China goes West
As Chinese companies internationalize they face a number of challenges on the global marketplace. Five factors influence the success of a "venture into the West."
China's ascent as a global economic power suggests that a number of its companies are poised to become true global players over the next decade. However, these companies face an uphill battle and only firms with clear, focused strategies, strong execution capabilities and substantial international business know-how can reap the potential rewards of going global. Roland Berger Strategy Consultants indentifies five key success factors for Chinese companies doing business abroad.
"Chinese companies are becoming increasingly active on the global market by exporting goods under their own brand name and investing outside China through FDI and M&A", says Vincent Mercier, Member of Roland Berger Strategy Consultants' Executive Committee and responsible for China. International M&A activities by mainland Chinese companies have increased over the last few years, but are still very few compared to the EU. The global share of mainland Chinese companies only reached 1.5% on a global scale in 2005. Hong Kong, on the other hand, is the single largest supplier of FDI among developing countries. "Chinese companies are still in the very early stages of international M&A activities. International purchases through M&A by Chinese companies only accounted to 0.2% of the nominal GDP, compared to 2.8% in the European Union", explains Mr. Mercier. Nevertheless, a number of Chinese companies have already begun to successfully globalize their business. These include Huawei Technologies, Haier, Sun Tech Solar and Chery automotive.
China's ascent as a global economic power suggests that a number of its companies are poised to become true global players over the next decade. However, these companies face an uphill battle and only firms with clear, focused strategies, strong execution capabilities and substantial international business know-how can reap the potential rewards of going global. Roland Berger Strategy Consultants indentifies five key success factors for Chinese companies doing business abroad.
"Chinese companies are becoming increasingly active on the global market by exporting goods under their own brand name and investing outside China through FDI and M&A", says Vincent Mercier, Member of Roland Berger Strategy Consultants' Executive Committee and responsible for China. International M&A activities by mainland Chinese companies have increased over the last few years, but are still very few compared to the EU. The global share of mainland Chinese companies only reached 1.5% on a global scale in 2005. Hong Kong, on the other hand, is the single largest supplier of FDI among developing countries. "Chinese companies are still in the very early stages of international M&A activities. International purchases through M&A by Chinese companies only accounted to 0.2% of the nominal GDP, compared to 2.8% in the European Union", explains Mr. Mercier. Nevertheless, a number of Chinese companies have already begun to successfully globalize their business. These include Huawei Technologies, Haier, Sun Tech Solar and Chery automotive.
Major challenges still ahead
Aside from these first promising signs, Chinese companies in general are still face major challenges on the road towards success on the global expansion. Main hurdles include:
Limited R&D capabilities
R&D capabilities in China are still generally low, which prevents Chinese companies from entering more profitable high-end market segments.
Weak brands with limited international marketing experience and few distribution channels
The strong focus on manufacturing has diverted attention away from brand development. That causes weak brand recognition, coupled with very little marketing experience. Additionally a lack of understanding of the functioning of international markets results in ineffective marketing strategies for long-term profitable business growth.
Weak international management skills
The managerial capacities of Chinese executives are still low when faced with different social rules and business environments.
Insufficient knowledge of foreign markets
There is still only a limited understanding of markets, including rules of competition, products, local differences, design, rules and regulations etc.
"Bad" reputation
The moniker "Made in China" still has a negative connotation. Chinese products are often associated with poor quality and low standards (e.g. according to a 2007 NBC Wall Street Journal survey, 82% of the Americans do not trust Chinese product quality).
However, Chinese companies have already demonstrated that they have a short learning curve and are able to learn from the mistakes of the past. According to Mr. Mercier: "It is not a question of whether Chinese companies are becoming truly globally operating companies, but only a question of how long it will take them to reach that level." To support Chinese companies on their way to Europe and North America, Roland Berger has identified five key success factors:
Aside from these first promising signs, Chinese companies in general are still face major challenges on the road towards success on the global expansion. Main hurdles include:
Limited R&D capabilities
R&D capabilities in China are still generally low, which prevents Chinese companies from entering more profitable high-end market segments.
Weak brands with limited international marketing experience and few distribution channels
The strong focus on manufacturing has diverted attention away from brand development. That causes weak brand recognition, coupled with very little marketing experience. Additionally a lack of understanding of the functioning of international markets results in ineffective marketing strategies for long-term profitable business growth.
Weak international management skills
The managerial capacities of Chinese executives are still low when faced with different social rules and business environments.
Insufficient knowledge of foreign markets
There is still only a limited understanding of markets, including rules of competition, products, local differences, design, rules and regulations etc.
"Bad" reputation
The moniker "Made in China" still has a negative connotation. Chinese products are often associated with poor quality and low standards (e.g. according to a 2007 NBC Wall Street Journal survey, 82% of the Americans do not trust Chinese product quality).
However, Chinese companies have already demonstrated that they have a short learning curve and are able to learn from the mistakes of the past. According to Mr. Mercier: "It is not a question of whether Chinese companies are becoming truly globally operating companies, but only a question of how long it will take them to reach that level." To support Chinese companies on their way to Europe and North America, Roland Berger has identified five key success factors:
- Continuously improve manufacturing productivity and quality
As wages - both in absolute terms and relative to other low-wage regions - increase, the role of technology, techniques and processes in productivity improvement becomes even more significant. - Increase spending and systematically invest in R&D
A strong R&D capability has become one of the leading competitive factors in many of the industries, in which China is trying to compete. China not only needs to develop its know-how in product technology, but in production processes as well. - Enhance brand recognition
In order for China's industrial economy to advance to the next stage of development, its companies have to own brands that are recognizable and well thought of outside of China. At present, there are less than a handful of Chinese brands that meet these criteria. - Develop excellent HR skills and ensure access to talent
The shortage of skilled and trained human resources for international business is one of China's greatest constraints. This is particularly true in management areas such as senior leadership, marketing, operations, and R&D. What is missing is not only experience, but also training programs, strategic planning capabilities and global perspectives. - Engage the help of external consultants
Many of the challenging tasks identified above can be addressed effectively with the use of appropriate consultants with world-class credentials in industrial and market analysis, strategic planning, organization management, and legal and M&A transactions.
Further reading
Automotive inSIGHTS 2/2008 -...
"Electrification of the car" is just one of the key developments that spring to mind when... >>
Requirements for turnaround...
As the current financial crisis shows, crises don't just hit in times of recession – they can... >>
Roland Berger Strategy...
Pressure on automotive suppliers worldwide has continued to increase over the last year. OEMs demand... >>
Roland Berger fourth study on...
Less than 20% of European companies are worried about consequences from the subprime crisis – more... >>
No light at the end of the...
The business paper talks about another troubled American investment bank and quotes Partner Fred... >>
Guerci â An industry guru...
Roberto Crapelli, Managing Director of Roland Berger Italy, remembers the late Carlo Maria Guerci,... >>
