Zhibin Gu: how China creates outourcing, tech, manufacturing, finance strategies
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Get onground knowledge and analysis from business and investment guide book: China’s Global Reach
Borderless Business, National Competition, Politics, and Globalization (book excerpts)
by George Zhibin Gu
China, United States and Global Development
by Andre Gunder Frank
China’s New International Experiences
(1). China, India and many other later developers have rather limited strengths to compete in a highly competitive world market dominated by a few well-developed nations today. Their best strengths come from a low-paid labor as well as hard work. Even so, they are able to provide massive low-priced goods and services. It turns out that this price gap is nothing less than survival.
(2). Gaining competitive advantages through low-pricing tags has been common throughout history. One example is the British competitiveness following the industrial revolution. For long, the British dominated the world commerce through their massively produced, highly competitive textile, steel, and consumer products, among others. China, India and other underdeveloped nations could not compete at all. This naturally changed the world production map in favor to Europe.
By early 20th century, the center of economic gravity moved to the US, as the nation was able to produce the biggest, cheapest volume of products and hence gained world economic leadership. For example, Ford was able to produce the cheapest cars in biggest volume. Through such mass production, the US has become the biggest economic power over some 100 years.
Again, Japan Inc. suddenly rolled its products all over the globe, which began in 1960s. In fact, made-in-Japan products had a low pricing advantage. For example, in 1970s, all the US TV manufacturers went bankrupt, even if the Japanese TV makers had no technological advantage over their US counterparts back then.
(3). The world economic map is changing rapidly for now. Though the late developers have gained quick growth, their advantages are few. It is still the developed world that gains most advantages. For example, the developed world can get enormous benefits simply by outsourcing to the low cost nations like China, Mexico, Vietnam, and India. In addition, they can easily set up shop there. Such moves have already brought unprecedented wealth to the developed world.
At the same time, the developing nations have also gained fast growth doing what they do best: low cost products and services, which have helped to lift living standards. Under this new environment, the world enters a new era, the era of borderless economy and unprecedented opportunities;
(4). One new trend is the increased internationalization of all businesses from all nations. For long, multinationals from the developed nations have dominated the world markets. This is beginning to change, as more emerging companies from the developing nations desire to go global as well. However, these emerging companies like the Chinese ones are still weak. This Chinese weakness happens at home market above all. But the reason is simple: there is a high degree of openness and massive foreign presence. As a result, cutthroat competition is common. In all this, building a strong home base is a must for the Chinese before any meaning international expansion. But achieving this goal will take a long time; and
(5). One alternate strategy for the Chinese expansion is through partnerships with established players overseas. One highly interesting area is that many international giants wish to dump their unprofitable business units to China. Both IBM-Lenovo and Thomson-TCL deals show this new trend in the making. Another kind of development is that Huawei goes global through various partnerships in different markets.
Chapter 3. Creation of a Global Manufacturing Center
This is a very creative era for China. The nation has become a highly dynamic and vibrant place as if overnight. One most unexpected outcome is the existence of a new manufacturing center, coming to life seemingly from nowhere.
Moving China forward has demanded huge efforts. There have been full of surprises as well. An old Chinese saying goes, “Things one dearly wishes for never occur, while things nobody expects do happen.” This manufacturing center has emerged more by accident than by design. But it is reaching a rational stage for now. We will explore its rise and development here and in the next two chapters.
To begin with, the center is partly tied to the new private sector. The next group is overseas businesses that have created more than 560,000 companies inside the nation as of mid-2006. The third player comes from the state sector, though it is going through vast transitional pains. These three groups together have produced this commercial hub in some rather accidental ways.
By now, this center has the biggest manufacturing capability in the world. For example, it produced 300 million mobile handsets in 2005 alone. Actually, it could double the volume easily if there were markets for it.
