Dual Success OF Chinese Business Internationalisation Essays Example
In the recent decades, after the end of the Cold War and stimulation of integration in Europe and world in general, the world has become a single international community with transparent boarders and freedom of movement for capital. Under such conditions, sooner or later medium or large business begins to consider expansion and its potential internationalisation. While the Western world countries are accustomed thinking globally for half a century, companies for the developing markets began to consider their strategies of internationalisation exactly in the last couple of decades. The main implications for the late-comers are that most of the traditionally existing gaps are covered, and competition is higher than ever. In these conditions, the case of the Chinese firms on the path of internationalisation is of particular importance. It demonstrates that the rules of the internationalisation game have changed and that in order to succeed in this world of global business actors, latecomers need to offer more and in a more consistent manner than a simple accusation of a company abroad. In other words, success of internationalisation does not equal presence on the foreign market; rather it means consistency in the competitiveness of one’s brand, which is something Chinese firms yet need to develop. The aim of this paper is to outline to what extent Chinese firms demonstrated to be successful in internationalisation.
Overview of Chinese Internationalisation
While until 1978, when the Open Door policy introduced China into global cooperation and business conduct, the county was relatively inactive the processes of globalisation and economic cooperation; after 1978, it took course on catching-up with the rest of the world. The outcome of constant boosting of economy and governmental stimulation of the development of certain industries was that Japan was replaced by China as the biggest nation that holds foreign exchange reserves, estimating $853.7 billion in 2006 (Ding et al., 2009). Furthermore, the country’s economic intention was not only motivated by encouraging FDI but also promoting “Made-in-China” products around the word (Richet et al., 2014). These were the first stages of Chinese internationalisation. The recent third stage (2001-nowadays) is characterised by outward FDI from China. This tendency has increased dramatically over the last thirty years. In 1980 Chinese outward FDI estimated $0.4 billion, increasing to $2.3billion in 1990, and reaching $41 billion in 2004 (Child & Rodrigues, 2005). On this last stage of internationalisation, Chinese companies tend to concentrate on overseas expansion in the form of merging and acquisition (M&A). The main feature of this process is that it is directly stimulated by Chinese government regarding firms and industries it considers to be crucial for the national economy. Such government-business symbiosis resulted in 13 cross-border M&A in 2004 (Wu, 2009).
Although Chinese economy became one of the key global players, and its companies continue to infiltrate international markets, the process of internationalisation is far from an easy one for Chinese companies. First of all, Chinese companies are considered to be relative new-comers in the word of globalisation and internationalisation. Consequently, these companies need to be highly competitive (Child & Rodrigues, 2005). Secondly, Chinese firms are known in the world for the production of cheap and low-quality products (Jin, 2007). Consequently, often in order to go global companies need to change their quality system in cooperation with foreign companies. In other words, Chinese companies need to obtain and implement Western-style know-how and qualification systems in order to make their products of the same quality as Western equivalents if not better (Wu, 2009). Thirdly, related to the previous argument is the fact that Chinese companies still need to work on developing national brands which could become recognised in the world and be associated with China in terms of quality and innovation (Boisot & Meyer, 2008).
Fourthly, Chinese companies also need not only follow the steps of the Western internationalisation strategies of the past, they need to incorporate into existing trends in internationalisation and be able to survive there (Richet et al., 2014). For instance, at the current stage of globalisation, where social, political and economic interests are entwined, it is no longer functional to separate economic internationalisation from its social aspect. In this regard, except for establishing functional business relations, Chinese firms need to work on their socio-political profiles and the ability to be liked and positively perceived by the local communities of the country where the internationalisation is taking place (Wu, 2009). For instance, the company might have a great modernised profile in the Western market, demonstrating innovations and correspondence to the local cultural specifics. However, if the same company uses child labour back in China or neighbouring countries, its success in the Western market will be endangered, because it is illegal in the Western countries and customers would refuse to buy products of this company as their social protest against child labour (Wu, 2009). Thus, Chinese companies need also to invest in cultural orientation of their expansion and potential of inter-cultural frictions. Finally, in order to be competitive on the global arena, Chinese companies require up-to-date technologies and know-hows (Child & Rodrigues, 2005).
Merging and Acquisition Strategies of Internationalisation
Although successful overcoming of all these challenges would require a systematic approach and thus Chinese government’s willingness for further changes inside the country, more suitable solution for internationalisation is considered to be a traditional M&A scheme (Richet et al., 2014). In this regard, while various scholars argue that there is no single internationalisation strategy for Chinese firms, merging and acquisition demonstrate to be the most common one. However, as it will be demonstrated further, it does not mean that this strategy is the most successful.
