57 percent of total exports in 2005 while Chinese companies only accounted for 43 percent.

Foreign investment in China
Foreign companies have invested a staggering US$621 billion in China with US$60 billion in 2005 alone, making China the third largest recipient of foreign direct investment (FDI) in the world.13 Much of this FDI can be attributed to China’s entry into the WTO, which offers unprecedented access for foreign companies in many industries. Ironically, while WTO has helped to spur economic growth and market liberalization, it is also driving Chinese companies overseas to build capabilities that can help them compete more effectively against domestic and foreign competitors in China.

Chinese investment abroad
By comparison, China’s outward direct investment (ODI) and cross-border M&A is tiny by global standards. In 2004, China accounted for only 0.25 percent of global ODI (excluding M&A), ranking 28th among all countries. Government-imposed financial controls have historically capped China’s total ODI at about US$5 billion per year and require companies investing more than US$10 million to gain special approvals. However, this may change in the near future. China has announced that it will relax or abolish these controls in 2006, which would undoubtedly lead to a sharp increase in ODI and M&A activities. In fact, China’s Ministry of Commerce predicts outward investment will maintain an average annual growth rate of over 22 percent during the next five years and exceed US$60 billion by 2010.

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Which industries, which companies?

The IBM Institute for Business Value analyzed Chinese industries and companies to determine those that are favorably positioned to become global players over the next decade. We used three “filters” – company size, industry characteristics and company characteristics – to identify Chinese companies, primarily in manufacturing and natural resources industries, with strong globalization potential (see Figure 1). Our analysis included both state owned enterprises (SOEs: companies with more than 50 percent ownership by either central or provincial governments) and privately owned enterprises (POEs: companies with 50 percent or more ownership by private investors).

Most Chinese companies remain small by global standards. Among China’s top 500 enterprises, only 290 companies met our initial filter of annual revenues over US$1 billion and only 14 have annual revenues over US$15 billion. By comparison, the U.S. has over 143 companies with annual revenues exceeding US$15 billion.

Our second filter identified Chinese industries with strong globalization potential based on criteria such as industry size as a percentage of GDP, degree of industry concentration, export intensity and government support. For instance, we included the home appliances industry, where Chinese companies are the largest global manufacturer in 28 out of 32 product categories. Air conditioners and refrigerators made in China accounted for 67 percent and 34 percent of global production in 2005, respectively.

A total of 12 industries met our second filter criteria, including consumer electronics, computer products and components, telecommunications equipment, automotive, steel, logistics and petrochemicals. This narrowed our list to 124 companies (105 SOEs and 19 POEs).

Our final filter identified among the 124 companies those that met additional criteria, such as a leading market position in China, over 15 percent of revenues from either exports or foreign operations and a strong global vision. This narrowed our final list to 60 companies, of which all but 13 are SOEs.

Among these 60 companies, relatively well known players such as Huawei, CNPC, CNOOC, Haier, TCL, Lenovo, SAIC and Baosteel met our criteria but so did less wellknown companies such as Galanz (home appliances), Wanxiang Group (auto parts), Midea Group (consumer electronics), Chery (automobiles), Lifan (motorcycles) and Ningbo Bird (mobile devices). It is primarily among these 60 companies that China’s global leaders are likely to emerge, but in our view only those with a clear management vision, strategy and strong execution capabilities are likely to succeed. Figure 2 show all POEs and a partial list of the SOEs that passed our three-filter test for globalization potential.

Visit Going Global: Prospects and Challenges for Chinese Companies on the World Stage IBM Website

Conclusion:

China’s ascent as a global economic power is giving rise to a small, but growing, group of Chinese companies with the potential to become global players in their industries over the next decade. However, success will not come easily. Chinese companies operate in a new era with intense competition, open markets, instant communication and an apprehensive world often fearing – rather than embracing – the notion of companies from emerging countries expanding into global markets. Only those companies with clear, focused strategies and strong execution capabilities can hope to become future global leaders in their industries. The potential rewards are great – not only for Chinese companies, but also their foreign partners with whom they may form alliances to win in the global marketplace, including within China.

About the authors:

Alan Beebe is the Research Director of the IBM Institutefor Business Value in China.

Chee Hew is a Senior Research Analyst at the IBM Institute for Business Value in China.

Feng Yueqi is a research analyst at the IBM Institute for Business Value in China.

Professor Shi Dailun is a Professor in the School of Management at Fudan University.

Contributors
Dr. Hagen Wenzek is the Global Leader, Electronics Industry in the IBM Institute for Business Value.
Professor He Xi You is a Lecturer and Research Fellow at Fudan University School of Economics.

IBM Institute for Business Value:

IBM Business Consulting Services, through the IBM Institute for Business Value, develops factbased strategic insights for senior business executives around critical industry-specific and crossindustry issues. This executive brief is based on an in-depth study by the Institute’s research team.

It is part of an ongoing commitment by IBM Business Consulting Services to provide analysis and viewpoints that help companies realize business value. You may contact the authors or send an e-mail to iibv@us.ibm.com for more information.

School of Management at Fudan University:

Fudan University was the first institution of higher learning in China to set up a department of business education, and was also the first in the country to resume its business education program after the reform and open-door was implemented in China. Over the past two decades, the School of Management at Fudan University has developed into an internationally well respected business school.

This joint project with the IBM Institute for Business Value fulfills our mission to analyze business operations and national economic activities using advanced management theories, systematic methods, mathematics models and information technology. It is part of our commitment of timely research for enterprise practitioners with insights into important strategic, tactic and operational business issues that can help firms make informed sound decisions.

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