What is the biggest driving force behind this new center? It is nothing but the exploding domestic consumption, which has created all sorts of opportunities. Before the reform, there was a poverty-stricken life in the nation. Most Chinese did not have any personal savings. Today, consumers have over $2 trillion in cash deposited in banks as of mid-2006. This rising consumption power is behind the business boom.
In this market, above all, there are immediate business transactions as well as profits for all participants to gain. Without these quick benefits, it would have been next to impossible to attract huge international capital within a short time.
In addition, integrating China into the global economy is another powerful driving force. Selling low-priced, made-in-China products has gained vast popularity. The US computer giant Dell spent $16 billion in buying made-in-China components in 2005 alone; Wal-Mart spent even more: $18 billion in 2004.
But traffic goes both ways. Foreign selling to China has been setting new records year after year. Selling to China is a new buzzword around the globe. In 1978, the nation’s total international trade was only $21.1 billion, but it had reached $1.42 trillion as of 2005. In that year, international players sold $658 billion worth goods to China. This Chinese buying could reach over $1 trillion within five years.
This exploding trade is partly tied to this new manufacturing hub. In short, China has become the world’s biggest factory within a short time. The massive foreign involvement has become part of a new commercial nation.
Arrival of Indian Companies
Today, numerous developing countries have a labor pool cheaper than China’s. Nevertheless, foreign multinationals see many advantages to being in the Chinese market. Even thousands of Indian businesspeople are here. Why?
Chapter 13. Chinese Multinationals
In this era, the key Chinese strategy is to bring foreign investors over to China. In this regard, China has been doing very well. Consequently, the nation has quickly become a global center. This basic strategy will not change any time soon.
At the same time, especially recently, a small group of Chinese companies have increasingly tried to reach the overseas markets in various ways. However, it has not happened in any big way so far. In truth, setting up an extensive international franchise for China Inc. remains at the very beginning.
In this chapter and the next one, we will examine various business dealings of China’s international work. Still, the most interesting ones take place at home market still.
Some Sizable Chinese Companies
At this time, the 15 Chinese companies in the 500 club are all state-run companies. The list in 2003 included several telecom operators, four banks, State Grid, China Food Group, China Life, Baosteel, and SAIC, the Shanghai-based auto maker.
For now, China’s energy needs are exploding. It now builds a new power plant each and every week. However, the prize goes mostly to State Grid and six other state energy companies. Only in this era have private investors and overseas parties been allowed to enter the field. Still, nobody can compete with State Grid directly, which controls much of the power transmission business. Its predecessor, State Energy, monopolized the entire energy sector for several decades. Only by the end of 1990s, reform on the energy sector gave rise to State Grid and six other companies.
State Grid was already ranked 46th in the club as of 2003. It will become bigger, as China’s energy needs are still exploding. For long, there have been frequent power shortages, even if China is already the second biggest energy supplier after the United States. Naturally, this attracts more investment.
In the state sector group, at least three companies, China National Petroleum Company (CNPC), Sinopec, and China National Offshore Oil Corporation, are already global players. How can they be this big? Well, these three companies form the state monopoly. Their annual profits could reach over $10 billion.
A booming economy has brought these companies all the perks. Since 1993, China has become a net importer of oil. In 2005, China consumed over 7% of the global oil supply. By 2020, its oil demand will likely triple. Fifty percent or more will have to be imported. Therefore, these three giants must go outside to acquire both supply and assets.
So far, CNPC has been competing with the other two oil players head-on in the international field as well as at home. These three giants have fistfights with each other, especially when they see golden spots for gas stations. CNPC’s new management style is reflected in the letter of complaint it sent to Fortune magazine when the Fortune editors wrongly ranked the company a low 73rd. The magazine had to upgrade CNPC to the 52nd slot.
All three companies have already cut a few dozen deals around the world. They are aggressive and go everywhere oil resources are located. So, these three giants are ahead of the curve compared to China Inc. as far as international expansion is concerned. However, several others in this group are also strong.
