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Op-Ed Contributors

Stop, think before going global

By Yang Ning (China Daily)
Updated: 2010-03-18 07:48
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"Honestly speaking, many Chinese companies began expanding overseas without first asking themselves two basic questions: Whether they needed to expand globally and, if so, whether they were truly ready."

China's outbound direct investment (ODI) jumped $2.7 billion in 2002 to $43.3 billion in 2009.

Its accumulated ODI net stock volume rose more than six times from $29.9 billion in 2002 to $183.97 billion in 2008.

Assets under China Investment Corporation's management: $200 billion.

China's foreign exchange reserve at the end of December 2009: $2.399 trillion.

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The above figures reflect the giant strides China has taken in international direct investment in recent years. With strong support from the government and banks, an increasing number of Chinese enterprises are now looking beyond their borders to invest, and soon many of them could join the "going global" race.

But Chen Chunhua says "going global" should not be the mantra of all Chinese companies. Instead, it should be a rational choice and strategic arrangement only for those with a solid foundation.

Stop, think before going global

Chen knows what she is talking about. She is not only a legendary entrepreneur, but also a professor who has given many years to the study of operational management at a number of companies. That aside, Chen is serving or has served in universities in different capacities: tutor of doctoral scholars in the College of Business Administration of South China University of Technology, visiting professor for executive master of business administration at Renmin University, National University of Singapore, Australian National University and Nanjing University. As the CEO of Shandong Liuhe Group, she helped raise its revenue from 2.8 billion yuan in 2002 to 7.4 billion yuan in 2004. She has been the senior management consultant for several leading Chinese companies, and written two best-selling collections of prose.

"Honestly speaking, many Chinese companies began expanding overseas without first asking themselves two basic questions: Whether they needed to expand globally and, if so, whether they were truly ready," Chen says.

"If Chinese enterprises go global only to get an 'international brand' label or in the hope that overseas markets will always offer more opportunities than at home, then their choice is unwise and can lead to tragic results."

If you disagree with Chen, look at China's second largest life insurer Ping An Insurance. It lost 15.7 billion yuan within eight months of investing in troubled European financial service group Fortis. For another example, rewind back to China's consumer electronics goods maker TCL's nightmare experience after it acquired French Thomson Color TV and Alcatel Mobile's phone business.

But the phenomenal economic growth of the past 30 years will prompt Chinese companies to taste the overseas pie despite the failure of others. After all, Chinese companies have to accelerate their global strides in line with China's rise as a major economic power.

In such a scenario, what types of enterprises have the best chance to succeed as global players? "Only those that have excelled in their respective fields in domestic market, fully understand the rules of the international market, and have clear global strategies and strong execution capabilities." Chen said. But even these companies may find the going tough in the global market, she says. They could face innumerable difficulties and challenges even in their initial stages of going global, which can stem from differences in cultures, laws and regulations, and the lack of qualified human resource. Chen suggests six possible modes for Chinese enterprises to venture overseas, enumerating their advantages and disadvantages.

First, Chinese companies can go global as original equipment manufacturers. They can sell their goods to a foreign company and let it retail them under its brand name. This mode combines the cost advantage of Chinese companies with the brand advantage of foreign companies. Such a venture would contribute to the national economy, too, by generating jobs and paying taxes.

Second, they can enter overseas markets as makers of customized products according to foreign companies' requirement. These would be high-profit ventures and can help export Chinese brands overseas.

Third, Chinese companies can set up overseas sales networks. This mode has the potential of becoming a favorite with Chinese companies. But it has relatively high administrative costs and would take a relatively long time to succeed.

Fourth, they can directly set up factories abroad and get closer to overseas markets and consumers. But since most Chinese enterprises have neither the money nor the technology to venture into developed countries, this approach would work only in developing countries or regions.

Fifth, Chinese enterprises can go in for mergers and acquisitions (M&As) abroad. This approach will obviously shorten the time needed for global expansion, but to make the M&As a success the enterprises should have huge funds, conduct in-depth studies on the companies to be acquired, and have a strong management to make the post-merger integration process hiccups-free.

Sixth, they can follow Huawei's example. Though a Chinese company, Huawei is a leading global telecom solutions provider and has research and development centers and retail networks around the world.

Every Chinese enterprise venturing abroad, Chen says, has to find the way best suited to it according to its "area of business, financial status, risk-taking factor, ability to manage complexities and so forth". Chen has dedicated her life and studies to help improve the lot of Chinese companies. To help them achieve sound and sustainable development, the ultimate goal for every company, she says: "The top priority of a company, domestic or international, is to be always in tune with the needs and desires of its customers - and it should devote all its efforts to realize customer value."

(China Daily 03/18/2010 page9)

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