What are the globalisation drivers for Chinese firms and what paths and strategies are they adopting? Katherine Xin provides insights into their motives and approaches.
Chinese enterprises are globalising at an unprecedented rate: Haier is now the world’s largest consumer appliance manufacturer and Lenovo is the world’s largest maker of PCs.
Meanwhile, Dalian Wanda Group owns not only nearly half of the theatres in the US with the acquisition of AMC and Carmike, but also the iconic American movie studio, Legendary Entertainment Group. Other Chinese enterprises, such as the conglomerate Fosun, automotive parts manufacturer Joyson and consumer goods manufacturers Shuanghui and Bright Food, have been expanding rapidly via cross-border mergers and acquisitions (M&As).
As Western multinational enterprises (MNE) encounter greater direct competition from Chinese enterprises, Chinese firms have received considerable attention regarding their globalisation motives, paths, and strategies. Questions then arise: Can traditional Western internationalisation models be used to describe the approaches of Chinese enterprises? What is fuelling Chinese organisations’ global ambitions? And what integration approach do they follow in the case of cross-border M&As?
‘As new international players, Chinese firms generally lack firm-specific competitive advantages in the traditional sense’
While the aforementioned questions are answered in detail in Global Expansion: The Chinese Way, a book written by five insightful and experienced professors at the Centre for Globalisation of Chinese Companies of the China Europe International Business School, this article aims to provide a summary of its key findings.
Chinese internationalisation strategies
The conventional internationalisation strategies derived mostly from the Western MNEs suggest that, since operating abroad is more difficult, time-consuming, risky and costly than operating at home, firms must have competitive advantages (technologies and brands) over local firms in host country to overcome cost and other disadvantages. Thus, most Western MNEs pursue internationalisation to exploit competitive advantages and seek market growth.
Yet, as new international players, Chinese firms generally lack firm-specific competitive advantages in the traditional sense, such as technological capabilities and managerial know-how, especially when compared to their Western counterparts. Therefore, Chinese enterprises are motivated by the desire to engage in asset-exploration in order to catch up with more competitive global market players, often by investing directly in advanced economies via cross-border M&As. In particular, Chinese firms follow a three-stage path to internationalisation: first, they obtain resources and capabilities overseas; then apply their know-how in local market to upgrade their capabilities, and third, they expand globally to explore international markets.
Stage 1. Resources and capabilities seeking
Most Chinese firms primarily seek three types of resource and capability abroad: natural resources, breakthrough technologies, and well-established brands. Though China seems rich in natural resources, the per capita resource figure is low. As direct demand cannot be fully satisfied, Chinese firms acquire related resources abroad. For example, China Min-metals purchased OZ mining in Australia; Sinopec Group acquired Canadian Tanganyika Oil Company, and China Minmetals Co. bought mining assets of OZ Minerals.
Furthermore, many Chinese entrepreneurs are aware that, to be competitive, firms need to climb up the value chain, and this cannot be achieved without sufficient R&D capabilities. Meanwhile, Chinese managers seek well-known brands to retain their customers, to increase company awareness, and to sustain their profitability. A famous example of technologies- and brand-seeking would be Lenovo, which has become the world’s largest PC maker after successfully adapting the technologies and brand of IBM’s PC business.
Stage 2: Domestic application and the reverse upgrade
China is one of the most populous, fast-growing economies in the world; it is currently growing at a rate of 7%, which is faster than most countries globally. Thus, many Chinese companies globalise to apply their newly acquired resources and capabilities to the Chinese market, with the aim of reversing upgrade and improving their competitive position locally.
‘Chinese and mature Western firms differ considerably in respect of their investment motives’
As Tom Doctoroff, author of What Chinese Want, put it: ‘To be successful, the global China company that’s looking to make a name for itself internationally will have to retain its Chinese characteristics and that means they will ultimately need Chinese management, even if they acquire foreign firms. Success must start in China for these companies.’ Therefore, when compared to other global markets, the Chinese market is most important and most attractive to Chinese firms.
Stage 3: Global expansion
At stage three, Chinese companies aim to achieve international growth and to pursue global exploration by leveraging local benefits and exploiting the acquired resources and capabilities. Firms successfully integrate acquired resources and capabilities with other local resources, such as cheap labour and capital costs, to develop their own core competitiveness, and thereby compete with overseas competitors in international markets.
While very few Chinese firms are at this stage, those that are, such as Haier and Huawei, first expand to other developing countries with similar cultures, and then to developed markets after gaining sufficient international experiences.
The Chinese way of achieving integration
Global M&As, notably those led by US MNEs, have focused on increasing shareholder value by realising synergies between two companies, in particular by increasing efficiency and exploiting scale advantages. The post-acquisition integration strategy to pursue synergies has typically been the absorption model, which brings together operational resources and reduces duplication and waste. The acquired company becomes a part of the acquirer, managed by the acquirer and adopting the corporate culture of the acquirer.
Chinese and mature Western firms differ considerably in respect of their investment motives. Chinese enterprises conducting cross-border M&As are typically still at the growth stage, and often acquire mature overseas enterprises to access natural resources, technology or brands. Their own management practices and organisational culture are not (yet) suitable for managing complex operations across multiple countries and locations. Therefore, the absorption model may not be suitable for Chinese enterprises.
Most Chinese acquirers that we have observed pursue the ‘light-touch strategy’ with post-merger integration. This is well-suited for enterprises from emerging economies that acquire firms in developed countries, as the top management teams in developing countries still lack the capabilities in international management, operations and marketing required in developed countries.
The essence of the ‘light-touch approach’ is to manage acquired capabilities by empowering local decision makers. Recognising that in the short term, resource transfers and retention can be very difficult, the investors allows the acquired enterprises to operate independently, while guiding the strategic direction through the board of directors and a small number of expatriate executives. Thus, the acquirers put the emphasis on preserving and developing acquired capabilities, bearing in mind that active involvement in the acquired company – especially if led by internationally inexperienced managers – might trigger the departure of individuals carrying critical knowledge.
The ‘light-touch approach’ has suited many of the cross-border acquisitions undertaken by Chinese investors in recent years, but not all. Where the acquired company is small and lacking strong management, or where the acquirer envisages the realisation of major operational synergies, then a more active involvement may be necessary. Thus, some Chinese investors, by design or necessity, have developed an ‘our-way approach’ to integrating their historical operations with newly acquired ones. Due to the relative novelty of cross-border acquisitions for Chinese businesses, such an integration mode has often evolved over several stages of trial and error.
No matter which method a Chinese company adopts, there must be a degree of organisational change both in the company itself and in the affiliate it has acquired. There are many factors that could influence decisions around changing the critical aspects of the affiliate organisaton: these include how closely the parent company wishes to control the affiliate, and whether the parent’s strategy is to build global standardised systems within the group or keep the affiliates localised. Even if the acquirer decides that the affiliate needs extensive changes, it must still consider whether it has the capabilities to maintain the affiliate’s operation and customer bases, especially in the case of companies from developing countries in the early stages of post-merger integration.
But the most important factor of all is the company’s strategy and motivation for undertaking M&As. If the aim is to acquire intangible assets such as advanced technologies, brands and/or capabilities, then the priority must be to retain existing talent and facilitate the transfer of these assets; this implies a minimal degree of organisational change in the acquired company. The wide-ranging case studies we present in Global Expansion: The Chinese Way make it clear that Chinese companies’ post-merger integration strategies play a crucial role in supporting their globalisation strategy.