Take China Mobile and China Unicom. These companies are the monopoly over China’s mobile communication market. China is already the biggest mobile phone market. By early 2006, there were over 400 million users. China Mobile and China Unicom have been the winners in this game. Private Chinese companies are banned from the field. International companies can only sell them hardware and software.
With billions in cash and over 400 million consumers in hand, these companies can go far. At investor conferences, many investors ask about their plans. But the truth is that China has an exploding mobile market, and these companies will stay at home for a while. They have yet to gain international experience above all. They are far from ready to jump into overseas market in a big way, though they may start to test the water soon.
But there are some occasional ventures especially related to industrial materials. The Shanghai-based steel mill Baosteel has created a major joint venture in Brazil. China’s steel market is already bigger than those in the United States and Japan combined, and China still imports more steel. Its manufacturing expansion is demanding ever-increasing amounts of metals, steel, and cements, among other basic industrial materials. Therefore, Baosteel and several other Chinese companies are reaching out to be near resource-rich places. Latin America, Canada, Australia, and Africa are all natural choices.
Chapter 6. All International Business Players are important
Today China is the biggest new frontier for international companies. In many ways, the Chinese market has more an international flavor than many other markets around the globe. Many unique characteristics have evolved along the way.
For now, China has already become one biggest theater for international businessmen to display their cultures and traditions as well as ambitions. They are singing their favorite songs and doing their traditional dances—all in one theater. So far, some have danced better than others.
Competing International Players
Up to now, the “Overseas Chinese Inc.” has been the biggest investor in mainland China. The United States is in second position, followed by Japan, numerous European nations, South Korea, Canada, and Australia.
Businesses from Hong Kong had an early start. Most if not all of the factories in Hong Kong have moved over the border. Today, about 240,000 Hong Kong residents work and live in Mainland China.1 Their employers are mostly small and midsize companies. They mostly focus on low-end consumer products. Their strengths are best shown in their vast numbers.
Similar things can be said about the business players from Taiwan and Macau, except that Taiwan’s semiconductor business has a sharp edge, which is increasingly established in Mainland China as well.
But the most influential players are global multinationals. China’s expanding market has created tremendous opportunities for the global giants, especially in capital-intensive and high-tech sectors. These giants have made a huge difference in connecting China to the global markets. But so far, different national players have had very different performance inside China.
Overall, on a global basis, the U.S. companies as a group are the biggest. The power of the United States is the most influential in many markets. In China as of now, U.S. players are just one among many foreign business groups. True, they are already very influential, but they can become even more influential if more US players join in.
Relatively speaking, the South Koreans are more active today than the Americans. To the Koreans, coming to China is a necessity, for their home market is small. They aim to use China as a new engine for growth. But the U.S. companies have a huge market at home. Most of them are less willing to venture out. Except for a few large players and high-tech companies, most sizable US companies have only 10% or less international business today. This is quite different from the situation for many leading companies in Europe, Japan, and South Korea. They may have much bigger international sales than their U.S. counterparts.
In China, many Korean companies have been latecomers in relation to Japanese and Western companies. But they have made great strides. Several are already household names, especially LG, Hyundai, and Samsung. Today, there are over 250,000 South Koreans living in China. In addition, some 4 million Korean workers engage in China-related business inside South Korea.
LG has been a star performer. By 2003, LG had invested $2.4 billion in China. The company has become a leader in the consumer electronics and home appliances sector. Its China business reached $8 billion in 2003 and $10 billion in 2004.2 LG is still expanding its investment programs and hoping to make China its second home.
Samsung is another success story. Its product lines—semiconductors, mobile phones, consumer electronics, and home appliances—fit China’s needs.3 By now Samsung has transferred most of its personal computer manufacturing to China. Its latest project is a new plant of making handsets. By now, it is already a top five player in China’s handsets market.