The main rationale for Chines interest in M&A is that it gives Chinese companies an opportunity to overcome some of the mentioned above challenges of internationalisation. First of all, through the acquisition of the foreign companies, Chinese companies can incorporate into already existing supplier networks, technological base, and knowledge of market-specific marketing techniques and representation of established brands (Deng, 2009). In general, Chinese strategy corresponds to the current global trend of acquisitions. The global activity of M&A has increased from $72.8 billion, in 1981, to $1.4trillion in 1999 (Wu, 2009). In this regard, the recent trends demonstrate that M&As are characterised by diversification of industries and countries.
For instance, in the sphere of consumer products, Shuanghui International conducted an acquisition of American pork production company Smithfield Foods, with the overall cost of $4.7 billion; its next market of expansion was Spain and its meats processing company Compofrio (Backaler, 2014). Regarding the sector of entertainment and real estate, Dalian Wanda is famous for its successful acquisition of AMC Entertainment in 2012 for $2.6 billion and for entering British yacht manufacturing industry by buying controlling stake of Sunseeker International in 2013 (Backaler, 2014). Another example is when Chinese oil and gas company CNOOC successfully acquired Canadian company Nexen. The transaction cost estimated $15.1 billion (Backaler, 2014).
Overall, it can be concluded that overall Chinese companies’ strategy of M&A demonstrates to be successful in the very process of acquisition and entering national markets through the firms that have established their profiles in those markets. However, the consistency of this presence through M&A is another question. In this regard, various factors can undermine the success of an acquisition. In this regard, from the perspective of local communities, aka consumers, M&A can be observed as a negative phenomenon of “Chinese desire to buy the world”, consequently, the eagerness to buy products of Chinese companies can deteriorate due to cultural frictions (Wu, 2009). On the other hand, some Chinese companies demonstrate more moderate and traditional way of internationalisation than M&A. The following case study of Chery demonstrates a catching-up model of internationalisation rather than an expansionist approach of M&A.
Chery Automobile Ltd. Co Case Study
This case study pays attention to an unusual internationalisation strategy of a relatively young private company. Nowadays, Chery Automobile is the largest independent auto producer in China. Unlike traditional M&A strategy of internationalisation, Chery’s strategy is characterised by “late starting-up, fast growing-up and sharp entering into international market” (Zhang & Filippov, 2009, p.20). It demonstrates the ability of developing consistent entrepreneurial culture and orientation towards advanced technologies. Particular feature of its profile is that company is not state-sponsored and represents a new generation of Chinese firms that are well-qualified technologically and are targeted globally from the very start (Filippov & Saebi, 2008).
The company was founded in 1997 in Anhui province of China, starting with the initial capital of RMB 3.2 billion. The first plant was created in March 1997, and the first car built in December 1999. Eight years later, the millionth car was manufactured in 2007 (Filippov & Saebi, 2008). In this regard, the first-stage goal of the company was to establish its brand in the internal, Chinese market and make its brand not just recognisable in the country but also trusted and respected (Richet et al., 2014). In this regard, the company’s approach to internationalisation corresponds to Japanese strategy. It is argued that in order to achieve success in internationalisation, companies need to acquire a strong presence in the national market, the way it was done by Japanese firms (Deng, 2009). By doing so gives them an opportunity to make their brand recognisable and respect, which would stimulate further investment strategies, obtain relevant institutional, financial, managerial and technological capacities required for the successful competition (Deng, 2009).
Another aspect of Chery’s strategy is that although the brand needs to be established and trust won, being a late-comer in the global business means that company also needs to be fast in decision-making and provision of qualified products to meet market’s demand (Filippov & Saebi, 2008). Chery was fast in its growth. It achieved an increase in total sales of 61.5% in 2006, comparing to 2005. In 2007, the increase was 24.8%, estimating 381, 000 units. Consequently, company had doubled “again with an increase rate of 132%, ranking 1st for 5 consecutive years in car export in China” (Zhang & Filippov, 2009, p. 20). This statistics is the best evidence of company’s success and growth in the demonstrated years. It also shows that the nature of catching-up model of internationalisation is in catching-up fast in order to fill in the gaps on the market that still exists there (Wu, 2009).
Another crucial element of Chery’s strategy is orientation on technology as means of improvement of quality and standards. On the other hand, unlike M&A strategy companies that acquire Western companies in order to obtain ready-made technologies and know-hows, Chery went a more conventional and traditional way for the Western companies rather the contemporary Chinese. It invested in its own R&D. In this regard, beginning from 2003 company had been using and developing 2452 patents enlisted in the Chinese State Intellectual Property Office (Zhang & Filippov, 2009). This suggest that company does not only concentrates on technological dimension, but does it at home, stimulating national technological development and getting it from first hands rather than together with a new acquired company a necessity for its restructuring (Richet et al., 2014).