It seems that the Korean giant Samsung has found jade in China. Samsung intends to make China its biggest market, hoping to reach $14 billion in sales by 2008. To this end, the company has been adding new programs. This has already made Samsung a leader in China. The Korean giant will become even more powerful, for it has found a big space in China.
What is behind the success of Korea Inc. is a combination of good timing and the right products. Above all, the Koreans are committed to China for the long term. The Korean success has inspired envy among international competitors.
In fact, Korean companies now treat China as their own production center as well as a big market. The average monthly salary for a manufacturing job is $1,524 in South Korea, but only $115 in China.4 In addition, China is a huge market, much bigger than Korea—something the Korean companies cannot ignore. They intend to move most of their production from Korea to China, increasing the efficiency and profitability of expanding around the globe.5
In the auto market, all the American players are in China today. As is true internationally, GM and Ford are only two players among many in China. The largest player so far is Volkswagen. Volkswagen has been operating in China since 1985. But GM set up its Shanghai joint venture only in 1996. Volkswagen has kept its leadership role by expanding its programs and adding joint ventures.
But Volkswagen also faces huge challenges. All other players are catching up at its expense partly. In particular, GM has been doing better especially lately and moved up to the number one position as of 2005, which makes the German company try harder only. In Volkswagen’s global sales, China now takes about 20%. The German company is adding $10 billion and wishes to make China a bigger center of its global business.6
At this time, both Volkswagen and GM confront numerous competing players in their price range. Honda and Toyota are two of these. Korea’s Hyundai landed in China in 2000. It hopes to make China its biggest market and is now in a hurry to achieve this goal. So far, progress has been huge. In 2004, Hyundai sold 150,000 cars in China, making it one of the top four car makers here.
Another U.S. giant, Ford, does not want to be left behind. Its most recent project was to build an auto factory in Nanjing in partnership with Japan’s Mazda and a Chinese company. At the present time, all global auto players are busy. They expect China’s auto market to reach 10 million by 2010, from 5.92 million in 2005.
All in all, China has become a new arena for global business. All multinationals have taken their unique roles. They are all important for now, and they all want to become even more important. In order to do so they must fight hard with one another, as well as China Inc.
In the banking sector, there have been numerous restrictions for foreign banks up to now. Even so, many international players are eager to establish a foothold. Since 2004, because of the WTO accord, lifting of these restrictions has begun.
There are numerous international banks active today. Both Citibank and HSBC are aggressive players. They are competing with each other head-on. Nobody wants to be behind. Both banks are trying to bring their entire business lines over. Their eagerness and ambition are matched only by the degree of surprise on the part of the Chinese banks. Both players are household names already.
Three New Lessons
Growing Up in China
This Small Book
The Big Picture
Part I China as a New Global Theater
1. Ambitions of Foreign Multinationals in China
Today’s Versions of Columbus and Magellan
Why Are They Here?
One Big Factory-Market
More Sectors, More Players
2. The Business of China Is Business!
“Empty Talk Destroys Prosperity!”
Spouses and Children
3. Creation of a Global Manufacturing Center
Arrival of Indian Companies
A Crowded Market
Galanz: the Manufacturer of the World
4. The Ultimate Driving Force: Explosive Consumption
Continued Consumption Surge
5. Sharp Rise of Private Sector
One U.S. Banker’s Discovery
40 Million New Businesspeople
Rural and Urban Entrepreneurs
Buttons Create a New Industrial Town
Jinjiang, Fujian: Biggest Exporting Center for Sport Shoes
6. All Players Are Important
Competing International Players
Part II Global Interactions, Business Dealings, and Job Transfers
7. Learning - A Big Industry
Demand for Education
A Top School
8. The Officials’ Global Reach
Officials Lead the Way
Guangdong versus Inland
Abolishing Bureaucratic Tricks
New York versus Beijing
9. “Capital Is Not Enough”
Two Lessons to Remember
Volkswagen versus Beijing Jeep
“Capital Is Not Enough”
Ericsson’s Seven Mistakes
10. Global Job Transfers
One International Question
Hiring by Foreign Multinationals
New Era of Global Job Transfers
Job Worries around the World
Hiring by Chinese Players
Global Job Transfers: China versus India
Part III China’s New International Experiences
11. Price, Price, Price
A Chinese Edge
GE in China
Japan’s Global Efforts
Cisco versus Huawei
Microsoft in China
Global Price Reductions
12. When Can Chinese Companies Become Global?
Weakness at Home
Low Benefits for China
State Banks: “The Troublemakers”
A Long Way to Go
13. Chinese Multinationals
Some Sizable Chinese Companies
Buying Into International Markets
Creating More Partnerships
14. Bringing Foreigners In
Part IV China’s Reform at Home: The Unfinished Task
15. Problems Outpacing Solutions
The Ownership Issue
State Assets and Death on the Nile
“Two Pockets of the Same Jacket”
Lack of Weapons and True Owners
16. How Can a Man Still Wear Baby Clothes?
Credit Crisis and Banking Problems
The Richest Man in Shanghai
17. Crises of State Sector
Rapid Changes in the Managerial Class
Hiring Foreign Managers
Long Live Competition!
18. When Can China Achieve Meaningful Restructuring?
A Saturated Market
Difficulties for a Rational Order
The CEO in China and Elsewhere
Who Is Responsible for Wealth Creation?
Buying Parties Ready?
Need for Greater Determination
19. Employment Traps
Lives of the Migrants
Employment Difficulties for Other Groups
Death of a College Graduate
20. Bureaucratic Tails
Lucky International Players
“The Red Building”
Part V Globalization in Light of History
21. An Unbroken Circle?
The British Isles as a Global Center
China’s Missed Opportunities
The U.S. Way: Dumping Losers
Expansion and Wealth Creation, Past and Present
22. Universal Companies and Global Expansion
Bigger and Bigger Multinationals
First Strategy: A Strong Home Base
Second Strategy: Creating a New Form of Dominance
Third Strategy: A True Global Reach
China’s Participation in the World Economy
23. More on the Circle
Who Has Affected Globalization the Most?
First Factor: Japan’s Global Reach and Retreat
What Is Going On in Tokyo?
South Korea: Glories and Bubbles
Second Factor: Asia’s Financial Crisis
Third Factor: The World Trade Organization
Global Development Orbit
24. How Does China Achieve Sustained Growth?
A Great Paradox
Effective Government, Different Role
The Big Picture
A New Model
Getting Out of the Box
A New World Order
Afterword: China, United States and Global Development
by Andre Gunder Frank
ABOUT THE AUTHOR
George Zhibin Gu is a journalist/consultant based in Guangdong, China. A native of Xian, he obtained education at Nanjing University in China and Vanderbilt University and the University of Michigan in the United States. He holds two MS degrees and a Ph.D. from the University of Michigan.
For the past two decades, he has been an investment banker and business consultant with a focus on China. His work focuses on helping international businesses to invest in China and the Chinese companies to expand overseas. He has worked for Prudential Securities, Lazard, and State Street Bank, among others. He generally covers mergers and acquisitions, joint ventures, venture capital, business expansion, and restructuring.
Also, he is a journalist focusing on China in relation to global development. His articles or columns have appeared in Asia Times, Beijing Review, The Seoul Times, Financial Sense, Gurus Online, Money Week, Online Opinion, Asia Venture Capital Journal, and Sinomania, among others.
He is the author of three additional books, China Beyond Deng: Reforms in the PRC (McFarland, 1991),
China and New World Order: How Entrepreneurship, Globalization, and Borderless Business Reshape China and World (Fultus, 2006), and Made in China: Players and Challengers in the 21st Century (English edition forthcoming; Portuguese edition, Centro Atlantico, 2005). He is a member of World Association of International Studies hosted by Stanford University.