Chery’s success can be estimated by the fact that it became Chinese number 1 car exporter and the largest local carmaker (Filippov & Saebi, 2008). In 2008, its global expansion included selling 135000 cars to 80 countries around the world, dislocating its seven foreign assembly plants in such countries like Iran, Egypt, Indonesia, Russia, Ukraine and Uruguay (Zhang & Filippov, 2009). The crucial element of company’s internationalisation strategy is its gradual nature. Unlike M&A expansionist approach to buying known brand companies and digging into their know-hows, Chery decided to move fast but slowly. In this regard, it concentrated on a gradual expansion on the neighbouring markets of Asia, rather than going to the Western heartland and competing with titans of automobile manufacturing business (Richet et al., 2014). Thus, it aimed to test its products and meliorate them according to the requirements of the Asian market and then use the basis for further development in the global environment. The focal point of this approach is that it places strategic alliances in its heart rather than merging and acquisition. In other words, the company has adopted a mutually beneficial approach of internationalisation rather than an aggressive and single-sided one of M&A (Deng, 2009).
The main rationale of Chery international expansion was conditioned by the desire to improve its technologies and manufacturing standards. In this regard, the company established a functional international network of collaboration. It initiated work with Western European companies like Pininfarina S.p.A., specialised at designing and AVL List GmbH, specialised in manufacturing technologies and standards (Zhang & Filippov, 2009). Consequently, Chery had to invest into restructuring of its manufacturing facilities according to the EU standards and norms (Child & Rodrigues, 2005). The next step in its strategy of internationalisation is in working on its brand. In this regard, Chery is cooperating with such titan of the automobile industry as Chrysler (Deng, 2009).
Overall, Chery’s strategy of internationalisation can be summarised as strategies-allies-oriented and gradual in its expansion towards new markets. In this regard, it can be argued that although it might not be as straightforward and representative as M&A strategy, it is more constant and stable then M&A strategy. It is aimed at deserving its pace under the sun by the qualities of its own home-grown brand like similar brands in Japan and South Korea rather than through buying into famous Western brands. Chery’s strategy also demonstrates an example of a successful strategy of internationalisation with long-termed commitments rather than a simple establishment of the presence through capital investments (Filippov & Saebi, 2008).
So, are Chinese companies successful in internationalisation?
However, the expansionist nature of these transactions and the usual restructuring package following these transactions results in negative perception of Chinese firms in the local communities and sooner or later effects business’s PR and bad perception (Child & Rodrigues, 2005). In this regard, on various occasions one of the conditions for M&A was that majority of labour was brought from China, resulting in significant unemployment among the local population (Richet et al., 2014). Consequently, such expansionist approach might be cost-efficient and straightforward in internationalisation of one’s business, but on a long run it would result in a negative PR and deterioration of inter-cultural frictions that do not stimulate purchasing capacity of consumers (Richet et al., 2014). To a certain extent, this approach to internationalisation reminds of a good old-fashioned territorial expansion, which can correspond to the idea that Chinese companies are buying the world.
On the other hand, the main minus of aggressive internationalisation is that cultural differences do matter. If the impact of unemployment on the local population is not taken into account, the company’s presence on the local market might be very short-termed irrespective of its original plans (Richet et al., 2014). One of the most successful American hospitality corporation Marriott International placed people at the heart of its business strategy and culture-friendly programme of internationalisation (Richet et al., 2014). In this regard, company demonstrates its commitments not only in the business sphere of a foreign country but also social and political. In this regard, Marriott International demonstrates the last stage of internationalisation and globalisation where business cannot be separated from political, social and human aspects of life. On the other hand, Chinese companies building their M&A strategies according to the internationalisation trends of a few decades ago (Wu, 2009). In other words, it can be argued that merciless profit-oriented and presence-establishing incentives might be entirely successful a few decades ago, but they had to evolve together with the cohesion of the Western society, where one cannot make money or gain respect if it harms local people (Richet et al., 2014). Thus, it can be argued that, from the perspective of the contemporary systematic and people-friendly internationalisation, Chinese companies are not that successful.
In terms of long-termed and stable representation on the global arena, Chery alliances-oriented strategy of internationalisation demonstrates a successful case of Chinese internationalisation. The main benefit of this strategy is that it corresponds to the traditional value-oriented strategy of Japan and South Korea and is aimed at developing its own national brand and improving its quality according to new markets’ requirements. Although, unlike M&A strategy, this approach does not give an immediate representation in the foreign market, from long-term and systematic perspectives, it is more successful than an expansionist approach. The rationale for the success of Chery’s catching-up model is that it follows stages of gradual internationalisation, learning on each stage specifics and cultural requirements of product characteristics and also ways of business conduct. This approach to internationalisation is less invasive, and more people-friendly. People who are employed on foreign plants consisted mainly of the local population; thus, it was stimulating the local economy and creating a favourable impression of the company and its brand (Jin, 2007). Thus, Chery’s strategy of internationalisation proves to be successful in a long run.
Overall from all mentioned above, it can be concluded that Chinese companies demonstrate to be successful in their internationalisation intentions. Although there various obstacles on their way including a tremendous difference in stages of globalisation and internationalisation between these companies and the rest of the world, they prove to achieve success both in immediate presence achieved through M&A, and also long-termed strengthening of the national brand on the overseas markets.
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